AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997

REGISTRATION STATEMENT NO. 333-15849
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------

AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

------------------------------
LEXINGTON HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 8059 061468252
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Code) Identification No.)
incorporation or organization)

35 PARK PLACE
NEW BRITAIN, CONNECTICUT 06052
(860) 223-6902
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------

HARRY DERMER
PRESIDENT AND CHIEF OPERATING OFFICER
LEXINGTON HEALTHCARE GROUP, INC.
35 PARK PLACE
NEW BRITAIN, CONNECTICUT 06052
(860) 223-6902
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------------------

COPIES OF COMMUNICATIONS TO:

JAY M. KAPLOWITZ, ESQ. FELICE F. MISCHEL, ESQ.
ARTHUR S. MARCUS, ESQ. THOMAS A. ROSE, ESQ.
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP Schneck Weltman Hashmall & Mischel LLP
101 East 52nd Street 1285 Avenue of the Americas
New York, New York 10022 New York, New York 10019
(212) 752-9700 (212) 956-3252

------------------------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box /X/

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering / /
- ---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. / /
- ---------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box / /
------------------------------

CALCULATION OF REGISTRATION FEE

TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING
REGISTERED REGISTERED PER SECURITY(1) PRICE

Common Stock, par value $.01 per share (the "Common
Stock")(2)............................................. 1,293,750 $ 5.00 $ 6,468,750
Common Stock Purchase Warrants........................... 1,940,625 $ .10 $ 194,063
Common Stock Issuable upon Exercise of Warrants.......... 1,940,625 $ 6.00 $ 11,643,750
Representative's Warrants(3)............................. 112,500 $ .001 $ 112.50
Common Stock underlying the Representative's
Warrants(4)............................................ 112,500 $ 7.50 $ 843,750
Common Stock Purchase Warrants Issuable upon Exercise of
Representative's Warrants.............................. 168,750 $ .15 $ 25,313
Common Stock underlying Warrants Issuable upon Exercise
of Representative's Warrants........................... 168,750 $ 9.00 $ 1,518,750
Total Registration Fee...................................

TITLE OF EACH CLASS
OF SECURITIES TO BE AMOUNT OF
REGISTERED REGISTRATION FEE

Common Stock, par value $.01 per share (the "Common
Stock")(2)............................................. $ 1,960.23
Common Stock Purchase Warrants........................... $ 58.81
Common Stock Issuable upon Exercise of Warrants.......... $ 3,528.41
Representative's Warrants(3)............................. $ -- (5)
Common Stock underlying the Representative's
Warrants(4)............................................ $ 255.68
Common Stock Purchase Warrants Issuable upon Exercise of
Representative's Warrants.............................. $ 7.67
Common Stock underlying Warrants Issuable upon Exercise
of Representative's Warrants........................... $ 460.23
Total Registration Fee................................... $ 6,271.03(6)

(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee.

(2) Includes 168,750 shares of Common Stock which the Underwriters have an
option to purchase from the Company to cover over-allotments, if any.

(3) To be issued by the Company and purchased by the Underwriter upon the
consummation of this offering.

(4) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of Common Stock issuable upon the
exercise of the Representative's Warrants pursuant to anti-dilution
provisions contained therein, which shares of Common Stock are registered
hereunder.

(5) No fee pursuant to Rule 457(g).

(6) This amount was previously paid.

------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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LEXINGTON HEALTHCARE GROUP, INC.
FORM S-1
CROSS REFERENCE SHEET

PURSUANT TO ITEM 501 OF REGULATION S-K
ITEM NUMBER CAPTION OR HEADING IN PROSPECTUS
- ----------- ---------------------------------------------------

1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Cover page of Registration Statement; and Outside
Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information.
3. Summary Information and Risk Factors............... Prospectus Summary; Risk Factors.
4. Use of Proceeds.................................... Use of Proceeds.
5. Determination of Offering Price.................... Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting.
6. Dilution........................................... Risk Factors; Dilution.
7. Selling Security Holders........................... Not Applicable.
8. Plan of Distribution............................... Outside Front Cover Page of Prospectus;
Underwriting.
9. Description of Securities to be Registered......... Dividend Policy; Description of Securities.
10. Interests of Named Experts and Counsel............. Legal Matters; Experts.
11. Information with Respect to Registrant............. Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; The Company; Dividend
Policy; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Stockholders and Financial Statements.
12. Disclosure of Commission's Position on
Indemnification for Securities Act Liabilities..... Not Applicable.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 12, 1997

PROSPECTUS

[LOGO]

LEXINGTON HEALTHCARE GROUP, INC.
1,125,000 SHARES OF COMMON STOCK AND
1,687,500 COMMON STOCK PURCHASE WARRANTS
--------------------------

LEXINGTON HEALTHCARE GROUP, INC. (the "Company") is hereby offering (the
"Offering") 1,125,000 shares (the "Shares") of its Common Stock, par value $.01
per share (the "Common Stock") and 1,687,500 Common Stock Purchase Warrants (the
"Warrants"), through Mason Hill & Co., Inc. the representative (the
"Representative") of the underwriters of the Offering (the "Underwriters"). The
shares of Common Stock and the Warrants may be purchased separately and will be
transferable separately upon issuance. Investors will not be required to
purchase shares of Common Stock and Warrants together or in any particular
ratio.

Each of the Warrants entitles the registered holder thereof to purchase one
share of Common Stock at a price of $6.00 per share, subject to adjustment in
certain circumstances, at any time commencing one year from the effective date
of the registration statement of which this Prospectus is a part (the "Effective
Date") and thereafter to , 2003, the sixth anniversary of the
Effective Date. The Warrants are subject to redemption by the Company,
commencing on the first anniversary of the Effective Date at a price of $.05 per
Warrant, upon 30 days' notice mailed within 10 days provided the closing price
of the Common Stock, as listed on the Nasdaq National Market ("Nasdaq") or
another national securities exchange, for a period of 20 consecutive trading
days has equalled or exceeded $10.00 per share. See "Description of Securities."

Of the proceeds of the Offering, $540,000 will be paid to Suzanne Nettleton,
who is to become the Company's Executive Vice-President, upon consummation of
the acquisition, in exchange for her 25% interest in Professional Relief Nurses,
Inc. See "Use of Proceeeds" and "Business--Acquisition of PRN."

Prior to this Offering, there has been no public market for the Common Stock
and Warrants and no assurance can be given that any such market will develop
upon completion of this Offering. Subject to completion of the Offering, the
Common Stock and Warrants have been approved for quotation on Nasdaq under the
symbol "LEXI" and "LEXIW." The initial public offering prices of the Common
Stock and Warrants and the exercise price and other terms of the Warrants have
been determined by negotiation between the Company and the Underwriters and do
not necessarily bear any relation to the Company's earnings, assets, book value,
net worth or any other recognized criteria of value. See "Underwriting."

AN INVESTMENT IN THE SHARES OF COMMON STOCK AND WARRANTS OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS BEGINNING ON PAGE 9.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

PRICE TO PUBLIC UNDERWRITING DISCOUNTS AND COMMISSIONS (1)

Per Share.......................... $5.00 $0.45
Per Warrant........................ $0.10 $0.009
Total(3)........................... $5,793,750 $521,438

PROCEEDS TO COMPANY (2)

Per Share.......................... $4.55
Per Warrant........................ $0.091
Total(3)........................... $5,272,312

(1) Does not include additional consideration to be received by the Underwriters
in the form of (i) a non-accountable expense allowance equal to 3% of the
gross offering proceeds, of which $25,000 has been paid, (ii) any value
attributable to warrants (the "Representative's Warrants") entitling the
Representive to purchase up to 112,500 shares of Common Stock and 168,750
Warrants at a price per share equal to 150% of the initial public offering
price, (iii) $2,777.78 per month for 36 months payable to the Representative
pursuant to a financial consulting agreement; and (iv) a three-year right of
first refusal with respect to subsequent offerings, if any. The Company has
also agreed to indemnify the Underwriters against certain liabilities under
the Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses of this Offering payable by the Company (including
the $173,813 non-accountable expense allowance) estimated at $600,813
($626,884 if the Underwriter's over-allotment option is exercised in full).

(3) The Company has granted the Underwriters an option (the "Over-allotment
Option"), exercisable within 45 days after the date of this Prospectus, to
purchase up to 168,750 shares of Common Stock and 253,125 Warrants upon the
same terms as set forth above, solely to cover over-allotments, if any. If
the Over-allotment Option is exercised in its entirety, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $6,662,813, $599,653 and $6,063,160, respectively. See "Underwriting."

------------------------------

The Shares and Warrants are being offered by the Underwriters subject to
prior sale, when, as and if delivered to the Underwriters and subject to their
right to reject orders in whole or in part and to certain other conditions. It
is expected that delivery of certificates will be made against payment therefor
at the offices of Mason Hill & Co., Inc., 110 Wall Street, New York, New York
10005, on or about , 1997.

MASON HILL & CO., INC. J.W. BARCLAY & CO., INC.

THE DATE OF THIS PROSPECTUS IS , 1997

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

A SIGNIFICANT AMOUNT OF THE SECURITIES IN THIS OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITERS WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE
A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN BE NO ASSURANCE. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE SECURITIES THROUGH AND/OR WITH THE UNDERWRITERS.

ALTHOUGH THEY HAVE NO OBLIGATION TO DO SO, THE UNDERWRITERS MAY FROM TIME TO
TIME ACT AS MARKET MAKERS AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITERS, IF THEY PARTICIPATE IN THE MARKET, MAY BECOME
DOMINATING INFLUENCES IN THE MARKET FOR THE SECURITIES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITERS WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITERS' PARTICIPATION
IN SUCH MARKET. THE UNDERWRITERS MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS--NO ASSURANCE OF PUBLIC MARKET; VOLATILITY
OF STOCK PRICE."

THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS ANNUAL REPORTS CONTAINING
AUDITED FINANCIAL STATEMENTS EXAMINED BY ITS INDEPENDENT AUDITORS. IN ADDITION,
THE COMPANY MAY FURNISH TO ITS STOCKHOLDERS QUARTERLY OR SEMI-ANNUAL REPORTS
CONTAINING UNAUDITED FINANCIAL INFORMATION AND SUCH OTHER INTERIM REPORTS AS THE
COMPANY MAY DETERMINE.

