<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
JULY 1, 1997
(Date of Earliest Event Reported)
LEXINGTON HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
Commission File Number 0-22261
DELAWARE 06-1468252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
35 PARK PLACE, NEW BRITAIN, CT 06052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 860-223-6902
<PAGE> 2
LEXINGTON HEALTHCARE GROUP, INC.
FORM 8-K
CURRENT REPORT
Item 1. Changes in Control
NOT APPLICABLE
Item 2. Acquisition or Disposition of Assets
On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities, Greenwood Health Center and Highland Acres
Extend-a-Care Center from Beverly Enterprises, Inc. These facilities are located
in Hartford and Winsted, CT and had 240 and 75 licensed beds respectively.
The Company is operating 225 beds and has returned the license on 40 beds to the
State of Connecticut. In November 1997, the Company sold the remaining license
on 50 beds to an unrelated party for $1,550,000 in cash which resulted in a gain
of $280,000.
All real estate, property, fixed and operating assets of the nursing homes were
acquired (with the exception of certain proprietary computer hardware and
systems) for a purchase price of approximately $6.8 million which was financed
by a mortgage on the real estate from Nationwide Health Properties, Inc., the
previous lessor to Beverly Enterprises. Beverly has agreed to pay a $2.5 million
operating subsidy to the Company over five years, bringing the net cost of the
transaction to the Company to $4.3 million.
There is no relation between Beverly Enterprises and Lexington Healthcare Group;
in 1995, Lexington Healthcare Group had acquired four nursing homes from
Beverly.
Financial statements depicting the results of the acquired nursing homes through
June 30, 1997 are now audited and included in Item 7 herein.
Item 3. Bankruptcy or Receivership
NOT APPLICABLE
Item 4. Changes in Registrants Certifying Accountant
NOT APPLICABLE
Item 5. Other Events
NOT APPLICABLE
Item 6. Resignations of Registrant's Directors
NOT APPLICABLE
<PAGE> 3
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LEXINGTON GREENWOOD PRO FORMA
HEALTHCARE AND ADJUSTMENTS
GROUP, INC. HIGHLAND DR CR PRO FORMA
----------- -------- -- -- ---------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,000 $ 200 200 $ 1,000
Accounts and note receivable, net 6,541 2,318 8,859
Estimated third-party payor settlements - Medicare & Medicaid 278 -- 278
Inventories 403 134 537
Prepaid expenses and other current assets 418 6 424
------- -------- -------
Total current assets 8,640 2,658 11,098
LAND, BUILDINGS, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net 814 1,370 255 2,439
OTHER ASSETS
Goodwill, net 3,275 -- 3,275
Bed licenses -- -- 2,780 2,780
Security deposits 2,282 -- 2,282
Other assets, net 421 63 484
------- -------- -------
5,978 63 8,821
------- -------- -------
$15,432 $ 4,091 $22,358
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,737 $ 1,138 1,138 $ 7,737
Estimated third-party payor settlements - Medicare & Medicaid 323 255 255 323
Notes and capital leases payable (current portion) 89 -- 89
Income taxes payable 204 -- 204
------- -------- -------
Total current liabilities 8,353 1,393 8,353
OTHER LIABILITIES
Mortgage note payable -- -- 6,863 6,863
Notes and capital leases payable (less current portion) 107 -- 107
Deferred rent 416 -- 416
Residents' funds payable 161 63 224
Payable to affiliate -- 12,703 12,703 --
------- -------- -------
684 12,766 747
------- -------- -------
Total liabilities 9,037 14,159 15,963
------- -------- -------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized
15,000,000 shares, issued and outstanding 4,125,000 shares 41 -- 41
Additional paid-in capital 6,168 -- 6,168
Excess of liabilities over assets -- (10,068) 10,068 --
Retained earnings 186 -- 186
------- -------- -------
Total stockholders' equity 6,395 (10,068) 6,395
------- -------- -------- ------- -------
$15,432 $ 4,091 17,131 17,131 $22,358
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma
condensed financial statements.
