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, 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22261
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LEXINGTON HEALTHCARE GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1468252
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1577 New Britain Avenue, Farmington, Connecticut 06032
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 674-2700
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
------------------- which registered
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Common stock, $.01 Par Value N/A
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |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 26, 2000, the aggregate market
value of the voting common stock held by nonaffiliates of the registrant was
$400,000.
1
<PAGE>
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 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 17, F-1-F-20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Part III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 21
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 23
</TABLE>
2
<PAGE>
Part 1
Item I. Business
Lexington Healthcare Group, Inc. has four wholly-owned subsidiaries: Balz
Medical Services, Inc.("BALZ"), Professional Relief Nurses, Inc.("PRN"),
Lexington Highgreen Holding, Inc., and Lexicore Rehab Services, L.L.C.
(collectively, the "Company"). The Company also controls one joint venture,
Lexicon Pharmacy Services, L.L.C .
The Company is a long-term and subacute care provider, which operates eight
nursing home facilities (the "Facilities") at June 30, 2000 with a total of
1,063 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.
The Facilities 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 90% as of August 31, 2000. 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's subsidiaries, Professional Relief Nurses, Inc. and Lexicore Rehab
Services, L.L.C. provide home health and therapy services, respectively.
The long term care industry has experienced many changes in the two years ended
June 30, 2000, including the implementation of the Balanced Budget Act of 1997
("BBA") which resulted in a new Medicare Prospective Payment System (known as
PPS). Under PPS, Medicare revenues are substantially less than those earned
under the former cost-based reimbursement system.
The BBA and PPS significantly changed the revenues available to nursing homes
and other health care providers; Medicare revenues in the Company's existing
nursing homes decreased by $2.2 million during the year ended June 30, 1999,
with PPS causing approximately $1.6 million of that shortfall. Some of the
Company's Medicare rate cuts were restored in October 1999 and April 2000; in
addition, a 4% federal rate increase is scheduled on October 1, 2000.
In Connecticut, multiple long term care entities have undergone financial
reorganization in 1999 and 2000 due to reduced occupancy and PPS-related revenue
reductions and increasing cost pressures (including union costs), and have
experienced considerable losses in the market value of their own securities.
The Company believes its continued emphasis on cost controls and development of
ancillary businesses remains the most appropriate strategy. Further, the Company
is encouraged by the above-noted Medicare rate increases and President Clinton's
recent announcement of proposed funding of staffing increases for nursing homes,
although it cannot be estimated what effect, if any, this proposed legislation
may have on the Company's revenues.
3
<PAGE>
The Company continues to believe 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.
In May 1997 the Company acquired all of the capital stock of Professional Relief
Nurses, Inc. ("PRN") and also of BALZ Medical Services, Inc. ("BALZ") from the
shareholders of PRN and BALZ.
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.
On June 14, 2000, in order to raise working capital, BALZ sold its operating
assets and business (exclusive of cash and accounts receivable) to an unrelated
company, for $539,000 plus assumption of certain liabilities relating to
financed equipment and leases. The agreement provided for a $40,000 cash payment
at closing, a $260,000 note receivable requiring twelve equal monthly
installments of principal and interest of $22,000 beginning July 1, 2000, and a
payment of $239,000 for the book value of inventory due 90 days after closing.
In connection with this sale, the Company recorded a loss on the transaction of
$1,089,000 which represented the difference in the recorded book value of assets
sold (including goodwill) and the sales price, and includes a $363,000 charge to
settle an employment contract with the President of BALZ.
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.
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 was
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. As of January 1, 1999, the Company acquired
the remaining 50% membership interest for a nominal amount plus $120,000 of
contingent payments based on the occurrence of certain future events. Henceforth
the Company accounted for Lexicore's operations as a wholly-owned subsidiary;
minority interest and liabilities were adjusted accordingly. 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 has ceased operations as of March 31,
2000. Once remaining accounts receivable have been collected and all obligations
paid, the members will terminate Lexicon.
4
<PAGE>
On November 1, 1998 the Company began providing management services for four
skilled nursing facilities in Connecticut under an interim Management Agreement
with SunBridge Healthcare Corporation (SunBridge), a New Mexico corporation and
nation-wide healthcare provider. As consideration for the services provided
under this Management Agreement, the Company is entitled to retain the excess of
any revenues earned in the delivery of patient services over the expenses
incurred during the term and will be responsible for any excess of expenses
incurred over revenues earned in the operation of the facilities during the
term. In addition, under the terms of the agreement SunBridge retained
responsibility for all building lease costs.
Effective September 1, 1999, the Company acquired the operations of two of the
managed facilities from SunBridge. The related real property was leased with
options to purchase which expire August 30, 2001. The facilities acquired are
Adams House and Heritage Heights, located in Torrington and Danbury, CT; they
have a total of 240 skilled nursing beds. Management contracts covering the two
other SunBridge facilities with a total of 239 skilled nursing beds were
terminated as of August 31, 1999 and the operations of those facilities were
returned to SunBridge.
In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which was secured by its accounts receivable and
other assets; this line of credit was utilized from time to time to provide
working capital until it was replaced.
In December 1998, the Company entered into a line of credit financing agreement
with a healthcare lender for up to $4.5 million, subsequently amended to $6.0
million (at prime plus 3%), which is secured by its accounts receivable and
certain other assets. As of June 30, 2000, $4,055,000 was borrowed under this
agreement to finance working capital needs.
As of September 1, 2000 the Company had approximately 1,500 full and part-time
employees, of which approximately 61% were covered by collective bargaining
agreements.
Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to
its initial public offering in May 1997, 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.
5
<PAGE>
Item 2. Properties
The following properties are leased as of June 30, 2000.
<TABLE>
<CAPTION>
Approximate Sq.
Sq. Ft.
Location Use 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
Adams House Nursing Home 25,500
80 Fern Drive, Torrington, CT 06790
Heritage Heights Nursing Home 42,000
22 Hospital Avenue, Danbury, CT 06810
Professional Relief Nurses, Inc. Nursing Services
1010 Wethersfield Avenue, Hartford, CT 06114 5,500
454 Wolcott Street, Waterbury, CT 06705 2,250
560 Saw Mill Road, West Haven, CT 06516 1,300
Lexington Healthcare Group, Inc. Corporate Offices 4,500
1577 New Britain Avenue, Farmington, CT 06032
</TABLE>
The following properties are owned as of June 30, 2000.
<TABLE>
<CAPTION>
Approximate Sq.
Sq. Ft.
Location Use 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.
6
<PAGE>
Item 3. Legal Proceedings
In October 1999, Federal officials (the "government") seized records and
documents from the Company and subpoenaed current and former employees to
provide testimony in connection with a grand jury investigation being conducted
by the Office of the U.S. Attorney. The Company and certain members of present
and former senior management have been named as targets of the government's
investigation. However, the government has not provided the Company with any
documentation from which it may determine the nature and scope of the
investigation.
The Company is cooperating fully with the government investigation, has provided
all requested records and information, and management is confident that the
Company has not committed any wrongdoings. In addition, the Company has
established an independent committee of the Board of Directors to supervise its
own investigation. The ultimate outcome of this uncertainty cannot presently be
determined. Accordingly, no provision for any liability that may result has been
made in the accompanying consolidated financial statements. Through June 30,
2000 the Company has incurred expenses of $343,000 relating to this matter.
The independent committee of the Board of Directors approved a formal Corporate
Compliance Plan which was submitted to the Connecticut Department of Social
Services in February 2000. The following actions have been taken in support of
that plan:
o An experienced operations executive was named Corporate Compliance Officer
o An 800 "hot line" phone number to report questions or problems has been
set up and communicated to employees and others
o A Management Compliance Committee has held seven monthly meetings,
resulting in a number of formal policies being written and distributed
including a Corporate Compliance Handbook for employees which includes
disciplinary guidelines, an offense detection plan, and corrective action
initiatives
o Corporate compliance training for employees has been conducted
o Written policies and procedures have been prepared relating to State of CT
reimbursement (including related party transactions and cost report
preparation); training will be completed before preparing the 2000 cost
reports
o Quarterly audits of management costs, related party transactions and rent
payments have been completed and submitted to the State of Connecticut
The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and Jack Friedler, the Company's former Chairman
and CEO, in connection with her termination in July 1998. In September 1999, the
Company settled the suit to avoid the expenses of protracted litigation. The
Company has recorded a provision for lawsuit settlement of $539,000 for the year
ended June 30, 1999.
