<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1997
REGISTRATION STATEMENT NO. 333-15849
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
LEXINGTON HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8059
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Code) Identification No.)
incorporation or organization)
</TABLE>
35 PARK PLACE
NEW BRITAIN, CONNECTICUT 06052
(860) 223-6902
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
HARRY DERMER
PRESIDENT AND CHIEF OPERATING OFFICER
LEXINGTON HEALTHCARE GROUP, INC.
35 PARK PLACE
NEW BRITAIN, CONNECTICUT 06052
(860) 223-6902
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
JAY M. KAPLOWITZ, ESQ. FELICE F. MISCHEL, ESQ.
ARTHUR S. MARCUS, ESQ. THOMAS A. ROSE, ESQ.
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP Schneck Weltman Hashmall & Mischel LLP
101 East 52nd Street 1285 Avenue of the Americas
New York, New York 10022 New York, New York 10019
(212) 752-9700 (212) 956-3252
</TABLE>
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering / /
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. / /
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING
REGISTERED REGISTERED PER SECURITY(1) PRICE
<S> <C> <C> <C>
Common Stock, par value $.01 per share (the "Common
Stock")(2)............................................. 1,150,000 $ 5.00 $ 5,750,000
Common Stock Purchase Warrants........................... 1,150,000 $ .10 $ 115,000
Common Stock Issuable upon Exercise of Warrants.......... 1,150,000 $ 6.00 $ 6,900,000
Underwriter's Warrants(3)................................ 100,000 $ .001 $ 100
Common Stock underlying the Underwriter's Warrants(4).... 100,000 $ 6.00 $ 600,000
Common Stock Purchase Warrants Issuable upon Exercise of
Underwriter's Warrants................................. 100,000 $ .12 $ 12,000
Common Stock underlying Warrants Issuable upon Exercise
of Underwriter's Warrants.............................. 100,000 $ 6.00 $ 600,000
Total Registration Fee...................................
<CAPTION>
TITLE OF EACH CLASS
OF SECURITIES TO BE AMOUNT OF
REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, par value $.01 per share (the "Common
Stock")(2)............................................. $ 1,742.42
Common Stock Purchase Warrants........................... $ 34.84
Common Stock Issuable upon Exercise of Warrants.......... $ 2,090.90
Underwriter's Warrants(3)................................ $ -- (5)
Common Stock underlying the Underwriter's Warrants(4).... $ 181.82
Common Stock Purchase Warrants Issuable upon Exercise of
Underwriter's Warrants................................. $ 3.64
Common Stock underlying Warrants Issuable upon Exercise
of Underwriter's Warrants.............................. $ 181.82
Total Registration Fee................................... $ 4,235.44(6)
</TABLE>
(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee.
(2) Includes 150,000 shares of Common Stock which the Underwriter has an option
to purchase from the Company to cover over-allotments, if any.
(3) To be issued by the Company and purchased by the Underwriter upon the
consummation of this offering.
(4) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants pursuant to anti-dilution provisions
contained therein, which shares of Common Stock are registered hereunder.
(5) No fee pursuant to Rule 457(g).
(6) This amount was paid upon the original filing of the Registration Statement.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
FORM S-1
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PURSUANT TO ITEM 501 OF REGULATION S-K
ITEM NUMBER CAPTION OR HEADING IN PROSPECTUS
- ----------- ---------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Cover page of Registration Statement; and Outside
Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information.
3. Summary Information and Risk Factors............... Prospectus Summary; Risk Factors.
4. Use of Proceeds.................................... Use of Proceeds.
5. Determination of Offering Price.................... Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting.
6. Dilution........................................... Risk Factors; Dilution.
7. Selling Security Holders........................... Not Applicable.
8. Plan of Distribution............................... Outside Front Cover Page of Prospectus;
Underwriting.
9. Description of Securities to be Registered......... Dividend Policy; Description of Securities.
10. Interests of Named Experts and Counsel............. Legal Matters; Experts.
11. Information with Respect to Registrant............. Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; The Company; Dividend
Policy; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Stockholders and Financial Statements.
12. Disclosure of Commission's Position on
Indemnification for Securities Act Liabilities..... Not Applicable.
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
LEXINGTON HEALTHCARE GROUP, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 COMMON STOCK PURCHASE WARRANTS
--------------------------
LEXINGTON HEALTHCARE GROUP, INC. (the "Company") is hereby offering (the
"Offering") 1,000,000 shares (the "Shares") of its Common Stock, par value $.01
per share (the "Common Stock") and 1,000,000 Common Stock Purchase Warrants (the
"Warrants"), through Mason Hill & Co., Inc. (the "Underwriter"). The shares of
Common Stock and the Warrants may be purchased separately and will be
transferable separately upon issuance. Investors will not be required to
purchase shares of Common Stock and Warrants together or in any particular
ratio.
Each of the Warrants entitles the registered holder thereof to purchase one
share of Common Stock at a price of $6.00 per share, subject to adjustment in
certain circumstances, at any time commencing one year from the effective date
of the registration statement of which this Prospectus is a part (the "Effective
Date") and thereafter to , 2003, the sixth anniversary of the
Effective Date. The Warrants are subject to redemption by the Company,
commencing on the first anniversary of the Effective Date at a price of $.05 per
Warrant, upon 30 days' notice mailed within 10 days provided the closing price
of the Common Stock, as listed on the Nasdaq National Market ("Nasdaq") or
another national securities exchange, for a period of 20 consecutive trading
days has equalled or exceeded $10.00 per share. See "Description of Securities."
Prior to this Offering, there has been no public market for the Common Stock
and Warrants and no assurance can be given that any such market will develop
upon completion of this Offering. Application has been made to have the Common
Stock and Warrants approved for quotation on Nasdaq under the symbol "LEXI" and
"LEXIW." The initial public offering prices of the Common Stock and Warrants and
the exercise price and other terms of the Warrants have been determined by
negotiation between the Company and the Underwriter and do not necessarily bear
any relation to the Company's earnings, assets, book value, net worth or any
other recognized criteria of value. See "Underwriting."
AN INVESTMENT IN THE SHARES OF COMMON STOCK AND WARRANTS OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS BEGINNING ON PAGE 9.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PUBLIC UNDERWRITING DISCOUNTS AND COMMISSIONS (1) PROCEEDS TO COMPANY (2)
<S> <C> <C> <C>
Per Share................... $5.00 $0.50 $4.50
Per Warrant................. $0.10 $0.01 $0.09
Total(3).................... $5,100,000 $510,000 $4,590,000
</TABLE>
(1) Does not include additional consideration to be received by the Underwriter
in the form of (i) a non-accountable expense allowance equal to 3% of the
gross offering proceeds, of which $25,000 has been paid, (ii) any value
attributable to warrants (the "Underwriter's Warrants") entitling the
Underwriter to purchase up to 100,000 shares of Common Stock and 100,0000
Warrants at a price per share equal to 120% of the initial public offering
price, (iii) $2,777.78 per month for 36 months payable to the Underwriter
pursuant to a financial consulting agreement; and (iv) a three-year right of
first refusal with respect to subsequent offerings, if any. The Company has
also agreed to indemnify the Underwriter against certain liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company (including
the $153,000 non-accountable expense allowance) estimated at $450,000
($472,950 if the Underwriter's over-allotment option is exercised in full).
(3) The Company has granted the Underwriter an option (the "Over-allotment
Option"), exercisable within 45 days after the date of this Prospectus, to
purchase up to 150,000 shares of Common Stock and 150,000 Warrants upon the
same terms as set forth above, solely to cover over-allotments, if any. If
the over-allotment option granted by the Company is exercised in its
entirety, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $5,865,000, $586,500 and $5,278,500,
respectively. See "Underwriting."
------------------------------
The Shares and Warrants are being offered by the Underwriter subject to
prior sale, when, as and if delivered to the Underwriter and subject to their
right to reject orders in whole or in part and to certain other conditions. It
is expected that delivery of certificates will be made against payment therefor
at the offices of Mason Hill & Co., Inc., 100 Wall Street, New York, New York
10005, on or about , 1997.
MASON HILL & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT AMOUNT OF THE SECURITIES IN THIS OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE
A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN BE NO ASSURANCE. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE SECURITIES THROUGH AND/OR WITH THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE SECURITIES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS--NO ASSURANCE OF PUBLIC MARKET; VOLATILITY
OF STOCK PRICE."
THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS ANNUAL REPORTS CONTAINING
AUDITED FINANCIAL STATEMENTS EXAMINED BY ITS INDEPENDENT AUDITORS. IN ADDITION,
THE COMPANY MAY FURNISH TO ITS STOCKHOLDERS QUARTERLY OR SEMI-ANNUAL REPORTS
CONTAINING UNAUDITED FINANCIAL INFORMATION AND SUCH OTHER INTERIM REPORTS AS THE
COMPANY MAY DETERMINE.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" REFERS TO LEXINGTON HEALTH CARE
GROUP, LLC ("LLC"), LEXINGTON HEALTHCARE GROUP, INC. ("LHG"), ITS SUBSIDIARIES
AND THEIR RESPECTIVE OPERATIONS, INCLUDING PROFESSIONAL RELIEF OF NURSES, INC.
("PRN") AND BALZ MEDICAL SERVICES, INC. ("BALZ"), TWO ENTITIES WHICH ARE
PRESENTLY PARTIALLY OWNED AND OPERATED BY AFFILIATES OF THE COMPANY, WHICH LHG
INTENDS TO ACQUIRE SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING, IN
CONSIDERATION FOR A PORTION OF THE NET PROCEEDS OF THIS OFFERING AND THE
ISSUANCE OF THE COMPANY'S COMMON STOCK. SEE "USE OF PROCEEDS" AND "BUSINESS."
ALL INFORMATION IN THIS PROSPECTUS, UNLESS OTHERWISE NOTED, ASSUMES THE
EFFECTIVENESS OF THE REORGANIZATION AND NO EXERCISE OF THE UNDERWRITER'S
OVER-ALLOTMENT OPTION OR THE UNDERWRITER'S WARRANTS.
EACH OF THE THREE MEMBERS OF LLC HAVE AGREED TO EXCHANGE THEIR RESPECTIVE
INTERESTS IN THE LLC, IMMEDIATELY PRIOR TO THE EFFECTIVE DATE, IN EXCHANGE FOR
AN AGGREGATE OF 2,462,000 SHARES OF THE COMPANY'S COMMON STOCK (THE
"REORGANIZATION"). SEE "CERTAIN TRANSACTIONS."
THE COMPANY
GENERAL
The Company is a long-term and subacute care provider, which operates four
nursing home facilities (the "Facilities") with 628 licensed beds in the State
of Connecticut. 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). In addition,
the Company has recently begun to offer a variety of products and services to
non-affiliated long-term care facilities. The Company's strategy in healthcare
is to integrate the main disciplines of nursing, pharmacy, social services and
other therapies under one program.
The Facilities are leased pursuant to a long-term lease from a partnership
of which Jack Friedler, the Company's principal stockholder, Chief Executive
Officer and Chairman of the Board, is a 33.33% limited partner. The individuals
owning the remaining portion of the partnership are shareholders of PRN. The
four nursing home facilities were previously operated as traditional nursing
homes by Beverly Enterprises, an unrelated entity which previously leased the
facilities from the Company's current landlord. Since the Company began
operating the Facilities, it has broadened the services provided and occupancy
and reimbursement rates have increased. 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. See "Certain Transactions." Oak Island is a
non-affiliated facility in Massachusetts.
The Facilities and the Managed Facilities service two basic patient
populations: traditional geriatric patient population and the emerging
population of subacute care patients with higher acuity disorders who require
complex and intensive medical services. Subacute care patients generally require
more rehabilitative therapy and are residents for a shorter stay 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 average occupancy rate of approximately
94% as of December 31, 1996. Specialty medical services include subacute care to
patients requiring complex medical care, intensive rehabilitation therapies and
in-house pharmaceutical services. These services are usually provided at higher
profit margins than routine services and compete with significantly higher cost
hospital care. The Company operates a dedicated subacute unit within one of the
Facilities, in addition to providing subacute services in each of the other
Facilities.
3
<PAGE>
STRATEGY
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: (i) increase Facility profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; (ii) adhere to strict cost standards at the
Facility level while providing effective patient care and containing corporate
overhead expenses; and (iii) 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 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 the
Company's nursing home services into additional states, including Massachusetts,
New Jersey and Vermont.
RECENT DEVELOPMENTS
The Company recently formed a wholly-owned subsidiary, LEV Rehab Services,
Inc. ("LEV") to provide physical, occupational, speech and other therapies to
patients at the Facilities, the Managed Facilities, unaffiliated facilities and
persons in their homes. LEV has not commenced any substantial business
activities and has not generated any significant revenues to date. The Company
intends to utilize a portion of the net proceeds of the Offering to hire
personnel to implement this strategy.
The Company intends to form a subsidiary to provide pharmaceutical services
to affiliated and non-affiliated long-term and subacute care facilities. See
"Use of Proceeds."
The Company has negotiated an agreement to acquire all of the capital stock
of BALZ Medical Services, Inc. ("BALZ") from the shareholders of BALZ
simultaneously with the closing of this Offering. BALZ is not currently operated
by the Company. Two of such shareholders, Jack Friedler and Harry Dermer, both
officers and directors of the Company, own an aggregate of 44% of BALZ. BALZ is
currently managed by Mary Archambault, an officer of the Company. Ms.
Archambault owns 20% of BALZ. The Company has an agreement to acquire all of the
capital stock of BALZ in exchange for an aggregate of 300,000 shares of the
Company's Common Stock. The consideration for the acquisition was negotiated,
based on past performance and projections, between the Company's President and
the shareholders of BALZ who are not affiliated with the Company. The
acquisition will be accounted for as a purchase. See "Business--BALZ
Acquisition" and "Certain Transactions." 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 medical supplies provided include band aids, wound care supplies
and durable medical products such as wheelchairs and beds. 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 Professional Relief Nurses, Inc. ("PRN") which will
become a wholly-owned subisdiary of the Company, as well.
4
<PAGE>
The Company has negotiated an agreement to acquire all of the capital stock
of PRN immediately prior to the Effective Date in exchange for $1,620,000,
payable out of the net proceeds of the Offering and 108,000 shares of Common
Stock, which shares will be issued upon the closing of this Offering. Jack
Friedler, the Company's principal stockholder owns 25% of the capital stock of
PRN. PRN is currently managed by Suzanne Nettleton, an officer of the Company.
Ms. Nettleton own 25% of the capital stock of PRN. PRN is not currently operated
by the Company. The acquisition will be accounted for as a purchase. See
"Business--PRN Acquisition" and "Certain Transactions." PRN provides skilled
nursing services to persons at home. PRN's personnel includes (i) registered
nurses, who provide a broad range of nursing care services, including skilled
observation and assessment, instruction of patients regarding medical and
technical procedures, direct hands-on treatment, and communication and
coordination with the attending physician or other service agencies; (ii)
licensed practical nurses who perform, under the supervision of a registered
nurse, technical nursing procedures, which include injections, dressing changes,
and assistance with ambulation and catheter care; (iii) physical and
rehabilitation therapists who provide services related to the reduction of pain
and improved rehabilitation of joints and muscles; and (iv) certified nurses
aides, who, under the supervision of a nurse, provide health-related services
and personal care such as assistance with ambulation, limited range-of-motion
exercises, monitoring of vital signs, non-sterile dressing changes and bathing.
The Company intends to expand PRN's activities to include the provision of
intravenous therapy to patients at home. The Company also 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.
The Company believes that the acquisitions of BALZ and PRN will be a
significant step towards creating a fully integrated healthcare company. BALZ
currently sells products to each of the Facilities, the Managed Facilities and
other facilities. Following the acquisitions, the Company intends to offer BALZ'
products to patients of PRN. The Company has provided certain management
services, in addition to office space, to BALZ since its inception. After the
Offering, PRN intends to begin to accept homecare patients after they are
released from the Facilities. The Company intends to integrate the finance,
billing, marketing and computer services for each of its divisions to eliminate
duplicate overhead.
Lexington Healthcare Group, Inc. was incorporated on February 23, 1996.
Prior to the Effective Date, LHG has 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 LLC is owned 37.5% by Jack Friedler, 37.5% by
Stephanie Friedler and 25% by Harry Dermer. Immediately prior to the Effective
Date, the members of the LLC will exchange their LLC interests and all of the
operations, assets and liabilities of the LLC for shares of Common Stock of LHG,
except that Stephanie Friedler's shares of the Company will be issued to her
husband, Jack Friedler. See "Certain Transactions." PRN was incorporated on
September 20, 1981, and BALZ was incorporated on October 5, 1995 and commenced
operations on November 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.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 1,000,000 shares of Common Stock and 1,000,000 Warrants.
The Common Stock and the Warrants (sometimes hereinafter
collectively referred to as the "Securities") may be
purchased separately and will be transferable separately
upon issuance. See "Description of Securities" and
"Underwriting."
Warrants.......................... Each Warrant is exercisable at an exercise price of
$6.00 per share. The exercise price of the Warrants is
subject to adjustment in certain circumstances. The
Warrants are exercisable commencing one year from the
Effective Date until , 2003, the sixth
anniversary of the Effective Date. The Warrants are
redeemable by the Company commencing on the first
anniversary of the Effective Date at a price of $.05 per
Warrant on 30 days' prior written notice provided the
last sale price of the Common Stock for 20 consecutive
trading days equals or exceeds $10.00. See "Description
of Securities-- Warrants."
Common Stock Outstanding
Prior to the Offering(1)........ 3,092,000
After the Offering(1)(2)........ 4,500,000
Warrants Outstanding
Prior to the Offering........... 500,000
After the Offering.............. 1,500,000
Risk Factors...................... The Securities offered hereby are speculative and
involve a high degree of risk and immediate substantial
dilution. Prospective investors should review carefully
and consider the information set forth under "Risk
Factors" and "Dilution."
Use of Proceeds................... The net proceeds of this Offering ($4,140,000) will be
used for the repayment of certain indebtedness, the
acquisition of PRN ($540,000 of which will be paid to an
officer of the Company), the establishment of
institutional pharmaceutical services, the expansion of
rehabilitation and nursing home services and working
capital. See "Use of Proceeds."
Proposed Nasdaq Symbol(3)......... Common Stock--LEXI
Warrants--LEXIW
</TABLE>
- ------------------------
(1) Does not include up to 450,000 shares of Common Stock reserved for issuance
pursuant to stock options which may be granted pursuant to the Company's
1997 Stock Option Plan (none of which have been granted to date). See
"Management--Stock Option Plan."
(2) Includes (i) 300,000 shares of Common Stock to be issued in connection with
the acquisition of BALZ and (ii) 108,000 shares of Common Stock to be issued
in connection with the acquisition of PRN.
(3) The proposed Nasdaq trading symbols do not imply that a liquid and active
market will be developed or sustained for the Shares and Warrants upon
completion of the Offering.
6
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
SUMMARY FINANCIAL INFORMATION
The following table presents, for the periods and dates indicated, summary
historical, pro forma and pro forma as adjusted financial data of the Company.
The pro forma condensed statement of operations data for the period July 1, 1995
(commencement of operations) to June 30, 1996 and for the six months ended
December 31, 1996 gives effect to the acquisition of PRN and BALZ as if the
acquisition had been consummated as of July 1, 1995. The pro forma condensed
statement of operations data for the six months ended December 31, 1996 also
gives effect to the sale of 102,000 shares of Common Stock and Warrants offered
hereby by the Company at an offering price of $5.00 per Share and $.10 per
Warrant and the application of the net proceeds therefrom to repay certain
indebtedness in the amount of $453,000 as described under "Use of Proceeds" as
if such transaction had occurred on July 1, 1996.
The pro forma balance sheet data at December 31, 1996 reflects the
acquisitions of PRN and BALZ as if they had occurred on December 31, 1996,
including the sale of 365,000 shares of Common Stock and Warrants at an offering
price of $5.00 per Share and $.10 per Warrant, the net proceeds of which will be
used to pay the cash portion price of PRN of $1,620,000. The pro forma as
adjusted balance sheet data at December 31, 1996 also gives effect to the sale
of the balance of 635,000 Shares of Common Stock and the balance of 635,000
Warrants offered hereby by the Company at an offering price of $5.00 per Share
and $.10 per Warrant and the application of $453,000 of the net proceeds
therefrom to repay certain indebtedness as described under "Use of Proceeds."
This information should be read in conjunction with "Capitalization,"
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Pro Forma Unaudited Condensed Financial
Information and the Company's Financial Statements and the notes thereto, each
included elsewhere herein. The pro forma data set forth below is not necessarily
indicative of what the actual results of operations would have been had the
transactions occurred at the dates referred to above, nor do they purport to
indicate the results of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------
JULY 1, 1995
1996 (COMMENCEMENT OF
----------- OPERATIONS TO)
1995 1996 JUNE 30, 1996
--------- ----------- ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net revenue.......................................... $ 17,447 $ 16,939 $ 20,195 $ 33,641 $ 38,102
Operating costs and expenses......................... 17,145 16,115 19,290 32,926 36,780
----------- --------- ----------- ----------- -----------
Income from operations............................... 302 824 905 715 1,322
Other (expense)-net.................................. (70) (100) (82) (254) (89)
----------- --------- ----------- ----------- -----------
Income before income taxes........................... 232 724 823 461 1,233
Provision for income taxes*.......................... 96 294 373 195 575
----------- --------- ----------- ----------- -----------
NET INCOME........................................... $ 136 $ 430 $ 450 $ 266 $ 658
----------- --------- ----------- ----------- -----------
Net income per share................................. $ 0.04 $ 0.14 $ 0.11 $ 0.09 $ 0.17
----------- --------- ----------- ----------- -----------
Weighted number of common shares outstanding......... 3,092 3,092 3,967 3,092 3,967
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
* Historical or pro forma as applicable
7
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, 1996 -----------
-------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
-----------
HISTORICAL PRO FORMA HISTORICAL
----------- ----------- AS ADJUSTED -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents...................................... $ 1,333 $ 1,059 $ 3,412 $ 212
Working capital (deficiency)................................... (2,278) (1,943) 863 (2,381)
Total assets................................................... 10,159 15,230 17,297 9,614
Short-term borrowings.......................................... 914 927 597 2,580
Total long-term debt excluding current maturities.............. 79 127 127 102
Total stockholders' equity..................................... 994 5,132 7,652 487
</TABLE>
8
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk. Prospective purchasers should consider carefully the risk factors set
forth below, as well as other information contained in the Prospectus, before
making an investment decision.
LACK OF OPERATING HISTORY
LHG only commenced operation of the Facilities which form the core of the
Company's business in July 1995. LHG had a net income of $461,000 and $232,000
(historical) and $266,000 and $136,000 (pro forma) for the year ended June 30,
1996 and the six months ended December 31, 1996, respectively. PRN has been
operating since September 1981, but will not be acquired or operated by the
Company until the Effective Date. PRN had a net income of $193,000 and $451,000
and $263,000 (historical) and $135,000 and $308,000 and $174,000 (pro forma) for
the years ended June 30, 1995 and 1996 and the six months ended December 31,
1996, respectively. BALZ was formed in October 1995 and commenced operations on
November 1, 1995 but will not be acquired or operated by the Company until
immediately prior to the Effective Date. BALZ had a net income of $214,000 and
$185,000 for the eight months ended June 30, 1996, and the six months ended
December 31, 1996 respectively. The principal officers of PRN and BALZ are
officers of the Company. Certain shareholders of BALZ and PRN are affiliates of
the Company. See "Certain Transactions." LEV, which is a wholly-owned subsidiary
of the Company, was only recently formed and has not generated any significant
revenues. There can be no assurance that the Company will continue to be
operated profitably or be able to successfully integrate acquired operations.
See the financial statements and the related notes thereto included elsewhere in
this Prospectus.
WORKING CAPITAL DEFICIENCY: EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITOR'S
REPORT
LHG had a working capital deficiency of $2,381,000 and $2,278,000 at June
30, 1996 and December 31, 1996, respectively. LHG's independent certified public
accountants have included an explanatory paragraph in their report on LHG's
financial statements for the year ended June 30, 1996. The Company believes that
its ability to continue as a going concern is dependent on its ability to
materially reduce future outlays for non-current assets and to increase the
occupancy levels at the Facilities, as well as the Company's receipt of the net
proceeds of this Offering of which $1,167,000 has been allocated to working
capital. The Company believes that the acquisitions of BALZ and PRN will improve
its working capital position and that since it has no plans to enter into a
significant lease, the Company does not foresee incurring cash outlays in such
magnitude as the security deposit incurred in the period ended June 30, 1996. In
the event that LHG is not able to effect such plans, it may not be able to
continue as a going concern. LHG's ability to continue as a going concern is
dependent on their receipt of the net proceeds of the Offering or other
alternative financing. As of December 31, 1996, LHG had total current assets of
$6,087,000 and total current liabilities of $8,365,000. Potential investors
should be aware of the problems, delays, expenses and difficulties encountered
by companies at this stage of development, many of which may be beyond the
Company's control. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
related notes thereto included elsewhere in this Prospectus.
NEED FOR ADDITIONAL FINANCING
The Company believes that the proceeds of the Offering, together with
operating revenues and cash flow from BALZ and PRN, which are not currently
operated or controlled by the Company, will be sufficient to finance the
Company's working capital requirements for a period of at least 12 months
following the completion of this Offering. The Company intends to utilize
approximately $1,167,000 of the net proceeds of the Offering for working
capital. See "Business--Company Strategy." In addition, the Company's strategy
is to acquire companies with related and complementary businesses, although the
Company has not presently identified any specific acquisitions, except for BALZ
and PRN. The continued
9
<PAGE>
expansion and operation of the Company's business beyond such 12 month period
and its ability to make acquisitions may be dependent upon its ability to obtain
additional financing. There can be no assurance that additional financing will
be available on terms acceptable to the Company, or at all. In the event that
the Company is unable to obtain additional financing as it becomes necessary,
the Company may not be able to achieve all of its business plans. In addition,
the nature of the Company's business requires it to carry significant accounts
receivable. The pro forma balance sheet as of December 31, 1996 included
accounts receivable of approximately $5,670,000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
Approximately $1,167,000 (28%) of the net proceeds of this Offering will be
applied to working capital and general corporate purposes. In addition, the
Company may utilize a portion of the net proceeds of this Offering currently
allocated to working capital for potential acquisitions. As of the Effective
Date, the Company has not identified any particular acquisition targets, except
for BALZ and PRN. Stockholders of the Company may have no opportunity to approve
specific acquisitions or to review the financial condition of any potential
target. Accordingly, management of the Company will have broad discretion over
the use of such proceeds. See "Use of Proceeds" and "Business--Business
Strategy."
POSSIBLE INABILITY TO CONSUMMATE ACQUISITIONS AND SUCCESSFULLY INTEGRATE
ACQUIRED OPERATIONS
A key element of the Company's strategy for the future, is expansion through
the acquisition and development of long-term care facilities and complementary
business. Historically, LLC has experienced working capital deficiencies. In the
event that the acquisitions of PRN and BALZ, as well as the receipt of the net
proceeds of the Offering do not adequately address the Company's working capital
deficiency there can be no assurance that the Company will have sufficient
resources to effect its strategy. In addition, except for the agreements to
acquire all of the capital stock of PRN and BALZ, the Company has not entered
into any agreements to acquire any businesses. There can be no assurance that
future suitable acquisition candidates will be identified, that acquisitions can
be consummated or that the Company can develop complementary businesses, that
can be operated profitably or integrated successfully into the Company's
operations.
Growth in the Company's operations entails certain risks. In order to
integrate new facilities into the Company's operations, the Company will be
required to expend significant management and financial resources. There can be
no assurance that the Company will be able to successfully integrate new
facilities into the Company's operations or that the Company's management
techniques will continue to be effective in a larger organization. In addition,
growth through acquisition entails certain risks. The Company seeks to minimize
these risks through the due diligence and documentation process undertaken in
connection with its acquisitions. Notwithstanding the Company's due diligence
investigation when it undertakes acquisitions, there can be no assurance that
environmental and other contingent or actual liabilities do not exist which
could have a material adverse effect on the Company. See "Business--Company
Strategy."
POSSIBLE INABILITY TO DEVELOP AND EXPAND ANCILLARY SERVICES
A significant aspect of the Company's operating strategy is the expansion of
its rehabilitation therapy services. While the Company has offered
rehabilitation therapy at its nursing homes, the Company recently formed LEV to
provide rehabilitative therapy services to the Facilities, the Managed
Facilities, non-affiliated long-term care facilities and patients at their
homes, including forming an institutional pharmacy. There can be no assurance
that such expansion will occur, or in the event that it does occur, that any
expanded operations will be successful. The Company intends to utilize
approximately $300,000 of the net proceeds of the Offering, to expand LEV and
$400,000 to develop an institutional pharmacy. The Company plans to develop and
expand other services and to provide such ancillary services to the
10
<PAGE>
Company's Facilities, the Managed Facilities and to nonaffiliated long-term care
facilities. There can be no assurance that the Company will have the necessary
resources in order to achieve such expansion or that such expansion will occur
or be successful. See "Use of Proceeds" and "Business--Company Strategy."
DEPENDENCE UPON THIRD PARTY PAYORS; GEOGRAPHIC CONCENTRATION OF THIRD PARTY
PAYORS
LHG typically receives a higher rate for services to private pay and
Medicare patients than for services to patients eligible for assistance under
Medicaid programs. For the year ended June 30, 1996 and the six months ended
December 31, 1996, LHG derived approximately 89% and 89% of its net patient
revenues from Medicaid and Medicare and 11% and 11% from private and other pay
sources, respectively. For the year ended June 30, 1996 and the six months ended
December 1996, BALZ derived approximately 80% and 80% of its revenues from
Medicare and 20% from private pay sources and Medicaid, respectively. For the
years ended June 30, 1996 and the six months ended December 1996, PRN derived
approximately 38% and 27% of its revenues from private pay sources, 62% and 73%
from Medicaid and Medicare, respectively.
Changes in the number of private pay patients and changes among different
private pay sources could significantly affect the profitability of the Company.
In order to control escalating healthcare costs, various third party payors have
instituted proposals to limit reimbursement levels for specific services
provided. There can be no assurance that the Company will continue to attract
and retain private patients or maintain a favorable payor mix.
Any adverse change in the regulatory environment or the reimbursement rates
paid under the Medicaid program in the states in which the Company currently
operates, particularly in Connecticut and the states that it may operate in the
future, could have a material adverse effect on the Company. See
"Business--Sources of Revenues" and "Business--Government Regulation."
GOVERNMENT REGULATION
The federal government and the states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
Medicaid and Medicare reimbursement rates described herein under the captions
"Business--Sources of Revenues" and "Business--Government Regulation" the
development and operation of nursing homes and the provision of nursing
long-term and subacute services are subject to federal, state and local
licensure and certification laws regulate many aspects of a facility, including
the number of beds, the provision of services, the distribution of
pharmaceuticals, equipment, staffing requirements, operating policies and
procedures, fire prevention measures and compliance with building and safety
codes and environmental laws. The Company believes that it is in compliance with
all applicable laws and regulations and has all required licenses to conduct its
business. There can be no assurance that federal, state or local governments
will not impose additional restrictions on the Company's activities which might
adversely affect the Company's business. The failure to maintain or renew any
required regulatory approvals or licenses could adversely affect the Company's
ability to provide its services and receive reimbursement of its expenses.
Long-term care facilities are subject to periodic inspection by government
authorities to assure compliance with the various standards established for
continued licensing under state law and certification under the Medicaid or
Medicare programs. Failure to comply with these standards could result in the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification under the Medicaid or Medicare program,
restrictions on the ability to acquire new facilities and, in extreme cases,
revocation of the facility's license or closure of a facility. There can be no
assurance that the facilities owned, leased or managed by the Company, or the
provision of services and supplies by the Company, will initially meet or
continue to meet the requirements for participation in the Medicaid or Medicare
programs.
Many states, including Connecticut, have adopted a moratorium on the opening
of any new facilities. Most states have adopted Certificate of Need or similar
laws which generally require that the appropriate
11
<PAGE>
state regulatory agency approve the construction or acquisition of, or the
addition of beds or services, to long-term care facility. To the extent that a
Certificate of Need or other similar approval is required for the acquisition or
construction of new facilities or the expansion of beds, services or existing
facilities, the Company could be adversely affected by the failure or inability
to obtain such approval, changes in the standards applicable to such approval
and possible delays and expenses associated with obtaining such approval. In
addition, in most states the reduction of beds or the closure of a facility
requires the approval of the appropriate state regulatory agency and, if the
Company were to determine to reduce beds or close a facility, the Company could
be adversely affected by a failure to obtain or a delay in obtaining such
approval. See "Business--Government Regulation."
POTENTIAL ADVERSE EFFECT OF HEALTHCARE REFORM
Various branches of government have proposed a major restructuring of the
healthcare system in the United States with a view toward, among other things,
slowing the overall rate of growth in healthcare expenditures and extending
healthcare coverage by either private insurance or government programs to
currently uninsured individuals. The Company is unable to predict the impact of
healthcare reform proposals on the Company or its stock price; however, it is
possible that such proposals could have a material adverse effect on the
Company. Any changes in reimbursement levels under Medicaid and Medicare and any
changes in applicable government regulations could significantly affect the
profitability of the Company. Various cost containment measures adopted by
governmental pay sources have begun to limit the scope and amount of
reimbursable healthcare expenses. Furthermore, governmental programs are subject
to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially affect the rate of payments to facilities operated by the Company.
Therefore, there can be no assurance that payments under governmental payor
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs of providing services to patients eligible for
assistance under such programs. See "Business--Sources of Revenues" and
"Business--Government Regulation."
COMPETITION
The long-term care industry in particular and the healthcare industry in
general, is highly competitive. The Company competes with other providers on the
basis of the breadth and quality of its services, the quality of its facilities
and price. The Company also competes in the recruitment and retention of
qualified healthcare personnel and the acquisition and development of additional
facilities. The Company's current and potential competitors include national,
regional and local operators of long-term care facilities, as well as acute care
hospitals and rehabilitation hospitals, many of which have significantly greater
financial and other resources than the Company. In addition, the Company
competes with a number of non-profit organizations and similar businesses which
can finance capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to the Company. There can be no assurance that the
Company will not encounter increased competition in the future which could
adversely affect the Company's operating results, particularly if existing
restrictive policies relating to the issuance of Certificates of Need are
relaxed or the moratorium in Connecticut is lifted. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company and its growth strategy is dependent upon the
experience, abilities and continued services of a small group of key management
personnel, particularly Harry Dermer and Jack Friedler, the Company's President
and Chief Executive Officer, respectively. The loss of services of any of these
individuals could have a material adverse effect on the Company. The Company has
entered into five year employment agreements with each of Messrs. Friedler and
Dermer which are effective as of the Effective Date. While the Company's
management has substantial experience in the nursing home business, no assurance
can be given that such prior experience will assure the Company's success. The
12
<PAGE>
Company is the owner and beneficiary of key-man life insurance policies each in
the amount of $1,000,000 on the lives of Mr. Friedler and Mr. Dermer. There can
be no assurance that the proceeds of such policies would adequately compensate
the Company for the loss of Mr. Dermer's or Mr. Friedler's services. See
"Management."
POTENTIAL SHORTAGE OF QUALIFIED HEALTHCARE PERSONNEL
At times during recent years, the healthcare industry has experienced a
shortage of qualified healthcare personnel. To date, the Company has been able
to staff its facilities appropriately with such personnel in order to maintain
its standards for quality care. However, no assurance can be given that the
Company will not be adversely affected by staffing shortages in the future. See
"Business--Employees."
CONFLICTS FROM RELATED PARTY TRANSACTIONS
The Facilities are leased from Fairfield Group Health Centers Limited
Partnership ("Fairfield"), a partnership of which Jack Friedler, the Company's
Chief Executive Officer, principal stockholder and a director is a limited
partner. Fairfield has informed the Company that other entities were willing to
lease such premises on substantially the same terms as the Company's current
lease. The Managed Facility in Connecticut is owned by Jack Friedler and his
wife. Suzanne Nettleton, an officer of the Company, will receive $540,000 of the
net proceeds of the Offering. The Company is acquiring BALZ and PRN from their
respective stockholders some of whom are stockholders of the Company. The
Company believes that the acquisition prices for BALZ and PRN are favorable
considering their historical and projected earnings. In addition, approximately
42%, of BALZ' revenues from its inception through December 31, 1996 have been
derived from sales to the Facilities and the Managed Facilities and 19% have
been derived from sales to nursing homes owned by affiliates of shareholders of
BALZ who are not affiliated with the Company. The Company leases its executive
offices from a Company controlled by Jack Friedler and his wife, who have
informed that Company that other parties had sought to lease the offices on
similar terms. The Company believes the terms of its leases and its management
agreement, are as favorable to the Company as those that could have been
obtained from nonaffiliated parties. However, the Company's contractual
relationship with entities affiliated with members of the Board of Directors
create potential conflicts of interest. There can be no assurance that these
contractual relationships with members of the Board of Directors and their
affiliates will not create an actual conflict of interest. Furthermore, no
independent fairness opinions were received with respect to any of the foregoing
transactions. In the future, all related party transactions will be approved by
the Company's independent directors. See "Certain Transactions."
IMMEDIATE AND SUBSTANTIAL DILUTION; PURCHASE OF COMMON STOCK BY EXISTING
STOCKHOLDERS AT PRICES BELOW THE OFFERING PRICE
This Offering involves an immediate and substantial dilution to investors.
Based upon an initial public offering price of $5.00 per Share and $.10 per
Warrant, purchasers of Shares and Warrants in the Offering will incur an
immediate dilution of $3.86 per Share in the net tangible book value of their
investment from the initial public offering price, which dilution amounts to
approximately 76% of the initial public offering price per Share. As a further
result of the acquisitions of BALZ and PRN, purchasers of Shares and Warrants in
the Offering will incur an immediate dilution of $4.24 per Share in the net
tangible book value of their investment from the initial public offering price,
which dilution amounts to approximately 83% of the initial public offering price
per Share. Investors in the Offering will pay $5.00 per Share, as compared with
an average cash price of $.11 per share of Common Stock paid by existing
stockholders. See "Dilution."
13
<PAGE>
POSSIBLE INADEQUACY OF GENERAL LIABILITY INSURANCE
As is typical in the health care industry, the Company is subject to claims
by patients and others in the ordinary course of its business. The Company
maintains general liability insurance in amounts and with such coverages and
deductibles that are deemed appropriate by management. Although the cost of such
liability insurance has not significantly increased in recent years, there can
be no assurance that such insurance will continue to be available at acceptable
costs or that claims in excess of the Company's insurance coverage or claims not
covered by the Company's insurance will not be asserted against the Company. See
"Business--Insurance."
CONTROL BY CURRENT PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the Company's officers and directors and
their affiliates will beneficially own approximately 61% of the outstanding
shares of Common Stock. Consequently, such stockholders will have voting control
of the Company, and as a practical matter will be able to determine the outcome
of most corporate actions requiring stockholder approval, including the election
of the Company's Board of Directors and approval of the Company's policies. See
"Principal Stockholders" and "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE
Of the 4,500,000 shares of Common stock of the Company outstanding as of the
date of this Prospectus, including the shares to be issued in connection with
the acquisitions of BALZ and PRN, 3,500,000 shares are "restricted securities,"
which are owned by "affiliates" of the Company, as those terms are defined in
Rule 144 promulgated under the Securities Act. Absent registration under the
Securities Act. A portion of the "restricted securities" will be eligible for
resale under Rule 144 commencing in June 1997 and a portion will be eligible two
years from the Effective Date. In general, under Rule 144, subject to
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell in brokerage transactions, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on NASDAQ or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least three years to sell such shares
without regard to any of the volume limitations as described above. All of the
Company's existing stockholders, have agreed not to sell or otherwise dispose of
any of their shares of Common Stock now owned for a period of twenty-four months
from the Effective Date, without the prior written consent of the Underwriter.
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of such shares for sale will have on the market
prices of the Company's securities prevailing from time to time. The possibility
that substantial amounts of Common Stock may be sold under Rule 144 into the
public market may adversely affect prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital in the future through
the sale of equity securities. See "Shares Eligible for Future Sale."
NO DIVIDENDS AND NONE ANTICIPATED
To date, no dividends have been declared or paid on the Common Stock, and
the Company does not anticipate declaring or paying any dividends to its
stockholders in the foreseeable future, but rather intends to reinvest profits,
if any, in the development and expansion of its business. See "Dividends."
14
<PAGE>
LACK OF MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY DETERMINATION OF
OFFERING PRICE
Prior to this Offering, there has been no public market for and there can be
no assurance that an active market in the Company's Common Stock and/or Warrants
will develop or be sustained after this Offering. Accordingly, purchasers of the
Shares and/or Warrants may experience difficulty selling or otherwise disposing
of such Shares and/or Warrants. The price of the Shares and/or Warrants and the
exercise price and other terms of the Warrants being offered hereby were
determined by negotiations between the Company and the Underwriter and are not
necessarily related to the Company's assets, earnings, book value per share, its
results of operations or any other generally accepted criteria of value and
should not be construed as indicative of their value. See "Underwriting."
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. In addition, the market prices of the securities of many
publicly-traded companies in the health care industry have in the past been, and
can in the future be expected to be, especially volatile. Various factors and
events, including future announcements of new service offerings by the Company
or its competitors, developments or disputes concerning, among other things,
regulatory developments in the United States, and economic and other external
factors, as well as fluctuations in the Company's financial results, could have
a significant impact on the market price of the Company's securities.
NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF COMMON
STOCK FROM
NASDAQ MARKET; RISKS OF LOW-PRICED STOCKS
The Company has applied for listing of the Common Stock on Nasdaq, subject
to completion of this Offering. The Commission has approved rules imposing
criteria for listing of securities on Nasdaq, including standards for
maintenance of such listing. In order to qualify for initial quotation of
securities on Nasdaq, a company, among other things, must have at least
$4,000,000 in net tangible assets, $3,000,000 in market value of the public
float and a minimum bid price of $5.00 per share. For continued listing, a
company, among other things, must have $1,000,000 in net tangible assets,
$1,000,000 in market value of securities in the public float and a minimum bid
price of $1.00 per share. If the Company is unable to satisfy Nasdaq's
maintenance criteria in the future, its securities may be delisted from Nasdaq.
In such event, the Company would seek to list its securities on the Nasdaq
SmallCap Market, however, if it was unsuccessful, trading, if any, in the
Company's securities would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets" or the OTC Bulletin Board. As a
consequence of such delisting, an investor would likely find it more difficult
to dispose of, or to obtain quotations as to, the price of the Company's
securities.
RELATIONSHIP OF UNDERWRITER TO TRADING
The Underwriter may act as a broker or dealer with respect to the purchase
or sale of the Common Stock and the Warrants in the over-the-counter market
where each is expected to trade. The Underwriter also has the right to act as
the Company's exclusive agent in connection with any future solicitation of
Warrantholders to exercise their Warrants. Regulation M, which was recently
adopted to replace Rule 10b-6, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), may prohibit the Underwriter from engaging in any
market-making activities with regard to the Company's securities for the period
of up to five business days (or such other applicable period as Regulation M may
provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, the Underwriter and solicitating broker/dealers may be unable to provide
a market for the Company's securities during certain periods while the warrants
are exercisable. Any temporary cessation of such market-making activities could
have an adverse effect on the market price of the Company's securities.
15
<PAGE>
LACK OF EXPERIENCE OF UNDERWRITER
The Underwriter was organized in March 1995, was first registered as a
broker dealer in December 1995, and became a member firm of the NASD in December
1995. The Underwriter is principally engaged in retail brokerage and market
making activities and various corporate finance projects. Although the
Underwriter has acted as a placement agent in private offerings and has
participated as a member of the underwriting syndicate or as a selected dealer
in four prior public offerings, it only has acted as the lead managing
underwriter in one prior public offering and has co-managed two other public
offerings. No assurance can be given that the Underwriter's lack of experience
as a lead managing underwriter of public offerings will not adversely affect the
Offering and the subsequent development of a liquid public trading market in the
Company's securities.
POSSIBLE ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Commencing on the first anniversary of the Effective Date of this
Prospectus, the Warrants are subject to redemption by the Company at $.05 per
Warrant on 30 days' written notice; provided, that the closing bid price of the
Company's Common Stock, as reported on Nasdaq or any other national securities
exchange, for 20 consecutive trading days ending within 10 days of the notice of
redemption equals or exceeds $10.00 per share. In the event the Company elects
to redeem the Warrants, such Warrants would be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such date, it will cease to be exercisable
and the holder will be entitled only to the nominal redemption price. Because
holders of Warrants may not exercise their Warrants unless the Company delivers
a "current" prospectus to such holders, the Company will not redeem the Warrants
unless it can deliver, concurrently with the notice of redemption, a "current"
prospectus. See "Description of Securities--Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS
The Warrants offered hereby are not exercisable unless, at the time of
exercise, (i) there is a current prospectus relating to the Common Stock
issuable upon the exercise of the Warrants under an effective registration
statement filed with the Securities and Exchange Commission, and (ii) such
Common Stock is then qualified for sale or exempt therefrom under applicable
state securities laws in the jurisdictions in which the various holders of
Warrants reside. There can be no assurance, however, that the Company will be
successful in maintaining a current registration statement. After a registration
statement becomes effective, it may require updating by the filing of a
post-effective amendment. A post-effective amendment is required (i) any time
after nine months subsequent to the effective date when any information
contained in the prospectus is over sixteen months old, (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement, or (iii) when any material change
occurs in the information relating to the plan of distribution of the securities
registered by such registration statement. The Company anticipates that this
Registration Statement will remain effective for at least nine (9) months
following the date of this Prospectus or until , 1997, assuming a post-
effective amendment is not filed by the Company. The Warrants will be separately
tradeable and separately transferable from the Common Stock offered hereby
immediately commencing on the date of this Prospectus. The Company intends to
qualify the Warrants and the shares of Common Stock issuable upon exercise of
the Warrants in a limited number of states, although certain exemptions under
state securities ("blue sky") laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. The Company will be prevented, however, from issuing shares of Common
Stock upon exercise of the Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Common Stock issuable upon
exercise of the Warrants. The Company may decide not to seek, or may not be able
to obtain qualification of the issuance of such Common Stock in all of the
states in which the holders of the Warrants reside. In such a case, the Warrants
of those holders
16
<PAGE>
will expire and have a no value if such Warrants cannot be exercised or sold.
See "Description of Securities."
POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of "blank check" preferred stock, $.01 par value ("Preferred
Stock"), with such designations, rights and preferences as may be determined
from time to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without further stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. The Company has no current plans to issue any
shares of Preferred Stock. See "Description of Securities."
17
<PAGE>
DILUTION
Dilution represents the difference between the initial public offering price
paid by the purchasers in the offering and the net tangible book value per share
immediately after completion of the offering. Net tangible book value per share
represents the amount of the Company's total assets minus the amount of its
liabilities and intangible assets divided by the number of shares of Common
Stock outstanding. The net tangible book value of the Company as of December 31,
1996 was $648,000 or $0.21 per share of Common Stock based on the 3,092,000
shares of Common Stock outstanding as of such date. After giving effect to the
receipt of the net proceeds (estimated to be approximately $4,140,000) from the
sale of the Shares and Warrants offered hereby at an initial offering price of
$5.00 per Share and $.10 per Warrant, the net tangible book value of the Company
at December 31, 1996 would have been $5,074,000 or $1.24 per share of Common
Stock. This represents an immediate increase in net tangible book value of $1.03
per share to the existing stockholders and an immediate dilution to new
investors of $3.86 per Share, which amounts to approximately 76% of the initial
public offering price per Share and per Warrant considered in the aggregate.
