-----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, A2EUYLKfp3chmTOKtS0ucildN+kxfvbvb3PSZPIVqDCZtyTf5LdamOacl0whKmDB moV76eSff2N8jVXQORtzPw== 0001005477-99-004522.txt : 19991227 0001005477-99-004522.hdr.sgml : 19991227 ACCESSION NUMBER: 0001005477-99-004522 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718930 BUSINESS ADDRESS: STREET 1: 1557 NEW BRITAIN AVE CITY: FARMINGTON STATE: CT ZIP: 06032 BUSINESS PHONE: 8606742700 MAIL ADDRESS: STREET 1: 1557 NEW BRITAIN AVE CITY: FARMINGTON STATE: CT ZIP: 06032 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, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-22261 LEXINGTON HEALTHCARE GROUP, INC. ---------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1468252 - --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1577 New Britain Avenue, Farmington, Connecticut 06032 -------------------------------------------------- ----------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (860) 674-2700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on ------------------- which registered ------------------------ Common stock, $.01 Par Value NASDAQ Small Cap Market Securities registered pursuant to Section 12(g) of the Act: None -------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Based on the closing sales price on September 24, 1999, the aggregate market value of the voting common stock held by nonaffiliates of the registrant was $1,690,000. 1 LEXINGTON HEALTHCARE GROUP, INC. Table of Contents
Page No. -------- Part I Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 17, F-1-F-23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 Part III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 21 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 24
2 Part 1 Item I. Business Lexington Healthcare Group, Inc. has four wholly-owned subsidiaries: Balz Medical Services, Inc.("BALZ"), Professional Relief Nurses, Inc.("PRN"), Lexington Highgreen Holding, Inc., and Lexicore Rehab Services, L.L.C. (collectively, the "Company"). The Company also controls one joint venture, Lexicon Pharmacy Services, L.L.C . The Company is a long-term and subacute care provider, which operates or manages ten nursing home facilities (the "Facilities") at June 30, 1999 with a total of 1,302 licensed beds in the State of Connecticut. The Facilities provide a broad range of healthcare services, including nursing care, subacute care (including rehabilitation therapy), and other specialized services (such as care to Alzheimer's patients). The Company's strategy in healthcare is to integrate the main disciplines of nursing, pharmacy, social services and other therapies under one program. In addition, the Company managed one nursing home, Oak Island Skilled Nursing Center in Massachusetts, pursuant to a management agreement; this is a non-affiliated facility. This management arrangement was terminated by mutual agreement on July 31, 1999. The Facilities service two basic patient populations: the traditional geriatric patient population and the population of subacute care patients with higher acuity disorders who require more complex and intensive medical services. Subacute care patients generally require more rehabilitative therapy and are residents for a shorter period of time than traditional geriatric patients. An important part of the Company's strategy is to achieve high occupancy and a favorable payor mix by offering specialty medical services. The Facilities have an occupancy rate of approximately 91% as of August 31, 1999. 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 long term care industry has experienced many changes in the year ended June 30, 1999 including the implementation of the Balanced Budget Act of 1997 ("BBA") which resulted in a new Medicare Prospective Payment System (known as PPS). Under PPS, Medicare revenues are substantially less than those earned under the former cost-based reimbursement system. The BBA and PPS significantly changed the revenues available to nursing homes and other health care providers; Medicare revenues in the Company's existing nursing homes decreased by $2.2 million during the year ended June 30, 1999, with PPS causing approximately $1.6 million of that shortfall. In Connecticut, multiple long term care entities are undergoing financial reorganization in 1999 due to reduced occupancy and PPS-related revenue reductions and increasing cost pressures (including union costs), and have experienced considerable losses in the market value of their own securities. The Company believes its continued emphasis on cost controls, selected favorable acquisitions, and development of ancillary businesses remains the most appropriate strategy. Further, the Company is encouraged by recent reports of bipartisan legislation introduced to restore the deep cuts resulting from the 1997 Balanced Budget Act. 3 The Company continues to believe that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities and home care agencies. In addition, the Company anticipates that recent trends toward industry consolidation will continue 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. BALZ provides a variety of medical supplies, nutritional supplements, institutional cleaning products, linens and everyday products including toothpaste and incontinence products, to affiliated and, increasingly, to non-affiliated nursing homes, other institutional facilities and private persons. The Company's strategy is to further expand BALZ's business to become more of a traditional medical supply company by supplying products to hospitals, doctor's offices and persons at their homes through PRN. PRN provides skilled nursing services to persons at home. PRN's personnel include (i) registered nurses, who provide a broad range of nursing care services, including skilled observation and assessment and intravenous therapy; (ii) licensed practical nurses who perform, under the supervision of a registered nurse, technical nursing procedures; (iii) physical and rehabilitation therapists and (iv) certified nurses aides, who, under the supervision of a nurse, provide health-related services and personal care. PRN has also continued to operate as a nursing pool agency whereby it supplies nurses and other skilled personnel to hospitals, affiliated and non-affiliated nursing homes and other home healthcare agencies on a temporary basis. On July 1, 1997, Lexington Highgreen Holding, Inc. purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. (`Beverly"). All real estate, property, fixed and substantially all operating assets of the nursing homes were acquired for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly. The Company has continued to develop its fully-integrated health network including marketing medical products and supplies, rehabilitative services, institutional pharmaceutical services and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. As part of that strategy, the Company formed joint venture companies as follows: 4 On October 15, 1997 Lexicore Rehab Services, L.L.C. began operations as a 50% owned joint venture with Core Rehab Management, L.L.C. The joint venture was controlled by the Company and the results of its operations from inception are included in the Company's consolidated financial statements with appropriate recognition of minority interest. As of January 1, 1999, the Company acquired the remaining 50% membership interest for a nominal amount plus $120,000 of residual payments based on the occurrence of certain future events. Henceforth the Company accounted for Lexicore's operations as a wholly-owned subsidiary; minority interest and liabilities were adjusted accordingly. Lexicore is presently serving the Company's nursing homes and PRN with further expansion plans underway in Connecticut and Massachusetts. On December 1, 1997 Lexicon Pharmacy Services, L.L.C. began operations as a 70% owned joint venture with Pharmacy Corporation of America. The joint venture is controlled by the Company and the results of its operations from inception are included in the Company's consolidated financial statements with appropriate recognition of minority interest. Lexicon is presently serving the Company's nursing homes and six unaffiliated nursing homes. On November 1, 1998 the Company began providing management services for four skilled nursing facilities in Connecticut under an interim Management Agreement with SunBridge Healthcare Corporation (SunBridge), a New Mexico corporation and nation-wide healthcare provider. As consideration for the services provided under this Management Agreement, the Company is entitled to retain the excess of any revenues earned in the delivery of patient services over the expenses incurred during the term and will be responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. In addition, under the terms of the agreement SunBridge also retained responsibility for all building lease costs. Effective September 1, 1999, the Company acquired the operations of two of those managed facilities from SunBridge by leasing the facilities with an option to buy in the next 24 months. The facilities acquired are Adams House and Heritage Heights, located in Torrington and Danbury, CT; they have a total of 240 skilled nursing beds. Management contracts covering the two other SunBridge facilities with a total of 239 skilled nursing beds were terminated as of August 31, 1999 and the operations of those facilities were returned to SunBridge. In August, 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which was secured by its accounts receivable and other assets; this line of credit was utilized from time to time to provide working capital until it was replaced. In December 1998, the Company entered into a line of credit financing agreement with a healthcare lender for up to $4.5 million (at prime plus 2%), which is secured by its accounts receivable and certain other assets. As of June 30, 1999, $3,631,000 was borrowed under this agreement to finance working capital needs. As of September 1, 1999 the Company had approximately 1,300 full and part-time employees, of which approximately 58% were covered by collective bargaining agreements. Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to its initial public offering, the Company had operated as Lexington Health Care Group, LLC, a limited liability company that was formed on March 8, 1995 and commenced operations on July 1, 1995. The Company's principal offices are located at 1577 New Britain Avenue, Farmington, Connecticut 06032 and its telephone number is (860) 674-2700. 5 Item 2. Properties The following properties are leased as of June 30, 1999.
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 3,000 454 Wolcott Street, Waterbury, CT 06705 2,700 560 Saw Mill Road, West Haven, CT 06516 1,300 Balz Medical Services, Inc. Ancillary 362 Industrial Park Road, Middletown, CT 06457 Services/Products 11,000 Lexington Healthcare Group, Inc. Corporate Offices 4,500 1577 New Britain Avenue, Farmington, CT 06032
The following properties are owned as of June 30, 1999.
