<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22261
LEXINGTON HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1468252
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1577 NEW BRITAIN AVENUE, FARMINGTON, CONNECTICUT 06032
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 674-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
COMMON STOCK, $.01 PAR VALUE NASDAQ SMALL CAP MARKET
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sales price on September 23, 1998, the aggregate market
value of the voting common stock held by nonaffiliates of the registrant was
$1,395,000.
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LEXINGTON HEALTHCARE GROUP, INC.
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 15, F1-F20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
Part III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 22
</TABLE>
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Part I
Item 1. Business
Lexington Healthcare Group, Inc. has three wholly-owned subsidiaries: Balz
Medical Services, Inc.("BALZ"), Professional Relief Nurses, Inc.("PRN"), and
Lexington Highgreen Holding, Inc. (collectively, the "Company"). The Company
also controls three joint ventures: Lexicon Pharmacy Services, L.L.C., Lexicore
Rehab Services, L.L.C. and Behavioral Rehab Services which began operations
during the fiscal year ended June 30, 1998.
The Company is a long-term and subacute care provider, which operates six
nursing home facilities (the "Facilities") with a total of 853 licensed beds in
the State of Connecticut. The Facilities provide a broad range of healthcare
services, including nursing care, subacute care (including rehabilitation
therapy), and other specialized services (such as care to Alzheimer's patients).
The Company's strategy in healthcare is to integrate the main disciplines of
nursing, pharmacy, social services and other therapies under one program.
In addition, the Company manages one nursing home (the "Managed Facility"), Oak
Island Skilled Nursing Center ("Oak Island") in Massachusetts, pursuant to a
management agreement; this is a non-affiliated facility.
The Facilities and the Managed Facility service two basic patient populations:
the traditional geriatric patient population and the population of subacute care
patients with higher acuity disorders who require more complex and intensive
medical services. Subacute care patients generally require more rehabilitative
therapy and are residents for a shorter period of time than traditional
geriatric patients. An important part of the Company's strategy is to achieve
high occupancy and a favorable payor mix by offering specialty medical services.
The Facilities have an occupancy rate of approximately 91% as of August 31,
1998. The Company operates a dedicated subacute unit within two of the
Facilities, in addition to providing subacute services in each of the other
Facilities.
The Company believes that the demand for long-term care and specialty medical
services will increase substantially over the next decade due primarily to
favorable demographic trends, advances in medical technology and emphasis on
healthcare cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities and home care agencies. In addition, the Company anticipates
that recent trends toward industry consolidation will continue and will provide
future acquisition opportunities.
The Company completed an initial public offering of its shares (the "Offering")
in May 1997 during which 1,125,000 shares of common stock and 1,940,625 common
stock purchase warrants were issued, resulting in net proceeds to the Company of
$4.1 million. Upon completion of the Offering the Company became the successor
to Lexington Health Care Group, LLC, a limited liability company ("LLC"), and
the members of LLC exchanged their membership interests in LLC for shares of the
Company's Common Stock representing a combined 59.7% ownership of the Company.
In May 1997 the Company acquired all of the capital stock of BALZ Medical
Services, Inc. ("BALZ") and also of Professional Relief Nurses, Inc. ("PRN")
from the shareholders of BALZ and PRN simultaneously with the closing of the
Offering.
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BALZ provides a variety of medical supplies, nutritional supplements,
institutional cleaning products, linens and everyday products including
toothpaste and incontinence products, to affiliated and non-affiliated nursing
homes, other institutional facilities and private persons. The Company's
strategy is to expand BALZ's business to become more of a traditional medical
supply company by supplying products to hospitals, doctor's offices and persons
at their homes through PRN.
PRN provides skilled nursing services to persons at home. PRN's personnel
include (i) registered nurses, who provide a broad range of nursing care
services, including skilled observation and assessment and intravenous therapy;
(ii) licensed practical nurses who perform, under the supervision of a
registered nurse, technical nursing procedures; (iii) physical and
rehabilitation therapists and (iv) certified nurses aides, who, under the
supervision of a nurse, provide health-related services and personal care. PRN
has begun to operate as a nursing pool agency whereby it supplies nurses and
other skilled personnel to hospitals, affiliated and non-affiliated nursing
homes and other home healthcare agencies on a temporary basis.
On July 1, 1997, Lexington Highgreen Holding, Inc. purchased substantially all
of the assets of two skilled nursing facilities, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ('Beverly").
All real estate, property, fixed and substantially all operating assets of the
nursing homes were acquired for a purchase price of approximately $6.8 million
which was financed by a mortgage on the real estate from Nationwide Health
Properties, Inc., the previous lessor to Beverly.
In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which is secured by its accounts receivable and
other assets; this line of credit expires on November 30, 1998. As of September
23, 1998, $200,000 was borrowed against this line of credit.
The Company has continued to develop its fully-integrated health network
including marketing 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. As part
of that strategy, the Company has formed three joint venture companies as
follows:
On October 15, 1997 Lexicore Rehab Services, L.L.C. began operations as a
50% owned joint venture with Core Rehab Management, L.L.C. The joint
venture is controlled by the Company and the results of its operations
from inception are included in the Company's consolidated financial
statements with appropriate recognition of minority interest. Lexicore is
presently serving the Company's nursing homes and PRN with further
expansion plans underway in Connecticut and Massachusetts.
On December 1, 1997 Lexicon Pharmacy Services, L.L.C. began operations as
a 70% owned joint venture with Pharmacy Corporation of America. The joint
venture is controlled by the Company and the results of its operations
from inception are included in the Company's consolidated financial
statements with appropriate recognition of minority interest. Lexicon is
presently serving the Company's nursing homes, six unaffiliated nursing
homes and has further expansion plans now underway in Connecticut and
Massachusetts.
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On March 9, 1998 the Company announced the formation of Behavioral Rehab
Services, a joint venture with Pioneer Healthcare, to develop and provide
psychological services to residents in nursing homes, initially in
Connecticut, with future expansion plans throughout the United States.
Behavioral Rehab has begun operations and is currently serving seven
nursing homes, but no significant revenues were recorded through June 30,
1998
On August 10, 1998 the Company announced that it had signed a letter of intent
to acquire five skilled nursing facilities located in Connecticut from Sun
Healthcare Group, Inc. The five homes are located in Bloomfield, Danbury,
Torrington, and Westport and have approximately 600 skilled nursing beds.
Negotiations, applications for regulatory approvals and due diligence reviews
for the acquisition of these facilities continue although there can be no
assurance that these acquisitions will actually be implemented.
In a separate development, the Company also stated on August 10, 1998 that
previously-announced plans to acquire a nursing facility in Braintree, MA were
terminated when the owner, Pioneer Healthcare moved the operation into Chapter 7
reorganization and closed the facility prior to obtaining regulatory approvals
for the sale to Lexington Healthcare Group.
As of August 31, 1998 the Company had approximately 1,294 full and part-time
employees, of which approximately 44% were covered by collective bargaining
agreements.
Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to
its initial public offering, the Company had operated as Lexington Health Care
Group, LLC, a limited liability company that was formed on March 8, 1995 and
commenced operations on July 1, 1995. The Company's principal offices are
located at 1577 New Britain Avenue, Farmington, Connecticut 06032 and its
telephone number is (860) 674-2700.
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Item 2. Properties
The following properties are leased.
<TABLE>
<CAPTION>
APPROXIMATE SQ.
LOCATION USE FT. OCCUPIED
- -------- --- ------------
<S> <C> <C>
Bentley Gardens Nursing Home 21,500
31 Terrace Avenue, West Haven, CT 06516-2698
Country Manor Nursing Home 27,000
64 Summit Road, Prospect, CT 06712-7060
Fairfield Manor Nursing Home 55,000
23 Prospect Street, Norwalk, CT 06850-3798
Pond Point Nursing Home 27,000
60 Platt Street, Milford, CT 06460-7697
Professional Relief Nurses, Inc. Nursing Services
800 Plaza Middlesex, Middletown, CT 06457 3,000
80 Phoenix Avenue, Waterbury, CT 06702 1,400
560 Saw Mill Road, West Haven, CT 06516 1,300
Balz Medical Services, Inc. Ancillary 9,350
362 Industrial Park Road, Middletown, CT 06457 Services/Products
Lexington Healthcare Group, Inc. Corporate Offices 4,500
1577 New Britain Avenue, Farmington, CT 06032
The following properties are owned.
<CAPTION>
APPROXIMATE SQ.
LOCATION USE FT. OCCUPIED
- -------- --- ------------
<S> <C> <C>
Greenwood Health Center Nursing Home 53,000
5 Greenwood Street, Hartford, CT 06106
Highland Acres Extend-a-Care Center Nursing Home 20,500
108 East Lake Street, Winsted, CT 06098
</TABLE>
Management considers its properties to be well maintained and sufficient for its
present operations.
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Item 3. Legal Proceedings
On July 31, 1998, Suzanne Nettleton, the former President and Administrator of
Professional Relief Nurses, Inc., the Company's home care subsidiary, initiated
a lawsuit against Lexington Healthcare Group, Inc., Professional Relief Nurses,
Inc. (PRN), and Jack Friedler, the Company's Chairman and CEO, in connection
with her termination as President of PRN. The suit alleges breach of contract
and wrongful discharge against the Company. The Company will vigorously defend
the suit on behalf of itself, PRN and Mr. Friedler; it believes that Ms.
Nettleton breached the contract, failed to perform in good faith and was
therefore terminated. At this time, it is not possible to estimate the final
cost to the Company to resolve this matter. However, with the intention of
avoiding the expenses of protracted litigation, the Company has entered into
settlement negotiations.
The Company has received notice of lawsuits initiated by Sundance Rehabilitation
Corporation in early July 1998 against three of its nursing homes for payment of
invoices for therapy services rendered. In total, the amounts claimed by
Sundance Rehabilitation is $625,000 which amounts have been recorded
appropriately on the Company's books, but remain unpaid. As mentioned in Item 1
above, on August 10, 1998 the Company announced that it had signed a letter of
intent to acquire five skilled nursing facilities from Sun Healthcare Group,
Inc., the parent of Sundance Rehabilitation. Management believes Sun Healthcare
Group will defer the collection proceedings until the closing of the nursing
home acquisitions.
The Company is involved in other legal proceedings and is subject to certain
lawsuits and claims in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that their resolution will not have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Lexington Healthcare Group, Inc.'s common stock, $.01 par value, was traded on
the National Market System of the NASDAQ Stock Market. Effective on July 16,
1998, the Company's stock trading was moved from the NASDAQ National Market to
The NASDAQ Small Cap Market because the Company did not meet certain new
criteria for continued trading on the National Market
The following table presents its high and low market prices, and dividend
information since trading began on May 14, 1997.