As a further result of the acquisitions of BALZ and PRN the net tangible
book value of the Company at December 31, 1996 would have been $3,873,000 or
$0.86 per share of Common Stock. This represents an immediate increase in net
tangible book value of $.65 per share to the existing stockholders and an
immediate dilution to new investors of $4.24 per share which amounts to
approximately 83% of the initial public offering price per Share and per Warrant
considered in aggregate. A substantial portion of the increased dilution from
the acquisition of BALZ and PRN is related to the goodwill that arises from the
acquisitions.
The following table illustrates the per share dilution to new investors with
and without the acquisition of BALZ and PRN:
<TABLE>
<CAPTION>
WITHOUT
REGARD TO THE INCLUDING THE
ACQUISITION ACQUISITION
OF BALZ AND OF BALZ AND
PRN PRN
------------- ---------------
<S> <C> <C>
Assumed public offering per share of Common Stock and Warrant
(combined)..................................................... $ 5.10 $ 5.10
Adjusted net tangible book value per share of Common Stock at
December 31, 1996.............................................. 0.21 0.21
Increase per share attributable to new investors................. 1.03 0.65
----- -----
Net tangible book value per share of Common Stock after the
offering....................................................... 1.24 0.86
----- -----
Dilution to new investors........................................ $ 3.86 $ 4.24
----- -----
----- -----
</TABLE>
The following table compares (i) the aggregate number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid for such shares by existing stockholders, with (ii) the
number of shares to be sold by the Company pursuant to this Prospectus and the
total consideration to be paid therefor under this Offering.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED PAID AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders................................... 3,092,000 75.56% $ 336,000 6.18% $ .11
New Investors........................................... 1,000,000 24.44% 5,100,000 93.82% $ 5.10
---------- --------- ------------ --------- -----
Total................................................... 4,092,000 100.00% $ 5,436,000 100.00% $ 1.33
---------- --------- ------------ --------- -----
---------- --------- ------------ --------- -----
</TABLE>
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities offered hereby at public offering price of $5.00 per Share and $.10
per Warrant, after deducting underwriting discounts and expenses payable by the
Company, are estimated to be approximately $4,140,000, ($4,805,550 if the Over-
allotment Option is exercised in full). The Company presently intends to use the
net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
- -------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
PRN acquisition(1).................................................................... $ 1,620,000 39.13%
Repayment of Indebtedness(2).......................................................... 453,000 10.94
Establishment of Institutional Pharmacy(3)............................................ 400,000 9.66
Expansion of LEV Rehab Services(4).................................................... 300,000 7.25
Capital Expenditures to Nursing Home(5)............................................... 200,000 4.83
Working Capital(6).................................................................... 1,167,000 28.19
------------ ------
Total............................................................................. $ 4,140,000 100.00%
------------ ------
------------ ------
</TABLE>
- ------------------------
(1) Reflects payment in full of the cash portion of the acquisition of PRN. Of
such amounts, $540,000 is payable to Suzanne Nettleton, the Company's
Executive Vice President. This obligation is payable in full upon the
closing of this Offering. The remainder of the purchase price for PRN will
be paid by issuing 108,000 shares of the Company's Common Stock (valued at
$540,000 based on the public offering price of $5.00 per share) to Jack
Friedler, the Company's Chief Executive Officer and Principal Stockholder.
The purchase price was arrived at by negotiations between the Company and
the shareholders of PRN who are not affiliated with the Company. See
"Business--PRN Acquisition" and "Certain Transactions."
(2) The Company intends to repay all of its outstanding indebtedness owed to a
non-affiliated lender which as of December 31, 1996 amounted to an aggregate
of $300,000. The loan bears interest at an annual rate of 15% and is due on
the consummation of this Offering. The proceeds of this loan made in May
1996 were used for working capital. The Company intends to repay an
aggregate of $153,000 owed to Beverly Enterprises, Inc. This promissory note
bears interest at 12% and is to be paid out of the net proceeds of this
Offering. The proceeds of the loan made in November 1995 were used for
working capital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(3) Includes the cost of renting a suitable facility, and purchasing a specially
designed pharmacy computer system and other equipment.
(4) Includes costs related to expanding into the provision of rehabilitative
services at homes and into the State of Massachusetts.
(5) The Company intends to utilize this portion of the net proceeds of the
Offering for leasehold improvements and rehabilitation equipment at its
Fairfield Manor subacute unit.
(6) The Company may seek to utilize funds allocated to working capital for
business or product acquisitions. The Company may seek to acquire, where
feasible, companies whose businesses are compatible with those of the
Company. The Company does not currently have any agreements, commitments or
arrangements with respect to my proposed acquisitions other than PRN and
BALZ, and no assurance can be given that any acquisition opportunity will be
consummated in the future. Includes $100,000 to be paid to the Underwriter
pursuant to the three-year financial advisory agreement, all of which is
payable upon consummation of the Offering.
19
<PAGE>
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering, based upon the current status of its
operations and anticipated business plans and certain assumptions regarding
industry conditions and the Company's future revenue and expenditures. It is
possible, however, that the application of funds will differ considerably from
the estimates set forth herein due to changes in the economic climate and/or the
Company's planned business operations or unanticipated complications, delays and
expenses, as well as any potential acquisitions that the Company may consummate,
although no specific acquisition has been identified. Any reallocation of the
net proceeds will be at the discretion of the Board of Directors of the Company.
Any additional net proceeds realized from the exercise of the Underwriter's
Over-allotment Option (up to $665,550) will be added to the Company's working
capital.
Pending application, the net proceeds will be invested principally in United
States government securities, short-term certificates of deposit, money market
funds or other short-term interest-bearing investments.
The Company estimates that the net proceeds from this Offering, together
with income from operations, including the incomes from PRN and BALZ, will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of at least 12 months from the completion of this Offering. In the
event that the Company consummates any acquisition, such funds will be derived
from the funds currently allocated to working capital. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual short-term debt and capitalization
of the Company (i) at December 31, 1996, (ii) pro forma as adjusted to reflect
300,000 shares of Common Stock issued to purchase BALZ, the issuance of 108,000
shares of Common Stock for the non-cash portion of the purchase price of PRN as
if such acquisitions had been consummated as of December 31, 1996, the sale of
the 1,000,000 Shares and Warrants being offered hereby and the application of
$453,000 of the net proceeds therefrom to repay certain indebtedness as
described (see "Use of Proceeds"). The pro forma as adjusted includes adjustment
for deferred tax benefits and write off of financing costs on the repayment of
certain debt. This table should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
(IN THOUSANDS)
----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
Short-term debt:
Notes payable and current portion of long-term debt.................. $ 914 $ 474
--------- -----------
--------- -----------
Long-term debt, excluding current portion.............................. $ 79 $ 127
--------- -----------
Stockholders' equity: (1)
Preferred Stock, $.01 par value, 1,000,000 authorized; none issued
and outstanding
Common Stock, $.01 par value, 15,000,000 authorized; 3,092,000 shares
issued and outstanding, actual 4,500,000 shares issued and
outstanding, pro forma as adjusted................................. 31 45
Additional paid-in capital........................................... 270 6,436
Retained earnings.................................................... 693 1,171
--------- -----------
Total stockholders' equity....................................... 994 7,652
--------- -----------
Total capitalization........................................... $ 1,073 $ 7,779
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include any shares issuable upon exercise of outstanding warrants.
21
<PAGE>
DIVIDEND POLICY
The Company has no present intention of paying any dividends on the Common
Stock in the foreseeable future, as it intends to reinvest profits, if any, in
the development and expansion of its business. The payment by the Company of
dividends, if any, in the future, rests solely within the discretion of its
Board of Directors and will depend upon, among other things, the Company's
earnings, capital requirements and financial condition, as well as other factors
deemed relevant by the Company's Board of Directors. Although dividends are not
limited currently by any agreements, it is anticipated that future agreements,
if any, with institutional lenders may also limit the Company's ability to pay
dividends.
22
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
SELECTED FINANCIAL DATA
The following table presents, for the periods and dates indicated, summary
historical, pro forma and pro forma as adjusted financial data of the Company.
The pro forma condensed statement of operations data for the period July 1, 1995
(commencement of operations) to June 30, 1996 and for the six months ended
December 31, 1996 gives effect to the acquisition of PRN and BALZ as if the
acquisition had been consummated as of July 1, 1995. The pro forma condensed
statement of operations data for the six months ended December 31, 1996 also
gives effect to the sale of 102,000 shares of Common Stock and Warrants offered
hereby by the Company at an offering price of $5.00 per Share and $.10 per
Warrant and the application of the net proceeds therefrom to repay certain
indebtedness in the amount of $453,000 as described under "Use of Proceeds" as
if such transaction had occurred on July 1, 1996.
The pro forma balance sheet data at December 31, 1996 reflects the
acquisitions of PRN and BALZ as if they had occurred on December 31, 1996,
including the sale of 365,000 shares of Common Stock and Warrants at an offering
price of $5.00 per Share and $.10 per Warrant, the net proceeds of which will be
used to pay the cash portion price of PRN of $1,620,000. The pro forma as
adjusted balance sheet data at December 31, 1996 also gives effect to the sale
of the balance of 635,000 Shares of Common Stock and the balance of 635,000
Warrants offered hereby by the Company at an offering price of $5.00 per Share
and $.10 per Warrant and the application of $453,000 of the net proceeds
therefrom to repay certain indebtedness as described under "Use of Proceeds."
This information should be read in conjunction with "Capitalization,"
"Summary Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Pro Forma Unaudited Condensed
Financial Information and the Company's Financial Statements and the notes
thereto, each included elsewhere herein. The pro forma data set forth below is
not necessarily indicative of what the actual results of operations would have
been had the transactions occurred at the dates referred to above, nor do they
purport to indicate the results of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
JULY 1, 1995
1996 1995 1996 (COMMENCEMENT OF
----------- --------- ----------- OPERATIONS TO)
JUNE 30, 1996
------------------------
(UNAUDITED)
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net revenue.......................................... $ 17,447 $ 16,939 $ 20,195 $ 33,641 $ 38,102
Operating costs and expenses......................... 17,145 16,115 19,290 32,926 36,780
----------- --------- ----------- ----------- -----------
Income from operations............................... 302 824 905 715 1,322
Other (expense)-net.................................. (70) (100) (82) (254) (89)
----------- --------- ----------- ----------- -----------
Income before income taxes........................... 232 724 823 461 1,233
Provision for income taxes*.......................... 96 294 373 195 575
----------- --------- ----------- ----------- -----------
NET INCOME........................................... $ 136 $ 430 $ 450 $ 266 $ 658
----------- --------- ----------- ----------- -----------
Net income per share................................. $ 0.04 $ 0.14 $ 0.11 $ 0.09 $ 0.17
----------- --------- ----------- ----------- -----------
Weighted number of common shares outstanding......... 3,092 3,092 3,967 3,092 3,967
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
* Historical or pro forma as applicable
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
JUNE 30, 1996
(UNAUDITED) PRO FORMA -------------
HISTORICAL PRO FORMA AS ADJUSTED HISTORICAL
----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents................................... $ 1,333 $ 1,059 $ 3,412 $ 212
Working capital (deficiency)................................ (2,278) (1,943) 863 (2,381)
Total assets................................................ 10,159 15,230 17,297 9,614
Short-term borrowings....................................... 914 927 597 2,580
Total long-term debt excluding current maturities........... 79 127 127 102
Total stockholders' equity.................................. 994 5,132 7,652 487
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LEXINGTON HEALTHCARE GROUP, INC.
OVERVIEW
Immediately prior to the Effective Date, the members of Lexington Health
Care Group, LLC will exchange their LLC interests in exchange for shares of
Common Stock of LHG.
LHG is a long-term and subacute care provider, which operates four nursing
homes (the "Facilities") with 628 beds which are leased from an affiliated
entity. See "Certain Transactions." LHG also manages two nursing homes pursuant
to management agreements. In the operation of the Facilities, the Company's
financial return is based on the overall performance of each Facility. The
Company is responsible for all costs at the Facilities and receives all revenues
generated by the Facilities. In exchange for managing the Managed Facilities,
the Company receives a monthly management fee for services rendered and is not
exposed to the risks of ownership. The Company determines the appropriate
management fee based on the services required. The Company receives a management
fee of $6,030 per month for services to Lexington House and $17,000 per month
for services to the Oak Island Skilled Nursing Center where the Company is
responsible for the salaries of the Nursing Home Administrator and Director of
Nursing at the Oak Island Facility. The Company believes that both management
agreements are profitable. In addition, as a manager, the Company is not a party
to third party reimbursement agreements; as an operator, the Company is a party
to such third party agreements.
The four nursing homes were previously operated as traditional nursing homes
by Beverly Enterprises, Inc. ("Beverly"), an unaffiliated entity. Beverly is a
national nursing home operator. Beverly sought to leave the Connecticut and
Massachusetts market due to its unprofitability and is in the process of
divesting itself of other nursing homes in Connecticut. In addition, Beverly had
been cited for certain quality of care issues and had been experiencing a
reduced census at the Facilities. The leases between Beverly and Fairfield were
scheduled to terminate in 1996. Beverly had been discussing early termination
since 1994. Since LHG has begun operating the Facilities, it has broadened the
services provided and occupancy and reimbursement rates have increased. When the
Company first began operating the Facilities, the overall occupancy rate was
84%. As of February 1, 1997, the occupancy rate was approximately 94%. Daily
reimbursement rates have increased by approximately 9%. The Facilities and the
Managed Facilities service two basic patient populations: traditional geriatric
patients and emerging subacute care patients with higher acuity disorders who
require complex and intensive medical services. Subacute care patients generally
require more rehabilitative therapy and are residents for a shorter stay 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. Favorable payor mix includes greater percentages of
higher-rate Medicare and managed care patients as well as an overall increase in
the volume of ancillary services (i.e., therapies) provided. Offering specialty
medical services allows the Company to expand its base of revenues and provide
those services in the demand by the population which the facility serves.
In the health care continuum, it is more cost effective to provide those
specialty services in the lower cost environment of a nursing home (subacute)
facility, rather than as part of the acute care (hospital) cost structure. The
Company has moved towards obtaining more short term subacute care patients in
the Facilities as opposed to a traditional nursing home where the patients are
predominantly geriatric patients.
Specifically, the Company is seeking to shift from Medicaid which is the
lowest reimbursement rate to managed care which provides for the highest
reimbursement. To a lesser degree, the Company is moving away from Medicare to
managed care. Special rehabilitative services, such as orthopedic, respiratory
and rehabilitative therapy provide for a higher reimbursement rate.
24
<PAGE>
In the subacute care setting, higher rehabilitative-therapy revenues are
generated in a shorter length of stay; average length of stay (ALOS) typically
ranges from 7 to 21 days for subacute patients. The nursing home is reimbursed
by the managed care insurer at rates traditionally two or three times higher
than the typical geriatric patient, due to the intensity of the subacute medical
needs and, therefore, the higher level of services provided. (The medical
requirement establishing the need for more ancillary services is usually not
found with a geriatric or chronic-disease resident, whose care may be more of a
custodial nature.)
Payment for the higher level of services is typically made in 30 days.
Combined, the subacute services increase the Company's revenues and speed the
collection of same. Currently, about 12% of the residents at the Facilities are
subacute residents. In the next 12 months, it expects, although there can be no
assurance, to increase the percentage of subacute patients to 15% of residents.
This increase is limited due to the needed renovations to its physical plant for
which the Company has allocated $200,000 of the net proceeds for.
As a result of the acquisitions of BALZ and PRN which are not currently
operated by the Company, the Company is expected to be able to generate general
and administrative cost savings in the operation of the combined entities
compared to separate operations. In addition, the combined level of business for
the companies should increase as a result of referrals from the nursing homes to
BALZ and PRN. This additional business will allow cost reductions in purchasing
due to greater volume without a corresponding increase in PRN's marketing staff.
As a result of the combination of the companies, internally-generated cash
flow will increase with the addition of BALZ and PRN the Company believes the
need for external financing should be lessened.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD") VS. SIX MONTHS ENDED
DECEMBER 31, 1995 ("1995 PERIOD")
For the six months ended December 31, 1996, LHG had total revenues of
$17,447,000 and total expenses of $17,215,000. These expenses consisted of
salaries and benefits of $13,010,000, food, medical and other supplies of
$1,075,000, other operating expenses (including rent of $1,236,000) of
$2,574,000, corporate, general and administrative expenses of $486,000 and
interest expense of $70,000. LHG had net income of $232,000 for the six months
ended December 31, 1996.
For the six months ended December 31, 1995, LHG had total revenues of
$16,939,000 and total expenses of $16,215,000. These expenses consisted of
salaries and benefits of $12,260,000, food, medical and other supplies of
$1,073,000, other operating expenses (including rent of $1,241,000) of
$2,305,000, corporate, general and administrative expenses of $477,000 and
interest expense of $100,000. LHG had net income of $724,000 for the six months
ended December 31, 1995.
Revenues in the 1996 period increased over the 1995 period by $508,000;
$342,000 of this increase was a result of increased occupancy, $50,000 of the
increase was applicable to patient services performed during the period ended
June 30, 1996 recognized currently as a result of the Company's current revision
of its estimated reimbursement rate from Medicaid and $116,000 of such increase
was due to an additional unrelated-party management fee.
Costs in the 1996 period increased over the 1995 period by $1,000,000. The
major increase was for higher salaries and benefits including $750,000 for
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 of approximately $380,000 and occupancy-driven higher operating
expenses in housekeeping, laundry, and nursing.
25
<PAGE>
RESULTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1995 ("COMMENCEMENT OF OPERATIONS") TO
JUNE 30, 1996
LHG had total revenues of $33,641,000 for the period ended June 30, 1996.
LHG had total expenses of $33,180,000 for the period 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. LHG had net income of $461,000 for
the period ended June 30, 1996. LHG's financial statements have been prepared
under the assumption that it has converted to a corporation, which will occur
immediately prior to the Effective Date; therefor, it would have been obligated
to pay $195,000 in income taxes and would have had net income of $266,000.
During this period, 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 period decreased as the
Company experienced vacancies and implemented plans to improve patient mix and
census.
LIQUIDITY AND CAPITAL RESOURCES
LHG has primarily financed its operations through operating revenues,
borrowings from the prior operator of the facilities and other private lenders
including stockholders, and by financing its accounts receivable.
Start up and initial period operations have consumed a large amount of the
Company's cash and working capital; going forward certain earlier needs will not
re-occur. As a result of the acquisitions, internally-generated cash flow will
increase from the addition of BALZ and PRN and the need for external financing
should be lessened.
LHG, as the operator of the Facilities, received certain Medicaid
reimbursement in the aggregate amount of $2,600,000 that related to the time
that the Facilities were operated by Beverly. The Company utilized such amounts
and agreed to repay them to Beverly with 12% interest. As of December 31, 1996
there was a $153,000 balance on the loan which is to be repaid out of the
proceeds of the Offering. In July 1995, LHG borrowed an aggregate of $50,000 on
an interest free basis from South Side Agency. The balance as of December 31,
1996 on the loan from South Side is $25,500. LHG entered into a revolving credit
facility collateralized by LHG's accounts receivable. The facility bore interest
at 9.75% and was paid in its entirety in July 1996. The proceeds were used for
working capital.
In May 1996, LHG borrowed an aggregate of $350,000 from an unaffiliated
lender which loan bears interest at the rate of 15%. The loan which is
personally guaranteed by Jack Friedler, the Company's Chief Executive Officer,
had a balance of $300,000 as of December 31, 1996. Such loan will be repaid from
the proceeds of the Offering. In July 1996, LHG borrowed $500,000 from a
non-affiliated entity. This loan bore interest at the prime rate plus 2%. The
loan was repaid in full in December, 1996 without interest.
In addition, between October 1995 and July 1996, LHG borrowed an aggregate
of $286,000 from Jack Friedler and Harry Dermer with an annual interest rate of
10% on an interest free basis. $104,000 of such loan was repaid as of December
31, 1996. The loan, which was used for working capital, is payable on demand but
is not anticipated to be repaid in the next 12 months.
The Company believes that by eliminating outlays such as the $2,282,000
security deposit and the $394,000 loan to Lexington House, Inc., it can
substantially improve its liquidity. In addition, the Company expended
approximately $600,000 in capital improvements to the Facilities. The Company
expects that capital expenditures for the Facilities should not exceed $200,000
over the next 12 months. The Company has allocated a portion of the net proceeds
for this purpose. See "Use of Proceeds." In addition, the interest on short-term
borrowings of $254,000 was higher during the first year of operations and has
26
<PAGE>
subsequently decreased to $70,000 in the six months ended December 31, 1996.
Interest costs are expected to further decrease after the Offering when the debt
is repaid out of the Offering proceeds. The Company has intensified its efforts
to collect accounts receivable which have decreased by $1,249,000 from June 30,
1996 to December 31, 1996. Proceeds of the Offering not immediately used will be
invested and any interest earned will be added to the Company's working capital.
The Company believes that the acquisitions of BALZ and PRN will improve its
liquidity by enabling the Company to utilize those entities positive cash flows.
The Company is acquiring PRN in exchange for $1,620,000 in cash and 108,000
shares of Common Stock. The cash portion is to be paid out of the net proceeds
of the Offering. The acquisition will be accounted for as a purchase. The
Company is acquiring BALZ in exchange for 300,000 shares of Common Stock. The
acquisition will be accounted for as a purchase.
The Company expects to integrate the computer systems of each of its units
and to otherwise consolidate responsibilities and streamline operations. The
Company believes that following the acquisitions of BALZ and PRN and its receipt
of the net proceeds of the Offering that the Company's working capital needs
will allow it to continue its operations for at least 12 months following the
Offering. The Company intends to utilize $200,000 of the Offering proceeds to
make capital improvements at the Fairfield and Pond Facilities, $300,000 to
expand the operations of LEV and $400,000 to establish an institutional
pharmacy. The $300,000 directed to LEV will be utilized for working capital to
hire personnel. The $400,000 allocated to the institutional pharmacy is for the
purchase of a pharmaceutical computer system, leasehold improvements, inventory
and working capital. All other obligations of the Company will be paid out of
cash flow. The operations of BALZ and PRN are cash flow positive and are
expected, although there can be no assurance, to contribute approximately
$750,000 to the Company's operations during the 12 months following the
Offering.
At June 30, 1996, LHG had cash of $212,000, accounts receivable of
$5,585,000 and prepaid and other current assets of $159,000. LHG also had
non-current assets of $3,585,000 which consisted primarily of a security deposit
of $2,282,000, equipment and leasehold improvements of $462,000 and an 8% note
in the principal amount of $394,000 due from Lexington House, Inc. (an entity
owned by Jack Friedler). LHG made certain expenditures on behalf of Lexington
House, Inc. in anticipation that LHG would acquire Lexington House, Inc.
Subsequently, the negotiations for the sale were terminated.
At June 30, 1996 and December 31, 1996, LHG had a working capital deficiency
of $2,381,000 and $2,278,000, respectively. As a result of such working capital
deficiency, LHG's accountants included an explanatory paragraph in their report
on LHG's financial statements for the year ended June 30, 1996. The Company
believes its ability to continue as a going concern is dependent on its ability
to materially reduce future outlays for non-current assets and to increase the
occupancy levels at the Facilities, as well as the Company's receipt of the net
proceeds of the Offering of which $1,217,000 has been allocated to working
capital ($100,000 of which will be used to pay the fees under the financial
advisory agreement). The Company believes that the acquisitions of BALZ and PRN
will improve its working capital position and that its past outlays for
non-current assets are of a non-recurring nature.
At December 31, 1996, LHG had cash of $1,333,000, accounts receivable of
$4,336,000 and prepaid and other current assets of $324,000. At December 31,
1996 LHG had a working capital deficiency of $2,278,000, essentially unchanged
from June 30, 1996. Notes payable decreases were offset by increases in accounts
payable and accrued liabilities.
As a result of the Company receiving the majority of its revenues from third
party payors, there is lag time between when the services are performed and when
they are paid for. Medicaid, which is payable by the State of Connecticut,
remits payment for the previous month on the 15th of the next month. In December
1996, the Company received an overpayment of $2,500,000 from the State of
Connecticut for Medicaid reimbursement as a result of a clerical error by the
State. The Company immediately reimbursed the State $800,000 and made
arrangements with the State to repay the $1,700,000 balance as follows:
27
<PAGE>
$450,000 to be deducted each month from its Medicaid payment and the balance of
$350,000 to be paid out of the proceeds of the Offering. As of February 15,
1997, the Company owes an aggregate of $800,000 of the $2,500,000. Since the
Company does not anticipate that the Offering will close prior to April 15, the
State intends to deduct $450,000 out of its March Medicaid payment and the
balance out of its April Medicaid payment. The balance owed bears no interest.
In the event the balance is not paid in accordance with the arrangement, the
State has informed the Company that it will refer the matter to the Attorney
General's Office. Since the State of Connecticut is directly withholding the
amounts due from the Company's monthly Medicaid payments, the Company does not
believe that there is any substantial likelihood that such matter will be
referred to the Attorney General's Office. Medicaid pays the Company
approximately 30 days from its receipt of a bill which the Company submits at
the end of each month. The overpayment was used to repay another creditor
$450,000, which represented its total indebtedness to such party, and to repay
certain vendors. Other than the repayment of the Medicare overpayment, the
Company is not aware of any claims for reimbursement of amounts previously
received from third party payors, although Medicare and Medicaid have the right
to audit the Company's payments.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of LHG.
28
<PAGE>
BALZ MEDICAL SERVICES, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 1,
1995
SIX MONTHS (COMMENCEMENT OF NOVEMBER 1, 1995
ENDED OPERATIONS) TO (COMMENCEMENT OF
DECEMBER 31 DECEMBER 31 OPERATIONS) TO
1996 1995 JUNE 30, 1996
--------------- ------------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Statement of Operations Data:
Net revenue.................................................... $ 658 $ 81 $ 745
Operating costs and expenses................................... 343 78 374
----- --- -----
Income before provision for income taxes......................... 315 3 371
Provision for income taxes....................................... 130 -- 157
----- --- -----
NET INCOME....................................................... $ 185 $ 3 $ 214
----- --- -----
----- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------- ----------
<S> <C> <C>
UNAUDITED
Balance sheet data:
Cash and Cash equivalents............................................................. $ 81 $ 16
Working capital....................................................................... 400 219
Total assets.......................................................................... 1,045 756
Short-term borrowings................................................................. 30 60
Total stockholders' equity............................................................ 419 234
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALZ MEDICAL SERVICES, INC.
OVERVIEW
BALZ was formed in October 1995 and commenced operations on November 1, 1995
to provide medical supplies, durable medical equipment and other medical
supplies to the Facilities, the Managed Facilities and other non-affiliated
nursing homes, doctors and patients at their homes. BALZ markets its products in
Connecticut, Massachusetts and New York. Approximately 42% of its revenues from
its inception through December 31, 1996 were derived from sales to patients in
the Facilities and the Managed Facilities. In addition, BALZ generated 19% of
its revenues from sales to facilities controlled by affiliates of other owners
of BALZ who are not affiliates of the Company. The Company expects those
percentages to be reduced as BALZ's business is expanded.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
BALZ generated net revenues of $658,000 for the six month period ended
December 31, 1996. Costs of goods amounted to $196,000. This resulted in a gross
profit of $462,000.
BALZ incurred general and administrative expenses of $147,000 for the six
month period. These expenses consisted primarily of salaries and rental
expenses. BALZ paid LHG an aggregate of $19,000 for the six months ended
December 31, 1996 for management services, rent and general and administrative
expenses. BALZ had income from operations of $315,000 and provision for income
taxes of $130,000, resulting in a net income of $185,000.
RESULTS OF OPERATIONS--
EIGHT MONTHS ENDED JUNE 30, 1996
BALZ generated net revenues of $745,000 for the eight month period from
November 1, 1995 to June 30, 1996. Costs of goods sold amounted to $247,000.
This resulted in a gross profit of $498,000. Revenues are recognized at the time
the medical supplies are provided to the nursing home facility. Substantially
all of the Company's revenues are billed to Medicare under the provisions of
reimbursement formulas and regulations in effect.
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare; such reimbursements are subject to audit by Medicare
and estimates are recorded for potential adjustments that may result.
Differences between the estimated amounts accrued and final settlements are
reported in operations in the year of settlement.
BALZ incurred general and administrative expenses of $127,000 for the eight
month period. These expenses consisted primarily of salaries and rental
expenses. BALZ paid LLC an aggregate of $25,000 for the period ended June 30,
1996 for management services, rent and general and administrative expenses. BALZ
had income from operations of $371,000 and incurred income taxes of $157,000,
resulting in a net income of $214,000.
LIQUIDITY AND CAPITAL RESOURCES
To date, BALZ has primarily financed its operations through borrowings from
its stockholders, the sale of Common Stock and revenues from operations. BALZ
borrowed an aggregate of $60,000 pursuant to a series of promissory notes which
bear interest at the rate of 10% and are payable on demand. BALZ
30
<PAGE>
raised $30,000 through the sale of shares of Common Stock. BALZ subsequently
repurchased a portion of such shares for an aggregate of $10,000 and has repaid
$30,000 of the demand notes.
As of June 30, 1996, BALZ had cash of $16,000, accounts receivable of
$649,000, net of allowance for uncollectible amounts, inventory of $23,000 and
deferred taxes of $50,000. As of December 31, 1996, BALZ had cash of $81,000,
accounts receivable of $785,000, inventory of $27,000 and deferred taxes of
$130,000. Immediately prior to the Effective Date, the shareholders of BALZ have
agreed to exchange their shares of BALZ for an aggregate of 300,000 shares of
Common Stock of the Company.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of BALZ.
31
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue............................................................ $ 2,090 $ 1,686 $ 3,821 $ 3,042
Operating costs and expenses........................................... 1,794 1,575 3,300 2,813
--------- --------- --------- ---------
Income before provision for income taxes................................... 296 111 521 229
Provision for state income taxes........................................... 33 14 70 36
--------- --------- --------- ---------
NET INCOME................................................................. 263 97 451 193
Pro forma federal income taxes............................................. 89 33 143 58
--------- --------- --------- ---------
Pro forma net income....................................................... $ 174 $ 64 $ $308 $ 135
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
DECEMBER 31, --------- ---------
1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents....................................................... $ 130 $ 261 $ 198
Working capital................................................................. 420 433 271
Total assets.................................................................... 792 817 616
Total stockholders' equity...................................................... 485 492 329
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROFESSIONAL RELIEF NURSES, INC.
OVERVIEW
PRN provides skilled nurses and nursing services in the homes of patients.
Substantially all of PRN's revenues are derived from third party payers such as
Medicare, Medicaid and private insurance companies. PRN bills Medicare and
Medicaid weekly for its claims. PRN is not aware of any material pending claims
or unsettled matters. PRN was formed in 1981.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1995.
Net patient service revenue increased by $404,000 or 24%, to $2,090,000 for
the six months ended December 31, 1996 from $1,686,000 for the six months ended
December 31, 1995. This increase was primarily due to the increased number of
patients receiving care from PRN nurses, particularly in therapy services. At
December 31, 1996 revenues from Medicare and Medicaid accounted for 73% of total
revenues compared to 64% for the prior year period.
Salaries and benefits increased $272,000 or 38%, to $988,000 for the six
months ended December 31, 1996 from $716,000 for the six months ended December
31, 1995. The largest portion of this increase is attributable to the increased
amount of service provided, and the addition of another employee involved in
administration. As a percentage of revenues, salaries and benefits amounted to
47% of sales at December 31, 1996, compared to 42% in the prior year period.
Operating expenses decreased by $53,000 or 6%, to $806,000 for the six
months ended December 31, 1996 from $859,000 for the six months ended December
31, 1995. The reduction was due to stringent cost controls including staff
vacancies at a higher rate than previously experienced. As a percentage of
revenue, operating expenses were 39% for the six months ended December 31, 1996
compared to 51% in the prior year.
Income from operations increased $185,000 or 167%, to $296,000 for the six
months ended December 31, 1996 from $111,000 for the six months ended December
31, 1995. This increase was a result of the increase in revenues without a
corresponding increase in operating expenses.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1995.
Net patient service revenue increased by $779,000, or 26%, to $3,821,000 for
the year ended June 30, 1996 from $3,042,000 for the year ended June 30, 1995.
This increase was primarily due to the increased number of patients receiving
care from PRN nurses, particularly in therapy services. At June 30, 1996,
revenues from Medicare and Medicaid accounted for 62% of total revenues compared
to 64% for the prior year.
Salaries and benefits increased $420,000, or 37%, to $1,563,000 for the year
ended June 30, 1996 from $1,143,000 for the year ended June 30, 1995. The
largest portion of this increase is attributable to the increased amount of
service provided. As a percentage of revenues, salaries and benefits amounted to
41% of sales at June 30, 1996, compared to 38% in the prior year.
Operating expenses increased $67,000, or 4%, to $1,737,000 for the year
ended June 30, 1996 from $1,670,000 for the year ended June 30, 1995. This
increase is principally due to an expanded volume of services provided. As a
percentage of revenue, operating expenses were 45% for the year ended June 30,
1996 compared to 55% in the prior year. This reduction was due to the fact that
certain fixed expenses did not proportionately increase with revenues.
33
<PAGE>
Income from operations increased $292,000, or 128%, to $521,000 for the year
ended June 30, 1996 from $229,000 for the year ended June 30, 1995. This
increase was a direct result of the increase in revenues.
Provision for pro forma Federal and historical State income taxes increased
$119,000, or 127%, to $213,000 at June 30, 1996 from $94,000 at June 30, 1996.
This increase in taxes is due to the increase in income from operations.
PRN had pro forma net income of $308,000 for the year ended June 30 1996,
compared to $135,000 for the year ended June 30, 1995. This increase of
$173,000, or 128% was a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES.
PRN's primary source of cash is from operating revenues. For the fiscal year
ended June 30, 1996, net cash provided by operating activities was $363,000. At
June 30, 1996, PRN had $497,000 in trade receivables. Of such receivables 49%
were from Medicare and Medicaid. For the six months ended December 31, 1996 net
cash provided by operating activities was $137,000. At December 31, 1996, PRN
had $549,000 of trade receivables, of which 49% were due from Medicare and
Medicaid.
PRN did not make any significant purchases of capital assets during the two
years ended June 30, 1996. PRN purchased $59,000 of equipment, during the six
months ended December 31, 1996 and does not foresee making any significant
purchases of fixed assets in the next year.
For the year ended June 30, 1996, PRN paid dividends of $288,000. For the
six months ended December 31, 1996, PRN paid dividends of $270,000. Prior to the
Effective Date, PRN plans to pay a dividend equal to all of PRN's undistributed
earnings.
Three stockholders of PRN have entered into an agreement to sell, for an
aggregate of $1,620,000 in cash, all of their shares of capital stock in PRN to
LHG immeditely prior to the Effective Date. One shareholder, Jack Friedler, the
Company's Chief Executive Officer will be exchanging his shares in PRN for
108,000 shares of the Company's Common Stock immediately prior to the Effective
Date.
PRN anticipates that cash flow from operations will continue to enable PRN
to meet its cash requirements for the next twelve months.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
34
<PAGE>
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
The following pro forma condensed balance sheet reflects the transactions
indicated below as if they had occurred on December 31, 1996: (1) the
acquisitions of BALZ and PRN (the "Acquisitions") and (2) the assumed repayment
of $453,000 of certain short term notes payable from the net proceeds arising
from the sale of 102,000 shares of Common Stock and Warrants at an offering
price of $5.00 per Share and $0.10 per Warrant. The acquisitions are accounted
for as purchases.
The pro forma condensed balance sheet should be read in conjunction with the
notes thereto, the financial statements of the Company, BALZ and PRN and the
related notes thereto, and with "Managements Discussion and Analysis of
Financial Condition and Results of Operations," each included elsewhere in this
Prospectus. The pro forma condensed balance sheet is not necessarily indicative
of what the actual financial position would have been had the transactions
occurred at December 31, 1996, nor does it purport to represent the future
financial position of the Company and the Acquisitions.
35
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LEXINGTON
HEALTHCARE
GROUP, INC. BALZ MEDICAL PROFESSIONAL RELIEF
AND SERVICES,
SUBSIDIARY INC. NURSES, INC. ADJUSTMENTS
----------- ------------- ------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ----------------------------------
Cash and cash equivalents......... $ 1,333 $ 81 $ 130 (b) $ 1,620 (a) $ 1,620
(c) 453 (e) 485
(c) 453
Accounts receivable............... 4,336 785 549
Due from related party............ 94 (f) 94
Other current assets.............. 324 160
----------- ------ -----
Total current assets...... 6,087 1,026 679
Fixed assets...................... 610 79
Amortizable assets................ 60
Security deposit.................. 2,282
Deferred registration costs....... 286
Note receivable - related party... 494
Residents' funds.................. 340
Other assets...................... 19 34 (d) 522 (c) 44
Excess Cost over Fair Value of
Assets.......................... (a) 3,241
----------- ------ -----
$ 10,159 $ 1,045 $ 792
----------- ------ -----
----------- ------ -----
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Notes payable and current portion
of long term debt............... $ 732 $ 13 (c) $ 453
Notes payable - officers/
stockholders/related party...... 444 $ 93 30 (f) 94
Accounts payable, accrued
expenses, etc................... 7,189 533 216
Total current
liabilities............. 8,365 626 259
Other liabilities................. 340
Notes and capital lease payable... 79 48
Deferred rent..................... 381
----------- ------ -----
Total liabilities......... 9,165 626 307
Stockholders' equity.............. 994 419 485 (c) 44 (d) 522
(e) 485 (b) 1,620
(a) 1,621
(c) 453
----------- ------ -----
$ 10,159 $ 1,045 $ 792
----------- ------ -----
----------- ------ -----
<CAPTION>
PRO FORMA
-----------
<S> <C>
ASSETS
- ----------------------------------
Cash and cash equivalents......... $ 1,059
Accounts receivable............... 5,670
Due from related party............
Other current assets.............. 484
-----------
Total current assets...... 7,213
Fixed assets...................... 689
Amortizable assets................ 60
Security deposit.................. 2,282
Deferred registration costs....... 286
Note receivable - related party... 494
Residents' funds.................. 340
Other assets...................... 531
Excess Cost over Fair Value of
Assets.......................... 3,241
-----------
$ 15,136
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUI
- ----------------------------------
Notes payable and current portion
of long term debt............... $ 292
Notes payable - officers/
stockholders/related party...... 473
Accounts payable, accrued
expenses, etc................... 7,938
Total current
liabilities............. 8,703
Other liabilities................. 340
Notes and capital lease payable... 127
Deferred rent..................... 381
-----------
Total liabilities......... 9,645
Stockholders' equity.............. 5,585
-----------
$ 15,136
-----------
-----------
</TABLE>
36
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE/WARRANT AND PER SHARE/WARRANT DATA)
(a) To reflect the acquisitions of BALZ and PRN after December 31, 1996 as
follows:
<TABLE>
<CAPTION>
FAIR VALUE COST OVER
OF NET FAIR VALUE
ASSETS OF ASSETS COMMON
COMPANY ACQUIRED ACQUIRED STOCK CASH
- ----------------------------------------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BALZ............................................................. $ 419 $ 1,081 $ 1,500
PRN.............................................................. 2,160 540 1,620
----- ----------- ----------- ---------
$ 419 $ 3,241 $ 2,040 $ 1,620
----- ----------- ----------- ---------
----- ----------- ----------- ---------
The fair value of net assets acquired approximates the carrying value.
</TABLE>
(b) Reflects the sale of 365,000 shares of Common Stock and Warrants of the
Company at an offering price of $5.00 per Share and $0.10 per Warrant, the
net proceeds of which will be used to pay cash portion of purchase price of
PRN of $1,620.
(c) Reflects sale of 102,000 shares of Common Stock and Warrants of the Company
at an offering price of $5.00 per Share and $0.10 per Warrant, the net
proceeds of which will be used to repay indebtedness of $453. Previously
unamortized deferred financing cost of $44 will be written off.
(d) To adjust for deferred taxes.
(e) Dividend to stockholders of PRN's undistributed earnings.
(f) To eliminate inter-company balances.
37
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1995 (COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
The following pro forma unaudited condensed statements of operations reflect
the transactions indicated below as if such transactions had occurred on July 1,
1995: (1) the acquisitions of BALZ and PRN (the "Acquired Companies"), and (2)
the assumed repayment of $453,000 of certain short term notes payable, from the
net proceeds arising from the sale of 102,000 shares of Common Stock and
Warrants at an offering price $5.00 per Share and $0.10 per Warrant. The
Acquired Companies are accounted for as purchases. In the opinion of management
of Lexington HealthCare Group Inc. and its subsidiary (the "Company"), all
adjustments necessary to present fairly such pro forma statements of operations
have been made.
These pro forma condensed statements of operations should be read in
conjunction with the notes thereto, the financial statements of the Company,
BALZ and PRN and the related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," each included
elsewhere in this Prospectus. The pro forma condensed statements of operations
are not necessarily indicative of what the actual results of operations would
have been had the transactions occurred at July 1, 1995, or July 1, 1996 nor do
they purport to indicate the results of future operations.
38
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
LEXINGTON
HEALTHCARE BALZ PROFESSIONAL
GROUP, INC. MEDICAL RELIEF
AND SUPPLIES, NURSES,
SUBSIDIARY INC. INC. ADJUSTMENTS
----------- ----------- ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue (including related party
management revenue of $36)............. $ 17,447 $ 658 $ 2,090
Operating costs and expenses (including
rent paid to related party of
$1,234)................................ 17,145 343 1,794 (a) 81 (c) 73
(e) 19 (e) 19
-- --
----------- ----- ----------- --- ---
Income from operations................... 302 315 296
Other expense:
Interest expense--net.................. 70 (d) 44 (b) 32
--
----------- ----- -----------
Income before income taxes............... 232 315 296
Provision for income taxes*.............. 96 130 122 (f) 25
----------- ----- -----------
NET INCOME--PRO FORMA.................... $ 136 $ 185 $ 174
----------- ----- -----------
----------- ----- -----------
Pro forma net income per share...........
Weighted number of common shares
outstanding............................
<CAPTION>
PRO FORMA
---------
<S> <C>
Net Revenue (including related party
management revenue of $36)............. $ 20,195
Operating costs and expenses (including
rent paid to related party of
$1,234)................................ 19,290
---------
Income from operations................... 905
Other expense:
Interest expense--net.................. 82
Income before income taxes............... 823
Provision for income taxes*.............. 373
---------
NET INCOME--PRO FORMA.................... 450
---------
---------
Pro forma net income per share........... $ 0.11
---------
---------
Weighted number of common shares
outstanding............................ 3,967
---------
---------
</TABLE>
- ------------------------
*Historical or pro forma as applicable
39
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE/WARRANT AND PER SHARE/WARRANT DATA)
Adjustments to the pro forma statement of operations for the six months
ended December 31, 1996 have been made to reflect the acquisitions of the
Acquired Companies as if the acquisitions had taken place at the beginning of
the period.
(a) The amortization of goodwill arising from the acquisitions of BALZ ($27) and
PRN ($54) over 20 years.
(b) To reflect the reduction of interest expense assuming that the net proceeds
of $453 from the sale of 102,000 shares of Common Stock and Warrants at an
offering price of $5.00 per Share and $0.10 per Warrant had been applied to
the repayment of indebtedness at the beginning of the period.
(c) Adjustment to compensation expense of $73 pursuant to employment agreement
to be effective upon consummation of the acquisition, net of adjustment to
director's fees.
(d) To write off deferred financing cost of $44.
(e) To eliminate intercompany charges.
(f) Tax provision adjustment after giving effect to the adjustments in (b), (c)
and (d) above.
40
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
JULY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
LEXINGTON
HEALTHCARE BALZ
GROUP, INC. MEDICAL PROFESSIONAL
AND SERVICES, RELIEF NURSES,
SUBSIDIARY(I) INC.(II) INC.(III) ADJUSTMENTS
------------ ----------- --------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue (including related party
management revenue of $72).......... $ 33,536 $ 745 $ 3,821
Operating costs and expenses
(including rent expense to related
party of $2,468).................... 32,926 374 3,300 (b) 36 (e) 37
(a) 144
(e) 37
------------ ----- ------
Income from operations................ 610 371 521
Other expense:
Interest expense--net............... 149 (c) 60
------------ ----- ------
Income before income taxes............ 461 371 521
Provision for income taxes*........... 195 157 213 (d) 10
------------ ----- ------
NET INCOME--PRO FORMA................. $ 266 $ 214 $ 308
------------ ----- ------
------------ ----- ------
Pro forma net income per share........
Weighted number of common shares
outstanding.........................
<CAPTION>
PRO FORMA
---------
<S> <C>
Net Revenue (including related party
management revenue of $72).......... $ 38,102
Operating costs and expenses
(including rent expense to related
party of $2,468).................... 36,780
---------
Income from operations................ 1,322
Other expense:
Interest expense--net............... 89
---------
Income before income taxes............ 1,233
Provision for income taxes*........... 575
---------
NET INCOME--PRO FORMA................. $ 658
---------
---------
Pro forma net income per share........ $ 0.17
---------
---------
Weighted number of common shares
outstanding......................... 3,967
---------
---------
</TABLE>
- ------------------------
*Historical or pro forma as applicable
(i) Represents operations from July 1, 1995 (commencement of operations) to June
30, 1996.
(ii) Represent operations from November 1, 1995 (commencement of operations) to
June 30, 1996.
(iii) Represent operations for the year ended June 30, 1996.
41
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
JULY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Adjustments to the pro forma statement of operations for the period July 1,
1995 (commencement of operations) to June 30, 1996 have been made to reflect the
acquisitions of the Acquired Companies as if the acquisitions had taken place at
the beginning of the period.
(a) The amortization of goodwill arising from the acquisitions of BALZ ($36) and
PRN ($108) over 20 years, giving effect to BALZ operations for the short
period of eight months.
(b) Adjustment to compensation expense (including bonuses) of $36 pursuant to
employment agreement to be effective upon consummation of the acquisition,
net of adjustments to director's fees.
(c) To reflect the reduction of interest expense assuming that the net proceeds
of $453 from the sale of 102,000 shares of Common Stock and Warrants at an
offering price of $5.00 per Share and $0.10 per Warrant had been applied to
the repayment of indebtedness at the beginning of the period.
(d) Tax provision adjustment after giving effect to the adjustments in (b) and
(c) above.
(e) To eliminate intercompany charges.
42
<PAGE>
BUSINESS
The Company is a long-term and subacute care provider, which operates four
nursing home facilities (the "Facilities") with 628 licensed beds in the State
of Connecticut. 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). In
addition, the Company has recently begun to offer a variety of products and
services to non-affiliated long-term care facilities. The Company's strategy in
healthcare is to integrate the main disciplines of nursing, pharmacy, social
services and other therapies under one program.