The Company has received notice of lawsuits initiated against it in April 2000
concerning four nursing homes which it was managing for SunBridge Healthcare
Corporation; the claims are being made by affiliates of SunBridge for therapy
and pharmacy services rendered. The total claimed is $1.2 million of which $1.1
million is reflected by invoices recorded on the Company's books. The Company
believes that the claim includes overbillings, payments and credits not applied,
and amounts charged in excess of contract rates. The Company intends to
vigorously contest the lawsuits as it works out arrangements to pay appropriate
charges.
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.
7
<PAGE>
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.
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 trading of the Company's stock 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 Company was notified on March 31, 2000 that, since it was no longer in
compliance with the net tangible asset criteria for continued listing on The
NASDAQ Small Cap Market, its securities were delisted from the NASDAQ Stock
Market effective with the open of business April 3, 2000. Subsequently, the
Company's securities have traded on the pink sheets.
A broker dealer has filed a Form 15-C-2(11) to list the Company's securities on
the NASD Electronic Bulletin Board. There can be no assurance that the Company
will be successful in its efforts to become listed on the Electronic Bulletin
Board.
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
Quarter High Low Dividend
------- ---- --- --------
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-
FY 1999
-------
1st 2 21/32 7/8 $-0-
2nd 3 1/8 7/8 $-0-
3rd 2 1/2 7/8 $-0-
4th 1 1/2 15/16 $-0-
FY 2000
-------
1st 1 11/16 5/8 $-0-
2nd 1 7/16 1/4 $-0-
3rd 3 1/16 17/32 $-0-
4th 1 31/32 1/4 $-0-
8
<PAGE>
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 and were then delisted
from The NASDAQ Small Cap Market on April 3, 2000 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
Quarter High Low
------- ---- ---
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
FY 1999
-------
1st 13/32 3/16
2nd 7/8 1/8
3rd 19/32 3/16
4th 7/16 1/8
FY 2000
-------
1st 5/16 3/32
2nd 13/32 1/32
3rd 3/4 3/32
4th 1/4 1/64
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 June
30, 2000 was 27; the Company believes that its shares are beneficially owned by
over 500 individuals.
On September 25, 2000, the closing price of the Company's common stock was $.30.
9
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Amounts in Thousands, Except Per Share Data)
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues $77,453 $76,892 $58,252 $35,900 $33,641
Operating costs and expenses (80,447) (77,725) (58,248) (36,241) (33,180)
Other income (expense) (1,089) (539) 280 -- --
-----------------------------------------------------------
Income (loss) before income taxes and minority interest (4,083) (1,372) 284 (341) 461
Provision for (benefit from) income taxes * 0 15 30 (66) 195
Minority interest (20) (190) (224) -- --
-----------------------------------------------------------
NET INCOME (LOSS) * $(4,103) $(1,577) $30 $(275) $266
======= ======= ==== ===== ====
Basic earnings (loss) per common share * $(1.15) $(.38) $.01 $(.10) $.11
======= ======= ==== ===== ====
Balance Sheet Data
Cash and cash equivalents $1,265 $3,675 $831 $1,000 $212
Working capital (deficiency) (1,498) 1,059 3,074 287 (2,381)
Total Assets 30,958 34,283 25,613 15,432 9,614
Short-term borrowings 4,296 3,867 398 49 2.580
Total long-term debt excluding current maturities 7,892 7,768 7,424 107 102
Total stockholders equity $127 $4,232 $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.
10
<PAGE>
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, 2000, the Company's operations were
affected when the management contract for two nursing homes was terminated, when
certain assets and the business of BALZ were sold, when the Company's joint
venture pharmacy ceased operations, and when settlements were negotiated on
employment agreements with two executives. The two remaining nursing homes under
management contract were leased and are now operated by the Company. Further,
the Company experienced a government investigation during the year ended June
30, 2000.
During the fiscal year ended June 30, 1999, the Company expanded its nursing
home operations with the management of four additional facilities, acquired the
remaining 50% interest in its therapy joint venture company, terminated the
operation of another start-up joint venture company whose operations had not
reached meaningful proportions, and undertook an interim management contract to
manage an additional three skilled nursing facilities located in Connecticut.
In the previous fiscal year, the Company had expanded its nursing home
operations with two additional facilities and formed and began operating three
healthcare joint venture companies.
The long term care industry has experienced many changes in the two years ended
June 30, 2000, including the implementation of the Balanced Budget Act of 1997
("BBA") which resulted in a new Medicare Prospective Payment System (known as
PPS). Under PPS, Medicare revenues are substantially less than those earned
under the former cost-based reimbursement system.
The BBA and PPS significantly changed the revenues available to nursing homes
and other health care providers; Medicare revenues in the Company's existing
nursing homes decreased by $2.2 million during the year ended June 30, 1999,
with PPS causing approximately $1.6 million of that shortfall. Some of the
Company's Medicare rate cuts were restored in October 1999 and April 2000; in
addition, a 4% federal rate increase is scheduled.
In Connecticut, multiple long term care entities have undergone financial
reorganization in 1999 and 2000 due to reduced occupancy and PPS-related revenue
reductions and increasing cost pressures (including union costs), and have
experienced considerable losses in the market value of their own securities.
The Company believes its continued emphasis on cost controls and development of
ancillary businesses remains the most appropriate strategy. Further, the Company
is encouraged by the above-noted Medicare rate increases and President Clinton's
recent announcement of proposed funding of staffing increases for nursing homes,
although it cannot be estimated what effect, if any, this proposed legislation
may have on the Company's revenues.
11
<PAGE>
The Company continues to believe 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.
The Company's operating strategy is to increase nursing home profitability
levels through aggressive marketing and by offering rehabilitation therapies and
other specialized services; by adhering to strict cost standards at the Facility
level while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will increase marketing of rehabilitative 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.
Results of Operations
Year ended June 30, 2000 ("2000 period") vs. year ended June 30, 1999 ("1999
period")
The 2000 period includes the operating results of the eight nursing facilities
operated by the Company, the operations of two nursing homes managed by the
Company from July 1, 1999 through August 31, 1999, the operations of PRN and
Lexicore Rehab Services for a full year, the operations of BALZ for eleven
months, and the operations of the pharmacy joint venture company for nine
months.
The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.
For the year ended June 30, 2000, the Company had total revenues of $77,453,000
and total operating expenses of $80,447,000. These expenses consisted of
salaries and benefits of $58,042,000, food, medical and other supplies of
$7,279,000, other operating expenses (including rent of $3,134,000) of
$10,570,000, corporate, general and administrative expenses of $3,271,000, and
interest expense of $1,285,000. The Company had a net loss before other expense,
income taxes, and minority interest of $2,994,000 and net loss of $4,103,000 for
the year ended June 30, 2000.
Revenues in the 2000 period increased over the 1999 period by $561,000 or 1%, as
a result of many factors. Nursing home revenues increased by $1.7 million, net,
due to Medicaid rate increases which were offset by lower overall census (due to
the termination of the management contract for two homes), although census in
existing nursing homes increased by 2%. Subsidiary company revenues were lower
by $1.2 million as operations were sold or terminated.
12
<PAGE>
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
$230,000 and $443,000 during the years ended June 30, 2000 and 1999,
respectively, in connection with adjustments of previously recorded estimated
settlements as shown below:
Year ended June 30,
-------------------
2000 1999
---- ----
Medicare $(185,000) $(402,000)
Medicaid (45,000) (41,000)
---------------------------
$(230,000) $(443,000)
========= =========
Operating expenses in the 2000 period increased over the 1999 period by
$2,722,000 or 4%, largely as a result of increased wages resulting from Medicaid
rate increases and increased census in the existing nursing homes, $250,000 of
contract termination payments to the former CEO and $343,000 of costs relating
to the government investigation. Interest expense increased by $245,000 as a
result of additional borrowings on the mortgage for improvements to the
facilities acquired in July 1997 and additional line of credit borrowings at
increased interest rates.