Quarterly Common Stock Price Ranges and Dividends
<TABLE>
<CAPTION>
Quarter High Low Dividend
------- ---- --- --------
<S> <C> <C> <C>
FY 1997
4th 8 1/4 5 1/2 $-0-
FY 1998
1st 7 3 $-0-
2nd 3 15/16 2 5/8 $-0-
3rd 4 2 7/8 $-0-
4th 3 7/16 2 1/2 $-0-
</TABLE>
Lexington Healthcare Group, Inc.'s common stock purchase warrants entitle the
holder to purchase one share of common stock at a price of $6.00 per share from
May 14, 1997 through May 13, 2003. Trading in the Company's warrants was also
moved to The NASDAQ Small Cap Market on July 16, 1998 as discussed above.
The following table presents its high and low market prices since trading began
on May 14, 1997.
Quarterly Common Stock Warrant Price Ranges
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C>
FY 1997
4th 3 3/8 1 1/2
FY 1998
1st 3 1/4 7/8
2nd 1 5/16 5/8
3rd 27/32 1/4
4th 17/32 1/4
</TABLE>
The Company has not paid dividends to date and has no present intention of
paying any dividends on its Common Stock in the foreseeable future, as it
intends to reinvest profits, if any, in the development and expansion of its
business.
The number of shareholders of record for the Company's common stock as of
September 1, 1998 was 30; the Company believes that its shares are beneficially
owned by over 500 individuals.
On September 23, 1998, the closing price of the Company's common stock was
$1.03.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
---- ---- ----
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Statement of Operations Data
Net revenues $ 58,252 $ 35,900 $ 33,641
Operating costs and expenses (58,248) (36,241) (33,180)
Other income 280 -- --
----------------------------------------------
Income (loss) before income taxes and minority interest 284 (341) 461
Provision for (benefit from) income taxes* 30 (66) 195
Minority interest (224) -- --
----------------------------------------------
NET INCOME (LOSS)* $ 30 $ (275) $ 266
======== ======== ========
Basic earnings (loss) per common share* $ .01 $ (.10) $ .11
======== ======== ========
Balance Sheet Data
Cash and cash equivalents $ 831 $ 1,000 $ 212
Working capital (deficiency) 3,074 287 (2,381)
Total Assets 25,613 15,432 9,614
Short-term borrowings 398 49 2.580
Total long-term debt excluding current maturities 7,424 107 102
Total stockholders equity $ 6,383 $ 6,395 $ 487
</TABLE>
* Historical or pro forma, as applicable. In 1996, Lexington Healthcare Group
was a limited liability company (LLC) and as such, it was the obligation of
the individual members of the LLC to report their proportionate share of
taxable income. Pro forma taxes are provided as if LLC had been subject to
tax as a regular corporation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
OVERVIEW
During the fiscal year ended June 30, 1998, the Company expanded its nursing
home operations with two additional facilities, formed and began operating three
healthcare joint venture companies, and initiated plans to acquire five
additional nursing homes, which plans were announced in August 1998.
In the previous fiscal year the Company had reorganized its capital structure
and completed an initial public stock offering (the "Offering") which raised net
proceeds of approximately $4.1 million. In connection with the Offering, the
Company acquired two businesses in the healthcare field, BALZ and PRN.
The Company believes that the demand for long-term care and specialty medical
services will increase substantially over the next decade due primarily to
favorable demographic trends, advances in medical technology and emphasis on
healthcare cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. In addition, the Company anticipates that recent trends toward
industry consolidation will continue and will provide future acquisition
opportunities.
The Company's operating strategy is to increase nursing home profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; adhere to strict cost standards at the Facility
level while providing effective patient care and containing corporate overhead
expenses; and become a fully integrated health network whereby the Company will
increase marketing of medical products and supplies, rehabilitative services,
institutional pharmaceutical services and nursing services to affiliated and
non-affiliated nursing homes and hospitals, as well as patients at home.
By concentrating its facilities and ancillary service operations within a
selected geographic region, the Company's strategy is to achieve operating
efficiencies through economies of scale, reduced corporate overhead, more
effective management supervision and financial controls. In addition, the
Company believes that geographic concentration also enhances the Company's
ability to establish more effective relationships with referral sources and
regulatory authorities in the states where the Company operates.
YEAR 2000 DISCLOSURE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation.
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The Company has not completed its assessment, but currently believes that costs
of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. In order to assure that this
does not occur, the Company plans to devote all resources required to resolve
any significant year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 ("1998 PERIOD") VS. YEAR ENDED JUNE 30, 1997 ("1997
PERIOD")
The 1998 period includes the operating results of six nursing facilities and of
the acquired subsidiaries, BALZ and PRN, for a full year and of the newly formed
joint ventures since inception, but only for part of the year. The 1997 period
results include the results of operations of four nursing facilities and of the
acquired subsidiaries, BALZ and PRN, since their acquisition on May 15, 1997.
For the year ended June 30, 1998, the Company had total revenues of $58,252,000
and total operating expenses of $58,248,000. These expenses consisted of
salaries and benefits of $42,823,000, food, medical and other supplies of
$4,077,000, other operating expenses (including rent of $2,623,000) of
$8,685,000, corporate, general and administrative expenses of $1,871,000, and
interest expense of $792,000. Other income of $280,000 was recorded on the sale
of the bed license in November 1997. The Company had income before income taxes
and minority interest of $284,000 and net income of $30,000 for the year ended
June 30, 1998.
Revenues in the 1998 period increased over the 1997 period by $22,352,000 or
62%, largely as a result of the acquisitions during May 1997 and July 1997. Of
the total change, an increase of $22,491,000 pertained to the nursing homes and
healthcare businesses acquired, but in the existing nursing facilities there was
a net decrease of $139,000 due to Medicaid and Medicare rate and settlement
adjustments and mix changes. In 1998 private pay and Medicaid occupancy
increased approximately 1% each over 1997, while in the same period Medicare
occupancy decreased approximately 2%. Overall, occupancy in those facilities
remained essentially unchanged.
Revenue received under cost reimbursement agreements is subject to audit and
retroactive adjustment by third-party payors. Provisions for estimated
adjustments are reflected in patient service revenue. Differences between
estimated adjustments and final settlements are recorded in the year of
settlement. The Company has recorded reductions in patient service revenue of
$699,000 and $45,000 during the years ended June 30, 1998 and 1997,
respectively, in connection with adjustments of previously recorded estimated
settlements. As shown below, prior year Medicaid interim rates were audited and
settled in 1998 resulting in revenue reductions of $584,000; net Medicare
reductions of $115,000 were also recorded as a result of Medicare's desk reviews
and amended cost reports:
<TABLE>
<CAPTION>
Impact of rate settlements
Year Medicaid Medicare
---- -------- --------
<S> <C> <C>
1996 $(273,000) $(115,000)
1997 (311,000) -
</TABLE>
The Company collected $102,000 in excess of the net carrying value of accounts
receivable purchased in connection with the Greenwood and Highland acquisitions.
Since the Company has collected more than originally recorded for these
purchased accounts receivable, such amount has been included in other revenue.
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Operating expenses in the 1998 period increased over the 1997 period by
$22,007,000 or 61%, largely as a result of the acquisitions noted above. Of the
total cost increase, $21,168,000 pertained to the nursing homes and healthcare
businesses acquired and $225,000 was from increased existing-facility and
corporate, general and administrative costs. Interest expense increased by
$614,000 mostly as a result of the new mortgage on the facilities acquired in
July 1997.
Income taxes were provided in the 1998 period on income before income taxes and
minority interest of $284,000; the combined federal and state effective tax rate
was 11%. A benefit from income taxes was provided in the 1997 period since the
Company reported a loss for that period.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 ("1997 PERIOD") VS. YEAR ENDED JUNE 30, 1996 ("1996
PERIOD")
The 1997 period results include the nursing facility operations for a full year.
The Company has recorded a reduction in patient service revenue of $45,000
during the year ended June 30, 1997 in connection with estimated Medicare and
Medicaid settlements.. The results of operations of the acquired subsidiaries,
BALZ and PRN, are included in operations since acquisition on May 15.
For the year ended June 30, 1997, the Company had total revenues of $35,900,000
and total expenses of $36,241,000. These expenses consisted of salaries and
benefits of $26,979,000, food, medical and other supplies of $2,689,000, other
operating expenses (including rent of $2,497,000) of $5,113,000, corporate,
general and administrative expenses of $1,282,000 and interest expense of
$178,000. The Company had a net loss of $275,000 for the year ended June 30,
1997.
Revenues in the 1997 period increased over the 1996 period by $2,259,000 or
6.7%; $1,301,000 of this increase was a result of increased rates, mix changes
and higher occupancy in the nursing facilities (net of $45,000 in revenue
adjustments as a result of expected Medicare and Medicaid settlements), $699,000
is due to additional revenues from subsidiaries acquired, and $259,000 as a
result of other revenue increases, principally third-party management fees.
Expenses in the 1997 period increased over the 1996 period by $3,061,000 or 9.2
%. $2,464,000 of this increase was a result of increased costs in the nursing
facilities and $597,000 is due to additional costs from subsidiaries acquired.
The major increase in nursing home costs were for higher salaries and benefits
including additional nursing, dietary, and housekeeping staffing (as a result of
higher occupancy and union and non-union wage increases of approximately 4%),
higher therapy costs and occupancy-driven higher operating expenses in
housekeeping, laundry, and nursing.
RESULTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1995 ("COMMENCEMENT OF OPERATIONS") TO JUNE 30, 1996
The Company had total revenues of $33,641,000 for the year ended June 30, 1996.
The Company had total expenses of $33,180,000 for the year ended June 30, 1996.
These expenses consisted of salaries and benefits of $24,839,000, food, medical
and other supplies of $2,065,000, other operating expenses (including rent of
$2,468,000) of $4,896,000, corporate, general and administrative expenses of
$1,126,000 and interest expense of $254,000. The Company had net income of
$461,000 and pro forma net income of $266,000 for the year ended June 30, 1996.
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During this year, the Company began its operations of the nursing homes and
incurred startup and financing costs which have been reduced in later periods.
Revenues in the second six months of this year decreased as the Company
experienced some vacancies due to construction of a subacute wing at the
Fairfield Facility but implemented plans to improve patient mix and census.
Expenses in the second six months increased by a total of $783,000 or 4.8% due
to higher salaries and benefits ($319,000), higher legal, accounting and
professional costs ($172,000), higher laundry and housekeeping costs to improve
service ($238,000) and higher interest ($54,000).