<PAGE> 4
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
LEXINGTON GREENWOOD PRO FORMA
HEALTHCARE AND ADJUSTMENTS
GROUP, INC. HIGHLAND DR CR PRO FORMA
----------- -------- -- -- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Net patient service revenue $ 35,536 $ 13,267 1,000 $ 49,803
Other revenue 364 -- 364
-------- -------- --------
Total revenues 35,900 13,267 50,167
EXPENSES
Facility operating expenses:
Salaries and benefits 26,979 10,092 790 36,281
Food, medical and other supplies 2,689 2,682 200 5,171
Other operating expenses 5,113 2,052 160 7,005
Corporate, general and administrative expenses 1,282 555 50 1,787
Interest expense 178 -- 178
-------- -------- --------
Total expenses 36,241 15,381 50,422
-------- -------- --------
Income (loss) before income taxes (341) (2,114) (255)
INCOME TAXES (66) -- (66)
-------- -------- --------
Net income (loss) $ (275) $ (2,114) $ (189)
======== ======== ========
Net income (loss) per common share $ (0.10) $ -- $ (0.07)
======== ======== ========
Weighted average number of common shares outstanding 2,724 - 2,724
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma
condensed financial statements.
<PAGE> 5
LEXINGTON HEALTHCARE GROUP, INC.
FORM 8-K
Notes to Pro Forma Financial Statements
On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities, Greenwood Health Center and Highland Acres
Extend-a-Care Center from Beverly Enterprises, Inc. These facilities are located
in Hartford and Winsted, CT and had 240 and 75 licensed beds respectively.
Lexington Highgreen Holding, Inc. is operating 225 beds and has returned the
license on 40 beds to the State of Connecticut and has sold the license on 50
beds to an unrelated party.
All real estate, property, fixed and operating assets of the nursing homes were
acquired (with the exception of certain proprietary computer hardware and
systems) for a purchase price of approximately $6.8 million which was financed
by a mortgage on the real estate from Nationwide Health Properties, Inc., the
previous lessor to Beverly Enterprises. Beverly has agreed to pay a $2.5 million
operating subsidy to Lexington over five years.
Basis of Presentation of Pro Forma Financial Statements
The proforma financial statements include a balance sheet as of June 30, 1997
(the date of the combination) and a statement of operations for a representative
period of time (a one-year period ending June 30, 1997 for the registrant and
the available one-year period ending December 31, 1996 for the businesses
acquired).
Overall, adjustments were made in the pro forma financial statements to reflect
the purchased costs of assets acquired and the elimination of liabilities which
were not assumed, as well as to reflect known changes being made in the
operations of the business.
In the pro forma balance sheet, adjustments were made to reflect assets not
acquired (cash and leasehold improvements) and to eliminate liabilities not
assumed (accounts payable, third party settlements, and affiliate payables).
In the pro forma statement of operations, adjustments were made to reflect
increased revenues from rate and census increases and decreases in costs as a
result of wage rate and benefit reductions negotiated along with other changes
reflective of reduced bed operations.
Such pro forma amounts are not necessarily indicative of what the actual
consolidated results of operations might have been had the acquisitions been
effective on July 1, 1996.
<PAGE> 6
LEXINGTON HEALTHCARE GROUP, INC.
FORM 8-K
CURRENT REPORT (CONTINUED)
Item 7. Financial Statements and Exhibits
Pro Forma Financial Statements of Registrant and Acquired Businesses
Notes to Pro Forma Financial Statements
Report of Independent Certified Public Accountants on Combined Financial
Statements
Combined Financial Statements of Businesses Acquired
(Greenwood Health Center and Highland Acres Extend-a-Care Center)
Combined Balance Sheets
June 30, 1997 and December 31, 1996 and 1995
Combined Statements of Operations
Six Months Ended June 30, 1997 and Years ended December 31,
1996 and 1995
Combined Statements of Excess of Liabilities Over Assets
Six Months Ended June 30, 1997 and Years Ended
December 31, 1996 and 1995
Combined Statements of Cash Flows,
Six Months Ended June 30, 1997 and Years Ended
December 31, 1996 and 1995
Notes to Combined Financial Statements
<PAGE> 7
LEXINGTON HEALTHCARE GROUP, INC.
FORM 8-K
CURRENT REPORT (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly
/s/ Harry Dermer
(Harry Dermer, President)
(Duly Authorized Officer)
Date February 13, 1998 /s/ Thomas E. Dybick
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
<PAGE> 8
[DISANTO BERTOLINE & COMPANY, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Beverly Enterprises, Inc.