Results of Operations
Year ended June 30, 1999 ("1999 period") vs. year ended June 30, 1998 ("1998
period")
The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.
The 1998 period includes the operating results of the 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.
For the year ended June 30, 1999, the Company had total revenues of $76,892,000
and total operating expenses of $77,725,000. These expenses consisted of
salaries and benefits of $57,109,000, food, medical and other supplies of
$7,778,000, other operating expenses (including rent of $2,983,000) of
$8,845,000, corporate, general and administrative expenses of $2,953,000, and
interest expense of $1,040,000. The Company had a net loss before other expense,
income taxes, and minority interest of $833,000 and net loss of $1,577,000 for
the year ended June 30, 1999.
Revenues in the 1999 period increased over the 1998 period by $18,640,000 or
32%, largely as a result of the addition of the four managed facilities and
growth in the subsidiaries and joint venture companies. Of the total change, an
increase of $20,404,000 pertained to the new nursing home management contract
and growth in the healthcare businesses acquired previously, but in the existing
nursing facilities there was a net decrease of $1,764,000 due to a 3.3% overall
decrease in occupancy, Medicare settlement adjustments, and mix changes.
In 1999 private pay occupancy increased approximately 4.6% over 1998, while in
the same period Medicaid and Medicare occupancy decreased 3.4% and 8.0%,
respectively.
13
<PAGE>
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
$443,000 and $699,000 during the years ended June 30, 1999 and 1998,
respectively, in connection with adjustments of previously recorded estimated
settlements as shown below:
Year ended June 30,
-------------------
1999 1998
---- ----
Medicare $(402,000) $(115,000)
Medicaid (41,000) (584,000)
---------------------------
$(443,000) $(699,000)
========= =========
Operating expenses in the 1999 period increased over the 1998 period by
$19,477,000 or 33%, largely as a result of the addition of the four managed
facilities and growth in the subsidiaries and joint venture companies. Of the
total cost increase, $17,202,000 pertained to the nursing homes and healthcare
businesses acquired and $2,027,000, net was from decreased existing-facility
costs, offset by increases in subsidiary and joint venture and corporate,
general and administrative costs. Interest expense increased by $248,000 mostly
as a result of additional borrowings on the 1997 mortgage for improvements to
the facilities acquired in July 1997 and additional line of credit borrowings.
Other expense of $539,000 was recorded in connection with a provision for
lawsuit settlement.
Income taxes of $15,000 were provided in the 1999 period on loss before income
taxes and minority interest of $1,372,000. Such provision is due to state taxes
on income reported by certain subsidiaries which are taxed separately from other
entities in the consolidated group.
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.
14
<PAGE>
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:
Impact of rate settlements
--------------------------
Rate Year Medicaid Medicare
--------- -------- --------
1996 $(273,000) $(115,000)
1997 (311,000) --
---------------------------------
$(584,000) $(115,000)
========= =========
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.
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.
Liquidity and Capital Resources
The Company has primarily financed its operations through operating revenues,
borrowings from banks, the prior operator of certain of the Facilities and other
private lenders including stockholders, by financing its accounts receivable,
through a public offering of its common stock which raised net proceeds of
approximately $4.1 million, and through the sale of bed licenses for $1.5
million.
In July 1999, pursuant to Board of Director's approval, the Company defaulted an
8% interest-bearing promissory note due from the Company's former CEO and seized
the collateral of 600,000 shares of the Company's common stock in satisfaction
of the note and interest due. The shares have been retired as of June 30, 2000.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender; the note and accumulated interest had a carrying value of $576,000.
The Company's Board of Directors considers the difference between the market
price and the carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
15
<PAGE>
During the years ended June 30, 2000, 1999, and 1998, the Company expended
approximately $331,000, $451,000, and $112,000, 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 years ended June 30, 2000, 1999 and 1998 the Company expended
$429,000, $353,000 and $231,000, respectively, 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 then 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); the note was thus
repaid in full. Interest on the note of $20,000 was paid through December 31,
1997 and later on May 5, 1998.
At June 30, 2000, the Company had cash and cash equivalents of $1,265,000,
receivables of $16,963,000, inventories of $437,000 and prepaid expenses and
other current assets of $912 ,000. Receivables increased by $767,000 since June
30, 1999 due to generally higher reimbursement rates in effect.
There was a working capital deficiency at June 30, 2000 of $1,498,000 as
compared with working capital of $1,059,000 at June 30, 1999. The principal
reasons for the decrease are the losses from operations, costs relating to the
government investigation, and the negotiated settlement of employment contracts.
Current liabilities at June 30, 2000 consist principally of trade accounts
payable, amounts due to SunBridge for purchased accounts receivable, estimated
third-party payor settlements due Medicare and Medicaid, current portion of
notes and capital leases payable, accrued payroll and related 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 was secured by its accounts receivable and
other assets; borrowings under the line were also personally guaranteed by the
Company's Chairman and President. The line of credit was utilized from time to
time until December 1998 at which time a new line of credit was implemented.
In December 1998, the Company entered into a financing agreement with a
healthcare lender for up to $4,500,000, subsequently increased to $6,000,000,
which is secured by its accounts receivable and certain other assets. As of June
30, 2000, $4,055,000 was borrowed under this agreement. The Company has
increased its utilization of this line of credit to finance working capital
needs as a result of accounts receivable increases, payback of Medicare and
Medicaid settlements, costs of the government investigation, settlement of
employment contracts and operating losses.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
16
<PAGE>
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations 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, 2000 and 1999 and for the Years
Ended June 30, 2000, 1999 and 1998
Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and 1999
Consolidated Statements of Operations
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows,
Years Ended June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
17
<PAGE>
DISANTO BERTOLINE & COMPANY, P.C.
628 Hebron Avenue, Building #3
Glastonbury, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the accompanying consolidated balance sheets of Lexington
Healthcare Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended June 30, 2000, 1999 and 1998. 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, 2000 and 1999, and the results of
their operations and their cash flows for the years ended June 30, 2000, 1999
and 1998 in conformity with generally accepted accounting principles.
