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, 2001
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 N/A
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 26, 2001, the aggregate market
value of the voting common stock held by nonaffiliates of the registrant was
$200,000.
1
LEXINGTON HEALTHCARE GROUP, INC.
Table of Contents
Page No.
Part I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 17, F-1-F-20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
Part III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 22
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 .
Lexington Healthcare Group, Inc.
Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to
its initial public offering in May 1997, the Company had operated as Lexington
Healthcare 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.
The Company is a long-term and subacute care provider, which operates eight
nursing home facilities (the "Facilities") at June 30, 2001 with a total of
1,033 licensed beds in the State of Connecticut. The Facilities provide a broad
range of healthcare services, including nursing care, subacute care (including
rehabilitation therapy), and other specialized services (such as care to
Alzheimer's patients). The Company's strategy in healthcare is to integrate the
main disciplines of nursing, pharmacy, social services and other therapies under
one program.
The Facilities service two basic patient populations: the traditional geriatric
patient population and the population of subacute care patients with higher
acuity disorders who require more complex and intensive medical services.
Subacute care patients generally require more rehabilitative therapy and are
residents for a shorter period of time than traditional geriatric patients. An
important part of the Company's strategy is to achieve high occupancy and a
favorable payer mix by offering specialty medical services. The Facilities have
an occupancy rate of approximately 89% as of August 31, 2001. The Company
operates a dedicated subacute unit within two of the Facilities, in addition to
providing subacute services in each of the other Facilities.
Lexington Highgreen Holding, Inc.
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.
3
Lexicore Rehab Services, L.L.C.
On October 15, 1997 Lexicore Rehab Services, L.L.C. began operations as a 50%
owned joint venture with Core Rehab Management, L.L.C. The joint venture was
controlled by the Company and the results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest. As of January 1, 1999, the Company acquired
the remaining 50% membership interest for a nominal amount plus $120,000 of
contingent payments which are payable 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.
Lexicon Pharmacy Services, L.L.C.
On December 1, 1997 Lexicon Pharmacy Services, L.L.C. began operations as a 70%
owned joint venture with Pharmacy Corporation of America. The joint venture is
controlled by the Company and the results of its operations from inception are
included in the Company's consolidated financial statements with appropriate
recognition of minority interest. Lexicon has ceased operations as of March 31,
2000. Once remaining accounts receivable have been collected and all obligations
paid, the members will terminate Lexicon.
Balz Medical Services, Inc.
On June 14, 2000, in order to raise working capital, BALZ sold its operating
assets and business (exclusive of cash and accounts receivable) to an unrelated
company, for $539,000 plus assumption of certain liabilities relating to
financed equipment and leases. In connection with this sale, the Company
recorded a loss on the transaction of $1,089,000 which represented the
difference in the recorded book value of assets sold (including goodwill) and
the sales price, and includes a $363,000 charge to settle an employment contract
with the President of BALZ.
Reimbursement from Medicare and Medicaid
The Medicare Part A program provides reimbursement for extended care services
furnished to Medicare beneficiaries who are admitted to skilled nursing
facilities after at least a three-day stay in an acute care hospital. The
Medicare Part B program provides reimbursement for patients receiving ancillary
services who have not had the required stay at a hospital or have exhausted
their Part A benefits. Medicaid is a state-administrated program that provides
assistance to the indigent and certain other eligible persons. Private pay
patients typically have financial resources (including managed care insurance
coverage) to pay for their care and do not rely on government programs for
financial support.
The long-term care industry has experienced many changes in recent years
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. Some of the Company's Medicare rate cuts were
restored in October 1999 and April 2000; in addition, a 4% federal rate increase
became effective October 1, 2000 and a 10% increase became effective April 1,
2001.
4
In Connecticut, multiple long term care entities have undergone financial
reorganization in recent years 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.
Risks Associated With Reimbursement Process
The Company derives a substantial percentage of its total revenues from
Medicare, Medicaid and private insurance. Net revenues realizable under
third-party payor agreements are subject to change due to examination and
retroactive adjustment by payors during the settlement process. Under cost-based
reimbursement plans, payors may disallow, in whole or in part, requests for
reimbursement based on determinations that certain costs are not reimbursable or
reasonable or because additional supporting documentation is necessary. The
Company recognizes revenues from third-party payors and accrues estimated
settlement amounts in the period in which the related services are provided. The
Company estimates these settlement balances by making determinations based on
its prior settlement experience and its understanding of the applicable
reimbursement rules and regulations. The majority of Medicaid balances are
settled within two to three years following the provision of services although
the Company has from time to time experienced delays in receiving final
settlement and reimbursement.
Government Regulation
Long-term care facilities must comply with certain requirements to participate
in the Medicare or Medicaid program. Regulations promulgated pursuant to the
Omnibus Budget Reconciliation Act of 1987 were adopted by CMS (formerly HCFA)
effective July 1, 1995 and obligate facilities to demonstrate quality of care,
quality of life, physician services, nursing services, governing survey,
certification and enforcement procedures to be used by state and federal survey
agencies to determine facilities' level of compliance with the participation
requirements for Medicare and Medicaid. These regulations require that surveys
focus on residents' outcomes of care and state that all deviations from
participation requirements will be considered deficiencies, but a facility may
have deficiencies and be in substantial compliance with the regulations. The
regulations identify alternative remedies against facilities and specify the
categories of deficiencies for which they will be applied. The alternative
remedies include, but are not limited to: civil monetary penalties of up to
$10,000 per day; facility closure and/or transfer of residents in emergencies;
denial of payment for new or all admissions; directed plans of correction; and
directed in-service training. Failure to comply with certain standards as a
condition to participate in Medicare and Medicaid programs may result in
termination of the provider's Medicare and Medicaid provider agreements.
Potential Adverse Effect of Change In Revenue Sources
Changes in the mix of patients among the Medicaid, Medicare and private pay
categories, and among different types of private pay sources, could
significantly affect the revenues and the profitability of the Company's
operations. There can be no assurance that the Company will continue to attract
and retain private pay patients or maintain its current payor or revenue mix. In
addition, there can be no assurance that the facilities operated by the Company,
or the provision of services and products by the Company, now or in the future,
will initially meet or continue to meet the requirements for participation in
the Medicare and Medicaid programs. A loss of Medicare or Medicaid certification
or a change in Company reimbursement under Medicare or Medicaid could have an
adverse effect on its financial condition and results of operations.
5
Competition
The long-term and subacute care industry is highly competitive. The nature of
competition varies by location. The Company's facilities generally operate in
communities that are also served by similar facilities operated by others. Some
competing facilities are located in buildings that are newer than those operated
by the Company and provide services not offered by the Company, and some are
operated by entities having greater financial and other resources and longer
operating histories than the Company. In addition, some facilities are operated
by nonprofit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other resources not available to the
Company. Some hospitals that either currently provide long-term and subacute
care services or are converting their under-utilized facilities into long-term
and subacute care facilities are also a potential source of competition to the
Company. The Company competes with other facilities based on key competitive
factors such a its reputation for the quality and comprehensiveness of care
provided; the commitment and expertise of its staff; the innovativeness of its
treatment programs; local physician and hospital support; marketing programs;
charges for services; and the physical appearance, location and condition of its
facilities. The range of specialized services, together with the price charged
for services, are also competitive factors in attracting patients from large
referral sources.
Employees
As of September 1, 2001 the Company had approximately 1,250 full and part-time
employees, of which approximately 61% were covered by collective bargaining
agreements.
6
Item 2. Properties
The following properties are leased as of June 30, 2001.
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
Adams House Nursing Home 25,500
80 Fern Drive, Torrington, CT 06790
Heritage Heights Nursing Home 42,000
22 Hospital Avenue, Danbury, CT 06810
Professional Relief Nurses, Inc. Nursing Services
1010 Wethersfield Avenue, Hartford, CT 06114 5,500
454 Wolcott Street, Waterbury, CT 06705 2,250
560 Saw Mill Road, West Haven, CT 06516 1,300
Lexington Healthcare Group, Inc. Corporate Offices 4,500
1577 New Britain Avenue, Farmington, CT 06032
The following properties are owned as of June 30, 2001.
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.
7
Item 3. Legal Proceedings
Government Investigation
The Company has previously disclosed that the Company and certain members of
former senior management were named as targets of a grand jury investigation
being conducted by the Office of the United States Attorney for the District of
Connecticut (the "Government"). By letter dated June 26, 2001, the Government
advised counsel to the Company and other targets of the grand jury investigation
that criminal prosecution of the Company and certain members of former senior
management "has been declined based on information and evidence obtained to
date." In addition, by letter dated July 9, 2001, the Government further advised
counsel to the Company and other targets of the grand jury investigation that
"the civil division of [the U.S. Attorney's] office has closed its investigation
of Lexington Healthcare Group, Inc. at this time."
Other 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 former Chairman
and CEO, in connection with her termination in July 1998. In September 1999, the
Company settled the suit to avoid the expenses of protracted litigation. The
Company has recorded a provision for lawsuit settlement of $539,000 for the year
ended June 30, 1999.
The Company received notice of lawsuits initiated against it in April 2000
concerning four nursing homes, which it was managing for SunBridge Healthcare
Corporation; the claims are being made by affiliates of SunBridge for therapy
and pharmacy services rendered. The total claimed is $1.2 million of which $1.1
million is reflected by invoices recorded on the Company's books. The Company
settled these claims for approximately $400,000, which is payable monthly over
the next 18 months. The Company has recorded a provision for lawsuit settlement
of $94,000 for the year ended June 30, 2001 for the difference between the
settlement amount and the liability, net of credits, previously recovered by the
Company.
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.
8
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Lexington Healthcare Group, Inc.'s common stock, $.01 par value, was traded on
the National Market System of the NASDAQ Stock Market. Effective on July 16,
1998, the trading of the Company's stock was moved from the NASDAQ National
Market to The NASDAQ Small Cap Market because the Company did not meet certain
new criteria for continued trading on the National Market.