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. 6 Item 3. Legal Proceedings The former President and Administrator of Professional Relief Nurses, Inc. (PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO, in connection with her termination in July 1998. In September 1999 the Company reached a settlement in principle to avoid the expenses of protracted litigation. The Company has recorded a provision for lawsuit settlement of $539,000 in the consolidated statement of operations for the year ended June 30, 1999. The Company had previously posted a cash bond of $350,000 and paid certain other expenses; the remaining balance due was recorded at present value of $69,000 and will be paid over time. The Company had previously disclosed the existence of lawsuits initiated by Sundance Rehabilitation Corporation in July 1998 against three of its nursing homes for payment of invoices for therapy services rendered. During the year ended June 30, 1999, the amounts due ($625,000) were paid and the lawsuits were withdrawn. The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Lexington Healthcare Group, Inc.'s common stock, $.01 par value, was traded on the National Market System of the NASDAQ Stock Market. Effective on July 16, 1998, the Company's stock trading was moved from the NASDAQ National Market to The NASDAQ Small Cap Market because the Company did not meet certain new criteria for continued trading on the National Market. The following table presents its high and low market prices, and dividend information since trading began on May 14, 1997. Quarterly Common Stock Price Ranges and Dividends Quarter High Low Dividend ------- ---- --- -------- FY 1997 4th 8 1/4 5 1/2 $-0- FY 1998 1st 7 3 $-0- 2nd 3 15/16 2 5/8 $-0- 3rd 4 2 7/8 $-0- 4th 3 7/16 2 1/2 $-0- FY 1999 1st 2 21/32 7/8 $-0- 2nd 3 1/8 7/8 $-0- 3rd 2 1/2 7/8 $-0- 4th 1 1/2 15/16 $-0- 7 Lexington Healthcare Group, Inc.'s common stock purchase warrants entitle the holder to purchase one share of common stock at a price of $6.00 per share from May 14, 1997 through May 13, 2003. Trading in the Company's warrants was also moved to The NASDAQ Small Cap Market on July 16, 1998 as discussed above. The following table presents its high and low market prices since trading began on May 14, 1997. Quarterly Common Stock Warrant Price Ranges Quarter High Low ------- ---- --- FY 1997 4th 3 3/8 1 1/2 FY 1998 1st 3 1/4 7/8 2nd 1 5/16 5/8 3rd 27/32 1/4 4th 17/32 1/4 FY 1999 1st 13/32 3/16 2nd 7/8 1/8 3rd 19/32 3/16 4th 7/16 1/8 The Company has not paid dividends to date and has no present intention of paying any dividends on its Common Stock in the foreseeable future, as it intends to reinvest profits, if any, in the development and expansion of its business. The number of shareholders of record for the Company's common stock as of June 30, 1999 was 29; the Company believes that its shares are beneficially owned by over 500 individuals. On September 24, 1999, the closing price of the Company's common stock was $1.19. 8 Item 6. Selected Financial Data
Year ended June 30, ------------------- 1999 1998 1997 1996 ---- ---- ---- ---- (Amounts in Thousands, Except Per Share Data) Statement of Operations Data Net revenues $76,892 $58,252 $35,900 $33,641 Operating costs and expenses (77,725) (58,248) (36,241) (33,180) Other income (expense) (539) 280 -- -- -------------------------------------------- Income (loss) before income taxes and minority interest (1,372) 284 (341) 461 Provision for (benefit from) income taxes * 15 30 (66) 195 Minority interest (190) (224) -- -- -------------------------------------------- NET INCOME (LOSS) * $(1,577) $30 $(275) $266 ======== ======== ======== ======== Basic earnings (loss) per common share * $(.38) $.01 $(.10) $.11 ======== ======== ======== ======== Balance Sheet Data Cash and cash equivalents $3,675 $831 $1,000 $212 Working capital (deficiency) 955 3,074 287 (2,381) Total Assets 34,283 25,613 15,432 9,614 Short-term borrowings 3,867 398 49 2.580 Total long-term debt excluding current maturities 7,768 7,424 107 102 Total stockholders equity $4,232 $6,383 $6,395 $487
* Historical or pro forma, as applicable. In 1996, Lexington Healthcare Group was a limited liability company (LLC) and as such, it was the obligation of the individual members of the LLC to report their proportionate share of taxable income. Pro forma taxes are provided as if LLC had been subject to tax as a regular corporation. 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Overview During the fiscal year ended June 30, 1999, the Company again expanded its nursing home operations with the management of four additional facilities, acquired the remaining 50% interest in its therapy joint venture company, terminated the operation of another start-up joint venture company whose operations had not reached meaningful proportions, and undertook an interim management contract to manage an additional three skilled nursing facilities located in Connecticut. In the previous fiscal year, the Company had expanded its nursing home operations with two additional facilities, formed and began operating three healthcare joint venture companies, and initiated plans to acquire five additional nursing homes. In the 1997 fiscal year, the Company had reorganized its capital structure and completed an initial public stock offering (the "Offering") which raised net proceeds of approximately $4.1 million. In connection with the Offering, the Company acquired two businesses in the healthcare field, BALZ and PRN. The long term care industry has experienced many changes in the year ended June 30, 1999 including the implementation of the Balanced Budget Act of 1997 ("BBA") which resulted in a new Medicare Prospective Payment System (known as PPS). Under PPS, Medicare revenues are substantially less than those earned under the former cost-based reimbursement system. The BBA and PPS significantly changed the revenues available to nursing homes and other health care providers; Medicare revenues in the Company's existing nursing homes decreased by $2.2 million during the year ended June 30, 1999, with PPS causing approximately $1.6 million of that shortfall. In Connecticut, multiple long term care entities are undergoing financial reorganization in 1999 due to reduced occupancy and PPS-related revenue reductions and increasing cost pressures (including union costs), and have experienced considerable losses in the market value of their own securities. The Company believes its continued emphasis on cost controls, selected favorable acquisitions, and development of ancillary businesses remains the most appropriate strategy. Further, the Company is encouraged by recent reports of bipartisan legislation introduced to restore the deep cuts resulting from the 1997 Balanced Budget Act. The Company continues to believe that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities and home care agencies. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. 10 The Company's operating strategy is to increase nursing home profitability levels, through aggressive marketing and by offering rehabilitation therapies and other specialized services; adhere to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and become a fully integrated health network whereby the Company will increase marketing of medical products and supplies, rehabilitative services, institutional pharmaceutical services and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. By concentrating its facilities and ancillary service operations within a selected geographic region, the Company's strategy is to achieve operating efficiencies through economies of scale, reduced corporate overhead, more effective management supervision and financial controls. In addition, the Company believes that geographic concentration also enhances the Company's ability to establish more effective relationships with referral sources and regulatory authorities in the states where the Company operates. Year 2000 The Company is continuing work on resolving the potential impact of the year 2000 on the ability of its computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation, however it primarily uses licensed software products, with a significant portion of processes and transactions centralized in only a few third-party vendor packages. Certain of those packages were acquired in recent years and are Year 2000 compliant. Management has made plans to complete the conversion of remaining programs before the end of the calendar year. The Company currently believes that costs of addressing this issue will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant Year 2000 issues in a timely manner. Results of Operations Year ended June 30, 1999 ("1999 period") vs. year ended June 30, 1998 ("1998 period") The 1999 period includes the operating results of the six nursing facilities operated by the Company, the operations of the four nursing homes managed by the Company since November 1, 1998, and the operations of its subsidiaries (BALZ, PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full year. The 1998 period includes the operating results of the six nursing facilities and of the acquired subsidiaries, BALZ and PRN, for a full year and of the newly formed joint ventures since inception, but only for part of the year. 11 For the year ended June 30, 1999, the Company had total revenues of $76,892,000 and total operating expenses of $77,725,000. These expenses consisted of salaries and benefits of $57,109,000, food, medical and other supplies of $7,778,000, other operating expenses (including rent of $2,983,000) of $8,845,000, corporate, general and administrative expenses of $2,953,000, and interest expense of $1,040,000. The Company had a net loss before income taxes, other expense and minority interest of $833,000 and net loss of $1,577,000 for the year ended June 30, 1999. Revenues in the 1999 period increased over the 1998 period by $18,640,000 or 32%, largely as a result of the addition of the four managed facilities and growth in the subsidiaries and joint venture companies. Of the total change, an increase of $20,404,000 pertained to the new nursing home management contract and growth in the healthcare businesses acquired previously, but in the existing nursing facilities there was a net decrease of $1,764,000 due to a 3.3% overall decrease in occupancy, Medicare settlement adjustments, and mix changes. In 1999 private pay occupancy increased approximately 4.6% over 1998, while in the same period Medicaid and Medicare occupancy decreased 3.4% and 8.0%, respectively. Revenue received under cost reimbursement agreements is subject to audit and retroactive adjustment by third-party payors. Provisions for estimated adjustments are reflected in patient service revenue. Differences between estimated adjustments and final settlements are recorded in the year of settlement. The Company has recorded reductions in patient service revenue of $443,000 and $699,000 during the years ended June 30, 1999 and 1998, respectively, in connection with adjustments of previously recorded estimated settlements. Year ended June 30, ------------------- 1999 1998 ---- ---- Medicare $(402,000) $(115,000) Medicaid (41,000) (584,000) ------------------------- $(443,000) $(699,000) ========= ========= Operating expenses in the 1999 period increased over the 1998 period by $19,477,000 or 33%, largely as a result of the addition of the four managed facilities and growth in the subsidiaries and joint venture companies. Of the total cost increase, $17,202,000 pertained to the nursing homes and healthcare businesses acquired and $2,027,000, net was from decreased existing-facility costs, offset by increases in subsidiary and joint venture and corporate, general and administrative costs. Interest expense increased by $248,000 mostly as a result of additional borrowings on the 1997 mortgage for improvements to the facilities acquired in July 1997 and additional line of credit borrowings. Other expense of $539,000 was recorded in connection with a provision for lawsuit settlement. Income taxes of $15,000 were provided in the 1999 period on loss before income taxes and minority interest of $1,372,000. Such provision is due to state taxes on income reported by certain subsidiaries which are taxed separately from other entities in the consolidated group. 