The Facilities are leased by the Company from a partnership of which Jack
Friedler, the Company's principal stockholder, Chief Executive Officer and
Chariman of the Board is a 33.33% limited partner, pursuant to a long-term
lease. The individuals owning the remaining portion of the partnership are
shareholders of PRN. The four nursing home facilities were previously operated
as traditional nursing homes by Beverly Enterprises, an unrelated entity who
previously leased the facilities from the Company's current landlord. Since the
Company has begun operating the Facilities, it has broadened the services
provided and occupancy and reimbursement rates have increased. 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. See "Certain Transactions." Oak
Island is a non-affiliated facility in Massachusetts.
INDUSTRY BACKGROUND
The long-term care industry encompasses a broad range of health care
services provided to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home. Long-term
care facilities offer skilled nursing care, routine rehabilitation therapy and
other support services, primarily to elderly patients. In addition, long-term
care facilities may provide a broad range of specialized health care services
such as care for Alzheimer's patients and subacute care. The Company believes
that the demand for the services provided by long-term care facilities will
increase substantially during the next decade due primarily to the general aging
of the United States population, advances in medical technology and the impact
of cost containment measures. The primary consumers of long-term care services
are persons over the age of 65 years old. The Company believes such age group
will continue to increase resulting in increased demand for long-term care
services. At the same time, government restrictions and high construction and
start-up costs are expected to limit the supply of long-term care facilities.
ADVANCES IN MEDICAL TECHNOLOGY. Advances in medical technology have
increased the demand for long-term care by increasing life expectancies and by
enhancing the ability of long-term care providers to offer, on a more
cost-effective basis, services traditionally provided only in acute care
hospitals. Sophisticated new forms of equipment and treatment have lengthened
life expectancies and extended the survival rate of trauma patients, thereby
increasing the number of individuals requiring specialized care and supervision.
In the past, the level of care required by many of these individuals was not
generally available outside acute care hospitals. However, technological
advances have enabled long-term care providers to expand the range of services
they offer which has made them an attractive alternative to acute care hospitals
in certain instances.
IMPACT OF COST CONTAINMENT MEASURES. In response to rapidly rising health
care costs, governmental and private pay sources have adopted cost containment
measures that have encouraged reduced lengths of stay in hospitals. The federal
government previously acted to curtail increases in health care costs under
Medicare by limiting acute care hospital reimbursement for specific services to
predetermined fixed amounts. Under this payment system, reimbursement for acute
care hospital services is based on regional and national rates established for
diagnosis-related groups ("DRGs") regardless of length of stay. In
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<PAGE>
addition, private insurers have begun to limit reimbursement to predetermined
"reasonable charges," while managed care organizations such as health
maintenance organizations ("HMOs") and preferred provider organizations are
attempting to limit hospitalization costs by negotiating discounted rates for
hospital services and by monitoring and reducing hospital utilization. As a
result, average hospital stays have been shortened, with many patients being
discharged despite a continuing need for nursing care. For many of these
patients, home health care is not a viable alternative because of the complexity
of medical services and equipment required. Long-term care facilities, such as
those operated by the Company, are able to provide many of these services at
significantly lower costs than acute care hospitals due to their lower capital
costs, overhead and salary levels.
LIMITS ON SUPPLY OF LONG-TERM CARE FACILITIES. The construction of
long-term care facilities and the addition of beds or services in existing
facilities is regulated in most states. Under Connecticut law, through June 30,
2004, the Department of Public Health and Addiction Services is prohibited from
accepting or approving any requests for additional nursing home beds, with
certain limited exceptions. Other states have implemented health plans which
limit the number of long-term care beds and thus limit the number of new
facilities that can be constructed. High construction costs and start-up
expenses also act to constrain growth in the numbers of facilities. See
"--Government Regulation" and "--Competition."
COMPANY STRATEGY
The Company's operating strategy is to: (i) increase facility profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; (ii) adhere to strict cost standards at the
facility level while providing effective patient care and containing corporate
overhead expenses; and (iii) to 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.
PROVIDE HIGH QUALITY CARE. In order to provide quality care to its
residents, the Company seeks to employ highly qualified administrators and
nurses, and to retain the services of reputable medical directors. The Company's
management and committees at the facility level (composed of the facility
administrator and the facility's senior medical professionals) continually
monitor the quality of care provided to ensure compliance with Company and
government standards. The Company believes that its commitment to providing high
quality care has established the reputations of the Facilities in their local
markets. As a result, at December 31, 1996, the Company achieved an overall
occupancy rate of approximately 94%. At the time the Company began operating the
Facilities, the overall occupancy rate was 85%.
ACHIEVE OPERATING EFFICIENCIES. The Company believes that concentrating its
long-terms care facilities within a selected geographic region enables the
Company to achieve operating efficiencies through economies of scale, reduced
corporate overhead and more effective management supervision and financial
controls. Geographic concentration also allows the Company to establish more
effective working relationships with referral sources and regulatory authorities
in the states in which it operates. The Company establishes detailed operating
budgets at its facilities. The responsibility for adherence to these budgets is
at the facility level with supervisory oversight at the corporate headquarters.
By supervising compliance with these budgets at its facilities, the Company
seeks to maintain control over its operating costs.
EXPAND ANCILLARY SERVICES. The Company intends to expand its provision of
specialized ancillary services, such as rehabilitation therapy through LEV, home
healthcare through PRN, medical supplies and products through BALZ, to
nonaffiliated long-term care facilities and to the facilities operated by the
Company, as well as to patients at home, and other institutional facilities. The
Company intends to form a subsidiary to provide institutional pharmaceutical
services to such markets. See "Use of Proceeds". The Company also intends to
provide management services similar to those provided to the Managed Facilities,
to other non-affiliated facilities. The Company believes the provision of these
services is an appropriate
44
<PAGE>
complement to the traditional services provided at the long-term care facilities
operated by the Company. The Company receives a monthly fee of approximately
$6,030 for the management of Lexington House, the Managed Facility in
Connecticut. The Company receives an aggregate monthly management fee of
approximately $17,650 for managing the Oak Island nursing home. The Managed
Facilities have achieved a 99% occupancy rate since the Company began managing
them, as compared to a 87.3% occupancy rate before the Company began managing
them.
GROWTH THROUGH SELECTIVE ACQUISITIONS. The Company intends to expand
through the acquisition of long-term care facility operations (which may include
the acquisition of real property) and complementary businesses in geographic
areas in which the Company is currently operating or in other areas in which the
Company can acquire a group of facilities where operational efficiencies can be
achieved. The Company believes that concentrating long-term care facilities
within a selected geographic area reduces corporate overhead and enables the
Company to benefit from marketing efficiencies.
The Company plans to evaluate opportunities to acquire long-term care
facilities and complementary business. In evaluating opportunities, management
will consider, among other factors, location, demographics, price, the
availability of financing on acceptable terms (including lease terms), the
competitive and state regulatory environment and the opportunity to improve
performance through the implementation of the Company's operating strategy.
Although the Company continually considers and evaluates acquisitions and
opportunities for growth, other than with respect to PRN and BALZ, the Company
has not entered into any agreements with respect to future acquisitions.
PATIENT SERVICES
BASIC PATIENT AND ANCILLARY SERVICES. Basic patient services include those
traditionally provided to elderly patients in long-term care facilities with
respect to daily living activities and general medical needs. The Company
provides 24-hour nursing care by registered nurses, licensed practical nurses
and certified nursing aides in all of the Facilities. The Company also provides
a broad range of support services including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies and routine rehabilitation therapy. The
majority of these products and services are provided directly by the Company
through its wholly-owned subsidiaries.
SPECIALIZED SERVICES. Specialized health care services are those provided
to patients with medically complex needs. These services typically generate
higher profit margins because of the higher complexity of the patients' medical
conditions. The Company intends to expand the scope and range of its specialty
medical services and programs, with the goal of further enhancing revenue and
profitability and further improving upon the reputation of the Facilities as
providers of quality care.
SUBACUTE CARE. Subacute care includes those services provided to patients
with medically complex conditions who require ongoing medical and nursing
supervision and access to specialized equipment and services, but do not require
many of the other services provided by an acute care hospital. Services in this
category also include ventilator care, intravenous therapy, complex wound care,
traumatic brain injury care, post-stroke care and hospice care. The Company
provides a range of subacute care services. Although the Company currently
operates only one segregated subacute care unit, many of these services are
provided at each of the Facilities. The Company plans to continue to expand its
subacute care services by supplementing and expanding currently available
services and by developing expertise in additional areas. Subacute care services
can be provided by the Company under existing licenses held by the Facilities,
subject to prior approval of policies and procedures by appropriate regulatory
agencies.
REHABILITATION THERAPY SERVICES. The Company provides rehabilitation
therapy services at each of the Facilities. To complement the routine
rehabilitation therapy services provided to its long-term care patients, the
Company has developed specialized rehabilitation therapy programs to serve
patients with complex care needs, such as motor vehicle and other accident
victims, persons suffering from job-related
45
<PAGE>
injuries and disabilities, joint-replacement patients and stroke victims. Plans
have been developed to expand the Company's provision of rehabilitation therapy
services and to increase the marketing of such services to non-affiliated
facilities. The Company recently formed LEV to provide rehabilitative services
to patients at the Facilities, the Managed Facilities and to facilities not
operated by the Company. The services to be provided by LEV include physical,
occupational and speech therapy services to both nonaffiliated long-term care
facilities and the Facilities. LEV has not commenced any substantial activities
and has only produced limited revenues to date.
INSTITUTIONAL PHARMACEUTICAL SERVICES. Many facilities are provided with
pre-packaged pharmaceuticals and admixtures prepared by independent providers.
In order to control the cost of healthcare services and maximize profitability,
the Company intends to operate an institutional pharmacy business. The Company
is not currently operating such pharmacy and all pharmaceutical needs are being
provided by an unaffiliated third party. The Company's plan is to provide
pharmaceutical products and services to the Facilities, the Managed Facilities
and gradually to nonaffiliated facilities. There can be no assurance that it
will provide institutional pharmaceutical services to a significant number of
non-affiliated facilities. In addition to pre-packaged pharmaceuticals and
admixtures, the institutional pharmacy business maintains consultant pharmacists
and assists in preparation of billing documentation.
OPERATIONS
GENERAL. The day-to-day operations of the Facilities are managed by on-site
state licensed administrators who are responsible for the overall operation of
the Facilities, including quality of care, marketing and financial performance.
The administrators are assisted by an array of professional and non-professional
personnel (some of whom may be independent providers), including medical
directors, nurses and nursing assistants, social workers, therapists, dietary
personnel, therapeutic recreation staff and housekeeping, laundry and
maintenance personnel. The business office staff at each of the Facilities
manages the day-to-day administrative functions, including data processing,
accounts payable, billing and payroll. Members of the Company's management
review and supervise the activities of the Facility's business office.
The medical management of patients is supervised by a medical director who
is a licensed physician and receives a monthly stipend. The medical director
monitors all aspects of patient treatment. The treatment of patients is the
responsibility of the patients' attending physicians, who are not employed by
the Company and bill their patients directly for services. Attending physicians
serving patients at the Facilities are required to comply with certain
guidelines. The medical director's responsibilities include ensuring that
attending physicians comply with such guidelines. Other medical personnel such
as psychiatrists, podiatrists and audiologists are also independent providers
who serve the Facilities pursuant to contractual arrangements and bill patients
directly for services. A state-registered director of nursing at each of the
Facilities supervises that Facility's nursing staff and oversees the nursing and
clinical services provided to residents. The support services provided by the
Company, including therapeutic recreation, speech, occupational and physical
therapy, dietary advice, housekeeping, laundry and pharmaceutical services, are
performed by independent providers under contractual commitments. These
agreements are generally for a one year term and are either at a fixed fee or
provide for a fee based on the amount of services actually provided. A medical
records clerk at each of the Facilities is responsible for maintaining medical
record files, and management visits each of the Facilities regularly to ensure
compliance with Federal and state regulations.
MANAGEMENT AND FINANCIAL CONTROLS. Consistent with its strategy of
providing quality patient care and maintaining control over costs, the Company
has developed an organizational structure of centralized management intended to
increase operating efficiency. The Company stresses frequent communication among
personnel at the Facilities and executive personnel and active involvement by
management in the operation of the Facilities.
46
<PAGE>
The Company conducts monthly review meetings. At such meetings, the
Company's management reviews operations of each of the Facilities, including
financial and patient care, and reviews the operational and marketing needs of
each of the Facilities. At each Facility, reports are prepared that are used by
corporate management to monitor its operations. The President of the Company
attends these monthly meetings.
The Company's integrated management and financial information systems enable
management to monitor key operations and financial data on a timely basis. Key
operating data, such as payables and billing data, cash collections and
admissions/discharge data, are entered into the system daily from workstations
located at each Facility. This information forms the basis for a variety of
management and financial reports, including monthly financial statements for
each Facility.
Each Facility operates under a detailed budget prepared through the
cooperation of the Facility and corporate personnel. Budgets are initially
prepared by corporate personnel and are then revised based on discussions with
facility personnel. Adherence to budgets is closely monitored by all levels of
management on an ongoing basis and through a monthly budget review process.
QUALITY ASSURANCE. The Company has developed a comprehensive quality
assurance program involving personnel at all levels and designed to maintain
standards of care at the Facilities. Each Facility maintains a quality assurance
committee consisting of the Facility administrator and the Facility's senior
medical professionals. The committee is responsible for monitoring and
evaluating all aspects of the Facility's operations, including patient care,
physical environment, staff appearance, patient rights, patient activities and
dietary regimen. Facility and corporate administrators are encouraged to play an
active role in quality assurance by maintaining a high-profile presence and
closely monitoring all aspects of operations. All medical and other consulting
personnel are required to prepare and submit reports at the end of each
scheduled visit identifying any patient care or other quality related issues.
Patient satisfaction surveys are conducted periodically and provide a
confidential method for patients and their families to comment on the Company's
patient care services. Discharge interviews allow the Company to assess patient
satisfaction and to isolate potential patient care issues.
MARKETING
The Company engages in local marketing efforts to promote the Facilities so
as to maintain and improve occupancy rates and mix. The Company's marketing
activities are conducted primarily by each Facility's admissions director and
administrator who together seek to establish relationships with referring
physicians, hospital discharge planners, social workers, community
organizations, local attorneys, bank trust officers and senior citizens',
Alzheimer's and other support groups. The Company intends to employ a marketing
director to conduct marketing activities at its Facilities.
The Company believes that many of the services and programs provided by the
Facilities supplement formal marketing efforts which seek to establish the
Facility's reputation in the community as a provider of quality patient care.
For example, the availability of specialized health care services can be a key
factor in the selection of the Facility. Based on the Company's experience of
the importance that patients place on the provision of specialized services in
the Facilities, the Company believes these programs also contribute to increased
occupancy by making the Facilities more attractive choices to prospective
residents. In this regard, community groups are encouraged to visit the
Facilities both to provide and to participate in entertainment events such as
musical and drama productions, and to participate in group discussion and
therapy sessions. In addition, Facility staff members serve as an information
source for local communities through speaking engagements and participation in
seminars and other events relating to healthcare issues. The Company has
developed promotional literature for each Facility focusing on the Facility's
philosophy of care and provision of services.
The Company is increasingly concentrating its market efforts on private
third party payors, such as managed care and insurance companies, as well as
hospital discharge planners, thereby developing referral
47
<PAGE>
sources for both its long-term care and specialty medical services. The
Company's former director of marketing expanded the Company's marketing programs
in these areas and increased its referral base for its specialty medical
programs.
SOURCES OF REVENUES
The Company's revenues from long-term care services are influenced by a
number of factors, including: (i) the licensed bed capacity of the Facilities,
(ii) the occupancy rates at the Facilities, (iii) the mix of patients and the
rates of reimbursement among payor categories (Private, Medicaid and Medicare)
and (iv) the extent to which certain ancillary services available to patients in
the Facilities are utilized by the patients and paid for by the respective payor
sources. The Company's management monitors both Medicaid and Medicare regulatory
developments, to assist in compliance with all reporting requirements and to
increase reimbursable services. While the Company believes that is has been
successful in meeting applicable cost ceilings and in obtaining reimbursement,
there can be no assurance that reimbursement rates will remain at present
levels. In particular, cost containment proposals at both the federal and state
levels may have an adverse effect on the Company's ability to recover its costs
of providing services to Medicaid and Medicare patients. As a result of
government regulations and moratoriums, it is difficult to increase the amount
of licensed beds that the Company can maintain. See "--Governmental Regulation."
MEDICAID. The Medicaid program refers to the various state administered
reimbursement programs created by federal law. Although Medicaid programs vary
from state to state, typically they provide for fixed rate payment to health
care providers at levels designed to compensate an efficiently and economically
operated facility. Reimbursement rates are typically determined by the state
from "cost reports" filed annually by each facility, on a prospective or in a
limited number of states on a retrospective basis. Under a prospective system,
the state sets its rate of payment for the period in advance of services
rendered. In Connecticut the formula by which the per diem rates are established
is subject to change annually and state law does not prohibit retroactive
revisions to the formula. The provider can accept the prospective rate as
payment in full for all services rendered or they can appeal the rate as not
sufficient to recoup their actual costs. Subsequent audits, can provide a basis
for the state program or the facility to retroactively recoup monies. Actual
costs incurred during the period are used to establish the prospective rate for
a subsequent period. The Connecticut Medicaid programs currently include
incentive allowances for providers whose costs are less than certain ceilings
and who meet other requirements. See "--Government Regulation."
All of the Facilities participate in the Medicaid program. Under the Federal
Medicaid statute and regulations, state Medicaid programs must provide facility
rates that are reasonable and adequate to cover the costs that must be incurred
by efficiently and economically operated facilities in providing services in
conformity with state and federal laws, regulations and quality and safety
standards. Furthermore, payments must be sufficient to enlist enough providers
so that services under the state's Medicaid plan are available to recipients at
least to the extent that those services are available to the general population.
There can be no assurance that Medicaid reimbursement will be sufficient to
cover actual costs incurred by the Company with respect to Medicaid services
rendered.
In December 1996, the Company received an overpayment of $2,500,000 from the
State of Connecticut for Medicaid reimbursement as a result of a clerical error
by the State. The Company immediately reimbursed the State $800,000 and made
arrangements with the State to repay the $1,700,000 balance as follows: $450,000
to be deducted each month from its Medicaid payment and the balance of $350,000
to be paid out of the proceeds of the Offering. The Company currently owes an
aggregate of $800,000 of the $2,500,000. Since the Company does not anticipate
that its Offering will close prior to April 15, the State intends to deduct
$450,000 out of its March Medicaid payment and the balance out of its April
Medicaid payment. The balance owed bears no interest. In the event the balance
is not paid in accordance with the arrangement, the State has informed the
Company that it will refer the matter to the Attorney General's Office. Since
the State of Connecticut is directly withholding the amounts due from the
Company's monthly Medicaid payments, the Company does not believe that there is
any substantial likelihood that
48
<PAGE>
such matter will be referred to the Attorney General's Office. Medicaid pays the
Company approximately 30 days from its receipt of a bill which the Company
submits at the end of each month. Medicare pays the Company approximately 30
days from its receipt of a bill which the Company submits at the end of the
month. Other than the repayment of the Medicaid overpayment, the Company is not
aware of any claims for reimbursement of amounts previously received from third
party payors, although Medicaid has the right to audit the Company's payments.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. While there can be no assurance that future adjustments
will not have a material adverse effect on the Company, the Company believes
that it has properly applied the various payment formulas and that the
possibility of adjustments that would be materially adverse financially is
remote.
MEDICARE. All of the Facilities are certified to receive benefits provided
under Medicare. Medicare is a federally funded and administered health insurance
program primarily designed for individuals who are age 65 or over and are
entitled to receive Social Security benefits. The Medicare program consists of
two parts. The first part ("Part A") covers inpatient hospital services and
services furnished by other institutional healthcare providers, such as
long-term care facilities. The second part ("Part B") covers the services of
doctors, suppliers of medical items and services, and various types of
outpatient services. Part B services include physical, speech and occupational
therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation
and psychiatric services, ancillary diagnostic and other services of the type
provided by long-term care or acute care facilities. Part A coverage is limited
to a specified term (generally 100 days in a long-term care facility) and
requires beneficiaries to share some of the cost of covered services through the
payment of deductible or a co-insurance payment. There are no limits on duration
of coverage for Part B services, but there is a co-insurance requirement for
most services covered by Part B.
Under the Medicare program, the Company is reimbursed for its direct costs
plus an allocation of indirect costs up to a regional limit. As the Company
expands its specialty medical and institutional pharmacy services, the costs of
care for these patients are expected to exceed the regional reimbursement
limits. As a result, the Company will be required to submit exception requests
to recover the excess costs from Medicare. There is no assurance the Company
will be able to recover such excess costs. The failure to recover these excess
costs in the future would adversely affect the Company's financial position and
results of operations.
PRIVATE PAY SOURCES. Private pay revenues include payments from individuals
who pay directly for services without governmental assistance, revenues from
commercial insurers, Blue Cross organizations, HMOs, providers organizations,
workers compensation programs and other similar payment sources. Payments from
these private pay sources may be charge-based, cost-based or based on
periodically renewable contracts negotiated with these payors. Many conditions
treated by rehabilitation services are covered by liability insurance, rather
than health benefits policies. In such cases, reimbursement rates are
established on a case-by-case basis.
Although the level of charges by the Company to private patients in the
Facilities is not subject to the same regulatory control as with Medicaid or
Medicare, the Company's charges are still generally limited to customary and
reasonable charges for such health care services.
REHABILITATION THERAPY SERVICES TO NONAFFILIATES. Revenues from
rehabilitation therapy services to nonaffiliates will be derived from LEV, the
Company's rehabilitation therapy business which intends to provide physical,
occupational and speech therapy to patients at the Facilities, the Managed
Facilities and to long-term care facilities not operated by the Company. In
general, payments for these rehabilitation therapy services are received
directly from the long-term care facilities. Revenues from rehabilitation
therapy services provided to the Facilities are included in the Medicaid,
Medicare and private pay sources of revenues of the Company. The Company's
charges to nonaffiliates, though not directly regulated, are effectively limited
by regulatory reimbursement policies imposed on the long-term care facilities
which receive these therapy services as well as competitive market factors.
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GOVERNMENT REGULATION
The health care industry is subject to substantial Federal, state and local
regulation. The various layers of government regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its properties and controlling reimbursement
to the Company for services provided. See "Sources of Revenue." Licensing,
certification and other applicable government regulations vary from jurisdiction
to jurisdiction and are revised periodically. It is not possible to predict the
content or impact of future legislation and regulations affecting the health
care industry.
The State of Connecticut has adopted a Certificate of Need statute
applicable to the services provided by the Company. The statute provides
generally that, prior to the construction of new beds, or the making of certain
capital expenditures exceeding defined levels, a state agency must determine
that a need exists for such proposed activities. Failure to obtain the necessary
state approval can result in the inability to provide the service, operate the
facility or complete the addition or other change, and can also result in the
imposition of sanctions or adverse action on the facility's license and
reimbursement. However, a Certificate of Need is not required for the Company's
plan to expand the operations of LEV or to establish an institutional pharmacy.
The State of Connecticut has currently imposed a moratorium on the construction
of any new facilities until June 30, 2004.
All of the Facilities are licensed under Connecticut law and are certified
or approved as providers under one or more of the Medicaid or Medicare programs.
Initial and continuing qualification of a long-term care facility to participate
in such programs depend upon many factors, including accommodations, equipment,
services, patient care, safety, personnel, physical environment and adequate
policies, procedures and controls. Licensing certification and other applicable
standards vary from jurisdiction to jurisdiction and are revised periodically.
State agencies survey all long-term care facilities on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in government sponsored third party payor programs.
The Company believes that the Facilities are in substantial compliance with
the various Medicare and Medicaid regulatory requirements applicable to them.
However, in the ordinary course of its business, the Company receives notices of
deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and seeks to take appropriate corrective action. In
most cases, the Company and the reviewing agency will agree upon the measures to
be taken to bring the Facility into compliance. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid program and, in
extreme circumstances, revocation of a facility's license. These actions would
adversely affect a facility's eligibility to participate in the Medicare or
Medicaid programs. Additionally, conviction of abusive or fraudulent behavior
with respect to one facility could subject other facilities under common control
or ownership to disqualification from participation in the Medicare and Medicaid
programs.
All of the Facilities are certified to receive benefits provided under
Medicare. In order to participate in the Medicare program, a facility must be
licensed and certified as a provider of Medicare certified nursing services.
LEV intends to provide Medicare and Medicaid covered rehabilitative services
and supplies to long-term care facilities under arrangements with the Facilities
and non-affiliated long-term care facilities. Under these arrangements, LEV will
bill and be paid by the long-term care facility for the services actually
rendered and the details of billing the Medicare and Medicaid programs are
handled directly by the long-term care facility. As a result, the Company's
rehabilitation therapy generally is not Medicare and Medicaid certified and does
not enter into provider agreements with the Medicare and Medicaid programs.
50
<PAGE>
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under the Medicaid Program in favor of a
single "nursing facility" standard. This standard requires, among other things,
that the Company have at least one registered nurse on each day shift and one
licensed nurse on each other shift and increases training requirements for
nurse's aides by requiring a minimum number of training hours and a
certification test before a nurse's aide can commence work. States continue to
be required to certify that nursing facilities provide "skilled care" in order
to obtain Medicare reimbursement.
Various state and federal laws regulate the relationship between providers
of health care services and physicians, including employment or service
contracts, and investment relationships. These laws include the broadly worded
fraud and abuse provisions of the Medicare and Medicaid statutes (the "Fraud and
Abuse Provisions"), which prohibit various transactions involving Medicare or
Medicaid covered patients or services. Violations of these provisions may result
in civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare and Medicaid programs. The Company believes that
it has not entered into any relationship with physicians or other health care
providers which might be considered to fall within the coverage of the Fraud and
Abuse Provisions and other related state and federal laws. The Company believes
that it will be able to arrange its future business relationships so as to
comply with the Fraud and Abuse Provisions and any safe harbor guidelines issued
pursuant thereto.
In addition, there are specific laws regulating aspects of the Company's
business, such as civil commitment of patients to psychiatric hospitals and
disclosure of information regarding patients being treated for chemical
dependency. All states have adopted a "patient's bill of rights" that set forth
standards dealing with such issues as using the least restrictive treatment,
patient confidentiality, allowing patient access to the telephone and mail,
allowing the patient to see a lawyer and requiring the patient to be treated
with dignity.
COMPETITION
The Company operates in a highly competitive industry. Each Facility
operates in communities in Connecticut that are generally served by
approximately five similar facilities operated by others. Some competing
facilities are located in buildings which are newer than those operated by the
Company and provide services not offered by the Company, and some are operated
by entities having greater financial and other resources and longer operating
histories than the Company. Sun Healthcare, Inc. operates nursing homes in
Norwalk and Milford which compete with Fairfield and Pond. In addition, some
facilities are operated by nonprofit organizations or government agencies
supported by endowments, charitable contributions, tax revenues and other
resources not available to the Company. Some hospitals that provide long-term
care services are also a potential source of competition to the Company. The
Company will compete with other companies in providing rehabilitation services,
medical supplies, home health care, and pharmaceutical products and services.
Many of these competing companies have greater financial and other resources
than the Company. There can be no assurance that the Company will not encounter
increased competition in the future that would adversely affect the Company's
results of operations.
The Facilities compete with other facilities based on such key competitive
factors as the reputation for the quality and comprehensiveness of care
provided; the commitment and expertise of its staff; the innovativeness of
treatment programs; local physician and hospital support; marketing programs;
charges for services; and the physical appearance, location and condition of its
facilities. The range of specialized services, together with the price charged
for services, are also competitive factors in attracting patients from large
referral sources. There is limited, if any, competition in price with respect to
Medicaid and Medicare patients, because revenues for services to such patients
are strictly controlled and based on fixed rates and uniform cost reimbursement
principles. See "--Sources of Revenue."
51
<PAGE>
FACILITIES
All of the Facilities are subject to a long-term operating lease. The
Company considers the properties to be in good operating condition and suitable
for the purposes for which they are being used. The Company's rights as lessee
could be subject to termination upon a foreclosure by the underlying lender.
The following table sets forth certain information concerning the Facilities
as of June 30, 1996. All of the long-term facilities are leased or subleased
unless otherwise indicated.
<TABLE>
<CAPTION>
OCCUPANCY OF
LICENSED LICENSED BEDS AT
NAME LOCATION BEDS(2) DECEMBER 31, 1996
- --------------------------- ------------------------------ ----------- ---------------------
<S> <C> <C> <C>
1) Pond Point Milford, Connecticut
06460-7697 140 91.4%(3)
2) Country Manor Prospect, Connecticut
06712-7060 150 99.3%
3) Bentley Gardens West Haven, Connecticut
06516-2598 98 99.0%
4) Fairfield Manor Norwalk, Connecticut
06850 240 90.8%
---
Total number of
licensed beds 628
---
---
</TABLE>
- ------------------------
(1) "Occupancy" is computed by dividing the total beds occupied by the total
licensed beds available for use during the period indicated.
(2) "Licensed Beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from beds available for use.
(3) Although Pond Point is licensed for 140 beds, six (6) of these beds have
been removed to create a therapy area and are not available for patient use.
Pond Point has an occupancy rate of 97% of available beds as of December 31,
1996. The Company intends to transfer the license for these beds to the
Bentley Gardens' Facility. The Company has applied to transfer such license.
The Company believes, although there can be no assurance, that such approval
will be granted.
The Company operates the Facilities pursuant to a ten-year lease commencing
July 1, 1995 between Fairfield and the Company. The lease, which is triple net,
provides for an annual rent of $2,520,000 through the end of its term. The lease
is automatically renewable for four additional five year periods at an annual
rental of $2,520,000, provided, the Company is not in default. The Company paid
$2,000,000 in the first year of the lease. Jack Friedler is a 33.33% partner of
Fairfield. Fairfield has a mortgage with a bank for the Facilities which expires
in 2007, which is secured by the Facilities. The payments on the mortgage are
current. See "Certain Transactions" and the Company's financial statements and
the related notes thereto included elsewhere in this Prospectus.
EMPLOYEES
As of December 31, 1996, LHG and LEV had an aggregate of approximately 681
full-time and regular part-time employees. Of this total, there were
approximately 669 employees at the Facilities, one (1) employee involved in
providing rehabilitation therapy services through LEV and ten (10) employees at
the corporate headquarters. BALZ had six (6) employees as of December 31, 1996.
PRN had an average of 205 employees for the six months ended December 31, 1996.
PRN's employees vary on a week-to-week basis. Approximately 338 of the Company's
employees are covered by collective bargaining contracts which expire in
November 1998. These employees are primarily nurses aides, dietary aides,
janitorial staff and
52
<PAGE>
cooks. The Company believes it has had good relationships with New England
Health Care Employees Union Local 1199, the union which represents its
employees, but it cannot predict the effect of continued union representation or
organizational activities on its future activities.
Although the Company believes it is able to employ sufficient nurses and
therapists to provide its services, a shortage of health care professional
personnel in any of the geographic areas in which the Company operates could
affect the ability of the Company to recruit and retain qualified employees and
could increase its operating costs. The Company competes with other health care
providers for both professional and non-professional employees and with
non-health care providers for non-professional employees.
INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims that are customary risks inherent in the operation of
health facilities and are generally covered by insurance. The Company maintains
property insurance in the amount of $19,000,000, liability and professional
malpractice insurance in the aggregate amount of $3,000,000 and $1,000,000 per
occurrence with deductibles that are deemed appropriate by management, based
upon historical claims, industry standards and the nature and risks of its
business. The Company also requires that physicians practicing at the Facilities
carry medical malpractice insurance to cover their respective individual
professional liabilities. There can be no assurance that a future claim will not
exceed available insurance coverages or that such coverages will continue to be
available for the same scope of coverages at reasonable premium rates. Any
substantial increase in the cost of such insurance or the unavailability of any
such coverages could have an adverse effect on the Company's business.
LEGAL PROCEEDINGS
There is no material litigation pending or threatened against the Company.
ACQUISITION OF BALZ
The Company entered into an agreement with all of the shareholders (the
"BALZ Sellers") of BALZ Medical Services, Inc. ("BALZ") to acquire all of the
capital stock of BALZ immediately prior to the Effective Date for Common Stock
having an aggregate value of $1,500,000 based on the Offering price. The Company
is not currently operating BALZ. For a discussion of the relationships between
the Company and the BALZ Sellers. See "Certain Transactions."
BUSINESS OF BALZ
GENERAL
BALZ is a provider of a variety of healthcare products and supplies. BALZ
provides such products to affiliated and non-affiliated nursing homes and other
institutional facilities. The medical supplies provided included an array of
medical products ranging from band aids to woundcare supplies. BALZ also
provides nutritional supplements, durable medical equipment (primarily
wheelchairs and beds), institutional cleaning products, linens and primary care
products including toothpaste and incontinence products. 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, visiting nurse associations and other home care
organizations.
INDUSTRY BACKGROUND
Patients at long-term care facilities, including the Facilities and the
Managed Facilities, require an extensive array of healthcare products and
supplies. BALZ coordinates with the personnel at such facilities
53
<PAGE>
to fill particular patient needs. In addition, facilities require a variety of
everyday products of the type provided by BALZ. See "Products and Services."
The Federal Medicare program is broken down into two major programs.
Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance).
Medicare Part A covers hospital inpatient services, skilled nursing home
inpatient services, home health agency services and hospice care. Medicare Part
B is an elective supplemental insurance that pays for durable medical equipment,
prosthetic devices and other medical supplies.
A nursing home has three possible programs for Medicare B billing. The first
program is for a skilled nursing home facility to provide Part B supplies and
bill Medicare Part A, only if the resident in on Part A stay, or Part B only if
the resident has exhausted his Part A stay and is Part B eligible. The second
option is to provide Part B supplies "under contract." Under contract means an
outside vendor supplies and bills the nursing facility directly for the products
and also charges the nursing home facility for submission of bills to Medicare
Part B. The nursing home facility shares the profit with the outside vendor
(ie., BALZ). The third option is for the facility to permit an outside supplier,
such as BALZ, to provide the Part B supplies directly to the patient and the
outside provider to receive reimbursement directly from Medicare.
Under the first program, nursing facilities direct billing, the nursing
facility bills for Part B supplies to Part A on the nursing home facility's
Medicare cost report. Under the second program the charge of the outside
supplier who provides products "under contract" becomes the "cost" to the
facility and is cost settled at the end of the facility's fiscal year. Under
either of these programs, the facility is limited to a cost reimbursement and
therefore cannot profit from the Medicare Part B supplies.
PRODUCTS AND SERVICES
BALZ currently provides medical products and services to each of the
Facilities, the Managed Facilities and to four non-affiliated nursing homes.
BALZ coordinates with the nursing home facility and medical personnel to fill
particular patient needs and general facility requirements. BALZ sets up the
equipment as necessary and spends time with the caregivers to explain the proper
use of the medical equipment.
54
<PAGE>
The primary categories of products provided by BALZ (and examples of the
products available in each category) are set forth below:
<TABLE>
<S> <C> <C>
Disposable Medical -- Incontinent products (diapers, liners, chux)
Supplies
-- Wound care products and bandages (sterile and non-sterile)
for treating decubitus ulcers,
surgical incisions and skin graft sites
-- Nutritional products (Ensure, Sustacal, etc.)
-- Diabetic products/supplies
-- Ostomy supplies
-- Urological supplies (catheters, etc.)
-- Blood pressure products
-- Skin care products
-- Tracheostomy supplies
-- Examination gloves
Durable medical equipment -- Hospital beds
-- Wheelchairs
-- Walking aids
-- Bathroom safety equipment
-- Patient lifts
Rehabilitation Products -- Power operated vehicles (such as wheelchairs and scooters)
-- Advanced support surfaces (low air loss beds, alternating
pressure mattresses)
-- Specialized seating
Institutional Cleaning and -- Deodorant
Everyday Products -- Toothpaste
-- Linens
-- Toilet paper
-- Paper towels
</TABLE>
Generally, the cost of BALZ's products and supplies is covered by third
party payor arrangements such as Medicaid, Medicare or private insurance. As an
example, purchased equipment covered by Medicare is generally sold pursuant to
an approved price range or a cost plus fee basis. Private insurance payors use
customary and usual standards for their reimbursement terms which are generally
comparable to Medicare fee screens. BALZ usually receives payment within 75 to
90 days of invoicing, but delays can be up to six months.
MARKETING
BALZ engages in local marketing efforts and directs such marketing
activities toward a wide range of affiliated and non-affiliated nursing homes
and other institutional facilities. BALZ marketing area includes Connecticut,
Massachusetts, Rhode Island and New York. In order to develop existing accounts,
as well as procure additional accounts, BALZ works to maintain and improve
current products lines and service levels.
COMPETITION
The medical supplies industry is highly competitive and fragmented. While
there are a few selected national providers, BALZ currently encounters its most
significant competition in providing health care products from small commercial
providers operating in the New England and New York areas. BALZ believes that
health care facilities in the geographic area serviced by BALZ consider
reliability of services and cost to be the most important factors in contracting
with a medical supply company. although other
55
<PAGE>
factors such as financial stability of a medical supply company and the
Company's integrity are also considered personnel policies and practices and
cost are also considered. In addition to present competition, other companies
that do not currently provide health care products may enter the business.
GOVERNMENT REGULATION AND REIMBURSEMENT
BALZ must comply with various requirements in connection with its
participation in Medicaid and Medicare. Medicaid is a combined federal-state
program for medical assistance to impoverished individuals who are aged, blind,
or disabled or members of families with dependent children. The Medicaid
programs in many states are subject to federal requirements. The state has the
authority to set levels of reimbursement within Federal guidelines. BALZ
receives, from its customers who are covered by Medicaid, only the reimbursement
permitted by Medicaid and is not permitted to collect from the patient any
difference between its customary charge to users and the amount reimbursed. Any
difference between BALZ's customary charge to its customers who are covered by
Medicaid and amounts reimbursed by Medicaid are not material to BALZ's operating
results because BALZ's customary charges to such customers generally do not
exceed amounts reimbursable by Medicaid.
Medicare is a federal health insurance program, for the elderly and for
chronically disabled individuals, which pays for equipment and services when
medically necessary. Medicare uses a charge-based reimbursement system for
purchased medical equipment based on approved published prices. Equipment such
as hospital beds, wheelchairs and patient lifters is generally paid for on a
rental basis over a 15 month term, with maintenance payments semi-annually
thereafter.
The Company believes BALZ is in substantial compliance with all material
statutes, regulations, standards and conditions applicable to its business.
However, new laws and/or regulations, standards or conditions may be adopted or
existing laws, regulations, standards or conditions may be interpreted by
governmental authorities in a manner which could adversely impact BALZ's
operations. Many of the regulations applicable to the Company's facilities are
also applicable to BALZ. For a more detailed discussion of Government Regulation
see "Business--Government Regulation." BALZ cannot predict whether any such
proposals or interpretations will be adopted and, if adopted, what effect such
proposals or interpretations would have on BALZ's business.
ACQUISITION OF PRN
Three stockholders of PRN have entered into an agreement to sell, for an
aggregate of $1,620,000 in cash, all of their shares of capital stock in PRN to
LHG immediately prior to the Effective Date. One shareholder will be exchanging
his shares in PRN for 108,000 shares of the Company immediately prior to the
Effective Date. See "Use of Proceeds." The Company is not currently operating
PRN. For a discussion of the relationships between the Company and the PRN
Sellers, see "Certain Transactions."
BUSINESS OF PRN
GENERAL
PRN provides skilled nursing services to persons at home. PRN's personnel
includes (i) registered nurses, who provide a broad range of nursing care
services, including skilled observation and assessment, instruction of patients
regarding medical and technical procedures, direct hands-on treatment, and
communication and coordination with the attending physician or other service
agencies; (ii) licensed practical nurses who perform, under the supervision of a
registered nurse, technical nursing procedures, which include injections,
dressing changes, and assistance with ambulation and catheter care; (iii)
physical and rehabilitation therapists who provide services related to the
reduction of pain and improved rehabilitation of joints and muscles; and (iv)
certified nurses aides, who, under the supervision of a nurse, provide
56
<PAGE>
health-related services and personal care such as assistance with ambulation,
limited range-of-motion exercises, monitoring of vital signs, non-sterile
dressing changes and bathing.
INDUSTRY BACKGROUND
Due to a variety of factors the home health care market has increased
rapidly in the last decade. The Company anticipates continued growth in the home
health care market due to increasing emphasis on cost effective medical
treatment, the "Greying of Our Society" and continuing advances in medical
technology. The over-65 population, which has a higher incidence of illness and
disability, continues to increase. At the same time, home treatment of medical
needs as compared with hospital treatment is generally considered more cost
effective. The increased acceptance of home care has been bolstered by medical
technological advances which have facilitated the maintenance of high medical
standards in home care. The Company believes that cost containment initiatives
will continued to increase the demand for home health care.
STRATEGY
The Company plans to increase the scope of the services PRN provides to
patients at home, as well as the number of patients it provides such services
to. PRN targets hospitals, clinics, nursing homes, physician groups, assisted
living facilities, health maintenance organizations and other health care
providers as sources of home health care referrals. PRN has become involved in
the communities it serves through participation in senior service provider
councils and coalitions. PRN's active participation in such meetings provides it
with a high level of exposure to key sources and the opportunity to obtain new
contracts. PRN also relies on advertising, direct mail and other forms of
consumer marketing, as well as general word of mouth, to develop its clientele.
PRN has been accredited with commendation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO").
The Company intends to expand the scope of services provided by PRN to
include the provision of intravenous therapy to patients at home. The Company
believes that as technology advances an increasing level of medical problems can
be treated effectively at home. The Company also 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. The Company believes that staffing limitations at
hospitals, nursing homes and other institutional facilities have increased the
need for temporary nurses and other skilled personnel.
MARKETING
PRN markets a multi-dimensional package of nursing care. PRN's marketing is
focussed at the local level and is conducted by PRN's employees who call on
referral sources such as doctors, hospitals and various community and
professional organizations. Besides actively soliciting business from these
sources, PRN's marketing objective is to maintain a public awareness of its
services. These efforts are supplemented through marketing materials. PRN seeks
to expand its existing relationships with local and regional health care
providers as sources of referral.
COMPETITION
PRN faces competition from hospitals with their own home care agencies,
divisions of major pharmaceutical companies and other home care organizations.
Many of these competitors have greater capital and other resources than are
available to the Company. The national home care market is, however, highly
fragmented, and management estimates that the top 10 companies active in home
care collectively account for less than a 25% share of the home care market.
Because most home care business is generated by referral from local third party
payors and medical-related organizations, home care providers compete on a local
basis to develop relationships with key referral sources. The Company believes
the most important competitive factors in the home care industry are the ability
to provide
57
<PAGE>
qualified personnel on a timely basis, price and range of services offered.
Management believes the Company's plans for diversification of the services
offered by PRN will improve PRN's ability to compete within the home health care
market.
GOVERNMENT REGULATION
Much of the regulations imposed upon the Company also apply to the
activities of PRN. The Company's health care business is subject to extensive
and frequently changing regulation by federal, state and local authorities.
Regulation imposes a significant compliance burden on the Company, including
state licensing and federal and state eligibility standards for certification as
a Medicare and Medicaid provider. In Connecticut, PRN need only be licensed as a
Medicare and Medicaid provider. In other states, home care providers must
receive a certificate of need ("CON") from the state in order to directly
provide Medicare and Medicaid services. CON requirements and restrictions vary
substantially from state to state.
The Company believes PRN is in substantial compliance with all material
statutes, regulations, standards and conditions applicable to its business.
However, new laws and/or regulations, standards or conditions may be adopted or
existing laws, regulations, standards or conditions may be interpreted by
governmental authorities in a manner which could adversely impact PRN's
operations. The Company cannot predict whether any such proposals or
interpretations will be adopted and, if adopted, what effect such proposals or
interpretations would have on PRN's business.
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, together with their
ages and present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Jack Friedler.............................. 64 Chief Executive Officer, Chairman of the
Board and Director
Harry Dermer............................... 45 President, Chief Operating Officer and
Director
Thomas E. Dybick........................... 48 Chief Financial Officer
Jon Mills.................................. 57 Director
Mary Archambault........................... 46 Executive Vice President
Suzanne J. Nettleton....................... 50 Executive Vice President
</TABLE>
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, formerly Lexington Convalescent Home, which is
currently managed by the Company. Mr. Friedler and his wife own 100% of
Lexington House. He is currently Secretary and a Director of Professional Relief
Nurses, Inc., a multi-dimensional provider of nursing care, positions he has
held since 1981. From 1990 to 1993, Mr. Friedler served as President of
Bridgeport Healthcare Center of which he was a shareholder. 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 spends approximately 35 hours per week on matters relating to the
Company's business. Mr. Friedler owns 24% and 25% of BALZ and PRN, respectively.
HARRY DERMER has served as President, Chief Financial Officer and Director
of the Company since its inception in February 1995. Prior thereto, 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.
Subsequent to founding these pharmaceutical companies he remained employed by
these companies and successfully expanded their operations. From 1990 to 1993,
Mr. Dermer served as Vice-President of Operations and Chief Financial Officer of
Reliance Pharmacy Corp. From 1987 to 1990, he served as Chief Financial Officer
of Arrow Prescription Center Corp. From 1986 to 1987, Mr. Dermer was employed by
Gulf and Western as a Senior Financial Analyst. He served as Plant Controller of
DAP, Inc., the manufacturing division of Schering Plough, from 1982 to 1985. Mr.
Dermer received a B.S. in Marketing from Rutgers University, an M.B.A. from the
University of Dallas, and also completed one year of medical school at Bucharest
University. In addition, Mr. Dermer has a Connecticut nursing home
administrator's license. Mr. Dermer owns 20% of BALZ.
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 CT and MA. Previously, Mr. Dybick was
employed by the law firm of Levy & Droney, PC as Executive Director (1985-1992),
as
59
<PAGE>
Director of Internal Auditing for The Stanley Works (1980-1985) and as an Audit
Principal for Ernst & Young (1970-1980). Mr. Dybick received a B.S. in
Accounting from Fairfield University and has completed the Management
Development Program at the Hartford Graduate Center.
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. Mr. Mills
obtained a B.S. in Marketing from Northwestern University.
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. Ms. Archambault was employed in a supervisory capacity at
Allcare Medication Services, Inc. from 1990 to 1993. She served as the Director
of Operations of MedCare North from 1987 to 1990. Ms. Archambault received a
B.A. in English and a B.S. from the University of Eastern Connecticut State
College, obtained a Nursing Home Administrator's license from the University of
Connecticut Graduate Center, and is a licensed Practical Nurse in the State of
Connecticut. Ms. Archambault owns 20% of BALZ.