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations through operating revenues,
borrowings from banks, the prior operator of the Facilities and other private
lenders including stockholders, by financing its accounts receivable, by a
private placement of shares and warrants (subsequently rescinded), by a $2.5
million Medicaid overpayment from the State of Connecticut (repaid in full in
four months in 1997), through a public offering of its common stock (the
"Offering") which raised net proceeds of approximately $4.1 million and through
the sale of bed licenses for $1.5 million. The net proceeds of the Offering were
used to pay off remaining balances of previous borrowings, to fund the
acquisition of PRN and, after providing for other business development plans,
were added to the working capital of the Company. The net proceeds from the sale
of the bed licenses were added to working capital.
Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer. $104,000 of such loan was repaid
to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned $100,000 to the
Company in connection with the reacquisition of shares from a private placement
investor. Mr. Friedler's balance of $266,000 was then offset against loans due
from Lexington House in May 1997. Mr. Friedler also instructed the Company to
offset interest due him from the Company of $10,000 each during May and June
1997 against the Lexington House loan (which is discussed below). The Company
paid Mr. Dermer $16,000 in July 1997 to liquidate his loan.
In July 1995, the Company entered into an agreement to manage the day-to-day
business affairs of Lexington House, Inc., a nursing home with 67 licensed beds;
Lexington House is owned by Jack Friedler and his wife. The Company made certain
expenditures on behalf of Lexington House in anticipation that it would acquire
Lexington House. Subsequently, the negotiations for the sale were terminated
because the Company determined that such facility required too many capital
improvements. As of June 30, 1997, Lexington House, Inc. was indebted to the
Company in the amount of $290,000. Lexington House had agreed to a payment
schedule of $10,000 per month.
During the year ended June 30, 1998, $23,000 was charged for management fees and
costs, interest of $26,000 accumulated, and an additional $286,000 was advanced;
$30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998
an additional $50,000 was advanced. The total, with accumulated unpaid interest,
amounted to $649,000 as of July 31, 1998.
During September 1998, the balance of $649,000 was formalized into an 8%
interest bearing promissory note from Jack Friedler with $15,000 monthly
installments and a balloon payment of the remaining balance due May 31, 1999. As
security for the note, Mr. Friedler has pledged the right to receive a $15,000
monthly payment and also pledged 600,000 of his shares of the common stock of
the Company. As a result, the entire balance of this note is classified as a
current asset in the accompanying consolidated balance sheet.
13
<PAGE> 14
During the years ended June 30, 1998, 1997 and 1996, the Company expended
approximately $112,000, $290,000 and $462,000, respectively, in capital
improvements to the leased facilities. Any capital improvements made to these
facilities belong to the landlord. However, any amounts expended for capital
improvements are generally recouped in their entirety through the reimbursement
system. During the year ended June 30, 1998 the Company expended $231,000 for
capital improvements at its owned facilities which was funded by the mortgagor
under the terms of the mortgage.
In July 1997, the Company borrowed $6.8 million in connection with the
acquisition of land, buildings, bed licenses and operating assets of two nursing
homes. Interest is payable at 10% over the 25 year term of the mortgage. In
connection with the acquisitions, the Company also obtained from the former
owner an operating subsidy of $2.5 million which was reduced by the Company's
$1.3 million purchase of accounts receivable; the net balance is to be received
over five years. As noted above, some of the bed licenses acquired were sold for
$1.5 million.
On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000), December 31
($300,000), February ($150,000), and May 5, 1998 ($150,000). Interest on the
note of $20,000 was paid through December 31, 1997 and subsequently on May 5,
1998.
The Company has recorded $303,000 of investments in joint ventures (of which
$48,000 was paid through June 30, 1998) which began operations and became
profitable in fiscal 1998; positive cash flow is expected in fiscal 1999.
The Company's profitable ancillary businesses grew by approximately $8.7 million
from 1997 to 1998.
At June 30, 1998, the Company had cash and cash equivalents of $831,000,
receivables of $10,848,000, inventories of $777,000, prepaid expenses and other
current assets of $533,000, and a note receivable from its principal stockholder
of $595,000. Receivables including estimated third-party payer settlements
increased by $4,346 ,000 since June 30, 1997 due mostly to the nursing homes
acquired and generally higher rates in effect.
Working capital at June 30, 1998 was $3,074,000 as compared with working capital
of $287,000 at June 30, 1997. The principal reasons for the increase are
profitable operations in the joint ventures, the operating subsidy receivable
obtained in connection with the nursing home acquisitions, and the bed licenses
sold. Current liabilities at June 30, 1998 consist principally of trade accounts
payable, estimated third-party payor settlements due Medicaid, current portion
of notes and capital leases payable, accrued payroll and related taxes, income
taxes, and other accrued expenses.
In August 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which matures on November 30, 1998 and is secured
by its accounts receivable and other assets; borrowings under the line are also
personally guaranteed by the Company's Chairman and President. In November 1997
this line of credit was utilized with a borrowing of $1,000,000 for working
capital which was repaid after the sale of bed licenses. In March 1998 $400,000
was borrowed for working capital purposes; $200,000 of this was repaid in April,
1998; $1,800,000 was available at June 30, 1998.
14
<PAGE> 15
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Reports of Independent Certified Public Accountants on Consolidated
Financial Statements as of June 30, 1998 and 1997 and for the
Years Ended June 30, 1998, 1997 and 1996
Financial Statements:
Consolidated Balance Sheets
June 30, 1998 and 1997
Consolidated Statements of Operations
Years Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows,
Years Ended June 30, 1998,1997 and 1996
Notes to Consolidated Financial Statements
15
<PAGE> 16
DISANTO BERTOLINE & COMPANY, P.C.
628 HEBRON AVENUE, BUILDING #3
GLASTONBURY, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the accompanying consolidated balance sheets of Lexington
Healthcare Group, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
We also audited the adjustment, to reflect the Company's reorganization
described in Note B, that was applied to the 1996 consolidated financial
statements. In our opinion, such adjustment is appropriate and has been properly
applied.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 15, 1998
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows for the period from July 1, 1995
(commencement of operations) through June 30, 1996 of Lexington Healthcare
Group, Inc. and subsidiary. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated results of operations and consolidated cash
flows for the period from July 1, 1995 (commencement of operations) through June
30, 1996 of Lexington Healthcare Group, Inc. and subsidiary in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
October 18, 1996
With respect to Note J
November 5, 1996 and May 9, 1997
<PAGE> 18
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 831,000 $ 1,000,000
Accounts receivable - net of allowance for
doubtful accounts of $346,000 and $180,000
for 1998 and 1997, respectively 10,848,000 6,421,000
Estimated third-party payor settlements-Medicare 197,000 --
Estimated third-party payor settlements-Medicaid -- 278,000
Note receivable-related party 595,000 120,000
Inventories 777,000 403,000
Prepaid and other current assets 533,000 418,000
----------- -----------
Total current assets 13,781,000 8,640,000
PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 3,370,000 814,000
OTHER ASSETS
Security deposits - related parties 2,337,000 2,282,000
Residents' funds 206,000 161,000
Goodwill, net of accumulated amortization of $190,000 and
$20,000 for 1998 and 1997, respectively 3,181,000 3,275,000
Deferred tax asset 35,000 35,000
Bed licenses - net of accumulated amortization of $116,000 1,626,000 --
Operating subsidy receivable (less current portion of $104,000) 701,000 --
Other assets, net 376,000 55,000
Note receivable - related party -- 170,000
----------- -----------
8,462,000 5,978,000
----------- -----------
$25,613,000 $15,432,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (current portion) $ 296,000 $ 17,000
Accounts payable and accrued expenses 8,532,000 7,777,000
Estimated third-party payor settlements-Medicaid 1,686,000 --
Estimated third-party payor settlements-Medicare -- 323,000
Capital leases payable (current portion) 102,000 32,000
Income taxes payable 91,000 204,000
----------- -----------
Total current liabilities 10,707,000 8,353,000
OTHER LIABILITIES
Notes payable (less current portion) 7,047,000 44,000
Capital leases payable (less current portion) 377,000 63,000
Residents' funds payable 206,000 161,000
Deferred rent 364,000 416,000
----------- -----------
7,994,000 684,000
----------- -----------
Total liabilities 18,701,000 9,037,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note N)
MINORITY INTERESTS 529,000 --
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized
15,000,000 shares 41,000 41,000
Additional paid-in capital 6,126,000 6,168,000
Retained earnings 216,000 186,000
----------- -----------
Total stockholders' equity 6,383,000 6,395,000
----------- -----------
$25,613,000 $15,432,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 19
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net patient service revenue $ 57,610,000 $ 35,536,000 $ 33,536,000
Other revenue 642,000 364,000 105,000
------------ ------------ ------------
Total revenues 58,252,000 35,900,000 33,641,000
EXPENSES
Facility operating expenses:
Salaries and benefits 42,823,000 26,979,000 24,839,000
Food, medical and other supplies 4,077,000 2,689,000 2,065,000
Other operating expenses 8,685,000 5,113,000 4,896,000
Corporate, general and administrative expenses 1,871,000 1,282,000 1,126,000
Interest expense 792,000 178,000 254,000
------------ ------------ ------------
Total expenses 58,248,000 36,241,000 33,180,000
------------ ------------ ------------
Income (loss) from operations 4,000 (341,000) 461,000
OTHER INCOME
Gain on sale of bed licenses 280,000 -- --
------------ ------------ ------------
Income (loss) before income taxes and minority interest 284,000 (341,000) 461,000
INCOME TAXES (Proforma in 1996) 30,000 (66,000) 195,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES (224,000) -- --
------------ ------------ ------------
Net income (loss) (Proforma in 1996) $ 30,000 $ (275,000) $ 266,000
============ ============ ============
Basic earnings (loss) per common share (Proforma in 1996) $ 0.01 $ (0.10) $ 0.11
============ ============ ============
Weighted average number of common shares outstanding 4,125,000 2,724,000 2,462,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 20
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
Members Number Paid-in Retained
Equity of Shares Amount Capital Earnings TOTAL
------ --------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Capital contribution $ 26,000 - $ - $ - $ - $ 26,000
Adjustment for reorganization of entities
under common control (Note B) (26,000) 2,462,000 25,000 1,000 - -
Net income - - - - 461,000 461,000
--------- ---------- --------- ------------ ---------- -----------
Balance, June 30, 1996 $ - 2,462,000 25,000 1,000 461,000 487,000
=========
Issuance of common stock for legal services
rendered 130,000 1,000 59,000 - 60,000
Issuance of common stock in connection with the
acquisition of BALZ 300,000 3,000 1,497,000 - 1,500,000
Issuance of common stock in connection with the
acquisition of PRN 108,000 1,000 539,000 - 540,000
Issuance of common stock and warrants in connec-
tion with initial public offering, net of
issuance costs of $1,734,000 1,125,000 11,000 4,072,000 - 4,083,000
Net loss - - - (275,000) (275,000)
---------- --------- ------------ ---------- -----------
Balance, June 30, 1997 4,125,000 41,000 6,168,000 186,000 6,395,000
Additional costs of issuance (42,000) (42,000)
Net income 30,000 30,000
---------- --------- ------------ ---------- -----------
Balance, June 30, 1998 4,125,000 $ 41,000 $ 6,126,000 $ 216,000 $6,383,000
========== ========= ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 21