The Company was notified on March 31, 2000 that, since it was no longer in
compliance with the net tangible asset criteria for continued listing on The
NASDAQ Small Cap Market, its securities were delisted from the NASDAQ Stock
Market effective with the open of business April 3, 2000. Subsequently, the
Company's common stock has traded on the pink sheets.
The following table presents its high and low market prices, and dividend
information since trading began on May 14, 1997.
Quarterly Common Stock Price Ranges and Dividends
Quarter High Low Dividend
FY 1997
4th 8 1/4 5 1/2 $-0-
FY 1998
1st 7 3 $-0-
2nd 3 15/16 2 5/8 $-0-
3rd 4 2 7/8 $-0-
4th 3 7/16 2 1/2 $-0-
FY 1999
1st 2 21/32 7/8 $-0-
2nd 3 1/8 7/8 $-0-
3rd 2 1/2 7/8 $-0-
4th 1 1/2 15/16 $-0-
FY 2000
1st 1 11/16 5/8 $-0-
2nd 1 7/16 1/4 $-0-
3rd 3 1/16 17/32 $-0-
4th 1 31/32 1/4 $-0-
Quarter High Low Dividend
FY 2001
1st 11/32 1/4 $-0-
2nd 13/32 3/32 $-0-
3rd 5/32 1/8 $-0-
4th 11/64 1/16 $-0-
9
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 at
any time through May 13, 2003. Trading in the Company's warrants was also moved
to The NASDAQ Small Cap Market on July 16, 1998 and was then delisted from The
NASDAQ Small Cap Market on April 3, 2000 as discussed above. The common stock
warrants have traded on the pink sheets since then.
The following table presents its high and low market prices since trading began
on May 14, 1997.
Quarterly Common Stock Warrant Price Ranges
Quarter High Low
FY 1997
4th 3 3/8 1 1/2
FY 1998
1st 3 1/4 7/8
2nd 1 5/16 5/8
3rd 27/32 1/4
4th 17/32 1/4
FY 1999
1st 13/32 3/16
2nd 7/8 1/8
3rd 19/32 3/16
4th 7/16 1/8
FY 2000
1st 5/16 3/32
2nd 13/32 1/32
3rd 3/4 3/32
4th 1/4 1/64
FY 2001
1st 3/16 1/64
2nd 1/64 1/64
3rd - -
4th - -
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, 2001 was 29; the Company believes that its shares are beneficially owned by
over 500 individuals.
On September 26, 2001, the closing price of the Company's common stock was $.17.
10
Item 6. Selected Financial Data
Year ended June 30,
-------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in Thousands, Except Per Share Data)
---------------------------------------------
Statement of Operations Data
Net revenues $68,571 $77,453 $76,892 $58,252 $35,900
Operating costs and expenses (76,416) (81,536) (78,264 (58,248) (36,241)
Other income -- -- -- 280 --
-------------------------------------------------------
Income (loss) before income taxes and minority interest (7,845) (4,083) (1,372) 284 (341)
Provision for (benefit from) income taxes * -- -- 15 30 (66)
Minority interest 93 (20) (190) (224) --
-------------------------------------------------------
NET INCOME (LOSS) * $(7,752) $(4,103) $(1,577) $ 30 $ (275)
======= ======= ======= ======= =======
Basic earnings (loss) per common share * $ (2.20) $ (1.15) $ (.38) $ .01 $ (.10)
------- ------- ------- ------- -------
Balance Sheet Data
Cash and cash equivalents $ 1,467 $ 1,265 $ 3,675 $ 831 $ 1,000
Working capital (deficiency) (9,440) (1,498) 1,059 3,074 287
Total assets 29,599 30,958 34,283 25,613 15,432
Short-term borrowings 8,002 4,296 3,867 398 49
Total long-term debt excluding current maturities 9,140 7,892 7,768 7,424 107
Total stockholders equity (deficiency) $(7,625) $ 127 $ 4,232 $ 6,383 $ 6,395
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.
11
Overview
During the fiscal year ended June 30, 2001 the Company's operations were
negatively affected by certain nonrecurring losses and expenses including a
Union strike and settlement costs, legal fees of a federal investigation,
nonrecurring charges relating to terminated operations, provision for lawsuits
settlements, costs related to the former president's consulting agreement and
reduced revenue from prior period Medicare audit settlements which resulted in
approximately $2,500,000 in additional losses recognized in the current fiscal
year. In addition, revenues were negatively impacted by a reduction in beds. In
March 2001, 30 beds were reduced pursuant to a Certificate of Need (CON)
agreement with the State and an additional 40 beds were reduced through an
informal agreement with the State starting in January 2001.
Management has submitted a request to the State for rate relief because of the
reduced reimbursement caused by the bed reductions described above and because
of the continuing under reimbursement of costs associated with the care of
Medicaid patients. The Company received approval for increased rates at certain
Facilities and rate increases are pending at other Facilities. As a result of
the requested rate increases, management anticipates the total increase in
revenue for Medicaid patients, based upon current census, will be in excess of
$1,700,000 for the fiscal year ending June 30, 2002. In addition, management has
implemented an aggressive marketing program and anticipates increased revenue
from improved patient mix and occupancy of over $1,200,000 in fiscal 2002 and is
in the process of reviewing the status of unprofitable subsidiaries and
facilities.
The Company continues to believe that the demand for long-term care and
specialty medical services will increase substantially over the next decade due
primarily to favorable demographic trends, advances in medical technology and
emphasis on healthcare cost containment. At the same time, government
restrictions and high construction and start-up costs are expected to limit the
supply of long-term care facilities and home care agencies. In addition, the
Company anticipates that recent trends toward industry consolidation will
continue.
The Company's operating strategy is to increase nursing home profitability
levels through aggressive marketing and by offering rehabilitation therapies and
other specialized services; by adhering to strict cost standards at the Facility
level while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will increase marketing of rehabilitative services and nursing services to
affiliated and non-affiliated nursing homes and hospitals, as well as patients
at home.
By concentrating its facilities and ancillary service operations within a
selected geographic region, the Company's strategy is to achieve operating
efficiencies through economies of scale, reduced corporate overhead, more
effective management supervision and financial controls. In addition, the
Company believes that geographic concentration also enhances the Company's
ability to establish more effective relationships with referral sources and
regulatory authorities in the State of Connecticut.
12
Results of Operations
Year ended June 30, 2001 ("2001 period") vs. year ended June 30, 2000 ("2000
period")
The 2001 period includes the operating results of the eight nursing facilities
operated by the Company and the operations of PRN and Lexicore Rehab services.
The 2000 period includes the operating results of the eight nursing facilities
operated by the Company, the operations of two nursing homes managed by the
Company from July 1, 1999 through August 31, 1999, the operations of PRN and
Lexicore Rehab Services for a full year, the operations of BALZ for eleven
months, and the operations of the pharmacy joint venture company for nine
months.
Revenues in the 2001 period decreased from the 2000 period by $8,882,000 or by
11.5% largely as a result of the termination of the management agreement for two
nursing homes, and due to the sale of the assets and the business of BALZ, and
the termination of Lexicon's operations and bed reductions mandated by a
certificate of need (CON) agreement with the State of Connecticut.
The Company had a net loss of $7,752,000 or ($2.20) per share for the 2001
period and a net loss of $4,103,000 or ($1.15) per share for the 2000 period.
During the 2001 period the Company's operations were negatively affected by the
following nonrecurring expenses and losses:
Nonrecurring charges-relating to terminated operations $ 677,000
Union strike and settlement costs, net 960,000
Legal fees of federal investigation 273,000
Provision for settlement of lawsuits 94,000
Prior period Medicare audit settlements 311,000
Former president consulting agreement 187,000
----------
Total $2,502,000
Additional net losses of approximately $1,000,000 were incurred during the 2001
period as a result of reduced revenue caused by bed reductions mandated by a CON
agreement with the State of Connecticut.
Results of Operations
Year ended June 30, 2000 ("2000 period") vs. year ended June 30, 1999 ("1999
period")
The 2000 period includes the operating results of the eight nursing facilities
operated by the Company, the operations of two nursing homes managed by the
Company from July 1, 1999 through August 31, 1999, the operations of PRN and
Lexicore Rehab Services for a full year, the operations of BALZ for eleven
months, and the operations of the pharmacy joint venture company for nine
months.
The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.
13
Revenues in the 2000 period increased over the 1999 period by $561,000 or 1%, as
a result of many factors. Nursing home revenues increased by $1.7 million, net,
due to Medicaid rate increases which were offset by lower overall census (due to
the termination of the management contract for two homes), although census in
existing nursing homes increased by 2%. Subsidiary company revenues were lower
by $1.2 million as operations were sold or terminated.
Revenue received under cost reimbursement agreements is subject to audit and
retroactive adjustment by third-party payors. Provisions for estimated
adjustments are reflected in patient service revenue. Differences between
estimated adjustments and final settlements are recorded in the year of
settlement. The Company has recorded reductions in patient service revenue of
$230,000 and $443,000 during the years ended June 30, 2000 and 1999,
respectively, in connection with adjustments of previously recorded estimated
settlements as shown below:
Year ended June 30
------------------
2000 1999
---- ----
Medicare $(185,000) $(402,000)
Medicaid (45,000) (41,000)
-----------------------
$(230,000) $(443,000)
========== ==========
Operating expenses in the 2000 period increased over the 1999 period by
$3,272,000 or 4%, largely as a result of increased wages resulting from Medicaid
rate increases and increased census in the existing nursing homes, $250,000 of
contract termination payments to the former CEO and $343,000 of costs relating
to the government investigation. Interest expense increased by $245,000 as a
result of additional borrowings on the mortgage for improvements to the
facilities acquired in July 1997 and additional line of credit borrowings at
increased interest rates.