As discussed in Note N, the Company is the subject of a federal investigation.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 25, 2000
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,265,000 $ 3,675,000
Accounts receivable - net of allowance for
doubtful accounts of $1,634,000 and $848,000
for 2000 and 1999, respectively 16,498,000 16,010,000
Current portion of operating subsidy and note receivable 465,000 186,000
Inventories 437,000 1,058,000
Prepaid and other current assets 912,000 1,031,000
------------ ------------
Total current assets 19,577,000 21,960,000
PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 4,477,000 4,147,000
OTHER ASSETS
Security deposits - related parties 2,337,000 2,337,000
Residents' funds 370,000 403,000
Goodwill, net of accumulated amortization of $349,000 and
$358,000 for 2000 and 1999, respectively. 1,886,000 3,013,000
Deferred tax asset 35,000 35,000
Bed licenses - net of accumulated amortization of $348,000
and $232,000 for 2000 and 1999, respectively. 1,394,000 1,510,000
Operating subsidy receivable (less current portion of $205,000) 247,000 451,000
Other assets, net 635,000 427,000
------------ ------------
6,904,000 8,176,000
------------ ------------
$ 30,958,000 $ 34,283,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (current portion) $ 4,176,000 $ 3,748,000
Due to SunBridge - purchased receivables 2,094,000 2,582,000
Accounts payable and accrued expenses 14,423,000 13,473,000
Estimated third-party payor settlements-Medicaid 131,000 922,000
Estimated third-party payor settlements-Medicare 57,000 17,000
Capital leases payable (current portion) 120,000 119,000
Income taxes payable 74,000 40,000
------------ ------------
Total current liabilities 21,075,000 20,901,000
OTHER LIABILITIES
Notes payable (less current portion) 7,652,000 7,415,000
Capital leases payable (less current portion) 240,000 353,000
Residents' funds payable 370,000 403,000
Deferred rent 809,000 314,000
Other liabilities 120,000 120,000
------------ ------------
9,191,000 8,605,000
------------ ------------
Total liabilities 30,266,000 29,506,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note N)
MINORITY INTERESTS 565,000 545,000
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized
15,000,000 shares 35,000 41,000
Additional paid-in capital 5,556,000 6,126,000
Note receivable - related party -- (574,000)
Deficit (5,464,000) (1,361,000)
------------ ------------
Total stockholders' equity 127,000 4,232,000
------------ ------------
$ 30,958,000 $ 34,283,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Net patient service revenue $ 72,792,000 $ 58,867,000 $ 57,610,000
Management fee revenue 4,378,000 17,620,000 225,000
Other revenue 283,000 405,000 417,000
------------ ------------ ------------
Total revenues 77,453,000 76,892,000 58,252,000
EXPENSES
Facility operating expenses:
Salaries and benefits 58,042,000 57,109,000 42,823,000
Food, medical and other supplies 7,279,000 7,778,000 4,077,000
Other operating expenses 10,570,000 8,845,000 8,685,000
Corporate, general and administrative expenses 3,271,000 2,953,000 1,871,000
Interest expense 1,285,000 1,040,000 792,000
------------ ------------ ------------
Total expenses 80,447,000 77,725,000 58,248,000
------------ ------------ ------------
Income (loss) from operations (2,994,000) (833,000) 4,000
OTHER INCOME (EXPENSE)
Loss on sale of business (1,089,000) -- --
Provision for lawsuit settlement -- (539,000) --
Gain on sale of bed licenses -- -- 280,000
------------ ------------ ------------
Income (loss) before income taxes and minority interest (4,083,000) (1,372,000) 284,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES -- 15,000 30,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES (20,000) (190,000) (224,000)
------------ ------------ ------------
Net income (loss) $ (4,103,000) $ (1,577,000) $ 30,000
============ ============ ============
Basic earnings (loss) per common share $ (1.15) $ (0.38) $ 0.01
============ ============ ============
Weighted average number of common shares outstanding 3,568,000 4,125,000 4,125,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------- Additional Note Rec.
Number Paid-in Related Retained
of Shares Amount Capital Party Earnings TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 4,125,000 $ 41,000 $ 6,168,000 $ -- 186,000 $ 6,395,000
Additional costs of issuance of common
stock and warrants -- -- (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
Net loss -- -- -- -- (1,577,000) (1,577,000)
Reclassification of note receivable -
related party -- -- -- (574,000) -- (574,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 4,125,000 41,000 6,126,000 (574,000) (1,361,000) 4,232,000
Increase in note receivable - related party -- -- -- (2,000) -- (2,000)
Retirement of common stock received in
satisfaction of related party note
receivable (600,000) (6,000) (570,000) 576,000 -- --
Net loss -- -- -- -- (4,103,000) (4,103,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 3,525,000 $ 35,000 $ 5,556,000 $ -- $(5,464,000) $ 127,000
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(4,103,000) $(1,577,000) $ 30,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts, net 786,000 502,000 166,000
Depreciation and amortization 780,000 817,000 569,000
Loss on sale of business 726,000 -- --
Increase (decrease) in deferred rent 495,000 (50,000) (52,000)
Loss on disposal of assets -- -- 27,000
Minority interest in income of consolidated joint ventures 20,000 190,000 224,000
Gain on sale of bed licenses -- -- (280,000)
Changes in operating assets and liabilities:
Increase in accounts payable and accrued expenses 1,030,000 4,941,000 752,000
Decrease (increase) in inventories 382,000 (281,000) (274,000)
Decrease (increase) in prepaid and other current assets 94,000 (601,000) (115,000)
Increase (decrease) in income taxes payable 34,000 (51,000) (113,000)
Increase in other assets (208,000) (51,000) (417,000)
(Decrease) increase in due to SunBridge - purchased receivables (488,000) 2,582,000 --
(Decrease) increase in estimated third-party payor settlements--Medicaid
and Medicare, net (751,000) (550,000) 1,444,000
Increase in accounts receivable (1,035,000) (5,768,000) (3,194,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,238,000) 103,000 (1,233,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments of operating subsidy receivable 185,000 168,000 148,000
Proceeds from sale of business 40,000 -- --
Repayments of note receivable - related party -- 120,000 787,000
Proceeds from sale of bed licenses -- -- 1,550,000
Increase in security deposits - related parties -- -- (55,000)
Increase in goodwill on purchase of subsidiary -- -- (75,000)
Disbursements on note receivable - related party (2,000) (99,000) (1,092,000)
Acquisition of property, equipment and leasehold improvements (542,000) (583,000) (681,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities (319,000) (394,000) 582,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net 424,000 3,431,000 --
Proceeds of short term borrowings and Beverly receivables -- -- 400,000
Proceeds from mortgage note -- -- 231,000
Stock registration costs -- -- (42,000)
Repayment of short-term borrowing -- -- (200,000)
Minority investment (distribution) in consolidated joint ventures -- (54,000) 305,000
Repayments of mortgage and notes payable (135,000) (120,000) (117,000)
Repayments of capital lease obligations (142,000) (122,000) (95,000)
----------- ----------- -----------
Net cash provided by financing activities 147,000 3,135,000 482,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,410,000) 2,844,000 (169,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,675,000 831,000 1,000,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,265,000 $ 3,675,000 $ 831,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest $ 1,285,000 $ 1,040,000 $ 789,000
Income taxes (15,000) 9,000 145,000
Non-cash investing and financing activities:
Certain assets acquired through assumption of mortgage
note payable. $ 455,000 $ 392,000 $ 6,863,000
Equipment and leasehold improvements acquired through
assumption of notes payable and capital leases. 76,000 232,000 555,000
Common stock received in satisfaction of note receivable - related party 576,000 -- --
Promissory note received and accounts receivable recorded in connection
with sale of business 499,000 -- --
Equipment distributed to joint venture member in satisfaction of accounts
payable 80,000 -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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"), Lexington
Highgreen Holding, Inc. and Lexicore Rehab Services, L.L.C. (Lexicore)
(collectively, the "Company") as well as the accounts of a joint venture
controlled by the Company, Lexicon Pharmacy Services, L.L.C. All material
intercompany balances and transactions have been eliminated in consolidation.
As of January 1, 1999, the Company acquired the remaining 50% membership
interest of Lexicore for a nominal amount plus $120,000 of contingent payments
which are payable based on the occurrence of certain future events. The
acquisition of Lexicore has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
purchased and liabilities assumed based on their fair value on the date of
acquisition. The Company has not recorded any goodwill in connection with this
purchase. Henceforth, the Company has accounted for Lexicore as a wholly-owned
subsidiary and minority interest has been adjusted accordingly.
NATURE OF OPERATIONS
The Company is a long-term and subacute care provider, which operates eight
nursing home facilities at June 30, 2000 with a total of 1,063 beds licensed by
the State of Connecticut. The Company also provides physical, occupational and
speech therapy and other services to qualified health care facilities, and
provides health care services in the homes of its patients.
JOINT VENTURE
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 health care facilities and the
patients residing therein. The joint venture is controlled by the Company and
the assets, liabilities and results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest. Lexicon has ceased operations as of March 31,
2000. Once remaining accounts receivable have been collected and all obligations
paid, the members will terminate Lexicon.
Page F-1
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
As consideration for services provided under an interim management agreement
with SunBridge Healthcare Corporation which was terminated in fiscal 2000 (see
Note B), the Company was entitled to retain the excess of any revenues earned in
the delivery of patient services over the expenses incurred during the term and
was responsible for any excess of expenses incurred over revenues earned in the
operation of the facilities during the term. Such revenues have been classified
as management fee revenue in the accompanying consolidated statement of
operations.
The Company recognizes other management fees as they are earned and accrues
related fees payable to subcontractors as they are incurred.
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 $865,000 at June
30, 2000 and $1,172,000 at June 30, 1999, consisting of overnight investments
and certificates of deposit.
