-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pg5nCRNmI1M1jCB2QW7MBjc/x2wQ7CVfxN3nrRA9Qyg9Ib22ij5lvH9egB2oNtVN zdmjBpV9Gr0vywzPov0xlw== 0000912057-97-032201.txt : 19971001 0000912057-97-032201.hdr.sgml : 19971001 ACCESSION NUMBER: 0000912057-97-032201 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON HEALTHCARE GROUP INC CENTRAL INDEX KEY: 0001026348 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 061468252 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22261 FILM NUMBER: 97688710 BUSINESS ADDRESS: STREET 1: 35 PARK PL CITY: NEW BRITAIN STATE: CT ZIP: 06052 BUSINESS PHONE: 8602236902 MAIL ADDRESS: STREET 1: 35 PARK PLACE CITY: NEW BRITTAIN STATE: CT ZIP: 06052 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended JUNE 30, 1997 ------------- OR [ ] TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-22261 ------- LEXINGTON HEALTHCARE GROUP, INC. -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1468252 - ---------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 35 PARK PLACE, NEW BRITAIN, CONNECTICUT 06052 - --------------------------------------- ----- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (860) 223-6902 -------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON ------------------- WHICH REGISTERED ------------------------ COMMON STOCK, $.01 PAR VALUE NASDAQ STOCK EXCHANGE - ---------------------------- --------------------- Securities registered pursuant to Section 12(g) of the Act: NONE ----------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X. --- ---- Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on the closing sales price on September 25, 1997, the aggregate market value of the voting common stock held by nonaffiliates of the registrant was $5,158,313. 1 LEXINGTON HEALTHCARE GROUP, INC. Table of Contents PAGE NO. Part I Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 6 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 8. Financial Statements and Supplementary Data 12, F1-F20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 Part III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 18 2 PART 1 ITEM I. BUSINESS Lexington Healthcare Group, Inc. has four wholly-owned subsidiaries: Balz Medical Services, Inc., Professional Relief Nurses, Inc., LEV Rehab Services, Inc. ("LEV"), and Lexington Highgreen Holding, Inc. (collectively, the "Company"). The Company is a long-term and subacute care provider, which operates six nursing home facilities (the "Facilities") with a total of 853 licensed beds in the State of Connecticut; two of these facilities (representing 225 beds) were acquired on July 1, 1997. The Facilities provide a broad range of healthcare services, including nursing care, subacute care (including rehabilitation therapy), and other specialized services (such as care to Alzheimer's patients). The Company's strategy in healthcare is to integrate the main disciplines of nursing, pharmacy, social services and other therapies under one program. In addition, the Company manages two nursing homes (the "Managed Facilities"), Lexington House, Inc. in Connecticut and Oak Island Skilled Nursing Center ("Oak Island") in Massachusetts, pursuant to management agreements. Lexington House, Inc. is owned by a partnership controlled by Jack Friedler, the Company's CEO and largest shareholder. Oak Island is a non-affiliated facility. The Facilities and the Managed Facilities service two basic patient populations: the traditional geriatric patient population and the emerging population of subacute care patients with higher acuity disorders who require more complex and intensive medical services. Subacute care patients generally require more rehabilitative therapy and are residents for a shorter time than traditional geriatric patients. An important part of the Company's strategy is to achieve high occupancy and a favorable payor mix by offering specialty medical services. The Facilities have an occupancy rate of approximately 92% as of August 31, 1997 (including the two facilities acquired on July 1, 1997 whose occupancy at August 31, 1997 is 81%). The Company operates a dedicated subacute unit within two of the Facilities, in addition to providing subacute services in each of the other Facilities. The Company believes that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. The Company completed an initial public offering of its shares (the "Offering") in May, 1997 during which 1,125,000 shares of common stock and 1,940,625 common stock purchase warrants were issued, resulting in net proceeds to the Company of $4.1 million. Upon completion of the Offering the Company became the successor to Lexington Health Care Group, LLC, a limited liability company ("LLC"), and the members of LLC exchanged their membership interests in LLC for shares of the Company's Common Stock representing a combined 59.7% ownership of the Company. In May, 1997 the Company acquired all of the capital stock of BALZ Medical Services, Inc. ("BALZ") and also of Professional Relief Nurses, Inc. ("PRN") from the shareholders of BALZ and PRN simultaneously with the closing of the Offering. 3 BALZ provides a variety of medical supplies, nutritional supplements, institutional cleaning products, linens and everyday products including toothpaste and incontinence products, to affiliated and non-affiliated nursing homes, other institutional facilities and private persons. The Company's strategy is to expand BALZ's business to become more of a traditional medical supply company by supplying products to hospitals, doctor's offices and persons at their homes through PRN. PRN provides skilled nursing services to persons at home. PRN's personnel include (i) registered nurses, who provide a broad range of nursing care services, including skilled observation and assessment and intravenous therapy; (ii) licensed practical nurses who perform, under the supervision of a registered nurse, technical nursing procedures; (iii) physical and rehabilitation therapists and (iv) certified nurses aides, who, under the supervision of a nurse, provide health-related services and personal care. The Company intends to establish PRN as a nursing pool agency whereby it supplies nurses and other skilled personnel to hospitals, affiliated and non-affiliated nursing homes and other home healthcare agencies on a temporary basis. On July 1, 1997, Lexington Highgreen Holding, Inc. purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ( Beverly"). All real estate, property, fixed and substantially all operating assets of the nursing homes were acquired for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly. LEV was incorporated in 1996 as a wholly-owned subsidiary and commenced operations in May 1996 to provide physical, occupational, speech and other therapies to patients at the nursing home facilities owned or managed by the Company, unaffiliated facilities and persons in their homes. LEV has not generated any significant revenues to date. In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which is secured by its accounts receivable and other assets. Through September 25, 1997 this line of credit has not been accessed. In August and September, the Company signed letters of intent to form new joint venture operations with unrelated companies in the pharmacy, respiratory, oxygen and rehab therapy business. Services will be provided to patients in the Company's and unrelated nursing facilities and to patients in their homes. In September, 1997, the Company signed a letter of intent to acquire a 49% ownership position in a regional medical supply business in exchange for 100,000 shares of the Company's common stock, subject to various terms and conditions yet to be finalized. The Company has the option to acquire the remaining 51% of the business within twelve months. As of August 31, 1997 the Company had approximately 1,200 full and part-time employees, of which approximately 45% were covered by collective bargaining agreements. Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to its initial public offering, the Company had operated as Lexington Health Care Group, LLC, a limited liability company that was formed on March 8, 1995 and commenced operations on July 1, 1995. The Company's principal offices are located at 35 Park Place, New Britain, Connecticut 06052 and its telephone number is (860) 223-6902. 4 ITEM 2. PROPERTIES The following properties are leased. APPROXIMATE LOCATION USE SQ. FT. OCCUPIED Bentley Gardens Nursing Home 21,500 31 Terrace Avenue, West Haven, CT 06516-2698 Country Manor Nursing Home 27,000 64 Summit Road, Prospect, CT 06712-7060 Fairfield Manor Nursing Home 55,000 23 Prospect Street, Norwalk, CT 06850-3798 Pond Point Nursing Home 27,000 60 Platt Street, Milford, CT 06460-7697 Professional Relief Nurses, Inc. Nursing Services 800 Plaza Middlesex, Middletown, CT 06457 3,000 80 Phoenix Avenue, Waterbury, CT 06702 1,400 560 Saw Mill Road, West Haven, CT 06516 1,300 Balz Medical Services, Inc. Ancillary 9,000 362 Industrial Park Road, Services/Products Middletown, CT 06457 The following properties are owned. APPROXIMATE LOCATION USE SQ. FT. OCCUPIED Greenwood Health Center Nursing Home 53,000 5 Greenwood Street, Hartford, CT 06106 Highland Acres Extend-a-Care Center Nursing Home 20,500 108 East Lake Street, Winsted, CT 06098 Management considers its properties to be well maintained and sufficient for its present operations. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5 No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Lexington Healthcare Group, Inc.'s common stock, $.01 par value, is traded on the National Market System of the NASDAQ Stock Market. The following table presents its high and low market prices, and dividend information since trading began on May 14, 1997. QUARTERLY COMMON STOCK PRICE RANGES AND DIVIDENDS FY 1997 QUARTER HIGH LOW DIVIDEND 4th 8 1/4 5 1/2 $-0- The Company has not paid dividends to date and has no present intention of paying any dividends on its Common Stock in the foreseeable future, as it intends to reinvest profits, if any, in the development and expansion of its business. The number of shareholders of record for the Company's common stock as of September 1, 1997 was 21; The Company believes that its shares are beneficially owned by over 500 individuals. On September 25, 1997, the closing price of the Company's common stock was $3.81. 6 ITEM 6. SELECTED FINANCIAL DATA YEAR ENDED JUNE 30, --------------------- 1997 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------- STATEMENT OF OPERATIONS DATA Net revenues $35,900 $33,641 Operating costs and expenses 36,244 33,180 ------ ------ Income (loss) before income taxes (341) 461 Provision for (benefit from) income taxes (66) 0 -- -- NET INCOME (LOSS) $ (275) $ 461 -------- ------- -------- ------- Net income (loss) per share $ (.10) $ .18 -------- ------- -------- ------- BALANCE SHEET DATA Cash and cash equivilents $ 1,000 $ 212 Working capital (deficiency) 287 (2,381) Total Assets 15,432 9,614 Short-term borrowings 89 2,580 Total long-term debt excluding current maturities 107 102 Total stockholders equity $ 6,395 $ 487 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During the fiscal year ended June 30, 1997, the Company reorganized its capital structure and completed an initial public stock offering (the "Offering") which raised net proceeds of approximately $4.1 million. In connection with the Offering, the Company acquired two businesses in the healthcare field and later initiated plans to expand its nursing home operations with two additional facilities, which were acquired immediately after the close of the fiscal year. The Company believes that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. The Company's operating strategy is to increase Facility profitability levels, through aggressive marketing and by offering rehabilitation therapies and other specialized services; adhere to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and become a fully integrated health network whereby the Company will market medical products and supplies, rehabilitative services, institutional pharmaceutical services and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. By concentrating its facilities and ancillary service operations within a selected geographic region, the Company's strategy is to achieve operating efficiencies through economies of scale, reduced corporate overhead, more effective management supervision and financial controls. In addition, the Company believes that geographic concentration also enhances the Company's ability to establish more effective relationships with referral sources and regulatory authorities in the states where the Company operates. The Company's strategy is to gradually expand services into additional states including Massachusetts and New Jersey. RESULTS OF OPERATIONS YEAR ENDED JUNE 30, 1997 ("1997 PERIOD") VS. YEAR ENDED JUNE 30, 1996 ("1996 PERIOD") The 1997 period results include the nursing facility operations for a full year. The Company has recorded a reduction in patient service revenue of $45,000 during the year ended June 30, 1997 in connection with estimated Medicare and Medicaid settlements. The results of operations of the acquired subsidiaries, BALZ and PRN, are included in operations since acquisition on May 15. 8 For the year ended June 30, 1997, the Company had total revenues of $35,900,000 and total expenses of $36,241,000. These expenses consisted of salaries and benefits of $26,979,000, food, medical and other supplies of $2,689,000, other operating expenses (including rent of $2,497,000) of $5,113,000, corporate, general and administrative expenses of $1,282,000 and interest expense of $178,000. The Company had a net loss of $275,000 for the year ended June 30, 1997. Revenues in the 1997 period increased over the 1996 period by $2,259,000 or 6.7%; $1,301,000 of this increase was a result of increased rates, mix changes and higher occupancy in the nursing facilities (net of $45,000 in revenue adjustments as a result of expected Medicare and Medicaid settlements), $699,000 is due to additional revenues from subsidiaries acquired, and $259,000 as a result of other revenue increases, principally third-party management fees. Expenses in the 1997 period increased over the 1996 period by $3,061,000 or 9.2%. $2,464,000 of this increase was a result of increased costs in the nursing facilities and $597,000 is due to additional costs from subsidiaries acquired. The major increase in nursing home costs were for higher salaries and benefits including additional nursing, dietary, and housekeeping staffing (as a result of higher occupancy and union and non-union wage increases of approximately 4%), higher therapy costs and occupancy-driven higher operating expenses in housekeeping, laundry, and nursing. RESULTS OF OPERATIONS FOR THE PERIOD FROM JULY 1, 1995 ("COMMENCEMENT OF OPERATIONS") TO JUNE 30, 1996 The Company had total revenues of $33,641,000 for the year ended June 30, 1996. The Company had total expenses of $33,180,000 for the year ended June 30, 1996. These expenses consisted of salaries and benefits of $24,839,000, food, medical and other supplies of $2,065,000, other operating expenses (including rent of $2,468,000) of $4,896,000, corporate, general and administrative expenses of $1,126,000 and interest expense of $254,000. The Company had net income of $461,000 for the year ended June 30, 1996. During this year, the Company began its operations of the nursing homes and incurred startup and financing costs which have been reduced in later periods. Revenues in the second six months of this year decreased as the Company experienced some vacancies due to construction of a subacute wing at the Fairfield Facility but implemented plans to improve patient mix and census. Expenses in the second six months increased by a total of $783,000 or 4.8% due to higher salaries and benefits ($319,000), higher legal, accounting and professional costs ($172,000), higher laundry and housekeeping costs to improve service ($238,000) and higher interest ($54,000). 9 LIQUIDITY AND CAPITAL RESOURCES The Company has primarily financed its operations through operating revenues, borrowings from the prior operator of the Facilities and other private lenders including stockholders, by financing its accounts receivable, by a private placement of shares and warrants (subsequently rescinded), and through a public offering of its common stock (the "Offering") which raised net proceeds of approximately $4.1 million. The net proceeds of the Offering were used to pay off remaining balances of previous borrowings, to fund the acquisition of PRN and, after providing for other business development plans, were added to the working capital of the Company. As a result of the acquisitions, internally-generated cash flow will increase from the addition of BALZ and PRN. Between October 1995 and July 1996, the Company borrowed an aggregate of $286,000 from Jack Friedler and Harry Dermer. $104,000 of such loan was repaid to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned $100,000 to the Company in connection with the reacquisition of shares from a private placement investor. Mr. Friedler's balance of $266,000 was then offset against loans due from Lexington House in May 1997. Mr. Friedler also instructed the Company to offset interest due him from the Company of $10,000 each during May and June 1997 against the Lexington House loan (which is discussed below). The Company is still indebted to Mr. Dermer for $16,000 as of June 30, 1997. In July 1995, the Company entered into an agreement to manage the day-to-day business affairs of Lexington House, Inc., a nursing home with 67 licensed beds; Lexington House is owned by Jack Friedler and his wife. The Company made certain expenditures on behalf of Lexington House in anticipation that it would acquire Lexington House. Subsequently, the negotiations for the sale were terminated because the Company determined that such facility required too many capital improvements. At June 30, 1997, Lexington House, Inc. is indebted to the Company in the net amount of $290,000 after Mr. Friedler's balance due the Company and interest due to him from the Company were offset as discussed above. Lexington House has agreed to a payment schedule of $10,000 per month. During the years ended June 30, 1997 and 1996, the Company expended approximately $290,000 and $462,000, respectively, in capital improvements to the Facilities. Any capital improvements made to the Facilities belong to the landlord. However, any amounts expended for capital improvements are generally recouped in their entirety through the reimbursement system. At June 30, 1997, on a consolidated basis, the Company had cash and cash equivalents of $1,000,000, receivables of $6,819,000, inventories of $403,000 and prepaid and other current assets of $418,000. Overall, current assets increased by $2,611,000 during the year ended June 30, 1997. Current notes payable decreased by $2,250,000 since June 30, 1996; overall, current liabilities decreased by $57,000 from July 1, 1996 to June 30, 1997. 10 Working capital at June 30, 1997 was $287,000 as compared with a working capital deficit of $(2,381,000) at June 30, 1996. Current assets consist mostly of cash, cash equivalents and accounts receivable which are not collateralized as of June 30, 1997. Current liabilities at June 30, 1997 consist principally of trade accounts payable, accrued payroll and related taxes, and other accrued expenses. In August, 1997, the Company has obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which is secured by its accounts receivable and other assets. Through September 25, 1997 this line of credit has not been utilized. Inflation has not had, nor is it expected to have, a material impact on the operations and financial condition of the Company. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Reports of Independent Certified Public Accountants on Consolidated Financial Statements as of and for the Years Ended June 30, 1997 and 1996 Financial Statements: Consolidated Balance Sheets June 30, 1997 and 1996 Consolidated Statements of Operations Years Ended June 30, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows, Years Ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 15, 1997, the Board of Directors of Lexington Healthcare Group, Inc. appointed the firm of DiSanto Bertoline and Company, P.C. as the Company's auditors replacing the firm of Richard A. Eisner and Company, LLP, which was dismissed by the Board of Directors effective the same date. The report of Richard A Eisner and Company, LLP on the Company's June 30, 1996 consolidated financial statements contained an emphasis of a matter paragraph expressing substantial doubt about the Company's ability to continue as a going concern. There were no disagreements as to accounting policies or other financial issues with the former accounting firm. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company, together with their ages and present positions with the Company are as follows: NAME AGE POSITION Jack Friedler...............65 Chief Executive Officer, Chairman of the Board and Director Harry Dermer................45 President, Chief Operating Officer and Director Jon Mills...................57 Director Eric D. Moskow, MD..........38 Director Thomas E. Dybick............49 Chief Financial Officer Mary Archambault............46 Executive Vice President and Secretary Suzanne J. Nettleton........51 Executive Vice President Lawrence W. Fusco...........49 Controller All directors of the Company hold office until the next annual meeting of the stockholders and until their successors have been elected and qualified. The officers of the Company are elected by the Board of Directors at the first meeting after each annual meeting of the Company's stockholders, and hold office until their death, until they resign or until they have been removed from office. The following is a brief summary of the background of each director and executive officer of the Company: Jack Friedler has been Chief Executive Officer and Chairman of the Board since the Company's inception in February 1995. Since 1988, Mr. Friedler served as President of Lexington House, Inc. which is currently managed by the Company. Mr. Friedler and his wife own 100% of Lexington House, Inc. He managed Fairfield Manor Health Care Center, Pond Point Health Care Center, Country Manor Health Care Center and Bentley Gardens Health Care Center from 1981 to 1986. Mr. Friedler was a co-founder of PRN in 1981. Mr. Friedler spends approximately 35 hours per week on matters relating to the Company's business. 13 Harry Dermer has served as President, Chief Financial Officer and Director of the Company since its inception in February 1995. Mr. Dermer has a Connecticut nursing home administrator's license. Prior to February, 1995, Mr. Dermer co-founded Prometheus Pharmacy and Nursing Homes America, Inc., which are divisions of the Olympus Healthcare Group, where he served as Chief Financial Officer from 1994 to 1995, and Mediscript Pharmacy, Inc., a division of Mediplex, where he served as Chief Financial Officer from 1993 to 1994. Previously from 1990 to 1993 he was Vice President of Operations and Chief Financial Officer of Reliance Pharmacy Corp. Jon Mills has served as a Director of the Company since March 1996. He is currently President and a Director of Medline Industries, Inc., a national manufacturer of healthcare products, positions he has held since 1966. Eric D. Moskow, MD has served as a Director of the Company since March 1997. Dr. Moskow has been the Executive Vice President of Strategic Planning for PhyMatrix, Inc. and has served as a member of the PhyMatrix Board of Directors since that time. In 1993, he founded Physician's Choice Management, LLC and served as its Executive Vice President until 1996. Prior to establishing Physician's Choice, he served as Medical Director for US Healthcare in Connecticut. Dr. Moskow is board-certified in internal medicine and served as President of the Family Medical Associates of Ridgefield, Connecticut for the past nine years. Thomas E. Dybick has served as the Company's Chief Financial Officer since September, 1996. He is a Certified Public Accountant. Prior thereto, from 1992 to 1996 Mr. Dybick was Chief Financial Officer of AHF/Connecticut Management, Inc. which managed six nursing homes in Connecticut and Massachussetts. Previously, Mr. Dybick was employed by the law firm of Levy & Droney, PC as Executive Director (1985-1992). Mary Archambault has served as President of BALZ since its inception in 1995. Prior thereto, Ms. Archambault co-founded Prometheus Pharmacy and Nursing Homes America, Inc., where she served as Executive Vice President from 1994 to 1995. She also co-founded Mediscript Pharmacy, Inc.'s Medicare Part B division, which was a division of Mediplex, where she served as Executive Vice-President from 1993 to 1994. Previously, Ms. Archambault was Manager of Medical Supplies and Medicare Part B Services for Allcare Pharmacy, Inc. from 1990 - 1993. Ms. Archambault has a Connecticut Nursing Home Administrator's license and is a licensed Practical Nurse in Connecticut. Suzanne J. Nettleton founded and has served as President and Administrator of PRN since its inception in 1981. She is licensed as a Nursing Home Administrator in Connecticut and is licensed as a Registered Nurse in both New York and Connecticut. Ms. Nettleton owned 25% of PRN prior to its acquisition by the Company. Lawrence W. Fusco has served as the Company's Controller since July, 1997. He is a Certified Public Accountant. Prior thereto, from 1996 to 1997, Mr. Fusco was Division Controller of American Medical Response, a national ambulance and handi-van company. Previously, since 1991 he was Controller of The H.P. Hallock Co., a retailer. 14 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash compensation, as well as certain other compensation paid or accrued, by the Company to Jack Friedler, its Chief Executive Officer, and Harry Dermer, its President and Chief Operating Officer during the fiscal years ended June 30, 1997 and 1996. Other than Messrs. Friedler and Dermer, no other executive officer of the Company had a total annual salary and bonus of $100,000 during the reported periods. The executive compensation received from PRN by Suzanne Nettleton, its President, and that received from BALZ by Mary Archambault, its President, is also disclosed below. Long Term Annual Compensation Compensation Stock Name and Principal Position Year Salary Bonus Options Granted Jack Friedler, Fiscal 1996 $210,000(1) --- --- Chief Executive Officer and Fiscal 1997 $260,000 --- --- Director Harry Dermer, Fiscal 1996 $127,204 --- --- President, Chief Operating Fiscal 1997 $174,980 --- Officer and Director Suzanne Nettleton, Fiscal 1996 $122,237(1) $38,121 --- Executive Vice President, Fiscal 1997 $132,492 $31,376 President of PRN Mary Archambault, Fiscal 1996 $159,783 --- --- Executive Vice President, Fiscal 1997 $ 54,256 Secretary, President of BALZ 1) In addition, Jack Friedler and Suzanne Nettleton each received director fees of $40,000 for serving as Directors of PRN, but are no longer entitled to such fees after the Company's acquisition of PRN. The Company has employment agreements with four of its executive officers which became effective upon consummation of the Offering. The agreements provide that such individuals shall devote substantially all of their working time and attention to the business of the Company and contain certain non-compete provisions. The agreements with the CEO and President have an initial term of five years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew his employment. The agreements with the subsidiary presidents have an initial term of three years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew her employment. The CEO's agreement provides for a $250,000 annual salary, with cost of living increases and a bonus equal to 1% of the Company's net income before taxes. The President's employment agreement is identical except that the salary is $175,000 annually. The agreement with the president of BALZ provides for a base annual salary of $100,000, subject to five percent annual increases, plus a bonus of 3.75% of BALZ's net profits before taxes. The agreement with the president of PRN provides for an annual salary of $160,000, subject to five percent annual increases. 