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 30,000 $ (275,000) $ 461,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 569,000 110,000 47,000
Minority interest in income of consolidated subsidiaries 224,000 -- --
Provision for doubtful accounts 166,000 105,000 75,000
Benefit from deferred taxes -- (97,000) --
Loss on disposal of assets 27,000 -- --
(Decrease) increase in deferred rent (52,000) (52,000) 468,000
Gain on sale of bed licenses (280,000) -- --
Changes in operating assets and liabilities:
Increase in estimated third-party payor settlements--Medicaid and
Medicare, net 1,444,000 46,000 --
Increase in accounts payable and accrued expenses 752,000 1,099,000 5,814,000
Increase in organization costs -- -- (70,000)
(Decrease) increase in due to related parties, net -- (291,000) 189,000
(Decrease) increase in income taxes payable (113,000) 204,000 --
Increase in prepaid and other current assets (115,000) (341,000) (65,000)
Increase in inventories (274,000) (240,000) (94,000)
(Increase) decrease in other assets (417,000) 85,000 --
(Increase) decrease in accounts and operating subsidy receivable (3,046,000) 282,000 (5,660,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,085,000) 635,000 1,165,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of bed licenses 1,550,000 -- --
Repayments of note receivable - related party 787,000 -- --
Cash paid for businesses acquired -- (1,434,000) --
Increase in security deposits - related parties (55,000) -- (2,282,000)
Increase in goodwill on purchase of subsidiary (75,000) -- --
Acquisition of property, equipment and leasehold improvements (681,000) (285,000) (346,000)
Disbursements on note receivable - related party (1,092,000) (162,000) (394,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 434,000 (1,881,000) (3,022,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of short term borrowings and Beverly receivables 400,000 500,000 3,527,000
Minority investment in consolidated joint ventures 305,000 -- --
Proceeds from mortgage note 231,000 -- --
Proceeds from issuance of common stock, net -- 4,143,000 26,000
Decrease (increase) in deferred registration costs -- 198,000 (131,000)
Proceeds of notes payable to officers -- 100,000 392,000
Financing costs -- -- (47,000)
Repayment of notes payable to officers (29,000) (110,000) (106,000)
Stock registration costs (42,000) -- --
Repayments of mortgage and term notes payable (88,000) -- --
Repayments of capital lease obligations (95,000) (34,000) (19,000)
Repayment of short-term borrowing (200,000) (2,763,000) (1,573,000)
----------- ----------- -----------
Net cash provided by financing activities 482,000 2,034,000 2,069,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (169,000) 788,000 212,000
CASH AND CASH EQUIVALENTS, beginning of year 1,000,000 212,000 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 831,000 $ 1,000,000 $ 212,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 22
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 789,000 $ 176,000 $217,000
Income taxes 145,000 -- --
Non-cash investing and financing activities:
Certain assets acquired through assumption of mortgage
note payable $6,863,000 $ -- $ --
Equipment and leasehold improvements acquired through
assumption of notes payable and capital leases 555,000 -- 148,000
Accounts payable financed by short-term borrowings -- -- 313,000
Deferred registration costs accrued -- -- 67,000
Common stock issued in connection with legal services
recorded as cost of issuance -- 60,000 --
Offset of note payable - officers/stockholders against
note receivable - related party -- 266,000 --
Details of businesses acquired was as follows:
Fair value of assets acquired $ -- $ 4,788,000 $ --
Liabilities assumed -- 1,314,000 --
---------- ----------- --------
Purchase price, net of cash received -- 3,474,000 --
Common stock issued for acquired businesses -- (2,040,000) --
---------- ----------- --------
Net cash paid for acquired businesses $ -- $ 1,434,000 $ --
========== =========== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 23
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexington
Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical
Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN" ), and
Lexington Highgreen Holding, Inc. (collectively, the "Company") as well as the
accounts of the following joint ventures controlled by the Company: Lexicore
Rehab Services, L.L.C. and Lexicon Pharmacy Services, L.L.C. All material
intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a long-term and subacute care provider, which operates six
nursing home facilities at June 30, 1998 with 853 beds licensed by the State of
Connecticut. The Company also provides medical supplies and durable medical
equipment to nursing homes and provides health care services in the homes of its
patients. In addition, the Company manages another nursing home pursuant to a
management agreement (see Note K).
JOINT VENTURES
The Company has a 50% interest in Lexicore Rehab Services, L.L.C. ("Lexicore"),
a Connecticut limited liability company, which was formed on September 11, 1997
to provide physical, occupational and speech therapy and other services to
qualified health care facilities. The operating agreement provides for Lexicore
to continue for an indefinite period of time, unless dissolved in accordance
with the agreement. In addition, in accordance with the operating agreement,
members are not personally liable for any debts or losses of Lexicore beyond
their respective capital contributions. The agreement also stipulates that after
making the initial capital contribution, no member shall be required to make any
additional capital contributions.
The Company has a 70% interest in Lexicon Pharmacy Services, L.L.C. ("Lexicon"),
a Delaware limited liability company, which was formed on October 31, 1997 to
provide institutional pharmacy services to qualified health care facilities and
the patients residing therein. The limited liability company agreement provides
for Lexicon to continue until November 1, 2002, with earlier termination
possible in the event of exercise by a member of an option to terminate or the
occurrence of certain other events specified in the agreement. The agreement
also stipulates that members are not personally liable for any debts or losses
of Lexicon beyond their respective capital contribution and that no member shall
be permitted or required to make any additional capital contributions, except as
specifically provided in the agreement.
Page F-1
<PAGE> 24
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JOINT VENTURES (CONTINUED)
In addition, the agreement contains a provision whereby the other member,
Pharmacy Corporation of America ("PCA"), may at its sole option, contribute cash
to Lexicon as preferred capital if funds in excess of the total capital
contributions contributed by the members are reasonably required by Lexicon. PCA
shall be entitled to a preferred return, as defined in the agreement, on its
preferred capital contribution and on any unpaid preferred return for any prior
fiscal year until repaid.
For financial reporting purposes, the assets, liabilities and earnings of these
joint ventures have been included in the Company's consolidated financial
statements. The other members' interest in the joint ventures has been recorded
as minority interest.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
PATIENT SERVICE REVENUE
Revenues are recognized at the time the service is provided to the patient. A
substantial amount of the Company's revenues are billed to third party payors,
i.e., Medicaid, Medicare and others under the provisions of reimbursement
formulas and regulations in effect.
Patient service revenue is reported at the estimated net realizable amount from
residents, third-party payors, and others for services rendered. Revenue
received under cost reimbursement agreements is subject to audit and retroactive
adjustment by third-party payors. Provisions for estimated adjustments have been
reflected in patient service revenue. Differences between estimated adjustments
and final settlements are recorded in the year of settlement.
MANAGEMENT FEES
The Company recognizes management fees as they are earned and accrues related
fees payable to subcontractors as they are incurred.
Page F-2
<PAGE> 25
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
defines cash equivalents as highly liquid instruments with an original maturity
of three months or less. The Company had cash equivalents of $141,000 at June
30, 1998 and $674,000 at June 30, 1997, consisting of overnight investments.
INVENTORIES
Inventories consisting of food, chemicals and supplies are valued at the lower
of cost or market, with cost determined on a first-in, first-out (FIFO) basis.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful lives of the
equipment. Leasehold improvements are amortized over the remaining period of the
respective leases or the estimated useful lives of the improvement, whichever is
shorter.
Maintenance, repairs and minor renovations are charged to operations as
incurred. Expenditures which substantially increase the useful lives of the
related assets are capitalized.
RESIDENTS' FUNDS
Residents' funds represent cash balances which have been deposited into a
separate bank account and are restricted for the use of the residents.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Prior to the reorganization (see Note B), Lexington Healthcare Group, Inc. was a
limited liability company ("LLC") and, as such, it was the obligation of the
individual members of the LLC to separately report their proportionate share of
the LLC's taxable income. Accordingly, the Company has not recognized a
provision for income taxes for the year ended June 30, 1996. However, the 1996
consolidated statement of operations includes a pro forma adjustment for incomes
taxes which would have been provided had LLC been subject to tax as a regular
corporation.
Page F-3
<PAGE> 26
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", which establishes a
fair value based method of accounting for an employee stock option or similar
equity instrument. SFAS No. 123 gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If the former
standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effects of using the new management criteria. The Company
intends to continue using the measurement prescribed by APB Opinion No. 25 and
accordingly, this pronouncement will not affect the Company's consolidated
financial position or results of operations.
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which requires a company to review the
carrying value of long-lived assets and certain intangibles for impairment when
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Management believes that the adoption of SFAS No.
121 will not have a material adverse effect on the Company's consolidated
financial statements.
EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share". The objective of SFAS No. 128 is to simplify the
standards for computing earnings per share (EPS) and make them comparable to
international EPS standards. It replaces the presentation of primary and
fully-diluted EPS with a presentation of basic and diluted EPS. All prior period
EPS data presented has been restated to conform with the provisions of this
statement. There is no difference between basic and diluted EPS for all periods
presented because there are no dilutive securities.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
Page F-4
<PAGE> 27
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an
initial public offering of its common stock in May, 1997 during which 1,125,000
shares of common stock at $5 per share and 1,940,625 common stock warrants at
$.10 per warrant were issued resulting in net proceeds to the Company of $4.1
million. Upon completion of this offering, the Company became the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"), and the
members of LLC exchanged their membership interests in LLC for 2,462,000 shares
of the Company's common stock representing a combined 59.7% ownership of the
Company. LLC was formed on March 8, 1995 and commenced operations on July 1,
1995. The business combination was accounted for as a reorganization of entities
under common control, in a manner similar to a pooling of interests, using LLC's
historical cost basis. Accordingly, the accompanying consolidated financial
statements for periods prior to the reorganization reflect the accounts and
operations of LLC and adjustment has been made to give effect to the
reorganization resulting in the restatement of certain stockholders' equity
accounts.
The Company acquired in May 1997, simultaneously with the closing of the public
offering, all of the common stock of BALZ and PRN. Prior to acquisition, the
members of LLC owned 44% and 25% of BALZ and PRN, respectively.
The Company acquired all of the common stock of BALZ in exchange for 300,000
shares of common stock of the Company which were valued at $1,500,000 based on
the price of the public offering.