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" REFERS TO LEXINGTON HEALTH CARE
GROUP, LLC ("LLC"), LEXINGTON HEALTHCARE GROUP, INC. ("LHG"), ITS SUBSIDIARIES
AND THEIR RESPECTIVE OPERATIONS, INCLUDING PROFESSIONAL RELIEF NURSES, INC.
("PRN") AND BALZ MEDICAL SERVICES, INC. ("BALZ"), TWO ENTITIES WHICH ARE
PRESENTLY PARTIALLY OWNED AND OPERATED BY AFFILIATES OF THE COMPANY, WHICH LHG
INTENDS TO ACQUIRE SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING, IN
CONSIDERATION FOR A PORTION OF THE NET PROCEEDS OF THIS OFFERING AND THE
ISSUANCE OF THE COMPANY'S COMMON STOCK. SEE "USE OF PROCEEDS" AND "BUSINESS."
ALL INFORMATION IN THIS PROSPECTUS, UNLESS OTHERWISE NOTED, ASSUMES THE
EFFECTIVENESS OF THE REORGANIZATION AND NO EXERCISE OF THE OVER-ALLOTMENT OPTION
OR THE REPRESENTATIVE'S WARRANTS. IN ADDITION, ALL SHARE OUTSTANDING AMOUNTS
ASSUME THE REPURCHASE OF THE 500,000 SHARES OF COMMON STOCK AND 500,000 WARRANTS
ISSUED IN THE NOVEMBER 1996 PRIVATE PLACEMENT, AS HEREINAFTER DEFINED. SEE
"UNDERWRITING--DETERMINATION OF OFFERING PRICE."

EACH OF THE THREE MEMBERS OF LLC HAVE AGREED TO EXCHANGE THEIR RESPECTIVE
INTERESTS IN THE LLC, IMMEDIATELY PRIOR TO THE EFFECTIVE DATE, IN EXCHANGE FOR
AN AGGREGATE OF 2,462,000 SHARES OF THE COMPANY'S COMMON STOCK (THE
"REORGANIZATION"). SEE "CERTAIN TRANSACTIONS."

THE COMPANY

GENERAL

The Company is a long-term and subacute care provider, which operates four
nursing home facilities (the "Facilities") with 628 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). In addition,
the Company has recently begun to offer a variety of products and services to
non-affiliated long-term care facilities. 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 are leased pursuant to a long-term lease from a partnership
of which Jack Friedler, the Company's principal stockholder, Chief Executive
Officer and Chairman of the Board, is a 33.33% limited partner. The individuals
owning the remaining portion of the partnership are shareholders of PRN. The
four nursing home facilities were previously operated as traditional nursing
homes by Beverly Enterprises, an unrelated entity which previously leased the
facilities from the Company's current landlord. The Company, as the operator of
the Facilities, received certain Medicaid reimbursement in the aggregate amount
of approximately $3,100,000 (net of Medicaid charge backs) that related to the
time that the Facilities were operated by Beverly. The arrangement providing for
collection by the Company of certain receivables of Beverly's arose in as much
as Beverly's outstanding Medicaid billings (constituting the overwhelming
majority of its receivables) were paid by Connecticut in accordance with
procedure to the then current operator of the facility where the services were
performed. Accordingly, the only way to enable Beverly to collect its fees for
services rendered through cessation of its operations was to have the subsequent
operator collect on its behalf and remit. This constituted a standard operating
procedure.

on its behalf and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Since the Company began operating the Facilities, it
has broadened the services provided and occupancy and reimbursement rates have
increased. In addition, the Company manages two nursing homes (the "Managed
Facilities"), Lexington House, Inc. in Connecticut and Oak Island Skilled
Nursing Center ("Oak Island") in Massachusetts, pursuant to management
agreements. Lexington House, Inc. is owned by a partnership controlled by Jack
Friedler. As of April 30, 1997, Lexington House owes the Company an aggregate of
$520,393. Upon the expiration of the management agreement on June 30, 1997, the
Company intends to consider discontinuing providing management services to
Lexington House. See "Certain Transactions." Oak Island is a non-affiliated
facility in Massachusetts.

The Facilities and the Managed Facilities service two basic patient
populations: the traditional geriatric patient population and the emerging
population of subacute care patients with higher acuity disorders who require
complex and intensive medical services. Subacute care patients generally require
more rehabilitative therapy and are residents for a shorter stay than
traditional geriatric patients. An important part of the Company's strategy is
to achieve high occupancy and a favorable payor mix by offering specialty
medical services. The Facilities have an occupancy rate of approximately 94% as
of December 31, 1996. Occupancy rate is determined by dividing the total number
of patients by the amount of beds available for patients at the Facilities.
Specialty medical services include subacute care to patients requiring complex
medical care, intensive rehabilitation therapies and in-house pharmaceutical
services. These services are usually provided at higher profit margins than
routine services and compete with significantly higher cost hospital care. The
Company operates a dedicated subacute unit within one of the Facilities, in
addition to providing subacute services in each of the other Facilities.

STRATEGY

The Company believes that the demand for long-term care and specialty
medical services will increase substantially over the next decade due primarily
to favorable demographic trends, advances in medical technology and emphasis on
healthcare cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. In addition, the Company anticipates that recent trends toward
industry consolidation will continue and will provide future acquisition
opportunities.

The Company's operating strategy is to: (i) increase Facility profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; (ii) adhere to strict cost standards at the
Facility level while providing effective patient care and containing corporate
overhead expenses; and (iii) become a fully integrated health network whereby
the Company will market medical products and supplies, rehabilitative services,
institutional pharmaceutical services and nursing services to affiliated and
non-affiliated nursing homes and hospitals, as well as patients at home.

By concentrating its facilities within a selected geographic region, the
Company's strategy is to achieve operating efficiencies through economies of
scale, reduced corporate overhead, more effective management supervision and
financial controls. In addition, the Company believes that geographic
concentration also enhances the Company's ability to establish more effective
relationships with referral sources and regulatory authorities in the states
where the Company operates. The Company's strategy is to gradually expand the
Company's nursing home services into additional states, including Massachusetts,
New Jersey and Vermont.

RECENT DEVELOPMENTS

The Company recently formed a wholly-owned subsidiary, LEV Rehab Services,
Inc. ("LEV") to provide physical, occupational, speech and other therapies to
patients at the Facilities, the Managed Facilities, unaffiliated facilities and
persons in their homes. LEV has not commenced any substantial

business activities and has not generated any significant revenues to date. The
Company intends to utilize a portion of the net proceeds of the Offering to hire
personnel to implement this strategy.

The Company intends to form a subsidiary to provide pharmaceutical services
to affiliated and non-affiliated long-term and subacute care facilities. See
"Use of Proceeds."

The Company has negotiated an agreement to acquire all of the capital stock
of BALZ Medical Services, Inc. ("BALZ") from the shareholders of BALZ
simultaneously with the closing of this Offering. BALZ is not currently operated
by the Company. Two of such shareholders, Jack Friedler and Harry Dermer, both
officers and directors of the Company, own an aggregate of 44% of BALZ. BALZ is
currently managed by Mary Archambault, the Company's secretary who will become
an executive vice president of the Company upon the consummation of the
acquisition. Ms. Archambault owns 20% of BALZ. The Company has an agreement to
acquire all of the capital stock of BALZ in exchange for an aggregate of 300,000
shares of the Company's Common Stock. The consideration for the acquisition was
negotiated, based on past performance and projections and the acquisition price
of other medical supply companies, between the Company's President and the
shareholders of BALZ who are not affiliated with the Company. The acquisition
will be accounted for as a purchase. The Company did not obtain an independent
appraisal in connection with the acquisition. See "Business--BALZ Acquisition"
and "Certain Transactions."

BALZ provides a variety of medical supplies, nutritional supplements,
institutional cleaning products, linens and everyday products including
toothpaste and incontinence products, to affiliated and non-affiliated nursing
homes, other institutional facilities and private persons. The medical supplies
provided include band aids, wound care supplies and durable medical products
such as wheelchairs and beds. The Company's strategy is to expand BALZ's
business to become more of a traditional medical supply company by supplying
products to hospitals, doctor's offices and persons at their homes through
Professional Relief Nurses, Inc. ("PRN") which will become a wholly-owned
subisdiary of the Company, as well.

The Company has negotiated an agreement to acquire all of the capital stock
of PRN immediately prior to the Effective Date in exchange for $1,620,000,
payable out of the net proceeds of the Offering and 108,000 shares of Common
Stock (valued at $540,000), which shares will be issued upon the closing of this
Offering. Jack Friedler, the Company's principal stockholder owns 25% of the
capital stock of PRN. Including the value assigned to the 108,000 shares, the
total purchase price is $2,160,000. PRN is currently managed by Suzanne
Nettleton, who will become an officer of the Company upon the consummation of
the acquisition. Ms. Nettleton own 25% of the capital stock of PRN. The
remaining 50% of PRN is owned by two individuals who collectively own 66.66% of
Fairfield, the landlord for the Facilities. The acquisition will be accounted
for as a purchase. The Company did not obtain an independent appraisal in
connection with the acquisition. In connection with the acquisition, PRN will
distribute 100% of its book value to its shareholders prior to the acquisition
and accordingly, at the time of the acquisition, PRN will have a book value of
zero. See "Lexington Healthcare Group, Inc. and subsidiaries pro forma balance
sheet December 31, 1996," "Business--PRN Acquisition" and "Certain
Transactions." PRN is not currently operated by the Company.

PRN provides skilled nursing services to persons at home. PRN's personnel
includes (i) registered nurses, who provide a broad range of nursing care
services, including skilled observation and assessment, instruction of patients
regarding medical and technical procedures, direct hands-on treatment, and
communication and coordination with the attending physician or other service
agencies; (ii) licensed practical nurses who perform, under the supervision of a
registered nurse, technical nursing procedures, which include injections,
dressing changes, and assistance with ambulation and catheter care; (iii)
physical and rehabilitation therapists who provide services related to the
reduction of pain and improved rehabilitation of joints and muscles; and (iv)
certified nurses aides, who, under the supervision of a nurse, provide
health-related services and personal care such as assistance with ambulation,
limited range-of-motion exercises, monitoring of vital signs, non-sterile
dressing changes and bathing. The Company intends to

expand PRN's activities to include the provision of intravenous therapy to
patients at home. The Company also intends to establish PRN as a nursing pool
agency whereby it supplies nurses and other skilled personnel to hospitals,
affiliated and non-affiliated nursing homes and other home healthcare agencies
on a temporary basis.

The Company believes that the acquisitions of BALZ and PRN will be a
significant step towards creating a fully integrated healthcare company. BALZ
currently sells products to each of the Facilities, the Managed Facilities and
other facilities. Approximately 42% of BALZ revenues from October 1995 to
December 31, 1996 were derived from sales to patients in the Facilities and the
Managed Facilities. Following the acquisitions, the Company intends to offer
BALZ' products to patients of PRN. Since BALZ' inception, the Company has
provided BALZ with certain management services, in addition to office space for
which BALZ paid the Company an aggregate of $25,000. The management services
included bookkeeping and secretarial services, which were provided on an as
needed basis, as well as routine office supplies. After the Offering, PRN
intends to begin to accept homecare patients after they are released from the
Facilities. The Company intends to integrate the finance, billing, marketing and
computer services for each of its divisions to eliminate duplicate overhead.