Results of Operations
Year ended June 30, 1999 ("1999 period") vs. year ended June 30, 1998 ("1998
period")
The 1999 period includes the operating results of the six nursing facilities
operated by the Company, the operations of the four nursing homes managed by the
Company since November 1, 1998, and the operations of its subsidiaries (BALZ,
PRN and Lexicore Rehab Services) and pharmacy joint venture company for a full
year.
The 1998 period includes the operating results of the six nursing facilities and
of the acquired subsidiaries, BALZ and PRN, for a full year and of the newly
formed joint ventures since inception, but only for part of the year.
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
14
service revenue. Differences between estimated adjustments and final settlements
are recorded in the year of settlement. The Company has recorded reductions in
patient service revenue of $443,000 and $699,000 during the years ended June 30,
1999 and 1998, respectively, in connection with adjustments of previously
recorded estimated settlements as shown below:
Year ended June 30,
-------------------
1999 1998
---- ----
Medicare $(402,000) $(115,000)
Medicaid (41,000) (584,000)
-----------------------
$(443,000) $(699,000)
========== ==========
Operating expenses in the 1999 period increased over the 1998 period by
$20,016,000 or 34%, 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.
15
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 by extending terms with trade creditors and
stockholders, by financing its accounts receivable, through a public offering of
its common stock, and through the sale of bed licenses.
As shown in the accompanying consolidated financial statements, the Company has
reported net losses for the last three fiscal years totaling $13,432,000 and, as
of June 30, 2001, has a working capital deficiency of $9,440,000 and a
stockholders' deficiency of $7,625,000. In addition, the Company is not in
compliance with certain covenants on its line of credit agreement and is unable
to satisfy its trade creditors in the ordinary course of business and is in
arrears on its related party operating lease obligation. These conditions create
an uncertainty about the Company's ability to continue as a going concern.
Management has implemented a plan to return the Company to profitability, which
includes receipt of significant increases in Medicaid revenue through the
request for rate relief submitted to the State, improvements to patient mix and
occupancy and significant reductions in operating and administrative costs. In
addition, management is in the process of negotiating settlement plans with
trade creditors and restructuring its debt financing. The ability of the Company
to continue as a going concern is dependent on the success of the above plan and
the continuing forbearance of default remedies by its line of credit lender.
During the 2001 period, the Company expended approximately $2,088,000 in capital
improvements to its leased facilities of which $1,392,000 was funded by the
mortgagor, banks or capital lease financing.
At June 30, 2001, the Company had a working capital deficit of $9,440,000 as
compared to a working capital deficit of $1,498,000 at June 30, 2000. The
increase in the working capital deficit is due primarily to the $7,752,000
operating loss reported for the 2001 period.
In December 1998, the Company entered into a financing agreement with a
healthcare lender for up to $4,500,000, subsequently increased to $6,000,000,
which is secured by its accounts receivable and certain other assets. As of June
30, 2001, $5,217,000 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 payback of Medicare and Medicaid settlements, costs of the
government investigation, and operating losses.
16
Commencing in April 2001, the Company engaged unrelated professional service
firms to perform the dietary and laundry and housekeeping for the nursing homes.
Management anticipates that these contracts should generate approximately
$1,500,000 in positive cash flow based upon sixty-day payment terms in place.
At June 30, 2001, the company had cash and cash equivalents of $1,467,000,
receivables of $13,622,000, inventories of $379,000 and prepaid expenses and
other current assets of $1,501,000. Receivables decreased by $2,876,000 since
June 30, 2000 due primarily to the termination of operations of the BALZ and
Lexicon operations.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations 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, 2001 and 2000 and for the Years Ended June 30, 2001,
2000, and 1999
Financial Statements:
Consolidated Balance Sheets
June 30, 2001 and 2000
Consolidated Statements of Operations
Years Ended June 30, 2001, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Years Ended June 30, 2001, 2000, and 1999
Consolidated Statements of Cash Flows,
Years Ended June 30, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
17
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,467,000 $ 1,265,000
Accounts receivable - net of allowance for
doubtful accounts of $2,046,000 and $1,634,000
for 2001 and 2000, respectively 13,622,000 16,498,000
Current portion of operating subsidy and note receivable 371,000 465,000
Inventories 379,000 437,000
Prepaid and other current assets 1,130,000 912,000
----------- -----------
Total current assets 16,969,000 19,577,000
PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 6,173,000 4,477,000
OTHER ASSETS
Security deposits - related parties 2,337,000 2,337,000
Residents' funds 398,000 370,000
Goodwill - net of accumulated amortization of $461,000 and
$349,000 for 2001 and 2000, respectively 1,775,000 1,886,000
Bed licenses - net of accumulated amortization of $464,000
and $348,000 for 2001 and 2000, respectively 1,278,000 1,394,000
Operating subsidy receivable, less current portion 20,000 247,000
Other assets, net 649,000 670,000
----------- -----------
6,457,000 6,904,000
----------- -----------
$29,599,000 $30,958,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable (current portion) $ 7,897,000 $ 4,176,000
Due to SunBridge - purchased receivables 2,891,000 2,094,000
Accounts payable and accrued expenses 15,291,000 14,423,000
Estimated third-party payor settlements-Medicaid 67,000 131,000
Estimated third-party payor settlements-Medicare 79,000 57,000
Capital leases payable (current portion) 105,000 120,000
Income taxes payable 79,000 74,000
----------- -----------
Total current liabilities 26,409,000 21,075,000
OTHER LIABILITIES
Notes payable (less current portion) 8,997,000 7,652,000
Capital leases payable (less current portion) 143,000 240,000
Residents' funds payable 398,000 370,000
Deferred rent 1,024,000 809,000
Other liabilities 183,000 120,000
----------- -----------
10,745,000 9,191,000
----------- -----------
Total liabilities 37,154,000 30,266,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note N)
MINORITY INTERESTS 70,000 565,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, par value $.01 per share, authorized
15,000,000 shares 35,000 35,000
Additional paid-in capital 5,556,000 5,556,000
Deficit ----------- -----------
Total stockholders' equity (deficiency) (7,625,000) 127,000
----------- -----------
$29,599,000 $30,958,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
LEXINGTON HEATLHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
2001 2000 1999
----------- ----------- -----------
REVENUES
Net patient service revenue $68,340,000 $72,792,000 $58,867,000
Management fee revenue -- 4,378,000 17,620,000
Other revenue 231,000 283,000 405,000
----------- ----------- -----------
Total revenues 68,571,000 77,453,000 76,892,000
EXPENSES
Salaries and benefits 53,994,000 58,042,000 57,109,000
Other operating expenses 12,010,000 8,765,000 7,678,000
Food, medical and other supplies 3,496,000 7,279,000 7,778,000
Corporate, general and administrative expenses 2,337,000 2,648,000 2,555,000
Interest expense 1,426,000 1,285,000 1,040,000
Depreciation and amortization 648,000 780,000 817,000
Provision for bad debts 501,000 1,305,000 748,000
Special items:
Nonrecurring charges 677,000 -- --
Union strike and settlement costs, net 960,000 -- --
Legal fees of federal investigation 273,000 343,000 --
Provision for settlement of lawsuits 94,000 -- 539,000
Loss on sale of business -- 1,089,000 --
----------- ----------- -----------
Total special items 2,004,000 1,432,000 539,000
----------- ----------- -----------
Total expenses 76,416,000 81,536,000 78,264,000
----------- ----------- -----------
Loss from operations (7,845,000) (4,083,000) (1,372,000)
PROVISION FOR INCOME TAXES -- -- 15,000
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED JOINT VENTURES 93,000 (20,000) (190,000)
----------- ----------- -----------
Net loss $(7,752,000) $(4,103,000) $(1,577,000)
=========== =========== ===========
Basic loss per common share $ (2.20) $ (1.15) $ (0.38)
=========== =========== ===========
Weighted average number of common shares outstanding 3,525,000 3,568,000 4,125,000
=========== =========== ===========
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 (DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Common Stock Note
-------------------- Additional Receivable - Retained
Number Paid-in Related Earnings
of Shares Amount Capital Party (Deficit) Total
--------- --------- ----------- ----------- ------------ ------------
Balance, June 30, 1998 4,125,000 $ 41,000 $ 6,126,000 $ -- $ 216,000 $ 6,383,000
Net loss -- -- -- -- (1,577,000) (1,577,000)
Reclassification of note receivable - related
party -- -- -- (574,000) -- (574,000)
--------- --------- ----------- ----------- ------------ -----------
Balance, June 30, 1999 4,125,000 41,000 6,126,000 (574,000) (1,361,000) 4,232,000
Increase in note receivable - related par -- -- -- (2,000) -- (2,000)
Retirement of common stock received in
satisfaction of related party note receivable
(600,000) (6,000) (570,000) 576,000 -- --
Net loss -- -- -- -- (4,103,000) (4,103,000)
--------- --------- ----------- ----------- ------------ -----------
Balance, June 30, 2000 3,525,000 35,000 5,556,000 -- (5,464,000) 127,000
Net loss -- -- -- -- (7,752,000) (7,752,000)
--------- --------- ----------- ----------- ------------ -----------
Balance, June 30, 2001 3,525,000 $ 35,000 $ 5,556,000 $ -- $(13,216,000) $(7,625,000)
========= ========= =========== =========== ============ ===========
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, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,752,000) $(4,103,000) $(1,577,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 648,000 780,000 817,000
Change in allowance for doubtful accounts 412,000 786,000 502,000
Increase (decrease) in deferred rent 215,000 495,000 (50,000)
Loss on sale of business -- 726,000 --
Minority interest in income of consolidated joint ventures (93,000) 20,000 190,000
Changes in operating assets and liabilities:
Increase in accounts payable and accrued expenses 3,516,000 1,030,000 4,941,000
Decrease (increase) in accounts receivable 2,464,000 (1,035,000)
Increase (decrease) in Due to SunBridge - purchased receivables 797,000 (488,000) 2,582,000
Increase in other liabilities 63,000 -- --
Decrease (increase) in inventories 58,000 382,000 (281,000)
Increase (decrease) in income taxes payable 5,000 34,000 (51,000)
Decrease in other assets (8,000) (208,000) (51,000)
Decrease in estimated third-party payor settlements - Medicaid
and Medicare, net (42,000) (751,000) (550,000)
Increase (decrease) in prepaid and other current assets (218,000) 94,000 (601,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 65,000 (2,238,000) 103,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments of operating subsidy and note receivable 321,000 185,000 168,000
Proceeds from sale of business -- 40,000 --
Disbursements on note receivable - related party -- (2,000) (99,000)
Repayments of note receivable - related party -- -- 120,000
Acquisition of property, equipment and leasehold improvements (696,000) (542,000) (583,000)
----------- ----------- -----------
Net cash used in investing activities (375,000) (319,000) (394,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net 1,161,000 424,000 3,431,000
Repayments of capital lease obligations (112,000) (142,000) (122,000)
Repayments of mortgage and notes payable (135,000) (135,000) (120,000)
Minority investment (distribution) in consolidated joint ventures (402,000) -- (54,000)
----------- ----------- -----------
Net cash provided by financing activities 512,000 147,000 3,135,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 202,000 (2,410,000) 2,844,000
CASH AND CASH EQUIVALENTS, beginning of year 1,265,000 3,675,000 831,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,467,000 $ 1,265,000 $ 3,675,000
=========== =========== ===========
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, 2001, 2000 AND 1999
2001 2000 1999
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $1,418,590 $1,285,000 $1,040,000
Income taxes -- (15,000) 9,000
Non-cash investing and financing activities:
Reduction of accounts payable and accrued expenses
through assumption of notes payable $2,648,000 $ -- $ --
Certain assets acquired through assumption of mortgage
note payable 1,375,000 455,000 392,000
Equipment and leasehold improvements acquired through
assumption of notes payable and capital leases 17,000 76,000 232,000
Common stock received in satisfaction note receivable -
related party -- 576,000 --
Promissory note received and accounts receivable recorded
in connection with sale of business -- 499,000 --
Equipment distributed to joint venture member in satisfaction
of accounts payable -- 80,000 --
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, 2001, 2000 AND 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexington
Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz
Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc.