The purchase price of PRN consisted of $1,620,000 payable in cash and the
exchange of 108,000 shares of common stock of the Company which were valued at
$540,000 based on the price of the public offering. Furthermore, prior to the
acquisition, PRN distributed 100% of its net book value to its former
stockholders; this book value was approximately $392,000. Certain adjustments
have been made during the year ended June 30, 1998 to record $76,000 of
additional liabilities assumed as a direct result of the purchase.
The acquisitions of BALZ and PRN have been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon their fair values at
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired was $3,371,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 20 years. The amount of goodwill
amortization was $170,000 and $20,000 for the years ended June 30, 1998 and
1997, respectively.
Page F-5
<PAGE> 28
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
(Continued)
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
BALZ PRN
---- ---
<S> <C> <C>
Working capital, other than cash $ 516,000 $ 268,000
Property and equipment 80,000 71,000
Other assets -- 38,000
Goodwill 1,135,000 2,236,000
Other liabilities (315,000) (555,000)
----------- -----------
Purchase price, net of cash received $ 1,416,000 $ 2,058,000
=========== ===========
</TABLE>
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. ("Beverly"). These
facilities are located in Hartford and Winsted, CT and at the time of purchase
had 240 and 75 licensed beds, respectively.
The Company is presently operating 225 beds, has returned the license on 40 beds
to the State of Connecticut and, in November 1997, sold the remaining license on
50 beds to an unrelated party for $1,550,000 in cash resulting in a gain of
$280,000 which is reflected as other income in the accompanying consolidated
statement of operations.
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. 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.
The acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets purchased
based on their fair values at the date of acquisition. The Company has not
recorded any goodwill in connection with this purchase but has allocated
$1,742,000 of the purchase price to bed licenses, which is being amortized over
15 years. The amount of bed license amortization was $116,000 for the year ended
June 30, 1998.
The operating results of these acquired nursing homes have been included in the
consolidated statement of operations from the date of acquisition. On the basis
of a pro forma consolidation of the results of operations as if the acquisition
of these nursing homes had taken place at the beginning of fiscal year 1997
(based on a representative period of time, a one-year period ending June 30,
1997 for the Company and the available one-year period ending December 31, 1996
for the nursing homes acquired), consolidated net revenues would have been $50.2
million for fiscal 1997.
Page F-6
<PAGE> 29
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
(CONTINUED)
Consolidated pro forma net loss would have been $(189,000) for fiscal 1997 and
pro forma loss per share would have been $(.07) for fiscal 1997. Such pro forma
amounts reflect the operating results produced by Beverly, as adjusted 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 these nursing homes, i.e., 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. However, the resulting pro forma amounts are not necessarily
indicative of what the actual consolidated results of operations might have been
had the acquisitions been effective at the beginning of fiscal 1997.
NOTE C - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, residents' funds, accounts
receivable, estimated third-party payor settlements - Medicare, note
receivable-related party, and operating subsidy receivable.
CASH AND CASH EQUIVALENTS AND RESIDENTS' FUNDS
The Company places its cash deposits with high credit-quality institutions and
such deposits exceeded federal depository insurance limits by approximately
$493,000 at June 30, 1998. However, the Company has not experienced any losses
in this area and management believes its cash deposits are not subject to
significant credit risk.
ACCOUNTS RECEIVABLE
The Company grants credit without collateral to its patients, all of whom are
residents of local communities in the State of Connecticut in which the
Company's facilities are located, and most of whom are insured under third-party
payor agreements. Management provides ongoing credit evaluations of its
residents and has provided for potential credit losses through direct write-offs
and such write-offs have been within management's expectations. Industry
experience indicates that, after such direct write-offs have been made,
potential credit losses are considered minimal, therefore only a negligible
allowance for doubtful accounts is considered necessary by management.
Page F-7
<PAGE> 30
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE C - FINANCIAL INSTRUMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
ACCOUNTS RECEIVABLE (CONTINUED)
The mix of receivables from patients, third-party payors and others as of June
30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Medicare and Medicaid 71% 80% 89%
Private insurance and other nongovernment 25 10 9
agencies
Other 4 10 2
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
ESTIMATED THIRD-PARTY PAYOR SETTLEMENTS - MEDICARE
This amount represents a government obligation, and as such, management believes
it represents negligible credit risk.
NOTE RECEIVABLE-RELATED PARTY
This amount is controlled by an officer and director of the Company and is
collateralized (see Note F); accordingly, management believes it represents
negligible credit risk.
OPERATING SUBSIDY RECEIVABLE
This amount is due from Beverly, a provider of health care services throughout
the United States, in connection with the Company's purchase of the assets of
two nursing homes. The receivable is unsecured, but Beverly has made all
required payments in a timely manner, and management believes it is not subject
to significant credit risk.
SECURITY DEPOSITS - RELATED PARTIES
This amount is controlled by entities related to the Company by common ownership
(see Note I); accordingly, management believes it represents negligible credit
risk.
Page F-8
<PAGE> 31
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE C - FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value of
Financial Instruments, requires disclosure of the fair value of financial
instruments for which the determination of fair value is practicable. SFAS No.
107 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following table sets forth the carrying amounts and estimated fair values of
financial instruments of the Company for which there is a difference between the
amounts. Financial liabilities:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
----- -----
<S> <C> <C>
Obligations under capital leases $479,000 $519,000
</TABLE>
The following methods and assumptions were used to estimate the fair value of
the above financial instrument:
Obligations under capital leases:
---------------------------------
The fair value is estimated by discounting the expected cash flows of
lease obligations using the Company's current borrowing rate.
The carrying amounts of the Company's other financial instruments approximate
their fair values as outlined below:
Cash and cash equivalents, residents' funds, accounts receivable and
accounts and accrued expenses payable:
--------------------------------------
The carrying amounts approximate their fair values because of the short
maturity of those instruments.
Notes payable:
--------------
The carrying amount approximates fair value because the interest rates on
the notes approximate the Company's current borrowing rate.
Management has determined that it is not practicable to estimate the fair value
of the note receivable - related party, security deposits - related parties, and
operating subsidy receivable due to the lack of marketability of these financial
instruments.
The Company's financial instruments are held for other than trading purposes.
Page F-9
<PAGE> 32
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS
The Company has recorded reductions in patient service revenue of $699,000 and
$45,000 during the years ended June 30, 1998 and 1997, respectively, in
connection with adjustments of previously recorded estimated settlements. As
shown below, prior year Medicaid interim rates were audited and settled in 1998
resulting in revenue reductions of $584,000; net Medicare reductions of $115,000
were also recorded as a result of Medicare's desk reviews.
<TABLE>
<CAPTION>
Impact of rate settlements
--------------------------
Year Medicaid Medicare
---- -------- --------
<S> <C> <C>
1996 $(273,000) $(115,000)
1997 (311,000) --
</TABLE>
As of June 30, 1998 and 1997 the Company had recorded the following amounts as
receivable and payable in connection with estimated Medicare and Medicaid
settlements:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Receivable $ 197,000 $278,000
Payable 1,686,000 323,000
</TABLE>
Such amounts represent management's best estimates of the amounts expected to be
realized or that may be due and are based on anticipated results of ongoing
negotiations, interpretation of applicable regulations and other assumptions. It
is reasonably possible that the amounts the Company will ultimately realize or
be obligated to pay could differ materially in the near term.
NOTE E - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- --------
<S> <C> <C>
Land and land improvements $ 321,000 $ --
Building and building improvements 1,486,000 --
Equipment 1,339,000 529,000
Leasehold improvements 608,000 407,000
---------- --------
3,754,000 936,000
Less accumulated depreciation and amortization 384,000 122,000
---------- --------
$3,370,000 $814,000
========== ========
</TABLE>
Depreciation and amortization expense totaled $267,000, $90,000, and $32,000 for
the years ended June 30, 1998, 1997, and 1996, respectively.
Page F-10
<PAGE> 33
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE F - NOTE RECEIVABLE--RELATED PARTY
At June 30, 1997, the Company had a $290,000 note receivable due from an entity
in which an officer and director of the Company has a controlling ownership
interest. During the year ended June 30, 1998, $23,000 was charged for
management fees and costs, interest of $26,000 accumulated, an additional
$286,000 was advanced and $30,000 was repaid; the balance due at June 30, 1998
was $595,000. In July 1998 an additional $50,000 was advanced and interest of
$4,000 accumulated, making the balance due $649,000 at July 31, 1998.
During September 1998, the $649,000 balance was converted into an 8%
interest-bearing promissory note due from the officer with $15,000 monthly
installments and a balloon payment of the remaining balance due May 31, 1999. As
security for the note, the officer has pledged the right to receive a $15,000
monthly payment and also pledged 600,000 of his shares of the common stock of
the Company, with the certificate representing such shares being held in escrow
by the Company's legal counsel. As a result, the entire balance of this note is
classified as a current asset in the accompanying consolidated balance sheet.
NOTE G - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- -------
<S> <C> <C>
10% mortgage note secured by property
and equipment of two nursing homes;
due in 2022, with monthly installments
of approximately $65,000 $7,028,000 $ --
10% bank line of credit 200,000 --
8.75% equipment term note payable to a bank;
due in 2003 with monthly installments of
approximately $2,000 97,000 56,000
9.95% vehicle term note; due in 2001 18,000 --
Demand note payable, noninterest bearing -- 5,000
---------- -------
7,343,000 61,000
Less: current portion 296,000 17,000
---------- -------
$7,047,000 $44,000
========== =======
</TABLE>
In July 1997 the Company financed the purchase of two nursing homes with a $6.8
million mortgage note payable to Nationwide Health Properties, Inc. Nationwide
has agreed to finance up to $2 million in improvements to the nursing homes made
in connection with change of ownership requirements. Through June 30, 1998,
$231,000 has been advanced for such improvements and is included in the mortgage
obligation above.
Page F-11
<PAGE> 34
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE G - NOTES PAYABLE (CONTINUED)
The Company is also obligated to deposit amounts monthly with Nationwide to
establish a debt service reserve of $360,000. As of June 30, 1998, $241,000 of
the reserve has been funded and is included in other assets in the accompanying
consolidated balance sheet.
In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which matures November 30, 1998 and is secured by
its accounts receivable and other assets. As of June 30, 1998, $200,000 was
borrowed against this line of credit.