As a condition to listing on the NASDAQ/NMS, the Company and the November
1996 Private Placement investors agreed to a repurchase of the securities sold
in the Private Placement for an aggregate of $250,000 (the original purchase
price). NASDAQ objected to the terms of the Private Placement as not being in
the public interest because of the disparity between the public offering price
and the price paid by the investors in the Private Placement. According to Rule
4300 of the NASDAQ Marketplace Rules, NASDAQ may deny initial inclusion based on
any count, condition or circumstance which exists or occurs that makes initial
inclusion unwarranted in its opinion. The Company has repurchased 250,000 shares
of Common Stock and 250,000 Warrants for an aggregate of $125,000. The remaining
250,000 shares and 250,000 Warrants will be repurchased with $125,000 of the net
proceeds of the Offering. See "Use of Proceeds".

Lexington Healthcare Group, Inc. was incorporated on February 23, 1996.
Prior to the Effective Date, LHG has operated as Lexington Health Care Group,
LLC, a limited liability company that was formed on March 8, 1995 and commenced
operations on July 1, 1995. The LLC is owned 37.5% by Jack Friedler, 37.5% by
Stephanie Friedler and 25% by Harry Dermer. Immediately prior to the Effective
Date, the members of the LLC will exchange their LLC interests and all of the
operations, assets and liabilities of the LLC for shares of Common Stock of LHG,
except that Stephanie Friedler's shares of the Company will be issued to her
husband, Jack Friedler. See "Certain Transactions." PRN was incorporated on
September 20, 1981, and BALZ was incorporated on October 5, 1995 and commenced
operations on November 1, 1995. The Company's principal offices are located at
35 Park Place, New Britain, Connecticut 06052 and its telephone number is (860)
223-6902.

THE OFFERING

Securities Offered................ 1,125,000 shares of Common Stock and 1,687,500 Warrants.
The Common Stock and the Warrants (sometimes hereinafter
collectively referred to as the "Securities") may be
purchased separately and will be transferable separately
upon issuance. See "Description of Securities" and
"Underwriting."

Warrants.......................... Each Warrant is exercisable at an exercise price of
$6.00 per share. The exercise price of the Warrants is
subject to adjustment in certain circumstances. The
Warrants are exercisable commencing one year from the
Effective Date until , 2003, the sixth
anniversary of the Effective Date. The Warrants are
redeemable by the Company commencing on the first
anniversary of the Effective Date at a price of $.05 per
Warrant on 30 days' prior written notice provided the
last sale price of the Common Stock for 20 consecutive
trading days equals or exceeds $10.00. See "Description
of Securities-- Warrants."

Common Stock Outstanding
Prior to the Offering(1)........ 2,592,000
After the Offering(1)(2)........ 4,125,000

Warrants Outstanding
Prior to the Offering........... --
After the Offering.............. 1,687,500

Risk Factors...................... The Securities offered hereby are speculative and
involve a high degree of risk and immediate substantial
dilution. Prospective investors should review carefully
and consider the information set forth under "Risk
Factors" and "Dilution."

Use of Proceeds................... The net proceeds of this Offering ($4,671,500) will be
used for the repayment of certain indebtedness, the
acquisition of PRN ($540,000 of which will be paid to an
officer of the Company), the establishment of
institutional pharmaceutical services, the expansion of
rehabilitation and nursing home services and working
capital. See "Use of Proceeds."

Proposed Nasdaq Symbol(3)......... Common Stock--LEXI
Warrants--LEXIW

- ------------------------

(1) Does not include up to 450,000 shares of Common Stock reserved for issuance
pursuant to stock options which may be granted pursuant to the Company's
1997 Stock Option Plan (none of which have been granted to date). See
"Management--Stock Option Plan." Excludes the 500,000 shares issued in the
November 1996 Private Placement which shares are being repurchased. See
"Underwriting--Determination of Offering Price."

(2) Includes (i) 300,000 shares of Common Stock to be issued in connection with
the acquisition of BALZ and (ii) 108,000 shares of Common Stock to be issued
in connection with the acquisition of PRN.

(3) The proposed Nasdaq trading symbols do not imply that a liquid and active
market will be developed or sustained for the Shares and Warrants upon
completion of the Offering.

LEXINGTON HEALTHCARE GROUP, INC.
SUMMARY FINANCIAL INFORMATION

The following table presents, for the periods and dates indicated, summary
historical, pro forma and pro forma as adjusted financial data of the Company
and the historical financial data for the four Facilities operated by Beverly
Enterprises, Inc. (the Predecessor Entity). The pro forma condensed statement of
operations data for the period July 1, 1995 (commencement of operations) to June
30, 1996 and for the six months ended December 31, 1996 gives effect to the
acquisition of PRN and BALZ as if the acquisitions had been consummated as of
July 1, 1995. The pro forma condensed statement of operations data for the six
months ended December 31, 1996 also gives effect to the sale of 111,000 shares
of Common Stock and Warrants offered hereby by the Company at an offering price
of $5.00 per Share and $.10 per Warrant and the application of the net proceeds
therefrom to repay certain indebtedness in the amount of $453,000 as described
under "Use of Proceeds" as if such transaction had occurred on July 1, 1996.
Also gives effect to the repurchase of 500,000 shares and Warrants issued in
connection with the Private Placement as described in Note 4 of the following
paragraph.

The pro forma balance sheet data reflects the transactions indicated below
as if they had occurred on December 31, 1996: (1) the acquisitions of BALZ and
PRN (the "Acquired Companies") for (i) 408,000 shares of Common Stock and (ii)
cash of $1,620,000, payable from the net proceeds arising from the sale of
395,000 shares of Common Stock and Warrants, (2) payment of a cash dividend
estimated at $485,000 to the stockholders of PRN representing its net book
value, (3) the assumed repayment of $453,000 of certain short term notes payable
from the net proceeds arising from the sale of 111,000 shares of Common Stock
and Warrants and (4) the repurchase of 500,000 shares of stock and 500,000
Warrants issued in the private placement for $250,000, $125,000 which was paid
prior to the Offering and the balance will be paid from the net proceeds arising
from the sale of 31,000 shares of Common Stock and Warrants at an offering price
of $5.00 per share and $0.10 per Warrant (See "Use of Proceeds"). The
acquisitions are accounted for as purchases. The pro forma as adjusted balance
sheet data at December 31, 1996 also gives effect to the sale of the balance of
588,000 Shares of Common Stock and the balance of 1,150,500 Warrants offered
hereby by the Company at an offering price of $5.00 per Share and $.10 per
Warrant.

This information should be read in conjunction with "Capitalization,"
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Pro Forma Unaudited Condensed Financial
Information and the Company's Financial Statements and the notes thereto, each
included elsewhere herein. The pro forma data set forth below is not necessarily
indicative of what the actual results of operations would have been had the
transactions occurred at the dates referred to above, nor do they purport to
indicate the results of future operations.

SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------
JULY 1, 1995
1996 (COMMENCEMENT OF
----------- OPERATIONS TO)
1995 1996 JUNE 30, 1996
--------- ----------- ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------- ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net revenue.......................................... $ 17,447 $ 16,939 $ 20,195 $ 33,641 $ 38,102
Operating costs and expenses......................... 17,145 16,115 19,290 32,926 36,780
----------- --------- ----------- ----------- -----------
Income from operations............................... 302 824 905 715 1,322
Other (expense)-net.................................. (70) (100) (38) (254) (89)
----------- --------- ----------- ----------- -----------
Income before income taxes........................... 232 724 867 461 1,233
Provision for income taxes*.......................... 96 294 391 195 575
----------- --------- ----------- ----------- -----------
NET INCOME........................................... $ 136 $ 430 $ 476 $ 266 $ 658
----------- --------- ----------- ----------- -----------
Net income per share................................. $ 0.04 $ 0.14 $ 0.13 $ 0.09 $ 0.19
----------- --------- ----------- ----------- -----------
Weighted number of common shares outstanding......... 3,092 3,092 3,537 3,092 3,537
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------

- ------------------------
* Historical or pro forma as applicable

JUNE 30,
1996
DECEMBER 31, 1996 -----------
-------------------------------------

PRO FORMA
-----------
HISTORICAL PRO FORMA HISTORICAL
----------- ----------- AS ADJUSTED -----------

(DOLLARS IN THOUSANDS)

Balance Sheet Data:
Cash and cash equivalents...................................... $ 1,333 $ 934 $ 3,694 $ 212
Working capital (deficiency)................................... (2,278) (1,379) 1,381 (2,381)
Total assets................................................... 10,159 14,881 17,355 9,614
Short-term borrowings.......................................... 914(a) 504 504 2,580
Total long-term debt excluding current maturities.............. 79 127 127 102
Total stockholders' equity..................................... 994 5,330 7,804 487

- ------------------------

(a) Includes $453,000 of notes payable to lenders which have not been paid
timely. The Company has verbal understandings with the lenders that these
notes will be repaid from the net proceeds of the Offering. See "Use of
Proceeds."

PREDECESSOR ENTITY
-------------------------------------
SIX MONTHS YEAR ENDED DECEMBER
ENDED 31,
Statement of Operations Data: JUNE 30, 1995 1994 1993
--------------- --------- ---------

Net patient service revenue............................. $ 15,186 $ 29,858 $ 31,791
Expenses................................................ 17,511 32,708 33,527
------- --------- ---------
Net Loss................................................ $ (2,325) $ (2,850) $ (1,736)
------- --------- ---------

AS OF
Balance Sheet Data: JUNE 30, 1995
---------------

Cash.............................................................. $ 412
Working Capital................................................... 1,574
Total assets...................................................... 6,660
Payable to affiliate.............................................. 16,637
Excess of liabilities over assets................................. (12,976)

RISK FACTORS

The Securities offered hereby are speculative and involve a high degree of
risk. Prospective purchasers should consider carefully the risk factors set
forth below, as well as other information contained in the Prospectus, before
making an investment decision.