("PRN"), Lexington Highgreen Holding, Inc. and Lexicore Rehab Services,
L.L.C. (Lexicore) (collectively, the "Company") as well as the accounts
of a joint venture controlled by the Company, Lexicon Pharmacy
Services, L.L.C. All material intercompany balances and transactions
have been eliminated in consolidation.
As of January 1, 1999, the Company acquired the remaining 50%
membership interest of Lexicore for a nominal amount plus $120,000 of
contingent payments which are payable based on the occurrence of
certain future events. The acquisition of Lexicore has been accounted
for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets purchased and
liabilities assumed based on their fair value on the date of
acquisition. The Company has not recorded any goodwill in connection
with this purchase. Henceforth, the Company has accounted for Lexicore
as a wholly-owned subsidiary.
NATURE OF OPERATIONS
The Company is a long-term and subacute care provider, which operates
eight nursing home facilities at June 30, 2001 with a total of 1,033
beds licensed by the State of Connecticut. The Company also provides
physical, occupational and speech therapy and other services to
qualified health care facilities, and provides health care services in
the homes of its patients.
JOINT VENTURE
The Company has a 70% interest in Lexicon Pharmacy Services, L.L.C.
("Lexicon"), a Delaware limited liability company, which was formed on
October 31, 1997 to provide institutional pharmacy services to health
care facilities and the patients residing therein. The joint venture is
controlled by the Company and the assets, liabilities and results of
its operations from inception are included in the Company's
consolidated financial statements with appropriate recognition of
minority interest. Lexicon has ceased operations as of March 31, 2000.
Once remaining accounts receivable have been collected and all
obligations paid, the members will terminate Lexicon. During the year
ended June 30, 2001, the Company recorded a nonrecurring charge to
operations of $308,000 related primarily to uncollectible accounts
receivable.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the consolidated financial statements. Actual results
could differ from those estimates.
F-1
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
PATIENT SERVICE REVENUE
Revenues are recognized at the time the service is provided to the
patient. A substantial amount of the Company's revenues are billed to
third party payors, i.e., Medicaid, Medicare and others under the
provisions of reimbursement formulas and regulations in effect.
Patient service revenue is reported at the estimated net realizable
amount from residents, third-party payors, and others for services
rendered. Revenue received under cost reimbursement agreements is
subject to audit and retroactive adjustment by third-party payors.
Provisions for estimated adjustments have been reflected in patient
service revenue. Differences between estimated adjustments and final
settlements are recorded in the year of settlement.
MANAGEMENT FEES
As consideration for services provided under an interim management
agreement with SunBridge Healthcare Corporation which was terminated in
fiscal 2000 (see Note B), the Company was entitled to retain the excess
of any revenues earned in the delivery of patient services over the
expenses incurred during the term and was responsible for any excess of
expenses incurred over revenues earned in the operation of the
facilities during the term. Such revenues have been classified as
management fee revenue in the accompanying consolidated statement of
operations.
The Company recognizes other management fees as they are earned and
accrues related fees payable to subcontractors as they are incurred.
CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the
Company defines cash equivalents as highly liquid instruments with an
original maturity of three months or less. The Company had cash
equivalents of $1,068,000 at June 30, 2001 and $865,000 at June 30,
2000, consisting of overnight investments and certificates of deposit.
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.
F-2
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
NET LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". Dilutive earnings per share has
not been presented as the potentially dilutive stock options are
anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
RECENT ACCOUNTING STANDARDS
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131")
changed the way public companies report financial and descriptive
information about their operating segments. The Company provides health
care services and many other closely related ancillary services to its
patients and residents. All of these services fall within one
reportable segment as defined in SFAS 131.
F-3
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING STANDARDS (Continued)
DERIVATIVE INSTRUMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires
all derivatives to be recognized in the consolidated balance sheet at
fair value. Gains or losses from changes in fair value would be
recognized in earnings in the period of change unless the derivative is
designated as a hedging instrument. In June 1999, Statement of
Financial Accounting Standards No. 137, amended SFAS 133 delaying its
effective date to fiscal years beginning after June 15, 2000. The
Company does not currently hold any derivative instruments nor does it
engage in hedging activities. Therefore, this new standard has not
impacted the Company's consolidated financial statements.
ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
ASSETS
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
were issued in July, 2001. These standards change the accounting for
business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting and requiring
companies to stop amortizing goodwill and certain intangible assets
with indefinite useful lives. Instead, goodwill and intangible assets
deemed to have an indefinite useful life will be subject to an annual
review for impairment. The new standard for goodwill and other
intangible assets will be effective for fiscal years beginning after
December 15, 2001 unless the Company elects for early adoption in which
case the standard will be effective in the first quarter of fiscal
2002. The new standard requiring the purchase method for business
combinations applies to all business combinations consummated after
June 30, 2001.
Upon adoption, the Company will stop amortizing goodwill and bed
licenses which, based on their current levels, would reduce
amortization expense and increase net income by approximately $228,000
per year.
NOTE B - ACQUISITIONS AND DISPOSITIONS OF BUSINESS
MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND
TERMINATION OF MANAGEMENT AGREEMENT
On November 1, 1998 the Company began providing management services for
four skilled nursing facilities in Connecticut under an interim
Management Agreement with SunBridge Healthcare Corporation
("SunBridge"), a New Mexico corporation and nation-wide healthcare
provider.
As consideration for the services provided under this Management
Agreement, the Company was entitled to retain the excess of any
revenues earned in the delivery of patient services over the expenses
incurred during the term and was responsible for any excess of expenses
incurred over revenues earned in the operation of the facilities during
the term.
F-4
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE B - ACQUISITIONS AND DISPOSITIONS OF BUSINESS (Continued)
MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND
TERMINATION OF MANAGEMENT AGREEMENT (Continued)
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, 2001, the balance owed is presented as "Due
to SunBridge - purchased receivables" in the accompanying consolidated
balance sheets.
As a result of this agreement, the Company earned management fees of
$4,422,000 and $17,394,000 and incurred costs and expenses of
$4,407,000 and $17,004,000 during the years ended June 30, 2000 and
1999, respectively.
Effective September 1, 1999, the Company finalized agreements to
acquire the operations of two of the managed facilities, Adams House
and Heritage Heights. The related real property was leased (see Note J)
with options to purchase which have been extended to August 31, 2002.
These facilities are located in Torrington and Danbury, CT and have a
total of 210 skilled nursing beds at June 30, 2001. Management
contracts covering the two other SunBridge facilities with a total of
239 skilled nursing beds were terminated as of August 31, 1999 and the
operations of those facilities were returned to SunBridge.
SALE OF BUSINESS
On June 14, 2000 BALZ sold its operating assets and business (exclusive
of cash and accounts receivable) to an unrelated company, for $539,000
plus assumption of certain liabilities relating to financed equipment
and leases. The agreement provided for a $40,000 cash payment at
closing, a $260,000 note receivable requiring twelve equal monthly
installments of principal and interest of $22,000 beginning July 1,
2000, and a payment of $239,000 for the book value of inventory due 90
days after closing.
As of June 30, 2001, the Company has received only five of the payments
due it under the note receivable, and has not received the payment for
the book value of the inventory. However, the Company believes that its
credit risk is minimal since it has the right to offset payables for
goods purchased from the unrelated company in an amount sufficient to
cover the unpaid amount of approximately $400,000 owing to the Company.
