-----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, Av3zwIqWa0e/uF+7q2ztg6rePScsXc01eivjU1CnO6OqCdQT6oUC4qka3FdKSgSG +Oeg/neV6RO5GuwVzOBulg== 0000914039-98-000035.txt : 19980217 0000914039-98-000035.hdr.sgml : 19980217 ACCESSION NUMBER: 0000914039-98-000035 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970701 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980212 SROS: NONE 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: 8-K SEC ACT: SEC FILE NUMBER: 000-22261 FILM NUMBER: 98535639 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 8-K 1 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 JULY 1, 1997 (Date of Earliest Event Reported) LEXINGTON HEALTHCARE GROUP, INC. (Exact name of registrant as specified in its charter) Commission File Number 0-22261 DELAWARE 06-1468252 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 35 PARK PLACE, NEW BRITAIN, CT 06052 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 860-223-6902 2 LEXINGTON HEALTHCARE GROUP, INC. FORM 8-K CURRENT REPORT Item 1. Changes in Control NOT APPLICABLE Item 2. Acquisition or Disposition of Assets On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly owned subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. These facilities are located in Hartford and Winsted, CT and had 240 and 75 licensed beds respectively. The Company is operating 225 beds and has returned the license on 40 beds to the State of Connecticut. In November 1997, the Company sold the remaining license on 50 beds to an unrelated party for $1,550,000 in cash which resulted in a gain of $280,000. All real estate, property, fixed and operating assets of the nursing homes were acquired (with the exception of certain proprietary computer hardware and systems) for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly Enterprises. Beverly has agreed to pay a $2.5 million operating subsidy to the Company over five years, bringing the net cost of the transaction to the Company to $4.3 million. There is no relation between Beverly Enterprises and Lexington Healthcare Group; in 1995, Lexington Healthcare Group had acquired four nursing homes from Beverly. Financial statements depicting the results of the acquired nursing homes through June 30, 1997 are now audited and included in Item 7 herein. Item 3. Bankruptcy or Receivership NOT APPLICABLE Item 4. Changes in Registrants Certifying Accountant NOT APPLICABLE Item 5. Other Events NOT APPLICABLE Item 6. Resignations of Registrant's Directors NOT APPLICABLE 3 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED BALANCE SHEET JUNE 30, 1997 (IN THOUSANDS) (UNAUDITED)
LEXINGTON GREENWOOD PRO FORMA HEALTHCARE AND ADJUSTMENTS GROUP, INC. HIGHLAND DR CR PRO FORMA ----------- -------- -- -- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,000 $ 200 200 $ 1,000 Accounts and note receivable, net 6,541 2,318 8,859 Estimated third-party payor settlements - Medicare & Medicaid 278 -- 278 Inventories 403 134 537 Prepaid expenses and other current assets 418 6 424 ------- -------- ------- Total current assets 8,640 2,658 11,098 LAND, BUILDINGS, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 814 1,370 255 2,439 OTHER ASSETS Goodwill, net 3,275 -- 3,275 Bed licenses -- -- 2,780 2,780 Security deposits 2,282 -- 2,282 Other assets, net 421 63 484 ------- -------- ------- 5,978 63 8,821 ------- -------- ------- $15,432 $ 4,091 $22,358 ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 7,737 $ 1,138 1,138 $ 7,737 Estimated third-party payor settlements - Medicare & Medicaid 323 255 255 323 Notes and capital leases payable (current portion) 89 -- 89 Income taxes payable 204 -- 204 ------- -------- ------- Total current liabilities 8,353 1,393 8,353 OTHER LIABILITIES Mortgage note payable -- -- 6,863 6,863 Notes and capital leases payable (less current portion) 107 -- 107 Deferred rent 416 -- 416 Residents' funds payable 161 63 224 Payable to affiliate -- 12,703 12,703 -- ------- -------- ------- 684 12,766 747 ------- -------- ------- Total liabilities 9,037 14,159 15,963 ------- -------- ------- STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 15,000,000 shares, issued and outstanding 4,125,000 shares 41 -- 41 Additional paid-in capital 6,168 -- 6,168 Excess of liabilities over assets -- (10,068) 10,068 -- Retained earnings 186 -- 186 ------- -------- ------- Total stockholders' equity 6,395 (10,068) 6,395 ------- -------- -------- ------- ------- $15,432 $ 4,091 17,131 17,131 $22,358 ======= ======== ======== ======= =======
The accompanying notes are an integral part of these pro forma condensed financial statements. 4 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT FOR PER SHARE FIGURES) (UNAUDITED)
YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- LEXINGTON GREENWOOD PRO FORMA HEALTHCARE AND ADJUSTMENTS GROUP, INC. HIGHLAND DR CR PRO FORMA ----------- -------- -- -- --------- REVENUES Net patient service revenue $ 35,536 $ 13,267 1,000 $ 49,803 Other revenue 364 -- 364 -------- -------- -------- Total revenues 35,900 13,267 50,167 EXPENSES Facility operating expenses: Salaries and benefits 26,979 10,092 790 36,281 Food, medical and other supplies 2,689 2,682 200 5,171 Other operating expenses 5,113 2,052 160 7,005 Corporate, general and administrative expenses 1,282 555 50 1,787 Interest expense 178 -- 178 -------- -------- -------- Total expenses 36,241 15,381 50,422 -------- -------- -------- Income (loss) before income taxes (341) (2,114) (255) INCOME TAXES (66) -- (66) -------- -------- -------- Net income (loss) $ (275) $ (2,114) $ (189) ======== ======== ======== Net income (loss) per common share $ (0.10) $ -- $ (0.07) ======== ======== ======== Weighted average number of common shares outstanding 2,724 - 2,724 ======== ======== ========
The accompanying notes are an integral part of these pro forma condensed financial statements. 5 LEXINGTON HEALTHCARE GROUP, INC. FORM 8-K Notes to Pro Forma Financial Statements On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly owned subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. These facilities are located in Hartford and Winsted, CT and had 240 and 75 licensed beds respectively. Lexington Highgreen Holding, Inc. is operating 225 beds and has returned the license on 40 beds to the State of Connecticut and has sold the license on 50 beds to an unrelated party. All real estate, property, fixed and operating assets of the nursing homes were acquired (with the exception of certain proprietary computer hardware and systems) for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly Enterprises. Beverly has agreed to pay a $2.5 million operating subsidy to Lexington over five years. Basis of Presentation of Pro Forma Financial Statements The proforma financial statements include a balance sheet as of June 30, 1997 (the date of the combination) and a statement of operations for a representative period of time (a one-year period ending June 30, 1997 for the registrant and the available one-year period ending December 31, 1996 for the businesses acquired). Overall, adjustments were made in the pro forma financial statements to reflect the purchased costs of assets acquired and the elimination of liabilities which were not assumed, as well as to reflect known changes being made in the operations of the business. In the pro forma balance sheet, adjustments were made to reflect assets not acquired (cash and leasehold improvements) and to eliminate liabilities not assumed (accounts payable, third party settlements, and affiliate payables). In the pro forma statement of operations, adjustments were made to reflect increased revenues from rate and census increases and decreases in costs as a result of wage rate and benefit reductions negotiated along with other changes reflective of reduced bed operations. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been had the acquisitions been effective on July 1, 1996. 6 LEXINGTON HEALTHCARE GROUP, INC. FORM 8-K CURRENT REPORT (CONTINUED) Item 7. Financial Statements and Exhibits Pro Forma Financial Statements of Registrant and Acquired Businesses Notes to Pro Forma Financial Statements Report of Independent Certified Public Accountants on Combined Financial Statements Combined Financial Statements of Businesses Acquired (Greenwood Health Center and Highland Acres Extend-a-Care Center) Combined Balance Sheets June 30, 1997 and December 31, 1996 and 1995 Combined Statements of Operations Six Months Ended June 30, 1997 and Years ended December 31, 1996 and 1995 Combined Statements of Excess of Liabilities Over Assets Six Months Ended June 30, 1997 and Years Ended December 31, 1996 and 1995 Combined Statements of Cash Flows, Six Months Ended June 30, 1997 and Years Ended December 31, 1996 and 1995 Notes to Combined Financial Statements 7 LEXINGTON HEALTHCARE GROUP, INC. FORM 8-K CURRENT REPORT (CONTINUED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly /s/ Harry Dermer (Harry Dermer, President) (Duly Authorized Officer) Date February 13, 1998 /s/ Thomas E. Dybick (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) 8 [DISANTO BERTOLINE & COMPANY, P.C. LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Beverly Enterprises, Inc. Fort Smith, Arkansas We have audited the accompanying combined balance sheets of Greenwood Health Center and Highland Acres Extend-A-Care Center (collectively, the "Centers") as of June 30, 1997 and December 31, 1996 and 1995, and the related combined statements of operations, excess of liabilities over assets and cash flows for the six months ended June 30, 1997, and the years ended December 31, 1996 and 1995. These combined financial statements are the responsibility of the Centers' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Greenwood Health Center and Highland Acres Extend-A-Care Center as of June 30, 1997 and December 31, 1996 and 1995, and the results of their operations and their cash flows for the six months ended June 30, 1997, and the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. As more fully discussed in Note 7, the Centers terminated their leases of the nursing facilities effective July 1, 1997, and ceased operation of those facilities. /s/ DISANTO BERTOLINE & COMPANY, P.C. Glastonbury, Connecticut January 9, 1998 9 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER COMBINED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