15 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person owned of record or was known to own beneficially more than five percent (5%) of the outstanding common stock of the Company except as noted below. The following table shows the amount of common stock owned as of September 24, 1997 by each Director, and by all Directors and officers as a group, consisting of seven persons. Amount and Nature Name and Address of Beneficial Percent of Beneficial Owner Ownership of Shares Owned Class Jack Friedler, Chief Executive Officer, Chairman of the Board and Director 2,026,500 49.1% Harry Dermer, President, Chief Operating Officer and Director 685,500 16.6% Thomas E. Dybick, Chief Financial Officer 0 0% Jon Mills, Director 0 0% Mary Archambault, Executive Vice President, Secretary 60,000 1.5% Suzanne J. Nettleton, Executive Vice President 0 0% Eric D. Moskow, MD, Director 0 0% ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In July 1995, the Company entered into an agreement to manage the day-to-day business affairs of Lexington House, Inc., a nursing home with 67 licensed beds. Lexington House is owned by Jack Friedler and his wife. As of June 30, 1997, Lexington House, Inc. is indebted to the Company in the amount of $290,000. Lexington House has agreed to a payment schedule of $10,000 per month. In connection with the Company's reorganization and the Offering, the previous members of Lexington Health Care Group, LLC, Jack Friedler, his wife Stephanie Friedler and Harry Dermer, exchanged their respective interests (37.5%, 37.5% and 25%) in the LLC for an aggregate of 2,462,000 shares of Common Stock of the Company. Effective July 1, 1995, the Company entered into a ten-year lease, which was subsequently and retroactively amended, for four of the nursing homes operated by the Company. Jack Friedler, the Company's Chief Executive Officer is a 33.33% limited partner of the lessor, Fairfield Group Health Care Centers Limited Partnership ("Fairfield"). The Company's annual rent expense for the year ended June 30, 1997 was $2,468,000. The Company believes that the terms of the lease are as favorable to the Company as those that could have been obtained from nonaffiliated parties. The partners owning the remaining 66.66% interest in Fairfield were also owners of an aggregate of 50% of the capital stock of PRN which interest was purchased by the Company for a total of $1,080,000. Jack Friedler was the owner of 25% of PRN; in exchange for Mr. Friedler's interest in PRN, the Company issued Mr. Friedler 108,000 shares of the Company's Common Stock valued at $540,000, based on the public offering price. Suzanne J. Nettleton, Executive Vice President of the Company, was owner of the remaining 25% of the capital stock of PRN. The Company purchased Ms. Nettleton's interest for $540,000. 16 The Company acquired all of the capital stock of BALZ from its existing stockholders (including Jack Friedler, Harry Dermer and Mary Archambault) in exchange for an aggregate of 300,000 shares of the Company's Common Stock (valued at $1,500,000 based on the public offering price). The following number of shares were issued to Officers and Directors of the Company in exchange for their shares of BALZ: Jack Friedler 72,000 Harry Dermer 60,000 Mary Archambault 60,000 Between October 1995 and July 1996, the Company borrowed an aggregate of $286,000 from Jack Friedler and Harry Dermer which loans bear interest at an annual rate of 10%. A total of $104,000 was repaid to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned another $100,000 to the Company in connection with the reacquisition of shares from a private placement investor. Mr. Friedler's balance of $266,000 was then offset against loans due from Lexington House in May 1997. Mr. Friedler also instructed the Company to offset interest due him from the Company of $10,000 each during May and June 1997 against the Lexington House loan. The Company is still indebted to Mr. Dermer for $16,000 as of June 30, 1997. In March 1997, the Company entered into an agreement with Physicians Choice, LLC ("PCL") whereby it agreed to provide skilled nursing and rehabilitation services to patients in the PCL network that reside at the Company's Facilities. PCL is a subsidiary of PhyMatrix, Inc. Eric D. Moskow, MD, a Director of the Company, is a director of PhyMatrix, Inc. No significant revenues have yet been generated as a result of this contract. Jack Friedler and Harry Dermer entered into a stockholder's agreement, effective in May, 1997, which includes, among other things, the grant of a mutual right of first refusal to purchase any shares of Common Stock beneficially owned by the other stockholder, and a mutual agreement to vote for the other stockholder as a Director of the Company. With respect to each of the foregoing transactions, although the Company has not obtained any independent fairness opinions, the Company believes that the terms of such transactions were as fair to the Company as could be obtained from an unrelated third party. In the event the Company enters into negotiations to acquire any business or assets of a related party it will secure an independent appraisal. Future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated parties and will be approved by a majority of the independent and/or disinterested members of the Board of Directors. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page (a) Financial Statements (1) The following financial statements and supplementary data are included in Part II Item 8: Reports of Independent Certified Public Accountants on Financial Statements Financial Statements: Consolidated Balance Sheets - June 30, 1997 and 1996 Consolidated Statements of Operations - Years Ended June 30, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity - Years Ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows - Years Ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements (2) The following financial statement schedule for the years 1997 and 1996 is submitted herewith: Reports of Independent Certified Public Accountants on Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K: No reports were filed during the quarter ended June 30, 1997, however, subsequently and to date the following reports have been filed: July 15, 1997 Acquisition of Greenwood and Highland nursing facilities August 29, 1997 Change in Accountants September 24, 1997 Change in Accountants, Response of Prior Accounting Firm (c) EXHIBITS (11) Earnings per share calculation (21) Subsidiaries 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: LEXINGTON HEALTHCARE GROUP, INC. (Registrant) BY: /s/ HARRY DERMER -------------------- Harry Dermer, President, Chief Operating Officer and Director Date: September 29, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: S/JACK FRIEDLER Chief Executive Officer, Date: September 29, 1997 - -------------------- Chairman of the Board and Director Jack Friedler S/THOMAS E. DYBICK Chief Financial Officer Date: September 29, 1997 - -------------------- Thomas E. Dybick S/JON MILLS Director Date: September 29, 1997 - -------------------- Jon Mills S/ERIC D. MOSKOW, MD Director Date: September 29, 1997 - -------------------- Eric D. Moskow S/MARY ARCHAMBAULT Executive Vice President and Date: September 29, 1997 - -------------------- Secretary Mary Archambault S/SUZANNE J. NETTLETON Executive Vice President Date: September 29, 1997 - ---------------------- Suzanne J. Nettleton 19 DISANTO BERTOLINE & COMPANY, P.C. 628 Hebron Avenue Building #3 Glastonbury, CT 06033 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lexington Healthcare Group, Inc. New Britain, Connecticut We have audited the consolidated financial statements of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1997, and for the year then ended, and have issued our report thereon dated September 24, 1997; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Lexington Healthcare Group, Inc. and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DISANTO BERTOLINE & COMPANY, P.C. Glastonbury, Connecticut September 24, 1997 20 INDEPENDENT AUDITORS' REPORT To the Board of Directors Lexington Healthcare Group, Inc. New Britain, Connecticut We have audited the consolidated financial statements of Lexington Healthcare Group, Inc. and subsidiary as of June 30, 1996, and for the period from July 1, 1995 (commencement of operations) through June 30, 1996, and have issued our report thereon dated October 18, 1996 (November 5, 1996 and May 9, 1997 with respect to Note J); such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule as of and for the period ended June 30, 1996 of Lexington Healthcare Group, Inc. and subsidiary, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Richard A. Eisner & Company, LLP New York, New York October 18, 1996 21
LEXINGTON HEALTHCARE GROUP, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Additions ----------------------------------------- Other Charged Changes - Balance at Charged to to other Add Balance at Beginning Costs and Account - (Deduct)- End of Year Description of Year Expenses Describe Describe Year - --------------------------------------------------------------------------------------------------------- 1997 Allowance for doubtful amounts $75,000 $ 105,000 $ 180,000 ------------------------- -------------------------- ------------------------- -------------------------- 1996 Allowance for doubtful amounts $ 0 $ 75,000 $ 75,000 ------------------------- -------------------------- ------------------------- --------------------------
22 DISANTO BERTOLINE & COMPANY, P.C. 628 HEBRON AVENUE BUILDING #3 GLASTONBURY, CT 06033 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lexington Healthcare Group, Inc. New Britain, Connecticut We have audited the accompanying consolidated balance sheet of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Lexington Healthcare Group, Inc. and subsidiary as of June 30, 1996, before the adjustment described in Note B, were audited by other auditors whose report dated October 18, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. We also audited the adjustment, to reflect the Company's reorganization described in Note B, that was applied to the 1996 consolidated financial statements. In our opinion, such adjustment is appropriate and has been properly applied. DISANTO BERTOLINE & COMPANY, P.C. Glastonbury, Connecticut September 24, 1997 Page F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors Lexington Healthcare Group, Inc. New Britain, Connecticut We have audited the accompanying consolidated balance sheet of Lexington Healthcare Group, Inc. and subsidiary as of June 30, 1996, prior to the reorganization described in Note B, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the period from July 1, 1995 (commencement of operations) through June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Lexington Healthcare Group, Inc. and subsidiary at June 30, 1996, prior to the reorganization described in Note B, and the consolidated results of their operations and their consolidated cash flows for the period from July 1, 1995 (commencement of operations) through June 30, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net working capital deficiency raising substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters included raising additional equity such as that contemplated in the initial public offering (see Note B). Richard A. Eisner & Company, LLP New York, New York October 18, 1996 With respect to Note J November 5, 1996 and May 9, 1997 Page F-2 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996