LACK OF OPERATING HISTORY

LHG only commenced operation of the Facilities which form the core of the
Company's business in July 1995. LHG had a net income of $461,000 and $232,000
(historical) and $266,000 and $136,000 (pro forma) for the year ended June 30,
1996 and the six months ended December 31, 1996, respectively. PRN has been
operating since September 1981, but will not be acquired or operated by the
Company until the Effective Date. PRN had a net income of $193,000 and $451,000
and $263,000 (historical) and $135,000 and $308,000 and $174,000 (pro forma) for
the years ended June 30, 1995 and 1996 and the six months ended December 31,
1996, respectively. BALZ was formed in October 1995 and commenced operations on
November 1, 1995 but will not be acquired or operated by the Company until
immediately prior to the Effective Date. BALZ had a net income of $214,000 and
$185,000 for the eight months ended June 30, 1996, and the six months ended
December 31, 1996 respectively. The principal officers of PRN and BALZ are
officers of the Company. Certain shareholders of BALZ and PRN are affiliates of
the Company. See "Certain Transactions." LEV, which is a wholly-owned subsidiary
of the Company, was only recently formed and has not generated any significant
revenues. There can be no assurance that the Company will continue to be
operated profitably or be able to successfully integrate acquired operations.
See the financial statements and the related notes thereto included elsewhere in
this Prospectus.

WORKING CAPITAL DEFICIENCY: EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITOR'S
REPORT

LHG had a working capital deficiency of $2,381,000 and $2,278,000 at June
30, 1996 and December 31, 1996, respectively. LHG's independent certified public
accountants have included an explanatory paragraph in their report on LHG's
financial statements for the year ended June 30, 1996. The Company believes that
its ability to continue as a going concern is dependent on its ability to
materially reduce future outlays for non-current assets and to increase the
occupancy levels at the Facilities, as well as the Company's receipt of the net
proceeds of this Offering of which $1,473,500 has been allocated to working
capital. In addition, the Company believes that the acquisitions of BALZ and PRN
will improve its working capital position since both are cash flow positive and
that since it has no plans to enter into a significant lease, the Company does
not foresee incurring cash outlays in such magnitude as those incurred in the
period ended June 30, 1996, including the $1,300,000 payment to Beverly on
behalf of Fairfield deemed a security deposit and an aggregate of approximately
$388,000 paid to third parties on behalf of Lexington House, an entity
controlled by Jack Friedler, the Company's Chief Executive Officer. Mr. Friedler
paid $100,000 to the Company against such indebtedness, which amount was used
towards the repurchase of a Private Placement investor's securities. In
addition, Mr. Friedler agreed to offset a $165,000 loan owed to him by the
Company towards such indebtedness. In addition, Mr. Friedler has agreed to pay
the Company $10,000 per month commencing May 20, 1997. In the event that LHG is
not able to effect its plans, it may not be able to continue as a going concern.
LHG's ability to continue as a going concern is dependent on their receipt of
the net proceeds of the Offering or other alternative financing. As of December
31, 1996, LHG had total current assets of $6,087,000 and total current
liabilities of $8,365,000. Potential investors should be aware of the problems,
delays, expenses and difficulties encountered by companies at this stage of
development, many of which may be beyond the Company's control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes thereto included
elsewhere in this Prospectus.

NEED FOR ADDITIONAL FINANCING

The Company believes that the proceeds of the Offering, together with
operating revenues and cash flow from BALZ and PRN, which are not currently
operated or controlled by the Company, will be

sufficient to finance the Company's working capital requirements for a period of
at least 12 months following the completion of this Offering. Management
estimates that BALZ and PRN, based on historical and projected earnings will
contribute approximately $750,000 to the Company's operations during the twelve
months following the Offering. In addition, the Company intends to utilize
approximately $1,473,500 of the net proceeds of the Offering for working
capital. See "Business--Company Strategy." The continued expansion and operation
of the Company's business beyond such 12 month period and its ability to make
any acquisitions may be dependent upon its ability to obtain additional
financing. There can be no assurance that additional financing will be available
on terms acceptable to the Company, or at all. In the event that the Company is
unable to obtain additional financing as it becomes necessary, the Company may
not be able to achieve all of its business plans. In addition, the nature of the
Company's business requires it to carry significant accounts receivable. The pro
forma balance sheet as of December 31, 1996 included accounts receivable of
approximately $5,670,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

CONFLICTS FROM RELATED PARTY TRANSACTIONS

The Facilities are leased from Fairfield Group Health Centers Limited
Partnership ("Fairfield"), a partnership of which Jack Friedler, the Company's
Chief Executive Officer, principal stockholder and a director is a limited
partner. Fairfield has informed the Company that other entities were willing to
lease such premises on substantially the same terms as the Company's current
lease. Lexington House, the Managed Facility in Connecticut is owned by Jack
Friedler and his wife. Between July 1995 and July 1996, the Company made certain
expenditures on behalf of Lexington House in anticipation that it would acquire
Lexington House. The negotiations for the acquisition were terminated between
August and September 1996 because the Company determined that such facility
required too many capital improvements. As of April 30, 1997, Lexington House is
indebted to the Company in the aggregate amount of $520,393. The $520,393
consists of management fees of $132,660, payments for Lexington House's mortgage
of $55,000, the purchase of equipment of $41,088 and the payment of bills on
behalf of Lexington House aggregating $291,645. Lexington House is obligated to
pay the Company $6,030 per month in exchange for certain management services
provided by the Company. To date, Lexington House has not made any of such
payments, nor has it made any required interest payments on the amount owed to
the Company. The total interest due as of March 31, 1997 is $47,000. Lexington
House has agreed to pay the Company $10,000 per month commencing May 20, 1997.
In addition, Jack Friedler agreed to offset a $165,000 loan owed to him by the
Company towards such indebtedness. Also, Mr. Friedler paid $100,000 to the
Company against such indebtedness, which amount was used towards the repurchase
of a Private Placement investor's securities. The amounts owed by Lexington
House to the Company are collateralized by a lien on a building owned by Mr.
Friedler. Upon the expiration of the management agreement on June 30, 1997, the
Company intends to consider discontinuing to provide management services to
Lexington House.

Suzanne Nettleton, who will be an officer of the Company upon consummation
of the acquisition, will receive $540,000 of the net proceeds of the Offering.
The Company is acquiring BALZ and PRN neither of which are currently operated or
controlled by the Company, from their respective stockholders, some of whom are
stockholders of the Company. BALZ is owned 20% by Harry Dermer, the Company's
President, 24% by Jack Friedler, the Company's Chief Executive Officer and
principal stockholder and 20% by Mary Archambalt, the Company's Secretary who
will become an executive vice president of the Company upon completion of the
acquisition. PRN is owned 25% by Jack Frieder and 25% by Suzanne Nettleton. The
remaining 50% of PRN is owned by two individuals who collectively own 66.66% of
Fairfield. The Company believes that the acquisition prices for BALZ and PRN are
favorable considering their historical and projected earnings which were
prepared by the Company's President and the Presidents of BALZ and PRN,
respectively. In addition, approximately 42%, of BALZ' revenues from its
inception through December 31, 1996 have been derived from sales to patients at
the Facilities and the Managed Facilities and 19% have been derived from sales
to patients at nursing homes owned by affiliates of shareholders of

BALZ who are not affiliated with the Company. The Company leases its executive
offices from a Company controlled by Jack Friedler and his wife, who have
informed the Company that other parties had sought to lease the offices on
similar terms. In addition, the Company compared similar space and found the
rent charged to be reasonable. The Company believes the terms of its leases and
its management agreement, are as favorable to the Company as those that could
have been obtained from nonaffiliated parties. However, the Company's
contractual relationship with entities affiliated with members of the Board of
Directors create potential conflicts of interest. There can be no assurance that
these contractual relationships with members of the Board of Directors and their
affiliates will not create an actual conflict of interest. As the Company's
President determined that such transactions were as favorable to the Company as
could be obtained from unrelated third parties, no independent fairness opinions
or appraisals were received with respect to any of the foregoing transactions.
In the future, all related party transactions will be approved by the Company's
directors who are not related to the party transacting with the Company. In the
event that the Company enters into negotiations to acquire any business or
assets of a related party it will secure an independent appraisal. Mr. Friedler
and Mr. Dermer are parties to a shareholders' agreement, effective upon
consummation of the Offering, which includes, among other things, the grant of a
mutual right of first refusal to purchase any shares of Common Stock
beneficially owned by the other stockholder and a mutual agreement to vote for
the other stockholder as a director of the Company. See "Certain Transactions."

LOSSES OF PRIOR OPERATOR OF FACILITIES

For the years ended December 31, 1994 and 1993 and the six months ended June
30, 1995, the four Facilities which were operated by Beverly Enterprises, Inc.
had net losses of $2,850,145, $1,735,725 and $2,324,691, respectively, on a
combined basis. There can be no assurance that the Company will be able to
operate such Facilities profitably in the future. See "Selected Financial Data
and Financial Statements."

RISK RELATED TO AGREEMENT WITH PHYSICIANS CHOICE, LLC

In March 1997, the Company entered into an agreement with Physicians Choice,
LLC ("PCL') whereby it agreed to provide skilled nursing and rehabilitation
services to patients in the PCL network at the Company's affiliated facilities.
Pursuant to the agreement, the Company will receive $450 per day from the
patient's insurance company for any patient referred by PCL. Although all
non-routine medical supplies or rehabilitative services provided by outside
providers, as well as pharmaceuticals above $225 per day, are billed at cost to
the patient's insurance company, the patients referred by PCL will likely
require more skilled medical personnel and certain new therapy equipment. The
Company intends to use approximately $150,000 of the net proceeds to purchase
such equipment. See "Use of Proceeds." As the Company receives more patients
from the PCL contract, it expects to hire additional skilled sub-acute medical
personnel. The Company expects to use revenues from the PCL contract to pay for
such personnel. In the event of a decline in patients referred by PCL, the
Company may have slightly higher operating costs as a result of the hiring of
such additional personnel which may adversely affect the Company's future
results of operations. In addition, Medicare is billed for any pharmaceuticals
(other than over the counter medicine) regular patients are given, while the
Company is responsible for the first $225 per day of pharmaceuticals distributed
to patients referred by PCL. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

BROAD DISCRETION IN APPLICATION OF PROCEEDS

Approximately $1,473,500 (31.5%) of the net proceeds of this Offering will
be applied to working capital and general corporate purposes. In addition, the
Company may utilize a portion of the net proceeds of this Offering currently
allocated to working capital for potential acquisitions. Stockholders of the
Company may have no opportunity to approve specific acquisitions or to review
the financial condition of any potential target. Accordingly, management of the
Company will have broad discretion over the use of such proceeds. See "Use of
Proceeds" and "Business--Business Strategy."