SUZANNE J. NETTLETON has served as President and Administrator of PRN since
its inception in 1981. In January 1994, Ms. Nettleton co-founded the Connecticut
Home Care Alliance. From 1980 to 1981, Ms. Nettleton was employed as Area Sales
Manager and State Administrator of Olsten Kimberly Quality Care, a national home
healthcare agency that Ms. Nettleton brought through Connecticut state
licensure. From 1978 to 1979, she served as Director of Nursing of the Queens
Convalescent Center, and from 1976 to 1978 she was the Director of Staff
Development of Middlesex Memorial Hospital. Ms. Nettleton received a B.S. in
Science and Nursing at Long Island University and a Masters Degree in Health
Administration at the Hartford Graduate Center. She obtained a Nursing Home
Administrator's License from the State of Connecticut and is licensed as a
Registered Nurse in both New York and Connecticut. Ms. Nettleton owns 25% of
PRN.
The by-laws of the Company provide that the authorized number of directors
shall be as set by the Board of Directors but shall not be less than three,
unless all of the outstanding shares are owned beneficially and of record by
less than three stockholders, in which event the number of directors shall not
be less than the number of stockholders permitted by statute. The authorized
number is presently five. The Company intends to appoint an additional
independent director within 90 days of the Effective Date.There are no
agreements with respect to the election of directors except that the Underwriter
has the right to appoint a designee as an observer to the Board of Directors and
the Company's President and Chief Executive Officer have entered into a
shareholder's agreement. As of the Effective Date, the Underwriter has not
appointed a designee as an observer to the Board of Directors. See
"Underwriting".
COMPENSATION OF DIRECTORS
None of the directors has received or currently receives any cash
compensation for serving on the Board of Directors; however, directors may be
reimbursed for expenses incurred in connection with their services as such.
COMMITTEES OF THE BOARD
No committees of the Board have been established to date. Pursuant to the
listing requirements for Nasdaq, the Company is required to establish an
independent audit committee. The Company intends to satisfy this requirement
within 90 days of the Effective Date. A failure by the Company to comply with
this requirement may result in the delisting of the Common Stock and Warrants
from Nasdaq.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation, as well as certain
other compensation paid or accrued, by LHG to Jack Friedler, its Chief Executive
Officer, and Harry Dermer, its President and Chief Financial Officer during the
fiscal year ended June 30, 1996, during which period Messrs. Friedler and Dermer
had no formal agreements with the Company. Other than Messrs. Friedler and
Dermer, no other executive officer of LHG 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 by Mary Archambault,
BALZ President is also disclosed below.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION STOCK
------------------------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED
- ---------------------------------------------- -------------- ---------- --------- -----------------------------
<S> <C> <C> <C> <C>
Jack Friedler................................. Fiscal 1996 $ 210,000(1) -- --
Chief Executive Officer and Director
Harry Dermer.................................. Fiscal 1996 $ 127,204 -- --
President, Chief Operating Officer
and Director
Suzanne Nettleton............................. Fiscal 1996 $ 122,237(1) $ 38,121 --
President of PRN
Mary Archambault.............................. Fiscal 1996* $ 54,256 -- --
President of BALZ
</TABLE>
- ------------------------
(1) In addition, Jack Friedler and Suzanne Nettleton each received director fees
of $40,000 for serving on the Board of Directors of PRN. Following the
consummation of the Offering, they will not be entitled to such fees.
* Represents salary for an eight month period since BALZ only commenced
operations in November 1995.
The Company has obtained individual term life insurance policies covering
Messrs. Friedler and Dermer in the amount of $1,000,000 per person. The Company
is the sole beneficiary under these policies and the Company will keep such
policies in force for a minimum of three years from the completion of this
Offering.
EMPLOYMENT AGREEMENTS
Prior to the Effective Date, the Company will enter into separate employment
agreements with each of Suzanne J. Nettleton and Mary Archambault, to be
effective upon consummation of the Offering. The Company has entered into
employment agreements with Jack Friedler and Harry Dermer which are effective
upon consummation of the Offering. The agreements will provide that such
individuals shall devote substantially all of their working time and attention
to the business of the Company and will contain certain non-compete provisions.
Each such agreement will have an initial term of five years and shall be
automatically renewable for successive one-year periods unless either the
Company or the employee elects not to renew his/her employment.
Mr. Friedler's employment agreement provides that Mr. Friedler will receive
a $250,000 annual salary, with cost of living increases and a bonus equal to one
(1%) percent of the Company's net income before taxes. Mr Dermer's employment
agreement is identical except that Mr. Dermer will be entitled to a $175,000
salary. If their employment agreements had been in effect on June 30, 1996 they
would have each received approximately $4,600 as a bonus.
The agreement with Ms. Archambault provides that Ms. Archambault will
receive a base annual salary of $100,000, subject to five percent annual
increases. In addition to her base salary, Ms. Archambault will
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<PAGE>
be entitled to receive 3.75% of BALZ's net profits before taxes. If her
employment agreement was in effect on June 30, 1996 she would have received
approximately $12,000 as a bonus.
The agreement with Ms. Nettleton provides that Ms. Nettleton will receive a
base annual salary of $135,000, subject to five percent annual increases. In
addition to her base salary, Ms. Nettleton will be entitled to receive 3.75% of
PRN's net profits before taxes. If her employment agreement was in effect on
June 30, 1996 she would have received approximately $24,000 as a bonus.
SHAREHOLDERS AGREEMENT
In October 1996, Jack Friedler and Harry Dermer entered into a stockholder's
agreement, effective upon consummation of the Offering, 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.
STOCK OPTION PLAN
Prior to the Offering, the Company intends to adopt the 1997 Stock Option
Plan (the "Plan" or the "1997 Stock Option Plan"). The purpose of the Plan is to
promote the success of the Company by providing a method whereby eligible
participants may be awarded additional remuneration for services rendered,
thereby increasing their personal interest in the Company. The Plan is also
intended to aid the Company in attracting persons of suitable ability to
becoming employees of the Company. Pursuant to the Plan, options to acquire an
aggregate of 450,000 shares of Common Stock may be granted, none of which have
been granted to date. The Plan provides for grants to employees, consultants and
directors of the Company.
The 1997 Stock Option Plan authorizes the Board to issue incentive stock
options ("ISOs"), as defined in Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"), as well as stock options that do not conform to
the requirements of the Code section ("Non-ISOs"). Consultants and directors who
are not also employees of the Company could be granted only Non-ISOs. The
exercise price of each ISO may not be less than 100% of the fair market value of
the Common Stock at the time of grant, except that in the case of a grant to an
employee who owns 10% or more of the outstanding stock of the Company or a
subsidiary or parent of the Company (a "10% Stockholder"), the exercise price
may not be less than 110% of the fair market value on the date of grant. The
exercise price of each Non-ISO shall be at least 100% of the fair market value
of the Common Stock on the date of grant. ISOs may not be exercised after the
tenth anniversary (fifth anniversary in the case of any option granted to a 10%
Stockholder) of their grant. Non-ISOs may not be exercised after the tenth
anniversary of the date of grant. Options may not be transferred during the
lifetime of an option holder. No stock options could be granted under the Plan
after , 2007.
Subject to the provisions of the Plan, the Board had 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. Payments by optionholders upon exercise of an option may be made (as
determined by the Board) in cash or such other form of payment as may be
permitted under the Plan, including without limitation, by promissory note or by
shares of Common Stock.
LIMITATION ON LIABILITY
Delaware law permits a corporation through its Certificate of Incorporation
to indemnify its directors and officers from personal liability to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, other than (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent violations of provisions regarding the
unlawful payment of dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Company's Certificate of Incorporation exonerates its directors and
officers from monetary liability to the extent permitted by the statutory
provisions.
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<PAGE>
CERTAIN TRANSACTIONS
Immediately prior to the Effective Date, the members of Lexington Health
Care Group, LLC, Jack Friedler, Stephanie Friedler and Harry Dermer, have agreed
to exchange their respective interests (37.5%, 37.5% and 25%) in the LLC in
exchange for an aggregate of 2,462,000 shares of Common Stock of the Company
(the "Reorganization"). Stephanie Friedler has directed that her shares be
issued to her husband, Jack Friedler. In connection with the Reorganization, all
of the assets, liabilities and operations of the LLC will be transferred to the
Company. In addition, all undistributed earnings of the LLC will be contributed
to the capital of the Company.
In February 1995 (effective July 1, 1995), the Company entered into a
ten-year lease for the four Facilities, Jack Friedler, the Company's Chief
Executive Officer is a 33.33% limited partner of the lessor, Fairfield. See
"Business--PRN Acquisition." The partners owning the remaining 66.66% interest
in Fairfield are also owners of an aggregate of 50% of the capital stock of PRN.
The Company paid $2,000,000 for the first year of the lease. Thereafter, the
annual payment is $2,520,000 per year. The lease is automatically renewable for
four additional five year periods at the same rent provided the Company is not
in default of its obligations under the lease. In addition, the Company paid a
$2,282,000 security deposit to Fairfield. 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 landlord has informed the Company that a third
party offered to lease the Facilities on substantially the same terms.
The Company leases its executive offices from a company controlled by Jack
Friedler and his wife pursuant to a three-year lease for a monthly rental fee of
$1,100 per month. The Company compared similar space and found the price charged
to be reasonable. In addition as of December 31, 1996, the Company has loaned
Lexington House, Inc. an aggregate of $494,000. This loan bears interest at an
annual rate of eight (8%) percent, is due and payable on June 30, 2001, and is
secured by a lien on the executive facility. The loan arose as a result of the
Company's payment of certain expenses of Lexington House and Lexington House's
non-payment of its monthly management fee.
The Company, as the operator of the Facilities, received certain Medicaid
reimbursement in the aggregate amount of $2,600,000 that related to the time
that the Facilities were operated by Beverly. The Company utilized such amounts
and agreed to repay them to Beverly with 12% interest. Jack Friedler, the
Company's Chief Executive Officer, personally guaranteed this obligation. The
loan bears interest at the rate of 12% per annum. As of February 1, the current
balance of the loan is $153,000. The Company intends to repay such loan with a
portion of the net proceeds of the Offering. See "Use of Proceeds."
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 Samir Realty, a Company owned by Jack Friedler and
his wife. The management agreement is for a period of one year and provides for
a $6,030 monthly fee to be paid to the Company. The Company believes that the
terms of the management agreement are fair and reasonable.
Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer which loan bears interest an an
annual rate of 10%. $104,000 of such loan was repaid as of December 31, 1996.
The loan which was used for working capital is payable on demand but is not
anticipated to be repaid in the next 12 months.
Upon the Effective Date, the Company will acquire all of the capital stock
of PRN from its existing stockholders. Jack Friedler is the owner of 25% of such
capital stock. In exchange for Mr. Friedler's 25% interest in PRN, the Company
will issue Mr. Friedler an amount of shares of the Company's Common Stock with a
value of $540,000 (108,000 shares based on the proposed initial public offering
price). Suzanne J. Nettleton, an officer of the Company, is the owner of 25% of
the capital stock of PRN. The Company is purchasing Ms. Nettleton's interest for
$540,000. Abraham Sova, Esther Sova and Joseph Sova (the "Sova Family")
collectively own 25% of the capital stock of PRN which the Company is purchasing
for
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<PAGE>
an aggregate of $540,000. The Sova Family is a 33.33% limited partner of
Fairfield. Israel Berger, Mark Berger and Julius Berger (the "Berger Family")
collectively own the remaining 25% of the capital stock of PRN which the Company
is purchasing for an aggregate of $540,000. The Berger Family is a 33.33%
limited partner of Fairfield. The Company believes that based on PRN's past
performance and projections that the acquisition price is at least as favorable
for the Company as could be obtained from a non-related party.
Upon the Effective Date, the Company will acquire all of the capital stock
of BALZ from its existing stockholders in exchange for an aggregate of 300,000
shares of the Company's Common Stock (valued at $1,500,000 based on the proposed
initial public offering price). Jack Friedler is the owner of 24% of such
capital stock. In exchange for Mr. Friedler's 24% interest in BALZ, the Company
will issue Mr. Friedler 72,000 shares of the Company's Common Stock. Also, in
exchange for Harry Dermer's, the Company's President, 20% interest in BALZ, the
Company will issue Mr. Dermer 60,000 shares of the Company's Common Stock. Mary
Archambault, an officer of the Company, is the owner of 20% of the capital stock
of BALZ. The Company is purchasing Ms. Archambault's interest on the same terms
and conditions as that of Mr. Dermer. The Company believes that based on BALZ's
past performance and projections that the acquisition price is at least as
favorable for the Company as could be obtained from a non-related party. BALZ
was formed in October 1995. The owners of BALZ have contributed an aggregate of
approximately $25,000 since its inception. The shareholders of BALZ loaned it an
aggregate of $60,000 pursuant to a series of promissory notes which bear
interest at the rate of 10% and are payable on demand. BALZ repaid an aggregate
of $30,000 of such amounts. Since BALZ's inception, the Company has provided
certain management services and office space to BALZ. In consideration for the
rent and services, BALZ paid the Company an aggregate of $25,000 for the year
ended June 30, 1996 and $19,000 for the six months ended December 31, 1996.
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. 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of (i) each person who is known by the Company to be the
beneficial owner of 5% or more of its outstanding shares of Common Stock; (ii)
each director of the Company (iii) each named executive officer of the Company;
and (iv) all directors and named executive officers as a group, together with
their respective percentage ownership of such shares before the Offering and as
adjusted to reflect the sale of the Shares offered hereby.
<TABLE>
<CAPTION>
PERCENTAGE OF
----------------------
COMMON STOCK OWNED
----------------------
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP BEFORE AFTER
NAME AND ADDRESS(1) SHARES OWNED(2) OFFERING OFFERING(3)
- ------------------------------------------------------ ---------------- --------- -----------
<S> <C> <C> <C>
Jack Friedler(4)...................................... 2,026,500 57.90% 45.03%
Harry Dermer(5)....................................... 675,500 19.30% 15.01%
Suzanne J. Nettleton.................................. 0 0% 0%
Mary Archambault(5)................................... 60,000 1.71% 1.33%
John Mills............................................ 0 0% 0%
Thomas Dybick......................................... 0 0% 0%
Wayne B. Wiseman(6)................................... 250,000 7.14% 5.56%
Sean Leahy(6)......................................... 250,000 7.14% 5.56%
All officers and directors as a group (4
persons)(4)(5)...................................... 2,762,000 78.91% 61.38%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the address of each beneficial owner is c/o the
Company, 35 Park Place, New Britain, Connecticut 06052.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act ("Rule 13d-3") and unless otherwise indicated, represents
shares for which the beneficial owner has sole voting and investment power.
(3) The percentage of class if calculated in accordance with Rule 13d-3 and
assumes that the beneficial owner has exercised any option or other rights
to subscribe which are exercisable within sixty (60) days and that no other
options or rights to subscribe have been exercised by anyone else.
(4) As a result of the Reorganization, Mr. Friedler will receive an aggregate of
1,846,500 shares of the Company's Common Stock for his and his wife's 75%
collective ownership interest in the LLC. Includes 108,000 and 72,000 shares
to be issued in connection with the acquisitions of PRN and BALZ,
respectively. Mr. Friedler's ownership of PRN and BALZ is 25% and 24%,
respectively.
(5) Includes 60,000 shares to be issued to each of Mr. Dermer and Ms.
Archambault in connection with the acquisition of their respective ownership
of BALZ.
(6) Does not include 250,000 shares of Common Stock issuable upon the exercise
of 250,000 Warrants.
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<PAGE>
DESCRIPTION OF SECURITIES
The following descriptions of the Company's securities are qualified in all
respects by reference to the Articles of Incorporation and By-laws of the
Company, copies of which are filed as Exhibits to the Registration Statement of
which this Prospectus is a part. The Company is authorized to issue 15,000,000
shares of Common Stock, $.01 par value and 1,000,000 shares of Preferred Stock,
$.01 par value. As of the date hereof, the Company has 3,500,000 shares of
Common Stock outstanding, including the 408,000 shares to be issued in
connection with the acquisitions of BALZ and PRN, held by 10 stockholders of
record. After the Offering, the Company will have 4,500,000 shares of Common
Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
in its discretion out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preferences over the Common
Stock. Holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are and the shares of Common Stock offered hereby, when issued against the
consideration set forth in this Prospectus, will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of Preferred Stock with designations, rights and preferences determined
from time to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any shares of its Preferred Stock and the Company has committed not to
issue any shares of Preferred Stock without the consent of the Underwriter,
except in connection with an acquisition, for a period of two years from the
Effective Date, there can be no assurance that it will not do so in the future.
See "Dividend Policy."
WARRANTS
Each Warrant entitles its holder to purchase one share of Common Stock at an
exercise price of $6.00 per share (the "Exercise Price"). The Warrants are
exercisable commencing one year from the Effective Date and expire six years
after the Effective Date.
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Underwriter and the warrant agent (the
"Warrant Agent"), and will be evidenced by warrant certificates in registered
form.
The Exercise Price of the Warrants and the number and kind of shares of
Common Stock or other securities and property issuable upon exercise of the
Warrants are subject to adjustment in certain circumstances, including stock
splits, dividends, or subdivisions, combinations or recapitalizations of the
Common Stock. Additionally, an adjustment will be made upon the sale of all or
substantially all of the assets of the Company in order to enable Warrantholders
to purchase the kind and number of shares of
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<PAGE>
stock or other securities or property (including cash) receivable in such event
by a holder or the number of shares of Common Stock that might otherwise have
been purchased upon exercise of the Warrant.
The Warrants do not confer upon the holder any voting or any other rights of
a stockholder of the Company. Upon notice to the Warrantholders, the Board of
Directors has the right to reduce the exercise price or extend the expiration
date of the Warrants.
No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
shares of Common Stock issuable upon exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the Warrantholder. The Company has undertaken to use its best
efforts to maintain a current prospectus relating to the issuance of shares of
Common Stock upon the exercise of the Warrants. While it is the Company's
intention to maintain a current prospectus, there can be no assurance that it
will be able to do so.
The Warrants are redeemable by the Company at a price of $.05 per Warrant,
commencing one year after the Effective Date and prior to their expiration, on
30 days' prior written notice to the registered holders of the Warrants,
provided the last sales price per share of the Common Stock for 20 consecutive
trading days equals or exceeds $10.00. The Warrants shall be exercisable until
the close of the business day preceding the date fixed for redemption. Under
certain circumstances the Underwriter will receive a warrant solicitation fee.
See "Underwriting."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Warrants is
Continental Stock Transfer & Trust Company located at 2 Broadway, New York, New
York 10004.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 4,500,000 shares of Common Stock of the Company outstanding as of the
date of this Prospectus, including the shares issued in connection with the
acquisition of BALZ and PRN, 3,500,000 are "restricted securities" of which
3,262,000 are beneficially owned by "affiliates" of the Company, as those terms
are defined in Rule 144 promulgated under the Securities Act. Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144, as promulgated under the Securities Act. All of the Company's existing
stockholders have agreed not to sell or otherwise dispose of any shares of
Common Stock, without the prior written consent of the Underwriter, for a period
of 24 months after the Effective Date.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
as such term is used in Rule 144 under the Act) for at least two years,
including persons who may be deemed to be affiliates of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock (which
number, immediately following the Offering made by, will be 45,000 shares,
assuming the Underwriter does not exercise their over-allotment option) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale, provided that the Company has filed certain periodic
reports with the Commission (or made publicly available certain information
concerning it) and the sale is made in a "broker's transaction" or in a
transaction directly with a "market-maker," as those terms are used in Rule 144,
without the solicitation of buy orders by the broker or such person, and without
such person making any payment to any person other than the broker who executes
the order to sell the shares of Common Stock. A person (or person whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale by such person, and who has
beneficially owned restricted shares for at least three years, would be entitled
to sell such shares under Rule 144 without regard to the volume limitations and
public information and manner of sale requirements described above. Restricted
shares properly sold in reliance upon Rule 144 are thereafter freely tradeable
without restriction or registration under the Act, unless thereafter held by an
affiliate of the Company.
Prior to this Offering, there has been no public market for the Company's
Common Stock. The Company cannot predict the number of shares of Common Stock
which may be sold in the future pursuant to Rule 144 or other applicable
exemptions form the registration requirements of the Act because such sales will
depend on whether persons choose to exercise any registration rights they may
have, the market price of the Common Stock, the individual circumstances of
holders thereof and other factors. Nevertheless, there is the possibility that
substantial amounts of restricted or registrable shares may be resold in the
public market which may adversely affect prevailing market prices for the Common
Stock.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the Underwriter, the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase, on a "firm commitment" basis, all of the 1,000,000 shares of Common
Stock and the 1,000,000 Warrants offered hereby, if any are purchased.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent including the current effectiveness
of the Registration Statement, delivery of an opinion of Company's counsel, a
"comfort letter" from the Company's accountants, the delivery of an officer's
certificate certifying that all representations and warranties are true and
correct, the appointment of the Transfer and Warrant Agent and NASD approval of
the Underwriter's compensation. The Underwriting Agreement also provides that
the Underwriter will be obligated to purchase all of the shares of Common Stock
and Warrants if any are purchased.
The Underwriter has advised the Company that they propose to offer the
shares of Common Stock and Warrants to the public at the offering prices set
forth on the cover page of this Prospectus and that the Underwriters may allow
to certain dealers, who are members of the National Association of Securities
Dealers, concessions not in excess of $ per share of Common Stock and
$ per Warrant. After the Offering, the public offering price and
concessions and discounts and other offering terms may be changed.
The Company has granted an option to the Underwriter exercisable during the
45-day period from the date of this Prospectus, to purchase up to a maximum of
100,000 additional shares of Common Stock and 100,000 additional Warrants solely
to cover over-allotments, if any, in the sale of the shares of Common Stock and
Warrants, at the Offering price, less the underwriting discounts and commission
set forth on the cover page of this Prospectus.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of the Offering, including the
proceeds of the Over-allotment Option, if and to the extent exercised. The
Underwriting Agreement provides for reciprocal indemnification between the
Company and the Underwriter against certain liabilities in connection with this
Offering, including liabilities under the Securities Act of 1933, as amended
(the "Act").
As additional compensation in connection with this Offering the Company has
agreed to sell to the Underwriter, for nominal consideration, the Underwriter's
Warrants to purchase 100,000 shares of Common Stock and 100,000 the
Underwriter's Warrant is exercisable for a four-year period commencing one year
from the Effective Date and entitles the Underwriter to purchase each share of
Common Stock and Warrant covered thereby at an exercise price equal to 120% of
the initial public Offering price per share of Common Stock and Warrant, subject
to adjustment in certain events. The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year after the
Effective Date, except to officers and partners of the Underwriter or members of
the selling group or any officer or partner of any member of the selling group.
The prices payable for the securities upon exercise of the Underwriter's Warrant
and the number of securities underlying the Underwriter's Warrant are subject to
adjustment to prevent dilution.
For the term of the Underwriter's Warrant, the holder or holders thereof are
given, at a nominal cost, the opportunity to profit from a rise in the market
price of the shares of Common Stock subject to the Underwriter's Warrants with a
resulting dilution in the interests of other stockholders. The Company may find
it more difficult to raise additional equity capital if it should be needed for
its business while the Underwriter's Warrants are outstanding; and at any time
when the holders of the Underwriter's Warrants might be expected to exercise
such Warrants, the Company would in all likelihood be able to obtain additional
equity capital on terms more favorable than those provided in the Underwriter's
Warrants. Any
69
<PAGE>
profit realized on the sale of the Underwriter's Warrants and shares of Common
Stock and Warrants subject to the Underwriter's Warrants may be deemed
additional underwriting compensation.
All of the Company's officers, directors and all stockholders have agreed
not to publicly sell, prior to 24 months from the date hereof, any securities of
the Company owned by them, without the prior written approval of the
Underwriter.
The Underwriting Agreement gives the Underwriter the right to appoint a
designee to attend all meetings of the Company's Board of Directors for a period
of three years following the closing of this Offering.
The Underwriting Agreement also provides that the Company may not issue
shares of Common Stock or any warrants, options or other rights to purchase
Common Stock (other than pursuant to its Stock Option Plan) for a period of two
years following the Effective Date without the Underwriter's prior written
consent, which may not be unreasonably withheld.
The Company has agreed to retain the Underwriter as a financial consultant,
for a period of three years from the date of this Prospectus at an annual fee of
$33,333.36, all of which fees (an aggregate of $100,000) will be payable in
advance on the completion of this Offering. The Underwriter will seek out and
review potential acquisition and joint venture targets for the Company, as well
as assisting the Company in responding to any acquisitions for the Company.
Upon the exercise of any Warrant for a period of four years commencing one
year after the date of this Prospectus, the Company has agreed to pay to the
Underwriter a fee of 5% of the exercise price for each Warrant exercised;
provided, however, that the Underwriter will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
Common Stock at the time of exercise is lower than the exercise price of the
Warrants; (ii) the Warrants are held in any discretionary account; (iii)
disclosure of compensation arrangements is not made, in addition to the
disclosure provided in this Prospectus, in documents provided to holders of the
Warrants at the time of exercise; (iv) the exercise of the Warrants is
unsolicited by the Underwriter; or (v) the solicitation of exercise of the
Warrants was in violation of Regulation M promulgated under the Exchange Act.
The Underwriter was organized in March 1995, was first registered as a
broker dealer in December 1995, and became a member firm of the NASD in December
1995. The Underwriter is principally engaged in retail brokerage and market
making activities and various corporate finance projects. Although the
Underwriter has acted as a placement agent in private offerings and has
participated as a member of the Underwriting syndicate or as a selected dealer
in four prior public offeirngs, it only has acted as the lead managing
underwriter in one prior public offering and has co-managed two other public
offerings. No assurance can be given that the Underwriter's lack of experience
as a lead managing underwriter of public offerings will not adversely affect the
Offering and the subsequent development of a liquid public trading market in the
Company's securities.
The Company has agreed to indemnify the Underwriter against liabilities
incurred by the Underwriter by reason of misstatements or omissions to state
material facts in connection with the statements made in this Prospectus and the
Registration Statement of which it forms a part. The Underwriter, in turn, has
agreed to indemnify the Company against liabilities incurred by the Company by
reason of misstatements or omissions to state material facts in connection with
statements made in the Registration Statement and Prospectus based on
information furnished by the Underwriter.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement. Reference is made to a copy of the
Underwriting Agreement, which is an exhibit to the Registration Statement of
which this Prospectus forms a part.
70
<PAGE>
DETERMINATION OF OFFERING PRICE
There is currently no public market for the Company's securities.
Consequently, the Offering price has been determined by negotiations between the
Company and the Underwriter and does not necessarily bear any relationship to
any recognized criteria of value. In their negotiations of the Offering price,
the Company and the Underwriter took in account estimates of the business
potential and earning prospects of the Company, the present state of the
Company's development and prevailing market conditions. In this regard, greater
significance was given to the business potential and earnings prospects of the
Company than was given to historical financial information. On November 1, 1996,
the Company sold an aggregate of 500,000 shares of Common Stock and 500,000
warrants for an aggregate of $250,000. This price was not taken into
consideration in connection with the pricing of this Offering. The Offering
price set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the securities of the Company.
Such market price is subject to change as a result of market conditions and
other factors.
There can be no assurance that an established trading market will develop
for the Common Stock, or, if such market develops and continues, that the
prevailing market price of such securities will bear a favorable relationship to
the Offering price of the Common Stock and Warrants. See "Risk Factors--Lack of
Market; Possible Volatility of Stock Price; Arbitrary Determination of Offering
Price."
71
<PAGE>
LEGAL MATTERS
The validity of the securities which are being offered hereby and certain
other legal matters will be passed upon for the Company by Gersten, Savage,
Kaplowitz, Fredericks & Curtin, LLP ("Gersten Savage"), 101 East 52nd Street,
New York, New York 10022. Certain members of Gersten Savage are the owners of
130,000 shares of the Company's Common Stock. Gersten Savage has in the past,
represented the Underwriter and may do so in the future. Certain legal matters
will be passed upon for the Underwriter by Schneck Weltman Hashmall & Mischel,
LLP, 1285 Avenue of the Americas, New York, New York 10019.
EXPERTS
The financial statements of Lexington Healthcare Group, Inc., BALZ Medical
Services, Inc. and Professional Relief Nurses, Inc. included elsewhere in this
Prospectus and the Registration Statement have been so included in the reliance
on the report of Richard A. Eisner & Company, LLP, independent auditors, for the
periods indicated in said reports, given on the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
Prior to this Offering, the Company has not been subject to the reporting
requirements of the Exchange Act. The Company will become subject to the
Exchange Act reporting requirements upon effectiveness of the Registration
Statement of which this Prospectus is a part.
The Company has filed a Registration Statement on Form S-1 with the
Commission in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby (such Registration Statement with all exhibits
and amendments thereto being referred to hereinafter as the Registration
Statement). This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement. Statements herein contained
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement. The Registration Statement, including
exhibits, may be inspected without charge and copied at the Commission's Public
Reference Section located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048
upon payment of the fees prescribed by the Commission. This Registration
Statement, amendments hereto and electronically filed exhibits are also
available to the public through an Internet Web Site (http://www.sec.gov)
maintained by the Commission. In addition, application has been made to have the
Common Stock and the Warrants approved for quotation on the Nasdaq. Reports and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-------------
<S> <C>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
Report of Independent Auditors..................................................................... F-2
Consolidated Balance Sheets as at December 31, 1996 (unaudited) and June 30, 1996.................. F-3
Consolidated Statements of Income for the six months ended December 31, 1996 (unaudited), December
31, 1995 (unaudited) and for the period from July 1, 1995 (commencement of operations) to June
30, 1996......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the period from July 1, 1995
(commencement of operations) to June 30, 1996 and for the six months ended December 31, 1996
(unaudited)...................................................................................... F-5
Consolidated Statements of Cash Flows for the six months ended December 31, 1996 (unaudited),
December 31, 1995 (unaudited) and for the period from July 1, 1995 (commencement of operations)
to June 30, 1996................................................................................. F-6
Notes to Financial Statements...................................................................... F-7 - F-14
BALZ MEDICAL SERVICES, INC.
Report of Independent Auditors..................................................................... F-15
Balance Sheets as at December 31, 1996 (unaudited) and June 30, 1996............................... F-16
Statements of Income for the six months ended December 31, 1996 (unaudited), for the period
November 1, 1995 (commencement of operations) to December 31, 1995 (unaudited) and for the period
from November 1, 1995 (commencement of operations) to June 30, 1996.............................. F-17
Statements of Changes in Stockholders' Equity for the period from November 1, 1995 (commencement of
operations) to June 30, 1996 and for the six months ended December 31, 1996 (unaudited).......... F-18
Statements of Cash Flows for the six months ended December 31, 1996 (unaudited), the period from
November 1, 1995 (commencement of operations) to December 31, 1995 (unaudited) and for the period
from November 1, 1995 (commencement of operations) to June 30, 1996.............................. F-19
Notes to Financial Statements...................................................................... F-20 - F-22
PROFESSIONAL RELIEF NURSES, INC.
Report of Independent Auditors..................................................................... F-23
Balance Sheets as at December 31, 1996 (unaudited), June 30, 1996 and June 30, 1995................ F-24
Statements of Income for the six months ended December 31, 1996 (unaudited) and December 31, 1995
(unaudited) and for the years ended June 30, 1996 and June 30, 1995.............................. F-25
Statements of Changes in Stockholders' Equity for the years ended June 30, 1995 and June 30, 1996
and for the six months ended December 31, 1996 (unaudited)....................................... F-26
Statements of Cash Flows for the six months ended December 31, 1996 (unaudited) and December 31,
1995 (unaudited) and for the years ended June 30, 1996 and June 30, 1995......................... F-27
Notes to Financial Statements...................................................................... F-28 - F-31
</TABLE>
F-1
<PAGE>
The accompanying financial statements of Lexington Healthcare Group, Inc.
and subsidiary give effect to the completion of the Reorganization described in
Note A of Notes to Financial Statements which will be completed prior to the
consummation of the public offering contemplated by the Registration Statement
of which this Prospectus is a part. The following report is in the form which
will be furnished by Richard A. Eisner & Company, LLP upon completion of the
Reorganization and assuming that from October 18, 1996 to the date of such
completion no other material events have occurred that would affect the
accompanying financial statements or require disclosure therein.
REPORT OF INDEPENDENT AUDITORS
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 at June 30, 1996, and the related
consolidated statements of income, 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 financial position of Lexington Healthcare Group,
Inc. and subsidiary at June 30, 1996, and the results of their operations and
their 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. As discussed in Note B to the
financial statements, the Company has a net working capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B
including the need to raise additional equity such as that contemplated by this
offering (see Note K). The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
October 18, 1996
(November 5, 1996
with respect to Note B)
F-2
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash............................................................................... $ 1,333,000 $ 212,000
Accounts receivable--net of allowance for uncollectible amounts of $75,000......... 4,336,000 5,585,000
Due from related parties........................................................... 94,000 73,000
Prepaid and other current assets................................................... 324,000 159,000
------------- ------------
Total current assets........................................................... 6,087,000 6,029,000
Equipment and leasehold improvements, net............................................ 610,000 462,000
Security deposit--related party...................................................... 2,282,000 2,282,000
Residents' funds..................................................................... 340,000 147,000
Deferred registration costs.......................................................... 286,000 198,000
Other assets, net.................................................................... 60,000 102,000
Note receivable--related party....................................................... 494,000 394,000
------------- ------------
TOTAL.......................................................................... $ 10,159,000 $ 9,614,000
------------- ------------
------------- ------------
LIABILITIES
Current liabilities:
Notes payable...................................................................... $ 703,000 $ 2,267,000
Notes payable--officers/stockholders............................................... 182,000 286,000
Accounts payable and accrued expenses............................................ 7,189,000 5,568,000
Capital leases payable (current portion)......................................... 29,000 27,000
Due to related party............................................................. 262,000 262,000
------------- ------------
Total current liabilities...................................................... 8,365,000 8,410,000
Capital leases payable (less current portion)...................................... 79,000 102,000
Residents' funds payable........................................................... 340,000 147,000
Deferred rent...................................................................... 381,000 468,000
------------- ------------
Total liabilities.............................................................. 9,165,000 9,127,000
------------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock....................................................................... 31,000 25,000
Additional paid-in capital....................................................... 270,000 1,000
Retained earnings................................................................ 693,000 461,000
------------- ------------
Total stockholders' equity..................................................... 994,000 487,000
------------- ------------
------------- ------------
TOTAL.......................................................................... $ 10,159,000 $ 9,614,000
------------- ------------
------------- ------------
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-3
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JULY 1, 1995
(COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS)
DECEMBER 31, TO
---------------------------- JUNE 30,
1996 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues:
Net patient service revenue..................................... $ 17,295,000 $ 16,903,000 $ 33,536,000
Management fees and other revenue (including related party
management revenue of $36,000, $36,000 and $72,000)......... 152,000 36,000 105,000
------------- ------------- ---------------
Total revenues.............................................. 17,447,000 16,939,000 33,641,000
------------- ------------- ---------------
Expenses:
Facility operating expenses:
Salaries and benefits......................................... 13,010,000 12,260,000 24,839,000
Food, medical and other supplies.............................. 1,075,000 1,073,000 2,065,000
Other operating expenses (including rent expense to related
party of $1,234,000, $1,234,000 and $2,468,000)............. 2,574,000 2,305,000 4,896,000
Corporate, general and administrative expenses.................. 486,000 477,000 1,126,000
Interest expense................................................ 70,000 100,000 254,000
------------- ------------- ---------------
Total expenses.............................................. 17,215,000 16,215,000 33,180,000
------------- ------------- ---------------
NET INCOME........................................................ 232,000 724,000 461,000
Pro forma income taxes............................................ 96,000 294,000 195,000
------------- ------------- ---------------
Pro forma net income.............................................. $ 136,000 $ 430,000 $ 266,000
------------- ------------- ---------------
Pro forma net income per share.................................... $ .04 $ .14 $ .09
------------- ------------- ---------------
------------- ------------- ---------------
Weighted average number of shares outstanding .................... 3,092,000 3,092,000 3,092,000
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-4
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED (PAR VALUE $0.01)(B)
STOCK --------------------- ADDITIONAL
(PAR VALUE NUMBER OF PAID-IN RETAINED
$0.01)(A) SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock......................... 2,462,000 $ 25,000 $ 1,000 $ 26,000
Net income for the period........................ $ 461,000 461,000
---------- --------- ---------- ---------- ----------
Balance--June 30, 1996........................... 2,462,000 25,000 1,000 461,000 487,000
Issuance of common stock and warrants for cash in
November 1996.................................. 500,000 5,000 210,000 215,000
Issuance of common stock for services capitalized
as deferred registration costs................. 130,000 1,000 59,000 60,000
Net income for the period........................ 232,000 232,000
---------- --------- ---------- ---------- ----------
BALANCE--DECEMBER 31, 1996 (UNAUDITED)........... 3,092,000 $ 31,000 $ 270,000 $ 693,000 $ 994,000
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
</TABLE>
- ------------------------
(a) Authorized and unissued 1,000,000 shares.
(b) Authorized 15,000,000 shares.
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-5
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 1, 1995
(COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS)
DECEMBER 31, TO
---------------------------- JUNE 30,
1996 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income...................................................... $ 232,000 $ 724,000 $ 461,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 34,000 23,000 47,000
Provision for uncollectible amounts......................... 75,000 75,000
Deferred rent............................................... (87,000) 226,000 468,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................. 1,249,000 (5,378,000) (5,660,000)
Increase (decrease) in due to related parties--net.......... (21,000) 262,000 189,000
(Increase) in prepaid and other current assets.............. (165,000) (266,000) (159,000)
(Increase) in organization costs............................ (3,000) (70,000) (70,000)
Increase in accounts payable and accrued expenses........... 1,621,000 5,406,000 5,814,000
------------- ------------- ---------------
Net cash provided by operating activities................. 2,860,000 1,002,000 1,165,000
------------- ------------- ---------------
Cash flows from investing activities:
Acquisition of fixed assets..................................... (173,000) (346,000) (346,000)
(Increase) in security deposit--related party................... (2,105,000) (2,282,000)
Note receivable--related part................................... (64,000) (145,000) (394,000)
------------- ------------- ---------------
Net cash (used in) investing activities................... (237,000) (2,596,000) (3,022,000)
------------- ------------- ---------------
Cash flows from financing activities:
Proceeds of short-term borrowings and Beverly receivables..... 500,000 2,921,000 3,527,000
Repayment of short-term borrowing............................. (2,064,000) (894,000) (1,573,000)
Proceeds of notes payable to officers......................... 194,000 392,000
Repayment of notes payable to officers........................ (104,000) (106,000) (106,000)
Issuance of common stock...................................... 215,000 22,000 26,000
Repayments of capital lease obligations....................... (21,000) (19,000)
Registration costs............................................ (28,000) (131,000)
Financing costs............................................... (47,000)
------------- ------------- ---------------
Net cash provided by (used in) financing activities....... (1,502,000) 2,137,000 2,069,000
------------- ------------- ---------------
NET INCREASE IN CASH.............................................. 1,121,000 543,000 212,000
Cash--beginning of period......................................... 212,000 -0- -0-
------------- ------------- ---------------
CASH--END OF PERIOD............................................... $ 1,333,000 $ 543,000 $ 212,000
------------- ------------- ---------------
Supplemental disclosures of noncash investing and financing
activities:
Equipment acquired by capital leases.......................... $ 108,000 $ 148,000
Accounts payable financed by short-term borrowings............ 313,000
Issuance of common stock for services capitalized as deferred
registration costs.......................................... $ 60,000
Deferred registration costs accrued........................... 109,000 67,000
Supplemental disclosure of cash flow information:
Interest paid................................................... 60,000 24,000 217,000
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-6
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE A)--THE COMPANY AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include Lexington Healthcare Group,
Inc. and its wholly owned subsidiary LEV Rehab Services, Inc. ("LEV")
(collectively, the "Company").
The Company was incorporated in 1996. Upon consummation of the proposed
public offering contemplated herein the Company will be the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"). The
financial statements have been prepared as if such reorganization took place
effective July 1, 1995.
LLC is a long-term and subacute care provider, which operates four nursing
home facilities in the State of Connecticut. These facilities, which are leased
under a long-term lease from a partnership, (of which a 33% partner is presently
the controlling member of LLC) had previously been leased from that partnership
and operated by Beverly Enterprises, Inc. ("Beverly"), an unrelated entity.
Subacute care is generally provided to patients who have been discharged from an
acute care hospital and require additional care in specialized clinical programs
before being discharged.
LLC includes in revenues all room and board, nursing, therapies, medical
supplies and pharmacy charges. Basic care generally is provided to geriatric and
chronic care patients requiring routine nursing services.
LLC also provides management services to a nursing facility owned by a
partnership controlled by its principal member and to a nonaffiliated entity.
LLC was formed on March 8, 1995 and commenced operations on July 1, 1995
(see Note E).
LEV was incorporated in 1996 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 LLC, unaffiliated facilities and persons in
their homes. LEV has not generated any significant revenues to date.
The Company intends to acquire contingently upon and simultaneously with the
closing of the proposed public offering (see Note K) all of the capital stock of
Balz Medical Services, Inc. ("Balz") and Professional Relief Nurses, Inc.
("PRN"). The stockholders owning 100% of the Company presently own 44% and 25%
of Balz and PRN, respectively.
The Company will acquire all of the capital stock of Balz through an
exchange of 300,000 shares of the Company which are valued at $1,500,000 based
on the offering price of the proposed public offering.
The purchase price of PRN consists of $1,620,000 payable in cash and
exchange of 108,000 shares of the Company which are valued at $540,000 based on
the offering price of the proposed public offering.
The excess of cost over the fair value of the assets acquired from Balz and
PRN will be amortized over 20 years.
(NOTE B)--BASIS OF PRESENTATION:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In the course of developing its
business, in the fiscal year ended June 30, 1996, the Company has expended a
substantial amount of current resources for fixed assets and a security deposit.
F-7
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE B)--BASIS OF PRESENTATION: (CONTINUED)
As of June 30, 1996 and December 31, 1996, the Company has a working capital
deficiency of approximately $2.3 million.
The Company concluded a private placement of 500,000 shares of common stock
and 500,000 warrants. Net proceeds ($215,000) were received in November 1996.
Management's plans include the following:
i) Materially reduce future outlays for noncurrent assets.
ii) Vigorously promote the Company's business by increasing patient
occupancy levels, as well as the businesses of PRN and Balz in order to
enhance profitability and cash flows.
iii) To make a public offering of 1,000,000 shares of common stock and
warrants as provided, the net proceeds of which are estimated at $4.0
million.
The Company's ability to continue as a going concern is dependent upon its
ability to implement its plans described above and to consummate its initial
public offering as described in Note K. Accordingly, the Company's financial
statements do not reflect such adjustments, if any, that might result should the
Company be unable to continue as a going concern.
(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies in the preparation of the financial
statements are as follows:
[1] REVENUE RECOGNITION:
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.
Net operating revenues include amounts estimated by management to be
reimbursable by the third party payors; such reimbursements are subject to audit
by the payors, and estimates are recorded for potential adjustments that may
result. The Company has revised its estimate of reimbursable costs to be
received from Medicaid and other third party payors. Accordingly, included as
patient revenues during the period ended December 31, 1996 is $50,000 applicable
to patient services performed in the prior period ended June 30, 1996.
Furthermore, differences between the estimated amounts accrued and final
settlements are reported in operations in the year of settlement. To date, no
such audits or settlements have taken place.
[2] 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.
F-8
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[3] ACCOUNTS RECEIVABLE, NET AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable, net is comprised principally of amounts expected to be
collected from third party payors for services provided.
[4] 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. The useful lives of equipment range from five to seven years.
Leasehold improvements are amortized over the period of the respective leases or
the estimated useful lives of the assets, whichever is shorter.
[5] INCOME TAXES:
Since LLC is a limited liability company, it is the obligation of the
individual members of LLC to separately report their proportionate share of
LLC's taxable income. As a result, as long as LLC remains a limited liability
company, members can withdraw such income without any further tax consequences.
Upon the closing of the proposed public offering and related reorganization,
LLC's status as a limited liability company will terminate and a final
distribution of some portion of its undistributed earnings will be made to its
members. The Company has adopted Statement of Accounting Standards No. 109,
"Accounting for Income Taxes" which requires the use of the liability method of
accounting for income taxes (see Note L).
[6] USE OF ESTIMATES:
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[7] RECENTLY ISSUED ACCOUNTING STANDARDS:
The Company has not elected to adopt early, the provisions of two recently
issued accounting standards regarding impairment of long-lived assets ("FAS
121") and stock-based compensation ("FAS 123"). FAS 121 requires entities to
review long-lived assets and certain identifiable intangibles to be held and
used for indicia of impairment whenever changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. FAS 123 permits
accounting for stock-based compensation for employees pursuant to a fair value
based method. The Company does not expect to adopt the accounting provisions of
FAS 123, however, it will make disclosure of pro forma net income and pro forma
earnings per share on a fair value basis as required. The Company does not
believe that the potential impact, if any, of the adoption of these standards on
its financial position or results of operations will, when adopted, be material.
F-9
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[8] EARNINGS PER SHARE:
Net income per share is computed using the weighted average number of shares
deemed outstanding during the period as adjusted for the exchange ratio for
shares to be issued in the proposed reorganization.
(NOTE D)--EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements (at cost) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
<S> <C> <C>
(UNAUDITED)
Equipment.............................................................................. $ 314,000 $ 231,000
Leasehold improvements................................................................. 353,000 263,000
------------ ----------
667,000 494,000
Less accumulated depreciation and amortization......................................... 57,000 32,000
------------ ----------
Total.............................................................................. $ 610,000 $ 462,000
------------ ----------
------------ ----------
</TABLE>
(NOTE E)--SHORT-TERM NOTES PAYABLE:
Short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
10% note payable to a medical supplies vendor; principal and interest of $27,000
payable monthly through May 1997................................................... $ 224,000 $ 313,000
Payable to a noninstitutional lender, bearing interest at the 30-day LIBOR plus 4.5%;
collateralized by patient receivables (repaid July 1996)........................... 852,000
12% note payable to Beverly. Under an agreement with Beverly, the Company collected
Beverly's receivables and has agreed to repay such proceeds in monthly installments
through December 1996.............................................................. 153,000 702,000
15% demand note (due December 1996).................................................. 300,000 350,000
Demand note payable, noninterest bearing............................................. 26,000 50,000
------------ ------------
Total............................................................................ $ 703,000 $ 2,267,000
------------ ------------
------------ ------------
</TABLE>
(NOTE F)--NOTE RECEIVABLE--RELATED PARTY:
The note receivable is due from an entity in which the principal stockholder
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 advances and payment of certain expenses on behalf of
this entity and bears interest at 8%, per annum, payable quarterly. The note is
due in full on June 30, 2001.
F-10
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE F)--NOTE RECEIVABLE--RELATED PARTY: (CONTINUED)
The note receivable includes a monthly management fee of $6,030 which
commenced July 1, 1995. During the periods ended December 31, 1996, December 31,
1995 and June 30, 1996, the Company accrued management fees of $36,180, $36,180
and $72,360, respectively. The agreement expires on June 30, 1997.
(NOTE G)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Accounts payable................................................. $3,663,000 $ 3,566,000
Accrued payroll and payroll taxes................................ 1,250,000 1,466,000
Due to the State of Connecticut.................................. 1,616,000*
Other accrued expenses........................................... 660,000 536,000
------------ ------------
Total........................................................ $7,189,000 $ 5,568,000
------------ ------------
------------ ------------
</TABLE>
- ------------------------
* The amount is payable to the State of Connecticut as a result of an
erroneous Medicaid reimbursement received from the State. The Company is to
repay the State at the monthly rate of approximately $450,000, with final
payment due in March 1997. The State has indicated that failure to adhere to
this repayment schedule may result in further action against the Company,
including referral to the State Attorney General.