12 Results of Operations Year ended June 30, 1998 ("1998 period") vs. year ended June 30, 1997 ("1997 period") The 1998 period includes the operating results of six nursing facilities and of the acquired subsidiaries, BALZ and PRN, for a full year and of the newly formed joint ventures since inception, but only for part of the year. The 1997 period results include the results of operations of four nursing facilities and of the acquired subsidiaries, BALZ and PRN, since their acquisition on May 15, 1997. For the year ended June 30, 1998, the Company had total revenues of $58,252,000 and total operating expenses of $58,248,000. These expenses consisted of salaries and benefits of $42,823,000, food, medical and other supplies of $4,077,000, other operating expenses (including rent of $2,623,000) of $8,685,000, corporate, general and administrative expenses of $1,871,000, and interest expense of $792,000. Other income of $280,000 was recorded on the sale of the bed license in November 1997. The Company had income before income taxes and minority interest of $284,000 and net income of $30,000 for the year ended June 30, 1998. Revenues in the 1998 period increased over the 1997 period by $22,352,000 or 62%, largely as a result of the acquisitions during May 1997 and July 1997. Of the total change, an increase of $22,491,000 pertained to the nursing homes and healthcare businesses acquired, but in the existing nursing facilities there was a net decrease of $139,000 due to Medicaid and Medicare rate and settlement adjustments and mix changes. In 1998 private pay and Medicaid occupancy increased approximately 1% each over 1997, while in the same period Medicare occupancy decreased approximately 2%. Overall, occupancy in those facilities remained essentially unchanged. Revenue received under cost reimbursement agreements is subject to audit and retroactive adjustment by third-party payors. Provisions for estimated adjustments are reflected in patient service revenue. Differences between estimated adjustments and final settlements are recorded in the year of settlement. The Company has recorded reductions in patient service revenue of $699,000 and $45,000 during the years ended June 30, 1998 and 1997, respectively, in connection with adjustments of previously recorded estimated settlements. As shown below, prior year Medicaid interim rates were audited and settled in 1998 resulting in revenue reductions of $584,000; net Medicare reductions of $115,000 were also recorded as a result of Medicare's desk reviews and amended cost reports: Impact of rate settlements -------------------------- Rate Year Medicaid Medicare --------- -------- -------- 1996 $(273,000) $(115,000) 1997 (311,000) -- The Company collected $102,000 in excess of the net carrying value of accounts receivable purchased in connection with the Greenwood and Highland acquisitions. Since the Company has collected more than originally recorded for these purchased accounts receivable, such amount has been included in other revenue. Operating expenses in the 1998 period increased over the 1997 period by $22,007,000 or 61%, largely as a result of the acquisitions noted above. Of the total cost increase, $21,168,000 pertained to the nursing homes and healthcare businesses acquired and $225,000 was from increased existing-facility and corporate, general and administrative costs. Interest expense increased by $614,000 mostly as a result of the new mortgage on the facilities acquired in July 1997. 13 Income taxes were provided in the 1998 period on income before income taxes and minority interest of $284,000; the combined federal and state effective tax rate was 11%. A benefit from income taxes was provided in the 1997 period since the Company reported a loss for that period. Results of Operations Year ended June 30, 1997 ("1997 period") vs. year ended June 30, 1996 ("1996 period") The 1997 period results include the nursing facility operations for a full year. The Company has recorded a reduction in patient service revenue of $45,000 during the year ended June 30, 1997 in connection with estimated Medicare and Medicaid settlements.. The results of operations of the acquired subsidiaries, BALZ and PRN, are included in operations since acquisition on May 15. For the year ended June 30, 1997, the Company had total revenues of $35,900,000 and total expenses of $36,241,000. These expenses consisted of salaries and benefits of $26,979,000, food, medical and other supplies of $2,689,000, other operating expenses (including rent of $2,497,000) of $5,113,000, corporate, general and administrative expenses of $1,282,000 and interest expense of $178,000. The Company had a net loss of $275,000 for the year ended June 30, 1997. Revenues in the 1997 period increased over the 1996 period by $2,259,000 or 6.7%; $1,301,000 of this increase was a result of increased rates, mix changes and higher occupancy in the nursing facilities (net of $45,000 in revenue adjustments as a result of expected Medicare and Medicaid settlements), $699,000 is due to additional revenues from subsidiaries acquired, and $259,000 as a result of other revenue increases, principally third-party management fees. Expenses in the 1997 period increased over the 1996 period by $3,061,000 or 9.2 %. $2,464,000 of this increase was a result of increased costs in the nursing facilities and $597,000 is due to additional costs from subsidiaries acquired. The major increase in nursing home costs were for higher salaries and benefits including additional nursing, dietary, and housekeeping staffing (as a result of higher occupancy and union and non-union wage increases of approximately 4%), higher therapy costs and occupancy-driven higher operating expenses in housekeeping, laundry, and nursing. Liquidity and Capital Resources The Company has primarily financed its operations through operating revenues, borrowings from banks, the prior operator of certain of the Facilities and other private lenders including stockholders, by financing its accounts receivable, through a public offering of its common stock (the "Offering") which raised net proceeds of approximately $4.1 million and through the sale of bed licenses for $1.5 million. The net proceeds of the Offering were used to pay off remaining balances of previous borrowings, to fund the acquisition of PRN and, after providing for other business development plans, were added to the working capital of the Company. The net proceeds from the sale of the bed licenses were added to working capital. 14 Between October 1995 and July 1996, the Company borrowed an aggregate of $286,000 from Jack Friedler and Harry Dermer. $104,000 of such loan was repaid to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned $100,000 to the Company in connection with the reacquisition of shares from a private placement investor. Mr. Friedler's balance of $266,000 was then offset against loans due from Lexington House in May 1997. Mr. Friedler also instructed the Company to offset interest due him from the Company of $10,000 each during May and June 1997 against the Lexington House loan (which is discussed below). The Company paid Mr. Dermer $16,000 in July 1997 to liquidate his loan. In July 1995, the Company entered into an agreement to manage the day-to-day business affairs of Lexington House, Inc., a nursing home with 67 licensed beds; Lexington House was owned by Jack Friedler and his wife. The Company made certain expenditures on behalf of Lexington House in anticipation that it would acquire Lexington House. Subsequently, the negotiations for the sale were terminated because the Company determined that such facility required too many capital improvements. As of June 30, 1997, Lexington House, Inc. was indebted to the Company in the amount of $290,000. During the year ended June 30, 1998, Lexington House, Inc. was charged $23,000 for management fees and costs, interest of $26,000 accumulated, and an additional $286,000 was advanced; $30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998 an additional $50,000 was advanced. The total, with accumulated unpaid interest, amounted to $649,000 as of July 31, 1998. During September 1998, the balance of $649,000 was formalized into an 8% interest bearing promissory note from Jack Friedler with $15,000 monthly installments and a balloon payment of the remaining balance due May 31, 1999. As security for the note, Mr. Friedler pledged the right to receive a $15,000 monthly payment and also pledged 600,000 of his shares of the common stock of the Company. Monthly payments totaling $120,000 were made through June 30, 1999. However, on May 6, 1999 Mr. Friedler suffered a heart attack, had by-pass surgery, and began a recovery period. The balloon payment was not made at May 31, but monthly payments were made in May and June 1999. In July, Mr. Friedler stated he would be unable to make the balloon payment and the Company, pursuant to Board of Director's approval, defaulted the note and seized the collateral of 600,000 shares in satisfaction of the note and interest due. The shares were cancelled by the transfer agent. The 600,000 shares had a market bid price of $731,000 at the time of their surrender; the note and accumulated interest had a carrying value of $574,000. The Company's Board of Directors considers the difference of $157,000 between the market price and the carrying value of the note receivable to be a reasonable and fair discount for the shares received. Based on the above, the Company has presented the balance of the note receivable and interest as a reduction of stockholder's equity in the accompanying consolidated balance sheet as of June 30, 1999. This resulted in the reduction of working capital and stockholders equity of $574,000 as shown in that balance sheet. During the years ended June 30, 1999, 1998, and 1997, the Company expended approximately $451,000, $112,000, and $290,000, respectively, in capital improvements to the leased facilities. Any capital improvements made to these facilities belong to the landlord. However, any amounts expended for capital improvements are generally recouped in their entirety through the reimbursement system. During the years ended June 30, 1999 and 1998 the Company expended $353,000 and $231,000, respectively, for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. 15 In July 1997, the Company borrowed $6.8 million in connection with the acquisition of land, buildings, bed licenses and operating assets of two nursing homes. Interest is payable at 10% over the 25 year term of the mortgage. In connection with the acquisitions, the Company also obtained from the former owner an operating subsidy of $2.5 million which was reduced by the Company's $1.3 million purchase of accounts receivable; the net balance is to be received over five years. As noted above, some of the bed licenses acquired were sold for $1.5 million. On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer and principal stockholder in order for him to pay personal income taxes due as a result of the reorganization of entities under common control (i.e., the Company's IPO). There was no cash compensation paid to him as part of the reorganization. The borrowing was evidenced by a 9% interest earning note receivable on which payments were made on December 26 ($157,000), December 31 ($300,000), February ($150,000), and May 5, 1998 ($150,000); the note was thus repaid in full. Interest on the note of $20,000 was paid through December 31, 1997 and later on May 5, 1998. The Company has recorded $303,000 of investments in joint ventures (of which $48,000 was paid through June 30, 1999) which began operations and became profitable in fiscal 1998; positive cash flow resulted in fiscal 1999. At June 30, 1999, the Company had cash and cash equivalents of $3,675,000, receivables of $16,092,000, inventories of $1,058,000 and prepaid expenses and other current assets of $1,031,000. Receivables increased by $5,047,000 since June 30, 1998 due mostly to the nursing homes acquired under management contract (in which the Company purchased existing accounts receivable at November 1, 1998) and generally higher rates in effect. Working capital at June 30, 1999 was $955,000 as compared with working capital of $3,074,000 at June 30, 1998. The principal reasons for the decrease are the unprofitable operations in the owned nursing homes, the provision for lawsuit settlement, and the default on the related party note receivable balloon payment which are offset by the profitable operations in the subsidiaries and joint venture. Current liabilities at June 30, 1999 consist principally of trade accounts payable, amounts due to SunBridge for purchased accounts receivable, estimated third-party payor settlements due Medicare and Medicaid, current portion of notes and capital leases payable, accrued payroll and related taxes, income taxes, and other accrued expenses (including the balance due for lawsuit settlement). In August 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which was secured by its accounts receivable and other assets; borrowings under the line were also personally guaranteed by the Company's Chairman and President. The line of credit was utilized from time to time until December 1998 at which time a new line of credit was implemented. In December 1998, the Company entered into a financing agreement with a healthcare lender for up to $4.5 million, which is secured by its accounts receivable and certain other assets. As of June 30, 1999, $3,631,000 was borrowed under this agreement. The Company has increased its utilization of this line of credit to finance working capital needs as a result of growing operations, accounts receivable increases, payback of Medicare and Medicaid settlements, costs of the lawsuit settlement and operating losses in the owned nursing homes. Inflation has not had, nor is it expected to have, a material impact on the operations and financial condition of the Company. 16 Forward Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors. Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Reports of Independent Certified Public Accountants on Consolidated Financial Statements as of June 30, 1999 and 1998 and for the Years Ended June 30, 1999, 1998 and 1997 Financial Statements: Consolidated Balance Sheets June 30, 1999 and 1998 Consolidated Statements of Operations Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years Ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 17 DISANTO BERTOLINE & COMPANY, P.C. 628 Hebron Avenue, Building #3 Glastonbury, CT 06033 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lexington Healthcare Group, Inc. Farmington, Connecticut We have audited the accompanying consolidated balance sheets of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 1999, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for the years ended June 30, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. DISANTO BERTOLINE & COMPANY, P.C. Glastonbury, Connecticut September 24, 1999 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998