ASSETS 1997 1996 1995 ---- ---- ---- CURRENT ASSETS Cash $ 199,787 $ 420,303 $ 5,418 Patient accounts receivable, less allowance for uncollectible accounts of $73,000, $82,000 and $88,000, respectively 2,318,456 2,141,067 1,896,546 Inventory 134,107 134,107 137,013 Prepaid expenses and other current assets 5,843 126,263 70,275 ------------ ------------ ------------ Total current assets 2,658,193 2,821,740 2,109,252 PROPERTY AND EQUIPMENT, at cost Leasehold improvements 1,564,553 1,558,884 1,553,937 Furniture and equipment 1,297,762 1,282,937 1,172,876 ------------ ------------ ------------ 2,862,315 2,841,821 2,726,813 Less: accumulated depreciation and amortization 1,492,206 1,394,054 1,204,851 ------------ ------------ ------------ 1,370,109 1,447,767 1,521,962 RESIDENTS' FUNDS 62,934 58,770 85,030 ------------ ------------ ------------ $ 4,091,236 $ 4,328,277 $ 3,716,244 ============ ============ ============ LIABILITIES AND EXCESS OF LIABILITIES OVER ASSETS CURRENT LIABILITIES Accounts payable and accrued expenses $ 880,437 $ 905,825 $ 1,120,727 Accrued payroll 257,790 318,038 280,665 Estimated third-party payor settlements - Medicare 254,655 162,199 340,577 ------------ ------------ ------------ Total current liabilities 1,392,882 1,386,062 1,741,969 RESIDENTS' FUNDS PAYABLE 62,934 58,770 85,030 PAYABLE TO AFFILIATE 12,703,673 11,347,465 8,239,395 EXCESS OF LIABILITIES OVER ASSETS (10,068,253) (8,464,020) (6,350,150) ------------ ------------ ------------ $ 4,091,236 $ 4,328,277 $ 3,716,244 ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. 10 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995
1997 1996 1995 ---- ---- ---- NET PATIENT SERVICE REVENUE $ 6,176,833 $ 13,267,256 $ 13,829,808 EXPENSES Salaries and benefits 5,239,364 10,092,013 11,001,030 Purchased services and professional fees 624,195 1,115,532 1,170,542 Management fees 158,190 339,599 364,388 Depreciation and amortization 98,150 192,859 185,017 Provision for bad debts 22,166 22,745 36,791 Facility rent 464,221 936,048 973,482 Supplies and other 1,174,780 2,682,330 2,106,486 ------------ ------------ ------------ 7,781,066 15,381,126 15,837,736 ------------ ------------ ------------ NET LOSS $ (1,604,233) $ (2,113,870) $ (2,007,928) ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. 11 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER COMBINED STATEMENTS OF EXCESS OF LIABILITIES OVER ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995
1997 1996 1995 ---- ---- ---- BALANCE, beginning of period $ (8,464,020) $ (6,350,150) $ (4,342,222) Net loss (1,604,233) (2,113,870) (2,007,928) ------------ ------------ ------------ BALANCE, end of period $(10,068,253) $ (8,464,020) $ (6,350,150) ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. 12 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,604,233) $(2,113,870) $(2,007,928) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 98,150 192,859 185,017 Changes in operating assets and liabilities: Prepaid expenses and other current assets 120,420 (53,082) 1,480 Accounts payable and accrued expenses (25,388) (214,902) 401,326 Estimated third-party payor settlements - Medicaid -- -- 279,087 Accrued payroll (60,248) 37,373 19,463 Estimated third-party payor settlements - Medicare 92,456 (178,378) 359,501 Patient accounts receivable, net (177,389) (244,521) (684,827) ----------- ----------- ----------- Net cash used in operating activities (1,556,232) (2,574,521) (1,446,881) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (20,492) (118,664) (173,487) ----------- ----------- ----------- Net cash used in investing activities (20,492) (118,664) (173,487) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from affiliate 1,356,208 3,108,070 1,529,356 ----------- ----------- ----------- Net cash provided by financing activities 1,356,208 3,108,070 1,529,356 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH (220,516) 414,885 (91,012) CASH, beginning of period 420,303 5,418 96,430 ----------- ----------- ----------- CASH, end of period $ 199,787 $ 420,303 $ 5,418 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. 