Page F-2
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
property and 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
Page F-3
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING STANDARDS
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 replaced 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. Dilutive earnings per share has not been presented as the potentially
dilutive stock options are anti-dilutive.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. The Company has no material
components of other comprehensive income (loss) and, accordingly, the Company's
comprehensive income (loss) is the same as its net income (loss) for all years
presented.
SEGMENT REPORTING
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," changed the way public
companies report financial and descriptive information about their operating
segments. The Company provides health care services and many other closely
related ancillary services to its patients and residents. All of these services
fall within one reportable segment as defined in SFAS No. 131.
DERIVATIVE INSTRUMENTS
Statement of Financial Accounting Standards No 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") requires all derivatives to be
recognized in the balance sheet at fair value. Gains or losses from changes in
fair value would be recognized in earnings in the period of change unless the
derivative is designated as a hedging instrument. In June 1999, Statement of
Financial Accounting Standards No. 137, amended SFAS 133 delaying its effective
date to fiscal years beginning after June 15, 2000. The Company does not
currently hold any derivative instruments nor does it engage in hedging
activities. The Company does not believe that the new standard will impact its
consolidated financial statements.
Page F-4
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE B - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND TERMINATION OF
MANAGEMENT AGREEMENT
On November 1, 1998 the Company began providing management services for four
skilled nursing facilities in Connecticut under an interim Management Agreement
with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation
and nation-wide healthcare provider.
As consideration for the services provided under this Management Agreement, the
Company was entitled to retain the excess of any revenues earned in the delivery
of patient services over the expenses incurred during the term and was
responsible for any excess of expenses incurred over revenues earned in the
operation of the facilities during the term. Under the terms of the agreement
SunBridge retained responsibility for all building lease costs. In addition, the
Company purchased substantially all of SunBridge's accounts receivable for these
facilities. As of June 30, 2000, the balance owed is presented as "Due to
SunBridge - purchased receivables" in the accompanying consolidated balance
sheet.
As a result of this agreement, the Company earned management fees of $4,422,000
and $17,394,000 and incurred costs and expenses of $4,407,000 and $17,004,000
during the years ended June 30, 2000 and 1999, respectively,
Effective September 1, 1999, the Company finalized agreements to acquire the
operations of two of the managed facilities, Adams House and Heritage Heights.
The related real property was leased (see Note J) with options to purchase which
expire August 30, 2001; these facilities are located in Torrington and Danbury,
CT and have a total of 240 skilled nursing beds. Management contracts covering
the two other SunBridge facilities with a total of 239 skilled nursing beds were
terminated as of August 31, 1999 and the operations of those facilities were
returned to SunBridge.
SALE OF BUSINESS
On June 14, 2000 BALZ sold its operating assets and business (exclusive of cash
and accounts receivable) to an unrelated company, for $539,000 plus assumption
of certain liabilities relating to financed equipment and leases. The agreement
provided for a $40,000 cash payment at closing, a $260,000 note receivable
requiring twelve equal monthly installments of principal and interest of $22,000
beginning July 1, 2000, and a payment of $239,000 for the book value of
inventory due 90 days after closing.
In connection with this sale, the Company recorded a loss on the transaction of
$1,089,000 which represented the difference in the recorded book value of assets
sold (including goodwill) and the sales price and includes a $363,000 charge to
settle an employment contract with the President of BALZ (see Note N).
Page F-5
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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, operating subsidy receivable, note receivable and security
deposits-related parties.
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
$1,173,000 at June 30, 2000. 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 performs ongoing credit evaluations of its
residents and has provided for potential credit losses through direct write-offs
and an allowance for bad debts which is considered to be adequate by management.
The mix of receivables from patients, third-party payors and others as of June
30, 2000 and 1999 is as follows:
2000 1999
---- ----
Medicare and Medicaid 67% 68%
Private insurance and other nongovernment agencies 27 26
Other 6 6
--- ---
100% 100%
=== ===
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 in 1997 (see Note F). 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.
Page F-6
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE C - FINANCIAL INSTRUMENTS (Continued)
CONCENTRATIONS OF CREDIT RISK (Continued)
Note Receivable
This amount is due from MedixDirect.com, LLC, an unrelated party with whom the
Company is continuing to do business. The note is collateralized by the assets
and business sold.
Security deposits - related parties
This amount is controlled by entities related to the Company by common ownership
(see Note J); accordingly, management believes it represents negligible credit
risk.
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 carrying amounts of the Company's financial instruments approximate their
fair values as outlined below:
Cash and cash equivalents, residents' funds, accounts receivable, note
receivable, and accounts and accrued expenses payable:
The carrying amounts approximate their fair values because of the short
maturity of those instruments.
Notes payable and obligations under capital leases:
The carrying amounts approximate fair value because the interest rates on
the notes or leases approximate the Company's current borrowing rate.
Management has determined that it is not practicable to estimate the fair value
of the 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-7
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS
The Company has recorded reductions in patient service revenue of $230,000,
$443,000 and $669,000 during the years ended June 30, 2000, 1999 and 1998,
respectively, in connection with adjustments of previously recorded estimated
settlements as shown below:
Year ended June 30,
-------------------
2000 1999 1998
---- ---- ----
Medicare $(185,000) $(402,000) $(115,000)
Medicaid (45,000) (41,000) (584,000)
-----------------------------------
$(230,000) $(443,000) $(699,000)
========= ========= =========
As of June 30, 2000 and 1999 the Company had recorded the following amounts as
payable in connection with estimated Medicare and Medicaid settlements:
2000 1999
---- ----
Medicare $ 57,000 $ 17,000
Medicaid 131,000 922,000
Such amounts represent management's best estimates of the amounts expected to 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 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:
June 30, June 30,
2000 1999
-----------------------
Land and land improvements $ 449,000 $ 359,000
Building and building improvements 2,079,000 1,803,000
Equipment 1,623,000 1,734,000
Leasehold improvements 1,362,000 1,059,000
---------- ----------
5,513,000 4,955,000
Less: accumulated depreciation and amortization 1,036,000 808,000
---------- ----------
$4,477,000 $4,147,000
========== ==========
Construction in progress included in building and leasehold improvements totaled
$874,000 and $555,000 as of June 30, 2000 and 1999, respectively. Depreciation
and amortization expense totaled $475,000, $430,000, and 267,000 for the years
ended June 30, 2000, 1999, and 1998, respectively.
Page F-8
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE F - OTHER ASSETS
On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities, Greenwood Health Center and Highland Acres
Extend-a-Care Center from Beverly Enterprises, Inc. ("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. Beverly
also 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 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 in
each of the years ended June 30, 2000, 1999 and 1998.
The acquisitions of BALZ and PRN in 1997 were accounted for using the purchase
method of accounting and, accordingly, the purchase price was 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 was recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. The amount of goodwill
amortization was $164,000, $168,000, and $170,000 for the years ended June 30,
2000, 1999 and 1998, respectively. During June 2000 the operating assets and
business of BALZ were sold, resulting in the write off of the remaining amount
of unamortized goodwill of $963,000. The June 30, 2000 goodwill balance relates
to PRN.
NOTE G - NOTE RECEIVABLE--RELATED PARTY
In July 1999, the Company, pursuant to Board of Director's approval, defaulted
an 8% interest-bearing promissory note due from an officer and director of the
Company and seized the collateral of 600,000 shares of the Company's common
stock in satisfaction of the note and interest due. The shares received were
initially put into the Company's treasury but have been retired as of June 30,
2000.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
Page F-9
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE H - NOTES PAYABLE
Notes payable consist of the following: June 30, June 30,
2000 1999
-------------------------
10% mortgage note secured by property
and equipment of two nursing homes;
due in 2022, with monthly installments
of approximately $75,000 $ 7,711,000 $ 7,342,000
Line of credit at prime plus 3%, (11.5% at
June 30, 2000) secured by accounts
receivable and other assets 4,056,000 3,631,000
9.45% equipment term notes -- 84,000
8.75% equipment term note payable to a bank;
due in 2003 with monthly installments of
approximately $2,000 61,000 80,000
Vehicle term notes -- 26,000
----------- -----------
11,828,000 11,163,000
Less: current portion 4,176,000 3,748,000
----------- -----------
$ 7,652,000 $ 7,415,000
=========== ===========
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, 2000,
$1,052,000 has been advanced for such improvements and is included in the
mortgage obligation above. In addition, the Company is required to maintain a
debt service reserve of $360,000 which, as of June 30, 2000, is fully funded and
is included in other assets in the accompanying consolidated balance sheets.