1999 1998 ASSETS ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 3,675,000 $ 831,000 Accounts receivable - net of allowance for doubtful accounts of $848,000 and $346,000 for 1999 and 1998, respectively 16,092,000 10,848,000 Estimated third-party payor settlements-Medicare -- 197,000 Note receivable-related party -- 595,000 Inventories 1,058,000 777,000 Prepaid and other current assets 1,031,000 533,000 ----------- ----------- Total current assets 21,856,000 13,781,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 4,147,000 3,370,000 OTHER ASSETS Security deposits - related parties 2,337,000 2,337,000 Residents' funds 403,000 206,000 Goodwill, net of accumulated amortization of $358,000 and $190,000 for 1999 and 1998, respectively 3,013,000 3,181,000 Deferred tax asset 35,000 35,000 Bed licenses - net of accumulated amortization of $232,000 and $116,000 for 1999 and 1998, respectively 1,510,000 1,626,000 Operating subsidy receivable (less current portion of $104,000) 555,000 701,000 Other assets, net 427,000 376,000 ----------- ----------- 8,280,000 8,462,000 ----------- ----------- $34,283,000 $25,613,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable (current portion) $ 3,748,000 $ 313,000 Due to SunBridge - purchased receivables 2,582,000 -- Accounts payable and accrued expenses 13,473,000 8,532,000 Estimated third-party payor settlements-Medicaid 922,000 1,686,000 Estimated third-party payor settlements-Medicare 17,000 -- Capital leases payable (current portion) 119,000 85,000 Income taxes payable 40,000 91,000 ----------- ----------- Total current liabilities 20,901,000 10,707,000 OTHER LIABILITIES Notes payable (less current portion) 7,415,000 7,132,000 Capital leases payable (less current portion) 353,000 292,000 Residents' funds payable 403,000 206,000 Deferred rent 314,000 364,000 Other liabilities 120,000 -- ----------- ----------- 8,605,000 7,994,000 ----------- ----------- Total liabilities 29,506,000 18,701,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note N) MINORITY INTERESTS 545,000 529,000 STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 15,000,000 shares 41,000 41,000 Additional paid-in capital 6,126,000 6,126,000 Note receivable - related party (574,000) -- Retained earnings (deficit) (1,361,000) 216,000 ----------- ----------- Total stockholders' equity 4,232,000 6,383,000 =========== =========== $34,283,000 $25,613,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ------------ ------------ ------------ REVENUES Net patient service revenue $ 58,867,000 $ 57,610,000 $ 35,536,000 Management fee revenue 17,620,000 225,000 279,000 Other revenue 405,000 417,000 85,000 ------------ ------------ ------------ Total revenues 76,892,000 58,252,000 35,900,000 EXPENSES Facility operating expenses: Salaries and benefits 57,109,000 42,823,000 26,979,000 Food, medical and other supplies 7,778,000 4,077,000 2,689,000 Other operating expenses 8,845,000 8,685,000 5,113,000 Corporate, general and administrative expenses 2,953,000 1,871,000 1,282,000 Interest expense 1,040,000 792,000 178,000 ------------ ------------ ------------ Total expenses 77,725,000 58,248,000 36,241,000 ------------ ------------ ------------ Income (loss) from operations (833,000) 4,000 (341,000) OTHER INCOME (EXPENSE) Provision for lawsuit settlement (539,000) -- -- Gain on sale of bed licenses -- 280,000 -- ------------ ------------ ------------ Income (loss) before income taxes and minority interest (1,372,000) 284,000 (341,000) PROVISION FOR (BENEFIT FROM) INCOME TAXES 15,000 30,000 (66,000) MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES (190,000) (224,000) -- ------------ ------------ ------------ Net income (loss) $ (1,577,000) $ 30,000 $ (275,000) ============ ============ ============ Basic earnings (loss) per common share $ (0.38) $ 0.01 $ (0.10) ============ ============ ============ Weighted average number of common shares outstanding 4,125,000 4,125,000 2,724,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Common Stock ------------------------- Additional Note Rec. Number Paid-in Related Retained of Shares Amount Capital Party Earnings TOTAL ----------- ----------- ----------- ----------- ----------- ----------- 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 Additional costs of issuance -- -- (42,000) -- -- (42,000) Net income -- -- -- -- 30,000 30,000 ----------- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1998 4,125,000 41,000 6,126,000 -- 216,000 6,383,000 Net loss -- -- -- -- (1,577,000) (1,577,000) Reclassification of note receivable - related party -- -- -- (574,000) -- (574,000) ----------- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1999 4,125,000 $ 41,000 $ 6,126,000 $ (574,000) $(1,361,000) $ 4,232,000 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(1,577,000) $ 30,000 $ (275,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 817,000 569,000 110,000 Provision for doubtful accounts 502,000 166,000 105,000 Minority interest in income of consolidated joint ventures 190,000 224,000 -- Legal expenses pursuant to stock issuance -- -- 60,000 Benefit from deferred taxes -- -- (97,000) Loss on disposal of assets -- 27,000 -- Gain on sale of bed licenses -- (280,000) -- Decrease in deferred rent (50,000) (52,000) (52,000) Changes in operating assets and liabilities: Increase in accounts payable and accrued expenses 4,941,000 752,000 1,099,000 Due to SunBridge - purchased receivables 2,582,000 -- -- Decrease in due to related parties, net -- -- (291,000) (Increase) decrease in other assets (51,000) (417,000) 85,000 (Decrease) increase in income taxes payable (51,000) (113,000) 204,000 Increase in inventories (281,000) (274,000) (240,000) (Decrease) increase in estimated third-party payor settlements--Medicaid and Medicare, net (550,000) 1,444,000 46,000 Increase in prepaid and other current assets (601,000) (115,000) (341,000) (Increase) decrease in accounts and operating subsidy receivable (5,600,000) (3,046,000) 282,000 ----------- ----------- ----------- Net cash provided by (used in) operating activities 271,000 (1,085,000) 695,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Repayments of note receivable - related party 120,000 787,000 -- Proceeds from sale of bed licenses -- 1,550,000 -- Cash paid for businesses acquired -- -- (1,434,000) Increase in security deposits - related parties -- (55,000) -- Increase in goodwill on purchase of subsidiary -- (75,000) -- Disbursements on note receivable - related party (99,000) (1,092,000) (162,000) Acquisition of property, equipment and leasehold improvements (583,000) (681,000) (285,000) ----------- ----------- ----------- Net cash provided by (used in) investing activities (562,000) 434,000 (1,881,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit, net 3,431,000 -- -- Proceeds of short term borrowings and Beverly receivables -- 400,000 500,000 Proceeds from mortgage note -- 231,000 -- Proceeds from issuance of common stock, net -- -- 4,083,000 Decrease in deferred registration costs -- -- 198,000 Proceeds of notes payable to officers -- -- 100,000 Repayment of notes payable to officers -- (29,000) (110,000) Stock registration costs -- (42,000) -- Repayment of short-term borrowing -- (200,000) (2,763,000) Minority investment (distribution) in consolidated joint ventures (54,000) 305,000 -- Repayments of mortgage and term notes payable (120,000) (88,000) -- Repayments of capital lease obligations (122,000) (95,000) (34,000) ----------- ----------- ----------- Net cash provided by financing activities 3,135,000 482,000 1,974,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,844,000 (169,000) 788,000 CASH AND CASH EQUIVALENTS, beginning of year 831,000 1,000,000 212,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 3,675,000 $ 831,000 $ 1,000,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 1,040,000 $ 789,000 $ 176,000 Income taxes 9,000 145,000 -- Non-cash investing and financing activities: Certain assets acquired through assumption of mortgage note payable $ 392,000 $ 6,863,000 $ -- Equipment and leasehold improvements acquired through assumption of notes payable and capital leases 232,000 555,000 -- Common stock issued in connection with legal services recorded as cost of issuance -- -- 60,000 Offset of note payable - officers/stockholders against note receivable - related party -- -- 266,000 Details of businesses acquired was as follows: Fair value of assets acquired $ -- $ -- $ 4,788,000 Liabilities assumed -- -- 1,314,000 ----------- ----------- ----------- Purchase price, net of cash received -- -- 3,474,000 Common stock issued for acquired businesses -- -- (2,040,000) ----------- ----------- ----------- Net cash paid for acquired businesses $ -- $ -- $ 1,434,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE A - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Lexington Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN" ), Lexington Highgreen Holding, Inc. and Lexicore Rehab Services, L.L.C. (Lexicore) (collectively, the "Company") as well as the accounts of a joint venture controlled by the Company, Lexicon Pharmacy Services, L.L.C. All material intercompany balances and transactions have been eliminated in consolidation. As of January 1, 1999, the Company acquired the remaining 50% membership interest of Lexicore for a nominal amount plus $120,000 of residual payments which are payable based on the occurrence of certain future events. The acquisition of Lexicore has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based on their fair value on the date of acquisition. The Company has not recorded any goodwill in connection with this purchase. Henceforth, the Company has accounted for Lexicore as a wholly-owned subsidiary and minority interest has been adjusted accordingly. NATURE OF OPERATIONS The Company is a long-term and subacute care provider, which operates six and manages an additional four nursing home facilities at June 30, 1999 with a total of 1,302 beds licensed by the State of Connecticut. The Company also provides medical supplies and durable medical equipment to nursing homes, provides physical, occupational and speech therapy and other services to qualified health care facilities, and provides health care services in the homes of its patients. JOINT VENTURE The Company has a 70% interest in Lexicon Pharmacy Services, L.L.C. ("Lexicon"), a Delaware limited liability company, which was formed on October 31, 1997 to provide institutional pharmacy services to qualified health care facilities and the patients residing therein. The limited liability company agreement provides for Lexicon to continue until November 1, 2002, with earlier termination possible in the event of exercise by a member of an option to terminate or the occurrence of certain other events specified in the agreement. The agreement also stipulates that members are not personally liable for any debts or losses of Lexicon beyond their respective capital contribution and that no member shall be permitted or required to make any additional capital contributions, except as specifically provided in the agreement. Page F-1 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued) JOINT VENTURE (Continued) For financial reporting purposes, the assets, liabilities and earnings of this joint venture have been included in the Company's consolidated financial statements. The other member's interest in the joint venture has been recorded as minority interest. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION PATIENT SERVICE REVENUE Revenues are recognized at the time the service is provided to the patient. A substantial amount of the Company's revenues are billed to third party payors, i.e., Medicaid, Medicare and others under the provisions of reimbursement formulas and regulations in effect. Patient service revenue is reported at the estimated net realizable amount from residents, third-party payors, and others for services rendered. Revenue received under cost reimbursement agreements is subject to audit and retroactive adjustment by third-party payors. Provisions for estimated adjustments have been reflected in patient service revenue. Differences between estimated adjustments and final settlements are recorded in the year of settlement. MANAGEMENT FEES As consideration for services provided under an interim management agreement with SunBridge Healthcare Corporation (see Note B), the Company is entitled to retain the excess of any revenues earned in the delivery of patient services over the expenses incurred during the term and will be responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. Such revenues have been classified as management fee revenue in the accompanying consolidated statement of operations. The Company recognizes other management fees as they are earned and accrues related fees payable to subcontractors as they are incurred. Page F-2 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued) CASH EQUIVALENTS For the purpose of the consolidated statements of cash flows, the Company defines cash equivalents as highly liquid instruments with an original maturity of three months or less. The Company had cash equivalents of $1,172,000 at June 30, 1999 and $141,000 at June 30, 1998, consisting of overnight investments. INVENTORIES Inventories consisting of food, chemicals and supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the property and equipment. Leasehold improvements are amortized over the remaining period of the respective leases or the estimated useful lives of the improvement, whichever is shorter. Maintenance, repairs and minor renovations are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized. RESIDENTS' FUNDS Residents' funds represent cash balances which have been deposited into a separate bank account and are restricted for the use of the residents. INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. RECLASSIFICATIONS Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. Page F-3 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued) RECENT ACCOUNTING STANDARDS IMPAIRMENT OF LONG-LIVED ASSETS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires a company to review the carrying value of long-lived assets and certain intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management believes that the adoption of SFAS No. 121 will not have a material adverse effect on the Company's consolidated financial statements. STOCK BASED COMPENSATION In fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which establishes a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS No. 123 gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25, the former standard. If the former standard for measurement is elected, SFAS No. 123 requires supplemental disclosure to show the effects of using the new measurement criteria. The Company intends to continue using the measurement prescribed by APB Opinion No. 25 and accordingly, this pronouncement will not affect the Company's consolidated financial position or results of operations. EARNINGS PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The objective of SFAS No. 128 is to simplify the standards for computing earnings per share (EPS) and make them comparable to international EPS standards. It replaces the presentation of primary and fully-diluted EPS with a presentation of basic and diluted EPS. All prior period EPS data presented has been restated to conform with the provisions of this statement. Dilutive earnings per share has not been presented as the potentially dilutive stock options are anti-dilutive. Page F-4 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued) RECENT ACCOUNTING STANDARDS (Continued) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company has no material components of other comprehensive income (loss) and, accordingly, the Company's comprehensive income (loss) is the same as its net income (loss) for all years presented. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way public companies report financial and descriptive information about their operating segments. The Company provides health care services and many other closely related ancillary services to its patients and residents. All of these services fall within one reportable segment as defined in SFAS No. 131. NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS REORGANIZATION AND PUBLIC STOCK OFFERING 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. Page F-5 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (Continued) ACQUISITIONS - BALZ AND PRN The Company acquired in May 1997, simultaneously with the closing of the public offering, all of the common stock of BALZ and PRN. Prior to acquisition, the members of LLC owned 44% and 25% of BALZ and PRN, respectively. The Company acquired all of the common stock of BALZ in exchange for 300,000 shares of common stock of the Company which were valued at $1,500,000 based on the price of the public offering. The purchase price of PRN consisted of $1,620,000 payable in cash and the exchange of 108,000 shares of common stock of the Company which were valued at $540,000 based on the price of the public offering. Furthermore, prior to the acquisition, PRN distributed 100% of its net book value to its former stockholders; this book value was approximately $392,000. Certain adjustments have been made during the year ended June 30, 1998 to record $76,000 of additional liabilities assumed as a direct result of the purchase. The acquisitions of BALZ and PRN have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon their fair values at date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was $3,371,000 and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years. The amount of goodwill amortization was $168,000, $170,000 and $20,000 for the years ended June 30, 1999, 1998 and 1997, respectively. 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 2,236,000 Other liabilities (315,000) (555,000) ----------- ----------- Purchase price, net of cash received $1,416,000 $2,058,000 =========== =========== Page F-6 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (Continued) ACQUISITIONS - GREENWOOD AND HIGHLAND NURSING HOMES On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of the assets of two skilled nursing facilities, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly"). These facilities are located in Hartford and Winsted, CT and at the time of purchase had 240 and 75 licensed beds, respectively. The Company is presently operating 225 beds, has returned the license on 40 beds to the State of Connecticut and, in November 1997, sold the remaining license on 50 beds to an unrelated party for $1,550,000 in cash resulting in a gain of $280,000 which is reflected as other income in the accompanying consolidated statement of operations. All real estate, property, fixed and operating assets of the nursing homes were acquired (with the exception of certain proprietary computer hardware and systems) for a purchase price of approximately $6.8 million which was financed by a mortgage on the real estate from Nationwide Health Properties, Inc., the previous lessor to Beverly. Beverly has agreed to pay a $2.5 million operating subsidy to the Company over five years, bringing the net cost of the transaction to the Company to $4.3 million. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased based on their fair values at the date of acquisition. The Company has not recorded any goodwill in connection with this purchase but has allocated $1,742,000 of the purchase price to bed licenses, which is being amortized over 15 years. The amount of bed license amortization was $116,000 in each of the years ended June 30, 1999 and 1998. The operating results of these acquired nursing homes have been included in the consolidated statement of operations from the date of acquisition. On the basis of a pro forma consolidation of the results of operations as if the acquisition of these nursing homes had taken place at the beginning of fiscal year 1997 (based on a representative period of time, a one-year period ending June 30, 1997 for the Company and the available one-year period ending December 31, 1996 for the nursing homes acquired), consolidated net revenues would have been $50.2 million for fiscal 1997. Page F-7 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (Continued) ACQUISITIONS - GREENWOOD AND HIGHLAND NURSING HOMES (Continued) Consolidated pro forma net loss would have been $(189,000) for fiscal 1997 and pro forma loss per share would have been $(.07) for fiscal 1997. Such pro forma amounts reflect the operating results produced by Beverly, as adjusted to reflect the purchased costs of assets acquired and the elimination of liabilities which were not assumed, as well as to reflect known changes being made in the operations of these nursing homes, i.e., increased revenues from rate and census increases and decreases in costs as a result of wage rate and benefit reductions negotiated, along with other changes reflective of reduced bed operations. However, the resulting pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been had the acquisitions been effective at the beginning of fiscal 1997. MANAGEMENT OF SUN HOMES AND SUBSEQUENT ACQUISITION OF ADAMS AND HERITAGE On November 1, 1998 the Company began providing management services for four skilled nursing facilities in Connecticut under an interim Management Agreement with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation and nation-wide healthcare provider. As consideration for the services provided under this Management Agreement, the Company is entitled to retain the excess of any revenues earned in the delivery of patient services over the expenses incurred during the term and will be responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. Under the terms of the agreement SunBridge retained responsibility for all building lease costs. In addition, the Company purchased substantially all of SunBridge's accounts receivable for these facilities. As of June 30, 1999, the balance owed is presented as "Due to SunBridge - purchased receivables" in the accompanying consolidated balance sheet. As a result of this agreement, the Company earned management fees of $17,394,000 and incurred costs and expenses of $17,004,000 during the year ended June 30, 1999. Subsequent to the end of its fiscal year, the Company finalized agreements to acquire the operations of two of the managed facilities, Adams House and Heritage Heights, effective September 1, 1999. Initially the buildings will be leased with an option to purchase. These facilities are located in Torrington and Danbury, CT and have a total of 240 skilled nursing beds. Management contracts covering the two other SunBridge facilities with a total of 239 skilled nursing beds were terminated as of August 31, 1999 and the operations of those facilities were returned to SunBridge. Page F-8 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE C - FINANCIAL INSTRUMENTS CONCENTRATIONS OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, residents' funds, accounts receivable, note receivable-related party, security deposits-related parties, and operating subsidy receivable. Cash and cash equivalents and residents' funds The Company places its cash deposits with high credit-quality institutions and such deposits exceeded federal depository insurance limits by approximately $3,066,000 at June 30, 1999. 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, 1999, 1998 and 1997 is as follows: 1999 1998 1997 ---- ---- ---- Medicare and Medicaid 68% 71% 80% Private insurance and other nongovernment agencies 26 25 10 Other 6 4 10 --- --- --- 100% 100% 100% ==== ==== ==== Note receivable-related party This amount is controlled by an officer and director of the Company and is collateralized. Subsequent to year end, the Company seized the collateral as settlement of the obligations (see Note F). Page F-9 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE C - FINANCIAL INSTRUMENTS (Continued) CONCENTRATIONS OF CREDIT RISK (Continued) Operating subsidy receivable This amount is due from Beverly, a provider of health care services throughout the United States, in connection with the Company's purchase of the assets of two nursing homes (see Note B). The receivable is unsecured, but Beverly has made all required payments in a timely manner, and management believes it is not subject to significant credit risk. Security deposits - related parties This amount is controlled by entities related to the Company by common ownership (see Note I); accordingly, management believes it represents negligible credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value of Financial Instruments, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of the Company's financial instruments approximate their fair values as outlined below: Cash and cash equivalents, residents' funds, accounts receivable and accounts and accrued expenses payable: The carrying amounts approximate their fair values because of the short maturity of those instruments. Notes payable and obligations under capital leases: The carrying amounts approximate fair value because the interest rates on the notes or leases approximate the Company's current borrowing rate. Management has determined that it is not practicable to estimate the fair value of the note receivable - related party, security deposits - related parties, and operating subsidy receivable due to the lack of marketability of these financial instruments. The Company's financial instruments are held for other than trading purposes. Page F-10 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS The Company has recorded reductions in patient service revenue of $443,000, $699,000 and $45,000 during the years ended June 30, 1999, 1998 and 1997, respectively, in connection with adjustments of previously recorded estimated settlements as shown below: Year ended June 30, ------------------- 1999 1998 1997 ---- ---- ---- Medicare $(402,000) $(115,000) $(45,000) Medicaid (41,000) (584,000) -- --------------------------------------- $(443,000) $(699,000) $(45,000) ========= ========= ======== As of June 30, 1999 and 1998 the Company had recorded the following amounts as receivable and payable in connection with estimated Medicare and Medicaid settlements: 1999 1998 ---- ---- Receivable -- $197,000 Payable $939,000 1,686,000 Such amounts represent management's best estimates of the amounts expected to be realized or that may be due and are based on anticipated results of ongoing negotiations, interpretation of applicable regulations