In connection with this sale, the Company recorded a loss on the
transaction of $1,089,000 for the year ended June 30, 2000 which
represented the difference in the recorded book value of assets sold
(including goodwill) and the sales price and includes a $363,000 charge
to settle an employment contract with the President of BALZ (see Note
N). During the year ended June 30, 2001, the Company recorded a
nonrecurring charge to operations of $369,000 related primarily to
uncollectible accounts receivable
Prior to the sale of the business, BALZ had revenues of $2,491,000 and
$3,025,000, expenses of $2,191,000 and $2,740,000 and net income of
$300,000 and $285,000 for the nine months ended March 31, 2000 and the
year ended June 30, 1999, respectively.
F-5
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE C - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents,
residents' funds, accounts receivable, operating subsidy receivable,
note receivable and security deposits-related parties.
Cash and cash equivalents and residents' funds
The Company places its cash deposits with high credit-quality
institutions and such deposits exceeded federal depository insurance
limits by approximately $1,518,000 at June 30, 2001. However, the
Company has not experienced any losses in this area and management
believes its cash deposits are not subject to significant credit risk.
Accounts receivable
The Company grants credit without collateral to its patients, all of
whom are residents of local communities in the State of Connecticut in
which the Company's facilities are located, and most of whom are
insured under third-party payor agreements. Management performs ongoing
credit evaluations of its residents and has provided for potential
credit losses through direct write-offs and an allowance for doubtful
accounts which is considered to be adequate by management.
The mix of receivables from patients, third-party payors and others as
of June 30, 2001 and 2000 is as follows:
2001 2000
------ ------
Medicare and Medicaid 66% 67%
Private insurance and other nongovernment agencies 26 27
Other 8 6
--- ---
100% 100%
=== ===
Operating subsidy receivable
This amount is due from Beverly, a provider of health care services
throughout the United States, in connection with the Company's purchase
of substantially all of the assets of two skilled nursing facilities in
1997. 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.
Note receivable
This amount is due from MedixDirect.com, LLC, an unrelated party with
whom the Company is continuing to do business, in connection with the
sale of the business of BALZ. The note is collateralized by the assets
and business sold.
F-6
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE C - FINANCIAL INSTRUMENTS (Continued)
CONCENTRATIONS OF CREDIT RISK (Continued)
Security deposits - related parties
This amount is controlled by entities related to the Company by common
ownership (see Note J); accordingly, management believes it represents
negligible credit risk.
Fair Value Of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value
of Financial Instruments, requires disclosure of the fair value of
financial instruments for which the determination of fair value is
practicable. SFAS No. 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.
The carrying amounts of the Company's financial instruments approximate
their fair values as outlined below:
Cash and cash equivalents, residents' funds, accounts receivable,
note receivable, and accounts and accrued expenses payable:
The carrying amounts approximate their fair values because of the
short maturity of those instruments.
Notes payable and obligations under capital leases:
The carrying amounts approximate fair value because the interest
rates on the notes or leases approximate the Company's current
borrowing rate.
Security deposits - related parties and operating subsidy
receivable:
Management has determined that it is not practicable to estimate the
fair value due to the lack of marketability of these financial
instruments.
The Company's financial instruments are held for other than trading
purposes.
NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS
The Company has recorded reductions in patient service revenue of
$311,000, $230,000 and $443,000 during the years ended June 30, 2001,
2000 and 1999, respectively, in connection with adjustments of
previously recorded estimated settlements as shown below:
Year ended June 30,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Medicare $(375,000) $(185,000) $(402,000)
Medicaid 64,000 (45,000) (41,000)
--------- --------- ---------
$(311,000) $(230,000) $(443,000)
========= ========= =========
F-7
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS (Continued)
As of June 30, 2001 and 2000, the Company had recorded the following
amounts as payable in connection with estimated Medicare and Medicaid
settlements:
2001 2000
------- --------
Medicare $79,000 $ 57,000
Medicaid 67,000 131,000
Such amounts represent management's best estimates of the amounts
expected to be due and are based on anticipated results of ongoing
negotiations, interpretation of applicable regulations and other
assumptions. It is reasonably possible that the amounts the Company
will ultimately be obligated to pay could differ materially in the near
term.
NOTE E - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the
following:
June 30, June 30,
2001 2000
---------- ----------
Land and land improvements $ 449,000 $ 449,000
Building and building improvements 3,723,000 2,079,000
Equipment 1,832,000 1,623,000
Leasehold improvements 1,597,000 1,362,000
---------- ----------
7,601,000 5,513,000
Less: accumulated depreciation and
amortization 1,428,000 1,036,000
---------- ----------
$6,173,000 $4,477,000
========== ==========
Construction in progress included in building and building improvements
and leasehold improvements totaled $2,366,000 and $874,000 as of June
30, 2001 and 2000, respectively. Depreciation and amortization expense
totaled $392,000, $475,000, and 430,000 for the years ended June 30,
2001, 2000, and 1999, respectively.
NOTE F - OTHER ASSETS
On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly-owned
subsidiary of Lexington Healthcare Group, Inc.) purchased substantially
all of the assets of two skilled nursing facilities. The Company did
not record 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, 2001, 2000 and 1999.
F-8
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE F - OTHER ASSETS (Continued)
The acquisitions of BALZ and PRN in 1997 were accounted for using the
purchase method of accounting and, accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based
upon their fair values at date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired was
$3,371,000 and was recorded as goodwill, which is being amortized on a
straight-line basis over 20 years. During June 2000 the operating
assets and business of BALZ were sold, resulting in the write off of
the remaining amount of unamortized goodwill of $963,000. The June 30,
2001 and 2000 goodwill balance relates to PRN. The amount of goodwill
amortization was $112,000, $164,000, and $168,000 for the years ended
June 30, 2001, 2000 and 1999, respectively
NOTE G - NOTE RECEIVABLE--RELATED PARTY
In July 1999, the Company, pursuant to Board of Director's approval,
exercised its remedies in default on an 8% interest-bearing promissory
note due from an officer and director of the Company by seizing the
collateral of 600,000 shares of the Company's common stock in
satisfaction of the note and interest due. The shares received were
initially put into the Company's treasury but have been retired as of
June 30, 2000.
The 600,000 shares had a market bid price of $731,000 at the time of
their surrender and the note and accumulated interest had a carrying
value of $576,000. The Company's Board of Directors considers the
difference between the market price and carrying value of the note
receivable of $155,000 to be a reasonable and fair discount for the
shares received.
NOTE H - NOTES PAYABLE
Notes payable consist of the following:
June 30, June 30,
2001 2000
----------- -----------
10% mortgage note secured by property and
equipment of two nursing homes; due in
2022, with monthly installments of
approximately $82,000 $ 8,973,000 $ 7,711,000
Line of credit at prime plus 3%, (8.75% at June
30, 2001) secured by accounts receivable
and other assets 5,217,000 4,056,000
8.75% equipment term notes payable 56,000 61,000
Stipulated Judgment payable to Union Pension,
Welfare and Training Funds with interest at
18%; due in variable monthly installments
through July, 2002 2,488,000 --
Note payable to a partnership related through
common ownership, unsecured, due in
October, 2001 with interest at 12% 160,000 --
----------- -----------
16,894,000 11,828,000
Less: current portion 7,897,000 4,176,000
----------- -----------
$ 8,997,000 $ 7,652,000
=========== ===========
F-9
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE H - NOTES PAYABLE (Continued)
In July 1997, the Company financed the purchase of two skilled nursing
facilities with a $6.8 million mortgage note payable to Nationwide
Health Properties, Inc. Nationwide agreed to finance up to $2 million
in improvements to the nursing facilities made in connection with
change of ownership requirements. Through June 30, 2001, $1,375,000 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, 2001 and 2000,
is fully funded and is included in other assets in the accompanying
consolidated balance sheets.
The Company has a financing agreement through April 2003 with a
healthcare lender for a line of credit of up to the lesser of $6
million or an amount based on 85% of eligible accounts receivable, as
defined in the agreement. The line of credit is subject to certain
financial covenants, noncompliance with which would be considered to be
an event or default and provide the lender with the right to demand
repayment prior to the maturity date. At June 30, 2001, the Company is
not in compliance with certain of the financial covenants. The Company
is presently negotiating the restructuring of its line of credit
financing and, in connection with such negotiations, the Company's
interest rate was reduced to prime plus 2% subsequent to year end.
Aggregate principal maturities of notes payable in succeeding years are
as follows:
Year ending June 30:
2002 $ 7,897,000
2003 301,000
2004 161,000
2005 177,000
2006 196,000
Subsequent to 2006 8,162,000
-----------
$16,894,000
===========
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, June 30,
2001 2000
----------- -----------
Accounts payable $ 9,331,000 $ 8,582,000
Accrued payroll and payroll taxes 3,292,000 3,855,000
Other accrued expenses 2,668,000 1,986,000
----------- -----------
$15,291,000 $14,423,000
=========== ===========
F-10
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS
CAPITAL LEASES
The following is an analysis of leased property under capital leases by
major class at June 30, 2001:
Equipment $ 552,000
Less: accumulated amortization 297,000
---------
$ 255,000
=========
Amortization expense relative to leased property under capital leases
totaled $66,000, $79,000, and $80,000 for the years ended June 30,
2001, 2000 and 1999 respectively, and is included in depreciation and
amortization expense disclosed in Note E.
The following is a schedule by years of future minimum lease payments
under capital leases, together with the present value of the net
minimum lease payments:
Year ending June 30:
2002 $ 149,000
2003 109,000
2004 40,000
2005 10,000
--------
Total minimum lease payments 308,000
Less: amount representing interest 60,000
---------
$ 248,000
=========
RELATED PARTY OPERATING LEASES
The Company leases four of its nursing facilities (including certain
equipment) under an operating lease from a partnership related through
common ownership. The lease agreement, as amended, commenced on July 1,
1995 and is for an eighteen-year period, with renewal options for up to
thirteen years. Annual rentals under the lease are currently $2.5
million.