(NOTE H)--LEASES:
[1]OPERATING LEASES:
[1] OPERATING LEASES:
The Company leases its nursing home facilities (including certain equipment)
under an operating lease with a related partnership (Note A). The Company is
responsible for property taxes, maintenance, insurance, etc. under the lease.
The lease agreement 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 under an operating lease which expires June 30, 1998 from
the principal stockholder.
F-11
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE H)--LEASES: (CONTINUED)
[1]OPERATING LEASES: (CONTINUED)
Future minimum lease payments required under these obligations are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
1997............................................................................... $ 2,536,000 $ 2,535,000
1998............................................................................... 2,528,000 2,537,000
1999............................................................................... 2,520,000 2,520,000
2000............................................................................... 2,520,000 2,520,000
2001............................................................................... 2,520,000 2,520,000
Thereafter......................................................................... 8,820,000 10,080,000
------------- -------------
Total.......................................................................... $ 21,444,000 $ 22,712,000
------------- -------------
------------- -------------
</TABLE>
Rent expense charged to operations aggregated $2,481,000 during the year
ended June 30, 1996 and $1,236,000 and $1,241,000 during the six months ended
December 31, 1996 and December 31, 1995, respectively.
The Company has deposited with the landlord a non-interest bearing security
deposit approximating $2.3 million as of June 30, 1996 and December 31, 1996.
Deferred rent payable represents the excess of rental expense determined on
a straight-line basis over the amounts currently payable pursuant to the leases.
[2] CAPITAL LEASES:
The Company is obligated under capital leases for office equipment.
Future minimum lease payments required under these obligations are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
<S> <C> <C>
(UNAUDITED)
1997................................................................................... $ 29,000 $ 27,000
1998................................................................................... 34,000 34,000
1999................................................................................... 34,000 34,000
2000................................................................................... 11,000 32,000
2001................................................................................... 2,000
------------ ----------
Total.............................................................................. 108,000 129,000
Less current portion................................................................... 29,000 27,000
------------ ----------
Long-term portion...................................................................... $ 79,000 $ 102,000
------------ ----------
------------ ----------
</TABLE>
F-12
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE I)--COMMITMENT:
UNION CONTRACT:
Employees subject to collective bargaining agreements participate in union
pension plans which are funded by contributions by the Company. For the year
ended June 30, 1996, contributions were approximately $397,000. For the
six-month periods ended December 31, 1996 and December 31, 1995, contributions
were $253,000 and $231,000, respectively. Information as to the Company's
portion of accumulated plan benefits and plan net assets is not determinable.
Under the Employee Retirement Income Security Act of 1974 as amended, an
employer upon withdrawal from a multi-employer plan is required to continue
funding its proportionate share of the plan's unfunded vested benefits. The
Company has no intention of withdrawing from the plan.
(NOTE J)--CONCENTRATION OF RISK:
Revenues from principal sources are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1996 1995 1996
----- ----- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Medicare and Medicaid................................................................. 89% 91% 89%
Private insurance and other nongovernment agencies.................................... 9 8 9
Other................................................................................. 2 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
The Company derives the majority of its revenues from reimbursement by
third-party payors, particularly Medicaid and Medicare, typically invoicing and
collecting payments directly from the third-party payor.
Reimbursement can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors.
The Company, like other Medicaid and Medicare providers, is subject to
governmental audits of its Medicaid and Medicare reimbursement claims, but to
date has not experienced any such audit. As a provider of services under the
Medicaid and Medicare programs, the Company is also subject to the Medicaid and
Medicare fraud and abuse laws.
The primary geographic sources of the Company's patients are the local
communities in the State of Connecticut in which the Company's facilities are
located.
At June 30, 1996, 91% of accounts receivable was due from Medicaid and
Medicare and 9% from private insurers and other nongovernment sources. At
December 31, 1996, 87% of accounts receivable was due from Medicaid and Medicare
and 13% from private insurers and other nongovernment sources.
F-13
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)
(NOTE K)--PROPOSED PUBLIC OFFERING:
The Company is in the process of filing a Registration Statement covering an
initial public offering of 1,000,000 shares of common stock and warrants to
purchase common stock for gross proceeds estimated at $5,100,000. Deferred
registration costs at June 30, 1996 and costs incurred subsequently which
pertain to the offering will be charged against the proceeds or written-off if
the contemplated offering is not consummated.
(NOTE L)--PRO FORMA INCOME TAXES:
The pro forma net income in the accompanying consolidated statement of
income includes a pro forma adjustment for income taxes which would have been
provided for had LLC been subject to tax as a regular corporation.
Expected tax expense based on the federal statutory rate is reconciled with
the actual expense as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1996 1995 1996
----- ----- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Expected tax expense.................................................................. 34% 34% 34%
Increase in taxes resulting from:
State income tax net of federal benefit............................................. 7 7 7
Other............................................................................... 1
-- -- --
41% 41% 42%
-- -- --
-- -- --
</TABLE>
(NOTE M)--PRIVATE PLACEMENT:
In November 1996, the Company completed a Private Placement of 500,000
shares at $.50 per share together with (six-year) warrants to acquire an
additional 500,000 shares of common stock at $6.00 per share, and realized net
proceeds of $215,000 therefrom.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Balz Medical Services, Inc.
New Britain, Connecticut
We have audited the accompanying balance sheet of Balz Medical Services,
Inc. as at June 30, 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the period from November 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 financial position of Balz Medical Services, Inc. at
June 30, 1996, and the results of its operations and its cash flows for the
period from November 1, 1995 (commencement of operations) to June 30, 1996 in
conformity with generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
October 18, 1996
(October 30, 1996
with respect to Note G)
F-15
<PAGE>
BALZ MEDICAL SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash................................................................................. $ 81,000 $ 16,000
Accounts receivable, less allowance for uncollectible amounts of $120,000 at June 30
and $312,000 at December 31........................................................ 785,000 649,000
Inventory.......................................................................... 27,000 23,000
Prepaid expenses................................................................... 3,000 3,000
Deferred taxes....................................................................... 130,000 50,000
------------ ----------
Total current assets............................................................. 1,026,000 741,000
Other assets........................................................................... 19,000 15,000
------------ ----------
TOTAL............................................................................ $1,045,000 $ 756,000
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders........................................................ $ 30,000 $ 60,000
Accounts payable and accrued expenses................................................ 123,000 212,000
Due to related party............................................................... 63,000 43,000
Income taxes payable............................................................... 410,000 207,000
------------ ----------
Total current liabilities........................................................ 626,000 522,000
------------ ----------
------------ ----------
Stockholders' equity:
Common stock, par value $10 per share; authorized 10,000 shares; issued 2,500
shares............................................................................. 25,000 25,000
Retained earnings.................................................................... 394,000 209,000
------------ ----------
Total stockholders' equity....................................................... 419,000 234,000
------------ ----------
TOTAL............................................................................ $1,045,000 $ 756,000
------------ ----------
------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-16
<PAGE>
BALZ MEDICAL SERVICES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NOVEMBER 1, NOVEMBER 1,
1995 1995
(COMMENCEMENT (COMMENCEMENT
OF OF
SIX MONTHS OPERATIONS) OPERATIONS)
ENDED TO TO
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net sales.............................................................. $ 658,000 $ 81,000 $ 745,000
Cost of goods sold..................................................... 196,000 54,000 247,000
------------ ------------ -----------
Gross profit........................................................... 462,000 27,000 498,000
General and administrative expenses.................................... 147,000 24,000 127,000
------------ ------------ -----------
Income before income taxes............................................. 315,000 3,000 371,000
Income taxes........................................................... 130,000 157,000
------------ ------------ -----------
NET INCOME............................................................. $ 185,000 $ 3,000 $ 214,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-17
<PAGE>
BALZ MEDICAL SERVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
<S> <C> <C> <C> <C>
(PAR VALUE $10)
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- --------- ---------- ----------
Issuance of stock, October 1995....................................... 3,000 $ 30,000 $ 30,000
Repurchase and retirement of stock, February 1996..................... (500) (5,000) $ (5,000) (10,000)
Net income for the period............................................. 214,000 214,000
----- --------- ---------- ----------
Balance--June 30, 1996................................................ 2,500 25,000 209,000 234,000
Net income for the period............................................. 185,000 185,000
----- --------- ---------- ----------
BALANCE--DECEMBER 31, 1996 (UNAUDITED)................................ 2,500 $ 25,000 $ 394,000 $ 419,000
----- --------- ---------- ----------
----- --------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-18
<PAGE>
BALZ MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 1,
1995 NOVEMBER 1,
(COMMENCEMENT 1995
SIX MONTHS OF OPERATIONS) (COMMENCEMENT
ENDED TO OF OPERATIONS)
DECEMBER 31, DECEMBER 31, TO JUNE 30,
1996 1995 1996
------------ --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income..................................................... $ 185,000 $ 3,000 $ 214,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 2,000
Provision for uncollectible amounts........................ 192,000 17,000 120,000
Deferred tax provision..................................... (80,000) (50,000)
Increase in due to related party........................... 20,000 9,000 43,000
Changes in assets and liabilities:
(Increase) in accounts receivable........................ (328,000) (99,000) (769,000)
(Increase) in inventory.................................. (4,000) (22,000) (23,000)
(Increase) in prepaid expenses........................... (3,000)
Increase (decrease) in accounts payable and accrued
expenses............................................... (89,000) 57,000 212,000
Increase in income taxes payable......................... 203,000 207,000
------------ --------------- ---------------
Net cash provided by (used in) operating activities.... 101,000 (35,000) (49,000)
------------ --------------- ---------------
Cash flows from investing activities:
(Increase) in other assets..................................... (6,000) (1,000) (15,000)
------------ --------------- ---------------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable to stockholders.... (30,000) 20,000 60,000
Proceeds from issuance of common stock......................... 30,000 30,000
Repurchase of common stock..................................... (10,000)
------------ --------------- ---------------
Net cash provided by (used in) financing activities.... (30,000) 50,000 80,000
------------ --------------- ---------------
NET INCREASE IN CASH............................................. 65,000 14,000 16,000
Cash--beginning of period........................................ 16,000 -0 - -0 -
------------ --------------- ---------------
CASH--END OF PERIOD.............................................. $ 81,000 $ 14,000 $ 16,000
------------ --------------- ---------------
------------ --------------- ---------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-19
<PAGE>
BALZ MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)
(NOTE A)--ORGANIZATION AND BASIS OF PRESENTATION:
Balz Medical Services, Inc. (the "Company") is a provider of medical
supplies and durable medical equipment to nursing home facilities in New York
and Connecticut. All medical supplies are provided for specific patients
residing at these homes. Stockholders who own 44% of the Company presently own
100% of Lexington Health Care Group, LLC ("Lexington") (see Note E). The Company
was incorporated on October 5, 1995 and commenced operations on November 1,
1995.
(NOTE B)--SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies in the preparation of the financial
statements are as follows:
[1] REVENUE RECOGNITION:
Revenues are recognized at the time the medical supplies are provided to the
nursing home facilities. Substantially all of the Company's revenues are billed
to Medicare under the provisions of reimbursement formulas and regulations in
effect.
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare; such reimbursements are subject to audit by Medicare,
and estimates are recorded for potential adjustments that may result.
Differences between the estimated amounts accrued and final settlements are
reported in operations in the year of settlement. To date no such audits have
taken place.
[2] INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out) or market,
and consists of medical supplies held for sale.
[3] INCOME TAXES:
The Company has adopted Statement of Accounting Standards No. 109,
"Accounting for Income Taxes" which requires the use of the liability method of
accounting for income taxes.
Deferred income taxes are provided for temporary differences resulting from
the timing of certain deductions for financial reporting and income tax
purposes.
[4] USE OF ESTIMATES:
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(NOTE C)--SHORT-TERM NOTES PAYABLE:
Short-term borrowings at June 30, 1996 consisted of notes payable due to
stockholders aggregating $60,000 ($30,000 at December 31, 1996), due on demand.
These notes bear interest at 10%. Total interest
F-20
<PAGE>
BALZ MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)
(NOTE C)--SHORT-TERM NOTES PAYABLE: (CONTINUED)
expense for the period ended June 30, 1996 was $2,000; interest expense for the
six months ended December 31, 1996 was $3,000.
(NOTE D)--INCOME TAXES:
[1] The provision for federal and state income taxes is comprised of the
following:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
<S> <C> <C>
Current:
Federal.......................................................... $ 153,000 $ 151,000
State............................................................ 57,000 56,000
------------ ----------
210,000 207,000
------------ ----------
Deferred:
Federal.......................................................... (66,000) (41,000)
State............................................................ (14,000) (9,000)
------------ ----------
(80,000) (50,000)
------------ ----------
Total........................................................ $ 130,000 $ 157,000
------------ ----------
------------ ----------
</TABLE>
Expected tax expense (benefit) based on the statutory rate is reconciled
with the actual expense as follows:
<TABLE>
<S> <C>
Expected tax expense................................................... 34%
Increase in taxes resulting from:
State income tax net of federal benefit.............................. 7
Other................................................................ 1
--
42%
--
--
</TABLE>
[2] The temporary difference which gives rise entirely to the deferred tax
asset is the allowance for uncollectibles.
No valuation allowance has been established because the Company expects the
deferred tax asset to be fully realizable.
(NOTE E)--RELATED PARTY TRANSACTIONS:
The Company has an agreement to pay Lexington $3,100 a month for management
services, rent and general and administrative expenses. The agreement continues
to be in effect until modified by either party. The Company paid approximately
$25,000 for the period ended June 30, 1996 and $19,000 for the six months ended
December 31, 1996.
F-21
<PAGE>
BALZ MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)
(NOTE E)--RELATED PARTY TRANSACTIONS: (CONTINUED)
For the period from November 1, 1995 through June 30, 1996, approximately
43% of the Company's revenues were derived from patients at facilities operated
or managed by Lexington. Revenues from other related parties accounted for
approximately 19% of the Company's net sales. In addition, two unrelated
customers individually accounted for 22% and 16% of the Company's net sales.
For the six months ended December 31, 1996, net sales to Lexington operated
or managed facilities approximated 41% and net sales to other related parties
were approximately 20% of the Company's net sales. Additionally, two unrelated
customers comprised 22% and 17% of net sales.
(NOTE F)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
<S> <C> <C>
(UNAUDITED)
Accounts payable................................................... $ 180,000 $ 99,000
Accrued payroll and payroll taxes.................................. 16,000 6,000
Other accruals..................................................... 16,000 18,000
---------- ------------
Total........................................................ $ 212,000 $ 123,000
---------- ------------
---------- ------------
</TABLE>
(NOTE G)--PROPOSED ACQUISITION OF THE COMPANY:
The stockholders of the Company have agreed to exchange all of their capital
stock for stock in the successor corporation to Lexington. The exchange is
contingent upon completion of a proposed public offering by Lexington. Under the
agreement, stockholders of the Company will receive 300,000 shares of the
successor's common stock.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Professional Relief Nurses, Inc.
Middletown, Connecticut
We have audited the accompanying balance sheets of Professional Relief
Nurses, Inc. as at June 30, 1996 and June 30, 1995 and the related statements of
income, changes in stockholders' equity and cash flows for each of the years in
the two-year period ended 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Professional Relief Nurses,
Inc. at June 30, 1996 and June 30, 1995 and the results of its operations and
its cash flows for each of the years in the two-year period ended June 30, 1996
in conformity with generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
October 17, 1996
(October 30, 1996
With respect to Note G)
F-23
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 130,000 $ 261,000 $ 198,000
Trade receivables, less allowance of $40,000 at June 30, 1996 and $30,000
at June 30, 1995....................................................... 549,000 497,000 354,000
Prepaid expenses......................................................... 6,000
------------ ---------- ----------
Total current assets................................................. 679,000 758,000 558,000
Property and equipment, net................................................ 79,000 32,000 39,000
Other assets (principally cash surrender value of officer's life
insurance)............................................................... 34,000 27,000 19,000
------------ ---------- ----------
TOTAL................................................................ $ 792,000 $ 817,000 $ 616,000
------------ ---------- ----------
------------ ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................... $ 201,000 $ 285,000 $ 272,000
Due to affiliate......................................................... 30,000 30,000 15,000
Note payable--bank--current portion...................................... 13,000
Income taxes payable..................................................... 15,000 10,000
------------ ---------- ----------
Total current liabilities............................................ 259,000 325,000 287,000
------------ ---------- ----------
Note payable--bank (net of current portion)................................ 48,000
------------ ---------- ----------
Stockholders' equity:
Common stock, no par value; authorized 5,000 shares; issued 400 shares... 1,000 1,000 1,000
Retained earnings........................................................ 484,000 491,000 328,000
------------ ---------- ----------
Total stockholders' equity........................................... 485,000 492,000 329,000
------------ ---------- ----------
TOTAL................................................................ $ 792,000 $ 817,000 $ 616,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-24
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service revenue.............................. $ 2,090,000 $ 1,686,000 $ 3,821,000 $ 3,042,000
------------ ------------ ------------ ------------
Expenses:
Salaries and benefits.................................. 988,000 716,000 1,563,000 1,143,000
Operating expenses..................................... 806,000 859,000 1,737,000 1,670,000
------------ ------------ ------------ ------------
Total expenses..................................... 1,794,000 1,575,000 3,300,000 2,813,000
Income before provision for income taxes................. 296,000 111,000 521,000 229,000
Provision for state income taxes......................... 33,000 14,000 70,000 36,000
------------ ------------ ------------ ------------
NET INCOME............................................... 263,000 97,000 451,000 193,000
Pro forma federal income taxes........................... 89,000 33,000 143,000 58,000
------------ ------------ ------------ ------------
PRO FORMA NET INCOME..................................... $ 174,000 $ 64,000 $ 308,000 $ 135,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-25
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
<S> <C> <C> <C> <C>
NUMBER
OF
SHARES RETAINED
ISSUED AMOUNT EARNINGS TOTAL
----------- --------- ----------- -----------
Balance--July 1, 1994............................................... 400 $ 1,000 $ 543,000 $ 544,000
Dividends paid...................................................... (408,000) (408,000)
Net income.......................................................... 193,000 193,000
--- --------- ----------- -----------
Balance--June 30, 1995.............................................. 400 1,000 328,000 329,000
Dividends paid...................................................... (288,000) (288,000)
Net income.......................................................... 451,000 451,000
--- --------- ----------- -----------
Balance--June 30, 1996.............................................. 400 1,000 491,000 492,000
Dividends paid for the period....................................... (270,000) (270,000)
Net income for the period........................................... 263,000 263,000
--- --------- ----------- -----------
BALANCE--DECEMBER 31, 1996 (UNAUDITED).............................. 400 $ 1,000 $ 484,000 $ 485,000
--- --------- ----------- -----------
--- --------- ----------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-26
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 263,000 $ 97,000 $ 451,000 $ 193,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 12,000 7,000 10,000 15,000
(Reversal of) provision for uncollectible amounts.......... (40,000) 10,000
Deferred income taxes...................................... 4,000
Changes in assets and liabilities:
(Increase) decrease in trade receivables................... (12,000) 44,000 (153,000) (43,000)
Increase in due to affiliate............................... 15,000 15,000
Decrease (increase) in prepaid expenses.................... (6,000) 7,000 6,000 (6,000)
Increase (decrease) in accounts payable and accrued
expenses................................................. (84,000) (77,000) 13,000 (14,000)
Increase (decrease) in income taxes payable................ 5,000 (10,000) 10,000
Other...................................................... (1,000) 5,000 1,000 1,000
---------- ---------- ---------- ----------
Net cash provided by operating activities................ 137,000 73,000 363,000 165,000
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment............................. (59,000) 2,000 (3,000) (1,000)
Premiums paid for officer's life insurance..................... (9,000) (9,000)
---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities...... (59,000) 2,000 (12,000) (10,000)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from (payments of) loan............................... 61,000 (2,000)
Dividends paid................................................. (270,000) (160,000) (288,000) (408,000)
---------- ---------- ---------- ----------
Net cash (used in) financing activities.................. (209,000) (162,000) (288,000) (408,000)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH.................................. (131,000) (87,000) 63,000 (253,000)
Cash balance--beginning of year.................................. 261,000 198,000 198,000 451,000
---------- ---------- ---------- ----------
CASH BALANCE--END OF YEAR........................................ $ 130,000 $ 111,000 $ 261,000 $ 198,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes..................... $ 17,000 $ 14,000 $ 40,000 $ 26,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-27
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995 IS UNAUDITED)
(NOTE A)--ORGANIZATION AND BASIS OF PRESENTATION:
Professional Relief Nurses, Inc. (the "Company") provides health care
services in the homes of its patients; it operates three regional offices in the
State of Connecticut.
Nursing services are provided to patients under the direct orders of a
physician following a hospital or health care facility stay. Care generally is
provided to geriatric and chronic care patients requiring services.
The Company includes in revenues all nursing, therapy, medical supplies and
home health aide charges; the majority of charges by the Company are regulated
under the federal Medicare and state Medicaid programs.
A shareholder who owns 25% of the Company presently owns 75% of Lexington
Health Care Group, LLC ("Lexington").
(NOTE B)--SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies in the preparation of the financial
statements are as follows:
[1] REVENUE RECOGNITION:
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.
Net patient revenue include amounts estimated by management to be
reimbursable by the third party payors; such reimbursements are subject to audit
by the payors, and estimates are recorded for potential adjustments that may
result. Differences between the estimated amounts accrued and final settlements
are reported in operations in the year of settlement.
[2] PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the equipment. The useful
lives range from five to seven years.
[3] INCOME TAXES:
The Company has elected in a prior year to be treated as an S corporation
pursuant to Section 1362(a) of the Internal Revenue Code for federal income tax
purposes. As a result of this election, the income is taxed directly to
individual stockholders (see Note H).
[4] USE OF ESTIMATES:
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995 IS UNAUDITED)
(NOTE C)--EQUIPMENT:
Equipment, furniture and fixtures (at cost) consist of the following :
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Furniture and fixtures................................................... $ 49,000 $ 43,000 $ 43,000
Equipment................................................................ 181,000 130,000 127,000
Less accumulated depreciation and amortization........................... (151,000) (141,000) (131,000)
------------ ----------- -----------
Total.............................................................. $ 79,000 $ 32,000 $ 39,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(NOTE D)--NOTE PAYABLE TO BANK:
In November 1996, the Company borrowed $63,000 from a bank, bearing interest
at 6.5%, collateralized by the Company's cash account. The loan is due November
11, 2001 and is payable in monthly installments of approximately $1,000.
The long-term portion of the Company's debt at December 31, 1996 is payable
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
(UNAUDITED)
1997............................................................................... $ 13,000
1998............................................................................... 13,000
1999............................................................................... 13,000
2000............................................................................... 13,000
2001............................................................................... 9,000
---------
Total........................................................................ $ 61,000
---------
---------
</TABLE>
(NOTE E)--LEASES:
OPERATING LEASES:
The Company leases its office facilities under operating leases. The Company
is responsible for property taxes, maintenance, insurance, etc. under the lease.
F-29
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995 IS UNAUDITED)
(NOTE E)--LEASES: (CONTINUED)
Future minimum lease payments required under these lease obligations are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ ----------
<S> <C> <C>
(UNAUDITED)
1997............................................................... $ 67,000 $ 67,000
1998............................................................... 45,000 62,000
1999............................................................... 23,000 32,000
2000............................................................... 14,000 14,000
2001............................................................... 10,000 14,000
Thereafter......................................................... 3,000
------------ ----------
Total........................................................ $ 159,000 $ 192,000
------------ ----------
------------ ----------
</TABLE>
Rent expense charged to operations aggregated $68,000 for each of the years
ended June 30, 1996 and June 30, 1995. Rent expense charged to operations
aggregated $33,500 and $40,000 for the six months ended December 31, 1996 and
December 31, 1995, respectively.
(NOTE F)--CONCENTRATION OF RISK:
Revenues from principal sources are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
----- ----- ----- -----
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Medicare and Medicaid.................................... 73% 64% 62% 64%
Private insurance and other nongovernment agencies....... 27 36 38 36
--- --- --- ---
Total.............................................. 100% 100% 100% 100%
--- --- --- ---
--- --- --- ---
</TABLE>
Reimbursement can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors. The State of Connecticut Medicare Maximization Project requires
providers to rebill Medicare upon notification of specific claims for which
services might be covered by Medicare but were earlier paid by the State. The
effect of this program may be to delay the ultimate resolution of these types of
claims. Although Connecticut reserves the right to recoup such prior paid monies
in the future, even if they are not ultimately recouped by the Company from
Medicare, to date, the Company has not experienced any losses as a result of
this State program.
The Company, like other Medicaid and Medicare providers, is subject to
governmental audits of its Medicaid and Medicare reimbursement claims, but to
date has not experienced any such audit. As a provider of services under the
Medicaid and Medicare programs, the Company is also subject to the Medicaid and
Medicare fraud and abuse laws.
F-30
<PAGE>
PROFESSIONAL RELIEF NURSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995 IS UNAUDITED)
(NOTE F)--CONCENTRATION OF RISK: (CONTINUED)
At June 30, 1996 and December 31, 1996, 49% of accounts receivable was due
from Medicaid and Medicare and 51% from private insurers and other nongovernment
sources.
The primary geographic sources of the Company's patients are the local
communities in the state of Connecticut.
(NOTE G)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable........................................................... $ 57,000 $ 110,000 $ 76,000
Amount due Medicaid........................................................ 69,000 92,000 135,000
Accrued payroll............................................................ 75,000 64,000 39,000
Accrued vacation........................................................... 9,000 12,000
Deferred income taxes...................................................... 10,000 10,000
------------ ---------- ----------
Total................................................................ $ 201,000 $ 285,000 $ 272,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(NOTE H)--PROPOSED ACQUISITION OF THE COMPANY:
Three stockholders of the Company have entered into an agreement to sell,
for an aggregate of $1,620,000 in cash, all of their shares of capital stock to
Lexington or its successor corporation. One stockholder will exchange his shares
for 108,000 shares of capital stock in the successor corporation. Prior to the
sale, the Company intends to distribute all of its previously undistributed
earnings. The exchange is contingent upon completion of a proposed public
offering by the successor to Lexington.
(NOTE I)--PRO FORMA INCOME TAXES:
The pro forma net income in the accompanying statements of income include a
pro forma adjustment for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which represents
federal taxes which would have been provided for, had the Company been subject
to tax as a C corporation for the periods presented. The Company's S corporation
status will automatically terminate upon its sale as described in Note G.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary..............................
Risk Factors....................................
Dilution........................................
Use of Proceeds.................................
Capitalization..................................
Dividends Policy................................
Selected Financial Data.........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business........................................
Management......................................
Certain Transactions............................
Principal Stockholders..........................
Description of Securities.......................
Shares Eligible for Future Sale.................
Underwriting....................................
Legal Matters...................................
Experts.........................................
Additional Information..........................
Financial Statements............................
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. IN
ADDITION, DEALERS ARE OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
LEXINGTON HEALTHCARE
GROUP, INC.
1,000,000 SHARES OF COMMON STOCK
1,000,000 WARRANTS
---------------------
PROSPECTUS
---------------------
MASON HILL & CO., INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The Certificate of Incorporation provide for indemnification of its
officers and directors to the full extent authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Representative agrees to
indemnify the directors and certain officers of the Registrant and certain other
persons against certain civil liabilities.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following tab sets forth the various statement of the estimated expenses
(other than underwriting discounts and commissions) to be paid by the Company in
connection with the issuance and distribution of the securities being
registered. With the exception of the SEC Registration Fee and the NASD Filing
Fee, all amounts shown are estimates:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 4,235
NASD Filing Fee................................................... 1,989
Nasdaq Listing Fees and Expenses.................................. 20,000
Printing Expenses................................................. 50,000
Legal Fees and Expenses (other than Blue Sky)..................... 95,000
Accounting Fees and Expenses...................................... 95,000
Blue Sky Fees and Expenses (including legal and filing fees)...... 20,000
Transfer Agent and Registrar Fees and Expenses.................... 3,500
Miscellaneous Expenses............................................ 7,276
---------
Total....................................................... $ 297,000
---------
---------
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued securities to a limited
number of persons, without registering the securities under the Securities Act.
There were no underwriters involved in the transactions and there were no
underwriting discounts or commissions paid in connection therewith, except as
disclosed below.
In July 1996, the Company issued 130,000 shares of Common Stock to Gersten,
Savage, Kaplowitz, Fredericks & Curtin, LLP, in exchange for legal services
rendered to the Company. The issuance was made in reliance upon Section 4(2) of
the Securities Act, which provides an exemption for a transaction not involving
a public offering.
In November 1996, the Company completed a private placement of 500,000
shares of Common Stock and 500,000 warrants for an aggregate of $250,000 in
reliance upon Rule 506 of Regulation D of the Securities Act, which provides a
safe harbor under the Section 4(2) exemption for a transaction not involving a
public offering. The purchasers of the securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the certificates for the securities issued in such transactions. All purchasers
of securities in each such transaction had adequate access to information about
the Company. The Company received $225,000 of net proceeds after deducting
commissions of $25,000 to Mason Hill & Co., Inc., the Underwriter, for acting as
placement agent. The Underwriter deferred collection of expenses aggregating
$7,500 in connection with the private placement. In connection with the private
placement, the
II-1
<PAGE>
Company issued the securities described in the following table to two
unaffiliated investors, each an "accredited investor" within the meaning of
Regulation D of the Securities Act.
<TABLE>
<CAPTION>
INVESTOR DATE SHARES WARRANTS AMOUNT
-------------------------------------------- --------- --------- --------- ----------
<C> <S> <C> <C> <C> <C>
1. Sean Leahy.................................. 11-1-96 250,000 250,000 $ 125,000
2. Wayne Wiseman............................... 11-1-96 250,000 250,000 $ 125,000
</TABLE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1** Preliminary Form of Underwriting Agreement between the Company and
Mason Hill & Co., Inc.
1.2** Form of Underwriter's Warrant Agreement
3.1** Certificate of Incorporation of the Company dated February 23, 1996
3.2** Bylaws of the Company
4.1* Specimen Common Stock Certificate
4.2* Form of Underwriter's Warrant Agreement
4.3* 1997 Stock Option Plan
5.1* Form of Opinion of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
10.1* Form of Employment Agreement with Jack Friedler, Chief Executive Officer,
effective as of the date of this Prospectus
10.2* Form of Employment Agreement with Harry Dermer, President and Chief Financial
Officer, effective as of the date of this Prospectus
10.3* Form of Employment Agreement with Suzanne J. Nettleton, Executive Vice
President, effective as of the date of this Prospectus
10.4* Form of Employment Agreement with Mary Archambault, Executive Vice President,
effective as of the date of this Prospectus
10.5** Nursing Home Lease between Fairfield Group Healthcare Centers, LP and Lexington
Health Care Group, LLC
10.6** Management Agreement between Lexington House, Inc. and Lexington Health Care
Group, LLC
10.7** Management Agreement between the Company and Oak Island Skilled Nursing Center
10.8** Form of Public Warrant Agreement
10.9 Acquisition Agreements between the Company and the stockholders of Professional
Relief Nurses, Inc. dated October 29, 1996
10.10 Acquisition Agreements between the Company and the stockholders of Balz Medical
Services, Inc. dated October 28, 1996
10.11 Security Agreement between Lexington House, Inc. and Lexington Health Care Group
LLC dated June 30, 1996
10.12 8% Secured Promissory Note by Lexington House, Inc. payable to Lexington Health
Care Group LLC dated June 30, 1996
10.13 Promissory Note by Lexington Health Care Group LLC and Jack Friedler payable to
Beverly Health and Rehabilitation Services dated December 5, 1995, together with
Beverly Enterprises' November 28, 1995 letter
10.14 Loan and Security Agreement between Lexington Holding Corporation and Copelco/
American Healthfund, Inc. dated March 14, 1996
10.15 Accounts Purchase and Servicing Agreement among Lexington Health Care Group,
Lexington Holding Corporation and Copelco/American Healthfund, Inc. dated March
14, 1996
10.16 Management Agreement between the Company and Balz Medical Services, Inc. dated
October 1, 1996
11.1 Computation of Earnings per share
22.1 Consent of Independent Auditors
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
22.2 Consent of Independent Auditors
22.3 Consent of Independent Auditors
23.1* Consent of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP counsel for the
Registrant, (included in Exhibit 5.1)
24.1 Powers of Attorney (included on the signature page to this Registration
Statement)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to any charter provision, by-law contract
arrangements statute, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to suit information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h), under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement at that time as the initial bona fide offering of those
securities.
(6) To provide to the Underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirement for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on February 25, 1997.
LEXINGTON HEALTHCARE GROUP, INC.
BY: /S/ HARRY DERMER
-----------------------------------------
Harry Dermer,
PRESIDENT, CHIEF OPERATING OFFICER AND
DIRECTOR
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Harry Dermer, President, Chief Operating Officer
and Director, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JACK FRIEDLER Chief Executive Officer, February 25, 1997
---------------------------- Chairman of the Board
Jack Friedler (Principal Executive
Officer) and Director
/s/ HARRY DERMER President, Chief Operating February 25, 1997
---------------------------- Officer and Director
Harry Dermer
/s/ THOMAS E. DYBICK Chief Financial Officer February 25, 1997
---------------------------- (Principal Financial and
Thomas E. Dybick Accounting Officer)
/s/ JON MILLS Director February 25, 1997
----------------------------
Jon Mills
II-4
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY
<TABLE>
<S> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
Year Ended June 30,
1996:
Reserves and
allowances
deducted from
asset
accounts:
Allowance for
uncollectible
amounts $ 75,000 $ 75,000
</TABLE>
S-1
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 29, 1996
Mr. Julius Berger
Mr. Israel Berger
Mr. Mark Berger
c/o Mr. Julius Berger
1375 Vrain Street
Denver, CO 80204
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
Gentlemen:
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Professional Relief Nurses, Inc., a Connecticut
corporation.
Recital.
Professional Relief Nurses, Inc. ("PRN") is a Connecticut Corporation with
its principal office in Middletown, Connecticut. The "Sova" Family, the "Berger"
Family, Jack Friedler and Suzanne Nettleton each own 25% of the issued and
outstanding capital stock of PRN. Jack Friedler ("Friedler") is a majority
member and the manager of Lexington Health Care Group LLC. Friedler intends to
cause Lexington to prepare a Registration Statement under the Securities Act of
1933, as amended, wherein Lexington will offer, in an initial public offering,
Common Stock of Lexington. The offering shall be for a total gross proceeds of
approximately FOUR to SEVEN MILLION DOLLARS ($4,000,000.00 to $7,000,000.00),
exclusive of the over-allotment option. In conjunction with the initial public
offering ("IPO") and immediately prior thereto, Lexington intends to acquire all
of the capital stock of PRN. The following shareholders are the record owners of
all of the issued and outstanding capital stock of PRN:
-1-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 29, 1996
Suzanne J. Nettleton 100 Shares
Jack Friedler 100 Shares
Abraham Sova 1 Shares
Esther Sova 66 Shares
Joseph Sova 33 Shares
Mark Berger 33 Shares
Israel Berger 33 Shares
Julius Berger 34 Shares
---------
Total Issued and Outstanding 400 Shares No Par Common Stock
Lexington has agreed to purchase and the Sova family and Berger family each
agree to sell to Lexington their 25% share of the capital stock of PRN pursuant
to the terms and conditions hereinafter set forth:
1. The Berger family consisting of Julius Berger, Israel Berger and Mark
Berger agree to sell and Lexington agrees to purchase, all of the issued and
outstanding shares of capital stock of PRN owned by the Berger family, viz 100
shares of common no par stock.
2. Lexington agrees to pay to the Berger family and the Berger family
agrees to accept as full payment for the 100 shares of stock aforesaid, from
the proceeds of the IPO, the following:
a) $540,000.00; plus
b) 25% of the "book value" of the total stockholders' equity as of the
date of the IPO. There shall be no material increase in expenses from prior
years. "Book Value" shall be determine by PRN's regular certified accountant, in
accordance with generally accepted accounting procedures applied on a consistent
basis with prior years. The Berger family reserves the right to choose an
independent accountant at its own expense.
c) The purchase price as determined shall be paid within fifteen (15)
days of the receipt of PRN of the net proceeds realized from the IPO.
3. At least one week prior to said public offering, each of the
shareholders of the Berger family shall forward to Edwin A. Lassman, Trustee,
his stock certificates together with a separate stock power assigning his shares
of stock to Edwin A. Lassman, Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to Julius Berger, as
-2-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 3
October 29. 1996
representative of the Berger family, a client's fund check payable as directed
by Julius Berger in the amount of $540,000.00, plus 25% of the book value as
provided in paragraph 2b.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By _______________________________
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
____________________________________
Julius Berger Date
____________________________________
Israel Berger Date
____________________________________
Mark Berger Date
Terms of Escrow Agreed:
____________________________________
Edwin A. Lassman
EAL: nef
-3-
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 29, 1996
Mr. Abraham Sova
Mrs. Esther Sova
Mr. Joseph Sova
c/o Abraham Sova
6538 North Christiana Avenue
Lincolnwood, IL 60645
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
Ladies and Gentlemen:
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Professional Relief Nurses, Inc., a Connecticut
corporation.
Recital.
Professional Relief Nurses, Inc. ("PRN") is a Connecticut Corporation with
its principal office in Middletown, Connecticut. The "Sova" Family, the "Berger"
Family, Jack Friedler and Suzanne Nettleton each own 25% of the issued and
outstanding capital stock of PRN. Jack Friedler ("Friedler") is a majority
member and the manager of Lexington Health Care Group LLC. Friedler intends to
cause Lexington to prepare a Registration Statement under the Securities Act of
1933, as amended, wherein Lexington will offer, in an initial public offering,
Common Stock of Lexington. The offering shall be for a total gross proceeds of
approximately FOUR to SEVEN MILLION DOLLARS ($4,000,000.00 to $7,000,000.00),
exclusive of the over-allotment option. In conjunction with the initial public
offering ("IPO") and immediately prior thereto, Lexington intends to acquire all
of the capital stock of PRN. The following shareholders are the record owners of
all of the issued and outstanding capital stock of PRN:
-1-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 29, 1996
Suzanne J. Nettleton 100 Shares
Jack Friedler 100 Shares
Abraham Sova 1 Shares
Esther Sova 66 Shares
Joseph Sova 33 Shares
Mark Berger 33 Shares
Israel Berger 33 Shares
Julius Berger 34 Shares
---------
Total Issued and Outstanding 400 Shares No Par Common Stock
Lexington has agreed to purchase and the Sova family and Berger family each
agree to sell to Lexington their 25% share of the capital stock of PRN pursuant
to the terms and conditions hereinafter set forth:
1. The Sova family consisting of Abraham Sova, Esther Sova and Joseph
Sova agree to sell and Lexington agrees to purchase, all of the issued and
outstanding shares of capital stock of PRN owned by the Sova family, viz 100
shares of common no par stock.
2. Lexington agrees to pay to the Sova family and the Sova family agrees
to accept as full payment for the 100 shares of stock aforesaid, from the
proceeds of the IPO, the following:
a) $540,000.00; plus
b) 25% of the "book value" of the total stockholders' equity as of the
date of the IPO. There shall be no material increase in expenses from prior
years. "Book Value" shall be determine by PRN's regular certified accountant, in
accordance with generally accepted accounting procedures applied on a consistent
basis with prior years. The Berger family reserves the right to choose an
independent accountant at its own expense.
c) The purchase price as determined shall be paid within fifteen (15)
days of the receipt of PRN of the net proceeds realized from the IPO.
3. At least one week prior to said public offering, each of the
shareholders of the Sova family shall forward to Edwin A. Lassman, Trustee,
his stock certificates together with a separate stock power assigning his shares
of stock to Edwin A. Lassman, Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to Abraham Sova, as
-2-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 3
October 29. 1996
representative of the Sova family, a client's fund check payable as directed by
Abraham Sova in the amount of $540,000.00, plus 25% of the book value as
provided in paragraph 2b.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By _______________________________
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
____________________________________
Abraham Sova Date
____________________________________
Esther Sova Date
____________________________________
Joseph Sova Date
Terms of Escrow Agreed:
____________________________________
Edwin A. Lassman
EAL: nef
-3-
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 30, 1996
Mr. Jack Friedler
1041 Church Hill Road
Fairfield, CT 06432
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
Gentlemen:
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Professional Relief Nurses, Inc., a Connecticut
corporation.
Recital.
Professional Relief Nurses, Inc. ("PRN") is a Connecticut Corporation with
its principal office in Middletown, Connecticut. The "Sova" Family, the "Berger"
Family, Jack Friedler and Suzanne Nettleton each own 25% of the issued and
outstanding capital stock of PRN. Jack Friedler ("Friedler") is a majority
member and the manager of Lexington Health Care Group LLC. Friedler intends to
cause Lexington to prepare a Registration Statement under the Securities Act of
1933, as amended, wherein Lexington will offer, in an initial public offering,
Common Stock of Lexington. The offering shall be for a total gross proceeds of
approximately FOUR to SEVEN MILLION DOLLARS ($4,000,000.00 to $7,000,000.00),
exclusive of the over-allotment option. In conjunction with the initial public
offering ("IPO") and immediately prior thereto, Lexington intends to acquire all
of the capital stock of PRN. The following shareholders are the record owners of
all of the issued and outstanding capital stock of PRN:
-1-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 30, 1996
Suzanne J. Nettleton 100 Shares
Jack Friedler 100 Shares
Abraham Sova 1 Shares
Esther Sova 66 Shares
Joseph Sova 33 Shares
Mark Berger 33 Shares
Israel Berger 33 Shares
Julius Berger 34 Shares
---------
Total Issued and Outstanding 400 Shares No Par Common Stock
Lexington has agreed to purchase and the Sova family and Berger family each
agree to sell to Lexington their 25% share of the capital stock of PRN pursuant
to the terms and conditions hereinafter set forth:
1. Friedler agrees to sell and Lexington agrees to purchase, all of the
issued and outstanding shares of capital stock of PRN owned by Friedler,
viz 100 shares of common no par stock.
2. Lexington agrees to exchange the equivalent of $540,000.00 in the
common stock of Lexington for the 100 shares of stock of PRN owned by Friedler
concurrently with the IPO.
3. At least one week prior to said public offering, Friedler shall
forward to Edwin A. Lassman, Trustee, his stock certificates together with a
separate stock power assigning his shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to Friedler
-2-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 3
October 30. 1996
an equivalent of $540,000.00 in common stock of Lexington based on an IPO
price of $5.00 per share.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By _______________________________
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
____________________________________
Jack Friedler Date
Terms of Escrow Agreed:
____________________________________
Edwin A. Lassman
EAL: nef
-3-
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
November 1, 1996
Ms. Suzanne Nettleton
29 High Point Drive
Middle Raddan, CT 06456
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
Dear Suzanne:
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Professional Relief Nurses, Inc., a Connecticut
corporation.
Recital.
Professional Relief Nurses, Inc. ("PRN") is a Connecticut Corporation with
its principal office in Middletown, Connecticut. The "Sova" Family, the "Berger"
Family, Jack Friedler and Suzanne Nettleton each own 25% of the issued and
outstanding capital stock of PRN. Jack Friedler ("Friedler") is a majority
member and the manager of Lexington Health Care Group LLC. Friedler intends to
cause Lexington to prepare a Registration Statement under the Securities Act of
1933, as amended, wherein Lexington will offer, in an initial public offering,
Common Stock of Lexington. The offering shall be for a total gross proceeds of
approximately FOUR to SEVEN MILLION DOLLARS ($4,000,000.00 to $7,000,000.00),
exclusive of the over-allotment option. In conjunction with the initial public
offering ("IPO") and immediately prior thereto, Lexington intends to acquire all
of the capital stock of PRN. The following shareholders are the record owners of
all of the issued and outstanding capital stock of PRN:
-1-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
November 1, 1996
Suzanne J. Nettleton 100 Shares
Jack Friedler 100 Shares
Abraham Sova 1 Shares
Esther Sova 66 Shares
Joseph Sova 33 Shares
Mark Berger 33 Shares
Israel Berger 33 Shares
Julius Berger 34 Shares
---------
Total Issued and Outstanding 400 Shares No Par Common Stock
Lexington has agreed to purchase and the Sova family and Berger family each
agree to sell to Lexington their 25% share of the capital stock of PRN pursuant
to the terms and conditions hereinafter set forth:
1. Nettleton has agreed to sell and Lexington agrees to purchase, all of
Nettleton's capital stock of PRN.
2. Lexington agrees to pay to Nettleton and Nettleton agrees to accept
as full payment for said shares, from the proceeds of the IPO, the following:
a) $540,000.00; plus
b) 25% of the "book value" of the total stockholders' equity as of the
date of the IPO. There shall be no material increase in expenses from prior
years. "Book Value" shall be determine by PRN's regular certified accountant, in
accordance with generally accepted accounting procedures applied on a consistent
basis with prior years on the accrual basis.
c) The purchase price as determined shall be paid within fifteen (15)
days of the receipt of PRN of the net proceeds realized from the IPO.
3. At least one week prior to said public offering, Nettleton shall
forward to Edwin A. Lassman, Trustee, her stock certificate together with a
separate stock power assigning her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to Nettleton,
-2-
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 3
November 1, 1996
a client's fund check payable to Nettleton in the amount of $540,000.00, plus
25% of the book value as provided in paragraph 2b.
5. Friedler will cause PRN to negotiate a contract with Nettleton which
contract shall provide the following benefits to Nettleton:
a) Nettleton shall remain President of PRN;
b) Nettleton shall be retained as chief operating officer of PRN
for five (5) years from the date of the IPO at a salary of $135,000.00 per
year together with the following benefits:
(i) accrual bonus equal to 3.75% of net pre-tax income of PRN
as determined by PRN's regularly retained certified public
accountant. There will be no charge against net pre-tax income
for any costs incurred by the parent of or any affiliate of PRN
except for PRN's proportionate share as determined by PRN's
regularly retained certified public accountant;
(ii) Disability Policy equivalent to Northwest Mutual's
current policy in effect which policy will remain in effect
until Nettleton reached age 62;
(iii) $500,000.00 life insurance policy payable to a trust
for the benefit of Nettleton's children, which policy will
remain in effect until Nettleton reaches age 62 at which time
the cash value shall be paid over to said Trustee;
(iv) Group Health Plan equivalent to current policy insuring
Nettleton and her children which policy will remain in effect
until Nettleton reach age 62; and
(v) Layman insurance policy equivalent to current Northwest
Mutual Policy in the amount of $500,000.00 the cash value being
payable to Nettleton at age 62;
(vi) The benefits described in subparagraphs 5b(ii) through (v)
inclusive shall be payable notwithstanding Nettleton's
termination as an officer and/or employee.