Fort Smith, Arkansas
We have audited the accompanying combined balance sheets of Greenwood Health
Center and Highland Acres Extend-A-Care Center (collectively, the "Centers") as
of June 30, 1997 and December 31, 1996 and 1995, and the related combined
statements of operations, excess of liabilities over assets and cash flows for
the six months ended June 30, 1997, and the years ended December 31, 1996 and
1995. These combined financial statements are the responsibility of the Centers'
management. Our responsibility is to express an opinion on these combined
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 combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Greenwood Health
Center and Highland Acres Extend-A-Care Center as of June 30, 1997 and December
31, 1996 and 1995, and the results of their operations and their cash flows for
the six months ended June 30, 1997, and the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
As more fully discussed in Note 7, the Centers terminated their leases of the
nursing facilities effective July 1, 1997, and ceased operation of those
facilities.
/s/ DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
January 9, 1998
<PAGE> 9
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
COMBINED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 199,787 $ 420,303 $ 5,418
Patient accounts receivable, less allowance for uncollectible
accounts of $73,000, $82,000 and $88,000, respectively 2,318,456 2,141,067 1,896,546
Inventory 134,107 134,107 137,013
Prepaid expenses and other current assets 5,843 126,263 70,275
------------ ------------ ------------
Total current assets 2,658,193 2,821,740 2,109,252
PROPERTY AND EQUIPMENT, at cost
Leasehold improvements 1,564,553 1,558,884 1,553,937
Furniture and equipment 1,297,762 1,282,937 1,172,876
------------ ------------ ------------
2,862,315 2,841,821 2,726,813
Less: accumulated depreciation and amortization 1,492,206 1,394,054 1,204,851
------------ ------------ ------------
1,370,109 1,447,767 1,521,962
RESIDENTS' FUNDS 62,934 58,770 85,030
------------ ------------ ------------
$ 4,091,236 $ 4,328,277 $ 3,716,244
============ ============ ============
LIABILITIES AND EXCESS OF LIABILITIES OVER ASSETS
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 880,437 $ 905,825 $ 1,120,727
Accrued payroll 257,790 318,038 280,665
Estimated third-party payor settlements - Medicare 254,655 162,199 340,577
------------ ------------ ------------
Total current liabilities 1,392,882 1,386,062 1,741,969
RESIDENTS' FUNDS PAYABLE 62,934 58,770 85,030
PAYABLE TO AFFILIATE 12,703,673 11,347,465 8,239,395
EXCESS OF LIABILITIES OVER ASSETS (10,068,253) (8,464,020) (6,350,150)
------------ ------------ ------------
$ 4,091,236 $ 4,328,277 $ 3,716,244
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 10
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET PATIENT SERVICE REVENUE $ 6,176,833 $ 13,267,256 $ 13,829,808
EXPENSES
Salaries and benefits 5,239,364 10,092,013 11,001,030
Purchased services and professional fees 624,195 1,115,532 1,170,542
Management fees 158,190 339,599 364,388
Depreciation and amortization 98,150 192,859 185,017
Provision for bad debts 22,166 22,745 36,791
Facility rent 464,221 936,048 973,482
Supplies and other 1,174,780 2,682,330 2,106,486
------------ ------------ ------------
7,781,066 15,381,126 15,837,736
------------ ------------ ------------
NET LOSS $ (1,604,233) $ (2,113,870) $ (2,007,928)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 11
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
COMBINED STATEMENTS OF EXCESS OF LIABILITIES OVER ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BALANCE, beginning of period $ (8,464,020) $ (6,350,150) $ (4,342,222)
Net loss (1,604,233) (2,113,870) (2,007,928)
------------ ------------ ------------
BALANCE, end of period $(10,068,253) $ (8,464,020) $ (6,350,150)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 12
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,604,233) $(2,113,870) $(2,007,928)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 98,150 192,859 185,017
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 120,420 (53,082) 1,480
Accounts payable and accrued expenses (25,388) (214,902) 401,326
Estimated third-party payor settlements - Medicaid -- -- 279,087
Accrued payroll (60,248) 37,373 19,463
Estimated third-party payor settlements - Medicare 92,456 (178,378) 359,501
Patient accounts receivable, net (177,389) (244,521) (684,827)
----------- ----------- -----------
Net cash used in operating activities (1,556,232) (2,574,521) (1,446,881)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (20,492) (118,664) (173,487)
----------- ----------- -----------
Net cash used in investing activities (20,492) (118,664) (173,487)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate 1,356,208 3,108,070 1,529,356
----------- ----------- -----------
Net cash provided by financing activities 1,356,208 3,108,070 1,529,356
----------- ----------- -----------
INCREASE (DECREASE) IN CASH (220,516) 414,885 (91,012)
CASH, beginning of period 420,303 5,418 96,430
----------- ----------- -----------
CASH, end of period $ 199,787 $ 420,303 $ 5,418
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 13
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
Beverly Enterprises, Inc. ("Beverly") provided long-term
healthcare in the State of Connecticut through the nursing
facilities located at Greenwood Health Center and Highland
Acres Extend-A-Care Center (collectively "the Centers"). The
Centers were leased and operated through June 30, 1997 (see
Note 7), by Beverly Enterprises - Connecticut, Inc. ("BEC") (a
wholly-owned subsidiary of Beverly Health and Rehabilitation
Services, Inc., which is a wholly-owned subsidiary of Beverly
Enterprises, Inc.).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the
Centers. All significant accounts and transactions among the
Centers have been eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires the Centers'
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.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Centers
consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The
Centers had no cash equivalents as of June 30, 1997 and
December 31, 1996 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis
over the estimated useful life of each asset (principally 5-15
years). Leasehold improvements are amortized over the shorter
of the lease term or their respective estimated useful lives.