The Company has renegotiated the required rent payments covering the
period October 1999 through February 2001 which reduced the rent due
during that period by approximately $800,000. Recognition of the rent
reduction has been accounted for by increasing deferred rent which
equalizes the annual rent expense over the remaining fourteen-year
lease term. Deferred rent payable represents the excess of rent expense
determined on a straight-line basis over amounts paid to date pursuant
to the lease with the related partnership.
In addition, the Company leases its corporate office space from an
entity related through common ownership under an operating lease which
expires in February 2013 and has two five-year renewal options with
rent at then market rates.
F-11
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS (Continued)
RELATED PARTY OPERATING LEASES (Continued)
Future minimum lease payments required under these related party lease
obligations, net of sublease rentals are as follows:
Year ending June 30:
2002 $ 2,629,000
2003 2,640,000
2004 2,665,000
2005 2,679,000
2006 2,683,000
Thereafter 21,001,000
------------
$ 34,297,000
============
Rent expense charged to operations under these related party operating
leases, net of sublease rental income, aggregated $2,522,000,
$2,540,000 and $2,538,000 for the years ended June 30, 2001, 2000, and
1999, respectively.
The Company has deposited with the related partnership, in connection
with the nursing home facilities lease, a non-interest bearing security
deposit of approximately $2.3 million as of June 30, 2001 and 2000. 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, 2001 and 2000.
OTHER OPERATING LEASES
The Company has other operating leases, including the lease of the
Adams House and Heritage Heights facilities, which expire in various
years through 2010. Rent expense charged to operations under such
leases totaled approximately $682,000, $522,000, and $82,000 for the
years ended June 30, 2001, 2000 and 1999, respectively.
Future minimum lease payments required under these other operating
leases are as follows:
Year ending June 30:
2002 $ 690,000
2003 876,000
2004 937,000
2005 951,000
2006 900,000
Thereafter 3,121,000
------------
$ 7,475,000
============
F-12
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE J - LEASE AND CONTRACTUAL SERVICES COMMITMENTS (Continued)
CONTRACTUAL SERVICES AGREEMENTS
The Company executed contracts with unrelated entities for the
provision of housekeeping and laundry services and dietary services.
Housekeeping and Laundry Services
The contracts for housekeeping and laundry services commenced in March,
2001 and require annual payments of approximately $3,799,000, payable
bi-weekly. The contracts have an initial term of one year but may be
canceled upon ninety days written notice by either party. Expense under
the contracts totaled $882,000 for the year ended June 30, 2001.
Dietary Services
The contracts for dietary services commenced in April, 2001 and require
annual payments of approximately $5,731,000. The contracts continue for
an initial term of three years and may be extended for an additional
one year by providing written notice at least 90 days prior to
expiration of the initial term. Expense under the contracts totaled
$1,303,000 for the year ended June 30, 2001.
A summary of amounts due under the dietary services contract in
subsequent years is as follows:
Year ending June 30:
2002 $ 5,731,000
2003 5,731,000
2004 4,428,000
------------
$ 15,890,000
============
NOTE K - STOCKHOLDERS' EQUITY
WARRANTS
The Company has issued warrants to purchase 1,940,625 shares of the
Company's common stock at $6 per share, subject to adjustment in
certain circumstances, which may be exercised at any time through May
13, 2003. The warrants are subject to redemption by the Company at a
price of $.05 per warrant provided that the closing price of the
Company's common stock has equaled or exceeded $10 per share for a
period of twenty consecutive trading days.
The Company's Board of Directors approved the issuance to employees,
directors and others of warrants to purchase 1,533,200 shares of the
Company's common stock exercisable at $.56 cents per share; none of
these warrants have been issued as of June 30, 2001.
F-13
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTION PLAN
The Company has reserved 450,000 shares of its common stock for
issuance pursuant to stock options which may be granted pursuant to the
Company's 1997 Stock Option Plan. The Plan provides for grants to
employees, consultants and directors of the Company. Subject to the
provisions of the Plan, the Board has the authority to determine the
individuals to whom the stock options are to be granted, the number of
shares to be covered by each option, the exercise price, the type of
option, the option period, the restrictions, if any, on the exercise of
the option, the terms for the payment of the option price and other
terms and conditions.
The Company issued options to purchase 302,000 shares of its common
stock to directors and employees at exercise prices ranging from $2.625
to $3.062 based on the market value at date of grant. The Board of
Directors re-priced these outstanding options in November 1998 at $.87
based on the current market value. Such options vest at a rate of
one-third per year and are fully vested on the fourth anniversary of
their issuance. The options expire December 16, 2003 and March 17, 2004
depending on their date of issuance.
As of June 30, 2001, 62,000 options remain outstanding and 240,000
options have been cancelled when the employees to whom they were issued
terminated their employment. Through June 30, 2001 no options have been
exercised.
The Company has reserved 770,000 shares of its common stock for
issuance pursuant to stock options to be granted to consultants,
exercisable at $.56 per share, as compensation for services to be
rendered pursuant to consulting agreements. None of these options have
been issued as of June 30, 2001.
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 loss and loss per share would have been adjusted to the
pro forma amounts indicated below:
Year ended Year ended Year ended
June 30, 2001 June 30, 2000 June 30, 1999
-------------------------- -------------------------- --------------------------
As As As
Reported Pro forma Reported Pro forma Reported Pro forma
----------- ----------- ----------- ----------- ----------- -----------
Net loss $(7,752,000) $(7,856,000) $(4,103,000) $(4,320,000) $(1,577,000) $(1,794,000)
=========== =========== =========== =========== =========== ===========
Basic loss
per common share
$ (2.20) $ (2.23) $ (1.15) $ (1.21) $ (.38) $ (.43)
=========== =========== =========== =========== =========== ===========
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 5%
Expected life of options 72 months
F-14
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock,
$.01 par 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, 2001, the Company has issued no preferred stock.
NOTE L - INCOME TAXES
The components of the provision for income taxes for the years ended
June 30, 2001, 2000 and 1999 are as follows:
2001 2000 1999
------------ ----------- -----------
Current:
Federal $ -- $ -- $ --
State -- -- 15,000
------------ ----------- -----------
-- -- 15,000
------------ ----------- -----------
Deferred:
Federal -- -- --
State -- -- --
------------ ----------- -----------
-- -- --
------------ ----------- -----------
$ -- $ -- $ 15,000
============ =========== ===========
The significant components of the deferred tax provision for 2001, 2000
and 1999 are as follows:
2001 2000 1999
------------ ----------- -----------
Net operating loss $ (2,467,000) $ (494,000) $ (143,000)
Bad debt reserve (280,000) (283,000) (154,000)
Property and equipment 158,000 (169,000) 28,000
Organizational costs 6,000 5,000 (32,000)
Deferred rent (82,000) (214,000) 21,000
Accrued expenses 776,000 (144,000) (262,000)
Deferred revenue (47,000) (514,000) (1,000)
Valuation allowance 1,936,000 1,813,000 543,000
------------ ----------- -----------
$ -- $ -- $ --
============ =========== ===========
The components of the net deferred tax asset and liability as of June
30, 2001 are as follows:
2001 2000
----------- -----------
Deferred tax assets (liabilities):
Net operating loss $ 3,188,000 $ 721,000
Bad debt reserve 849,000 569,000
Property and equipment (30,000) 128,000
Organizational costs 14,000 20,000
Deferred rent 426,000 344,000
Accrued expenses 14,000 790,000
Deferred revenue (99,000) (146,000)
Valuation allowance (4,327,000) (2,391,000)
----------- -----------
Net deferred tax asset $ 35,000 $ 35,000
=========== ===========
F-15
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE L - INCOME TAXES (Continued)
The Company has recorded a valuation allowance of $4,327,000 and
$2,391,000 at June 30, 2001 and 2000, respectively, to reflect the
estimated amount of deferred tax assets. A valuation allowance is
required if it is more likely than not that some or all of the deferred
tax assets will not be realized in future years.
The net change in the valuation allowance for deferred tax assets was
an increase of $1,936,000, $1,813,000, and $543,000 for the years ended
June 30, 2001, 2000 and 1999, respectively.
The Company has federal and state operating loss carryforwards which
total approximately $7,702,000 and $7,596,000, respectively, that are
available to reduce federal and state taxable income. The federal
operating loss carryforwards expire in various years through 2021 and
the state operating loss carryforwards expire in various years through
2006.
The principal reasons for the difference between the statutory federal
income tax rate and the effective rate are as follows:
2001 2000 1999
------ ------ ------
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
State taxes, net of federal benefits -- -- 1.2
Goodwill amortization 0.7 1.2 5.0
Minority interest adjustment 1.8 (2.4) (4.5)
Bad debt expense 1.8 4.8 8.8
Accrued expenses 2.6 3.0 11.7
Other adjustments 1.0 11.5 16.5
Loss on sale of Balz assets -- 1.0 --
Valuation allowance 26.1 14.8 (3.7)
------ ------ ------
--% --% 1.0%
====== ====== ======
NOTE M - RISKS AND UNCERTAINTIES
LABOR CONCENTRATION
As of June 30, 2001, approximately 57% of the Company's employees were
covered by three separate collective bargaining agreements with New
England Health Care Employees Union, District 1199/SEIU, AFL-CIO
("Union"). Two of the agreements cover a facility each and expire in
October, 2001 (representing 15% of the Company's employees), while the
other agreement covers the remaining six facilities and expires on
March 15, 2005.