Aggregate principal maturities of notes payable in succeeding years are as
follows:
<TABLE>
<S> <C>
Year ending June 30:
1999 $ 296,000
2000 105,000
2001 116,000
2002 124,000
2003 132,000
Subsequent to 2003 6,570,000
-----------
$ 7,343,000
===========
</TABLE>
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $5,534,000 $5,481,000
Accrued payroll and payroll taxes 2,310,000 1,474,000
Other accrued expenses 688,000 822,000
---------- ----------
$8,532,000 $7,777,000
========== ==========
</TABLE>
NOTE I - LEASE COMMITMENTS
CAPITAL LEASES
The following is an analysis of leased property under capital leases by major
class at June 30, 1998:
<TABLE>
<S> <C>
Equipment $587,000
Less: accumulated amortization (86,000)
--------
$501,000
========
</TABLE>
Page F-12
<PAGE> 35
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE I - LEASE COMMITMENTS (CONTINUED)
CAPITAL LEASES (CONTINUED)
Amortization expense relative to leased property under capital leases totaled
$47,000, $29,000, and $14,000 for the years ended June 30, 1998, 1997 and 1996
respectively, and is included in depreciation and amortization expense disclosed
in Note E.
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments:
<TABLE>
<S> <C>
Year ending June 30:
1999 $157,000
2000 151,000
2001 121,000
2002 119,000
2003 71,000
---------
Total minimum lease payments 619,000
Less: amount representing interest 140,000
---------
$ 479,000
=========
</TABLE>
RELATED PARTY OPERATING LEASES
The Company leases its nursing homes facilities (including certain equipment)
under an operating lease with a partnership related through common ownership.
The Company is responsible for property taxes, maintenance, insurance, etc.
under the lease. The lease agreement, as amended, commenced on July 1, 1995 and
is for a ten-year period, with four five-year renewal options at specified
rents. In addition, the Company leases its corporate office space from an entity
related through common ownership under an operating lease which expires in
February 2013 and has two five-year renewal options with rent at then market
rates. Further, the Company leases office and warehouse space from a limited
liability company related through common ownership under an operating lease
which expires January 31, 2002.
Future minimum lease payments required under these related party lease
obligations are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1999 2,686,000
2000 2,689,000
2001 2,693,000
2002 2,676,000
2003 2,659,000
Thereafter 6,682,000
-----------
$20,085,000
===========
</TABLE>
Page F-13
<PAGE> 36
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE I - LEASE COMMITMENTS (CONTINUED)
RELATED PARTY OPERATING LEASES (CONTINUED)
Rent expense charged to operations under these related party operating leases
aggregated $2,538,000, $2,488,000 and $2,481,000 for the years ended June 30,
1998, 1997, and 1996, respectively.
The Company has deposited with the related partnership, in connection with the
nursing home facilities lease, a non-interest bearing security deposit of
approximately $2.3 million as of June 30, 1998 and 1997. Such security deposit
is comprised of a payment of approximately $1.3 million made by the Company on
the related partnership's behalf and payments of $1 million representing excess
rent which was paid to the related partnership prior to the retroactive
reduction of periodic rent payments. The Company has also deposited, in
connection with its corporate office lease, a non-interest bearing security
deposit of approximately $55,000 as of June 30, 1998.
Deferred rent payable represents the excess of rent expense determined on a
straight-line basis over amounts paid to date pursuant to the lease with the
related partnership.
OTHER OPERATING LEASES
The Company's PRN subsidiary has other operating leases which expire in various
years through 2001. Rent expense charged to operations under such leases totaled
approximately $78,000 and $9,000 for the periods ended June 30, 1998 and 1997,
respectively. Future minimum lease payments required under these other operating
leases are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1999 55,000
2000 39,000
2001 3,000
--------
$97,000
=======
</TABLE>
NOTE J - STOCKHOLDERS' EQUITY
WARRANTS
In connection with the public offering, the Company has issued warrants to
purchase 1,940,625 shares of Company's common stock at $6 per share, subject to
adjustment in certain circumstances, which may be exercised at any time after
May 14, 1998 through May 13, 2003. The warrants are subject to redemption by the
Company at any time after May 14, 1998 at a price of $.05 per warrant provided
that the closing price of the Company's common stock has equaled or exceeded $10
per share for a period of twenty consecutive trading days.
Page F-14
<PAGE> 37
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
RESCISSION OF PRIVATE PLACEMENT
In November 1996, the Company completed a Private Placement of 500,000 shares of
common stock at $.50 per share together with warrants to acquire an additional
500,000 shares of common stock at $6.00 per share, and realized net proceeds of
$215,000 therefrom.
In May 1997, at the request of NASDAQ as a condition for the approval of the
Company's listing, the transaction was rescinded. The purchasers in the Private
Placement were not otherwise obligated to sell back their securities to the
Company, but nonetheless agreed to do so. The rescinding purchasers did not
receive consideration for their agreement to rescind, other than as described
herein. The Company purchased the above-noted shares and warrants for $250,000.
The Company has recorded the costs incurred in connection with the Private
Placement as an issuance cost associated with the public offering, but has not
reflected the issuance and repurchase of the 500,000 shares of common stock in
the accompanying consolidated statement of changes in stockholders' equity since
the transaction is deemed to have been `undone'.
STOCK OPTION PLAN
The Company has reserved 450,000 shares of its common stock for issuance
pursuant to stock options which may be granted pursuant to the Company's 1997
Stock Option Plan. The Plan provides for grants to employees, consultants and
directors of the Company. Subject to the provisions of the Plan, the Board has
the authority to determine the individuals to whom the stock options are to be
granted, the number of shares to be covered by each option, the exercise price,
the type of option, the option period, the restrictions, if any, on the exercise
of the option, the terms for the payment of the option price and other terms and
conditions.
As of June 30, 1997, the Company had granted no stock options. During the year
ended June 30, 1998, the Company issued options to purchase 302,000 shares of
its common stock to directors and employees at exercise prices ranging from
$2.625 to $3.062 based on the market value at date of grant. Such options vest
at a rate of one-third per year and are fully vested on the fourth anniversary
of their issuance. The options expire December 16, 2003 and March 17, 2004
depending on their date of issuance. Through June 30, 1998 no options have been
exercised.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation". In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion No. 25 in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost at the grant date.
Page F-15
<PAGE> 38
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123, net
income and income per share would have been adjusted to the pro forma amounts
indicated below:
The fair value of each option grant is estimated on the date of grant with the
following assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Expected volatility 41%
Risk-free interest rate 9%
Expected life of options 72 months
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1998
------------------------
As reported Pro forma
----------- ---------
<S> <C> <C>
Net income (loss) $30,000 $(21,000)
======= =========
Basic earnings (loss) per common share $ .01 $ (.01)
======= =========
</TABLE>
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 per
value, with such rights, preferences and designations and to be issued in such
series as determined by the Board of Directors. As of June 30, 1998, the Company
has issued no preferred stock.
NOTE K - MANAGEMENT FEE
The Company had managed a nursing home owned by an entity in which an officer
and director of the Company has a controlling interest (see Note F); revenues
earned in connection with this agreement were $18,000, $72,000, and $72,000 for
the years ended June 30, 1998, 1997 and 1996, respectively. The contract ended
as of September 30, 1997. Also during the year ended June 30, 1998 medical
supplies, pharmacy products, and therapy services were provided to this entity
by Balz, Lexicon and Lexicore. A total of $92,000 was charged for these products
and services; there was a balance due to the Company of $98,000 at June 30,
1998.
The Company also manages a second home which is an unrelated entity under a
contract which extends through June 30, 1998 and generates an annual management
fee of approximately $207,000. The Company subcontracts the management of this
facility at an annual cost of approximately $188,000.
Page F-16
<PAGE> 39
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE L - INCOME TAXES
The components of the provision for (benefit from) income taxes for the years
ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current:
Federal $ -- $(11,000)
State 30,000 42,000
-------- --------
30,000 31,000
-------- --------
Deferred:
Federal -- (97,000)
State -- --
-------- --------
-- (97,000)
-------- --------
$ 30,000 $(66,000)
======== ========
</TABLE>
Certain of the entities included in the consolidated financial statements were
separate taxpayers for tax purposes for the first ten months of fiscal 1997. The
income tax expense for all prior periods was recorded on an entity by entity
basis as of May 14, 1997. Effective May 15, 1997, the entities became members of
a consolidated group for tax purposes.
The Company has recorded a valuation allowance of $35,000 and $459,000 at June
30, 1998 and 1997, respectively to reflect the estimated amount of deferred tax
assets. A valuation allowance is required if it is more likely than not that
some or all of the deferred tax assets will not be realized in future years.
The significant components of the deferred tax provision for 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net operating loss $ (84,000) $ --
Bad debt reserve (52,000) (80,000)
Property and equipment 27,000 (14,000)
Organizational costs 31,000 (24,000)
Deferred rent 21,000 (172,000)
Accrued expenses (118,000) (266,000)
Deferred revenue 599,000 --
Valuation allowance (424,000) 459,000
--------- ---------
$ -- $ (97,000)
========= =========
</TABLE>
Page F-17
<PAGE> 40
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE L - INCOME TAXES (CONTINUED)
The components of the net deferred tax asset and liability as of June 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) 1998 1997
--------------------------------- --------- ---------
<S> <C> <C>
Net operating loss - federal $ 84,000 $ --
Bad debt reserve 132,000 80,000
Property and equipment (13,000) 14,000
Organizational costs (7,000) 24,000
Deferred rent 151,000 172,000
Accrued expenses 384,000 266,000
Deferred revenue (661,000) (62,000)
Valuation allowance (35,000) (459,000)
--------- ---------
Net deferred tax asset $ 35,000 $ 35,000
========= =========
</TABLE>
The net change in the valuation allowance for deferred tax assets was a
decrease of $424,000 for the year ended June 30, 1998 and an increase of
$459,000 for the year ended June 30, 1997.
The principal reasons for the difference between the statutory federal
income tax rate and the effective rate are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Statutory federal income tax rate 34.0% (34.0%)
State taxes, net of federal benefits 7.0 8.8
Goodwill amortization 20.2 2.2
Minority interest adjustment (26.8) --
Purchase accounting adjustments and
change in tax status -- 3.6
Other adjustments (1.5) --
Valuation allowance (22.3) --
------ ------
10.6% (19.4%)
====== ======
</TABLE>
Page F-18
<PAGE> 41
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE M - RISKS AND UNCERTAINTIES
LABOR CONCENTRATION/PENSION CONTRIBUTION
As of June 30, 1998, approximately 44% of the Company's employees were covered
by five separate collective bargaining agreements with New England Health Care
Employees Union, District 1199/SEIU, AFL-CIO ("Union") three of which expire in
October, 1998 (representing 31% of the Company's employees) and two of which
expire in November, 2000.
These employees participate in Union pension plans to which the Company
contributes an amount stipulated in each collective bargaining agreement. For
the year ended June 30, 1998, 1997 and 1996, contributions were approximately
$842,000, 572,000 and $397,000, respectively.