Amortization of assets subject to leases is reported as part of
depreciation expense.
<PAGE> 14
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
Fair Value of Financial Instruments, requires disclosure of
the fair value of financial instruments for which the
determination of fair value is practicable. SFAS No. 107
defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current
transaction between willing parties.
The Centers have the following financial instruments:
- Cash, residents' funds, patient accounts receivable
and accounts payable and accrued expenses - The
carrying amounts approximate their fair value because
of the short maturity of those instruments.
- Payable to affiliate - It is not practical to
estimate the fair value of this financial instrument
because no formal agreement exists for repayment of
the balance.
The Centers financial instruments are held for other than
trading purposes.
INCOME TAXES
The Centers are included in the consolidated income tax
returns filed by Beverly. Each Center in the consolidated
group determines its tax expense as if it were filing a
separate income tax return. Any difference between the
individual Centers' current tax provision and the consolidated
tax paid or refunded is recorded in Beverly's financial
statements.
The Centers have incurred cumulative net operating losses.
Consequently, no provision for income taxes has been provided.
Deferred income tax liabilities and assets are recognized for
the tax effects of differences between the financial statement
and tax bases of assets and liabilities. Temporary differences
principally relate to net operating losses, depreciation and
amortization and inventory. A valuation allowance has been
established to offset the net deferred tax assets because it
is more likely than not that the deferred tax asset will not
be realized.
<PAGE> 15
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at the estimated net
realizable amount from patients, third-party payors, and
others for services rendered. Approximately, 90%, 89% and 91%
of the Centers' net patient service revenue for the six months
ended June 30, 1997 and the years ended December 31, 1996 and
1995, respectively, were derived from funds under federal and
state medical assistance programs.
Revenue under third-party payor agreements is subject to audit
and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the
related services are rendered. Differences between the
estimated amounts accrued and interim and final settlements
are reported in operations in the year of settlement.
NOTE 2 - MEDICARE AND MEDICAID REIMBURSEMENT ADJUSTMENTS
The Centers have been reimbursed for services rendered to
patients covered by the federal Medicare program on the basis
of estimated costs. Provisions for adjustment of amounts
accrued based on estimated costs to actual reimbursement based
on the Medicare cost report for each period have been included
in the accompanying combined financial statements. The
Medicare cost report is subject to audit and retroactive
adjustment under the terms of the Centers' Medicare
reimbursement agreement which may affect the actual
reimbursement for each period. Any liabilities resulting from
any retroactive adjustments after June 30, 1997 would be
Beverly's responsibility. It is reasonably possible that the
amount the Centers will ultimately realize could differ
materially in the near term.
The Centers have been reimbursed for services rendered to
Title XIX Medicaid patients on the basis of predetermined per
diem rates. The reimbursement plan is on a prospective basis,
and no additional settlement will be made on the difference
between the interim per diem rates paid and actual costs.
NOTE 3 - RESIDENTS' FUNDS PAYABLE
The Centers serve as trustees of funds received on behalf of
various residents. The Centers have fiduciary responsibility
for the administration of the bank accounts and the
distribution of the funds for residents.
<PAGE> 16
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 4 - RELATED PARTY TRANSACTIONS
OPERATING LEASES
BEC entered into agreements on behalf of the Centers to lease
the nursing facilities, together with all improvements,
furniture, furnishings, fixtures, machinery, equipment and
personal property for an initial period of fourteen years
commencing December 31, 1986. BEC had the option to renew
these leases for eight successive periods of five years each.