1997 1996 ------------------- ------------ ASSETS CURRENT ASSETS...................................................... Cash and cash equivalents........................................... $ 1,000,000 $ 212,000 Accounts receivable--net of allowance for doubtful accounts of $180,000 and $75,000 for 1997 and 1996, respectively.............. 6,421,000 5,585,000 Estimated third-party payor settlements-Medicaid.................... 278,000 -- Note receivable-related party....................................... 120,000 -- Due from related parties............................................ -- 73,000 Inventories......................................................... 403,000 94,000 Prepaid and other current assets.................................... 418,000 65,000 ----------- ------------ Total current assets............................................... 8,640,000 6,029,000 EQUIPMENT & LEASEHOLD IMPROVEMENTS, net.............................. 814,000 462,000 OTHER ASSETS Security deposit--related party..................................... 2,282,000 2,282,000 Residents' funds.................................................... 161,000 147,000 Deferred registration costs......................................... -- 198,000 Goodwill, net of accumulated amortization of $20,000................ 3,275,000 -- Deferred tax asset.................................................. 35,000 -- Other assets, net................................................... 55,000 102,000 Note receivable--related party...................................... 170,000 394,000 ----------- ---------- 5,978,000 3,123,000 ----------- ---------- $15,432,000 $ 9,614,000 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable (current portion)..................................... $ 17,000 $ 2,267,000 Notes payable--officers/stockholders................................ 40,000 286,000 Accounts payable and accrued expenses............................... 7,737,000 5,568,000 Estimated third-party payor settlements--Medicare................... 323,000 -- Capital leases payable (current portion)............................ 32,000 27,000 Income taxes payable................................................ 204,000 -- Due to related party................................................ -- 262,000 ----------- ----------- Total current liabilities.......................................... 8,353,000 8,410,000 OTHER LIABILITIES Notes payable (less current portion)................................ 44,000 -- Capital leases payable (less current portion)....................... 63,000 102,000 Residents' funds payable............................................ 161,000 147,000 Deferred rent....................................................... 416,000 468,000 ----------- ----------- 684,000 717,000 ---------- ----------- Total liabilities.................................................. 9,037,000 9,127,000 ---------- ----------- ---------- ----------- COMMITMENTS AND CONTINGENCIES (Note N) STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 15,000,000 shares....................................... 41,000 25,000 Additional paid-in capital.......................................... 6,168,000 1,000 Retained earnings................................................... 186,000 461,000 ----------- ----------- Total stockholders' equity......................................... 6,395,000 487,000 ----------- ----------- $15,432,000 $ 9,614,000 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. Page F-3 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996 ------------- ------------- REVENUES Net patient service revenue....................................................... $ 35,536,000 $ 33,536,000 Other revenue..................................................................... 364,000 105,000 ------------- ------------- Total revenues.................................................................. 35,900,000 33,641,000 EXPENSES Facility operating expenses: Salaries and benefits............................................................ 26,979,000 24,839,000 Food, medical and other supplies................................................. 2,689,000 2,065,000 Other operating expenses......................................................... 5,113,000 4,896,000 Corporate, general and administrative expenses.................................... 1,282,000 1,126,000 Interest expense.................................................................. 178,000 254,000 ------------- ------------- Total expenses.................................................................. 36,241,000 33,180,000 ------------- ------------- Income (loss) before income taxes................................................. (341,000) 461,000 INCOME TAXES....................................................................... (66,000) -- ------------- ------------- Net income (loss)................................................................. $ (275,000) $ 461,000 ------------- ------------- ------------- ------------- Net income (loss) per common share................................................ $ (0.10) $ 0.18 ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding.............................. 2,724,000 2,592,000 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. Page F-4 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
COMMON STOCK --------------------------------------- ADDITIONAL MEMBERS NUMBER PAID-IN RETAINED EQUITY OF SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------ ------------- ------------ ------------ ------------ ----------- Capital contribution ....................... $ 26,000 -- $ $ -- $ -- $ 26,000 Adjustment for reorganization of entities under common control (Note B)............. (26,000) 2,462,000 25,000 1,000 -- -- Net income.................................. -- -- -- -- 461,000 461,000 ----------- ---------- --------- -------- --------- ----------- Balance, June 30, 1996...................... $ -- 2,462,000 25,000 1,000 461,000 487,000 ----------- ----------- Issuance of common stock for legal services rendered.................................. 130,000 1,000 59,000 -- 60,000 Issuance of common stock in connection with the acquisition of BALZ................... 300,000 3,000 1,497,000 -- 1,500,000 Issuance of common stock in connection with the acquisition of PRN.................... 108,000 1,000 539,000 -- 540,000 Issuance of common stock and warrants in connection with initial public offering, net of issuance costs of $1,734,000....... 1,125,000 11,000 4,072,000 -- 4,083,000 Net loss.................................... -- -- -- (275,000) (275,000) ---------- ----------- ------------ ------------ ------------ Balance, June 30, 1997...................... 4,125,000 $ 41,000 $6,168,000 $186,000 $6,395,000 ---------- ----------- ------------ ------------ ------------ ---------- ----------- ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. Page F-5
LEXINGTON HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 1997 1996 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (275,000) $ 461,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 110,000 47,000 Provision for doubtful accounts 105,000 75,000 (Decrease) increase in deferred rent (52,000) 468,000 Benefit from deferred taxes (97,000) - Changes in operating assets and liabilities: Increase in accounts payable and accrued expenses 1,303,000 5,814,000 Increase in estimated third-party settlements--Medicare 324,000 - Decrease (increase) in accounts receivable 282,000 (5,660,000) Decrease in other assets 85,000 - Increase in organization costs - (70,000) Increase in inventories (240,000) (94,000) Increase in estimated third-party settlements--Medicaid (278,000) - (Decrease) increase in due to related parties, net (291,000) 189,000 Increase in prepaid and other current assets (341,000) (65,000) ----------- ----------- Net cash provided by operating activities 635,000 1,165,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in note receivable - related party (162,000) (394,000) Increase in security deposit - related party - (2,282,000) Acquisition of fixed assets (285,000) (346,000) Cash paid for businesses acquired (1,434,000) - ----------- ----------- Net cash used in investing activities (1,881,000) (3,022,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net 4,143,000 26,000 Proceeds of short term borrowings and Beverly receivables 500,000 3,527,000 Decrease (increase) in deferred registration costs 198,000 (131,000) Proceeds of notes payable to officers 100,000 392,000 Financing costs - (47,000) Repayments of capital lease obligations (34,000) (19,000) Repayment of notes payable to officers (110,000) (106,000) Repayment of short-term borrowing (2,763,000) (1,573,000) ----------- ----------- Net cash provided by financing activities 2,034,000 2,069,000 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 788,000 212,000 CASH AND CASH EQUIVALENTS, beginning of year 212,000 - ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 1,000,000 $ 212,000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 176,000 $ 217,000 Income taxes - - Non-cash investing and financing activities: Equipment acquired by capital leases $ - $ 148,000 Accounts payable financed by short-term borrowings - 313,000 Deferred registration costs accrued - 67,000 Common stock issued in connection with legal services recorded as cost of issuance 60,000 - Offset of note payable - officers/stockholders against note receivable - related party 265,693 - Details of businesses acquired was as follows: Fair value of assets acquired $ 4,788,000 $ - Liabilities assumed 1,314,000 - ----------- ----------- Purchase price, net of cash received 3,474,000 - Common stock issued for acquired businesses (2,040,000) - ----------- ----------- Net cash paid for acquired businesses $ 1,434,000 $ - ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements
Page F-6 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE A - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Lexington Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN"), LEV Rehab Services, Inc. ("LEV"), and Lexington Highgreen Holding, Inc. (collectively, the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS The Company is a long-term and subacute care provider, which operates four nursing home facilities at June 30, 1997 with 628 beds licensed by the State of Connecticut. These facilities were previously operated by Beverly Enterprises, Inc. ("Beverly"), through June 30, 1995. The Company also provides medical supplies and durable medical equipment to nursing homes and provides health care services in the homes of its patients. In addition, the Company manages two other nursing homes pursuant to management agreements (see Note K). USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION PATIENT SERVICE REVENUE Revenues are recognized at the time the service is provided to the patient. Substantially all of the Company's revenues are billed to third party payors, i.e., Medicaid, Medicare and others under the provisions of reimbursement formulas and regulations in effect. Patient service revenue is reported at the estimated net realizable amount from residents, third-party payors, and others for services rendered. Revenue received under cost reimbursement agreements is subject to audit and retroactive adjustment by third-party payors. Provisions for estimated adjustments have been reflected in patient service revenue. Differences between estimated adjustments and final settlements are recorded in the year of settlement. Page F-7 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) MANAGEMENT FEES The Company recognizes management fees as they are earned and accrues related fees payable to subcontractors as they are incurred. CASH EQUIVALENTS For the purpose of the statement of cash flows, the Company defines cash equivalents as highly liquid instruments with an original maturity of three months or less. The Company had cash equivalents of $674,000 at June 30, 1997, consisting of overnight investments. There were no cash equivalents at June 30, 1996. INVENTORIES Inventories consisting of food, chemicals and supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the equipment. Leasehold improvements are amortized over the remaining period of the respective leases or the estimated useful lives of the improvement, whichever is shorter. Maintenance, repairs and minor renewals are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized. RESIDENTS' FUNDS Residents' funds represent cash balances which have been deposited into a separate bank account and are restricted for the use of the residents. INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Page F-8 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES (CONTINUED) Prior to the reorganization (see Note B), the Company was a limited liability company ("LLC") and, as such, it was the obligation of the individual members of the LLC to separately report their proportionate share of the LLC's taxable income. Accordingly, the Company has not recognized a provision for income taxes for the year ended June 30, 1996. INCOME PER COMMON SHARE Income per common share is computed using the weighted average number of shares deemed outstanding as adjusted for the exchange of shares between entities under common control. Weighted average number of shares outstanding includes common stock equivalents when they have a dilutive effect. There are no material differences between primary and fully diluted income per common share. NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an initial public offering of its common stock in May, 1997 during which 1,125,000 shares of common stock at $5 per share and 1,940,625 common stock warrants at $.10 per warrant were issued resulting in net proceeds to the Company of $4.1 million. Upon completion of this offering, the Company became the successor to Lexington Health Care Group, LLC, a limited liability company ("LLC"), and the members of LLC exchanged their membership interests in LLC for 2,462,000 shares of the Company's common stock representing a combined 59.7% ownership of the Company. LLC was formed on March 8, 1995 and commenced operations on July 1, 1995. The business combination was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interests, using LLC's historical cost basis. Accordingly, the accompanying consolidated financial statements for periods prior to the reorganization reflect the accounts and operations of LLC and adjustment has been made to give effect to the reorganization resulting in the restatement of certain stockholders' equity accounts. The Company acquired in May 1997, simultaneously with the closing of the public offering, all of the common stock of BALZ and PRN. Prior to acquisition, the members of LLC owned 44% and 25% of BALZ and PRN, respectively. The Company acquired all of the common stock of BALZ in exchange for 300,000 shares of common stock of the Company which were valued at $1,500,000 based on the offering price of the public offering. Page F-9 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (CONTINUED) The purchase price of PRN consisted of $1,620,000 payable in cash and the exchange of 108,000 shares of common stock of the Company which were valued at $540,000 based on the offering price of the public offering. Furthermore, prior to the acquisition, PRN distributed 100% of its net book value to its former stockholders; this book value was approximately $392,000. The acquisitions of BALZ and PRN have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon their fair values at date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was $3,295,000 and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years. The amount of goodwill amortization was $20,000 for the year ended June 30, 1997. The purchase price was allocated as follows: BALZ PRN ---- ----- Working capital, other than cash $516,000 $268,000 Property and equipment 80,000 71,000 Other assets - 38,000 Goodwill 1,135,000 2,160,000 Other liabilities (315,000) (479,000) --------- --------- Purchase price, net of cash received $1,416,000 $2,058,000 ---------- ---------- ---------- ---------- The operating results of these acquired entities have been included in the consolidated statement of operations from the date of acquisition . On the basis of a pro forma consolidation of the results of operations as if the acquisitions had taken place at the beginning of fiscal year 1996, consolidated net revenues would have been $41.3 million for fiscal 1997 and $38.1 million for fiscal 1996. Consolidated pro forma net income would have been $241,000 and $658,000 in fiscal 1997 and 1996, respectively, and pro forma income per share would have been $.06 and $.19 for fiscal 1997 and 1996, respectively. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been had the acquisitions been effective at the beginning of fiscal 1996. Page F-10 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE C - FINANCIAL INSTRUMENTS CONCENTRATIONS OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, residents' funds, accounts receivable, estimated third-party payor settlements - Medicaid and note receivable-related party. CASH AND CASH EQUIVALENTS AND RESIDENTS' FUNDS The Company places its cash deposits with high credit-quality institutions and such deposits may, at times, exceed federal depository insurance limits. However, the Company has not experienced any losses in this area and management believes its cash deposits are not subject to significant credit risk. ACCOUNTS RECEIVABLE The Company grants credit without collateral to its patients, all of whom are residents of local communities in the State of Connecticut in which the Company's facilities are located, and most of whom are insured under third-party payor agreements. Management provides ongoing credit evaluations of its residents and has provided for potential credit losses through direct write-offs and such write-offs have been within management's expectations. Industry experience indicates that, after such direct write-offs have been made, potential credit losses are considered minimal, therefore only a negligible allowance for doubtful accounts is considered necessary by management. The mix of receivables from patients, third-party payors and others as of June 30, 1997 and 1996 is as follows: 1997 1996 Medicare and Medicaid 80% 89% Private insurance and other nongovernment agencies 10 9 Other 10 2 --- ----- 100% 100% ESTIMATED THIRD-PARTY PAYOR SETTLEMENTS - MEDICAID This amount represents a government obligation, and as such, management believes it represents negligible credit risk. NOTE RECEIVABLE-RELATED PARTY This amount is controlled by an officer and director of the Company and, accordingly, management believes it