POSSIBLE INABILITY TO DEVELOP AND EXPAND ANCILLARY SERVICES

A significant aspect of the Company's operating strategy is the expansion of
its rehabilitation therapy services. While the Company has offered
rehabilitation therapy at its nursing homes, the Company recently formed LEV to
provide rehabilitative therapy services to the Facilities, the Managed
Facilities, non-affiliated long-term care facilities and patients at their
homes. The Company's plans include forming an institutional pharmacy. There can
be no assurance that such expansion will occur, or in the event that it does
occur, that any expanded operations will be successful. The Company intends to
utilize approximately $300,000 of the net proceeds of the Offering, to expand
LEV and $400,000 to develop an institutional pharmacy which the Company believes
is sufficient to expand LEV and to form the institutional pharmacy. The Company
plans to develop and expand other services and to provide such ancillary
services to the Company's Facilities, the Managed Facilities and to
nonaffiliated long-term care facilities. There can be no assurance that the
Company will have the necessary resources in order to achieve such expansion or
that such expansion will occur or be successful. See "Use of Proceeds" and
"Business--Company Strategy."

POSSIBLE INABILITY TO CONSUMMATE ACQUISITIONS AND SUCCESSFULLY INTEGRATE
ACQUIRED OPERATIONS

A key element of the Company's strategy for the future, is expansion through
the acquisition and development of long-term care facilities and complementary
business. Historically, LLC has experienced working capital deficiencies. In the
event that the acquisitions of PRN and BALZ, as well as the receipt of the net
proceeds of the Offering do not adequately address the Company's working capital
deficiency there can be no assurance that the Company will have sufficient
resources to effect its strategy. In addition, except for the agreements to
acquire all of the capital stock of PRN and BALZ, the Company has not entered
into any agreements to acquire any businesses. There can be no assurance that
future suitable acquisition candidates will be identified, that acquisitions can
be consummated or that the Company can develop complementary businesses, that
can be operated profitably or integrated successfully into the Company's
operations.

Growth in the Company's operations entails certain risks. In order to
integrate new facilities into the Company's operations, the Company will be
required to expend significant management and financial resources. There can be
no assurance that the Company will be able to successfully integrate new
facilities into the Company's operations or that the Company's management
techniques will continue to be effective in a larger organization. In addition,
growth through acquisition entails certain risks. The Company seeks to minimize
these risks through the due diligence and documentation process undertaken in
connection with its acquisitions. Notwithstanding the Company's due diligence
investigation when it undertakes acquisitions, there can be no assurance that
environmental and other contingent or actual liabilities do not exist which
could have a material adverse effect on the Company. See "Business--Company
Strategy."

DEPENDENCE UPON THIRD PARTY PAYORS; GEOGRAPHIC CONCENTRATION OF THIRD PARTY
PAYORS

LHG typically receives a higher rate for services to private pay and
Medicare patients than for services to patients eligible for assistance under
Medicaid programs. For the year ended June 30, 1996 and the six months ended
December 31, 1996, LHG derived approximately 89% and 89% of its net patient
revenues from Medicaid and Medicare and 11% and 11% from private and other pay
sources, respectively. For the year ended June 30, 1996 BALZ derived 80% of its
revenues from Medicare and 20% from private pay sources and Medicaid. For the
six months ended December 31, 1996, BALZ derived approximately 80% of its
revenues from Medicare and 20% from private pay sources and Medicaid. For the
years ended June 30, 1996 and the six months ended December 31, 1996, PRN
derived approximately 38% and 27% of its revenues from private pay sources and
62% and 73% from Medicaid and Medicare, respectively.

Changes in the number of private pay patients and changes among different
private pay sources could significantly affect the profitability of the Company.
In order to control escalating healthcare costs, various third party payors have
instituted proposals to limit reimbursement levels for specific services
provided.

There can be no assurance that the Company will continue to attract and retain
private patients or maintain a favorable payor mix.

Any adverse change in the regulatory environment or the reimbursement rates
paid under the Medicaid program in the states in which the Company currently
operates, particularly in Connecticut and the states that it may operate in the
future, could have a material adverse effect on the Company. See
"Business--Sources of Revenues" and "Business--Government Regulation."

GOVERNMENT REGULATION

The federal government and the states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
Medicaid and Medicare reimbursement rates described herein under the captions
"Business--Sources of Revenues" and "Business--Government Regulation" the
development and operation of nursing homes and the provision of nursing
long-term and subacute services are subject to federal, state and local
licensure and certification laws regulate many aspects of a facility, including
the number of beds, the provision of services, the distribution of
pharmaceuticals, equipment, staffing requirements, operating policies and
procedures, fire prevention measures and compliance with building and safety
codes and environmental laws. The Company believes that it is in compliance with
all applicable laws and regulations and has all required licenses to conduct its
business. There can be no assurance that federal, state or local governments
will not impose additional restrictions on the Company's activities which might
adversely affect the Company's business. The failure to maintain or renew any
required regulatory approvals or licenses could adversely affect the Company's
ability to provide its services and receive reimbursement of its expenses.
Long-term care facilities are subject to periodic inspection by government
authorities to assure compliance with the various standards established for
continued licensing under state law and certification under the Medicaid or
Medicare programs. Failure to comply with these standards could result in the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification under the Medicaid or Medicare program,
restrictions on the ability to acquire new facilities and, in extreme cases,
revocation of the facility's license or closure of a facility. There can be no
assurance that the facilities owned, leased or managed by the Company, or the
provision of services and supplies by the Company, will initially meet or
continue to meet the requirements for participation in the Medicaid or Medicare
programs.

Many states, including Connecticut, have adopted a moratorium on the opening
of any new facilities. Most states have adopted Certificate of Need or similar
laws which generally require that the appropriate state regulatory agency
approve the construction or acquisition of, or the addition of beds or services,
to long-term care facility. To the extent that a Certificate of Need or other
similar approval is required for the acquisition or construction of new
facilities or the expansion of beds, services or existing facilities, the
Company could be adversely affected by the failure or inability to obtain such
approval, changes in the standards applicable to such approval and possible
delays and expenses associated with obtaining such approval. In addition, in
most states the reduction of beds or the closure of a facility requires the
approval of the appropriate state regulatory agency and, if the Company were to
determine to reduce beds or close a facility, the Company could be adversely
affected by a failure to obtain or a delay in obtaining such approval. See
"Business--Government Regulation."

POTENTIAL ADVERSE EFFECT OF HEALTHCARE REFORM

Various branches of government have proposed a major restructuring of the
healthcare system in the United States with a view toward, among other things,
slowing the overall rate of growth in healthcare expenditures and extending
healthcare coverage by either private insurance or government programs to
currently uninsured individuals. The Company is unable to predict the impact of
healthcare reform proposals on the Company or its stock price; however, it is
possible that such proposals could have a material adverse effect on the
Company. Any changes in reimbursement levels under Medicaid and Medicare and any
changes in applicable government regulations could significantly affect the
profitability

of the Company. Various cost containment measures adopted by governmental pay
sources have begun to limit the scope and amount of reimbursable healthcare
expenses. Furthermore, governmental programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially affect the rate of
payments to facilities operated by the Company. Therefore, there can be no
assurance that payments under governmental payor programs will remain at levels
comparable to present levels or will be sufficient to cover the costs of
providing services to patients eligible for assistance under such programs. See
"Business--Sources of Revenues" and "Business--Government Regulation."

COMPETITION

The long-term care industry in particular and the healthcare industry in
general, is highly competitive. The Company competes with other providers on the
basis of the breadth and quality of its services, the quality of its facilities
and price. The Company also competes in the recruitment and retention of
qualified healthcare personnel and the acquisition and development of additional
facilities. The Company's current and potential competitors include national,
regional and local operators of long-term care facilities, as well as acute care
hospitals and rehabilitation hospitals, many of which have significantly greater
financial and other resources than the Company. In addition, the Company
competes with a number of non-profit organizations and similar businesses which
can finance capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to the Company. There can be no assurance that the
Company will not encounter increased competition in the future which could
adversely affect the Company's operating results, particularly if existing
restrictive policies relating to the issuance of Certificates of Need are
relaxed or the moratorium in Connecticut is lifted. See "Business--Competition."

DEPENDENCE UPON KEY PERSONNEL

The success of the Company and its growth strategy is dependent upon the
experience, abilities and continued services of a small group of key management
personnel, particularly Harry Dermer and Jack Friedler, the Company's President
and Chief Executive Officer, respectively. The loss of services of any of these
individuals could have a material adverse effect on the Company. The Company has
entered into five year employment agreements with each of Messrs. Friedler and
Dermer which are effective as of the Effective Date. While the Company's
management has substantial experience in the nursing home business, no assurance
can be given that such prior experience will assure the Company's success. The
Company is the owner and beneficiary of key-man life insurance policies each in
the amount of $1,000,000 on the lives of Mr. Friedler and Mr. Dermer. There can
be no assurance that the proceeds of such policies would adequately compensate
the Company for the loss of Mr. Dermer's or Mr. Friedler's services. See
"Management."

POTENTIAL SHORTAGE OF QUALIFIED HEALTHCARE PERSONNEL

At times during recent years, the healthcare industry has experienced a
shortage of qualified healthcare personnel. To date, the Company has been able
to staff its facilities appropriately with such personnel in order to maintain
its standards for quality care. However, no assurance can be given that the
Company will not be adversely affected by staffing shortages in the future. See
"Business--Employees."

IMMEDIATE AND SUBSTANTIAL DILUTION; PURCHASE OF COMMON STOCK BY EXISTING
STOCKHOLDERS AT PRICES BELOW THE OFFERING PRICE

This Offering involves an immediate and substantial dilution to investors.
Based upon an initial public offering price of $5.00 per Share and $.10 per
Warrant, purchasers of Shares and Warrants in the Offering will incur an
immediate dilution of $3.66 per Share in the net tangible book value of their
investment from the initial public offering price, which dilution amounts to
approximately 72% of the initial public offering price per Share. As a further
result of the acquisitions of BALZ and PRN, purchasers of Shares and

Warrants in the Offering will incur an immediate dilution of $4.09 per Share in
the net tangible book value of their investment from the initial public offering
price, which dilution amounts to approximately 80% of the initial public
offering price per Share. Investors in the Offering will pay $5.00 per Share, as
compared with an average cash price of $.03 per share of Common Stock paid by
existing stockholders. See "Dilution."

POSSIBLE INADEQUACY OF GENERAL LIABILITY INSURANCE

As is typical in the health care industry, the Company is subject to claims
by patients and others in the ordinary course of its business. The Company
maintains general liability insurance in amounts and with such coverages and
deductibles that are deemed appropriate by management. Although the cost of such
liability insurance has not significantly increased in recent years, there can
be no assurance that such insurance will continue to be available at acceptable
costs or that claims in excess of the Company's insurance coverage or claims not
covered by the Company's insurance will not be asserted against the Company. See
"Business--Insurance."