F-16
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE M - RISKS AND UNCERTAINTIES (Continued)
PATIENT SERVICE REVENUE
Approximately 91%, 97%, and 98% of net patient service revenue was
derived under federal and state third-party reimbursement programs in
2001, 2000 and 1999, 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 increase 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.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is
in compliance with all applicable laws and regulations and is not aware
of any significant pending or threatened investigations involving
allegations of potential wrongdoing. Compliance with such laws and
regulations are subject to government review and interpretation as well
as significant regulatory action including fines, penalties, and
exclusion from the Medicare and Medicaid programs. Changes in the
Medicare and Medicaid programs and/or the reduction of funding levels
could have an adverse impact on the Company.
MALPRACTICE INSURANCE
The Company maintains malpractice insurance coverage on an occurrence
basis. It is the intention of the Company to maintain such coverage on
an occurrence basis in ensuing years. As of June 30, 2001, no known
malpractice claims have been asserted against the Company which, either
individually or in the aggregate, are in excess of insurance coverage.
NOTE N - COMMITMENTS AND CONTINGENCIES
GOVERNMENT INVESTIGATION
The Company has previously disclosed that the Company and certain
members of former senior management were named as targets of a grand
jury investigation being conducted by the Office of the United States
Attorney for the District of Connecticut (the "Government"). By letter
dated June 26, 2001, the Government advised counsel to the Company and
other targets of the grand jury investigation that criminal prosecution
of the Company and certain members of former senior management "has
been declined based on information and evidence obtained to date". By
letter dated July 9, 2001, the Government further advised counsel to
the Company and other targets of the grand jury investigation that "the
civil division of the [U.S. Attorney's] office has closed its
investigation of the Company at this time".
The Company recorded a charge to operations of $273,000 and $343,000
for the years ended June 30, 2001 and 2000, respectively, relating to
this matter.
F-17
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 and 1999
NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)
LABOR STRIKE
Union employees of the Company commenced a one day job action in March
2001 and commenced another strike on May 5, 2001 for a period of
twenty-one days. The Company executed an Expedited Medicaid
Reimbursement Agreement with the State of Connecticut ("the State")
whereby the State reimbursed the Company for certain strike related
incremental costs related to Medicaid patients, which approximated 80%
of cost incurred. Ultimately, the Company incurred union strike and
settlement costs, net of State reimbursement, of $960,000.
The Company engaged nursing staffing firms to replace the striking
workers and continued to maintain compliance with applicable State of
Connecticut patient care and staffing regulations. The Company and one
of the nursing staffing firms are presently disputing certain charges
and it is anticipated that the matter will be resolved through
voluntary mediation. Management believes the resolution of this matter
will not have a material adverse effect on the Company's consolidated
financial statements.
EMPLOYMENT AGREEMENTS
The Company had employment agreements with three of its former
executive officers. During the year ended June 30, 2000, the Company's
founder and CEO retired and the Company negotiated the settlement of
its remaining obligation under his employment agreement for $250,000
which has been recorded as a charge to operations in the accompanying
consolidated statement of operations. As a result of this settlement,
the former CEO completed the previously agreed-on repayment to the
Company of $109,000 for certain trade payables owed to the Company by a
business he previously owned.
As a result of the sale of the business of BALZ during the year ended
June 30, 2000 (see Note B), the Company settled the employment
agreement with the President of BALZ for $363,000 which is included in
the loss on sale of business recorded in the accompanying consolidated
statement of operations.
During the year ended June 30, 2001, the Company's President resigned
and the related employment agreement was canceled upon execution of a
consulting services agreement. The consulting services agreement
terminated in March, 2001 and amounts paid thereunder of $187,000 were
recorded as a charge to operations in the accompanying consolidated
statement of operations.
UNION PENSION CONTRIBUTION
The Company's union employees participate in union pension plans to
which the Company contributes an amount stipulated in each collective
bargaining agreement. For the years ended June 30, 2001, 2000 and 1999,
contributions were approximately $1,698,000, $1,807,000 and $1,458,000,
respectively.
F-18
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE N - COMMITMENTS AND CONTINGENCIES (Continued)
NON-UNION PENSION PLAN
As of February 1, 1999, the Company implemented a new
defined-contribution pension plan for non-union employees to which the
Company contributes 4% of employee compensation annually; investments
in the plan are directed by the participants. In connection therewith
the Company has recorded pension expense of $422,000, $464,000 and
$236,000 for the years ended June 30, 2001, 2000 and 1999,
respectively.
LAWSUIT SETTLEMENT
The former President and Administrator of Professional Relief Nurses,
Inc. (PRN), the Company's home care subsidiary, initiated a lawsuit
against Lexington Healthcare Group, Inc., PRN, and the Company's former
Chairman and CEO, in connection with her termination in July 1998. In
September 1999 the Company reached a settlement in this suit to avoid
the expenses of protracted litigation. The Company has recorded a
provision for lawsuit settlement of $539,000 in the accompanying
consolidated statement of operations for the year ended June 30, 1999.
OTHER CONTINGENCIES
The Company is also involved in other legal proceedings and is subject
to certain lawsuits and claims in the ordinary course of its business.
Although the ultimate effect of these matters is often difficult to
predict, management believes that their resolution will not have a
material adverse effect on the Company's consolidated financial
statements.
LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company is subject to extensive federal, state and local government
regulation relating to licensure, conduct of operations, ownership of
facilities, expansion of facilities and services and reimbursement for
services. As such, in the ordinary course of business, the Company's
operations are continuously subject to state and federal regulatory
scrutiny, supervision and control. Such regulatory scrutiny often
includes inquiries, investigations, examinations, audits, site visits
and surveys, some of which may be non-routine. The Company believes
that it is in substantial compliance with the applicable laws and
regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or
criminal fines, penalties or restitutionary relief which may have a
material adverse impact on the Company's financial results and
operations.
F-19
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2001, 2000 AND 1999
NOTE O - GOING CONCERN
As shown in the accompanying consolidated financial statements, the
Company has reported net losses for the last three fiscal years
totaling $13,432,000 and, as of June 30, 2001, has a working capital
deficiency of $9,440,000 and a stockholders' deficiency of $7,625,000.
In addition, the Company is not in compliance with certain of the
financial covenants on its line of credit agreement which may be
considered an event of default. Further, the Company is unable to
satisfy its trade creditors in the ordinary course of business and is
in arrears on its related party lease obligation. These conditions
create an uncertainty about the Company's ability to continue as a
going concern.
Management has implemented a plan to return the Company to
profitability, which includes receipt of significant increases in
Medicaid revenue through the request for rate relief submitted to the
State, improvements to patient mix and occupancy and significant
reductions in operating and administrative costs. Management projects
that the Company can return to profitability within the next twelve
months upon the successful implementation of the turnaround plan. In
addition, management is in the process of negotiating settlement plans
with trade creditors and restructuring its debt financing.
The ability of the Company to continue as a going concern is dependent
on the success of the above plan and the forebearance of default
remedies by its primary lender. The consolidated financial statements
do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
F-20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, together with their ages
and present positions with the Company are as follows:
Name Age Position
---- --- --------
Oscar Litchtman...................................68 Chief Executive Officer,
Chairman of the Board,
President and Director
Ira J. Perlmuter..................................39 Director and Secretary
Irwin Katz........................................33 Director
Barry M. Feldscher................................57 Chief Operating Officer
Michael D. Logan .................................46 Chief Financial Officer
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:
Oscar Lichtman was elected Chairman, CEO, President and director effective
February 1, 2001 upon the retirement of the Company's then CEO and President,
Harry Dermer. He operates an investment practice which concentrates on the
securities of companies in the healthcare industry as well as real estate. Mr.
Lichtman has worked as an administrator for various educational institutions. He
received a B.A. from Yeshiva University and a Master of Science in Educational
Psychology from the Ferkauf Graduate School.
Ira J. Perlmuter was elected director and Secretary effective February 1, 2001.
He is the managing director of Cove Capital Advisors, Inc., a financial advisory
firm specializing in providing advice on restructuring, mergers and
acquisitions, and strategic planning to middle market companies. Prior to
founding Cove Capital in June 2000, Mr. Perlmuter served as a vice president of
The Chase Manhattan Bank's Restructuring Group where he concentrated on
corporate loan restructurings. Mr. Perlmuter received a B.A. from Brandeis
University in 1985 and an MBA in Finance from the Stern School of Business at
New York University in 1991.
18
Irwin Katz was elected a director effective February 1, 2001. He serves as the
Manager for the MIS division at the New York County Health Services Review
Organization ("NYCHSRO")/MedReview, Inc., a position he has held since April of
1997. Mr. Katz is responsible for the management and integrity of NYCHSRO's
multi-user Novell databases. Mr. Katz was NYCHSRO's Program Manager from August
1993 to April 1997, where he was responsible for the supervision of day-to-day
operations. He received his B.S. from SUNY in 1996 and a Masters in Public
Administration from the Robert F. Wagner Graduate School of Public Service in
1998.
Barry M. Feldscher has served as the Company's Chief Operating Officer since
February 1, 2001. He is a licensed nursing home administrator in New Jersey and
Pennsylvania. Mr. Feldscher is the principal of Barry Feldscher & Associates,
LLC, a company which consults with long term care facilities. Mr. Feldscher has
been employed in the long-term care industry for more than twenty-five years.
Between 1977 and 1997 he held senior management positions with HBA Management,
Inc. and Meadowview Management, Inc., operators and consultants in long term
care.
Michael D. Logan was hired as the Company's Chief Operating Officer on February
1, 2001. He is a Certified Public Accountant. Mr. Logan is the principal of
Logan & Associates, Inc., a CPA practice specializing in financial management
and advisory services to the long-term care industry. From 1986 to 1995 he was a
principal in Cerreta, Logan & Co., a firm specializing in management consulting
and audits in the long-term care industry. Prior thereto, he was an associate
with the CPA firm of Smolin, Lupin & Co., a large regional accounting firm
specializing in real estate accounting and auditing.