6. This agreement shall terminate in the event that the IPO shall not
be concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By _______________________________
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
____________________________________
Suzanne Nettleton Date
Terms of Escrow Agreed:
____________________________________
Edwin A. Lassman
EAL: nef
-3-
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Ms. Mary Archambault
230 Geraldine Drive
Coventry, CT 06238
Dear Mr. Dermer:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Mary Archambault Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Mr. Harry Dermer
725 Town Hill Road
New Hartford, CT 06057
Dear Mr. Dermer:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Harry Dermer Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Mr. Jack Friedler
1041 Church Hill Road
Fairfield, CT 06432
Dear Mr. Friedler:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Jack Friedler Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Mr. Joseph Stern
Dear Mr. Stern:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Joseph Stern Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Mr. Craig Loren
Dear Mr. Loren:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Craig Loren Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Ms. Jackueline Braunstein
Dear Ms. Braunstein:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Jackueline Braunstein Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
[LETTERHEAD OF ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC]
October 28, 1996
Mr. Steven Neuman
Dear Mr. Neuman:
RE: Proposed Initial Public Offering of Lexington Health Care
Group LLC
This letter will confirm our understanding with regard to the acquisition
by Lexington Health Care Group LLC or its successor Corporation ("Lexington") of
the capital stock of Balz Medical Services, Inc., a Connecticut corporation.
Recital.
Balz Medical Services, Inc. ("BMS") is a Connecticut Corporation with its
principal office in New Britain, Connecticut. The following individuals are the
record owners of the capital stock of BMS, viz, a total of common par value
$10.00:
Mary Archambault 500 Craig Loren 255
Harry Dermer 500 Jackueline Braunstein 255
Jack Friedler 600 Steven Neuman 195
Joseph Stern 195
Jack Friedler ("Friedler") is a majority member and the manager of
Lexington Health Care Group LLC. Friedler intends to cause Lexington to prepare
a Registration Statement under the Securities Act of 1933, as amended, wherein
Lexington will offer, in an initial public offering, Common Stock of Lexington.
The offering shall be for a total gross proceeds of approximately FOUR to SEVEN
MILLION DOLLARS ($4,000,000.00 to $7,000,000.00), exclusive of the
over-allotment option. In conjunction with the initial public offering ("IPO")
and immediately prior thereto, Lexington intends to acquire all of the capital
stock of BMS.
Lexington has agreed to purchase and the undersigned shareholder agrees to
sell to Lexington his or her shares of the capital stock of BMS pursuant to the
terms and conditions hereinafter set forth:
<PAGE>
ROGIN, NASSAU, CAPLAN, LASSMAN & HIRTLE, LLC
Page 2
October 28, 1996
1. The undersigned, by his or her written acceptance hereinafter set forth,
agrees to sell and Lexington agrees to purchase, all of the shares of capital
stock of BMS owned by him or her.
2. Lexington agrees to exchange the equivalent of $600.00 in common stock
of Lexington for each share of capital stock of BMS owned by the undersigned.
3. At least one week prior to the IPO, the undersigned shall forward to
Edwin A. Lassman, Trustee, his or her stock certificates together with a
separate stock power assigning his or her shares of stock to Edwin A. Lassman,
Trustee for Lexington.
4. Edwin A. Lassman, as Trustee, shall hold the certificates in escrow
until he has forwarded to the undersigned the equivalent of $600.00 in common
stock of Lexington for each share of BMS stock tendered.
5. This agreement shall terminate in the event that the IPO shall not be
concluded by June 30, 1997.
Very truly yours,
Lexington Health Care Group LLC
By
---------------------------
Jack Friedler, Managing Member
ACCEPTED AND CONFIRMED:
SS#
- --------------------------- ------------------------------
Steven Neuman Date
Terms of Escrow Agreed:
- ---------------------------
Edwin A. Lassman
EAL: neg
<PAGE>
SECURITY AGREEMENT
AGREEMENT, dated the 30th day of June, 1996, by and between Lexington
House, Inc., a Connecticut Corporation, having an office in New Britain,
Connecticut (the "Maker"), and Lexington Health Care Group LLC, a Connecticut
Limited Liability Company, having an office at 35 Park Place, New Britain,
Connecticut 06052 (the "Secured Party"), the holder of a 5% Promissory Note
issued by the Maker to the Secured Party in the amount of $393,672.74, or so
much thereof as may be advanced from time to time (the "Note").
WHEREAS, The Maker has executed the Note in favor of the Secured Party; and
NOW, THEREFORE, in order to induce the Secured Party to make the loan
(represented by the Note) to the Maker, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Security Interest.
To secure the due payment and performance of all indebtedness and other
liabilities and obligations of the Maker to the Secured Party under the Note,
the Maker hereby grants to the Secured Party for the benefit of the Secured
Party, security interests in and liens, first in priority, with respect to the
premises located at 35 Park Place, New Britain, Connecticut 06052 (the
"Collateral").
2. Perfection of Security Interest.
The Maker shall join the Secured Party in executing one or more financing
statements and all necessary continuation statements thereto pursuant to the
Uniform Commercial Code as in effect in the State of Connecticut as are
necessary to perfect the Secured Party's liens or other notices appropriate
under applicable law in form satisfactory to the Secured Party and its counsel
and will pay all reasonable filing or recording costs with respect thereto in
all public offices where filing or recording is reasonably deemed by the Secured
Party and its counsel to be necessary or desirable to perfect the liens hereby
created under said Uniform Commercial Code.
3. Maker's Warranties and Representations.
Maker warrants, represents, covenants and agrees as follows:
a. To pay and perform all of the obligations secured by this Agreement
according to their terms.
b. To defend the title to the Collateral against all persons and
against all claims and demands whatsoever, which Collateral is lawfully owned
by the Maker and is now free and clear of any and all liens and security
interests, claims, charges, encumbrances, taxes and assessments.
c. On demand of the Secured Party, the Maker shall furnish further
assurance of title, execute any written agreement or do any other acts necessary
to effectuate the purposes and provisions of this Agreement, execute any
instrument or statement required by law or otherwise in order to perfect,
continue or terminate the security interest of the Secured Party in the
Collateral and pay all filing fees in connection therewith. The Maker hereby
agrees that the Secured Party may unilaterally file any statement necessary to
continue the security interest in the Collateral during the term of this
Agreement.
<PAGE>
d. Not to (i) grant any additional security interests in the
Collateral without the prior written consent of the Secured Party, or (ii)
transfer title to any of the Collateral without the prior written consent of the
Secured Party.
e. The Maker hereby constitutes and appoints the Secured Party its
true and lawful attorney, irrevocably, with full power after the occurrence of
and during the continuance of an Event of Default (as defined in the Note) (in
the name of the Secured Party or otherwise) to act, require, demand, receive,
compound and give acquittance for any and all monies and claims for monies due
or to become due to the Secured Party under or arising out of the Collateral, to
endorse any checks or other instruments or orders in connection therewith and to
file any claims or take any action or institute any proceedings which the
Secured Party may deem to be necessary or advisable to protect the interests of
the Secured Party, which appointment as attorney is coupled with an interest.
4. Rights and Remedies on Default.
a. In case an Event of Default shall occur and be continuing, the
Secured Party shall have the right, without further notice to the Maker, by any
available judicial procedure, to exercise any and all rights afforded to a
secured party upon default under the Uniform Commercial Code or other applicable
law. The Maker agrees to execute and deliver all such instruments of assignment
and conveyance and other documentation as may be reasonably requested by the
Secured Party to vest title in and to the Collateral in the Secured Party, or,
if such Collateral is sold or transferred as contemplated by the immediately
preceding sentence, in the purchaser or purchasers thereof.
b. Upon an Event of Default, the Secured Party's reasonable attorneys
fees and the legal and other expenses for pursuing, searching for, receiving and
taking, the Collateral shall be chargeable to the Maker.
c. If the Maker shall default in the performance of any of the
provisions of this Agreement on the Maker's part to be performed, the Secured
Party may perform same for the Maker's account and any amounts expended in so
doing shall be chargeable with interest to the Maker and added to the debt
secured hereby.
d. Upon an Event of Default, the Maker, upon reasonable request of the
Secured Party, shall remit all Collateral secured hereby directly to the Secured
Party or, at the Secured Party's direction, shall have all account debtors make
payment directly to a bank account maintained for the benefit of the Secured
Party, designated by the Secured Party and acceptable to the Maker.
5. Term of Security Agreement.
The term of this Security Agreement shall commence as of the date
hereof and this Security Agreement shall continue in full force and effect and
be binding upon the Maker until all of the obligations represented by the Note
have been fully and indefeasibly paid and performed, whereupon this Security
Agreement shall terminate and the Secured Party shall deliver to the Maker at
such time all appropriate termination statements, in recordable form with
respect to the liens as may be reasonably required by the Maker, including,
filing a UCC-3 statement with the Connecticut Secretary of State and any other
applicable states to extinguish the Secured Party's security interest and lien
with respect to the Collateral.
2
<PAGE>
6. Miscellaneous.
a. Amendments, Etc. No amendment of any provision of this Agreement
shall in any event be effective unless the amendment shall be in writing and
signed by the Maker and the Secured Party, and no waiver of any provision of
this Agreement, nor consent to any departure by any party therefrom shall be
effective unless such waiver or consent shall be in writing and signed by the
party waiving or consenting to such provision, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
b. Notices, Etc. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, facsimile, telex or cable
communication) and mailed, telegraphed, telecopied, telexed, cabled or
delivered:
(1) if to the Maker,
Lexington House, Inc.
35 Park Place
New Britain, Connecticut 06052
Attn: Jack Friedler
and
(2) if to the Secured Party,
Lexington Health Care Group LLC
35 Park Place
New Britain, Connecticut 06052
Attn: Harry Dermer
with copies to
GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP
575 Lexington Avenue
New York, New York 10022
Attn: Wesley C. Fredericks, Jr., Esq.
or, as to any such party, at such other address as shall be designated by such
party in a written notice to the other parties.
c. No Waiver; Remedies. No failure on the part of the Secured Party to
exercise, and no delay in exercising, any right under this Agreement shall
operate as a waiver thereof; nor shall any single or partial exercise thereof or
the exercise of any other right. The remedies herein provided are cumulative and
not exclusive of any remedies provided by law.
d. Severability of Provisions. Any provision of this Agreement or of
the Note which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or thereof
or affecting the validity or enforceability of such provision in any other
jurisdiction.
3
<PAGE>
e. Integration. This Agreement and the other documents set forth the
entire understanding of the parties hereto with respect to all matters
contemplated hereby and thereby and supersede all previous agreements and
understandings among them concerning such matters. No statements or agreements,
oral or written, made prior to or at the signing hereof, shall vary, waive or
modify the written terms hereof.
f. Binding Effect; Governing Law. This Agreement shall be binding upon
and inure to the benefit of the Maker and the Secured Party and their respective
successors and assigns, except that neither the Maker nor the Secured Party may
transfer or assign this Agreement or any of its rights or obligations hereunder
to a party other than an affiliate without the prior written consent of the
other party. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Connecticut applicable to agreements and
instruments executed and performed in the State of Connecticut.
g. Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute but one and the
same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
MAKER
LEXINGTON HOUSE, INC.
/s/ Jack Friedler, Pres.
-------------------------------
By: Jack Friedler
Title: President
SECURED PARTY
LEXINGTON HEALTH CARE GROUP LLC
/s/ Harry Dermer
-------------------------------
By: Harry Dermer
Title: President
4
<PAGE>
LEXINGTON HOUSE, INC.
8% Secured Promissory Note
$393,672.74
LEXINGTON HOUSE, INC., a Connecticut corporation (the "Company") , for
value received, hereby promises to pay to the order of Lexington Health Care
Group LLC (the "Payee"), an entity with its principal office in New Britain,
Connecticut, on the principal sum of $393,672.74 (or such lesser principal
amount as may then be outstanding), together with unpaid interest (computed on
the basis of a 360-day year of twelve 30-day months) on the unpaid balance at
the rate of 8% per annum from the date hereof within five years from the date of
this Note (the "Maturity Date"). The principal amount of the Note may be
prepaid by the Company, in whole or in part, without premium or penalty, at any
time. Interest shall be paid quarterly. Upon any prepayment of this Note, all
accrued but unpaid interest on the principal amount being prepaid shall be paid
to the holder on the date of prepayment. All payments hereunder shall be applied
first to interest then to principal.
If the Company shall fail to make a payment of principal or interest when
due; or shall make an assignment for the benefit of creditors, file a petition
in bankruptcy, be adjudicated insolvent or bankrupt, suffer an order for relief
under any federal bankruptcy law, petition or apply to any tribunal for the
appointment of a custodian, receiver or any trustee for the Company or any
substantial part of his assets, or shall commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
affect; or if there shall have been filed any such petition or application, or
any such proceeding shall have been commenced against the Company, which remains
undismissed for a period of ninety (90) days or more; or if the Company, by any
act or omission shall indicate consent to, approve of or acquiescence in any
such petition, application or proceeding or the appointment of, a custodian,
receiver or any trustee for all or any substantial part of its properties, or if
the Company shall suffer such custodianship, receivership, or trusteeship to
continue undischarged for a period of ninety (90) days or more, or the Company
violates any term or provision of this Note and same remains uncured for a
period of 15 days after notice thereof by any Noteholder, then and in any such
event (each such event, an "Event of Default"), the outstanding principal
amount of this Note, together with all accrued and unpaid interest thereon,
shall be and become immediately due and payable.
<PAGE>
Payments of principal, premium, if any, and interest are to be made in
lawful money of the United States of America at the principal offices of the
Payee (or at such bank as may be designated by the Payee or at such other place
as the Company and the Payee may mutually agree). Interest shall be paid
quarterly.
1. Security Agreement.
The payment, when due, of principal and interest hereunder, is secured by
the Collateral, as that term is defined in the Security Agreement between the
Company and the Payee, dated the date hereof (the "Security Agreement") and is
secured in the manner provided in the Security Agreement.
2. Covenants of Company.
a. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its income and
profits, or upon any of its property, before the same shall become in default,
as well as all lawful claims for labor, materials and supplies which, if unpaid,
might become a lien or charge upon such properties or any part thereof;
provided, however, that the Company shall not be required to pay and discharge
any such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings, and the Company
shall set aside on its books adequate reserves with respect to any such tax,
assessment, charge, levy or claim so contested.
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and franchises and
comply with all laws applicable to the Company as its counsel may advise;
(iii) At all times maintain, preserve, protect and keep its
property used and useful in the conduct of its business in good repair, working
order and conditions, and from time to time make all needful and proper repairs,
renewals, replacements, betterments and improvements thereto, so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times;
(iv) Will not issue or incur any indebtedness which is senior to
the Company's obligations under this Note;
(v) Keep adequately insured by financially sound insurers, all
property of a character usually insured by similar corporations and carry such
other insurance as is usually carried by similar corporations; and
2
<PAGE>
(vi) At all times keep true and correct books, records and
accounts.
3. Miscellaneous.
3.1 All the covenants and agreements made by the Company in this Note shall
bind its successors and assigns.
3.2 No course of dealing between the Company and the holder hereof shall
operate as a waiver of any right of any holder hereof, and no delay on the part
of the holder in exercising any right hereunder shall so operate. Any such
waiver must be in writing and signed by the holder and the Company.
3.3 This Note may be amended only by a written instrument executed by the
Company and the holder hereof. Any amendment shall be endorsed upon this Note,
and all future holders shall be bound thereby.
4.4 All communications provided for herein shall be sent, except as may be
otherwise specifically provided, by registered or certified mail: if to the
Payee, to the address shown on the books of the Company; and if to the Company,
to: Lexington House, Inc., 35 Park Place, New Britain, Connecticut, Attention:
President, or to such other address as the Company may advise the holder of this
Note in writing. Notices shall be deemed given when mailed.
4.5 The provisions of this Note shall in all respects be construed
according to, and the rights and liabilities of the parties hereto shall in all
respects be governed by, the laws of the State of Connecticut.
4.6 In the event that this Note is placed in the hands of an attorney for
collection, or in the event that any action be instituted on this Note, or any
action is taken with respect to a default hereunder, the holder hereof shall be
entitled to the payment by the Company and any other party liable for the
obligations of the Company hereunder of all expenses in connection therewith,
including, without limitation, reasonable attorney fees.
4.7 The headings of the Sections of this Note are inserted for convenience
only and shall not be deemed to constitute a part of this Note.
3
<PAGE>
IN WITNESS WHEREOF, LEXINGTON HOUSE, INC. has caused this Note to be
executed in its corporate name by its President.
Dated: June 30, 1996
LEXINGTON HOUSE, INC.
By: /s/ Jack Friedler
-----------------
Jack Friedler
President
4
<PAGE>
PROMISSORY NOTE
Amount: $1,948,066.00 December 5, 1995
FOR VALUE RECEIVED, the undersigned (hereinafter together referred to as
"Maker") jointly and severally promise to pay to the order of Beverly Health and
Rehabilitation Services, Inc., a California corporation (hereinafter referred to
as "Holder"), or its registered assigns, at 5111 Rogers Avenue, Suite 40-A in
Fort Smith, Arkansas 72919-0155, or at such place or to such other party or
parties as the Holder of this Note may from time to time designate, the
principal sum of One Million, Nine Hundred Forty-Eight Thousand Sixty-Six and
00/100 Dollars ($1,948,066.00) with interest at the rate of 12% per annum
accruing from October 1, 1995, on all sums at any time remaining unpaid.
Principal payments in the amount of $250,000.00 each shall be due and payable on
the tenth (10th) of each month hereafter comencing January 10, 1996, together
with accrued interest until July 10, 1996 when the entire unpaid balance of
principal together with accrued interest shall be due and payable.
The occurrence of any of the following events shall constitute a default
hereunder: (1) failure to pay (a) any installment or payment due hereunder
within five (5) days after the same is due, (b) any insurance premiums or tax
installment Maker is required to pay under, and within the time provided in, any
mortgage securing the premises known as Bentley Gardens, Pond Point, Fairfield
Manor and Country Manor located in Milford, West Haven, Norwalk and Prospect,
Connecticut respectively, (c) any installment of principal or interest due on
any obligation secured by said mortgages
If default is made in the payment of the whole or any part of this Note
when due, after fifteen (15) days written notice of such detault, then or at any
time thereafter during the continuance of any such default, the entire principle
of this Note remaining at the time unpaid, together with the accrued interest
thereon, at the rate of 18% per annum, shall, at the election of the Holder
hereof, without further notice to the Maker of such election and without further
demand or presentment, become immediately due and payable at the place of
payment aforesaid, and all costs and expenses of collection, including a
reasonable attorney's fee, shall be added to and become part of the total
indebtedness.
In the event of any default, the failure of the Holder hereof to exercise
promptly any of its rights hereunder shall not constitute a waiver of such
rights while such default continues, nor a waiver of such rights in connection
with any future default on the part of the Maker.
The Maker, any endorsers or guarantors hereof, and all other parties who
may become liable for all or any part of this Note, severally waive presentment
for payment, protest and demand, and notice of protest, demand, dishonor and
nonpayment, and hereby expressly consent to any such extension of time for
payment or other indulgence and to any substitution, exchange or release of
collateral granted by the Holdcr hereof, and to any number of renewals or
extensions of the time of payment of this Note.
<PAGE>
Notwithstanding any provision hereof, it is not intended by this Note to
impose upon the Maker any obligation to pay interest in excess of the maximum
rate of interest permitted by law, and any interest which so exceeds such
maximum rate of interest shall automatically abate to the extent of such
excess.
This Note may be prepaid at any time without premium or penalty.
This Note and liablity of all parties hereunder shall be governed by the
laws of the State of Connecticut.
This Note is given in connection with that certain Termination-Transition
Agreement dated June 1, 1995 regarding the Fairfield Manor Healthcare Center,
Bentley Gardens Healthcare Center, Pond Point Healthcare Center and Country
Manor Healthcare Center.
"MAKER"
Jack Friedler
an individual
/s/ Jack Friedler
------------------------------
Attest: Lexington Health Care Group,
a Connecticut limited
liability corporation
/s/ Lassman By: /s/ Jack Friedler
- ------------------------- --------------------------
SEAL
Title: Manager
------------------------
<PAGE>
[LETTERHEAD OF BEVERLY ENTERPRISES]
November 28, 1995
Jack Friedler
Lexington Health Care Group, L.L.C.
35 Park Place
New Britain, Conn. 06052
Re: Promissory Note for Beverly's receivables collected by Lexington at
Fairfield, Bentley Gardens, Pond Point and Country Manor
Dear Jack:
Enclosed you will find a revised Promissory Note which has been drafted in
order to formalize our agreement that you are remit to Beverly all monies
collected as of October 1, 1995, for Beverly's accounts receivable for the
above-referenced facilities. Per your letter dated November 21, 1995, I have
revised the original amount owed as of October 1, 1995, by subtracting from that
original amount the $500,000.00 payment of October 25th, the $229,467.92 payment
of November 21st and the utility adjustment of $10,196.66 from the original
balance of $2,687,730.58. The new balance is $1,948,066.00. We reject your
request for further adjustments for accrued vacation for employees at the
facilities as we have already paid directly to the employees all vacation
benefits due employees as of the effective date as set out in the
Termination-Transition Agreement.
We acknowledge receipt of your recent payments and are considering your
request for payout. In the event that we agree to a payout we will modify this
Note accordingly. However, it must be understood that we will only consider your
request for payout so long as you execute this Note without further revision and
return it to us no later that Wednesday, December 6, 1995. Be assured that this
letter will be the last notice that you receive from us in this matter. In the
event that you fail to act accordingly we shall no other choice but to instruct
local counsel to file suit in order to recover our money.
Sincerely,
/s/ David J. McDonough
-------------------------------
David J. McDonough
Attorney Transactions
cc: James R. Pietrzak
Brad McKown
Edwin A. Lassman/860-278-2179
<PAGE>
LOAN AND SECURITY AGREEMENT
between
Lexington Holding Corporation
as Borrower
and
COPELCO/AMERICAN HEALTHFUND, INC.,
as
Lender
March 14, 1996
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<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated as of March 14th, 1996 (this
"Agreement"), is entered into by and among Lexington Holding Corporation, a
Delaware corporation (the "Borrower"), and Copelco/American Healthfund, Inc.,
("CAHI), a Pennsylvania corporation (the "Lender").
Preliminary Statement:
The Borrower desires to obtain, and the Lender has agreed to provide, a
revolving credit facility which revolving credit facility will be used to fund
the purchase of certain accounts receivable from various healthcare providers
("Providers"), in each case pursuant to an Accounts Purchase and Servicing
Agreement among the respective Provider, the Borrower, as Purchaser, and
Copelco/American Healthfund, Inc., as Administrator (each a "Purchase Agreement"
and collectively, the "Purchase Agreements");
Intending to be legally bound hereby, the parties hereto agree as follows:
I. CERTAIN DEFINITIONS.
1.1 Definitions. Capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Purchase Agreements. As used in this
Agreement, the following terms shall have these meanings:
"Borrowing Base" shall mean, as of any date of determination, the lesser of
(i) the sum of each of the Purchaser Capital Investments (in each case as
calculated from time to time) under each Purchase Agreement and (ii) until such
time as the Providers have collected payments from Medicare representing at
least 120 days of patient service, 60% of the Estimated Net Value of all
Purchased Accounts; and thereafter, 80% of the Estimated Net Value of all
Purchased Accounts.
"Business Day" shall mean any day other than a Saturday, Sunday or any day
on which banking institutions in New York City are permitted or required by law,
executive order or governmental decree to remain closed or a day on which the
Lender is closed for business.
"Collateral" means (i) all accounts, instruments and general intangibles of
the Borrower, including all assets acquired by the Borrower from the Providers
from time to time pursuant to the Purchase Agreements, including, without
limitation, all of the Borrowers right, title and interest in and to the
Purchased Accounts, all Proceeds (including insurance Proceeds) thereof, as well
as all Commercial Lockboxes, all Government Lockboxes and all funds held in all
Commercial Lockboxes, Government Lockboxes and Cash Reserve Accounts, and any
instruments from time to time representing or evidencing Commercial Lockboxes,
Government
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<PAGE>
Lockboxes, Cash Reserve Accounts or such funds and (ii) the Purchase
Agreements and any other documents or agreements now or hereafter in effect
relating to the purchase, servicing or processing of Purchased Accounts
(collectively, the "Borrower Assigned Agreements"), including all rights of the
Borrower to receive moneys due and to become due under or pursuant to the
Borrower Assigned Agreements, all rights of the Borrower to receive proceeds of
any insurance, indemnity, warranty or guaranty with respect to the Borrower
Assigned Agreements, any claims of the Borrower for damages arising out of or
for breach of or default under the Borrower Assigned Agreements, and the right
of the Borrower to amend, waive or terminate the Borrower Assigned Agreements,
to perform under the Borrower Assigned Agreements and to compel performance and
otherwise exercise all remedies under the Borrower Assigned Agreements.
"Default Rate" shall mean 400 basis points above the interest rate
otherwise applicable on all Loans.
"Event of Default" shall have the meaning set forth in Section 8.1.
"Generally Accepted Accounting Principles" shall mean generally accepted
accounting principles as in effect from time to time in the United States,
consistently applied.
"Indebtedness for Borrowed Money" shall mean (i) all indebtedness,
liabilities, and obligations, now existing or hereafter arising, for money
borrowed by the Borrower, whether or not evidenced by any note, indenture, or
agreement and (ii) all indebtedness of others for money borrowed with respect to
which the Borrower has become liable by way of a guarantee or indemnity.
"Interest Period" shall mean with respect to any Loan, the weekly period
commencing on the date such Loan is made and ending on the first day prior to
the weekly anniversary thereof and each like weekly period thereafter.
"LIBOR" means the annual rate in effect in the London Interbank Market
applicable to one month deposits of U.S. dollars as reported in the Wall Street
Journal on the second Business Day prior to the date of determination. If the
Wall Street Journal is not published on such Business Day or does not report
such rate, such rate shall be as reported by such other publication or source as
the Lender shall select.
"Lien" means any lien, mortgage, security interest, chattel mortgage,
pledge or other encumbrance (statutory or otherwise) of any kind securing
satisfaction of an obligation, including any agreement to give any of the
foregoing, any conditional sales or other title retention agreement, any lease
in the nature thereof, and the filing of or the agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction or similar
evidence of any encumbrance, whether within or outside the United States.
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<PAGE>
"Loan" shall have the meaning set forth in Section 2.1.
"Loan Documents" shall mean this Agreement, the Note, and all financing
statements and other agreements, documents and certificates required to be
delivered hereunder (other than any Purchase Agreements).
"Note" shall mean the Revolving Credit Note.
"Obligations" shall mean all now existing or hereafter arising debts,
obligations, covenants, and duties of payment or performance of every kind,
matured or unmatured, direct or contingent, owing, arising, due, or payable to
the Lender by or from the Borrower arising out of this Agreement or any other
Loan Document, including, without limitation, all obligations to repay principal
of and interest on all the Loans, and to pay interest, fees, costs, charges,
expenses, professional fees, and all sums chargeable to the Borrower under the
Loan Documents, whether or not evidenced by any note or other instrument.
"Permitted Liens" shall mean Liens in favor of the Lender under the Loan
Documents.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, company, business trust or entity.
"Potential Default" shall mean an event that with the giving of notice or
lapse of time or both would become an Event of Default.
"Proceeds" shall have the meaning assigned to such term in the UCC.
"Regulation" means any statute, law, ordinance, regulation, order or rule
of any foreign, federal, state, local or other government or governmental body.
"Revolver Termination Date" shall have the meaning set forth in Section
2.1.
"Revolving Loan Commitment" shall have the meaning set forth in Section
2.1.
"Revolving Credit Note" shall have the meaning set forth in Section 2.2.
"Uniform Commercial Code" or "UCC" shall mean the Uniform Commercial Code
as in effect from time to time in the Commonwealth of Pennsylvania.
1.2 Accounting Terms. All accounting terms used herein shall be construed
in accordance with Generally Accepted Accounting Principles.
II. THE LOAN
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<PAGE>
2.1 The Loans.
(a) Subject to the terms and conditions hereof, the Lender agrees to
make revolving credit loans (collectively called the "Loans" and individually a
"Loan") to the Borrower from time to time during the period commencing the date
hereof and ending on March __, 1998, or on any earlier date as provided in
Sections 2.6 and 8.1 hereof (the "Revolver Termination Date"), in a principal
amount not to exceed at any time outstanding in the aggregate One Million Eight
Hundred Thousand Dollars - $1,800,000 (the "Revolving Loan Commitment").
(b) Within the limits of the Revolving Loan Commitment and the
Borrowing Base, the Borrower may borrow, prepay (in accordance with Section 2.7)
and reborrow Loans. All Loans shall, in any event, be repaid by the Borrower on
the Revolver Termination Date.
(c) The Lender's failure to deliver any bill, statement or invoice
with respect to amounts due under this Agreement shall not affect the Borrower's
obligation to pay any installment of principal, interest or any other amount
under this Agreement when due and payable.
2.2 The Note. The Loans shall all be evidenced by a single promissory note
of the Borrower (the "Revolving Credit Note") in principal face amount equal to
the Revolving Loan Commitment, payable to the order of the Lender and otherwise
in the form attached hereto as Exhibit A. The Revolving Credit Note shall be
dated the date the first Loan is made and shall bear interest in accordance with
the terms hereof. The Revolving Credit Note shall mature upon the Revolver
Termination Date and, upon maturity, each outstanding Loan shall be due and
payable. The Lender shall maintain records of all Loans evidenced by the
Revolving Credit Note and of all payments thereon, which records shall be
conclusive absent manifest error.
2.3 Funding Procedures.
(a) Each request for a Loan shall be made not later than 11:00 a.m. on
a Business Day by delivery to the Lender of a written request signed by the
Borrower, or in the alternative a telephone request followed promptly by written
confirmation of the request, in substantially the form reasonably requested by
the Lender from time to time, including the date and amount of the Loan to be
made. Until such time as the Lender shall reasonably direct the use of a
different form of request, the form of request attached hereto as Exhibit B
shall be used to request the making of Loans. Each request shall be received not
less than two (2) Business Days prior to the date of the proposed borrowing. No
request shall be effective until actually received by the Lender. Upon receipt
by the Lender the request for a Loan shall not be revocable by the Borrower.
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(b) Not later than 11:00 A.M. on the date of each Loan, the Lender
shall make available to the Borrower the amount of such Loan in immediately
available funds.
(c) If the Lender makes a Loan on a day on which all or any part of an
outstanding Loan is to be repaid, the Lender shall apply the proceeds of the new
Loan to make such repayment and only an amount equal to the difference (if any)
between the amount being borrowed and the amount being repaid shall be made
available by the Lender to the Borrower as provided in paragraph (b).
2.4 Interest.
(a) LIBOR. Each Loan shall bear interest on the principal amount
thereof from the date made until such Loan is paid in full, at a rate per annum
initially equal to LIBOR (determined as of the date such Loan is funded) plus
450 basis points. Such rate shall be adjusted by the Lender, based upon LIBOR
determined on the first day of each Interest Period.
(b) Default Rate.
(i) If any Event of Default specified in Section 8.1(a) or
Section 8.1(d) shall occur; or
(ii) If any other Event of Default occurs and the Lender declares
the Note to be immediately due and payable;
THEN, the rate of interest applicable to each Loan then outstanding shall be the
Default Rate. Unless waived by the Lender, the Default Rate shall apply from the
date of the Event of Default until the date such Event of Default or breach is
cured, and interest accruing at the Default Rate shall be payable upon demand.
2.5 Fees.
(a) Origination Fee. Upon the execution and delivery of this Agreement
by the Borrower and the Lender, the Borrower shall pay to the Lender a fee (the
"Origination Fee") in an amount equal to $36,000 in immediately available funds.
Once paid, the Origination Fee shall not be refundable to the Borrower, in whole
or in part, for any reason.
(b) [OMITTED]
(c) Early Termination Fee. In the event that the Revolver Termination
Date occurs prior to March 13, 1998 (other than by reason of an Event of
Default described in Section 8.1(d) hereof or a "Termination Event" described in
clauses (vi) - (ix), or (xii), (xiii) of Section 12(b) of the Purchase
Agreement), the Borrower shall pay to the Lender a fee (the "Early
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<PAGE>
Termination Fee") in immediately available funds, which fee shall be determined
pursuant to the following schedule, which the Borrower confirms is reasonable
under the circumstances:
Year in Which Revolver Early Termination Fee as a %
Termination Date Occurs of the Revolving Credit Commitment
- ----------------------- ----------------------------------
Year 1 2%
Year 2 1%
2.6 Termination of Revolving Loan Commitment.
(a) Notice. The Borrower may at any time, on not less than 90 days'
written notice, terminate the Revolving Loan Commitment.
(b) Termination. In the event the Revolving Loan Commitment is
terminated by the Borrower, the Revolver Termination Date shall be accelerated
to the effective date of termination, and the Borrower shall, simultaneously
with such termination, repay the Loans in accordance with Section 2.7.
2.7 Prepayments. The Borrower shall make such prepayments of the Loans
required for the Borrower to comply with Section 7.7 if at any time the
aggregate outstanding Loans exceed the lesser of (i) the Revolving Loan
Commitment or (ii) the then current Borrowing Base.
2.8 Payments.
(a) Due Dates. Accrued interest on each Loan for each Interest Period
shall be due and payable on the first Business Day following the end of such
Interest Period.
(b) Application of Payments, Payment Administration, Etc. All payments
and prepayments shall be applied first to any unpaid interest and thereafter to
principal and to such other outstanding amounts in such order as the Lender may
specify in its discretion. Except as otherwise provided herein, all payments of
principal, interest, fees, or other amounts payable by the Borrower hereunder
shall be remitted to the Lender in immediately available funds not later than
11:00 a.m. on the day when due. Whenever any payment is stated as due on a day
which is not a Business Day, the maturity of such payment shall be extended to
the next succeeding Business Day and interest shall continue to accrue during
such extension.
III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that:
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<PAGE>
3.1 Organization. Standing. The Borrower (i) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and (ii) has the corporate power and authority
necessary to own its assets, carry on its business and enter into and perform
its obligations hereunder, and under each Purchase Agreement.
3.2 Corporate Authority. Etc. The execution, delivery and performance of
this Agreement and each Purchase Agreement have been duly authorized by all
necessary corporate action of the Borrower. The execution, delivery and
performance of this Agreement and each Purchase Agreement by the Borrower do not
and under present law will not require any consent or approval of any person, do
not and under present law will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award, do not and will not
violate any provision of its charter or by-laws, do not and will not result in
any breach of any material agreement, lease or instrument to which it is a
party, by which it is bound or to which any of its assets are or may be subject,
and do not and will not give rise to any Lien upon any of its assets except in
favor of the Lender. Further, the Borrower is not in default under any such
agreement, lease or instrument. No authorizations, approvals or consents of, and
no filings or registrations with, any governmental or regulatory authority or
agency (other than filings or notices required to perfect any security interests
in favor of the Lender) are necessary for the execution, delivery or performance
by the Borrower of this Agreement or for the validity or enforceability thereof.
3.3 Validity of Documents. Each of this Agreement, the Note and each
Purchase Agreement is the legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms.
3.4 No Litigation. There is no action, suit, proceeding or investigation
pending or currently threatened against the Borrower of any nature whatsoever,
including without limitation any action, suit, proceeding or investigation which
questions the validity of this Agreement or the Revolving Credit Note or the
right of Borrower to enter into this Agreement or issue the Revolving Credit
Note or to consummate the transactions contemplated hereby and thereby, nor is
the Borrower aware that there is any basis for the foregoing. The Borrower is
not a party or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality.
3.5 New Company. The Borrower is a new company formed for the sole purpose
of consummating the transactions described in the Purchase Agreements, this
Agreement, and all agreements executed and delivered in connection therewith and
herewith and its only activities have been incident thereto. Without limiting
the foregoing, the Borrower has entered into no contracts or agreements of any
nature except those set forth or referred to in this Agreement, the Purchase
Agreements and certain agreements executed and delivered in connection therewith
and herewith and an agreement with CT Corporation concerning the two (2)
independent directors required by Borrower's certificate of incorporation.
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3.6 No Subsidiaries; No Partnerships. The Borrower has no subsidiaries and
is not engaged in any partnership with any other Person, nor does it hold an
equity interest in any other Person.
3.7 Collateral. No Liens in favor of any Person, other than the Lender,
exist on or with respect to the Collateral. Upon the filing of the financing
statements, the security interest granted under this Agreement will be perfected
(to the extent perfection may occur by filing). Attached hereto as Schedule 3.7
is a list showing all places at which the Borrower maintains, or will maintain,
the Collateral and all records relating to the Collateral. The address of the
chief executive office of the Borrower is identified on Schedule 3.7.
3.8 No Investments, Material Agreements. The Borrower (i) is not a party to
any indenture, agreement, contract, instrument or lease or subject to any
charter, by-law or other corporate restriction or any injunction, order, or
other corporate restriction or decree, which would materially and adversely
affect its business, operations, properties or assets; and (ii) has no material
contingent or long term liability or commitment which would materially affect
its business that has not been disclosed to the Lender in writing.
3.9 No Contingent Liabilities. The Borrower has not assumed, guaranteed or
endorsed, or otherwise become directly or contingently liable in connection
with, any liability of any other Person.
3.10 No Defaults. No Event of Default or other event, act or occurrence
which, with the giving of notice or the lapse of time or both would become an
Event of Default has occurred and is continuing. Without limiting the generality
of the foregoing, the Borrower is in compliance with all terms, covenants and
conditions applicable to it under each Purchase Agreement to which it is a
party, and the Borrower knows of no default by the Provider under any such
Purchase Agreement.
3.11 Initial Capitalization. The Borrower has received an initial capital
contribution from its shareholders in the aggregate amount of $75,000 (the
"Initial Capital Contribution").
3.12 Disclosure Generally. The representations and statements made by or on
behalf of the Borrower in connection with this Agreement and each Loan
hereunder, do not contain any untrue statement of a material fact or omit to
state a material fact or any fact necessary to make the representations made not
materially misleading. No written information, exhibit, report or financial
statement furnished by the Borrower to the Lender in connection with this
Agreement or the Loans contains any material misstatement of fact or omits to
state a material fact or any fact necessary to make the statements contained
therein not materially misleading.
IV. SECURITY.
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4.1 Grant of Security Interest. To secure the payment, promptly when due,
and the punctual performance of all of the Obligations, the Borrower hereby
pledges and assigns to the Lender, a first priority general continuing lien
upon, and security interest in, all of the Collateral.
4.2 Financing Statements. The Borrower shall execute and deliver to the
Lender, at any time or times hereafter, such Uniform Commercial Code financing
statements and all such other agreements and documents, and do such other and
further acts as the Lender may reasonably request, in form and substance
reasonably acceptable to the Lender, in order to further evidence or carry out
the intent of Section 4.1 or to perfect the lien and security interest created
pursuant to Section 4.1 or intended so to be, and the Borrower shall pay the
costs of any recording or filing of the same. The Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement and may be filed by
the Lender as such. The Lender may execute and file financing statements and
amendments thereto without the Borrower's signature to the extent permitted by
law.
4.3 Inspection of Collateral. The Lender (by any of its officers, employees
and/or agents) shall have the right, at any time or times during the Borrower's
usual business hours, to inspect the Collateral and all records related thereto
(and to make extracts from such records). The Borrower shall keep accurate
records of the Collateral, including all information necessary to identify the
amounts due on any Purchased Accounts and the services giving rise to such
Purchased Accounts.
4.4 Release of Security Interest. Upon the termination of this Agreement,
and the payment in full of the Obligations, the Lender shall reassign to the
Borrower the Collateral, release the security interest therein and file
terminations of all financing statements covering the Collateral.
4.5 Compliance with Purchase Agreements. The Borrower will duly perform and
comply with all of the terms of each Purchase Agreement to be performed or
complied with by it and will take such action as is necessary to preserve the
Borrower's rights thereunder.
4.6 Other Actions. Until the occurrence of an Event of Default hereunder,
the Borrower shall be authorized to:
(a) pursue any remedies available under any Purchase Agreement or
other Borrower Assigned Agreement;
(b) prove any claim and file such other papers or documents as may be
necessary or advisable in order to have any claim against a Provider allowed in
any bankruptcy proceedings involving a Provider, and take such other actions in
relation to such proceedings as may be necessary or advisable in relation
thereto; and
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(c) take any other actions under any Purchase Agreement or other
Borrower Assigned Agreement that the Borrower is required or permitted to take
thereunder.
The Borrower shall have the right to contract with other parties for, or
otherwise delegate to other parties, with the prior approval of the Lender, the
performance of any or all of the actions referred to above; provided, however,
that any such contract or delegation will not relieve the Borrower of its
obligations relating to the performance of such actions.
V. CONDITIONS PRECEDENT.
5.1 All Loans. The obligation of the Lender to make any Loan is conditioned
upon the following:
(a) Documents. The Borrower shall have delivered and the Lender shall
have received a request for a Loan, as provided in Sections 2.1 and 2.3. In
addition, a Purchase Agreement, in each case in such form and substance as is
satisfactory to the Lender, shall be in effect between the Borrower and each
Provider which originated any accounts which are, or in connection with the
requested Loan, are to become, Purchased Accounts included in the Collateral,
and the Borrower shall have delivered a copy of each such Purchase Agreement to
the Lender.
(b) Covenants; Representations. In the case of each Purchase Agreement
referred to in paragraph (a), the Borrower and the Provider thereunder shall be
in compliance with all covenants, agreements and conditions in such Purchase
Agreement, and the Borrower shall be in compliance with all covenants,
agreements and conditions applicable to it under this Agreement. The
representations and warranties of the Provider contained in each such Purchase
Agreement and the representations and warranties of the Borrower contained in
this Agreement shall be true with the same effect as if such representation or
warranty had been made on the date such Loan is made. Also, the Lender shall
have received a certificate dated the date of the Loan signed by the chief
executive officer, chief financial officer or controller of the Borrower, to the
foregoing effect.
(c) Defaults. After giving effect to such Loan, no Event of Default or
Potential Default shall exist.
5.2 Conditions to First Loan. The obligation of the Lender to make the
first Loan hereunder is conditioned upon the following:
(a) Articles, Bylaws. The Lender shall have received copies of the
Articles or Certificate of Incorporation and Bylaws of the Borrower, certified
by the secretary or assistant secretary of the Borrower;
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(b) Evidence of Authorization. The Lender shall have received
certified copies of all corporate or other action taken by each Person other
than the Lender who is a party to any Loan Document to authorize its execution
and delivery and performance of the Loan Documents and to authorize the Loans
hereunder, together with such other related certificates and documents as the
Lender shall reasonably require;
(c) Legal Opinions. The Lender shall have received a favorable written
opinion of Rogin, Nassau, Caplan, Lassman and Hittle, LLC, counsel to the
Borrower, which shall be addressed to the Lender and be dated the date of the
first Loan, in substantially the form attached as Exhibit C, and such other
legal opinion or opinions as the Lender may reasonably request;
(d) Incumbency. The Lender shall have received a certificate signed by
the secretary or assistant secretary of each corporate signatory to the Loan
Documents other than the Lender, together with the true signature of the officer
or officers authorized to execute and deliver the Loan Documents and
certificates thereunder, upon which the Lender shall be entitled to rely
conclusively until the Lender shall have received a further certificate of the
appropriate secretary or assistant secretary amending the prior certificate and
submitting the signature of the officer or officers named in the new certificate
as being authorized to execute and deliver Loan Documents and certificates
thereunder;
(e) Note. The Lender shall have received an executed Note payable to
the order of the Lender and otherwise in the form of Exhibit A hereto;
(f) Other Agreements. The Borrower shall have executed and delivered
each other Loan Document required hereunder and all certificates, instruments
and other documents then required to be delivered pursuant to any Loan
Documents, in each instance in form and substance reasonably satisfactory to the
Lender; and
(g) Financing Statements. The Borrower shall have executed and
delivered financing statements determined by the Lender and its counsel to be
necessary for perfecting the security interest of the Lender in the Collateral,
and such financing statements shall have been filed in the appropriate filing
offices.
(h) Initial Capitalization. The shareholders of the Borrower shall
have made the Initial Capital Contribution to the Borrower.
VI. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, without the prior written consent
of the Lender, from and after the date hereof and so long as the Revolving Loan
Commitment is in effect or any Obligations remain unpaid or outstanding, the
Borrower will:
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6.1 Reports. Furnish to the Lender the following:
(a) No Default. Within forty-five (45) calendar days after the end of
each of the first three fiscal quarters of each fiscal year and within ninety
(90) calendar days after the end of each fiscal year, a certificate signed by
the chief financial officer, treasurer or controller of the Borrower certifying
that, to the best of such officer's knowledge, after due inquiry, (i) the
Borrower has complied in all material respects (except where such covenant,
agreement and condition is already subject to a materiality standard, in which
case the certification will be without the materiality qualification immediately
preceeding this parenthetical) with all covenants, agreements and conditions in
each Loan Document and that each representation and warranty contained in each
Loan Document is true and correct with the same effect as though each such
representation and warranty had been made on the date of such certificate
(except to the extent such representation or warranty related to a specific
prior date), and (ii) no event has occurred and is continuing which constitutes
an Event of Default or Potential Default, or describing each such event and the
remedial steps being taken by the Borrower.
(b) Material Changes. The Borrower shall promptly notify the Lender of
any litigation, administrative proceeding, investigation, business development,
or change in financial condition which could reasonably have a material adverse
effect on the business, operations, assets or condition (financial or otherwise)
of the Borrower.
(c) Other Information. The Borrower will provide to the Lender such
financial and other information and reports regarding the operations, business
affairs, prospects and financial condition of the Borrower as the Lender may
reasonably request.
6.2 Taxes and Other Charges. Pay or cause to be paid after notice that the
same are due all taxes, assessments and governmental charges imposed upon the
Borrower, except as may be contested in good faith by the Borrower by
appropriate proceedings and for which adequate reserves have been established by
the Borrower as reflected in the Borrower's financial statements.
6.3 Corporate Existence. Preserve its corporate existence.
6.4 Compliance with Purchase Agreement and Regulations.
(a) Purchase Agreements. Comply with all terms, covenants and
conditions of each Purchase Agreement applicable to it.
(b) Regulations. Comply in all material respects with all Regulations
applicable to its business, the noncompliance with which could have a material
adverse effect on the business, operations, assets or condition (financial or
otherwise) of the Borrower.
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6.5 Notice of Events. Promptly upon discovery by the Borrower or any
officer of the Borrower of any of the events described in subsections (a)
through (e) hereof, the Borrower shall deliver to an officer of the Lender
telephone notice, and within three (3) calendar days of such telephone notice
deliver to the Lender a written notice, which describes the event and all action
the Borrower proposes to take with respect thereto:
(a) an Event of Default under this Agreement;
(b) any Potential Default or event which would entitle the Lender to
terminate or suspend the Revolving Loan Commitment hereunder or to accelerate
the Obligations;
(c) the institution of, any material adverse determination in, or the
entry of any default judgment or order or stipulated judgment or order in, any
suit, action, arbitration, administrative proceeding, criminal prosecution or
governmental investigation;
(d) any change in any Regulation, including, without limitation,
changes in tax laws and regulations, which could reasonably have a material
adverse impact on the ability of the Borrower to perform its obligations under
the Loan Documents or a material adverse effect on the business, operations,
assets or condition (financial or otherwise) of the Borrower; or
(e) a Termination Event under any Purchase Agreement between the
Borrower and a Provider.