The Company has a financing agreement through April 2003 with a healthcare
lender for a line of credit of up to the lesser of $6 million or an amount based
on 85% of eligible accounts receivable, as defined in the agreement. At June 30,
2000 the Company was not in compliance with one covenant of this financing
agreement, but has obtained a waiver of compliance for that specific
requirement.
Aggregate principal maturities of notes payable in succeeding years are as
follows:
Year ending June 30:
2001 $ 4,176,000
2002 134,000
2003 143,000
2004 137,000
2005 151,000
Subsequent to 2005 7,087,000
-----------
$11,828,000
===========
Page F-10
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, June 30,
2000 1999
--------------------------
Accounts payable $ 8,582,000 $ 7.730,000
Accrued payroll and payroll taxes 3,855,000 4,118,000
Other accrued expenses 1,986,000 1,625,000
----------- -----------
$14,423,000 $13,473,000
=========== ===========
NOTE J - LEASE COMMITMENTS
CAPITAL LEASES
The following is an analysis of leased property under capital leases by major
class at June 30, 2000:
Equipment $552,000
Less: accumulated amortization 233,000
--------
$319,000
========
Amortization expense relative to leased property under capital leases totaled
$79,000, $80,000, and $47,000 for the years ended June 30, 2000, 1999 and 1998
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:
Year ending June 30:
2001 $154,000
2002 152,000
2003 108,000
2004 40,000
2005 10,000
---- --------
Total minimum lease payments 464,000
Less: amount representing interest 104,000
--------
$360,000
========
Page F-11
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE J - LEASE COMMITMENTS (Continued)
RELATED PARTY OPERATING LEASES (Continued)
The Company leases four of its nursing facilities (including certain equipment)
under an operating lease with a partnership related through common ownership.
The lease agreement, as amended, commenced on July 1, 1995 and is for an
eighteen-year period, with renewal options for up to thirteen years. Annual
rentals under the lease are currently $2.5 million.
The Company has renegotiated the required rent payments covering the period of
October 1999 through February 2001 which will reduce the rent due during that
period by approximately $800,000. Recognition of the rent reduction has been
accounted for by increasing deferred rent which equalizes the annual rent
expense over the remaining fourteen-year lease term. 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.
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.
Future minimum lease payments required under these related party lease
obligations, net of sublease rentals are as follows:
Year ending June 30:
2001 $ 2,357,000
2002 2,629,000
2003 2,640,000
2004 2,665,000
2005 2,679,000
Thereafter 23,684,000
-----------
$36,654,000
===========
Rent expense charged to operations under these related party operating leases
aggregated $2,540,000, 2,538,000 and $2,488,000 for the years ended June 30,
2000, 1999, and 1998, 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, 2000 and 1999. 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, 2000 and 1999.
Page F-12
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE J - LEASE COMMITMENTS
OTHER OPERATING LEASES
The Company has other operating leases, including the lease of the Adams House
and Heritage Heights facilities, which expire in various years through 2010.
Rent expense charged to operations under such leases totaled approximately
$522,000, $82,000 and $78,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
Future minimum lease payments required under these other operating leases are as
follows:
Year ending June 30:
2001 $ 687,000
2002 892,000
2003 937,000
2004 962,000
2005 977,000
Thereafter 4,048,000
----------
$8,503,000
==========
NOTE K - STOCKHOLDERS' EQUITY
COMMMON STOCK
The Company's Board of Directors has approved the issuance of 250,000 shares of
common stock to be issued to the Company's counsel for legal services. As of
June 30, 2000, the shares have not been issued.
WARRANTS
The Company has issued warrants to purchase 1,940,625 shares of the 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.
The Company's Board of Directors approved the issuance to employees, directors
and others of warrants to purchase 1,533,200 shares of the Company's common
stock exercisable at $.56 cents per share; none of these warrants have been
issued as of June 30, 2000.
Page F-13
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE K - STOCKHOLDERS' EQUITY (Continued)
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.
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. The Board of Directors re-priced these
outstanding options in November 1998 at $.87 based on the current market value.
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.
As of June 30, 2000, 160,000 options remain outstanding; 142,000 options were
cancelled when the employees to whom they were issued terminated their
employment. Through June 30, 2000 no options have been exercised.
The Company has reserved 770,000 shares of its common stock for issuance
pursuant to stock options to be granted to consultants, exercisable at $.56 per
share, as compensation for services to be rendered pursuant to consulting
agreements. None of these options have been issued as of June 30, 2000.
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.
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 (loss) and income (loss) per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended June 30, 2000 Year ended June 30, 1999 Year ended June 30, 1998
------------------------ ------------------------ ------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(4,103,000) $(4,320,000) $(1,577,000) $(1,794,000) $30,000 $(21,000)
============ ============ ============ ============ ======= =========
Basic earnings (loss)
per common share $(1.15) $(1.21) $(.38) $(.43) $.01 $(.01)
======= ======= ====== ====== ==== ======
</TABLE>
Page F-14
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE K - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTION PLAN (Continued)
The fair value of each option grant is estimated on the date of grant with the
following assumptions:
Expected dividend yield 0%
Expected volatility 41%
Risk-free interest rate 9%
Expected life of options 72 months
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, 2000, the Company
has issued no preferred stock.
NOTE L - INCOME TAXES
The components of the provision for (benefit from) income taxes for the years
ended June 30, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- 15,000 30,000
------- ------- -------
-- 15,000 30,000
------- ------- -------
Deferred:
Federal -- -- --
State -- -- --
------- ------- -------
-- -- --
------- ------- -------
$ -- $15,000 $30,000
======= ======= =======
Page F-15
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE L - INCOME TAXES (Continued)
The significant components of the deferred tax provision for 2000, 1999 and 1998
are as follows:
2000 1999 1998
---- ---- ----
Net operating loss $ (494,000) $(143,000) $ (84,000)
Bad debt reserve (283,000) (154,000) (52,000)
Property and equipment (169,000) 28,000 27,000
Organizational costs 5,000 (32,000) 31,000
Deferred rent (214,000) 21,000 21,000
Accrued expenses (144,000) (262,000) (118,000)
Deferred revenue (514,000) (1,000) 599,000
Valuation allowance 1,813,000 543,000 (424,000)
---------- --------- ---------
$ -- $ -- $ --
========== ========= =========
The components of the net deferred tax asset and liability as of June 30, 2000
and 1999 are as follows:
Deferred tax assets (liabilities) 2000 1999
--------------------------------- ---- ----
Net operating losses $ 721,000 $ 227,000
Bad debt reserve 569,000 286,000
Property and equipment 128,000 (41,000)
Organizational costs 20,000 25,000
Deferred rent 344,000 130,000
Accrued expenses 790,000 646,000
Deferred revenue (146,000) (660,000)
Valuation allowance (2,391,000) (578,000)
----------- ---------
Net deferred tax asset $ 35,000 $ 35,000
=========== =========
The Company has recorded a valuation allowance of $2,391,000 and $578,000 at
June 30, 2000 and 1999, 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 net change in the valuation allowance for deferred tax assets was an
increase of $1,813,000 and $543,000 for the years ended June 30, 2000 and 1999,
respectively, and a decrease of $424,000 for the year ended June 30, 1998.
Page F-16
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE L - INCOME TAXES (Continued)
The Company has federal and state operating loss carryforwards which total
approximately $1,716,000 and $1,616,000, respectively, that are available to
reduce federal and state taxable income. The federal operating loss
carryforwards expire in various years through 2020 and the state operating loss
carryforwards expire in various years through 2005.