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 Barry M. Feldscher, its current
Chief Operating Officer, to Michael D. Logan, its current Chief Financial
Officer, to Jack Friedler, its former Chief Executive Officer, to Harry Dermer,
its former Chief Executive Officer and President, to Mary Archambault, its
former Executive Vice President and former Secretary, and to Thomas E. Dybick,
its former Chief Financial Officer and Secretary during the fiscal years ended
June 30, 2001, 2000, 1999, 1998 and 1997. Messrs. Lichtman, Perlmuter and Katz
received no compensation during these periods.
Other than Messrs. Dermer and 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.
19
------------------------------------------- ---------------
Long Term
Annual Compensation Compensation
------------------------------------------- ---------------
Stock
Name and Principal Position Year Salary Bonus Options Granted
--------------------------- ------------------------------------------- ---------------
Barry M. Feldscher, Fiscal 2001 $50,481 (1) -- --
Chief Operating Officer
Michael D. Logan, Fiscal 2001 $23,846 (1) -- --
Chief Financial Officer
Jack Friedler, Fiscal 1997 $260,000 -- --
Former Chief Executive Officer Fiscal 1998 $266,250 $17,586 60,000
and Director Fiscal 1999 $270,022 $10,500 --
Fiscal 2000 $511,188 (2) $5,250 (60,000)
Fiscal 2001 -- -- --
Harry Dermer, Fiscal 1997 $174,980 -- --
Former Chief Executive Officer, Fiscal 1998 $179,196 $14,317 60,000
President, and Director Fiscal 1999 $200,086 $8,077 --
Fiscal 2000 $214,078 $4,038 --
Fiscal 2001 $323,470 (3) $4,038 --
Thomas E. Dybick, Fiscal 1997 $72,037 -- --
Former Chief Financial Officer Fiscal 1998 $110,318 $4,392 20,000
and Secretary Fiscal 1999 $117,808 $2,250 --
Fiscal 2000 $133,588 $2,500 --
Fiscal 2001 $72,858 -- (20,000)
Mary Archambault, Fiscal 1997 $159,783 -- --
Former Executive Vice President, Fiscal 1998 $107,088 $15,041 40,000
Former President of BALZ Fiscal 1999 $135,874 $12,923 --
Fiscal 2000 $557,577 (4) $24,131 (40,000)
Fiscal 2001 -- -- --
(1) Compensation commenced on February 1, 2001.
(2) During the year ended June 30, 2000, Mr. Friedler, the Company's founder
and CEO, retired; the Company negotiated the settlement of its remaining
obligations under his employment agreement for $250,000. As a result of
this settlement, Mr. Friedler completed the previously agreed-on repayment
to the Company of $109,000 for certain trade payables owed to the Company
by a business he previously owned.
(3) During the year ended June 30, 2001, the Company's President resigned and
the related employment agreement was canceled upon execution of a
consulting services agreement. The consulting services agreement
terminated in March 2001, and amounts paid thereunder of $187,000 were
recorded as a charge to operations in the accompanying consolidated
statement of operations.
20
(4) As a result of the sale of the business of BALZ during the year ended June
30, 2000, the Company settled an employment agreement with Ms.
Archambault, the President of BALZ, for $363,000.
The Company had employment agreements with each of Jack Friedler, Harry Dermer,
and Mary Archambault, which became effective in 1997.
During the year ended June 30, 1998, the Company issued options to purchase
200,000 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.
Options on 100,000 shares were cancelled in 2000 when Mr. Friedler and Ms.
Archambault terminated their employment. Options on 80,000 shares were cancelled
in 2001 when Mr. Dermer and Mr. Dybick terminated their employment.
The former President and Administrator of Professional Relief Nurses, Inc.
(PRN), the Company's home care subsidiary, initiated a lawsuit against Lexington
Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO,
in connection with her termination in July 1998. In September 1999 the Company
settled this suit to avoid the expenses of protracted litigation. See Item 3 for
further information.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person owned of record or was known to own beneficially more than five
percent (5%) of the outstanding common stock of the Company except as noted
below. The following table shows the amount of common stock owned as of
September 26, 2001 by each Director, and by all Directors and officers as a
group, consisting of six persons.
Number of Shares of Percentage of Total Shares of
Name and Address of Beneficial Outstanding Common Stock Outstanding Common Stock
Owner (1) Beneficially Owned (2) Beneficially Owned
-------- ---------------------- ------------------
Jack Friedler (3) 1,651,667 46.8%
Harry Dermer (4) 358,700 10.2%
New Generation LLC(5) 225,167 6.4%
America Healthcare Services Corp. (6) 225,167 6.4%
Connecticut Investments LLC (7) 225,166 6.4%
Oscar Lichtman, Chairman, CEO and
President -- *
Irwin Katz, Director and Secretary -- *
Ira Perlmuter, Director -- *
Michael Logan, Chief Financial Officer -- *
Barry Feldscher, Chief Operating Officer -- *
All Directors and Officers as a group 1,651,667 48.8%
----------
*less than one percent
21
(1) Unless otherwise indicated, the address of each person listed below is c/o
Lexington Healthcare Group, Inc., 1577 New Britain Avenue, Farmington, CT,
06032.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes 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 in the table.
(3) Includes 225,167 shares of common stock beneficially owned by New
Generation LLC, with which Mr. Friedler is affiliated.
(4) Includes 60,000 shares of common stock underlying options held by Mr.
Dermer. Such options are currently exercisable. If the options held by New
Generation LLC, Connecticut Investments LLC and America Healthcare
Services Corporation are exercised. Mr. Dermer would own no more shares of
Common stock in the Company, but would retain his option to purchase
60,000 such shares.
(5) Includes 119,567 shares of common stock underlying an option to purchase
the shares from Mr. Dermer and Ms. Archambault.
(6) Includes 119,567 shares of common stock underlying an option to purchase
the shares from Mr. Dermer and Ms. Archambault.
(7) Includes 119,566 shares of common stock underlying an option to purchase
the shares from Mr. Dermer and Ms. Archambault.
Item 13. Certain Relationships and Related Transactions
During the year ended June 30, 2001, Harry Dermer, the Company's CEO and
President retired; the remaining agreement with the Company's former President
and CEO was canceled upon execution of a consulting services agreement in
January, 2001 for $187,000. The consulting services agreement was for a
two-month term through March, 2001. During the year ended June 30, 2000, Jack
Friedler, the Company's founder and former CEO, retired; the Company negotiated
the settlement of its remaining obligations under his employment agreement for
$250,000. As a result of this settlement, Mr. Friedler completed the previously
agreed-on repayment to the Company of $109,000 for certain trade payables owed
to the Company by a business he previously owned.
As a result of the sale of the business of BALZ during the year ended June 30,
2000, the Company settled an employment agreement with Mary Archambault, the
President of BALZ, for $363,000.
In July 1999, the Company, pursuant to Board of Director's approval, exercised
its remedies in default on an 8% interest-bearing promissory note due from the
Company's former CEO and by seizing the collateral of 600,000 shares of the
Company's common stock in satisfaction of the note and interest due. The shares
received were initially put into the Company's treasury but have been retired as
of June 30, 2000. This resulted in a reduction of working capital and
stockholders'
22
equity of $574,000 as shown in the June 30, 1999 consolidated statement of
changes in stockholders' equity.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
Effective July 1, 1995, the Company entered into a ten-year lease, which was
subsequently extended to eighteen years and retroactively amended, for four of
the nursing homes operated by the Company. Jack Friedler, the Company's former
Chief Executive Officer and other stockholders holding an additional 19.2% of
the outstanding common stock have a controlling interest in the lessor,
Fairfield Group Health Care Centers Limited Partnership ("Fairfield"). 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 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. Further, prior to the sale of assets by BALZ, the Company leased office
and warehouse space for BALZ from a related limited liability company owned in
part by Messrs. Friedler and Dermer and Ms. Archambault under an operating lease
which expires January 31, 2002.
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 are included in Part II Item 8:
Report of Independent Certified Public Accountants on Financial
Statements
Financial Statements:
Consolidated Balance Sheets - June 30, 2001 and 2000
Consolidated Statements of Operations - Years Ended June 30, 2001,
2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended June 30, 2001,
2000 and 1999
Notes to Consolidated Financial Statements
(2) The following schedule for the years 2001, 2000, and 1999 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:
(c) Exhibits
(11) Earnings per share calculation
(21) Subsidiaries
(23) Independent Auditors' Consent
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/ Oscar Lichtman
---------------------
Oscar Lichtman, CEO, Chairman, President and Director
Date: September 28, 2001
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/ Michael Logan Chief Financial Officer Date: September 28, 2001
------------------------
Michael Logan
Chief Operating Officer Date: September 28, 2001
------------------------
Barry Feldscher
Director Date: September 28, 2001
------------------------
Ira Perlmuter
Director, Secretary Date: September 28, 2001
------------------------
Irwin Katz
25
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, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years ended June 30, 2001, 2000 and 1999.
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 U.S. 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, 2001 and 2000, and the results of
their operations and their cash flows for the years ended June 30, 2001, 2000
and 1999 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note O to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note O. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 21, 2001
26
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, 2001 and 2000, and for the years
ended June 30, 2001, 2000 and 1999; and have issued our report thereon dated
September 21, 2001, which report includes an explanatory paragraph referring to
factors that raise substantial doubt about the Company's ability to continue as
a going concern; such consolidated financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedule of Lexington Healthcare Group, Inc. and subsidiaries, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 21, 2001
27
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
Beginning Costs and End of
Year Description of Year Expenses Write-offs Year
-------------------------------------------------------------------------------
2001 Allowance for
doubtful accounts $1,634,000 $1,027,000 $(615,000) $2,046,000
========== ========== ========= ==========
2000 Allowance for
doubtful accounts $ 848,000 $1,305,000 $(519,000) $1,634,000
========== ========== ========= ==========
1999 Allowance for
doubtful accounts $ 346,000 $ 748,000 $(246,000) $ 848,000
========== ========== ========= ==========
28