CONTROL BY CURRENT PRINCIPAL STOCKHOLDERS

Upon completion of the Offering, the Company's officers and directors and
their affiliates will beneficially own approximately 67% of the outstanding
shares of Common Stock. Consequently, such stockholders will have voting control
of the Company, and as a practical matter will be able to determine the outcome
of most corporate actions requiring stockholder approval, including the election
of the Company's Board of Directors and approval of the Company's policies. See
"Principal Stockholders" and "Description of Securities."

SHARES ELIGIBLE FOR FUTURE SALE

Of the 4,125,000 shares of Common stock of the Company outstanding as of the
date of this Prospectus, including the shares to be issued in connection with
the acquisitions of BALZ and PRN, 3,000,000 shares are "restricted securities,"
which are owned by "affiliates" of the Company, as those terms are defined in
Rule 144 promulgated under the Securities Act. Absent registration under the
Securities Act, a portion of the "restricted securities" will be eligible for
resale under Rule 144 commencing in June 1997 and a portion will be eligible one
year from the Effective Date. In general, under Rule 144, subject to
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is entitled to sell in brokerage transactions, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on NASDAQ or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years to sell such shares
without regard to any of the volume limitations as described above. All of the
Company's existing stockholders, have agreed not to sell or otherwise dispose of
any of their shares of Common Stock now owned for a period of twenty-four months
from the Effective Date, without the prior written consent of the
Representative. No prediction can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market prices of the Company's securities prevailing from time to time.
The possibility that substantial amounts of Common Stock may be sold under Rule
144 into the public market may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital in the
future through the sale of equity securities. See "Shares Eligible for Future
Sale."

NO DIVIDENDS AND NONE ANTICIPATED

To date, no dividends have been declared or paid on the Common Stock, and
the Company does not anticipate declaring or paying any dividends to its
stockholders in the foreseeable future, but rather intends to reinvest profits,
if any, in the development and expansion of its business. See "Dividends."

LACK OF MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY DETERMINATION OF
OFFERING PRICE

Prior to this Offering, there has been no public market for and there can be
no assurance that an active market in the Company's Common Stock and/or Warrants
will develop or be sustained after this Offering. Accordingly, purchasers of the
Shares and/or Warrants may experience difficulty selling or otherwise disposing
of such Shares and/or Warrants. The price of the Shares and/or Warrants and the
exercise price and other terms of the Warrants being offered hereby were
determined by negotiations between the Company and the Underwriter and are not
necessarily related to the Company's assets, earnings, book value per share, its
results of operations or any other generally accepted criteria of value and
should not be construed as indicative of their value. See "Underwriting."

The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. In addition, the market prices of the securities of many
publicly-traded companies in the health care industry have in the past been, and
can in the future be expected to be, especially volatile. Various factors and
events, including future announcements of new service offerings by the Company
or its competitors, developments or disputes concerning, among other things,
regulatory developments in the United States, and economic and other external
factors, as well as fluctuations in the Company's financial results, could have
a significant impact on the market price of the Company's securities.

NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF COMMON
STOCK FROM
NASDAQ MARKET

The Company has been approved for listing of the Common Stock on Nasdaq,
subject to completion of this Offering prior to the date that its new listing
requirements take effect. In the event that the new listing requirements go into
effect prior to the Effective Date, the Company will not qualify for NASDAQ/ NMS
as the Offering is currently structured. The Commission has approved rules
imposing criteria for listing of securities on Nasdaq/NMS, including standards
for maintenance of such listing. In order to qualify for initial quotation of
securities on Nasdaq, a company, among other things, must have at least
$4,000,000 in net tangible assets, $3,000,000 in market value of the public
float and a minimum bid price of $5.00 per share. For continued listing, a
company, among other things, must have $1,000,000 in net tangible assets,
$1,000,000 in market value of securities in the public float and a minimum bid
price of $1.00 per share. If the Company is unable to satisfy Nasdaq's
maintenance criteria in the future, its securities may be delisted from Nasdaq.
In such event, the Company would seek to list its securities on the Nasdaq
SmallCap Market, however, if it was unsuccessful, trading, if any, in the
Company's securities would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets" or the OTC Bulletin Board. As a
consequence of such delisting, an investor would likely find it more difficult
to dispose of, or to obtain quotations as to, the price of the Company's
securities.

PENNY STOCK REGULATION

In the event that the Company is unable to satisfy the maintenance
requirements for the NASDAQ National Market and its Common Stock falls below the
minimum bid price of $5.00 per share for the initial quotation, the Company
would seek to list its securities on the NASDAQ Small Capitalization Market. If
it was unsuccessful, trading would be conducted on the "pink sheets" or the
NASD's Electronic Bulletin Board. In the absence of the Common Stock being
quoted on NASDAQ, or the Company's having a minimum of $2,000,000 in
stockholders' equity, trading in the Common Stock would be covered by Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), for

non-NASDAQ and non-exchange listed securities. Under such rule, broker-dealers
who recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.

The Commission adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on NASDAQ, and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.

If the Company's Common Stock were to become subject to the regulations
applicable to penny stocks, the market liquidity for the Common Stock would be
severely affected, limiting the ability of broker-dealers to sell the Common
Stock and the ability of purchasers in this Offering to sell their Common Stock
in the secondary market. There is no assurance that trading in the Common Stock
will not be subject to these or other regulations that would adversely affect
the market for such securities.

RELATIONSHIP OF REPRESENTATIVE TO TRADING

The Representative may act as a broker or dealer with respect to the
purchase or sale of the Common Stock and the Warrants in the over-the-counter
market where each is expected to trade. The Representative also has the right to
act as the Company's exclusive agent in connection with any future solicitation
of Warrantholders to exercise their Warrants. Regulation M, which was recently
adopted to replace Rule 10b-6, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), may prohibit the Representative from engaging in
any market-making activities with regard to the Company's securities for a
period of up to five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation by the Representative of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Representative may have to receive a fee for the exercise of Warrants following
such solicitation. As a result, the Representative and solicitating
broker/dealers may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable. Any temporary
cessation of such market-making activities could have an adverse effect on the
market price of the Company's securities. See "Underwriting".

LACK OF EXPERIENCE OF REPRESENTATIVE

The Representative was organized in March 1995, was first registered as a
broker dealer in December 1995, and became a member firm of the NASD in December
1995. The Representative is principally engaged in retail brokerage and market
making activities and various corporate finance projects. Although the
Representative has acted as a placement agent in private offerings and has
participated as a member of the underwriting syndicate or as a selected dealer
in four prior public offerings, it only has acted as the lead managing
underwriter in one prior public offering and has co-managed two other public
offerings. No assurance can be given that the Representative's lack of
experience as a lead managing underwriter of public offerings will not adversely
affect the Offering and the subsequent development of a liquid public trading
market in the Company's securities.

POSSIBLE ADVERSE EFFECT OF REDEMPTION OF WARRANTS

Commencing on the first anniversary of the Effective Date of this
Prospectus, the Warrants are subject to redemption by the Company at $.05 per
Warrant on 30 days' written notice; provided, that the closing bid price of the
Company's Common Stock, as reported on Nasdaq or any other national securities

exchange, for 20 consecutive trading days ending within 10 days of the notice of
redemption equals or exceeds $10.00 per share. In the event the Company elects
to redeem the Warrants, such Warrants would be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such date, it will cease to be exercisable
and the holder will be entitled only to the nominal redemption price. Because
holders of Warrants may not exercise their Warrants unless the Company delivers
a "current" prospectus to such holders, the Company will not redeem the Warrants
unless it can deliver, concurrently with the notice of redemption, a "current"
prospectus. See "Description of Securities--Warrants."

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS

The Warrants offered hereby are not exercisable unless, at the time of
exercise, (i) there is a current prospectus relating to the Common Stock
issuable upon the exercise of the Warrants under an effective registration
statement filed with the Securities and Exchange Commission, and (ii) such
Common Stock is then qualified for sale or exempt therefrom under applicable
state securities laws in the jurisdictions in which the various holders of
Warrants reside. There can be no assurance, however, that the Company will be
successful in maintaining a current registration statement. After a registration
statement becomes effective, it may require updating by the filing of a
post-effective amendment. A post-effective amendment is required (i) any time
after nine months subsequent to the effective date when any information
contained in the prospectus is over sixteen months old, (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement, or (iii) when any material change
occurs in the information relating to the plan of distribution of the securities
registered by such registration statement. The Company anticipates that this
Registration Statement will remain effective for at least nine (9) months
following the date of this Prospectus or until , 1998, assuming a post-
effective amendment is not filed by the Company. The Warrants will be separately
tradeable and separately transferable from the Common Stock offered hereby
immediately commencing on the date of this Prospectus. The Company intends to
qualify the Warrants and the shares of Common Stock issuable upon exercise of
the Warrants in a limited number of states, although certain exemptions under
state securities ("blue sky") laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. The Company will be prevented, however, from issuing shares of Common
Stock upon exercise of the Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Common Stock issuable upon
exercise of the Warrants. The Company may decide not to seek, or may not be able
to obtain qualification of the issuance of such Common Stock in all of the
states in which the holders of the Warrants reside. In such a case, the Warrants
of those holders will expire and have a no value if such Warrants cannot be
exercised or sold. See "Description of Securities."

POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of "blank check" preferred stock, $.01 par value ("Preferred
Stock"), with such designations, rights and preferences as may be determined
from time to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without further stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. The Company has no current plans to issue any
shares of Preferred Stock. See "Description of Securities."

DILUTION

Dilution represents the difference between the initial public offering price
paid by the purchasers in the Offering and the net tangible book value per share
immediately after completion of the Offering. Net tangible book value per share
represents the amount of the Company's total assets minus the amount of its
liabilities and intangible assets divided by the number of shares of Common
Stock outstanding. The net tangible book value of the Company as of December 31,
1996 (adjusted for the assumed repurchase of 500,000 shares and 500,000 Warrants
issued in the Private Placement for an aggregate of $250,000), was $398,000 or
$0.15 per share of Common Stock based on the 2,592,000 shares of Common Stock
outstanding as of such date. After giving effect to the receipt of the net
proceeds (estimated to be approximately $4,671,500) from the sale of the Shares
and Warrants offered hereby at an initial offering price of $5.00 per Share and
$.10 per Warrant, the net tangible book value of the Company at December 31,
1996 would have been $5,355,500 or $1.44 per share of Common Stock. This
represents an immediate increase in net tangible book value of $1.29 per share
to the existing stockholders and an immediate dilution to new investors of $3.66
per Share, which amounts to approximately 72% of the initial public offering
price per Share and per Warrant considered in the aggregate.

As a further result of the acquisitions of BALZ and PRN, the net tangible
book value of the Company at December 31, 1996 would have been $4,154,500 or
$1.01 per share of Common Stock. This represents an immediate increase in net
tangible book value of $.86 per share to the existing stockholders and an
immediate dilution to new investors of $4.09 per share which amounts to
approximately 80% of the initial public offering price per Share and per Warrant
considered in aggregate. A substantial portion of the increased dilution from
the acquisition of BALZ and PRN is related to the goodwill that arises from the
acquisitions.