13 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Beverly Enterprises, Inc. ("Beverly") provided long-term healthcare in the State of Connecticut through the nursing facilities located at Greenwood Health Center and Highland Acres Extend-A-Care Center (collectively "the Centers"). The Centers were leased and operated through June 30, 1997 (see Note 7), by Beverly Enterprises - Connecticut, Inc. ("BEC") (a wholly-owned subsidiary of Beverly Health and Rehabilitation Services, Inc., which is a wholly-owned subsidiary of Beverly Enterprises, Inc.). PRINCIPLES OF COMBINATION The combined financial statements include the accounts of the Centers. All significant accounts and transactions among the Centers have been eliminated in combination. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Centers' management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the statement of cash flows, the Centers consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Centers had no cash equivalents as of June 30, 1997 and December 31, 1996 and 1995. PROPERTY AND EQUIPMENT Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset (principally 5-15 years). Leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives. Amortization of assets subject to leases is reported as part of depreciation expense. 14 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value of Financial Instruments, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Centers have the following financial instruments: - Cash, residents' funds, patient accounts receivable and accounts payable and accrued expenses - The carrying amounts approximate their fair value because of the short maturity of those instruments. - Payable to affiliate - It is not practical to estimate the fair value of this financial instrument because no formal agreement exists for repayment of the balance. The Centers financial instruments are held for other than trading purposes. INCOME TAXES The Centers are included in the consolidated income tax returns filed by Beverly. Each Center in the consolidated group determines its tax expense as if it were filing a separate income tax return. Any difference between the individual Centers' current tax provision and the consolidated tax paid or refunded is recorded in Beverly's financial statements. The Centers have incurred cumulative net operating losses. Consequently, no provision for income taxes has been provided. Deferred income tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. Temporary differences principally relate to net operating losses, depreciation and amortization and inventory. A valuation allowance has been established to offset the net deferred tax assets because it is more likely than not that the deferred tax asset will not be realized. 15 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET PATIENT SERVICE REVENUE Net patient service revenue is reported at the estimated net realizable amount from patients, third-party payors, and others for services rendered. Approximately, 90%, 89% and 91% of the Centers' net patient service revenue for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively, were derived from funds under federal and state medical assistance programs. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. NOTE 2 - MEDICARE AND MEDICAID REIMBURSEMENT ADJUSTMENTS The Centers have been reimbursed for services rendered to patients covered by the federal Medicare program on the basis of estimated costs. Provisions for adjustment of amounts accrued based on estimated costs to actual reimbursement based on the Medicare cost report for each period have been included in the accompanying combined financial statements. The Medicare cost report is subject to audit and retroactive adjustment under the terms of the Centers' Medicare reimbursement agreement which may affect the actual reimbursement for each period. Any liabilities resulting from any retroactive adjustments after June 30, 1997 would be Beverly's responsibility. It is reasonably possible that the amount the Centers will ultimately realize could differ materially in the near term. The Centers have been reimbursed for services rendered to Title XIX Medicaid patients on the basis of predetermined per diem rates. The reimbursement plan is on a prospective basis, and no additional settlement will be made on the difference between the interim per diem rates paid and actual costs. NOTE 3 - RESIDENTS' FUNDS PAYABLE The Centers serve as trustees of funds received on behalf of various residents. The Centers have fiduciary responsibility for the administration of the bank accounts and the distribution of the funds for residents. 