6.6 Generally Accepted Accounting Principles. Maintain its books and
records at all times in accordance with Generally Accepted Accounting
Principles.
6.7 Use of Proceeds. Use the proceeds of the Loans to fund the purchase of
accounts receivable as contemplated by the Purchase Agreements.
6.8 Corporate Separateness. At all times ensure that:
(a) at least two directors of the Borrower are, and will at all times
remain, Independent (as such term is defined in the Borrower's Certificate or
Articles of Incorporation);
(b) the Borrower's funds and other assets are not commingled with
those of any other Person;
(c) the Borrower will not direct or participate in the management of
any other Person's operations and no affiliate of the Borrower will be permitted
to direct or participate in the management of the Borrower;
(d) the Borrower will conduct its business from an office separate
from that of any other Person;
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(e) the Borrower will have stationery and other business forms and a
mailing address and a telephone number separate from that of any other Person;
(f) the Borrower will at all times be adequately capitalized in light
of its contemplated business;
(g) the Borrower will at all times provide for its own operating
expenses and liabilities from its own funds;
(h) the Borrower will maintain its assets and transactions separately
from those of any other Person and reflect such assets and transactions in
financial statements separate and distinct from those of any other Person and
evidence such assets and transactions by appropriate entries in books and
records separate and distinct from those of any other Person;
(i) the Borrower will hold itself out to the public under its own name
as a legal entity separate and distinct from any other Person;
(j) the Borrower will not hold itself out as having agreed to pay, or
as being liable, primarily or secondarily, for any obligations of any other
Person;
(k) the Borrower will not maintain any joint account with any other
Person or become liable as a guarantor or otherwise with respect to any debt or
contractual obligation of any other Person;
(l) the Borrower will not make any payment or distribution of assets
with respect to any obligation of any other Person or grant any Lien on any of
its assets to secure any obligation of any other Person;
(m) the Borrower will not make loans, advances or otherwise extend
credit to any other Person;
(n) the Borrower will hold regular duly noticed meetings of its
stockholders and directors and make and retain minutes of such meetings;
(o) the Borrower will have bills of sale (or other similar instruments
of assignment) and, if appropriate, UCC-l financing statements, with respect to
all assets purchased from any other Person;
(p) the Borrower will file its own tax returns or, if it is a member
of a consolidated group, will join in the consolidated return of such group as a
separate member thereof,
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(q) the Borrower will maintain its assets in such a manner that it
will not be costly or difficult to segregate, ascertain or identify its
individual assets from those of any other Person; and
(r) the Borrower will comply with all provisions of its Certificate or
Articles of Incorporation and Bylaws and shall observe all corporate
formalities.
VII. NEGATIVE COVENANTS.
The Borrower covenants and agrees that, without the prior written consent
of the Lender, from and after the date hereof and so long as the Revolving Loan
Commitment is in effect or any Obligations remain unpaid or outstanding, the
Borrower will not:
7.1 Merger, Consolidation. Merge or consolidate with or into any other
Person.
7.2 Indebtedness for Borrowed Money. Incur, create, or permit to exist any
Indebtedness for Borrowed Money except the Obligations.
7.3 Liens. Create, assume or permit to exist any Lien on any of the
Borrower's property or assets, whether now owned or hereafter acquired, or upon
any income or profits therefrom, except Permitted Liens.
7.4 Guarantees. Guarantee or otherwise in any way become or be responsible
for indebtedness or obligations (including working capital maintenance,
take-or-pay contracts, etc.) of any other Person, contingently or otherwise.
7.5 Judgment, Attachment. Permit any of its assets to be subject to any
judgments, attachments or levies, which judgments, attachments or levies have
not been stayed by appeal, satisfied, bonded or discharged within thirty (30)
calendar days after service of notice thereof to the Borrower.
7.6 Transfer of Assets. Sell, transfer, pledge, assign or otherwise dispose
of any of its assets, except the resale of Purchased Accounts to a Provider
pursuant to the terms of the Purchase Agreement pursuant to which such Purchased
Accounts were acquired by the Borrower.
7.7 Borrowing Base. Permit the unpaid principal amount of the Loans
outstanding at any time, in the aggregate, to exceed the Borrowing Base;
provided, however, that this covenant shall not be deemed breached if, within
five (5) Business Days after each date on which the Borrower knows or should
know such aggregate unpaid principal amount of Loans exceeds such level, a
prepayment shall be made in accordance with the prepayment provisions of Section
2.7 in an amount sufficient to assure continued compliance with this covenant
going forward.
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VIII. DEFAULT.
8.1 Events of Default. The Borrower shall be in default if any one or more
of the following events ("Events of Default") occurs:
(a) Principal, Interest or Other Amounts. The Borrower fails to pay
any principal of or interest on the Note when due and payable or fails to pay
when it is due and payable any other amount payable under any Loan Document;
(b) Covenants.
(i) The Borrower fails to observe or perform as and when required
any of the terms, conditions or covenants contained in any Loan Document (other
than those referred to in clause (ii) below); or
(ii) Any Borrower fails to observe or perform as and when
required any of the terms, conditions or covenants contained in Sections 6.2,
6.4(b) or 6.6 of this Agreement, and such failure shall continue for thirty (30)
days after written notice to the Borrower by the Lender; or
(iii) Less than 100% of the voting securities of the Borrower are
owned directly (or through one or more wholly owned subsidiaries) by Lexington
Health Care Group, L.L.C.
(c) Representations, Warranties, Etc. Any representation or warranty
made by the Borrower herein or in any Loan Document or in any exhibit, schedule,
report or certificate delivered pursuant hereto or thereto shall prove to have
been false, misleading or incorrect in any material respect when made or deemed
to have been made;
(d) Bankruptcy, Etc. The Borrower is dissolved or liquidated, makes an
assignment for the benefit of creditors, files a petition in bankruptcy, is
adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any
receiver or trustee, commences any proceeding relating to itself under any
bankruptcy, reorganization, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, has commenced against it any the proceeding
which remains undismissed for a period of thirty (30) days, indicated its
consent to, approval of or acquiescence in any such proceeding, or any receiver
of or trustee for the Borrower or any substantial part of the property of the
Borrower is appointed, or the Borrower suffers any such receivership or
trusteeship to continue undischarged for a period of thirty (30) days;
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(e) Termination Event. A Termination Event occurs under any Purchase
Agreement; THEN and in every such event other than that specified in clause (d),
the Lender may terminate the Revolving Loan Commitment and may declare the Loans
and all other Obligations, including without limitation accrued interest, to be,
and the Loans and all other Obligations shall thereupon become, due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower. Upon the occurrence of any event specified in
clause (d) above, the Revolving Loan Commitment shall automatically terminate
and the Loans and all other Obligations, including without limitation accrued
interest, shall immediately be due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower. (Any date on which the Loans and such other obligations are declared
due and payable pursuant to this Section 8.1, shall be a "Revolver Termination
Date" for purposes of this Agreement.) Following the occurrence of a Revolver
Termination Date, the Lender may, in addition to exercising any and all rights
under this Agreement, exercise any rights provided under the UCC and other
applicable law.
IX. MISCELLANEOUS.
9.1 Waiver. No failure or delay on the part of the Lender in exercising any
right, power or remedy under any Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy under any Loan Document. The remedies provided
under the Loan Documents are cumulative and not exclusive of any remedies
provided by law.
9.2 Amendments. No amendment, modification, termination or waiver of any
Loan Document or any provision thereof nor any consent to any departure by the
Borrower therefrom shall be effective unless the same shall be in writing and be
signed by Lender and then any such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given. No notice to
or demand on the Borrower shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.
9.3 Governing Law. This Agreement and all rights and obligations of the
parties hereunder shall be governed by and be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
Pennsylvania or federal principles of conflict of laws.
9.4 Assignment. The Borrower may not assign this Agreement or its rights
hereunder without the prior written consent of the Lender. The Lender may sell,
assign, transfer and create a security interest in any of the Loan Documents,
including the Note, and any assignee or secured party may enforce the rights of
the Lender hereunder without the consent, participation or joinder of the
Lender.
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9.5 Notices. All notices, requests, demands, directions, declarations and
other communications between the Lender and the Borrower shall, except as
otherwise expressly provided, be mailed by registered or certified mail, return
receipt requested, or telegraphed, or telefaxed, or delivered in hand to the
applicable party at its address indicated opposite its name on the signature
page hereto. The foregoing shall be effective and deemed received three days
after being deposited in the mails, postage prepaid, addressed as aforesaid and
shall whenever sent by telegram, telegraph or telefax or delivered in hand be
effective when received. Either party may change its address by a communication
in accordance herewith.
9.6 Survival of Warranties and Certain Agreements. All agreements,
representations and warranties made or deemed made herein shall survive the
execution and delivery of this Agreement, the making of the Loans hereunder and
the execution and delivery of the Note. Notwithstanding anything in this
Agreement or implied by law to the contrary, the agreements of the Borrower set
forth in Sections 2.1 and 2.8, shall survive the payment of the Loans and the
termination of this Agreement. This Agreement shall remain in full force and
effect until the latest to occur of the termination of the Revolving Loan
Commitment or the repayment in full of all amounts owed by the Borrower under
any Loan Document.
9.7 Severability. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Agreement, the Note or
other Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
the Note or other Loan Documents or of such provision or obligation in any other
jurisdiction.
9.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. THE BORROWER HEREBY
CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
COMMONWEALTH OF PENNSYLVANIA AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S
ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTE,
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS.
THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY
AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND
BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, SUCH NOTE,
OR SUCH OTHER LOAN DOCUMENT. THE BORROWER DESIGNATES AND APPOINTS CT CORPORATION
SYSTEM (OR SUCH OTHER PERSON AS SHALL ACT AS REGISTERED AGENT OF THE BORROWER IN
PENNSYLVANIA AND AS TO WHOM THE BORROWER SHALL PROVIDE NOTICE IN WRITING TO THE
LENDER) AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY SUCH PERSON WHICH
IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF
SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE
BEING HEREBY ACKNOWLEDGED BY THE
Page 19 of 26
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BORROWER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY
SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO THE BORROWER, AS
APPLICABLE, AT ITS ADDRESS PROVIDED IN SECTION 9.5, EXCEPT THAT UNLESS OTHERWISE
PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE
VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY THE BORROWER REFUSES
TO ACCEPT SERVICE, THE BORROWER HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL
CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE
LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER
JURISDICTION.
9.9 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE
LENDER/BORROWER RELATIONSHIP ESTABLISHED HEREBY. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY
COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF
DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE BORROWER AND THE
LENDER EACH ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE
TRANSACTION, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. THE BORROWER AND THE LENDER EACH FURTHER WARRANTS AND
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE LOANS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
9.10 Counterparts; Effectiveness. This Agreement and any amendment hereto
or waiver hereof may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
9.11 Use of Defined Terms. All words used herein in the singular or plural
shall be deemed to have been used in the plural or singular where the context or
construction so requires.
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Any defined term used in the singular preceded by "any" shall be taken to
indicate any number of the members of the relevant class.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be executed by their proper corporate officers thereunto duly authorized as
of the day and year first above written.
LEXINGTON HOLDING CORPORATION
Address: By: /s/ Harry Dermer
35 Park Place --------------------------------
New Britain, CT 06052 Print Name: Harry Dermer
Title: President
Address: COPELCO/AMERICAN HEALTHFUND, INC
l00 Berwyn Park #105
Berwyn, PA 19312 By: /s/ Gregory S. Campbell
--------------------------------
Gregory S. Campbell
President
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EXHIBIT A
REVOLVING CREDIT NOTE
_______________________,19___
FOR VALUE RECEIVED, Lexington Holding CORPORATION, a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of
Copelco/American Healthfund, Inc. (the "Lender") the principal amount of
$1,800,000 or so much thereof as shall have been advanced as Loans under the
Agreement referred to below and shall be outstanding, such payment to be made at
such time or times and in the manner specified in the Agreement; provided,
however, that all Loans shall be repaid in full on or before the Revolver
Termination Date.
This Note is issued under and is subject to and secured by the Loan
and Security Agreement dated as of March__, 1996 between the Borrower and the
Lender (as from time to time amended, restated, supplemented or otherwise
modified, the "Agreement"). Terms used herein and not defined herein are used
with the respective meanings set forth in the Agreement.
Interest on the outstanding principal amount of each Loan evidenced by
this Note shall accrue at the rate or rates specified in, and be payable in
accordance with the terms of, the Agreement.
The Agreement provides for the acceleration of the payment of
principal of and interest on such Loans upon the happening of certain Events of
Default as defined in the Agreement.
The Borrower waives presentment, demand for payment, notice of
dishonor or acceleration, protest and notice of protest, and any and all other
notices or demands in connection with this Note, except any notice expressly
required by the Agreement.
This Note shall be governed by and construed in accordance with
Pennsylvania law.
LEXINGTON HOLDING CORPORATION
By:________________________
Title:
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EXHIBIT B
FORM OF LOAN REQUEST
_____________ 19
Copelco/American Healthfund, Inc.
Suite 112
200 Berwyn Park
Berwyn, PA 19312
Re: Loan and Security Agreement dated as of
Ladies and Gentlemen:
Pursuant to Section 2.3 of the Loan and Security Agreement described
above (the "Agreement"), the Borrower hereby requests the following Loan:
(1) The date of the proposed Loan is _________, 19__ (which day is a
Business Day).
(2) The aggregate amount of the proposed Loan is $_____________ (or
such lesser amount as may be borrowed under the terms of the Agreement).
(3) The proceeds of such Loan will be used for the purchase of the
accounts described on the attachment hereto.
The Borrower hereby certifies that the following statements are true
and correct on and as of the date hereof, and will be true and correct on and as
of the date of the proposed Loan, before and after giving effect thereto and to
the application of the proceeds therefrom:
(a) the representations and warranties of the Borrower contained in
the Agreement and the representations and warranties of the respective Provider
contained in each Purchase Agreement referred to in Section 5.1(a) of the
Agreement (in each case except to the extent such representations and warranties
by their express terms relate to an earlier date) are true and correct and will
be true and correct on the date of the Loan as if made on and as of such date;
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(b) the Borrower has complied and on the date of the Loan will be in
material compliance with all the terms, covenants and conditions of the
Agreement; and
(c) no Event of Default or event which, with notice or passage of time
or both, would constitute an Event of Default exists or shall result from the
proposed Loan.
Very truly yours,
LEXINGTON HOLDING CORPORATION
By:_________________________
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Disbursement Instructions
1. Disburse the following amounts to or for the account of the
following Providers at the accounts specified below:
Deposit
Provider Amount Account
-------- ------ -------
Such disbursements shall be on account of the Initial Payments payable
by the Borrower to such Providers for Batches of Purchased Accounts purchased
under the Accounts Purchase and Servicing Agreement dated as of_____________,
1996 (the "Purchase Agreements") among each of the Providers, the Borrower and
the Lender, as Administrator, net of (i) any payments due from the Providers to
the Borrower for Rejected Accounts, as specified in paragraph 2 below, and (ii)
any fees and expenses due from the Borrower or the Providers to the Lender, as
specified in paragraph 3 below.
2. Disburse the following amounts to the Collection Account under the
Purchase Agreement in payment of the repurchase of Rejected Accounts under
Section 7(d) of the Purchase Agreement by the following Providers:
Provider Amount
-------- ------
3. Credit to the Lender the following amounts for the fees and
expenses listed below due from the Borrower and/or the Providers under the Loan
Agreement and the Purchase Agreement respectively:
Fees and Expenses Amount
----------------- ------
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EXHIBIT C
[Form of Opinion]
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ACCOUNTS PURCHASE AND SERVICING AGREEMENT
ACCOUNTS PURCHASE AND SERVICING AGREEMENT dated as of March 14th, 1996,
(this "Agreement") among LEXINGTON HEALTH CARE GROUP LLC, a Connecticut
Corporation in its individual capacity (the "Provider", and, in its capacity as
servicer, the "Servicer"), LEXINGTON HOLDING CORPORATION, a Delaware
corporation, as purchaser (the "Purchaser") and Copelco/American Healthfund,
Inc., a Delaware corporation, as administrator (the "Administrator").
Preliminary Statement
The Provider and the Purchaser intend that from time to time the Provider
will sell and the Purchaser will purchase certain Eligible Accounts originated
by the Provider. The Provider has agreed to act as the Servicer to perform
certain servicing, administrative and collection functions in respect of the
Purchased Accounts. The Purchaser and the Provider desire that the Administrator
perform certain administrative functions in respect of the Purchased Accounts.
(Capitalized terms which are not defined in the text of this Agreement are used
as defined in Exhibit A.)
The parties, intending to be legally bound, hereby agree as follows:
1. Commitment to Sell and Purchase Eligible Receivables. Subject to the
terms and conditions of this Agreement, from the date of this Agreement until
March 13, 1998, the Provider agrees to sell to the Purchaser without recourse
(except to the extent provided herein), and the Purchaser agrees to purchase
from the Provider, all Eligible Accounts originated by the Provider.
2. Purchase Price.
(a) The purchase price of each Batch of Purchased Accounts sold to the
Purchaser will be the Initial Payment plus any Deferred Payment. The Initial
Payment is payable to the Provider on the Purchase Date of the Batch. The amount
of the "Initial Payment" is (i) the Initial ENV of the Batch, minus (ii) the
Loss Discount, the Provider Reserve Discount, the Servicing Fee Discount, and
the Funding Discount.
(b) On each Purchase Date after the Collections (as posted by the
Servicer and reconciled to the satisfaction of the Administrator) have reduced
the Purchaser Capital Investment of the related Batch to zero and have been
otherwise distributed in the manner described in Section 5(h), the excess of
such Collections will be paid to the Provider as a "Deferred Payment".
(c) A sample illustration of the calculation of the Initial Payment
and the Deferred Payment is attached as Schedule 1.
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3. Purchase Procedure.
(a) Not less than four (4) Business Days prior to any Purchase Date on
which Eligible Accounts are to be purchased, the Provider will deliver to the
Administrator the computer file data required by the Administrator to enable the
Administrator to process and value the Provider's receivables. Upon completion
of the processing of the receivables data, the Administrator will prepare and
deliver to the Provider an assignment of the Provider's Eligible Accounts to be
sold substantially in the form of Exhibit B (an "Assignment") and a letter
substantially in the form of Exhibit C (a "CFO Letter"). In the event that any
purchase of such Eligible Accounts would cause any Concentration Limit to be
exceeded or would cause any other term or condition hereof to be breached, the
Administrator will select which of such Eligible Accounts are to be purchased on
the next Purchase Date in a manner such that all Concentration Limits and other
terms of this Agreement are adhered to.
(b) No later than 11:00 a.m. (locally prevailing Eastern time) on the
second Business Day prior to each Purchase Date, the Provider will sign and
return to the Administrator the Assignment, the CFO Letter, and the following
documents (the Assignment, CFO Letter and such documents, collectively, a
"Purchased Account File"):
(i) Any documentation of the claim giving rise to such Account
and any other related documents or information which the Administrator may
reasonably request; and
(ii) Any UCC financing statements and releases that the
Administrator may require in respect of each Account, in form acceptable to the
Administrator.
(c) On the Purchase Date, the Purchaser will send the Provider a check
or wire transfer in the amount of the Initial Payment for the Eligible Accounts
in the purchased Batch, and upon such payment all right, title and interest of
the Provider in and to such Accounts will be vested in the Purchaser and the
Purchaser will become the absolute owner of such Accounts ("Purchased
Accounts"). Thereafter the Purchaser may exercise all rights to enforce and
collect such Accounts, except that with respect to any Purchased Accounts which
are Government Accounts, the Provider will collect such Accounts but solely in
its capacity as Servicer hereunder.
(d) Unless otherwise agreed by the Purchaser and the Administrator,
the initial Purchase Date shall be March 14, 1996.
(e) The Administrator's determinations of the ENV, Initial Payment,
Deferred Payment, Collections and other amounts to be determined or calculated
under this Agreement shall, in the absence of a manifest error, be conclusive
among the Administrator, the Provider and the Purchaser.
4. Conditions of Purchase:
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(a) The purchase of the first Batch of Eligible Accounts is subject to
the following conditions:
(i) The Purchaser shall have received a certificate from the
Secretary or Assistant Secretary of the Provider certifying the names, titles
and signatures of the officers authorized to sign this Agreement, the
Assignments and the other documents to be delivered hereunder, and certifying
the resolutions authorizing this Agreement and the transactions contemplated
hereby.
(ii) The Administrator shall have received certified copies of
the Provider's charter and bylaws (or operating agreement) and an original
certificate, dated within 30 days prior to such purchase, issued by the
jurisdiction in which the Provider was formed, confirming the legal existence of
the Provider.
(iii) The Provider shall have signed and delivered to the
Administrator such UCC financing statements as the Administrator may require to
perfect the transfer of Accounts to the Purchaser.
(iv) The Provider shall have entered into lockbox agreements
required by Section 5(e).
(v) The Purchaser and the Administrator shall have received an
opinion of counsel with respect to the Provider and the transactions
contemplated by this Agreement which is in form and content satisfactory to
them. Such opinion of counsel shall include an opinion that in the event that
the sale of Accounts is treated as the creation of a security interest, the
Purchaser will have a first priority perfected security interest in the
Accounts.
(vi) The Provider shall have paid the Purchaser an origination
fee equal to two percent (2%) of the Maximum Purchaser Capital Investment set
forth in (b)(i) below. In addition, the Provider shall have paid the
Administrator all fees due in connection with its due diligence review and the
installation of the Value Track System and the Provider shall have reimbursed
the Administrator for its reasonable legal fees (whether incurred with respect
to outside or in-house legal counsel) and expenses incurred in connection with
the preparation and negotiation of this Agreement.
(vii) Jack Friedler shall have executed and delivered to the
Purchaser or its assignee a guaranty of the obligations of the Provider under
this Agreement, in form and substance satisfactory to the Administrator (the
"Affiliate Guaranties").
(viii) The Provider will supply Copelco/American Healthfund, Inc.
internally prepared, consolidating and consolidated financial statements, in
reasonable detail with appropriate notes and prepared in accordance with
Generally Accepted Accounting Principles applied on a consistent basis for the
period ending December 31, 1995 and the year to date.
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(ix) The Provider will provide documentation, in form and in
detail satisfactory to the Administrator and its counsel regarding any due and
owing payroll tax obligation including any failure to remit trust taxes under
Section 6672 of the Internal Revenue Code, as amended, for the tax periods
September 30, 1995 and December 31, 1995, together with evidence satisfactory to
the Administrator in its sole discretion that any liability resulting therefrom
has been paid in full, satisfied and released, including by way of illustration,
an agreement of compromise and settlement accepted by the District Director of
the Internal Revenue Service.
(x) The Provider will provide a certified copy of the policy
insuring the life of Jack Freidler in an amount not less than $1,000,000 naming
the Provider as beneficiary.
(xi) The audited financial statements of the Provider for the
year ending December 31, 1995 (otherwise meeting the requirements set forth in
Section 8(c) hereof) shall, with respect to the Current Ratio and tangible net
worth, reflect values which do not materially differ from the financial
statements for the eleven months ending November 30, 1995; provided, however, so
long as the net income of the Provider as indicated on the December 31, 1995
financial statements is between 3.7 and 2.0 percent of net revenue, then the
Current Ratio will be acceptable provided it is at least 0.82:1 when calculated
pursuant to Section 8(g).
(b) The purchase of each Batch of Eligible Accounts is subject to the
following conditions:
(i) After giving effect to such purchase
(1) until such time as the Provider has collected payments
from Medicare, if applicable, representing at least 120 days of patient service,
the Purchaser Capital Investment shall not exceed 60% of the ENV of all
Purchased Accounts with respect to such claims, and thereafter the Purchaser
Capital Investment shall not exceed 80% of the ENV of all Purchased Accounts
with respect to such claims, in each case, less the aggregate Funding Discounts
with respect to all Purchased Accounts;
(2) the Purchaser Capital Investment shall not exceed 80% of
the aggregate of the ENV of all Purchased Accounts, less the aggregate Funding
Discounts with respect to all Purchased Accounts;
(3) the ENV of all Purchased Accounts shall not exceed the
Concentration Limit;
(4) the ENV of all Purchased Accounts which have not been
billed shall not, in the aggregate, exceed the ENV of all Purchased Accounts
which have been billed.
(5) the Purchaser Capital Investment shall not exceed One
Million Eight Hundred Thousand Dollars, $1,800,000.
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<PAGE>
(ii) All representations and warranties of the Provider shall be
true both before and after giving effect to such purchase, the Provider shall be
in compliance with this Agreement, and the Provider shall have certified such
matters to the Purchaser and the Administrator.
(iii) The Provider shall continue to be the Servicer under this
Agreement; no event shall have occurred and be continuing which would, with
notice or lapse of time or both, constitute a Termination Event; and the
Termination Date shall not have occurred.
(iv) The Provider shall have signed and delivered to the
Administrator notices, in the form of Exhibit D, directing the Obligors (other
than Obligors with respect to Government Accounts) to make payment to the
Commercial Lockbox; and, in the form of Exhibit E, directing the Obligors with
respect to Government Accounts to make payment to the Government Lockbox.
(v) All Accounts in the Batch shall have been recorded in the
Administrator's Value Track System, and the Administrator shall have received
the Purchased Account Files (as defined in Section 3(b)) with respect to such
Batch.
(vi) The lockbox arrangements required by Section 5(e) shall be
in effect.
(vii) The Provider shall have taken such other actions, including
the delivery of documents and opinions as the Purchaser or the Administrator may
reasonably request.
(viii) [OMITTED].
5. Collections; Deferred Payment.
(a) The Provider will cause all Collections with respect to all of the
Accounts, other than Government Accounts, to be sent directly to the Commercial
Lockbox, and will cause all Collections with respect to all of the Government
Accounts to be sent directly to the Government Lockbox. In the event that the
Provider receives any Collections that should have been sent to the Commercial
Lockbox or the Government Lockbox, the Provider will, promptly upon receipt and
in any event within one Business Day of receipt, forward such Collections to the
Commercial Lockbox or the Government Lockbox, as the case may be, and promptly
notify the Administrator of such event. Until so forwarded, such collections
shall be held in trust for the benefit of the Purchaser.
(b) The Provider shall not withdraw any amounts from the accounts into
which the Collections remitted to the Commercial Lockbox and Government Lockbox
are deposited and shall not change the procedures under the agreements governing
such Lockboxes and accounts.
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<PAGE>
(c) The Provider will cooperate with the Administrator in the
identification and reconciliation on a daily basis of all amounts received in
the Commercial Lockbox and the Government Lockbox. If any such amount, which in
the aggregate is in excess of five percent (5%) of the Collections for that
Purchase Period, is not identified or reconciled to the satisfaction of the
Administrator within ten Business Days of receipt, the Discount Rate shall be
increased by 400 basis points until such amount is identified or is reconciled
to the satisfaction of the Administrator, as the case may be. In addition, if
any such amount cannot be identified or reconciled to the satisfaction of the
Administrator, the Administrator may utilize its own staff or, if it deems
necessary, engage an outside auditor, in either case at the Provider's expense
(which in the case of the Administrator's own staff shall be in accordance with
the Administrator's then prevailing customary charges, plus expenses), to make
such examination and report as may be necessary to identify and reconcile such
amount. The Purchaser agrees to cause any payments received on Accounts which
were not Purchased Accounts to be promptly returned to the Provider once such
payments are so identified.
(d) The Provider will not send to or deposit in the Commercial Lockbox
or the Government Lockbox any funds other than payments made with respect to
Accounts.
(e) The Provider will enter into lockbox agreements in respect of the
Government Lockbox and Commercial Lockbox in such form and with CoreStates Bank
or such other bank as is acceptable to the Administrator. The Provider shall
instruct the bank maintaining the Government Lockbox and the Commercial Lockbox
to sweep all amounts deposited therein on a daily basis to an account of the
Purchaser or its assignee to be designated by the Administrator (the "Collection
Account").
(f) On each Purchase Date, the Administrator shall determine for each
Batch:
(i) the amount of Collections received on Purchased Accounts
which were made during the preceding Purchase Period (or in respect of Retained
Receipts, were determined to be payments made in respect of Purchased Accounts)
(the "Purchased Receipts");
(ii) any amount of Collections received on Accounts which were
not Purchased Accounts (the "Provider Receipts"); and
(iii) any amount of Collections received during the preceding
Purchase Period representing payments on which no determination has yet been
made as to whether such amounts pertain to Purchased Accounts or are Provider
Receipts, which shall be retained pending such identification (the "Retained
Receipts").
(g) On each Purchase Date, the Administrator shall cause to be
disbursed an amount equal to any Provider Receipts to the Provider.
(h) On each Purchase Date, the Administrator shall cause all Purchased
Receipts in respect of a Batch to be distributed in the following order of
priority:
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<PAGE>
(O) to the Administrator, an amount equal to the payroll tax
obligation of the Provider, including all penalties and interest to date.
(i) to the Purchaser, the Purchase Period Amount for all
prior Purchase Periods, less all Purchase Period Amounts previously distributed
under this clause (i) with respect to such Batch;
(ii) to the Purchaser, such amount as is necessary to reduce
Purchaser Capital Investment in respect of such Batch to zero;
(iii) to the Purchaser, such amount required to be paid with
respect to Rejected Accounts determined pursuant to Section 7(a);
(iv) to the Administrator, any unreimbursed expenses
required to be paid under Sections 8(j) or 15;
(v) to the Servicer, the Servicing Fee in respect of such
Batch;
(vi) to the Administrator, the Administrator Fee for all
prior Purchase Periods with respect to such Batch, less all Administrator Fees
previously distributed under this clause (vi) with respect to such Batch; and
(vii) to the Provider, the excess amount of such Purchased
Receipts, if any, which remain after the above distributions (such excess is the
Deferred Payment).
Notwithstanding the foregoing, all amounts payable in respect of a
Batch on any Purchase Date with respect to item (v) above (if the Provider is
then the Servicer) and item (vii) above shall not be paid to the Provider, and
instead shall remain in the Collection Account, if the following event (a
"Restricting Event") shall have occurred and be continuing: (A) if the Purchaser
Capital Investment under this Agreement, less the aggregate Funding Discounts
with respect to all such Purchased Accounts, exceeds 80% of the ENV of all
Purchased Accounts, less the aggregate Funding Discounts with respect to all
such Purchased Accounts. Upon the occurrence and during the continuation of a
Restricting Event, the Administrator shall cause all such amounts that would
otherwise have been paid to the Provider under items (v) and (vii) to be
distributed on account of any of items (i) - (iv) and (vi) in respect of any
other Batch or Batches that the Administrator may determine in its sole
discretion. Upon the termination of a Restricting Event, such amounts shall be
payable to the Provider.
6. Representations and Warranties.
(a) As of the date of this Agreement and on each Purchase Date, the
Provider shall be deemed to make each of the representations and warranties set
forth below:
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<PAGE>
(i) If a corporation or a partnership or limited liability
company, the Provider is duly organized, validly existing and in good standing
as such under the laws of the jurisdiction of its organization, and has all the
power and authority necessary to carry on its business as now conducted and to
enter into and perform the Purchase Documents, or, if a sole proprietorship, the
Provider has the necessary power and capacity under applicable law to carry on
its business as now conducted and to enter into and perform the Purchase
Documents.
(ii) Each Purchase Document has been duly authorized, executed
and delivered on behalf of and by the Provider, and each constitutes a legal,
valid and binding obligation of the Provider, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforceability of rights of creditors
generally and to the application of equitable principles.
(iii) The execution, delivery and performance of the Purchase
Documents by the Provider will not violate any law or regulation or any order,
writ, judgment, award, injunction or decree of any court or governmental
authority, or conflict with any provision of the Provider's organizational
documents (if a corporation or partnership) or any agreement to which the
Provider is a party or by which any of its assets are bound, or result in the
creation of any adverse claim upon any of the Provider's assets, except in favor
of the Purchaser.
(iv) The Provider owns and operates facilities to provide health
care services and has obtained all material licenses, accreditations and
approvals of governmental authorities and all other Persons necessary for the
Provider to own its assets, to carry on its business, to execute, deliver and
perform the Purchase Documents, and to receive payments from the Obligors and,
(A) if organized as a not-for-profit entity, has and maintains its status, if
any, as an organization exempt from federal taxation under Section 501(c)(3) of
the Internal Revenue Code and (B) if the Provider has ever been certified by the
JCAHO (or other nationally recognized organization providing accreditations if
the Provider is not the type of health care entity eligible for accreditation by
the JCAHO), the Provider either has obtained a current certification from the
JCAHO or such other relevant organization or has not had any such certification
withdrawn by JCAHO or such other relevant organizations. The Provider has not
been notified by any such governmental authority or other person during the
immediately preceding 24 month period that such party has rescinded or not
renewed, or intends to rescind or not renew, any such license or approval.
(v) There are no legal actions pending or threatened against the
Provider, its officers or directors, before any court, governmental authority or
arbitrator of any kind, nor has any injunction, writ or order been issued by any
court or governmental authority which could adversely affect the enforceability
of the Purchase Documents or the Provider's ability to perform thereunder.
(vi) Except as described in Section 4(a)(ix), the Provider has
timely filed all required tax returns and has paid or made adequate provision
for the payment of all taxes.
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<PAGE>
(vii) The Medicaid and Medicare cost reports of each facility and
of the home office of the Provider for all cost reporting periods have been
submitted when and as required to (A) as to Medicaid, the state agency, or other
HCFA-designated agent or agent of such state agency, charged with such
responsibility or (B) as to Medicare, the Medicare intermediary or other
HCFA-designated agents charged with such responsibility. No cost report
indicates and no audit has resulted in any determination that the Provider was
overpaid for Medicaid and Medicare by 5% or more in any of the most recent three
fiscal years covered by such audit.
(viii) The location of the Provider's principal place of
business, chief executive office and all locations where the Provider maintains
records with respect to its Accounts are set forth on the signature page of this
Agreement, and such principal place of business and chief executive office is
not located within the states of Wyoming, Utah, Colorado, New Mexico, Kansas or
Oklahoma. Except as disclosed in writing to the Administrator: (i) the Provider
has not changed any such location in the last five years, (ii) the Provider has
not changed its name in the last five years, and (iii) during such period the
Provider did not use, nor does the Provider now use, any fictitious or trade
name.
(ix) There is no defaulted Debt of the Provider, which (together
with any other debt of the Provider subject to cross-default thereby) has an
outstanding principal amount in excess of $50,000 and during the past three
years the Provider has not defaulted on any Debt in excess of such amount.
(x) The Provider is in compliance in all material respects with
all applicable laws, rules, regulations, and orders with respect to it, its
business and properties and all Accounts and related Contracts (including,
without limitation, all applicable environmental, health and safety
requirements) and all restrictions contained in any agreement, bond, note, or
other agreement or instrument binding on or affecting the Provider or its
property.
(xi) With respect to the Provider or any of its Subsidiaries,
there has occurred no event which has or is reasonably likely to have a material
adverse effect on the Provider's financial condition, business or operations,
including its ability to perform its obligations under the Agreement.
(xii) The Provider is solvent and will not become insolvent after
giving effect to the transactions contemplated by the Agreement; the Provider is
paying its Debts as they become due and has not incurred Debts beyond its
ability to pay such debts as they mature; the Provider, after giving effect to
the transactions contemplated by the Agreement, will have an adequate amount of
capital to conduct its business in the foreseeable future; and the sales of
Purchased Accounts hereunder are made in good faith and without intent to
hinder, delay or defraud present or future creditors of the Provider; and the
Provider's sales of Purchased Accounts to the Purchaser will be made for
reasonably equivalent value and fair consideration.
(xiii) The Government Lockbox and the Commercial Lockbox are the
only lockbox accounts maintained by the Provider, and each Obligor of an
Page 9 of 37
<PAGE>
Eligible Account has been directed by the notice attached as Exhibit D to the
Agreement, and is required to, remit all payments with respect to such Account
for deposit in the Commercial Lockbox (other than the Obligors of Government
Accounts which have been directed by the notice attached as Exhibit E to the
Agreement to remit all payments with respect to such Accounts for deposit in the
Government Lockbox).
(xiv) Each Assignment contains a complete and accurate list of
all Eligible Accounts sold by the Provider to the Purchaser as of its Purchase
Date and each CFO Letter contains an accurate summary of all Eligible Accounts
of the Provider as of its date.
(xv) This Agreement and each Assignment constitutes a valid
transfer and assignment to the Purchaser of all right, title and interest of the
Provider in and to the Purchased Accounts now existing and hereafter created and
if, contrary to the intent of the parties, are recharacterized as evidencing a
loan secured by the Purchased Accounts, evidence a first priority perfected
security interest in such Purchased Accounts.
(xvi) All information furnished by or on behalf of the Provider
to the Purchaser or the Administrator in connection with the Agreement or any
transaction contemplated thereby is true and complete in all material respects
when made and does not omit to state a material fact necessary to make the
statements contained therein not misleading when made.
(xvii) The Provider has not done and shall not do anything to
interfere with the collection of the Purchased Accounts and shall not amend or
waive the terms or conditions of any Purchased Account or any related Contract.
(xviii) The Provider has made and will continue to make all
payments to Obligors necessary to prevent any Obligor from offsetting any
earlier overpayment to the Provider against any amounts such Obligor owes on a
Purchased Account.
(xix) For federal income tax reporting and accounting purposes,
the Provider will treat the sale of each Purchased Account pursuant to the
Agreement as a sale, or absolute assignment, of its full right, title and
ownership interest in, such Purchased Account to the Purchaser and the Provider
has not in any other manner accounted for or treated the transactions in
Purchased Accounts.
(xx) Each pension or profit sharing plan to which the Provider is
a party has been funded in accordance with the obligations of the Provider set
forth in such plan.
(xxi) The transaction contemplated by the Agreement will not
cause the Purchaser to be subjected to any obligation to pay any transfer tax to
any governmental authority, including without limitation, any transfer, sales,
use, value-added, documentary stamp or other similar tax.
Page 10 of 37
<PAGE>
(b) As of each Purchase Date, the Provider shall be deemed to make,
with respect to each Account sold under this Agreement, each of the
representations and warranties which are set forth below:
(i) Each Purchased Account is an Eligible Account.
(ii) All documents relating to the Purchased Accounts that have
been delivered to the Administrator are true and correct in all material
respects. With respect to each Purchased Account, the Provider has delivered to
the Obligor all requested supporting claim documents and all information set
forth in the bill and supporting claim documents is true, complete and correct
in all material respects.
(iii) There is no lien or adverse claim in favor of any third
party, nor any filing against the Provider, as debtor, covering or purporting to
cover any interest in any Purchased Account, except as been released by the
party holding such adverse claim.
(iv) Each Purchased Account is (A) payable in an amount not less
than its Estimated Net Value by the Obligor identified by the Provider as being
obligated to do so, and is recognized as such by the Obligor, (B) the legally
enforceable obligation of such Obligor, and (C) an account receivable or general
intangible within the meaning of the UCC of the state in which the Provider has
its principal place of business, or is a right to payment under a policy of
insurance or proceeds thereof and is not evidenced by any instrument or chattel
paper. There is no payor other than the Obligor identified by the Provider as
the payor primarily liable on any Purchased Account.
(v) No Purchased Account (A) requires the approval of any third
person for such Account to be purchased, (B) is subject to any legal action,
proceeding or investigation (ending or threatened), dispute, set-off,
counterclaim, defense, abatement, suspension, deferment, deductible, reduction
or termination by the Obligor, (C) is past, or within 180 days of, the statutory
limit for collection applicable to the Obligor, or (D) was generated by a
Provider facility located in any of the states of Wyoming, Utah, Colorado, New
Mexico, Kansas or Oklahoma.
(vi) The Provider does not have any guaranty of, letter of credit
support for, or collateral security for, any Purchased Account, other than any
such guaranty, letter of credit or collateral security as has been assigned to
the Purchaser.
(vii) The services constituting the basis of each Purchased
Account (A) were medically necessary for the patient and (B) at the time such
services were rendered, were fully covered by the insurance policy or Contract
obligating the applicable Obligor to make payment with respect to the Purchased
Account (and the Provider has verified such determination), and (C) the patient
received such services in the ordinary course of the Provider's business.
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(viii) The fees and charges charged for the services constituting
the basis for the Purchased Accounts were when rendered and are currently
consistent with the usual, customary and reasonable fees charged by other
similar medical service providers in the Provider's community or the community
in which the patient resides, whichever is less, for the same or similar
service.
(ix) The Obligor with respect to each Purchased Account is
located in the United States, and is (A) a party which in the ordinary course of
its business or activities agrees to pay for healthcare services received by
individuals, including, commercial insurance companies and non-profit insurance
companies issuing health, or other types of insurance, employers or unions,
self-insured healthcare organizations, preferred provider organizations, and
health insured, prepaid maintenance organizations, (B) a state, an agency or
instrumentality of a state or a political subdivision of a state, or (C) the
United States or an agency or instrumentality of the United States.
(x) The following have been delivered to the Administrator: (A)
an Assignment regarding payment with respect to each Purchased Account (other
than Government Accounts), along with a notice to the related Obligor; (B) UCC
search reports with respect to the Provider; (C) copies of each of the
accreditations, licenses and certifications referred to in Section 6(a)(iv); and
(D) copies of each of the documents required to be delivered pursuant to Section
4 of this Agreement.
(xi) The insurance policy or Contract obligating an Obligor to
make payment (A) does not prohibit the transfer of such payment obligation from
the patient to the Provider, and (B) is and was in full force and effect and
applicable to the patient at the time the services constituting the basis for
the Purchased Account were performed.
(xii) The representations and warranties made by the Provider in
the Purchase Documents and all financial or other information delivered to the
Administrator with respect to the Provider and the Purchased Accounts do not
contain any untrue statement of material fact or omit to state a material fact
necessary to make the statement made not misleading.
(xiii) A copy of each related Contract to which the Provider is a
party has been delivered to the Purchaser unless the Provider shall have, prior
to the related Purchase Date, certified in an Officer's Certificate that such
delivery is prohibited by the terms of the Contract or by law, and the
circumstances of such prohibition.
(xiv) The Billing Date with respect to such Account is no later
than 45 days after the discharge date or date of service of the Account, except
in the case of an Account payable by Medicare, Medicaid, HMOs or PPOs which
prohibit weekly billing, in which case the Billing Date shall be as required by
the related Contract, or if none exists or is specified, no later than is the
norm in respect of such providers or Obligors, as determined by the
Administrator based on an analysis of payment records.
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(xv) Such Account has an Estimated Net Value which, when added to
the Estimated Net Value of all other Accounts owing by the same Obligor and
which constitute Purchased Accounts hereunder, does not exceed any applicable
Concentration Limit.
(xvi) Neither such Account nor the related Contract contravenes
any laws, rules or regulations applicable thereto (including, without
limitation, laws, rules and regulations relating to usury, consumer protection,
truth-in-lending, fair credit billing, fair credit reporting, equal credit
opportunity, fair debt collection practices and privacy) and no party to such
related Contract is in violation of any such law, rule or regulation.
(xvii) As of the applicable Purchase Date, no Obligor on such
Account is bankrupt, insolvent, or is unable to make payment of its obligations
when due, and no other fact exists which would cause the Provider reasonably to
expect that the amount billed to the related Obligor for such Account will not
be paid in full when due.
(c) No representation or warranty made by the Provider with respect to
any Purchased Account will be deemed to constitute any guaranty of collection.
(d) The representations and warranties made in this Section 6 will
survive the sale of any Accounts and the termination of this Agreement.
7. Rejected Accounts; Reserve; Etc.
(a) Rejected Accounts. If any party to this Agreement obtains
knowledge that any representation or warranty with respect to any Purchased
Account is untrue, such party will give prompt written notice thereof to each
other party to this Agreement. If any representation or warranty made with
respect to a Purchased Account is untrue, the Provider will repurchase such
Account (a "Rejected Account") from the Purchaser. Such repurchase will occur on
the next Purchase Date following such written notice. The repurchase price (the
"Repurchase Price") will be equal to the Initial ENV of the Rejected Account
less any collections with respect to such Rejected Account pursuant to Section
5(h)(ii). Upon payment of the Repurchase Price, the Purchaser will reassign the
Rejected Account to the Provider without any representation, warranty or
recourse whatsoever, and the Purchaser shall have no further obligation to the
Provider with respect to such Rejected Account. After receipt of any payment of
all or any part of the Repurchase Price for any Rejected Account, if the
Purchaser is compelled to surrender such payment or any portion thereof, the
Provider will be liable to the Purchaser for the amount of such payment
surrendered.
(b) Disputed Accounts. If a Purchased Account is not collected within
120 days of its Billing Date, the Provider agrees to seek a written confirmation
from the Obligor that the amount payable is not in dispute. If within 30 days
thereafter the Purchased Account is still unpaid and the Provider has not
obtained such confirmation, unless the Obligor is then subject to a bankruptcy,
receivership or similar proceeding, the Purchased Account will be conclusively
presumed to be a Rejected Account due to a breach of a representation or
warranty.
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(c) [OMITTED].
(d) Payment for Rejected Accounts. In the event a Rejected Account is
required to be repurchased by the Provider, the Administrator shall cause the
amount of the Repurchase Price to be paid by the following means, in the
following order of priority: (i) an adjustment in the Servicing Fee (provided
that the breach giving rise to the Rejected Account occurred during such time as
the Provider acted as Servicer), (ii) an adjustment in any Deferred Payment due
the Provider, and/or (iii) an adjustment in any Initial Payment. On behalf of
the Purchaser the Administrator may also demand payment of the Repurchase Price
directly from the Provider or may pursue any other rights under this Agreement,
at law or in equity to obtain the Repurchase Price.
(e) Adjustments to Schedule, Etc. From time to time, in each case upon
not less than two Business Days' notice to the Provider, the Administrator may
amend all or any part of Schedule 2 (including, without limitation, the Provider
Reserve Percentage, the Loss Discount Percentage, the Servicing Fee Percentage
and the Concentration Limits) in order to reflect, in its reasonable judgment,
the experience with the Provider (including, by way of illustration, to adjust
for any known or potential offsets by Medicare or Medicaid), the Servicer or the
Purchased Accounts. In addition, upon not less than three days notice to the
Provider, the Administrator may amend all or any part of Schedule 2 in order to
comply with the requirements of any nationally recognized statistical rating
organization or party guaranteeing, rating or insuring payment of any
Securities.
(f) Disclaimer of Right of Repurchase. Except as otherwise set forth
in this Section 7, the Provider shall have no right to repurchase any Purchased
Accounts.
8. Covenants. The Provider agrees as follows:
(a) The Provider will execute such UCC financing statements (naming
the Purchaser as the purchaser/secured party) that the Administrator reasonably
requests with respect to any Purchased Accounts. From time to time, upon
reasonable request, the Provider will furnish any additional information, will
execute and deliver any additional agreements, documents or financing statements
and will take such other actions as the Administrator deems necessary or
desirable to give effect to the Purchase Documents, to evidence and perfect the
assignment of title to the Purchased Accounts or to aid the collection of the
Purchased Accounts.