The following table illustrates the per share dilution to new investors with
and without the acquisition of BALZ and PRN:

WITHOUT
REGARD TO THE INCLUDING THE
ACQUISITION ACQUISITION
OF BALZ AND OF BALZ AND
PRN PRN
------------- ---------------

Assumed public offering per share of Common Stock and Warrant
(combined)..................................................... $ 5.10 $ 5.10
----- -----
Adjusted net tangible book value per share of Common Stock at
December 31, 1996.............................................. 0.15 0.15
Increase per share attributable to new investors................. 1.29 0.86
----- -----
Net tangible book value per share of Common Stock after the
offering....................................................... 1.44 1.01
----- -----
Dilution to new investors........................................ $ 3.66 $ 4.09
----- -----
----- -----

The following table compares (i) the aggregate number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid for such shares by existing stockholders, with (ii) the
number of shares to be sold by the Company pursuant to this Prospectus and the
total consideration to be paid therefor under this Offering.

TOTAL CONSIDERATION
SHARES PURCHASED PAID AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------ --------- -----------

Existing Shareholders(1)................................ 2,592,000 69.73% $ 86,000 1.51% $ .03
New Investors........................................... 1,125,000 30.27% 5,625,000 98.49% $ 5.00
---------- --------- ------------ --------- -----
Total................................................... 3,717,000 100.00% $ 5,711,000 100.00% $ 1.54
---------- --------- ------------ --------- -----
---------- --------- ------------ --------- -----

- ------------------------

(1) Excluding 500,000 shares of Common Stock which are subject to an agreement
to be acquired by the Company for an aggregate of $250,000.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the
Securities offered hereby at public offering prices of $5.00 per Share and $.10
per Warrant, after deducting underwriting discounts and expenses payable by the
Company, are estimated to be approximately $4,671,500, ($5,436,275 if the Over-
allotment Option is exercised in full). The Company presently intends to use the
net proceeds as follows:

APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
- -------------------------------------------------------------------------------------- ------------ -------------

PRN acquisition(1).................................................................... $ 1,620,000 34.68%
Repayment of Indebtedness(2).......................................................... 453,000 9.70
Repurchase of Stock and Warrants issued in Private Placement(3)....................... 125,000 2.67
Establishment of Institutional Pharmacy(4)............................................ 400,000 8.56
Expansion of LEV Rehab Services and purchase of subacute care equipment(5)............ 300,000 6.42
Capital Expenditures to Nursing Home(6)............................................... 200,000 4.28
Payment of Financial Advisory Fee(7).................................................. 100,000 2.14
Working Capital(8).................................................................... 1,473,500 31.55
------------ ------
Total............................................................................. $ 4,671,500 100.00%
------------ ------
------------ ------

- ------------------------

(1) Reflects payment in full of the cash portion of the acquisition of PRN. Of
such amounts, $540,000 is payable to Suzanne Nettleton, who will become the
Company's Executive Vice President. Upon the consummation of the
acquisition. This obligation is payable in full upon the closing of this
Offering. The remainder of the purchase price for PRN will be paid by
issuing 108,000 shares of the Company's Common Stock (valued at $540,000
based on the public offering price of $5.00 per share) to Jack Friedler, the
Company's Chief Executive Officer and Principal Stockholder. In connection
with the acquisition, PRN will distribute 100% of its book value to its
shareholders. At the time of the acquisition, PRN will have a book value of
zero. The purchase price was arrived at by negotiations between the Company
and the shareholders of PRN who are not affiliated with the Company. See
"Business--PRN Acquisition" and "Certain Transactions."

(2) The Company intends to repay all of its outstanding indebtedness owed to a
non-affiliated lender, which as of April 30, 1997 amounted to an aggregate
of $300,000. The loan bears interest at an annual rate of 15% and is due on
the consummation of this Offering. The proceeds of this loan made in May
1996 were used for working capital. The Company intends to repay an
aggregate of $153,000 owed to Beverly Enterprises, Inc. This promissory note
bears interest at 12% and is to be paid out of the net proceeds of this
Offering. Such Obligation arose as a result of the Company's collection of
accounts receivable on behalf of Beverly which the Company utilized for
working capital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

(3) The Company intends to repurchase the 250,000 shares and 250,000 warrants
owned by Sean Leahy, a private placement purchaser with $125,000 from the
proceeds of the Offering. The Company repurchased the other 250,000 Shares
and 250,000 Warrants originally sold in the Private Placement prior to the
Offering for $125,000. The Company used $25,000 from operating cash flow and
$100,000 from a repayment of a portion of the Lexington House loan to
repurchase such securities. See "Underwriting--Determination of Offering
Price." The Company used the net proceeds of the Private Placement for
working capital including certain expenses of the Offering.

(4) Includes the cost of renting a suitable facility, leasehold improvements on
the facility, and purchasing a specially designed pharmacy computer system
and other equipment and working capital for the pharmacy.

(5) Includes costs related to the purchase of new equipment of approximately
$150,000 necessary to provide subacute care including new physical therapy
equipment (such as specialized beds) and an on-site x-ray room, and
expanding into the provision of rehabilitative services at homes and into
the State of Massachusetts, primarily the hiring of personnel.

(6) The Company intends to utilize this portion of the net proceeds of the
Offering for leasehold improvements and rehabilitation equipment at its
Fairfield Manor subacute unit and County Manor facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"

(7) $100,000 will be paid to the Representative pursuant to the three-year
financial advisory agreement, all of which is payable upon consummation of
the Offering.

(8) The Company may seek to utilize funds allocated to working capital for
business or product acquisitions. The Company may seek to acquire, where
feasible, companies whose businesses are compatible with those of the
Company. The Company does not currently have any agreements, commitments or
arrangements with respect to any proposed acquisitions other than PRN and
BALZ, and no assurance can be given that any acquisition opportunity will be
consummated in the future.

The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering, based upon the current status of its
operations and anticipated business plans and certain assumptions regarding
industry conditions and the Company's future revenue and expenditures. It is
possible, however, that the application of funds will differ considerably from
the estimates set forth herein due to changes in the economic climate and/or the
Company's planned business operations or unanticipated complications, delays and
expenses, as well as any potential acquisitions that the Company may consummate,
although no specific acquisition has been identified. Any reallocation of the
net proceeds will be at the discretion of the Board of Directors of the Company.

Any additional net proceeds realized from the exercise of the Over-allotment
Option (up to approximately $765,000) will be added to the Company's working
capital.

Pending application, the net proceeds will be invested principally in United
States government securities, short-term certificates of deposit, money market
funds or other short-term interest-bearing investments.

The Company estimates that the net proceeds from this Offering, together
with income from operations, including the incomes from PRN and BALZ, will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of at least 12 months from the completion of this Offering. In the
event that the Company consummates any acquisition, such funds will be derived
from the funds currently allocated to working capital. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

CAPITALIZATION

The following table sets forth the actual short-term debt and capitalization
of the Company (i) at December 31, 1996, (ii) pro forma as adjusted to reflect
300,000 shares of Common Stock issued to purchase BALZ, the issuance of 108,000
shares of Common Stock for the non-cash portion of the purchase price of PRN, as
if such acquisitions had been consummated as of December 31, 1996, the sale of
the 1,125,000 Shares and 1,687,500 Warrants being offered hereby and the
application of $453,000 of the net proceeds therefrom to repay certain
indebtedness as described (see "Use of Proceeds"), and the repurchase of 500,000
shares of Common Stock and 500,000 Warrants issued in the Private Placement for
an aggregate of $250,000. The pro forma as adjusted includes adjustment for
deferred tax benefits, the write off of financing costs on the repayment of
certain debt and the reclassification of the Company's undistributed earnings to
additional paid-in capital. This table should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.

DECEMBER 31, 1996
(IN THOUSANDS)
----------------------

PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
Short-term debt:
Notes payable and current portion of long-term debt.................. $ 914(a) 504
--------- -----------
--------- -----------
Long-term debt, excluding current portion.............................. $ 79 $ 127
--------- -----------
Stockholders' equity: (1)
Preferred Stock, $.01 par value, 1,000,000 authorized; none issued
and outstanding
Common Stock, $.01 par value, 15,000,000 authorized; 3,092,000 shares
issued and outstanding, actual 4,125,000 shares issued and
outstanding, pro forma as adjusted................................. 31 41
Additional paid-in capital........................................... 270 7,763
Members' Undistributed Earnings/Retained earnings.................... 693 0
--------- -----------
Total stockholders' equity....................................... 994 7,804
--------- -----------
Total capitalization........................................... $ 1,073 $ 7,931
--------- -----------
--------- -----------

- ------------------------

(1) Does not include any shares issuable upon exercise of outstanding warrants.

DIVIDEND POLICY

The Company has no present intention of paying any dividends on the Common
Stock in the foreseeable future, as it intends to reinvest profits, if any, in
the development and expansion of its business. The payment by the Company of
dividends, if any, in the future, rests solely within the discretion of its
Board of Directors and will depend upon, among other things, the Company's
earnings, capital requirements and financial condition, as well as other factors
deemed relevant by the Company's Board of Directors. Although dividends are not
limited currently by any agreements, it is anticipated that future agreements,
if any, with institutional lenders may also limit the Company's ability to pay
dividends.

LEXINGTON HEALTHCARE GROUP, INC.

SELECTED FINANCIAL DATA

The following table presents, for the periods and dates indicated, summary
historical, pro forma and pro forma as adjusted financial data of the Company
and the historical financial data for the four facilities operated by Beverly
Enterprises, Inc. (the Predecessor Entity). The pro forma condensed statement of
operations data for the period July 1, 1995 (commencement of operations) to June
30, 1996 and for the six months ended December 31, 1996 gives effect to the
acquisition of PRN and BALZ as if the acquisition had been consummated as of
July 1, 1995. The pro forma condensed statement of operations data for the six
months ended December 31, 1996 also gives effect to the sale of 111,000 shares
of Common Stock and Warrants offered hereby by the Company at an offering price
of $5.00 per Share and $.10 per Warrant and the application of the net proceeds
therefrom to repay certain indebtedness in the amount of $453,000 as described
under "Use of Proceeds" as if such transaction had occurred on July 1, 1996.
Also gives effect to the repurchase of 500,000 shares and 500,000 warrants
issued in connection with the Private Placement as described in Note 4 of the
following paragraph.