The principal reasons for the difference between the statutory federal income
tax rate and the effective rate are as follows:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate (34.0%) (34.0%) 34.0%
State taxes, net of federal benefits -- 1.2 7.0
Goodwill amortization 1.2 5.0 20.2
Minority interest adjustment (2.4) (4.5) (26.8)
Bad debt expense 4.8 8.8 --
Accrued expenses 3.0 11.7 --
Other adjustments 11.5 16.5 (1.5)
Loss on sale of Balz assets 1.0 -- --
Valuation allowance 14.8 (3.7) (22.3)
----- ----- -----
--% 1.0% 10.6%
===== ===== =====
NOTE M - RISKS AND UNCERTAINTIES
LABOR CONCENTRATION
As of June 30, 2000, approximately 56% of the Company's employees were covered
by eight separate collective bargaining agreements with New England Health Care
Employees Union, District 1199/SEIU, AFL-CIO ("Union") two of which expire in
November, 2000 (representing 13% of the Company's employees) and another six of
which expire on March 15, 2001.
PATIENT SERVICE REVENUE
Approximately 97%, 98%, and 97% of net patient service revenue was derived under
federal and state third-party reimbursement programs in 2000, 1999 and 1998,
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.
Page F-17
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE M - RISKS AND UNCERTAINTIES (Continued)
PATIENT SERVICE REVENUE (Continued)
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any significant
pending or threatened investigations involving allegations of potential
wrongdoing, except as disclosed in Note N . Compliance with such laws and
regulations are subject to government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs. Changes in the Medicare and Medicaid programs
and/or the reduction of funding levels could have an adverse impact on the
Company.
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, 2000, no known malpractice claims have been
asserted against the Company which, either individually or in the aggregate, are
in excess of insurance coverage.
NOTE N - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company had employment agreements with three of its executive officers which
became effective in 1997. During the year ended June 30, 2000, the Company's
founder and CEO retired; the Company negotiated the settlement of its remaining
obligations under his employment agreement for $250,000 which has been recorded
as a charge to expense in the accompanying consolidated statement of operations.
As a result of this settlement, the former CEO completed the previously
agreed-on repayment to the Company of $109,000 for certain trade payables owed
to the Company by a business he previously owned.
As a result of the sale of the business of BALZ (see Note B), the Company
settled the employment agreement with the President of BALZ for $363,000 which
has been recorded as a charge to expense in the accompanying consolidated
statement of operations.
The remaining agreement for the Company's President and current CEO provides for
a $175,000 annual salary, with cost of living increases and a bonus equal to 1%
of the Company's net income before taxes. The agreement provides that he shall
devote substantially all of his working time and attention to the business of
the Company and contains certain non-compete provisions. The agreement had an
initial term of five years and is automatically renewable for successive
one-year periods unless either the Company or the employee elects not to renew
his employment.
Page F-18
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)
UNION PENSION CONTRIBUTION
The Company's union employees participate in union pension plans to which the
Company contributes an amount stipulated in each collective bargaining
agreement. For the years ended June 30, 2000, 1999 and 1998, contributions were
approximately $1,807,000, 1,458,000 and $842,000, respectively.
NON-UNION PENSION PLAN
As of February 1, 1999, the Company implemented a new defined-contribution
pension plan for non-union employees to which the Company contributes 4% of
employee compensation annually; investments in the plan are directed by the
participants. In connection therewith the Company has recorded pension expense
of $464,000 and $236,000 for the years ended June 30, 2000 and 1999,
respectively.
GOVERNMENT INVESTIGATION
In October 1999, Federal officials (the "government") seized records and
documents from the Company and subpoenaed current and former employees to
provide testimony in connection with a grand jury investigation being conducted
by the Office of the U.S. Attorney. The Company and certain members of present
and former senior management have been named as targets of the government's
investigation. However, the government has not provided the Company with any
documentation from which it may determine the nature and scope of the
investigation.
The Company is cooperating fully with the government investigation, has provided
all requested records and information, and management is confident that the
Company has not committed any wrongdoings. In addition, the Company has
established an independent committee of the Board of Directors to supervise its
own investigation. The ultimate outcome of this uncertainty cannot presently be
determined. Accordingly, no provision for any liability that may result has been
made in the accompanying consolidated financial statements. Through June 30,
2000 the Company has recorded charges to expense of $343,000 relating to this
matter.
LAWSUIT SETTLEMENT
The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and the Company's former Chairman and CEO, in
connection with her termination in July 1998. In September 1999 the Company
reached a settlement in this suit to avoid the expenses of protracted
litigation. The Company has recorded a provision for lawsuit settlement of
$539,000 in the accompanying consolidated statement of operations for the year
ended June 30, 1999.
Page F-19
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)
OTHER CONTINGENCIES
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.
LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company is subject to extensive federal, state and local government
regulation relating to licensure, conduct of operations, ownership of
facilities, expansion of facilities and services and reimbursement for services.
As such, in the ordinary course of business, the Company's operations are
continuously subject to state and federal regulatory scrutiny, supervision and
control. Such regulatory scrutiny often includes inquiries, investigations,
examinations, audits, site visits and surveys, some of which may be non-routine.
The Company believes that it is in substantial compliance with the applicable
laws and regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or criminal
fines, penalties or restitutionary relief which may have a material adverse
impact on the Company's financial results and operations.
NOTE O - OPERATIONS
During the year ended June 30, 2000, the Company reported a net loss of
$4,103,000 which largely resulted from charges to operations which will not
reoccur due to their one-time or special nature. Management has prepared plans
which contemplate a significant turnaround in profitability and has plans to
address the Company's equity capital and cash flow needs so that operations may
continue in the normal manner.
Specifically, layoffs have been implemented, field and administrative positions
were restructured to reduce costs, and cost monitoring has been tightened.
Management is actively pursuing additional equity capital including a warrant
offering for which warrants have already been registered with the SEC and
potential investors have been contacted. In addition, positive cash flow is
expected to result from collection of receivables of BALZ and Lexicon estimated
at over $1,500,000, additional nursing home and home health agency collections
of $1,000,000 and a proposed sale of surplus bed licenses for $500,000.
Page F-20
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, together with their ages
and present positions with the Company are as follows:
Name Age Position
---- --- --------
Harry Dermer ..............48 Chief Executive Officer, Chairman of the Board,
President, and Director
Gary Coltek ...............43 Director
Dov Berkowitz, MD .........43 Director
Charles W. McLaughlin .....59 Director
Thomas E. Dybick ..........52 Chief Financial Officer and Secretary
Lawrence W. Fusco .........52 Controller
All directors of the Company hold office until the next annual meeting of the
stockholders and until their successors have been elected and qualified. The
officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.
The following is a brief summary of the background of each director and
executive officer of the Company:
Harry Dermer was elected Chairman and CEO effective June 1, 2000 upon the
retirement of the Company's founder Jack Friedler. Mr. Dermer has served as
President, Chief Operating Officer and Director of the Company since joining the
Company in August 1995. Mr. Dermer has a Connecticut nursing home
administrator's license. Prior to August 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.
Mr. Coltek is the chief executive officer and co-founder of WirelessMD, Inc. and
has extensive background in the medical, hospitality and lodging industries.
Prior to WirelessMD, he was the chief operating officer of International
Consolidated Capital Companies and also has held the position of executive vice
president with several medical organizations including PhyMatrix, Progressive
Clinical Systems, Inc. and Clinical Oncology Network. 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 1979 and received certification as an orthopedic surgeon from
Mount Sinai Hospital in 1984.
Charles W. McLaughlin was elected to the Company's Board of Directors in May
2000. Mr. McLaughlin is a former member of the New York Stock Exchange and is
the Chairman and CEO of MarketView Financial Group, Inc., a privately held
merchant/investment banking firm. He is also the President and CEO of Forte
Communications, Inc., a full service media company.
Thomas E. Dybick has served as the Company's Chief Financial Officer since
September, 1996; he was elected Secretary in May, 2000. 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).
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.
18
<PAGE>
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 former Chief
Executive Officer, to Harry Dermer, its current Chief Executive Officer and
President, to Mary Archambault, its former Executive Vice President and former
Secretary, and to Thomas E. Dybick, its Chief Financial Officer and current
Secretary during the fiscal years ended June 30, 2000, 1999, 1998 and 1997.
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.