16 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 4 - RELATED PARTY TRANSACTIONS OPERATING LEASES BEC entered into agreements on behalf of the Centers to lease the nursing facilities, together with all improvements, furniture, furnishings, fixtures, machinery, equipment and personal property for an initial period of fourteen years commencing December 31, 1986. BEC had the option to renew these leases for eight successive periods of five years each. BEC also had the right of first refusal to purchase the Centers on the same terms and conditions as offered by any other bona fide offeror during the term of the leases. The leases required BEC to pay all executory costs (property taxes, repairs, maintenance, insurance, and utilities). The leases were terminated on July 1, 1997 (see Note 7). Lease expense associated with these leases approximated $464,000, $931,000 and $973,000 for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. Total rent expense for all operating leases was approximately $492,000, $987,000 and $1,033,000 for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. MANAGEMENT FEE The Centers pay a management fee to Beverly which reflects the Centers' share of expenses incurred by Beverly for managing their operations. The management fee is composed of general corporate overhead of Beverly's national and regional corporate offices. This fee approximated $158,000, $340,000 and $364,000 for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. INSURANCE The Centers insure auto liability, general liability and workers' compensation risks through insurance policies with third parties executed by Beverly. Premiums paid to Beverly for these policies approximated $296,000, $424,000, and $468,000 for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. 17 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 5 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS Generally accepted accounting principles require disclosure of certain current vulnerabilities due to certain concentrations. Those matters include the following: CREDIT RISK The Centers place their cash deposits with high credit-quality institutions and such deposits may, at times, exceed federal depository insurance limits. However, the Centers have not experienced any losses in this area and management believes its cash deposits are not subject to significant credit risk. The Centers grant credit without collateral to their patients, most of whom are local residents and are insured under third-party payor agreements. The mix of accounts receivable from patients and third-party payors at June 30, 1997 was: Medicaid 47% Medicare 26 Private 27 --- 100% === Management has provided for potential credit losses through direct write-offs and such write-offs have been within management's expectations. Industry experience indicates that, after such direct write-offs have been made, potential credit losses are considered minimal, therefore, only a negligible allowance for doubtful accounts is considered necessary by management. Estimates of allowances for adjustments included in net patient service revenue are provided for as described in Notes 1 and 2. LITIGATION There are various lawsuits and regulatory actions pending against the Centers as operated by Beverly arising in the normal course of business or as a result of the early lease termination. Management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Centers' combined financial position or results of operations. LABOR CONCENTRATION As of June 30, 1997, approximately 57% of the Centers' employees were covered by collective bargaining agreements with New England Health Care Employees Union, District 1199/SEIU, AFL-CIO ("Union"). These employees participate in Union pension plans to which the Centers' contribute an amount stipulated in each collective bargaining agreement. 18 GREENWOOD HEALTH CENTER AND HIGHLAND ACRES EXTEND-A-CARE CENTER NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995 NOTE 6 - EMPLOYEE STOCK PURCHASE PLAN The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees of Beverly owned and/or operated facilities, having completed one year of continuous service, to purchase shares of common stock at the current market price through payroll deductions. Beverly makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. Total contributions related to this plan for the above Centers approximated $10,000, $37,000 and $27,000 for the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. NOTE 7 - EARLY LEASE TERMINATION AND DISCONTINUANCE OF LESSEE OPERATIONS In accordance with the terms of an agreement with the lessor, BEC terminated its leases of the facilities and associated real property effective July 1, 1997. In addition, BEC transferred the operations of the Centers to the purchaser of the lessor's real property and also sold furniture, fixtures, equipment, consumable goods and certain accounts receivable to this purchaser. Neither the purchaser nor the lessor assumed any of Beverly's liabilities. As of the effective date, the Centers ceased operation of the nursing homes. These combined financial statements do not reflect any adjustments or losses recognized by Beverly as a result of these lease termination agreements. -----END PRIVACY-ENHANCED MESSAGE-----