and other assumptions. It is reasonably possible that the amounts the Company will ultimately realize or be obligated to pay could differ materially in the near term. NOTE E - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following: June 30, June 30, 1999 1998 ----------------------- Land and land improvements $ 359,000 $ 321,000 Building and building improvements 1,803,000 1,486,000 Equipment 1,734,000 1,339,000 Leasehold improvements 1,059,000 608,000 ---------- ---------- 4,955,000 3,754,000 Less: accumulated depreciation and amortization 808,000 384,000 ---------- ---------- $4,147,000 $3,370,000 ========== ========== Depreciation and amortization expense totaled $430,000, 267,000, and $90,000 for the years ended June 30, 1999, 1998, and 1997, respectively. Page F-11 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE F - NOTE RECEIVABLE--RELATED PARTY At June 30, 1997, the Company had a $290,000 note receivable due from an entity in which an officer and director of the Company has a controlling ownership interest. During the year ended June 30, 1998, $23,000 was charged for management fees and costs, interest of $26,000 accumulated, an additional $286,000 was advanced and $30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998 an additional $50,000 was advanced and interest of $4,000 accumulated, making the balance due $649,000 at July 31, 1998. During September 1998, the $649,000 balance was converted into an 8% interest-bearing promissory note due from the officer requiring monthly installments of $15,000 and a balloon payment of the remaining balance due May 31, 1999. As security for the note, the officer pledged 600,000 of his shares of the Company's common stock. Based on the above, the note receivable was classified as a current asset in the accompanying consolidated balance sheet at June 30, 1998. Monthly payments totaling $120,000 were made during the year ended June 30, 1999, however, the balloon payment was not made at May 31, 1999. In July, the officer stated he would be unable to make the balloon payment and the Company, pursuant to Board of Director's approval, defaulted the note and seized the collateral of 600,000 shares in satisfaction of the note and interest due. The 600,000 shares had a market bid price of $731,000 at the time of their surrender and the note and accumulated interest had a carrying value of $574,000. The Company's Board of Directors considers the difference between the market price and carrying value of the note receivable of $157,000 to be a reasonable and fair discount for the shares received. Based on the above, the Company has presented the balance of the note receivable as a reduction of stockholders' equity in the accompanying consolidated balance sheet as of June 30, 1999. Page F-12 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE G - NOTES PAYABLE Notes payable consist of the following: June 30, June 30, 1999 1998 ------------------------- 10% mortgage note secured by property and equipment of two nursing homes; due in 2022, with monthly installments of approximately $68,000 $ 7,342,000 $ 7,028,000 10% bank line of credit -- 200,000 Line of credit at prime plus 2%, (8.75% at June 30, 1999) secured by accounts receivable and other assets 3,631,000 -- 9.45% equipment term notes; due in 2003 with monthly installments of $2,200 84,000 102,000 8.75% equipment term note payable to a bank; due in 2003 with monthly installments of approximately $2,000 80,000 97,000 Vehicle term notes; due in 2001 with monthly installments of $1,000 26,000 18,000 ----------- ----------- 11,163,000 7,445,000 Less: current portion 3,748,000 313,000 ----------- ----------- $ 7,415,000 $ 7,132,000 =========== =========== In July 1997, the Company financed the purchase of two nursing homes with a $6.8 million mortgage note payable to Nationwide Health Properties, Inc. Nationwide has agreed to finance up to $2 million in improvements to the nursing homes made in connection with change of ownership requirements. Through June 30, 1999, $623,000 has been advanced for such improvements and is included in the mortgage obligation above. In addition, the Company is required to maintain a debt service reserve of $360,000 which, as of June 30, 1999, is fully funded and is included in other assets in the accompanying consolidated balance sheets. In December 1998, the Company entered into a financing agreement with a healthcare lender for a line of credit of up to $4.5 million, which is secured by its accounts receivable and certain other assets. This line of credit replaced the 10% $2,000,000 bank line of credit shown above. At June 30, 1999 the Company was not in compliance with two covenants of this loan agreement, but has obtained a waiver of compliance for those specific requirements existing at June 30, 1999. Page F-13 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE G - NOTES PAYABLE (Continued) Aggregate principal maturities of notes payable in succeeding years are as follows: Year ending June 30: 2000 $ 3,748,000 2001 165,000 2002 155,000 2003 157,000 2004 129,000 Subsequent to 2004 6,809,000 ----------- $11,163,000 =========== NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: June 30, June 30, 1999 1998 --------------------------- Accounts payable $ 7,730,000 $ 5,534,000 Accrued payroll and payroll taxes 4,118,000 2,310,000 Other accrued expenses 1,625,000 688,000 ----------- ----------- $13,473,000 $ 8,532,000 =========== =========== NOTE I - LEASE COMMITMENTS CAPITAL LEASES The following is an analysis of leased property under capital leases by major class at June 30, 1999: Equipment $579,000 Less: accumulated amortization 157,000 -------- $422,000 ======== Amortization expense relative to leased property under capital leases totaled $80,000, $47,000, and $29,000 for the years ended June 30, 1999, 1998 and 1997 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, 1999, 1998 AND 1997 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: 2000 $178,000 2001 148,000 2002 146,000 2003 101,000 2004 22,000 -------- Total minimum lease payments 595,000 Less: amount representing interest 123,000 -------- $472,000 ======== RELATED PARTY OPERATING LEASES The Company leases four of its nursing homes facilities (including certain equipment) under an operating lease with a partnership related through common ownership. The Company is responsible for property taxes, maintenance, insurance, etc. under the lease. The lease agreement, as amended, commenced on July 1, 1995 and is for a ten-year period, with four five-year renewal options at specified rents. In addition, the Company leases its corporate office space from an entity related through common ownership under an operating lease which expires in February 2013 and has two five-year renewal options with rent at then market rates. Further, the Company leases office and warehouse space from a limited liability company related through common ownership under an operating lease which expires January 31, 2002. Future minimum lease payments required under these related party lease obligations, net of sublease rentals are as follows: Year ending June 30: 2000 $ 2,679,000 2001 2,680,000 2002 2,687,000 2003 2,674,000 2004 2,687,000 Thereafter 3,832,000 ---------- $17,239,000 =========== Rent expense charged to operations under these related party operating leases aggregated $2,653,000, 2,538,000 and $2,488,000 for the years ended June 30, 1999, 1998, and 1997, respectively. Page F-15 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 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, 1999 and 1998. Such security deposit is comprised of a payment of approximately $1.3 million made by the Company on the related partnership's behalf and payments of $1 million representing excess rent which was paid to the related partnership prior to the retroactive reduction of periodic rent payments. The Company has also deposited, in connection with its corporate office lease, a non-interest bearing security deposit of approximately $55,000 as of June 30, 1999 and 1998. Deferred rent payable represents the excess of rent expense determined on a straight-line basis over amounts paid to date pursuant to the lease with the related partnership. OTHER OPERATING LEASES The Company's PRN subsidiary has other operating leases which expire in various years through 2001. Rent expense charged to operations under such leases totaled approximately $82,000, $78,000 and $9,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Future minimum lease payments required under these other operating leases are as follows: Year ending June 30: 2000 $39,000 2001 3,000 ------- $42,000 ======= NOTE J - STOCKHOLDERS' EQUITY WARRANTS In connection with the public offering, the Company has issued warrants to purchase 1,940,625 shares of Company's common stock at $6 per share, subject to adjustment in certain circumstances, which may be exercised at any time after May 14, 1998 through May 13, 2003. The warrants are subject to redemption by the Company at any time after May 14, 1998 at a price of $.05 per warrant provided that the closing price of the Company's common stock has equaled or exceeded $10 per share for a period of twenty consecutive trading days. In April 1999, the Company issued to an investment banking firm warrants to purchase 250,000 shares of the Company's common stock. The warrants vest and are exercisable as follows: Date Number of warrants Exercise price ---- ------------------ -------------- April 1, 1999 125,000 $1.00 September 25, 1999 125,000 1.50 None of the above warrants have been exercised. Page F-16 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE J - STOCKHOLDERS' EQUITY (Continued) STOCK OPTION PLAN The Company has reserved 450,000 shares of its common stock for issuance pursuant to stock options which may be granted pursuant to the Company's 1997 Stock Option Plan. The Plan provides for grants to employees, consultants and directors of the Company. Subject to the provisions of the Plan, the Board has the authority to determine the individuals to whom the stock options are to be granted, the number of shares to be covered by each option, the exercise price, the type of option, the option period, the restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions. During the year ended June 30, 1998, the Company issued options to purchase 302,000 shares of its common stock to directors and employees at exercise prices ranging from $2.625 to $3.062 based on the market value at date of grant. The Board of Directors re-priced these outstanding options in November 1998 at $.87 based on the current market value. Such options vest at a rate of one-third per year and are fully vested on the fourth anniversary of their issuance. The options expire December 16, 2003 and March 17, 2004 depending on their date of issuance. During the year ended June 30, 1999 33,000 options were cancelled when the employees to whom they were issued terminated their employment. Through June 30, 1999 no options have been exercised. The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, does not recognize compensation cost at the grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and income per share would have been adjusted to the pro forma amounts indicated below: The fair value of each option grant is estimated on the date of grant with the following assumptions: Expected dividend yield 0% Expected volatility 41% Risk-free interest rate 9% Expected life of options 72 months
Year ended June 30, 1999 Year ended June 30, 1998 ------------------------- ------------------------ As reported Pro forma As reported Pro forma ----------- --------- ----------- --------- Net income (loss) $(1,577,000) $(1,794,000) $30,000 $(21,000) ============ ============ ======= ========= Basic earnings (loss) per common share $(.38) $(.43) $.01 $(.01) ====== ====== ==== ======