<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 1997 $260,000 --- ---
Former Chief Executive Officer Fiscal 1998 $266,250 $17,586 60,000
and Director Fiscal 1999 $270,022 $10,500 ---
Fiscal 2000 $511,188 (1) $5,250 (60,000)
Harry Dermer, Fiscal 1997 $174,980 --- ---
Chief Executive Officer, Fiscal 1998 $179,196 $14,317 60,000
President, and Director Fiscal 1999 $200,086 $8,077 ---
Fiscal 2000 $214,078 $4,038 ---
Thomas E. Dybick, Fiscal 1997 $72,037 --- ---
Chief Financial Officer and Fiscal 1998 $110,318 $4,392 20,000
Secretary Fiscal 1999 $117,808 $2,250 ---
Fiscal 2000 $133,588 $2,500 ---
Mary Archambault, Fiscal 1997 $159,783 --- ---
Former Executive Vice President, Fiscal 1998 $107,088 $15,041 40,000
Former President of BALZ Fiscal 1999 $135,874 $12,923 ---
Fiscal 2000 $557,577 (2) $24,131 (40,000)
</TABLE>
(1) During the year ended June 30, 2000, Mr. Friedler, the Company's founder
and CEO, retired; the Company negotiated the settlement of its remaining
obligations under his employment agreement for $250,000. As a result of
this settlement, Mr. Friedler completed the previously agreed-on repayment
to the Company of $109,000 for certain trade payables owed to the Company
by a business he previously owned.
(2) As a result of the sale of the business of BALZ during the year ended June
30, 2000, the Company settled an employment agreement with Ms.
Archambault, the President of BALZ, for $363,000.
The Company had employment agreements with each of Jack Friedler, Harry Dermer,
and Mary Archambault which became effective in 1997.
19
<PAGE>
The remaining employment agreement with the Company's current CEO and President
provides for a $175,000 annual salary, with cost of living increases and a bonus
equal to 1% of the Company's net income before taxes. The agreement provides
that he shall devote substantially all of his working time and attention to the
business of the Company and contains certain non-compete provisions. The
agreement had an initial term of five years and is automatically renewable for
successive one-year periods unless either the Company or Mr. Dermer elects not
to renew his employment.
During the year ended June 30, 1998, the Company issued options to purchase
180,000 shares of its common stock to the above-noted officers at exercise
prices ranging from $2.625 to $3.062 based on the market value at date of grant.
The Board of Directors re-priced all outstanding options to all grantees in
November 1998 at $.87 per share based on the current market value at that date.
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.
Options on 100,000 shares were cancelled in 2000 when Mr. Friedler and Ms.
Archambault terminated their employment.
The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO,
in connection with her termination in July 1998. In September 1999 the Company
settled this suit to avoid the expenses of protracted litigation. See Item 3 for
further information.
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 26, 2000 by each Director, and by all Directors and officers as a
group, consisting of six persons.
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial Owner of Beneficial Percent
Ownership of
Shares Owned (1) (2) Class
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jack Friedler, former Chief Executive Officer, Chairman of the Board and 1,426,500 40.5%
Director
Harry Dermer, CEO, Chairman, President, and Director 655,500 18.6%
Dov Berkowitz, MD, Director 10,000 *
Gary Coltek, Director 10,000 *
Charles W. McLaughlin - -
Thomas E. Dybick, Chief Financial Officer 13,334 *
* Less than 1%
</TABLE>
(1) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has the
right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of any
other person shown on the table.
20
<PAGE>
(2) The number of shares beneficially owned includes 40,000 options out of the
60,000 granted to Mr. Dermer, 13,334 options out of the 20,000 granted to
Mr. Dybick, 10,000 options out of the 15,000 granted to Dr. Berkowitz, and
10,000 options out of the 15,000 granted to Mr. Coltek.
Item 13. Certain Relationships and Related Transactions
During the year ended June 30, 2000, Jack Friedler, the Company's founder and
former CEO, retired; the Company negotiated the settlement of its remaining
obligations under his employment agreement for $250,000. As a result of this
settlement, Mr. Friedler completed the previously agreed-on repayment to the
Company of $109,000 for certain trade payables owed to the Company by a business
he previously owned.
As a result of the sale of the business of BALZ during the year ended June 30,
2000, the Company settled an employment agreement with Mary Archambault, the
President of BALZ, for $363,000.
In July 1999, the Company, pursuant to Board of Director's approval, defaulted
an 8% interest-bearing promissory note due from the Company's former CEO and
seized the collateral of 600,000 shares of the Company's common stock in
satisfaction of the note and interest due. The shares received were initially
put into the Company's treasury but have been retired as of June 30, 2000. This
resulted in a reduction of working capital and stockholders' equity of $574,000
as shown in the June 30, 1999 consolidated statement of changes in stockholders'
equity.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
On October 14, 1997 the Company loaned $757,000 to its then 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.
Effective July 1, 1995, the Company entered into a ten-year lease, which was
subsequently extended to eighteen years and retroactively amended, for four of
the nursing homes operated by the Company. Jack Friedler, the Company's former
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, 2000 was $2,449,000. The Company
believes that the terms of the lease are as favorable to the Company as those
that could have been obtained from nonaffiliated parties.
The partners owning the remaining 66.66% interest in Fairfield were also owners
of an aggregate of 50% of the capital stock of PRN which interest was purchased
by the Company for a total of $1,080,000. Jack Friedler was the owner of 25% of
PRN; in exchange for Mr. Friedler's interest in PRN, the Company issued Mr.
Friedler 108,000 shares of the Company's Common Stock valued at $540,000, based
on the public offering price. Suzanne 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.
21
<PAGE>
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 $127,000; subleases of
space intended for future expansion have reduced the Company's annual rental
expense to approximately $90,000 during the year ended June 30, 2000. Further,
prior to the sale of assets by BALZ, the Company leased 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,
2000 was $67,000.
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. As of June 30, 2000, Mr. Friedler is no longer 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.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
(1) The following financial statements are included in Part II Item 8:
Report of Independent Certified Public Accountants on Financial
Statements
Financial Statements:
Consolidated Balance Sheets - June 30, 2000 and 1999
Consolidated Statements of Operations - Years Ended June 30, 2000,
1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended June 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
(2) The following schedule for the years 2000, 1999, and 1998 is
submitted herewith:
Report 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:
June 29, 2000 Form 8-K filed concerning disposition of assets by BALZ;
discussed above in Item 1.
(c) Exhibits
(11) Earnings per share calculation
(21) Subsidiaries
(23) Independent Auditors' Consent
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
LEXINGTON HEALTHCARE GROUP, INC.
(Registrant)
By: /s/ Harry Dermer
----------------
Harry Dermer, CEO, Chairman, President and Director
Date: September 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Thomas E. Dybick Chief Financial Officer Date: September 28, 2000
---------------------
Thomas E. Dybick
Director Date: September 28, 2000
---------------------
Gary Coltek
Director Date: September 28, 2000
---------------------
Dov Berkowitz, MD
Director Date: September 28, 2000
---------------------
Charles W. McLaughlin
/s/ Lawrence W. Fusco Controller Date: September 28, 2000
---------------------
Lawrence W. Fusco
24
<PAGE>
DISANTO BERTOLINE & COMPANY, P.C.
628 Hebron Avenue, Building #3
Glastonbury, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
Farmington, Connecticut
We have audited the consolidated financial statements of Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and for the years
ended June 30, 2000, 1999 and 1998; and have issued our report thereon dated
September 25, 2000, which report includes an explanatory paragraph as to an
uncertainty relating to a government investigation; such consolidated financial
statements and report are included elsewhere in this Form 10-K. Our audits 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 25, 2000
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Year Description Year Expenses Writeoffs End of Year
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Allowance for
doubtful accounts $ 848,000 $1,305,000 $ (519,000) $1,634,000
========= ========== ========== ==========
1999 Allowance for
doubtful accounts $ 346,000 $ 748,000 $ (246,000) $ 848,000
========= ========== ========== ==========
1998 Allowance for
doubtful accounts $ 180,000 $ 166,000 $ 346,000
========= ========== ==========
</TABLE>