represents negligible credit risk. Page F-11 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE C - FINANCIAL INSTRUMENTS (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The following table sets forth the carrying amounts and estimated fair values of financial instruments of the Company for which there is a difference between the amounts. Financial liabilities: CARRYING FAIR VALUE VALUE ------ -------- Obligations under capital leases $95,000 $127,000 The following methods and assumptions were used to estimate the fair value of the above financial instrument: OBLIGATIONS UNDER CAPITAL LEASES: The fair value is estimated by discounting the expected cash flows of lease obligations using the Company's current borrowing rate. The carrying amounts of the Company's other financial instruments approximate their fair values as outlined below: CASH AND CASH EQUIVALENTS, RESIDENTS' FUNDS, ACCOUNTS RECEIVABLE AND ACCOUNTS AND ACCRUED EXPENSES PAYABLE: The carrying amounts approximate their fair values because of the short maturity of those instruments. NOTES PAYABLE: The carrying amount approximates fair value because the interest rates on the notes approximate the Company's current borrowing rate. Management has determined that it is not practicable to estimate the fair value of the note receivable - related party due to the lack of marketability of this financial instrument. The Company's financial instruments are held for other than trading purposes. Page F-12 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS The Company has recorded a reduction in patient service revenue of $45,000 during the year ended June 30, 1997 in connection with estimated Medicare/Medicaid settlements. Such amounts represent management's best estimates of the amounts expected to be realized and are based on anticipated results of ongoing negotiations, interpretation of applicable regulations and other assumptions. It is reasonably possible that the amounts the Company will ultimately realize could differ materially in the near term. NOTE E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following: June 30, June 30, 1997 1996 ------------------------- Equipment $529,000 $231,000 Leasehold improvements 407,000 263,000 -------- -------- 936,000 494,000 Less accumulated depreciation and amortization 122,000 32,000 -------- -------- $814,000 $462,000 -------- -------- -------- -------- Depreciation and amortization expense totaled $90,000 and $32,000 for the years ended June 30, 1997 and 1996, respectively. NOTE F - NOTE RECEIVABLE--RELATED PARTY The note receivable is due from an entity in which an officer and director of the Company has a controlling ownership interest. The Company has been granted a security interest in real property to collateralize the note. The obligation arose out of services performed, advances and payment of certain expenses on behalf of this entity and bears interest at 8%, per annum. In May 1997, a balance of $266,000 due from the Company to the officer and director was offset against this note receivable and a payment plan of $10,000 per month was established. As a result, $120,000 of this note is classified as a current asset in the accompanying consolidated balance sheet. Page F-13 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE G - NOTES PAYABLE Notes payable consist of the following: June 30, June 30, 1997 1996 10% note payable to a medical supplies vendor $ - $313,000 9.75% note payable to a noninstitutional lender - 852,000 12% note payable to Beverly - 702,000 15% demand note to unaffiliated lender - 350,000 Demand note payable, noninterest bearing 5,000 50,000 6.5% equipment note payable to bank, due in 2001 with monthly installments of approximately $1,000 56,000 - -------- ----------- 61,000 2,267,000 Less: current portion 17,000 - -------- ----------- $44,000 $2,267,000 -------- ----------- -------- ----------- NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: June 30, June 30, 1997 1996 Accounts payable $5,481,000 $3,566,000 Accrued payroll and payroll taxes 1,474,000 1,466,000 Other accrued expenses 782,000 536,000 ---------- ---------- $7,737,000 $5,568,000 ---------- ---------- ---------- ---------- NOTE I - LEASE COMMITMENTS CAPITAL LEASES The following is an analysis of leased property under capital leases by major class at June 30, 1997: Equipment $147,000 Less: accumulated amortization 44,000 -------- $103,000 -------- -------- Amortization expense relative to leased property under capital leases totaled $29,000 and $14,000 for the years ended June 30, 1997 and 1996 respectively, and is included in depreciation and amortization expense disclosed in Note E. Page F-14 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE I - LEASE COMMITMENTS (CONTINUED) CAPITAL LEASES (CONTINUED) The following is a schedule by years of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments: Year ending June 30: 1998 $ 46,000 1999 39,000 2000 32,000 2001 3,000 -------- Total minimum lease payments 120,000 Less: amount representing interest 25,000 -------- $ 95,000 -------- -------- RELATED PARTY OPERATING LEASES The Company leases its nursing homes facilities (including certain equipment) under an operating lease with a partnership related through common ownership. The Company is responsible for property taxes, maintenance, insurance, etc. under the lease. The lease agreement, as amended, commenced on July 1, 1995 and is for a ten-year period, with four five-year renewal options at specified rents. In addition, the Company leases office space from a corporation related through common ownership under an operating lease which expires June 30, 1998. Further, the Company leases office and warehouse space from a limited liability company related through common ownership under an operating lease which expires January 31, 2002. Future minimum lease payments required under these related party lease obligations are as follows: Year ending June 30: 1998 $ 2,579,000 1999 2,562,000 2000 2,562,000 2001 2,562,000 2002 2,541,000 Thereafter 7,560,000 --------- $20,366,000 ----------- ----------- Rent expense charged to operations under these related party operating leases aggregated $2,488,000 and $2,481,000 for the years ended June 30, 1997 and 1996, respectively. Page F-15 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE I - LEASE COMMITMENTS (CONTINUED) RELATED PARTY OPERATING LEASES (CONTINUED) The Company has deposited with the related partnership, in connection with the nursing home facilities lease, a non-interest bearing security deposit of approximately $2.3 million as of June 30, 1997 and 1996. Such security deposit is comprised of a payment of approximately $1.3 million made by the Company on the related partnership's behalf and payments of $1 million representing excess rent which was paid to the related partnership prior to the retroactive reduction of periodic rent payments. Deferred rent payable represents the excess of rent expense determined on a straight-line basis over amounts paid to date pursuant to the lease with the related partnership. OTHER OPERATING LEASES The Company's PRN subsidiary, which was purchased on May 15, 1997, has other operating leases which expire in various years through 2001. Rent expense charged to operations under such leases totaled approximately $9,000 for the period ended June 30, 1997. Future minimum lease payments required under these other operating leases are as follows: Year ending June 30: 1998 $55,000 1999 55,000 2000 39,000 2001 3,000 -------- $152,000 -------- -------- NOTE J - STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 per value, with such rights, preferences and designations and to be issued in such series as determined by the Board of Directors. As of June 30, 1997, the Company has issued no preferred stock. RESCISSION OF PRIVATE PLACEMENT In November 1996, the Company completed a Private Placement of 500,000 shares of common stock at $.50 per share together with warrants to acquire an additional 500,000 shares of common stock at $6.00 per share, and realized net proceeds of $215,000 therefrom. Page F-16 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE J - STOCKHOLDERS' EQUITY (CONTINUED) RESCISSION OF PRIVATE PLACEMENT (CONTINUED) In May 1997, at the request of NASDAQ as a condition for the approval of the Company's listing, the transaction was rescinded. The purchasers in the Private Placement were not otherwise obligated to sell back their securities to the Company, but nonetheless agreed to do so. The rescinding purchasers did not receive consideration for their agreement to rescind, other than as described herein. The Company purchased the above-noted shares and warrants for $250,000. The Company has recorded the costs incurred in connection with the Private Placement as an issuance cost associated with the public offering, but has not reflected the issuance and repurchase of the 500,000 shares of common stock in the accompanying consolidated statement of changes in stockholders' equity since the transaction is deemed to have been undone'. WARRANTS In connection with the public offering, the Company has issued warrants to purchase 1,940,625 shares of Company's common stock at $6 per share, subject to adjustment in certain circumstances, which may be exercised at any time after May 14, 1998 through May 13, 2003. The warrants are subject to redemption by the Company at any time after May 14, 1998 at a price of $.05 per warrant provided that the closing price of the Company's common stock has equaled or exceeded $10 per share for a period of twenty consecutive trading days. STOCK OPTION PLAN The Company has reserved 450,000 shares of its common stock for issuance pursuant to stock options which may be granted pursuant to the Company's 1997 Stock Option Plan. The Plan provides