(b) The Provider will keep its books and records in accordance with
generally accepted accounting principles and will mark its books and records,
including any computer files, to indicate which Accounts have been sold to the
Purchaser. From time to time the Purchaser or the Administrator or their
respective agents or designees may visit the offices of the Provider to (i)
examine its books and records and any related accountants' reports, (ii) make
copies or extracts therefrom, (iii) discuss the affairs of such Provider with
its employees, (iv) inspect the property of the Provider and (v) assist the
Provider in performing its obligations under this Agreement. In addition, the
Administrator may discuss the affairs of the Provider with the Provider's
accountants and attorneys.
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(c) The Provider will deliver to the Administrator (i) as soon as
available, but in no event later than 45 days after the end of each fiscal
quarter, the combined and combining financial statements of the Provider for
such period and for that portion of its fiscal year through the end of such
period, together with a certificate from the chief financial officer of the
Provider that the Provider and its Affiliates are in compliance with the
financial covenants set forth in Section 8 hereof, (ii) as soon as available but
in no event later than 120 days after the end of the Provider's fiscal year, the
combined and combining consolidated financial statements of the Provider for
such year, accompanied by a report and unqualified opinion of a firm of
independent certified public accountants selected by the Provider and acceptable
to the Administrator, together with a certificate from such accountants that the
Provider and its Affiliates are in compliance with the financial covenants set
forth in Section 8 hereof (provided, however, that in making their examination
such accountants shall not be required to go beyond the bounds of generally
accepted auditing procedures for the purpose of certifying financial statements)
and any letters of comments or recommendations issued by the independent
certified public accountants including, but not limited to, those comments
related to the internal accounting controls of the Provider and (iii) promptly
upon request, such other information concerning the Provider as the
Administrator may from time to time request, including Medicare cost reports and
audits, annual reports, securities law filings and reports to any
securityholders.
(d) The Provider will promptly notify the Administrator in the event
of any legal action, dispute, setoff, counterclaim, defense or reduction that is
or may be asserted by an Obligor with respect to any Purchased Account. The
Provider will make all payments to each Obligor necessary to prevent any setoff
against any amounts payable with respect to any Purchased Accounts.
(e) The Provider will not impede or interfere with the collection of
the Purchased Accounts, amend, waive or otherwise permit or agree to any
deviation from the terms or conditions of any Purchased Account, or purport to
sell, assign or grant a security interest in any Purchased Account. If
additional information with respect to any Account is requested by the Obligor
on such Account, the Provider will promptly provide the same. If any error has
been made, the Provider will promptly correct the same and, if necessary, rebill
the Purchased Account.
(f) The Provider will treat the purchase by the Purchaser of Purchased
Accounts as a sale for all purposes, including tax and accounting. The Provider
will respond to any inquiries about the ownership of any Purchased Accounts by
stating that it is no longer the owner and that it sold such Purchased Accounts
to the Purchaser.
(g) To help assure that the Provider will be able to perform its
obligations under this Agreement, including its obligation to repurchase
Rejected Accounts, the Provider agrees to maintain a pre-tax profit margin of no
less than two percent (2%) of net revenues based each fiscal quarter on the
average of such quarter and the three immediately preceding fiscal quarters and
tested against the consolidated statements of income delivered to the
Administrator pursuant to Section 8(c). The Provider further agrees to maintain
a Current Ratio of at least 0.85:1, 0.95:1, for the fiscal periods ending
December 31, 1995, March 31, 1996, respectively, and thereafter at 1.0:1, to be
computed and tested against the consolidated
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statements of income delivered to the Administrator pursuant to Section 8(c).
For purposes of determining the Current Ratio in the preceeding sentence, then
the liability of the Purchaser, in its capacity as Borrower to the
Administrator, in its capacity as Lender, as of any date of determination shall
be treated as a current liability.
(h) The Provider will notify the Administrator (i) immediately of any
default by it under any material agreement, including any financing agreement,
to which it is a party, (ii) immediately upon learning that any representation
or warranty made by the Provider in this Agreement is false in any material
respect, and (iii) 30 days prior to any change of its name or any of its
locations shown on the signature page of this Agreement.
(i) At the request of the Administrator, the Provider will promptly
provide and verify the accuracy of information concerning the Provider and its
Affiliates of the type provided to the Administrator in connection with the
Administrator's decision to enter into this Agreement and such other information
concerning the Provider and its Affiliates as the Administrator may reasonably
request in connection with any offering documents with respect to the
contemplated securitization of, and sale of securities backed by, the Purchased
Accounts (the "Securities"), including, without limitation, all information
necessary to provide full and complete disclosure of all material facts
pertaining to an investment in the Securities in compliance with federal and
state securities and blue sky laws, and such information may be published in
such offering documents and relied upon by the Purchaser and any party arranging
the offering of such Securities by the Purchaser or its assignee. Such
information will be true and complete in all material respects and will not omit
to state a material fact necessary to make the statements contained in such
information, in light of the circumstances under which they were made, not
misleading.
(j) The Provider will pay the reasonable third party expenses of the
Administrator incurred in connection with the transactions contemplated by this
Agreement including, without limitation, wire transfer fees, lockbox fees and
audit fees. In addition, the Provider will pay fees for Accounts analysis or
other business analysis conducted by the Administrator or its representatives
(including, without limitation, verifications of Accounts) in connection with
this Agreement, the need for which shall be determined by the Administrator.
Such fees shall be charged per day, per person, for each person employed to
perform such examinations, together with all costs, disbursements and expenses
incurred by Administrator and the person performing such examination. Such
analysis and audits may be performed on a quarterly basis, or more frequently if
deemed necessary or desirable in the sole discretion of the Administrator.
(k) The Provider will retain the first one million dollars of net
income, determined in accordance with GAAP; provided, however, that the Provider
may make such distributions to its shareholders in an amount not in excess of an
amount equal to the personal income tax (federal and state) levied or to be
levied on such income to the extent such income of the Provider is attributed to
such shareholders without actual distribution thereof.
9. Intent of Parties; Security Interest. The Provider and the Purchaser
confirm that the transactions contemplated by this Agreement are intended as
purchases and sales
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rather than loans. In the event that, contrary to such intent, any purchase of
Purchased Accounts is characterized as a loan and not a sale, the Provider will
be deemed to have granted (as of the date of this Agreement), and the Provider
does hereby grant, to the Purchaser a security interest in and to such Purchased
Accounts, all items and amounts deposited and held from time to time in the
Commercial Lockbox, the Government Lockbox, and the Collection Account, all
rights of payment under the Purchased Accounts and the Contracts related
thereto, and all proceeds thereof to secure all amounts to which the Purchaser
is entitled hereunder. In such event this Agreement will be deemed to be a
security agreement.
10. Servicing.
(a) The Purchaser and the Administrator hereby appoint the Servicer as
agent for the Purchaser to service the Purchased Accounts and to enforce the
Purchaser's rights and interests in each Purchased Account and to serve in such
capacity until the termination of its responsibilities pursuant to paragraphs
(g) or (h). The Servicer agrees to perform its duties and obligations set forth
herein. The Servicer may, with the prior written consent of the Administrator,
subcontract with a subservicer (a "SubServicer") for collection, servicing or
administration of the Accounts except, that (i) the Servicer shall continue to
perform its obligations with respect to Collections of Government Accounts, (ii)
the Servicer shall remain liable for the performance of the duties and
obligations of the Servicer, notwithstanding any arrangements it may have with
any SubServicer, (iii) any agreement relating to such subservicing shall be
assignable to the Purchaser, the Administrator or a third party designated by
either of them, and (iv) any agreement that may be entered into relating to the
Purchased Accounts involving a SubServicer shall be between the SubServicer and
the Servicer alone, and the Purchaser and Administrator shall have no
obligations, duties or liabilities with respect to the SubServicer.
(b) The Servicer shall conduct the servicing, administration and
collection of the Purchased and nonpurchased Accounts and shall take, or cause
to be taken, all actions as may be necessary or advisable to service, administer
and collect each Purchased and nonpurchased Account, all in accordance with (i)
customary and prudent servicing procedures for health care accounts receivable
of a similar type, (ii) all applicable laws, rules and regulations (including
Medicare, Medicaid and CHAMPUS regulations), and (iii) without limitation as to
its obligations under the preceding clauses (i) and (ii), no less a standard of
care than that which it applies to Accounts it services for its own account. Any
documents relating to the Purchased Accounts in the possession of the Servicer
shall be held in trust by the Servicer for the benefit of the Purchaser and any
assignee of the Purchaser.
(c) The duties of the Servicer shall include, without limitation:
(i) preparing and submitting claims to, and handling post-billing
liaison with, Obligors;
(ii) arranging for the direct remittance of all Collections to
the Commercial Lockbox (other than Collections with respect to Government
Accounts, which it shall arrange to be remitted directly to the Government
Lockbox) and remitting promptly, and in
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any event within one Business Day of receipt, to the Commercial Lockbox or the
Government Lockbox, as the case may be, any Collections the Servicer or the
Provider may receive. Until so remitted, such collections shall be held in trust
for the benefit of the Purchaser;
(iii) maintaining all necessary servicing records with respect to
the Purchased Accounts and providing such reports to the Administrator in
respect of the servicing of the Purchased Accounts as may be required hereunder
or as the Administrator may reasonably request;
(iv) at any time and from time to time at reasonable intervals
and during regular business hours, permitting the Purchaser, the Administrator
or any of their respective agents, designees or representatives, (A) to examine
and make copies of and abstracts from all servicing records, and (B) to visit
the offices and properties of the Servicer for the purpose of examining such
servicing records, and to discuss with employees of the Servicer matters
relating to the Accounts or the Servicer's performance under this Agreement; and
(v) immediately notifying the Administrator of (A) any action,
suit, proceeding, dispute, offset, deduction, defense or counterclaim that, to
the knowledge of the Servicer, is or may be asserted by an Obligor with respect
to any Purchased Account and (B) the occurrence of a Termination Event or an
event which, with notice or lapse of time or both would be a Termination Event
(such notice shall set forth the details of such event and any action which the
Servicer has taken or proposes to take with respect thereto).
(d) Each of the Provider and the Purchaser hereby authorizes the
Servicer (including any successor thereto) to take any and all reasonable steps
in its name and on its behalf necessary or desirable and not inconsistent with
the sale of the Purchased Accounts to the Purchaser, to collect all amounts due
under any and all Purchased Accounts, including, without limitation, endorsing
either of their names on checks and other instruments representing Collections,
executing and delivering any and all instruments of satisfaction, or of partial
or full release or discharge, and all other comparable instruments, with respect
to the Purchased Accounts and, after the delinquency of any Purchased Account,
to commence proceedings with respect to enforcing payment of such Purchased
Accounts, and adjusting, settling or compromising the Account or payment
thereof, to the same extent as the Provider could have done if it had continued
to own such Account. In no event shall the Servicer be entitled to make the
Purchaser or the Administrator a party to any litigation without such party's
express prior written consent.
(e) As compensation for its servicing activities hereunder, the
Servicer shall be entitled to receive a servicing fee equal to the Servicing Fee
Percentage (as set forth in Schedule 2) of the Purchased Receipts minus any
adjustment to such amount pursuant to Section 7(d) (the "Servicing Fee"). Such
Servicing Fee shall be payable as provided in Section 5(b). The Servicer shall
be required to pay for all expenses incurred by the Servicer in connection with
its activities hereunder without reimbursement and shall not be entitled to any
payment other than the Servicing Fee.
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(f) The Servicer agrees to comply with all laws, rules and regulations
applicable to it and with all Contracts to which it is a party and to maintain
its existence and all authorizations necessary or desirable to carry out its
duties hereunder. Without the written consent of the Administrator the Servicer
shall not:
(i) sell, assign or otherwise dispose of, or create or suffer to
exist any adverse claim upon or with respect to any Purchased Account or related
Contract, or upon or with respect to the Government Lockbox or the Commercial
Lockbox or any other account to which any Collections of any Purchased Account
are deposited, or assign any right to receive income in respect thereof;
(ii) extend, amend or otherwise modify the terms of any Purchased
Account, or amend, modify or waive any term or condition of any related
Contract;
(iii) make any material change in the character of its business;
(iv) make any change in the instructions to Obligors to make
payment to the Government Lockbox or the Commercial Lockbox; or
(v) merge or consolidate with, acquire all or substantially all
of the assets or capital stock of, or otherwise combine with, any person, or
permit any of its subsidiaries to do so.
(g) The Servicer shall not resign from its duties under this Agreement
except upon a determination that (a) the performance of such duties has become
impermissible under applicable law, and (b) there is no reasonable action which
the Servicer could take to make the performance of such duties permissible under
applicable law. Any such determination permitting the resignation of the
Servicer shall be evidenced as to clause (a) by an opinion of counsel, at the
Servicer's expense, to such effect delivered to the Administrator. No such
resignation shall become effective until a Successor Servicer acceptable to both
the Purchaser and the Administrator shall have assumed the responsibilities and
obligations of the Servicer in accordance with this Agreement.
(h) An "Event of Servicing Termination" shall occur if a Termination
Event occurs pursuant to Section 12(b) or if within any twelve month period two
or more default notices are given by the Administrator under clause (i) of
Section 12(b) (whether or not the Provider or Servicer cures the defaults
described in such notices). Upon the occurrence of an Event of Servicing
Termination the Administrator may appoint another party (a "Successor
Servicer"), which may be the Administrator, to assume the obligations of the
Servicer. In connection therewith, the Successor Servicer shall succeed to and
assume all of the Servicer's responsibilities, rights, duties and obligations as
Servicer (but not in any other capacity) under this Agreement except with
respect to Government Accounts. The Servicer shall provide the Successor
Servicer with all information, documents and records, to the extent required by
the Successor Servicer to perform its duties. The Servicer shall also terminate
its activities as Servicer hereunder, except its collection functions in respect
of Government Accounts, in a manner acceptable to the Administrator and the
Successor Servicer so as to facilitate the transfer
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of servicing to the Successor Servicer including, without limitation, accounting
for all funds related to the Purchased Accounts. The Servicer shall terminate
each subservicing agreement that may have been entered into, and the Successor
Servicer shall not be deemed to have assumed any of the Servicer's interest
therein or to have replaced the Servicer as a party to any such agreement.
11. Termination.
Following the Termination Date no Deferred Payments and, if the
Provider is acting as the Servicer, no further Servicing Fees, will be payable
until the Evaluation Date immediately following the month in which Collections
result in reducing the Purchaser Capital Investment to zero. On such Evaluation
Date any amounts that otherwise would have been payable as a Deferred Payment or
Servicing Fee will be disbursed to the Provider. In addition, any Purchased
Accounts which then have an ENV greater than zero shall be transferred to the
Provider. Such disbursement and transfer will constitute the final Deferred
Payment to the Provider with respect to all Batches.
12. Termination Events.
(a) Upon 90 days notice to the Administrator, the Provider may
designate a Termination Date which is earlier than the end of the period
specified in Section 1.
(b) Each of the following events shall constitute a "Termination
Event":
(i) the Provider or the Servicer fails to perform or observe in
any material respect any term, covenant or agreement contained in this Agreement
or any related documents (other than a failure described in clause (xii) below)
and such failure continues for five Business Days after notice by the
Administrator (or in the case of a failure to repurchase Rejected Accounts,
fails to effect such repurchase within the period specified in Section 7(a)), or
any representation or warranty contained in Section 6(a) proves to be incorrect
in any material respect;
(ii) any judgment against the Provider for the payment of money
in the amount of $50,000 or more (other than one covered by adequate insurance
after giving effect to any deductible) remains unpaid or unstayed on appeal for
a period of 30 days or more or any governmental authority files notice of a lien
on any assets of the Provider (other than a lien which is limited to property
other than Accounts and does not have a material adverse effect on the financial
condition or business of the Provider);
(iii) any failure by the Provider to make any payment or deposit
required to be made hereunder or otherwise due the Purchaser or the
Administrator and the continuance of such failure for a period of two Business
Days after the date upon which the Provider becomes aware of or has received
written notice of such failure;
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(iv) the Administrator determines that an event which adversely
affects the collectibility of a material portion of the Purchased Accounts has
occurred other than due to the financial inability of any Obligors to pay;
(v) Accounts which became Rejected Accounts during the four weeks
prior to the end of the preceding calendar month, as a percentage of the Initial
ENV of all Purchased Accounts purchased during the same period exceeds five
percent (5%);
(vi) a material adverse change in the business or prospects of
the Provider (including a change in control or shareholders of the Provider) or
in the Obligor reimbursement rates for the Provider's services, including
without limitation, a change in federal or state laws or rules affecting the
provision of, or payment for, medical services;
(vii) a material change occurs in the marketplace for the
delivery or financing of healthcare services which causes a material adverse
change in the business or prospects of the Purchaser or the Administrator, or
any event occurs which results in the early amortization or termination of
commitments made to the Purchaser for the financing or repurchase of Accounts;
(viii) the Purchase Documents cease for any reason to evidence
the transfer to the Purchaser (or its assignees or transferees) of title to, and
ownership of, the Purchased Accounts;
(ix) any change in law prevents the sale of Government Accounts
under this Agreement, or any change in law or accounting principles occurs which
the Administrator believes would jeopardize treatment of the transactions
contemplated by this Agreement as sales;
(x) any instruction or agreement regarding the Commercial Lockbox
or the Government Lockbox or the bank accounts related thereto is amended or
terminated without the written consent of the Administrator, or the Provider or
the Servicer fails, within one Business Day of receipt, to forward Collections
it receives with respect to any Purchased Accounts to the Commercial Lockbox or
the Government Lockbox, as the case may be;
(xi) the Administrator appoints a Successor Servicer pursuant to
Section 10(h);
(xii) the Provider generally fails to pay its debts as such debts
become due, or admits in writing its inability to pay its debts generally, or
makes a general assignment for the benefit of creditors;
(xiii) the Provider is dissolved or liquidated, makes an
assignment for the benefit of creditors, files a petition in bankruptcy, is
adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any
receiver or trustee, commences any proceeding relating to itself under any
bankruptcy, reorganization, readjustment of debt or dissolution or liquidation
law or statute of any jurisdiction, has commenced against it any bankruptcy,
reorganization or similar case or proceeding relating to it or its property
under the law of any
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jurisdiction which is not dismissed within sixty (60) days, or the Provider
seeks the appointment of a trustee or receiver or a trustee or receiver is
appointed for itself or any substantial part of its assets or permits such to
continue undismissed for a period of sixty (60) days; or,
(xiv) (A) the average ENV of the Purchased Accounts under all
Affiliate Purchase Agreements during the preceding three calendar months is less
than 120% of the average Purchaser Capital Investment under all Affiliate
Purchase Agreements during such period, or (B) the average ENV of the Purchased
Accounts under all Affiliate Purchase Agreements during any calendar month is
less than 115% of the average Purchaser Capital Investment under all Affiliate
Purchase Agreements during such period, or (C) the average ENV of the Purchased
Accounts under all Affiliate Purchase Agreements during any two consecutive
Purchase Periods is less than 110% of the average Purchaser Capital Investment
under all Affiliate Purchase Agreements during such period (for purposes of this
clause (xvi), the average ENV of the Purchased Accounts during a given period
shall be computed based on the ENV of the Purchased Accounts as of each Purchase
Date during such Period, and the average Purchaser Capital Investment during a
given period shall be computed by (i) treating the daily amount of the ENV of
the Purchased Accounts as the ENV of the Purchased Accounts as of the most
recent Purchase Date, (ii) totaling the daily amounts of the ENV of the
Purchased Accounts for all the days in the period, and (iii) dividing by the
number of days in the period. The average Purchaser Capital Investment shall be
computed in a similar manner.).
(xv) If the Administrator shall receive from either Jack Freidler
or Stefani Freidler, or both, a notice that they have cancelled either of their
respective guaranties given the Administrator of even date hereof.
(c) If a Termination Event occurs under clauses (i) through (ix),
inclusive, of Section 12(b), then the Administrator or the Purchaser may, by
delivery of a notice to the Provider, declare the Termination Date to have
occurred. If a Termination Event occurs under any other clause of Section 12(b),
then the Termination Date shall be deemed to have occurred automatically without
notice of any kind. Following the occurrence of the Termination Date (whether
under Section 1, Section 12(a) or Section 12(b)) no Deferred Payments and, if
the Provider is acting as the Servicer, no further Servicing Fees shall be
payable, except in either case as provided in Section 11. Also, following the
occurrence of the Termination Date the Purchaser may, in addition to exercising
any and all rights under this Agreement, exercise any rights provided under the
UCC and other applicable law.
(d) If a Termination Event occurs by reason of an event described in
clauses (x), (xi), (xii) or (xiii) of Section 12(b), as soon as practicable but
in any event within three Business Days of any demand by the Administrator, the
Servicer will give the Administrator, any Successor Servicer and their
representatives and designees remote access to the Servicer's information system
for purposes of monitoring, posting payments, and rebilling Purchased Accounts
to the extent deemed necessary by the Administrator in its sole discretion.
(e). Upon the occurrence of a Termination Event, the Discount Rate
shall be increased by 400 basis points.
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13. Early Termination Fee. The Provider agrees to pay the Purchaser an
early termination fee if: (x) the Provider declares an early Termination Date as
permitted by Section 12(a) or (y) the Administrator or the Purchaser declares an
early Termination Date upon the occurrence of an event described in any of
clauses (i)-(v) inclusive, (x), (xi) or (xiv) of Section 12(b). The early
termination fee will be payable on the Termination Date and be determined
pursuant to the following schedule, which the Provider confirms is reasonable
under the circumstances:
Early Termination Fee Expressed
Year in Which as a Percentage of Maximum
Termination Date Occurs Purchaser Capital Investment
- ----------------------- ----------------------------
First Year 2.0%
Second Year 1.0%
14. Waiver; Remedies; Etc. No failure by the Purchaser or the Administrator
to exercise, and no delay in exercising, any right shall operate as a waiver
thereof; nor shall any single or partial exercise preclude any other or future
exercise thereof or of any other right. The remedies provided in this Agreement
are cumulative and not exclusive of any remedies provided by law. Neither this
Agreement nor any Assignment will constitute an assumption by the Purchaser or
the Administrator of any obligation to any Obligor.
15. Indemnification; Expenses.
(a) Each of the Provider and the Servicer severally agrees to
indemnify and hold harmless the Purchaser, the Administrator and their
respective officers, directors and agents, from and against all losses,
liabilities, costs and expenses (including reasonable attorneys' fees) which may
be imposed on, incurred by or asserted against any of them relating to or
arising out of any breach by the Provider or the Servicer, as the case may be,
of any representation, warranty, covenant or agreement contained in any Purchase
Document or, in the case of the Provider, any misstatement or omission in any
information furnished by the Provider pursuant to Section 8(i).
(b) Each of the Provider and the Servicer severally agrees to pay all
out-of-pocket reasonable expenses, including fees and expenses of counsel and
accountants, which may be expended or incurred by the Administrator in enforcing
or attempting to enforce any of the Purchaser's or the Administrator's rights
against such party under the Purchase Documents, which costs, if not paid on
demand, shall bear interest at a rate of 18% per annum or, if less, the highest
rate permitted under applicable law.
(c) The Provider shall pay, on each Purchase Date a claim monitoring
fee in an amount equal to the product of one quarter of one percent (0.25%)
multiplied by the amount of Collections in respect of Purchased Accounts for the
then ended Purchase Period; provided, however, that the Provider shall not be
required to pay on account of the foregoing to the extent the amounts paid in
respect of the foregoing exceeds during each annual period commencing with the
date first above written, 1.5% per annum of the average Purchaser Capital
Investment as
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determined using the Purchaser Capital Investment determined on each Purchase
Date. In addition, if as of the close of business on any Purchase Date the
Purchaser Capital Investment, is less than the Minimum Purchaser Capital
Investment, the Provider shall pay, on each Purchase Date a supplemental claim
monitoring fee in an amount equal to $2,000. This Section 15 will survive the
termination of this Agreement.
16. Confidentiality. Except to the extent required by law, the Provider,
the Servicer, the Purchaser and the Administrator agree to maintain the
confidentiality of this Agreement and not to disclose the contents hereof or
provide a copy hereof to any third party, except (i) accountants, lawyers and
financial advisers of the parties who are informed of and agree to be bound by
this Section 16, and (ii) that copies hereof may be provided to any assignee of
the Purchaser, any investors or prospective investors who acquire or may acquire
securities backed by Purchased Accounts and any parties which facilitate the
issuance of such securities, including rating agencies, guarantors and insurers.
The Purchaser and the Administrator agree to maintain the confidentiality of
patient information obtained as a result of its interests in, or duties with
respect to, the Purchased Accounts.
17. Governing Law. This Agreement, each of the other Purchase Documents and
all of the rights and obligations of the parties hereunder and thereunder will
be governed by and interpreted in accordance with the laws of Pennsylvania.
18. Waiver of Jury Trial and Consent to Jurisdiction.
(a) THE PROVIDER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE COMMONWEALTH OF PENNSYLVANIA AND IRREVOCABLY
AGREES THAT, SUBJECT TO PURCHASER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING
OUT OF OR RELATING TO THE PURCHASE DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS.
THE PROVIDER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY
AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND
BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH ANY PURCHASE DOCUMENT. THE
PROVIDER DESIGNATES AND APPOINTS CT CORPORATION SYSTEM (OR SUCH OTHER PERSON AS
SHALL ACT AS REGISTERED AGENT OF THE PROVIDER IN PENNSYLVANIA AND AS TO WHOM THE
PROVIDER SHALL PROVIDE NOTICE IN WRITING TO THE PURCHASER) AND SUCH OTHER
PERSONS AS MAY HEREAFTER BE SELECTED BY SUCH PERSON WHICH IRREVOCABLY AGREE IN
WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS
IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY
ACKNOWLEDGED BY THE PROVIDER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY
RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL
TO THE PROVIDER, AS APPLICABLE, IN ACCORDANCE WITH SECTION 19(e). IF ANY AGENT
APPOINTED BY THE PROVIDER REFUSES TO ACCEPT SERVICE, THE PROVIDER HEREBY AGREES
THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN
SHALL AFFECT
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THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT OF THE PURCHASER TO BRING PROCEEDINGS AGAINST THE PROVIDER IN THE
COURTS OF ANY OTHER JURISDICTION.
(b) THE PROVIDER AND THE PURCHASER EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT OR ANY OF THE OTHER PURCHASE DOCUMENTS, OR ANY DEALINGS
BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE
RELATIONSHIP ESTABLISHED HEREBY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE OTHER PURCHASE DOCUMENTS,
INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE PROVIDER AND THE
PURCHASER EACH ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE
TRANSACTION, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. THE PROVIDER AND THE PURCHASER EACH FURTHER WARRANTS AND
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT OR TO ANY OTHER PURCHASE DOCUMENTS. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
19. Miscellaneous.
(a) This Agreement includes the entire agreement of the parties
concerning the subject matter contained herein. This Agreement supersedes any
and all prior agreements and understandings among the parties with respect to
such subject matter.
(b) The Provider agrees that it will not file or join in any
involuntary petition in bankruptcy with respect to the Purchaser or seek the
appointment of any trustee or receiver for any assets of the Purchaser. The
Provider acknowledges that the Administrator has not been engaged by the
Provider to perform any services for it and does not have any fiduciary duty to
the Provider.
(c) Except as otherwise provided in Section 7(e), this Agreement may
only be amended in writing signed by the parties hereto. No waiver under this
Agreement or any Purchase Document will be effective unless it is in writing and
is signed by the waiving party. Any waiver will be effective only in the
specific instance and for the specific purpose for which it is given.
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(d) This Agreement will inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns. Notwithstanding
the foregoing, the Provider may not assign this Agreement or its rights
hereunder without the prior written consent of the Purchaser and the
Administrator. The Purchaser may sell, assign, transfer and create a security
interest in any or all of the assets and interests conveyed to it hereunder,
including the Purchase Documents and the Purchased Accounts, and any purchaser
or assignee may enforce any or all the rights of the Purchaser hereunder without
the consent, participation or joinder of the Purchaser. The Purchaser and the
Administrator may offset against any amounts payable to the Provider or the
Servicer hereunder (including any amounts deposited into the Commercial Lockbox
or the Government Lockbox), any amounts due the Purchaser or the Administrator
from the Provider or the Servicer (except for shortfalls in Collections
resulting other than from a breach of representation and warranty or covenant of
the Provider or a breach of covenant by the Servicer).
(e) All notices, requests, demands, directions, declarations and other
communications provided for in this Agreement must be in writing and shall be
deemed to have been given when delivered by facsimile transmission or overnight
delivery service or five days after mailed by first class registered or
certified mail, postage prepaid, to the address set forth opposite the
recipient's signature on the signature page hereof, or at such other address as
may be furnished from time to time by notice to the other party.
(f) No Person who is not a party to this Agreement or a permitted
assignee hereof will be entitled to rely on, or will have any rights or benefits
under, this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
Address for notices:
35 Park Place
New Britain, CT 06052 LEXINGTON HEALTH CARE GROUP LLC
in its individual capacity and as Servicer
By: /s/ Jack Friedler
---------------------------------
Name: Jack Friedler
Title: Managing Member
Attention: Jack Friedler
Facsimile: 860-223-7372
Page 26 of 37
<PAGE>
Locations of Provider:
Country Manor Health Care Center
64 Summit Road
Prospect, CT 06712-7060
Bentley Gardens Health Care Center
310 Terrace Ave.
West Haven, CT 066516-2698
Pond Point Health Care Center
60 Platt St.
Milford, CT 06460-7697
Fairfield Manor Health Care Center
23 Prospect Ave.
Norwalk, CT 06850
Address for notices LEXINGTON HOLDING CORPORATION
35 Park Place
New Britain, CT 06052 By: /s/ Harry Dermer
---------------------------------
Name: Harry Dermer
Title: President
Attention: Jack Friedler
Facsimile: (860)223-7372
Address for notices: COPELCO/AMERICAN HEALTHFUND, INC.
By: /s/ Gregory S. Campbell
---------------------------------
100 Berwyn Park, Suite 105 Name Gregory S. Campbell
Berwyn, Pennsylvania, 19312 Title: President
Attention: Gregory S. Campbell
Facsimile: (610) 993-9424
<PAGE>
EXHIBIT A
DEFINITIONS
"Account" means (a) the third party reimbursable portion of accounts
receivable owing to the Provider arising out of the delivery by the Provider of
medical, surgical, diagnostic or other professional or medical or dental
services, including all rights to reimbursement under any agreements with an
Obligor, (b) all accounts, general intangibles, rights, remedies, guarantees,
and security interests in respect of the foregoing, all rights of enforcement
and collection, all books and records evidencing or related to the foregoing,
all rights under this Accounts Purchase Agreement in respect of the foregoing,
(c) all information and data compiled or derived by the Servicer in respect of
such accounts receivable (other than any such information and data subject to
legal restrictions of patient confidentiality), and (d) all proceeds of any of
the foregoing.
"Administrator Fee" means the fee payable to the Administrator with
respect to a Batch on each Purchase Date as compensation for its duties
hereunder, equal to the product of (a) the Administrator Fee Rate, (b) the
average daily Purchaser Capital Investment with respect to such Batch during
each day of the Purchase Period, and (c) a fraction, the numerator of which is
the total number of days in such Purchase Period and the denominator of which is
360.
"Administrator Fee Rate" means 0%.
"Batch" means all the Accounts purchased from a Provider on a
particular Purchase Date.
"Billing Date" means the last Business Day of the week in which the
services were rendered in the case of out-patient services and the discharge
date in the case of in-patient services.
"Business Day" means any day other than a Saturday, Sunday or any day
on which banking institutions in New York City are permitted or required by law,
executive order or governmental decree to remain closed or a day on which either
the Purchaser or the Administrator is closed for business.
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Service, a medical benefits program supervised by the U.S. Department
of Defense.
"Collections" means with respect to any Purchased Account, all cash
collections on such Account (including any cash amounts representing the
Repurchase Price of any Rejected Account, but not including any reduction in the
Initial Payment in respect of the Repurchase Price of any Rejected Account).
"Collection Account" is defined in Section 5(e).
"Current Ratio" means the ratio of the current assets of the Provider
to the current liabilities of the Provider as determined in accordance with
generally accepted accounting principles. For purposes of this calculation the
Purchaser Capital Investment outstanding as of the date of the calculation will
be considered a current liability.
<PAGE>
"Commercial Lockbox" means a lockbox in the name of a person (other
than the Provider) designated by the Administrator and maintained at CoreStates
Bank, or such other bank as is acceptable to the Administrator, to which
Collections on all Accounts, other than Government Accounts, are sent.
"Concentration Limits" means the various financial tests, expressed as
percentages of the then current ENV of all Purchased Accounts, described on
Schedule 2 as in effect from time to time.
"Contract" means an agreement by which an Obligor is obligated to pay
for services rendered to patients of a Provider.
"Debt" means all indebtedness for borrowed money, trade debt, debts of
others guaranteed by the Provider or secured by its assets, obligations under
capitalized leases and all other obligations which are or should be treated as
indebtedness under generally accepted accounting principles.
"Defaulted Account" means a Purchased Account as to which (a) the
Initial ENV has not been received in full as Collections within 150 days of the
Billing Date, or (b) the Administrator reasonably deems uncollectable because of
the bankruptcy or insolvency of the Obligor or any other reason.
"Deferred Payment" is defined in Section 2(b).
"Delinquent Account" means a Purchased Account as to which the Initial
ENV has not been received in full as Collections within 120 days of the Billing
Date.
"Discount Rate" is an annual rate equal to the sum of the annual rate
in effect in the London Interbank market applicable to one month deposits of
U.S. dollars as reported in the Wall Street Journal on the second Business Day
preceding the date of determination, plus 4.5%. If the Wall Street Journal is
not published on such Business Day or does not report such rate, such rate shall
be as reported by such other publication or source as the Administrator may
select.
"Eligible Account" means at any time, an Account:
(a) which is a liability of an Obligor which is (i) during such time
as the Provider is the Servicer, (A) Medicare, or (B) Medicaid, other than
those listed in Schedule 2,
(b) the Obligor of which is not an affiliate (meaning a party which
directly or indirectly controls, or is controlled by or under common control
with, a party hereto) of any of the parties hereto,
(c) the Obligor of which has received a letter substantially in the
form of Exhibit D, (in the case of all Accounts other than Government Accounts),
or a letter substantially in the form of Exhibit E (in the case of all
Government Accounts),
(d) in an amount not less than $5 nor more than $50,000, denominated
and payable in dollars in the United States,
<PAGE>
(e) as to which the representations and warranties of Section 6 are
true,
(f) having a Billing Date no more than thirty days prior to the
Purchase Date (except in the case of the first Purchase Date, the Billing Date
shall be no more than 120 days prior to the Purchase Date),
(g) which does not arise from the delivery of cosmetic surgery
services or psychiatric services or which is not a workers' compensation claim
(unless expressly approved by the Administrator) or arise from any services
delivered for injury sustained in a motor vehicle accident, and
(h) which complies with such other criteria and requirements as may be
specified from time to time by the Administrator in its discretion.
"Estimated Net Value" or "ENV" means on any date of calculation with
respect to any Account or Batch an amount equal to the anticipated cash
collections as calculated by the Administrator using the Value Track System
(which system periodically adjusts such amount to reflect the Administrator's
evaluation of the performance of similar Accounts and to reflect payments
received with respect thereto), except that if the Administrator determines that
all Obligor payments with respect to an Account have been made or if an Account
has become a Defaulted Account, the ENV of such Account shall be zero.
"Evaluation Date" means the 10th of each month, or if the 10th is not a
Business Day, the next Business Day.
"Event of Servicing Termination" is defined in Section 10(h).
"Funding Discount" is an amount equal to (a) the sum of (i) the
Initial ENV of the Batch, minus (ii) the Loss Discount, the Provider Reserve
Discount and the Servicing Fee Discount, multiplied by (b)the Funding Discount
Percentage.
"Funding Discount Percentage" is a variable rate, determined on the
Purchase Date by the Administrator, equal to (a) the Discount Rate, multiplied
by (b) a fraction the numerator of which is the number of weeks which the
Administrator reasonably anticipates will be needed for the Collections on the
Batch to equal its Initial ENV and the denominator of which is 52.
"Government Accounts" means Accounts on which any federal or state
governmental unit is the Obligor.
"Government Lockbox" means a lockbox in the name of the Provider
maintained at CoreStates Bank, N.A. or such other bank as is acceptable to the
Administrator, to which Collections on all Accounts that are Government Accounts
are sent.
"Initial ENV" means with respect to any Account or Batch, the
Estimated Net Value as of the date of purchase of such Account or Batch.
"Initial Payment" is the amount described in Section 2(a).
<PAGE>
"JCAHO" means the Joint Committee for Accreditation of Health Care
Organizations, a nationally recognized organization providing accreditations to
hospitals and other healthcare facilities, or any successor entity charged with
performing its functions.
"Loss Discount" means an amount equal to the product of the Initial
ENV of the Batch and the percentage identified in Schedule 2 as the "Loss
Discount Percentage," as such Schedule is in effect from time to time.
"Maximum Purchaser Capital Investment" is defined in Section
4(b)(i)(5).
"Minimum Purchaser Capital Investment" means $1,000,000.
"Obligor" means the party primarily obligated to pay an Account.
"Person" means any individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization, joint
venture, court or government or political subdivision or agency thereof, or
other entity.
"Provider Receipts" is defined in Section 5(f)(ii).
"Provider Reserve Discount" means an amount equal to the product of
the Initial ENV of the Batch and the Percentage identified in Schedule 2 as the
"Provider Reserve Percentage," as such Schedule is in effect from time to time.
"Purchase Date" means the first Business Day of each Purchase Period,
whether or not Eligible Receivables are purchased on such date.
"Purchase Documents" means this Accounts Purchase and Servicing
Agreement and all Assignments and CFO Letters.
"Purchase Period" means the weekly period beginning on the first
Purchase Date and ending on the first day prior to the weekly anniversary
thereof and each like weekly period thereafter, or such other weekly period as
the Administrator may subsequently designate as the Purchase Period for purposes
of this Agreement.
"Purchase Period Amount" means, in respect of a Batch and Purchase
Period, the product of (a) the Discount Rate (determined on the first day of the
Purchase Period) (b) the average daily Purchaser Capital Investment with respect
to such Batch during each day of the Purchase Period and (c) a fraction, the
numerator of which the total number of days in such Purchase Period and the
denominator of which is 360.
"Purchased Account File" is defined in Section 3(b).
"Purchased Accounts" is defined in Section 3(c).
"Purchased Receipts" is defined in Section 5(f)(i).
"Purchaser Capital Investment" means as of any Purchase Date an amount
equal to the sum of the Initial Payments for all Purchased Accounts (without
giving effect to any reductions in such Initial Payments for the Repurchase
Price of Rejected Accounts) less the
<PAGE>
amount of all Collections on such Purchased Accounts previously applied in the
reduction of the Purchaser Capital Investment pursuant to Section 5(h).
"Rejected Account" is defined in Section 7(a).
"Restricting Event" is defined in Section 5(h).
"Retained Receipts" is defined in Section 5(f)(iii).
"Securities" is defined in Section 8(i).
"Servicing Fee" is defined in Section 10(e).
"Servicing Fee Discount" means an amount equal to the product of the
Initial ENV of the Batch and the percentage identified in Schedule 2 as the
"Servicing Fee Percentage," as such Schedule is in effect from time to time.
"Termination Date" means the date specified in Section 1, or such
earlier date that the Termination Date is declared or automatically occurs under
Section 12.
"Termination Event" is defined in Section 12.
"UCC" means the Uniform Commercial Code as in effect in any applicable
jurisdiction.
"Value Track System" means the proprietary business system used by the
Administrator to value and record the status of Accounts.
<PAGE>
EXHIBIT B
ASSIGNMENT
Re: Provider: Date:__________________
Reference is made to the Accounts Purchase and Servicing Agreement
dated as of March___1996 (the "Agreement") among Lexington Health Care Group LLC
in its individual capacity (the "Provider") and in its capacity as servicer (the
"Servicer"), Lexington Holding Corporation, (the "Purchaser"), and
Copelco/American Healthfund, Inc., (the "Administrator") and the CFO Letter
dated ______________, 19__ (a copy of which is attached). Capitalized terms used
herein but not defined herein have the meanings assigned such terms in the
Agreement.
The Provider hereby acknowledges receipt of $_________________
representing the Initial Payment for Eligible Accounts being sold by the
Provider, net of adjustments under the Agreement, which are the subject matter
of the attached CFO Letter (the "Purchased Accounts"). The Provider hereby
certifies that: (i) the representations and warranties of the Provider set forth
in Section 6 of the Agreement are true and correct; (ii) no event has occurred
and is continuing, or would result from such purchase or from the application of
the proceeds therefrom, which constitutes a Termination Event or would
constitute a Termination Event but for the requirement that notice be given or
time elapse or both; and (iii) the Provider is in compliance with the terms and
conditions of the Agreement.
The Provider hereby sells, assigns, transfers and sets over to the
Purchaser, all of the Provider's right, title and interest in, to and under (a)
the Purchased Accounts, (b) all distributions with respect thereto and (c) all
proceeds of the foregoing. The foregoing assignment is given in furtherance of
Section 3(c) of the Agreement.
This Assignment and all of the rights and obligations of the parties
hereunder shall be governed by and interpreted in accordance with the laws of
Pennsylvania.
Lexington Health Care Group LLC
By:______________________________________
Name:
Title:
<PAGE>
EXHIBIT D
NOTICE TO OBLIGOR
[Name and Address of Obligor] Date:_________________
Dear___________:
Lexington Health Group LLC (the "Provider") has established a lockbox (the
"Lockbox") for collection of accounts receivable (the "Accounts") on which [name
of Obligor] owes payment to the Provider. Accordingly, you are hereby instructed
to remit all payments on Accounts of which you are, or have been, the obligor to
the Provider to CoreStates Bank - Lockbox #_______________, P.O. Box
8500-________ Philadelphia, PA 19178-_________ You should, of course, not
forward cash remittances or other items of intrinsic value to the Lockbox.
The Provider has entered into an agreement with Lexington Holding
Corporation and Copelco/American Healthfund, Inc. under which certain of the
Accounts will be sold, from time to time, to Lexington Funding Corporation.
Lexington Holding Corporation may, in turn, from time to time, sell, assign or
pledge such Accounts as it deems appropriate.
It is contemplated that the Accounts will continue to be serviced by
the Provider.
Sending payment on such Accounts to the Lockbox will discharge your
obligation on such Accounts (to the extent of such payment), whether or not
ownership has been transferred to Lexington Funding Corporation or any assignee
thereof.
This direction may not be changed or revoked without the prior written
consent of the bank named above.
Very truly yours,
LEXINGTON HEALTH GROUP LLC
By:______________________________________
Name:
Title:
<PAGE>
EXHIBIT E
NOTICE TO GOVERNMENTAL AGENCY/INTERMEDIARY
[Name and Address] Date:__________________
Dear__________:
We (the "Provider") have established a lockbox (the "Lockbox") in our
name for collection of accounts receivable (the "Accounts") due the Provider
under the [Medicare/Medicaid/CHAMPUS] program. Accordingly, you are hereby
instructed to remit all payments on Accounts of which you are, or have been, the
obligor to the Provider to CoreStates Bank - Lockbox Account #______________,
P.O. Box 8500, Philadelphia PA 19178
Sending payment on such Accounts to the Lockbox will discharge your
obligation on such Accounts (to the extent of such payment).
This direction may not be changed or revoked without the prior written
consent of the bank named above.
Very truly yours,
LEXINGTON HEALTH GROUP LLC
By:______________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.16
October 1, 1996
Ms. Mary Archambault
President
Balz Medical Services, Inc.
35 Park Place
New Britain, CT 06052
Dear Mary:
This will summarize and document for our files the currently existing
management and cost sharing arrangements between Balz Medical Services, Inc.
and Lexington Health Care Group, LLC.
For services provided, Balz agrees to reimburse Lexington the following
monthly:
Management and financial services $2,000.00
Telephone expenses 537.50
Rent 400.00
General office expenses 162.50
This arrangement shall be retroactive to November 1, 1995 and shall continue
in effect until modified or until Balz relocates its offices.
If the above agrees with your understanding, please sign below where
indicated and return this original letter to me. Thank you.
Sincerely,
/s/ Harry Dermer
Harry Dermer
Agreed to as noted above: /s/ Mary Archambault 10/1/96
--------------------------- ----------
Mary Archambault, President Date
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
LEXINGTON HEALTHCARE GROUP, INC.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JULY
1, 1995 (COMMENCEMENT OF
FOR THE SIX MONTHS ENDED OPERATIONS) TO JUNE 30,
DECEMBER 31, 1996 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------ ------------ ------------ ------------
Net income (loss)........................................ $ 136,000 $ 450,000 $ 266,000 $ 658,000
------------ ------------ ------------ ------------
Shares:
Weighted average number of common shares outstanding... 3,092,000 3,092,000 3,092,000 3,092,000
Shares assumed sold with proceeds used for:
Repayment of debt.................................... 102,000 102,000
Payment of the cash portion of the PRN acquisition
price.............................................. 365,000 365,000
Shares to be issued in connection with the acquisition
of Professional Relief Nurses, Inc. and Balz Medical
Services, Inc........................................ 408,000 408,000
------------ ------------ ------------ ------------
Weighted average number of shares outstanding.......... 3,092,000 3,967,000 3,092,000 3,967,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Income per share................................... $ .04 $ .11 $ .09 $ .17
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
EXHIBIT 22.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated October 18, 1996, November 5, 1996 as to Note B, on our audit
of the financial statements of Lexington Healthcare Group, Inc. and subsidiary
as at June 30, 1996 and for the period from July 1, 1995 (commencement of
operations) to June 30, 1996. We also consent to the reference to our firm under
the caption "Experts".
Richard A. Eisner & Company, LLP
New York, New York
February 25, 1997
<PAGE>
EXHIBIT 22.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated October 17, 1996, October 30, 1996 as to Note G on our audits
of the financial statements of Professional Relief Nurses, Inc. as at June 30,
1996 and June 30, 1995 and for each of the years in the two-year period ended
June 30, 1996.
Richard A. Eisner & Company, LLP
New York, New York
February 25, 1997
<PAGE>
EXHIBIT 22.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated October 18, 1996, October 30, 1996 as to Note G, on our audit
of the financial statements of Balz Medical Services, Inc. as at June 30, 1996
and for the period from November 1, 1995 (commencement of operations) to June
30, 1996.
Richard A. Eisner & Company, LLP
New York, New York
February 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 DEC-31-1996
<CASH> 212 1,333
<SECURITIES> 0 0
<RECEIVABLES> 5,660 4,411
<ALLOWANCES> 75 75
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,029 6,087
<PP&E> 494 667
<DEPRECIATION> 32 57
<TOTAL-ASSETS> 9,614 10,159
<CURRENT-LIABILITIES> 8,410 8,365
<BONDS> 0 0
0 0
0 0
<COMMON> 25 31
<OTHER-SE> 462 963
<TOTAL-LIABILITY-AND-EQUITY> 9,614 10,159
<SALES> 0 0
<TOTAL-REVENUES> 33,641 17,447
<CGS> 0 0
<TOTAL-COSTS> 31,800 16,659
<OTHER-EXPENSES> 1,126 486
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 254 70
<INCOME-PRETAX> 461 232
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 461 232
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 461 232
<EPS-PRIMARY> .00 .00
<EPS-DILUTED> .00 .00
</TABLE>