Page F-17 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE J - STOCKHOLDERS' EQUITY (Continued) 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, 1999, the Company has issued no preferred stock. NOTE K - OTHER MANAGEMENT FEES The Company had managed a nursing home owned by an entity in which an officer and director of the Company has a controlling interest (see Note F); revenues earned in connection with this agreement were $18,000 and $72,000 for the years ended June 30, 1998 and 1997, respectively. The contract ended as of September 30, 1997. Also during the years ended June 30, 1999 and 1998 medical supplies, pharmacy products, and therapy services were provided to this entity by Balz, Lexicon and Lexicore. A total of $17,000 and $92,000 was charged for these products and services during the years ended June 30, 1999 and 1998, respectively; there was a balance due to the Company of $109,000 at June 30, 1999. The Company also manages a second home which is an unrelated entity under a contract which extends through July 31, 1999 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 years ended June 30, 1999, 1998 and 1997 are as follows: 1999 1998 1997 ---- ---- ---- Current: Federal $ -- $ -- $(11,000) State 15,000 30,000 42,000 ------- -------- -------- 15,000 30,000 31,000 ------- -------- -------- Deferred: Federal -- -- (97,000) State -- -- -- ------- -------- -------- -- -- (97,000) ------- -------- -------- $15,000 $30,000 $(66,000) ======= ======== ======== Page F-18 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE L - INCOME TAXES (Continued) Certain of the entities included in the consolidated financial statements were separate taxpayers for tax purposes for the first ten months of fiscal 1997. The income tax expense for all prior periods was recorded on an entity by entity basis as of May 14, 1997. Effective May 15, 1997, the entities became members of a consolidated group for tax purposes. The significant components of the deferred tax provision for 1999, 1998 and 1997 are as follows: 1999 1998 1997 ---- ---- ---- Net operating loss $(143,000) $ (84,000) $ -- Bad debt reserve (154,000) (52,000) (80,000) Property and equipment 28,000 27,000 (14,000) Organizational costs (32,000) 31,000 (24,000) Deferred rent 21,000 21,000 (172,000) Accrued expenses (262,000) (118,000) (266,000) Deferred revenue (1,000) 599,000 -- Valuation allowance 543,000 (424,000) 459,000 --------- --------- --------- $ -- $ -- $ (97,000) ========= ========= ========= The components of the net deferred tax asset and liability as of June 30, 1999 and 1998 were as follows: Deferred tax assets (liabilities) 1999 1998 - --------------------------------- ---- ---- Net operating losses $ 227,000 $ 84,000 Bad debt reserve 286,000 132,000 Property and equipment (41,000) (13,000) Organizational costs 25,000 (7,000) Deferred rent 130,000 151,000 Accrued expenses 646,000 384,000 Deferred revenue (660,000) (661,000) Valuation allowance (578,000) (35,000) --------- --------- Net deferred tax asset $ 35,000 $ 35,000 ========= ========= Page F-19 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE L - INCOME TAXES (Continued) The Company has recorded a valuation allowance of $578,000 and $35,000 at June 30, 1999 and 1998, respectively, to reflect the estimated amount of deferred tax assets. A valuation allowance is required if it is more likely than not that some or all of the deferred tax assets will not be realized in future years. The net change in the valuation allowance for deferred tax assets was an increase of $543,000 for the year ended June 30, 1999, a decrease of $424,000 for the year ended June 30, 1998 and an increase of a $459,000 for the year ended June 30, 1997. The principal reasons for the difference between the statutory federal income tax rate and the effective rate are as follows: 1999 1998 1997 ---- ---- ---- Statutory federal income tax rate (34.0%) 34.0% (34.0%) State taxes, net of federal benefits 1.2 7.0 8.8 Goodwill amortization 5.0 20.2 2.2 Minority interest adjustment (4.5) (26.8) -- Purchase accounting adjustments and change in tax status -- -- 3.6 Bad debt expense 8.8 -- -- Accrued expenses 11.7 -- -- Other adjustments 16.5 (1.5) -- Valuation allowance (3.7) (22.3) -- ----- ----- ----- 1.0% 10.6% (19.4%) ===== ===== ===== NOTE M - RISKS AND UNCERTAINTIES LABOR CONCENTRATION/PENSION CONTRIBUTION As of June 30, 1999, approximately 63% of the Company's employees were covered by ten separate collective bargaining agreements with New England Health Care Employees Union, District 1199/SEIU, AFL-CIO ("Union") two of which expire in November, 2000 (representing 14% of the Company's employees) and another eight of which expire on March 15, 2001. These employees participate in Union pension plans to which the Company contributes an amount stipulated in each collective bargaining agreement. For the years ended June 30, 1999, 1998 and 1997, contributions were approximately $1,458,000, 842,000 and $572,000, respectively. Page F-20 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE M - RISKS AND UNCERTAINTIES (Continued) LABOR CONCENTRATION/PENSION CONTRIBUTION (Continued) During the year ended June 30, 1999, the Company implemented a new defined-contribution pension plan for non-union employees to which the Company will contribute 4% of employee compensation annually; investments in the plan will be directed by the participants. In connection therewith the Company has recorded pension expense of $236,000 for the year ended June 30, 1999. PATIENT SERVICE REVENUE Approximately 85%, 82% and 86% of net patient service revenue was derived under federal and state third-party reimbursement programs in 1999, 1998 and 1997, 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. Effective for the year ended June 30, 1999, the Company began receiving its nursing home Medicare reimbursement under a new per diem system known as the prospective payment system. This new system entirely changes the way the Company is paid for Medicare Part A services. The Company's success under this acuity-based system is largely dependent on managing patient utilization of clinical resources. The Company's ability to maintain its current level of Medicare reimbursement is uncertain. MALPRACTICE INSURANCE The Company maintains malpractice insurance coverage on an occurrence basis. It is the intention of the Company to maintain such coverage on an occurrence basis in ensuing years. As of June 30, 1999, 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-21 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE N - COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment agreements with three of its executive officers which became effective upon consummation of the public offering. The agreements provide that such individuals shall devote substantially all of their working time and attention to the business of the Company and contain certain non-compete provisions. The agreements have an initial term of five years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew his or her employment. The CEO's agreement provides for a $250,000 annual salary, with cost of living increases and a bonus equal to 1% of the Company's net income before taxes. The President's employment agreement is identical except that the salary is $175,000 annually. The agreement with the president of BALZ provides for a base annual salary of $100,000, subject to five percent annual increases, plus a bonus of 3.75% of BALZ's net profits before taxes. YEAR 2000 The Company is continuing work on resolving the potential impact of the year 2000 on the ability of its computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation, however it primarily uses licensed software products, with a significant portion of processes and transactions centralized in only a few third party vendor packages. Certain of those packages were acquired in recent years and are Year 2000 compliant. Management has made plans to complete the conversion of remaining programs before the end of the calendar year. The Company currently believes that costs of addressing this issue will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant Year 2000 issues in a timely manner. Page F-22 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 NOTE N - COMMITMENTS AND CONTINGENCIES (Continued) LAWSUIT SETTLEMENT AND CONTINGENCIES The former President and Administrator of Professional Relief Nurses, Inc. (PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO, in connection with her termination in July 1998. In September 1999 the Company reached a settlement in principle to avoid the expenses of protracted litigation. The Company has recorded a provision for lawsuit settlement of $539,000 in the accompanying consolidated statement of operations for the year ended June 30, 1999. The Company has funded a $350,000 cash bond as of June 30, 1999 which is included in prepaid and other current assets in the accompanying consolidated balance sheet. The Company is also involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company's consolidated financial statements. Page F-23 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..............67 Chief Executive Officer, Chairman of the Board and Director Harry Dermer...............47 President, Chief Operating Officer and Director Gary Coltek................42 Director Dov Berkowitz, MD..........42 Director Mary Archambault...........48 Executive Vice President and Secretary Thomas E. Dybick...........51 Chief Financial Officer Lawrence W. Fusco..........51 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. 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. Harry Dermer has served as President, Chief Operating Officer and Director of the Company since its inception in February 1995. Mr. Dermer has a Connecticut nursing home administrator's license. Prior to February, 1995, Mr. Dermer co-founded Prometheus Pharmacy and Nursing Homes America, Inc., which are divisions of the Olympus Healthcare Group, where he served as Chief Financial Officer from 1994 to 1995, and Mediscript Pharmacy, Inc., a division of Mediplex, where he served as Chief Financial Officer from 1993 to 1994. Previously from 1990 to 1993 he was Vice President of Operations and Chief Financial Officer of Reliance Pharmacy Corp. Gary Coltek has been an independent director of the Company since January 1998. Since 1996, Mr. Coltek has been Executive Vice President of Infumatrix, where he is responsible for infusion management. Also since 1996, Mr. Coltek has been Vice President of Operations of Phymatrix, where he is responsible for physician management. From 1994 to 1996, Mr. Coltek was President of Care Group, where he was responsible for infusion management. Mr. Coltek received a B.S. in Business in 1978 from the State University of New York. Dr. Dov Berkowitz has been an independent director of the Company since January 1998. Since 1984, Dr. Berkowitz has been in private practice as an Orthopedic Surgeon. Dr. Berkowitz received his M.D. in Medicine from the Mount Sinai School of Medicine in 1974 and received certification as an orthopedic surgeon from Mount Sinai Hospital in 1984. 18 Thomas E. Dybick has served as the Company's Chief Financial Officer since September, 1996. He is a Certified Public Accountant. Prior thereto, from 1992 to 1996 Mr. Dybick was Chief Financial Officer of AHF/Connecticut Management, Inc. which managed six nursing homes in Connecticut and Massachusetts. Previously, Mr. Dybick was employed by the law firm of Levy & Droney, PC as Executive Director (1985-1992). Mary Archambault has served as President of BALZ since its inception in 1995. Prior thereto, Ms. Archambault co-founded Prometheus Pharmacy and Nursing Homes America, Inc., where she served as Executive Vice President from 1994 to 1995. She also co-founded Mediscript Pharmacy, Inc.'s Medicare Part B division, which was a division of Mediplex, where she served as Executive Vice-President from 1993 to 1994. Previously, Ms. Archambault was Manager of Medical Supplies and Medicare Part B Services for Allcare Pharmacy, Inc. from 1990 - 1993. Ms. Archambault has a Connecticut Nursing Home Administrator's license and is a licensed Practical Nurse in Connecticut. 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. Item 11. Executive Compensation The following table sets forth the cash compensation, as well as certain other compensation paid or accrued, by the Company to Jack Friedler, its Chief Executive Officer, and Harry Dermer, its President and Chief Operating Officer, Mary Archambault, it Executive Vice President and Secretary, and Thomas E. Dybick, its Chief Financial Officer during the fiscal years ended June 30, 1999, 1998 and 1997. Other than Messrs. Friedler, Dermer, Dybick and Ms. Archambault, no other executive officer of the Company had a total annual salary and bonus of $100,000 during the reported periods. ------------------------------------------------- Long Term Annual Compensation Compensation ------------------------------------------------- Stock Name and Principal Position Year Salary Bonus Options Granted - --------------------------- ------------------------------- Jack Friedler, Fiscal 1997 $260,000 -- -- Chief Executive Officer and Fiscal 1998 $266,250 $17,586 60,000 Director Fiscal 1999 $270,022 $10,500 -- Harry Dermer, Fiscal 1997 $174,980 -- -- President, Chief Operating Fiscal 1998 $179,196 $14,317 60,000 Officer and Director Fiscal 1999 $200,086 $8,077 -- Thomas E. Dybick, Fiscal 1997 $72,037 -- -- Chief Financial Officer Fiscal 1998 $110,318 $4,392 20,000 Fiscal 1999 $117,808 $2,250 -- Mary Archambault, Fiscal 1997 $159,783 -- -- Executive Vice President, Fiscal 1998 $107,088 $15,041 40,000 Secretary, President of BALZ Fiscal 1999 $135,874 12,923 -- 19 The Company has employment agreements with each of Jack Friedler, Harry Dermer, and Mary Archambault. 