for grants to employees, consultants and directors of the Company. As of June 30, 1997, the Company has granted no stock options. Subject to the provisions of the Plan, the Board has the authority to determine the individuals to whom the stock options are to be granted, the number of shares to be covered by each option, the exercise price, the type of option, the option period, the restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions. NOTE K - MANAGEMENT FEE The Company manages two nursing homes. One of the homes is owned by an entity in which an officer and director of the Company has a controlling interest (see Note F); revenues earned in connection with this agreement were $72,000 in each of the years ended June 30, 1997 and 1996. Page F-17 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE K - MANAGEMENT FEE (CONTINUED) The second home is an unrelated entity whose contract extends through June 30, 1998 and generates an annual management fee of approximately $207,000. The Company subcontracts the management of this facility at an annual cost of approximately $188,000. NOTE L - INCOME TAXES The components of the provision for (benefit from) income taxes for the year ended June 30, 1997 are as follows: Current: Federal $ (11,000) State 42,000 ---------- 31,000 ---------- Deferred: Federal (97,000) State - ---------- (97,000) ---------- $ (66,000) ---------- ---------- Certain of the entities included in the consolidated financial statements were separate taxpayers for tax purposes for the first ten months of the year. The income tax expense for all prior periods was recorded on an entity by entity basis as of May 14, 1997. Effective May 15, 1997, the entities became members of a consolidated group for tax purposes. The Company has recorded a valuation allowance of $459,000 at June 30, 1997 to reflect the estimated amount of deferred tax assets. A valuation allowance is required if it is more likely than not that some or all of the deferred tax assets will not be realized in future years. The significant components of the deferred tax provision for 1997 are as follows: Bad debt reserve $ (80,000) Property and equipment (14,000) Organizational costs (24,000) Deferred rent (172,000) Accrued expenses (266,000) Valuation allowance 459,000 ---------- $ (97,000) ---------- ---------- The components of the net deferred tax asset and liability as of June 30, 1997 were as follows: Deferred tax assets (liabilities) Bad debt reserve $ 80,000 Property and equipment 14,000 Organizational costs 24,000 Deferred rent 172,000 Accrued expenses 266,000 Deferred revenue (62,000) ---------- Gross deferred tax asset 494,000 Valuation allowance (459,000) ---------- Net deferred tax asset $ 35,000 ---------- ---------- Page F-18 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 The net change in the valuation allowance for deferred tax assets was an increase of $459,000. The principal reasons for the difference between the statutory federal income tax rate and the effective rate are as follows: Statutory federal income tax rate (34.0%) State taxes, net of federal benefits 8.8 Goodwill amortization 2.2 Purchase accounting adjustments and change in tax status 3.6 ------ (19.4%) ------ ------ NOTE M - RISKS AND UNCERTAINTIES LABOR CONCENTRATION/PENSION CONTRIBUTION As of June 30, 1997, approximately 38% of the Company's employees were covered by collective bargaining agreements with New England Health Care Employees Union, District 1199/SEIU, AFL-CIO ("Union") which expire in October, 1998. These employees participate in Union pension plans to which the Company contributes an amount stipulated in each collective bargaining agreement. For the year ended June 30, 1997 and 1996, contributions were approximately $572,000 and $397,000, respectively. PATIENT SERVICE REVENUE Approximately 86% and 89% of net patient service revenue was derived under federal and state third-party reimbursement programs in 1997 and 1996, respectively. These revenues are based, in part, on cost reimbursement principles and are subject to audit and retroactive adjustment by the respective third-party fiscal intermediaries. The general trend in the nursing home industry is lower private pay utilization due to liberal asset transfer rules and the degree of financial planning that takes place by the general public. The Company's ability to maintain the current level of private pay utilization and thereby reduce reliance on third-party reimbursement is uncertain due to the economic and regulatory environment in which all Connecticut nursing homes operate. MALPRACTICE INSURANCE The Company maintains malpractice insurance coverage on an occurrence basis. It is the intention of the Company to maintain such coverage on the occurrence basis in ensuing years. As of June 30, 1997, no known malpractice claims have been asserted against the Company which, either individually or in the aggregate, are in excess of insurance coverage. Page F-19 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE N - COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment agreements with four of its executive officers which became effective upon consummation of the public offering. The agreements provide that such individuals shall devote substantially all of their working time and attention to the business of the Company and contain certain non-compete provisions. The agreements with the CEO and President have an initial term of five years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew his employment. The agreements with presidents of the acquired subsidiaries have an initial term of three years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew her employment. The CEO's agreement provides for a $250,000 annual salary, with cost of living increases and a bonus equal to 1% of the Company's net income before taxes. The President's employment agreement is identical except that the salary is $175,000 annually. The agreement with the president of BALZ provides for a base annual salary of $100,000, subject to five percent annual increases, plus a bonus of 3.75% of BALZ's net profits before taxes. The agreement with the president of PRN provides for an annual salary of $160,000, subject to five percent annual increases. CONTINGENCIES The Company is involved in various legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company's consolidated financial statements. NOTE O - SUBSEQUENT EVENTS ACQUISITION OF NURSING FACILITIES On July 1, 1997, Lexington Highgreen Holding, Inc. (a new wholly-owned subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly. These facilities are located in Connecticut; Beverly had operated 240 and 75 licensed beds, respectively; the Company intends to operate a total of 225 beds. Page F-20 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 NOTE O - SUBSEQUENT EVENTS (CONTINUED) ACQUISITION OF NURSING FACILITIES (CONTINUED) All real estate, property, fixed and operating assets of the nursing homes were acquired (with the exception of certain proprietary computer hardware and systems) for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly. Pursuant to the agreements, Lexington has also acquired certain accounts receivable from Beverly and Beverly has agreed to reimburse Lexington for certain costs and charges in connection with the operation of the facilities during the next five years. In addition, the Company acquired the right to sell the license to the unused beds. FORMATION OF NEW BUSINESSES The Company has signed letters of intent to form new joint venture operations with unrelated companies in the pharmacy, respiratory, oxygen and rehab therapy business. Services will be provided to patients in nursing facilities and in their homes. ACQUISITION OF MEDICAL SUPPLY COMPANY The Company has signed a letter of intent to acquire a 49% ownership position in a regional medical supply business in exchange for 100,000 shares of the Company's common stock, subject to various terms and conditions yet to be finalized. The Company has the option to acquire the remaining 51% of the business within twelve months. BANK LINE OF CREDIT In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which is secured by its accounts receivable and other assets. Through September 24, 1997 this line of credit has not been accessed. Page F-21 EX-11 2 EXHIBIT 11 EXHIBIT 11 LEXINGTON HEALTHCARE GROUP, INC. SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) Years Ended June 30, -------------------------- 1997 1996 Net income (loss) $ (275,000) $ 461,000 ------------ ----------- Net income (loss) for primary income per common share $ (275,000) $ 461,000 ------------ ----------- ------------ ----------- Weighted average number of common shares outstanding during the year 2,724,042 2,592,000 ------------ ----------- Weighted average number of shares used in calculation of primary income per share 2,724,042 2,592,000 ------------ ----------- ------------ ----------- Primary income (loss) per common share $ (0.10) $ 0.18 ------------ ----------- ------------ ----------- Income per common share is computed using the weighted average number of shares deemed outstanding as adjusted for the exchange of shares between entities under common control. Weighted average number of shares outstanding includes common stock equivalents when they have a dilutive effect. There are no material differences between primary and fully-diluted income per common share. EX-21 3 EXHIBIT 21 EXHIBIT 21 LEXINGTON HEALTHCARE GROUP, INC. SCHEDULE OF SUBSIDIARIES PARENT (Registrant) - ------------------- Lexington Healthcare Group, Inc. Wholly-owned subsidiaries - ------------------------- Balz Medical Services, Inc. LEV Rehab Services, Inc. Lexington Highgreen Holding, Inc Professional Relief Nurses, Inc. -----END PRIVACY-ENHANCED MESSAGE-----