BEC also had the right of first refusal to purchase the
Centers on the same terms and conditions as offered by any
other bona fide offeror during the term of the leases. The
leases required BEC to pay all executory costs (property
taxes, repairs, maintenance, insurance, and utilities). The
leases were terminated on July 1, 1997 (see Note 7).
Lease expense associated with these leases approximated
$464,000, $931,000 and $973,000 for the six months ended June
30, 1997 and the years ended December 31, 1996 and 1995,
respectively. Total rent expense for all operating leases was
approximately $492,000, $987,000 and $1,033,000 for the six
months ended June 30, 1997 and the years ended December 31,
1996 and 1995, respectively.
MANAGEMENT FEE
The Centers pay a management fee to Beverly which reflects the
Centers' share of expenses incurred by Beverly for managing
their operations. The management fee is composed of general
corporate overhead of Beverly's national and regional
corporate offices. This fee approximated $158,000, $340,000
and $364,000 for the six months ended June 30, 1997 and the
years ended December 31, 1996 and 1995, respectively.
INSURANCE
The Centers insure auto liability, general liability and
workers' compensation risks through insurance policies with
third parties executed by Beverly. Premiums paid to Beverly
for these policies approximated $296,000, $424,000, and
$468,000 for the six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, respectively.
<PAGE> 17
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 5 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of
certain current vulnerabilities due to certain concentrations.
Those matters include the following:
CREDIT RISK
The Centers place their cash deposits with high credit-quality
institutions and such deposits may, at times, exceed federal
depository insurance limits. However, the Centers have not
experienced any losses in this area and management believes
its cash deposits are not subject to significant credit risk.
The Centers grant credit without collateral to their patients,
most of whom are local residents and are insured under
third-party payor agreements. The mix of accounts receivable
from patients and third-party payors at June 30, 1997 was:
Medicaid 47%
Medicare 26
Private 27
---
100%
===
Management has provided for potential credit losses through
direct write-offs and such write-offs have been within
management's expectations. Industry experience indicates that,
after such direct write-offs have been made, potential credit
losses are considered minimal, therefore, only a negligible
allowance for doubtful accounts is considered necessary by
management.
Estimates of allowances for adjustments included in net
patient service revenue are provided for as described in Notes
1 and 2.
LITIGATION
There are various lawsuits and regulatory actions pending
against the Centers as operated by Beverly arising in the
normal course of business or as a result of the early lease
termination. Management does not believe that the ultimate
resolution of these matters will have a material adverse
effect on the Centers' combined financial position or results
of operations.
LABOR CONCENTRATION
As of June 30, 1997, approximately 57% of the Centers'
employees were covered by collective bargaining agreements
with New England Health Care Employees Union, District
1199/SEIU, AFL-CIO ("Union"). These employees participate in
Union pension plans to which the Centers' contribute an amount
stipulated in each collective bargaining agreement.
<PAGE> 18
GREENWOOD HEALTH CENTER AND
HIGHLAND ACRES EXTEND-A-CARE CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
NOTE 6 - EMPLOYEE STOCK PURCHASE PLAN
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as
amended and restated) enables all full-time employees of
Beverly owned and/or operated facilities, having completed one
year of continuous service, to purchase shares of common stock
at the current market price through payroll deductions.
Beverly makes contributions in the amount of 30% of the
participant's contribution. Each participant specifies the
amount to be withheld from earnings per two-week pay period,
subject to certain limitations. Total contributions related to
this plan for the above Centers approximated $10,000, $37,000
and $27,000 for the six months ended June 30, 1997 and the
years ended December 31, 1996 and 1995, respectively.
NOTE 7 - EARLY LEASE TERMINATION AND DISCONTINUANCE OF LESSEE
OPERATIONS
In accordance with the terms of an agreement with the lessor,
BEC terminated its leases of the facilities and associated
real property effective July 1, 1997. In addition, BEC
transferred the operations of the Centers to the purchaser of
the lessor's real property and also sold furniture, fixtures,
equipment, consumable goods and certain accounts receivable to
this purchaser. Neither the purchaser nor the lessor assumed
any of Beverly's liabilities. As of the effective date, the
Centers ceased operation of the nursing homes. These combined
financial statements do not reflect any adjustments or losses
recognized by Beverly as a result of these lease termination
agreements.