PATIENT SERVICE REVENUE
Approximately 82%, 86% and 89% of net patient service revenue was derived under
federal and state third-party reimbursement programs in 1998, 1997 and 1996,
respectively. These revenues are based, in part, on cost reimbursement
principles and are subject to audit and retroactive adjustment by the respective
third-party fiscal intermediaries. The general trend in the nursing home
industry is lower private pay utilization due to liberal asset transfer rules
and the degree of financial planning that takes place by the general public. The
Company's ability to maintain the current level of private pay utilization and
thereby reduce reliance on third-party reimbursement is uncertain due to the
economic and regulatory environment in which all Connecticut nursing homes
operate. The decline in the above-noted percentages reflects that an increasing
amount of the Company's revenues are from non-nursing home operations which
typically have lower federal and state reimbursement program utilization.
MALPRACTICE INSURANCE
The Company maintains malpractice insurance coverage on an occurrence basis. It
is the intention of the Company to maintain such coverage on an occurrence basis
in ensuing years. As of June 30, 1998, no known malpractice claims have been
asserted against the Company which, either individually or in the aggregate, are
in excess of insurance coverage.
Page F-19
<PAGE> 42
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE N - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has employment agreements with three of its executive officers which
became effective upon consummation of the public offering. The agreements
provide that such individuals shall devote substantially all of their working
time and attention to the business of the Company and contain certain
non-compete provisions. The agreements have an initial term of five years and
are automatically renewable for successive one-year periods unless either the
Company or the employee elects not to renew his or her employment.
The CEO's agreement provides for a $250,000 annual salary, with cost of living
increases and a bonus equal to 1% of the Company's net income before taxes. The
President's employment agreement is identical except that the salary is $175,000
annually.
The agreement with the president of BALZ provides for a base annual salary of
$100,000, subject to five percent annual increases, plus a bonus of 3.75% of
BALZ's net profits before taxes.
CONTINGENCIES
On July 31, 1998, the former President of PRN, the Company's home care
subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN,
and the Company's Chairman and CEO, in connection with her termination as
President of PRN. The suit alleges breach of contract and wrongful discharge
against the Company. The Company will vigorously defend the suit; it believes
that plaintiff breached the contract, failed to perform in good faith and was
therefore terminated. At this time, it is not possible to estimate the final
cost to the Company to resolve this matter. However, with the intention of
avoiding the expenses of protracted litigation, the Company has entered into
settlement negotiations.
The Company is also involved in other legal proceedings and is subject to
certain lawsuits and claims in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that their resolution will not have a material adverse effect on the
Company's consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS -- ACQUISITION OF NURSING HOMES
The Company has signed a letter of intent to acquire five skilled nursing
facilities located in Connecticut from Sun Healthcare Group, Inc.; these five
homes are located in Bloomfield, Danbury, Torrington, and Westport and have
approximately 600 skilled nursing beds. These acquisitions are subject to
regulatory approval and financing.
Page F-20
<PAGE> 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On August 15, 1997, the Board of Directors of Lexington Healthcare Group, Inc.
appointed the firm of DiSanto Bertoline and Company, P.C. as the Company's
auditors replacing the firm of Richard A. Eisner & Company, LLP, which was
dismissed by the Board of Directors effective the same date.
The report of Richard A. Eisner & Company, LLP on the Company's June 30, 1996
consolidated financial statements contained an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern.
Their report, as reissued herein, eliminates the going concern explanatory
paragraph that appeared in the original report.
There were no disagreements as to accounting policies or other financial issues
with the former accounting firm.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, together with their ages
and present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jack Friedler ........... 66 Chief Executive Officer, Chairman of the Board
and Director
Harry Dermer ............ 46 President, Chief Operating Officer and Director
Gary Coltek ............. 41 Director
Dov Berkowitz, MD ....... 44 Director
Mary Archambault ........ 47 Executive Vice President and Secretary
Thomas E. Dybick ........ 50 Chief Financial Officer
David O. Bond ........... 36 Senior Vice President Operations
Lawrence W. Fusco ....... 50 Controller
</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. He managed Fairfield Manor Health Care
Center, Pond Point Health Care Center, Country Manor Health Care Center and
Bentley Gardens Health Care Center from 1981 to 1986. Mr. Friedler was a
co-founder of PRN in 1981. Mr. Friedler spends approximately 35 hours per week
on matters relating to the Company's business.
16
<PAGE> 44
Harry Dermer has served as President, Chief Operating Officer and Director of
the Company since its inception in February 1995. Mr. Dermer has a Connecticut
nursing home administrator's license. Prior to February, 1995, Mr. Dermer
co-founded Prometheus Pharmacy and Nursing Homes America, Inc., which are
divisions of the Olympus Healthcare Group, where he served as Chief Financial
Officer from 1994 to 1995, and Mediscript Pharmacy, Inc., a division of
Mediplex, where he served as Chief Financial Officer from 1993 to 1994.
Previously from 1990 to 1993 he was Vice President of Operations and Chief
Financial Officer of Reliance Pharmacy Corp.
Gary Coltek has been an independent director of the Company since January
1998. Since 1996, Mr. Coltek has been Executive Vice President of
Infumatrix, where he is responsible for infusion management. Also since
1996, Mr. Coltek has been Vice President of Operations of Phymatrix, where he
is responsible for physician management. From 1994 to 1996, Mr. Coltek was
President of Care Group, where he was responsible for infusion management.
Mr. Coltek received a B.S. in Business in 1978 from the State University of
New York.
Dr. Dov Berkowitz has been an independent director of the Company since
January 1998. Since 1984, Dr. Berkowitz has been in private practice as an
Orthopedic Surgeon. Dr. Berkowitz received his M.D. in Medicine from the
Mount Sinai School of Medicine in 1974 and received certification as an
orthopedic surgeon from Mount Sinai Hospital in 1984.
Thomas E. Dybick has served as the Company's Chief Financial Officer since
September, 1996. He is a Certified Public Accountant. Prior thereto, from
1992 to 1996 Mr. Dybick was Chief Financial Officer of AHF/Connecticut
Management, Inc. which managed six nursing homes in Connecticut and
Massachusetts. Previously, Mr. Dybick was employed by the law firm of Levy &
Droney, PC as Executive Director (1985-1992).
Mary Archambault has served as President of BALZ since its inception in 1995.
Prior thereto, Ms. Archambault co-founded Prometheus Pharmacy and Nursing
Homes America, Inc., where she served as Executive Vice President from 1994
to 1995. She also co-founded Mediscript Pharmacy, Inc.'s Medicare Part B
division, which was a division of Mediplex, where she served as Executive
Vice-President from 1993 to 1994. Previously, Ms. Archambault was Manager of
Medical Supplies and Medicare Part B Services for Allcare Pharmacy, Inc. from
1990 - 1993. Ms. Archambault has a Connecticut Nursing Home Administrator's
license and is a licensed Practical Nurse in Connecticut.
David Bond has served as Senior Vice President Operations since February, 1998.
From 1993-1998 he was Vice President of Administration of Masonic Geriatric
Healthcare Center where he led the operations of a 544 bed multiple-licensed
facility. Prior to that, he was VP of Operations at Quality Care Centers of
Massachusetts where he developed the first subacute center in that state. He
began his healthcare career in 1988 at ADS Management in Massachusetts. Mr. Bond
has his MBA in Healthcare from Boston University and a Masters in Education from
the University of Virginia. He is a licensed Nursing Home Administrator in
Connecticut and Massachusetts.
Lawrence W. Fusco has served as the Company's Controller since July, 1997. He is
a Certified Public Accountant. Prior thereto, from 1996 to 1997, Mr. Fusco was
Division Controller of American Medical Response, a national ambulance and
handi-van company. Previously, since 1991 he was Controller of The H.P. Hallock
Co., a retailer.
17
<PAGE> 45
Item 11. Executive Compensation
The following table sets forth the cash compensation, as well as certain other
compensation paid or accrued, by the Company to Jack Friedler, its Chief
Executive Officer, and Harry Dermer, its President and Chief Operating Officer,
Mary Archambault, it Executive Vice President and Secretary, and Thomas E.
Dybick, its Chief Financial Officer during the fiscal years ended June 30, 1998,
1997 and 1996. Other than Messrs. Friedler, Dermer, Dybick and Ms. Archambault,
no other executive officer of the Company had a total annual salary and bonus of
$100,000 during the reported periods. The executive compensation received from
PRN by Suzanne Nettleton, its former President, is also disclosed below.
<TABLE>
<CAPTION>
------------------------------------------ -------------------
Long Term
Annual Compensation Compensation
------------------------------------------ -------------------
Stock
Name and Principal Position Year Salary Bonus Options Granted
----------- -------- -----
<S> <C> <C> <C> <C>
Jack Friedler, Fiscal 1996 $210,000(1) -- --
Chief Executive Officer and Director Fiscal 1997 $260,000 -- --
Fiscal 1998 $266,250 $17,586 60,000
Harry Dermer, Fiscal 1996 $127,204 -- --
President, Chief Operating Officer and Fiscal 1997 $174,980 -- --
Director Fiscal 1998 $179,196 $14,317 60,000
Suzanne Nettleton, Fiscal 1996 $122,237(1) $38,121 --
Former President of PRN Fiscal 1997 $132,492 $31,376 --
Fiscal 1998 $161,232 $ 5,444 --
Thomas E. Dybick, Fiscal 1997 $ 72,037 -- --
Chief Financial Officer Fiscal 1998 $110,318 $ 4,392 20,000
Mary Archambault, Fiscal 1996 $ 54,256 -- --
Executive Vice President, Secretary, Fiscal 1997 $159,783 -- --
President of BALZ Fiscal 1998 $107,088 $15,041 40,000
</TABLE>
1) In addition, Jack Friedler and Suzanne Nettleton each received director fees
of $40,000 for serving as Directors of PRN, but are no longer entitled to
such fees after the Company's acquisition of PRN.
The Company has employment agreements with three of its executive officers which
became effective upon consummation of the Offering. The agreements provide that
such individuals shall devote substantially all of their working time and
attention to the business of the Company and contain certain non-compete
provisions.
The agreements have an initial term of five years and are automatically
renewable for successive one-year periods unless either the Company or the
employee elects not to renew his or her employment.