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. Each of the agreements have an initial term of five years and are automatically renewable for successive one-year periods unless either the Company or the employee elects not to renew his or her employment. The CEO's agreement provides for a $250,000 annual salary, with cost of living increases and a bonus equal to 1% of the Company's net income before taxes. The President's employment agreement is identical except that the salary is $175,000 annually. The agreement with the president of BALZ provides for a base annual salary of $100,000, subject to five percent annual increases, plus a bonus of 3.75% of BALZ's net profits before taxes. During the year ended June 30, 1998, the Company issued options to purchase 180,000 shares of its common stock to the above-noted officers at exercise prices ranging from $2.625 to $3.062 based on the market value at date of grant. The Board of Directors re-priced all outstanding options to all grantees in November 1998 at $.87 per share based on the current market value at that date. Such options vest at a rate of one-third per year and are fully vested on the fourth anniversary of their issuance. The options expire December 16, 2003. The former President and Administrator of Professional Relief Nurses, Inc. (PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO, in connection with her termination in July 1998. In September 1999 the Company agreed in principle to settle this suit to avoid the expenses of protracted litigation. See Item 3 for further information. Item 12. Security Ownership of Certain Beneficial Owners and Management No person owned of record or was known to own beneficially more than five percent (5%) of the outstanding common stock of the Company except as noted below. The following table shows the amount of common stock owned as of September 28, 1999 by each Director, and by all Directors and officers as a group, consisting of six persons. Amount and Nature Name of Beneficial Owner of Beneficial Percent Ownership of Shares Owned (1)(2) Class - -------------------------------------------------------------------------------- Jack Friedler, Chief Executive Officer, Chairman of the Board and Director 1,446,500 40.2% Harry Dermer, President, Chief Operating Officer and Director 635,500 17.7% Dov Berkowitz, MD, Director 5,000 * Gary Coltek, Director 5,000 * Mary Archambault, Executive Vice President, Secretary 73,333 2.0% Thomas E. Dybick, Chief Financial Officer 6,667 * * Less than 1% 20 (1) Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of Common Stock that an individual or group has the right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown on the table. (2) The number of shares beneficially owned includes 20,000 options out of the 60,000 granted to Mr. Friedler, 20,000 options out of the 60,000 granted to Mr. Dermer, 13,333 options out of the 40,000 granted to Ms. Archambault, 6,667 options out of the 20,000 granted to Mr. Dybick, 5,000 options out of the 15,000 granted to Dr. Berkowitz, and 5,000 options out of the 15,000 granted to Mr. Coltek. 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 was owned by Jack Friedler and his wife. As of June 30, 1997, Lexington House, Inc. was indebted to the Company in the amount of $290,000. Lexington House had agreed to a payment schedule of $10,000 per month. During the year ended June 30, 1998, $23,000 was charged for management fees and costs, interest of $26,000 accumulated, and an additional $286,000 was advanced; $30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998 an additional $50,000 was advanced and interest of $4,000 accumulated, making the balance due $649,000 at July 31, 1998. During September 1998, the $649,000 balance was converted into an 8% interest-bearing promissory note due from Mr. Friedler with $15,000 monthly installments and a balloon payment of the remaining balance due May 31, 1999. As security for the note, Mr. Friedler has pledged the right to receive a $15,000 monthly payment and also pledged 600,000 of his shares of the common stock of the Company. Monthly payments totaling $120,000 were made through June 30, 1999. However, on May 6, 1999 Mr. Friedler suffered a heart attack, had by-pass surgery, and began a recovery period. The balloon payment was not made at May 31, but monthly payments were made in May and June 1999. In July, Mr. Friedler stated he would be unable to make the balloon payment and the Company, pursuant to Board of Director's approval, defaulted the note and seized the collateral of 600,000 shares in satisfaction of the note and interest due. The shares were cancelled by the transfer agent. The 600,000 shares had a market bid price of $731,000 at the time of their surrender; the note and accumulated interest had a carrying value of $574,000. The Company's Board of Directors considers the difference of $157,000 between the market price and the carrying value of the note receivable to be a reasonable and fair discount for the shares received. Based on the above, the Company has presented the balance of the note receivable and interest as a reduction of stockholders' equity in the accompanying consolidated balance sheet as of June 30, 1999. This resulted in a reduction of working capital and stockholders' equity of $574,000 as shown in that balance sheet. In 1998 Lexicore Rehab Services, a Company controlled joint venture, provided $90,000 of services to a nursing home owned by Jack Friedler, the Company's Chairman and CEO. Subsequently, Mr. Friedler sold the operations of that entity, but those billings for services have not yet been paid. As of June 30, 1999, Mr. Friedler has re-confirmed the balances due the Company and has provided a payment plan and partial security of same. 21 On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer and principal stockholder in order for him to pay personal income taxes due as a result of the reorganization of entities under common control (i.e., the Company's IPO). There was no cash compensation paid to him as part of the reorganization. The borrowing was evidenced by a 9% interest earning note receivable on which payments were made on December 26 ($157,000), December 31 ($300,000), February 3 ($150,000), and May 5, 1998 ($150,000). Interest on the loan (amounting to $20,000) was paid in full. In connection with the Company's reorganization and the Offering, the previous members of Lexington Health Care Group, LLC, Jack Friedler, his wife Stephanie Friedler and Harry Dermer, exchanged their respective interests (37.5%, 37.5% and 25%) in the LLC for an aggregate of 2,462,000 shares of Common Stock of the Company. Effective July 1, 1995, the Company entered into a ten-year lease, which was subsequently and retroactively amended, for four of the nursing homes operated by the Company. Jack Friedler, the Company's Chief Executive Officer is a 33.33% limited partner of the lessor, Fairfield Group Health Care Centers Limited Partnership ("Fairfield"). The Company's annual rent expense for the year ended June 30, 1999 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 Nettleton, former President of PRN, was owner of the remaining 25% of the capital stock of PRN. The Company purchased Ms. Nettleton's interest for $540,000. The Company leases its corporate office space from an entity in which Jack Friedler and Harry Dermer own 50% under an operating lease which expires in February 2013 and has two five-year renewal options with rent at then market rates. Annual gross rental expense under this lease is $125,000; subleases of space intended for future expansion have reduced the Company's annual rental expense to approximately $90,000 during the year ended June 30, 1999. Further, the Company leases office and warehouse space for BALZ from a related limited liability company owned in part by Messrs. Friedler and Dermer and Ms. Archambault under an operating lease which expires January 31, 2002. The Company's annual rent expense for the year ended June 30, 1999 was $59,000. The Company acquired all of the capital stock of BALZ from its existing stockholders (including Jack Friedler, Harry Dermer and Mary Archambault) in exchange for an aggregate of 300,000 shares of the Company's Common Stock (valued at $1,500,000 based on the public offering price). The following number of shares were issued to Officers and Directors of the Company in exchange for their shares of BALZ: Jack Friedler 72,000 Harry Dermer 60,000 Mary Archambault 60,000 22 Between October 1995 and July 1996, the Company borrowed an aggregate of $286,000 from Jack Friedler and Harry Dermer which loans paid interest at an annual rate of 10%. A total of $104,000 was repaid to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned another $100,000 to the Company in connection with the reacquisition of shares from a private placement investor. Mr. Friedler's balance of $266,000 was then offset against loans due from Lexington House in May 1997. Mr. Friedler also instructed the Company to offset interest due him from the Company of $10,000 each during May and June 1997 against the Lexington House loan. The Company was indebted to Mr. Dermer for $16,000 as of June 30, 1997, but this balance was repaid in July 1997. Jack Friedler and Harry Dermer entered into a stockholder's agreement, effective in May, 1997, which includes, among other things, the grant of a mutual right of first refusal to purchase any shares of Common Stock beneficially owned by the other stockholder, and a mutual agreement to vote for the other stockholder as a Director of the Company. With respect to each of the foregoing transactions, although the Company has not obtained any independent fairness opinions, the Company believes that the terms of such transactions were as fair to the Company as could be obtained from an unrelated third party. In the event the Company enters into negotiations to acquire any business or assets of a related party it will secure an independent appraisal. Future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated parties and will be approved by a majority of the independent and/or disinterested members of the Board of Directors. 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements (1) The following financial statements and supplementary data are included in Part II Item 8: Report of Independent Certified Public Accountants on Financial Statements Financial Statements: Consolidated Balance Sheets - June 30, 1999 and 1998 Consolidated Statements of Operations - Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity - Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Years Ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) The following schedule for the years 1999, 1998 and 1997 is submitted herewith: Report of Independent Certified Public Accountants on Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K: No reports were filed during the quarter ended June 30, 1999. (c) Exhibits (11) Earnings per share calculation (21) Subsidiaries 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: LEXINGTON HEALTHCARE GROUP, INC. (Registrant) By: s/Harry Dermer --------------------------- Harry Dermer, President, Chief Operating Officer and Director Date: September 28, 1999 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 28, 1999 --------------------- Chairman of the Board Jack Friedler and Director s/Thomas E. Dybick Chief Financial Officer Date: September 28, 1999 --------------------- Thomas E. Dybick Director Date: September 28, 1999 --------------------- Gary Coltek Director Date: September 28, 1999 --------------------- Dov Berkowitz, MD Executive Vice President Date: September 28, 1999 --------------------- and Secretary Mary Archambault s/Lawrence W. Fusco Controller Date: September 28, 1999 --------------------- Lawrence W. Fusco 25 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (In thousands, Except Per Share Data)
Years Ended June 30, 1999 1998 1997 --------------------------------------- Net income (loss) $(1,577,000) $ 30,000 $ (275,000) ----------- ---------- ----------- Net income (loss) for basic earnings per common share $(1,577,000) $ 30,000 $ (275,000) =========== ========== =========== Weighted average number of common shares outstanding during the year 4,125,000 4,125,000 2,724,000 ----------- ---------- ----------- Weighted average number of shares used in calculation of basic earnings per share 4,125,000 4,125,000 2,724,000 =========== ========== =========== Basic earnings (loss) per common share $ (0.38) $ .01 $ (0.10) =========== ========== ===========
Earnings per common share is computed using the weighted average number of shares deemed outstanding as adjusted for the exchange of shares between entities under common control. Dilutive earnings per share has not been presented as the potentially dilutive stock options are anti-dilutive. 26 LEXINGTON HEALTHCARE GROUP, INC. SCHEDULE OF SUBSIDIARIES PARENT (Registrant) Lexington Healthcare Group, Inc. Wholly-owned subsidiaries Balz Medical Services, Inc. Lexington Highgreen Holding, Inc. Professional Relief Nurses, Inc. Lexicore Rehab Services, LLC 27 DISANTO BERTOLINE & COMPANY, P.C. 628 Hebron Avenue, Building #3 Glastonbury, CT 06033 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lexington Healthcare Group, Inc. Farmington, Connecticut We have audited the consolidated financial statements of Lexington Healthcare Group, Inc. and subsidiaries as of June 30, 1999 and 1998, and for the years ended June 30, 1999, 1998 and 1997, and have issued our report thereon dated September 24, 1999; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Lexington Healthcare Group, Inc. and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DISANTO BERTOLINE & COMPANY, P.C. Glastonbury, Connecticut September 24, 1999 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions ------------------------------------- Other Charged to Changes - Balance at Charged to other Add Balance at Beginning Costs and Account - (Deduct)- End of Year Description of Year Expenses Describe Describe Year - ------------------------------------------------------------------------------------------- 1999 Allowance for doubtful accounts $346,000 $502,000 $848,000 ======== ======== ======== 1998 Allowance for doubtful accounts $180,000 $166,000 $346,000 ======== ======== ======== 1997 Allowance for doubtful accounts $ 75,000 $105,000 $180,000 ======== ======== ========
28 EX-27 2 FDS --
5 1,000 U.S. Dollars YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 1 3,675 0 16,940 (848) 1,058 21,856 4,956 809 34,283 20,901 7,768 0 0 41 4,191 34,283 76,487 76,892 0 76,685 539 0 1,040 (1,562) 15 (1,577) 0 0 0 (1,577) (.38) (.38)
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