18
<PAGE> 46
The CEO's agreement provides for a $250,000 annual salary, with cost of living
increases and a bonus equal to 1% of the Company's net income before taxes. The
President's employment agreement is identical except that the salary is $175,000
annually. The agreement with the president of BALZ provides for a base annual
salary of $100,000, subject to five percent annual increases, plus a bonus of
3.75% of BALZ's net profits before taxes.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person owned of record or was known to own beneficially more than five
percent (5%) of the outstanding common stock of the Company except as noted
below. The following table shows the amount of common stock owned as of
September 25, 1998 by each Director, and by all Directors and officers as a
group, consisting of seven persons.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial Ownership of
of Beneficial Owner Shares Owned Class
- -------------------------------------------------------------------------- --------------------- ---------
<S> <C> <C>
Jack Friedler, Chief Executive Officer, Chairman of the Board and Director 2,026,500 49.1%
Harry Dermer, President, Chief Operating Officer and Director 685,500 16.6%
Dov Berkowitz, MD, Director 0 0%
Gary Coltek, Director 0 0%
Mary Archambault, Executive Vice President, Secretary 60,000 1.5%
Thomas E. Dybick, Chief Financial Officer 0 0%
</TABLE>
19
<PAGE> 47
Item 13. Certain Relationships and Related Transactions
In July 1995, the Company entered into an agreement to manage the day-to-day
business affairs of Lexington House, Inc., a nursing home with 67 licensed beds.
Lexington House is owned by Jack Friedler and his wife. As of June 30, 1997,
Lexington House, Inc. was indebted to the Company in the amount of $290,000.
Lexington House had agreed to a payment schedule of $10,000 per month.
During the year ended June 30, 1998, $23,000 was charged for management fees and
costs, interest of $26,000 accumulated, and an additional $286,000 was advanced;
$30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998
an additional $50,000 was advanced and interest of $4,000 accumulated, making
the balance due $649,000 at July 31, 1998.
During September 1998, the $649,000 balance was converted into an 8%
interest-bearing promissory note due from the officer with $15,000 monthly
installments and a balloon payment of the remaining balance due May 31, 1999. As
security for the note, the officer has pledged the right to receive a $15,000
monthly payment and also pledged 600,000 of his shares of the common stock of
the Company, with the certificate representing such shares being held in escrow
by the Company's legal counsel. As a result, the entire balance of this note is
classified as a current asset in the accompanying consolidated balance sheet.
In addition, Lexington House owes $98,000 in accumulated trade accounts payable
to Balz, Lexicore and Lexicon which it has agreed to pay by December 31, 1998.
On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000), December 31
($300,000), February 3 ($150,000), and May 5, 1998 ($150,000). Interest on the
loan (amounting to $20,000) was paid in full.
In connection with the Company's reorganization and the Offering, the previous
members of Lexington Health Care Group, LLC, Jack Friedler, his wife Stephanie
Friedler and Harry Dermer, exchanged their respective interests (37.5%, 37.5%
and 25%) in the LLC for an aggregate of 2,462,000 shares of Common Stock of the
Company.
Effective July 1, 1995, the Company entered into a ten-year lease, which was
subsequently and retroactively amended, for four of the nursing homes operated
by the Company. Jack Friedler, the Company's Chief Executive Officer is a 33.33%
limited partner of the lessor, Fairfield Group Health Care Centers Limited
Partnership ("Fairfield"). The Company's annual rent expense for the year ended
June 30, 1998 was $2,468,000. The Company believes that the terms of the lease
are as favorable to the Company as those that could have been obtained from
nonaffiliated parties.
20
<PAGE> 48
The partners owning the remaining 66.66% interest in Fairfield were also owners
of an aggregate of 50% of the capital stock of PRN which interest was purchased
by the Company for a total of $1,080,000. Jack Friedler was the owner of 25% of
PRN; in exchange for Mr. Friedler's interest in PRN, the Company issued Mr.
Friedler 108,000 shares of the Company's Common Stock valued at $540,000, based
on the public offering price. Suzanne J. Nettleton, former President of PRN, was
owner of the remaining 25% of the capital stock of PRN. The Company purchased
Ms. Nettleton's interest for $540,000.
The Company leases its corporate office space from an entity in which Jack
Friedler and Harry Dermer own 50% under an operating lease which expires in
February 2013 and has two five-year renewal options with rent at then market
rates. Annual gross rental expense under this lease is $120,000; subleases of
space intended for future expansion are expected to reduce annual rental expense
to approximately $60,000; the Company's rent expense during the period ended
June 30, 1998 was $10,000. Further, the Company leases office and warehouse
space for BALZ from a related limited liability company owned in part by Messrs.
Friedler and Dermer and Ms. Archambault under an operating lease which expires
January 31, 2002. The Company's annual rent expense for the year ended June 30,
1998 was $42,000.
The Company acquired all of the capital stock of BALZ from its existing
stockholders (including Jack Friedler, Harry Dermer and Mary Archambault) in
exchange for an aggregate of 300,000 shares of the Company's Common Stock
(valued at $1,500,000 based on the public offering price). The following number
of shares were issued to Officers and Directors of the Company in exchange for
their shares of BALZ:
<TABLE>
<S> <C>
Jack Friedler 72,000
Harry Dermer 60,000
Mary Archambault 60,000
</TABLE>
Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer which loans paid interest at an
annual rate of 10%. A total of $104,000 was repaid to Mr. Friedler in August
1996. In May 1997 Mr. Friedler loaned another $100,000 to the Company in
connection with the reacquisition of shares from a private placement investor.
Mr. Friedler's balance of $266,000 was then offset against loans due from
Lexington House in May 1997. Mr. Friedler also instructed the Company to offset
interest due him from the Company of $10,000 each during May and June 1997
against the Lexington House loan. The Company was indebted to Mr. Dermer for
$16,000 as of June 30, 1997, but this balance was repaid in July 1997.
Jack Friedler and Harry Dermer entered into a stockholder's agreement, effective
in May, 1997, which includes, among other things, the grant of a mutual right of
first refusal to purchase any shares of Common Stock beneficially owned by the
other stockholder, and a mutual agreement to vote for the other stockholder as a
Director of the Company.
With respect to each of the foregoing transactions, although the Company has not
obtained any independent fairness opinions, the Company believes that the terms
of such transactions were as fair to the Company as could be obtained from an
unrelated third party. In the event the Company enters into negotiations to
acquire any business or assets of a related party it will secure an independent
appraisal. Future transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and will be approved
by a majority of the independent and/or disinterested members of the Board of
Directors.
21
<PAGE> 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
(1) The following financial statements and supplementary data are
included in Part II Item 8:
Reports of Independent Certified Public Accountants on Financial
Statements
Financial Statements:
Consolidated Balance Sheets - June 30, 1998 and 1997
Consolidated Statements of Operations - Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity Years
Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended June 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(2) The following schedule for the years 1998, 1997 and 1996 is
submitted herewith:
Reports of Independent Certified Public Accountants on Financial
Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K:
No reports were filed during the quarter ended June 30, 1998.
(c) Exhibits
(11) Earnings per share calculation
(21) Subsidiaries
22
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
LEXINGTON HEALTHCARE GROUP, INC.
(Registrant)
By: s/Harry Dermer
-------------------
Harry Dermer, President, Chief Operating Officer and Director
Date: September 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
s/Jack Friedler Chief Executive Officer, Chairman of Date: September 28, 1998
------------------------ the Board and Director
Jack Friedler
s/Thomas E. Dybick Chief Financial Officer Date: September 28, 1998
------------------------
Thomas E. Dybick
s/Gary Coltek Director Date: September 28, 1998
------------------------
Gary Coltek
s/Dov Berkowitz, MD Director Date: September 28, 1998
------------------------
Dov Berkowitz, MD
s/Mary Archambault Executive Vice President and Date: September 28, 1998
------------------------ Secretary
Mary Archambault
s/Lawrence W. Fusco Controller Date: September 28, 1998
------------------------
Lawrence W. Fusco
</TABLE>
23
<PAGE> 51
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Net income (loss) $ 30,000 $ (275,000) $ 461,000
---------- ----------- ----------
Net income (loss) for basic earnings per common share $ 30,000 $ (275,000) $ 266,000*
========== =========== ==========
Weighted average number of common shares
outstanding during the year 4,125,000 2,724,000 2,462,000
---------- ----------- ----------
Weighted average number of shares used in
calculation of basic earnings per share 4,125,000 2,724,000 2,462,000
========== =========== ==========
Basic earnings (loss) per common share $ .01 $ (0.10) $ 0.11*
========== =========== ==========
</TABLE>
Earnings per common share is computed using the weighted average number of
shares deemed outstanding as adjusted for the exchange of shares between
entities under common control. There is no difference between basic and diluted
earnings per common share for all periods presented because there are no
dilutive securities.
* Reflects effect of pro forma income taxes of $195,000
24
<PAGE> 52
LEXINGTON HEALTHCARE GROUP, INC.
SCHEDULE OF SUBSIDIARIES
PARENT (Registrant)
- -------------------
Lexington Healthcare Group, Inc.
Wholly-owned subsidiaries
- -------------------------
Balz Medical Services, Inc.
Lexington Highgreen Holding, Inc.
Professional Relief Nurses, Inc.
25
<PAGE> 53
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-------------------------------------------
Other
Charged to Changes -
Balance at Charged to other Add Balance at
Beginning Costs and Account - (Deduct)- End of Year
Year Description of Year Expenses Describe Describe
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 Allowance for doubtful
amounts $180,000 $166,000 $346,000
======== ======== ========
1997 Allowance for doubtful
amounts $ 75,000 $105,000 $180,000
======== ======== ========
1996 Allowance for doubtful
amounts 0 $ 75,000 $ 75,000
======== ======== ========
</TABLE>
26
<PAGE> 54
DISANTO BERTOLINE & COMPANY, P.C.
628 HEBRON AVENUE, BUILDING #3
GLASTONBURY, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the consolidated financial statements of Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 1998 and 1997, and for the years
then ended, and have issued our report thereon dated September 15, 1998; such
consolidated financial statements and report are included elsewhere in this Form
10-K. Our audit also included the financial statement schedule of Lexington
Healthcare Group, Inc. and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 15, 1998
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Lexington Healthcare Group, Inc. and
subsidiary for the period from July 1, 1995 (commencement of operations) through
June 30, 1996, and have issued our report thereon dated October 18, 1996
(November 5, 1996 and May 9, 1997 with respect to Note J); such consolidated
statements and report are included elsewhere in this Form 10-K. Our audit also
included the financial statement schedule as of and for the period ended June
30, 1996 of Lexington Healthcare Group, Inc. and subsidiary, listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
October 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 831
<SECURITIES> 0
<RECEIVABLES> 11,194
<ALLOWANCES> (346)
<INVENTORY> 777
<CURRENT-ASSETS> 13,781
<PP&E> 3,754
<DEPRECIATION> (384)
<TOTAL-ASSETS> 25,613
<CURRENT-LIABILITIES> 10,707
<BONDS> 7,424
0
0
<COMMON> 41
<OTHER-SE> 6,342
<TOTAL-LIABILITY-AND-EQUITY> 25,613
<SALES> 57,610
<TOTAL-REVENUES> 58,252
<CGS> 0
<TOTAL-COSTS> 57,456
<OTHER-EXPENSES> (280)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 792
<INCOME-PRETAX> 284
<INCOME-TAX> 30
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