The pro forma balance sheet data reflects the transactions indicated below
as if they had occurred on December 31, 1996: (1) the acquisitions of BALZ and
PRN (the "Acquired Companies") for (i) 408,000 shares of Common Stock and (ii)
cash of $1,620,000, payable from the net proceeds arising from the sale of
395,000 shares of Common Stock and Warrants, (2) payment of a cash dividend
estimated at $485,000 to the stockholders of PRN representing its net book
value, (3) the assumed repayment of $453,000 of certain short term notes payable
from the net proceeds arising from the sale of 111,000 shares of Common Stock
and Warrants and (4) the repurchase of 500,000 shares of stock and 500,000
warrants issued in the Private Placement for $250,000, $125,000 of which was
paid in cash prior to the Offering and the balance will be paid from the net
proceeds arising from the sale of 31,000 shares of Common Stock and Warrants at
an offering price of $5.00 per share and $0.10 per Warrant. See "Use of
Proceeds". The acquisitions are accounted for as purchases. The pro forma as
adjusted balance sheet data at December 31, 1996 also gives effect to the sale
of the balance of 588,000 Shares of Common Stock and the balance of 1,150,500
Warrants offered hereby by the Company at an offering price of $5.00 per Share
and $.10 per Warrant.

This information should be read in conjunction with "Capitalization,"
"Summary Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Pro Forma Unaudited Condensed
Financial Information and the Company's Financial Statements and the notes
thereto, each included elsewhere herein. The pro forma data set forth below is
not necessarily

LEXINGTON HEALTHCARE GROUP, INC.

SELECTED FINANCIAL DATA

indicative of what the actual results of operations would have been had the
transactions occurred at the dates referred to above, nor do they purport to
indicate the results of future operations.

SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
JULY 1, 1995
1996 1995 1996 (COMMENCEMENT OF
----------- --------- ----------- OPERATIONS TO)
JUNE 30, 1996
------------------------
(UNAUDITED)
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------- ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net revenue............................................ $ 17,447 $ 16,939 $ 20,195 $ 33,641 $ 38,102
Operating costs and expenses........................... 17,145 16,115 19,290 32,926 36,780
----------- --------- ----------- ----------- -----------
Income from operations................................. 302 824 905 715 1,322
Other (expense)--net................................... (70) (100) (38) (254) (89)
----------- --------- ----------- ----------- -----------
Income before income taxes............................. 232 724 867 461 1,233
Provision for income taxes*............................ 96 294 391 195 575
----------- --------- ----------- ----------- -----------
NET INCOME............................................. $ 136 $ 430 $ 476 $ 266 $ 658
----------- --------- ----------- ----------- -----------
Net income per share................................... $ 0.04 $ 0.14 $ 0.13 $ 0.09 $ 0.19
----------- --------- ----------- ----------- -----------
Weighted number of common shares outstanding........... 3,092 3,092 3,537 3,092 3,537
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------

- ------------------------
* Historical or pro forma as applicable

DECEMBER 31, 1996
---------------------------------------
JUNE 30, 1996
(UNAUDITED) PRO FORMA -------------
HISTORICAL PRO FORMA AS ADJUSTED HISTORICAL
----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)

Balance sheet data:
Cash and cash equivalents................................... $ 1,333 $ 934 $ 3,694 $ 212
Working capital (deficiency)................................ (2,278) (1,379) 1,381 (2,381)
Total assets................................................ 10,159 14,881 17,355 9,614
Short-term borrowings....................................... 914(a) 504 504 2,580
Total long-term debt excluding current maturities........... 79 127 127 102
Total stockholders' equity.................................. 994 5,330 7,804 487

- --------------------------------------------------------------------------------

BENTLEY GARDENS HEALTHCARE CENTER
COUNTRY MANOR HEALTHCARE CENTER
FAIRFIELD MANOR HEALTHCARE CENTER
POND POINT HEALTHCARE CENTER
SELECTED FINANCIAL DATA
PREDECESSOR COMPANY
(DOLLARS IN THOUSANDS)

YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1995 1994 1993
----------------- --------- ---------

Statement of Operations Data:
Net patient service revenue................................................ $ 15,186 $ 29,858 $ 31,791
Expenses................................................................... 17,511 32,708 33,527
NET LOSS................................................................... $ (2,325) $ (2,850) $ (1,736)

AS OF
JUNE 30, 1995
-------------

Balance Sheet Data:
Cash..................................................................... $ 412
Working Capital.......................................................... 1,574
Total assets............................................................. 6,660
Payable to affiliate..................................................... 16,637
Excess of liabilities over assets........................................ (12,976)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LEXINGTON HEALTHCARE GROUP, INC.

OVERVIEW

Immediately prior to the Effective Date, the members of Lexington Health
Care Group, LLC will exchange their LLC interests in exchange for shares of
Common Stock of LHG.

LHG is a long-term and subacute care provider, which operates four nursing
homes (the "Facilities") with 628 beds which are leased from an affiliated
entity. See "Certain Transactions." LHG also manages two nursing homes pursuant
to management agreements. In the operation of the Facilities, the Company's
financial return is based on the overall performance of each Facility. The
Company is responsible for all costs at the Facilities and receives all revenues
generated by the Facilities. In contrast, in exchange for managing the Managed
Facilities, the Company charges a monthly management fee for services rendered
and is not exposed to the risks of ownership. The Company determines the
appropriate management fee based on the services required to manage such
facilities and the amount of patients at a particular facility. The Company
accrues a management fee of $6,030 per month for services to Lexington House and
$17,000 per month for services to the Oak Island Skilled Nursing Center where
the Company is responsible for the salaries of the Nursing Home Administrator
and Director of Nursing at the Oak Island Facility (an aggregate of
approximately $15,000 per month). Lexington House has not paid any of the
management fees owed. At April 30, 1997, Lexington House is indebted to the
Company in the aggregate amount of $520,393. For a more detailed analysis of the
components of such debt and certain payments made by Mr. Friedler on behalf of
Lexington House towards such debt, See "Liquidity and Capital Resources." The
Company believes that both management agreements are profitable based on the
services provided, which services are provided by the Company's existing
employees at no additional cost. In addition, as a manager, the Company is not a
party to third party reimbursement agreements; as an operator, the Company is a
party to such third party agreements. Therefore, as a manager, the Company does
not bear the risk of uncollectible receivables.

The four nursing homes were previously operated as traditional nursing homes
by Beverly Enterprises, Inc. ("Beverly"), an unaffiliated entity. Beverly is a
national nursing home operator. Beverly sought to leave the Connecticut and
Massachusetts market due to its unprofitability and is in the process of
divesting itself of other nursing homes in Connecticut. In addition, Beverly had
been cited for certain quality of care issues and had been experiencing a
reduced census at the Facilities. The leases between Beverly and Fairfield were
scheduled to terminate in 1996. Beverly had been discussing early termination
since 1994. Since LHG has begun operating the Facilities, it has broadened the
services provided and occupancy and reimbursement rates have increased. When the
Company first began operating the Facilities, the overall occupancy rate was
84%. As of February 1, 1997, the occupancy rate was approximately 94%. Daily
reimbursement rates have increased by approximately 9%. The Facilities and the
Managed Facilities service two basic patient populations: traditional geriatric
patients and emerging subacute care patients with higher acuity disorders who
require complex and intensive medical services. Subacute care patients generally
require more rehabilitative therapy and are residents for a shorter stay than
traditional geriatric patients. An important part of the Company's strategy is
to achieve high occupancy and a favorable payor mix by offering specialty
medical services. Favorable payor mix includes greater percentages of
higher-rate Medicare and managed care patients as well as an overall increase in
the volume of ancillary services (i.e., therapies) provided. Offering specialty
medical services allows the Company to expand its base of revenues and provide
those services in the demand by the population which the facility serves.

In the health care continuum, it is more cost effective to provide those
specialty services in the lower cost environment of a nursing home (subacute)
facility, rather than as part of the acute care (hospital) cost

structure. The Company has moved towards obtaining more short term subacute care
patients in the Facilities as opposed to a traditional nursing home where the
patients are predominantly geriatric patients. In March 1997, the Company
entered into an agreement with Physicians Choice, LLC ("PCL") whereby it agreed
to provide skilled nursing and rehabilitation services to patients in the PCL
network at the Company's affiliated facilities. PCL operates a nationwide
network of physicians and other medical providers and contracts with health
insurers, HMO's and managed care companies to become part of their group. The
agreement provides that commencing in April 1997,the Company will use its best
efforts to provide vacancies for patients referred by physicians in the PCL
network. These patients will be short term stay (generally between 10 and 20
days) patients who require rehabilitative services such as patients recovering
from strokes and accidents. The Company will receive $450 per day from the
patient's insurance company, for any patient referred by PCL and in turn will
provide for total care of the patient including, but not limited to room, board,
routine medical supplies (I.E. band-aids, over-the-counter medication,
ointments, etc.), general therapy and pharmaceutical products. However, in the
event the Company supplies more than $225 in pharmaceutical products in one day,
to a patient referred by PCL, the Company will bill the patient's insurance
company for any amount in excess of $225. Any non-routine medical supplies or
rehabilitation services provided by outside providers, as well as
pharmaceuticals above $225 per day are billed, at cost, to the patient's
insurance company. The company bills the insurance company either at the end of
the patient's stay (if such stay is shorter than 30 days) or at the end of the
month. In the event that such insurance company does not make payment, PCL is
obligated to make payment to the Company within 30 days of the insurance
companies rejection. The Company then reimburses the third party provider. The
Company pre-approves any additional products or services with the patient's
insurance company to assure that the patient is entitled to reimbursement on
such services. PCL is a subsidiary of PhyMatrix, Inc. See "Certain
Transactions."

Specifically, the Company is seeking to shift from Medicaid which is the
lowest reimbursement rate to managed care which provides for the highest
reimbursement. To a lesser degree, the Company is moving away from Medicare to
managed care. Special rehabilitative services, such as orthopedic, respiratory
and rehabilitative therapy provide for a higher reimbursement rate.

In the subacute care setting, higher rehabilitative-therapy revenues are
generated in a shorter length of stay; average length of stay (ALOS) typically
ranges from 7 to 21 days for subacute patients. The nursing home is reimbursed
by the managed care insurer at rates traditionally two or three times higher
than the typical geriatric patient, due to the intensity of the subacute medical
needs and, therefore, the higher level of services provided. (The medical
requirement establishing the need for more ancillary services is usually not
found with a geriatric or chronic-disease resident, whose care may be more of a
custodial nature.)

Payment for the higher level of services is typically made in 30 days.
Combined, the subacute services increase the Company's revenues and speed the
collection of same. Currently, about 12% of the residents at the Facilities are
subacute residents. In the next 12 months, it expects, although there can be no
assurance, to increase the percentage of subacute patients to 22% of residents.
The primary increase in subacute residents is expected to be derived from
referrals pursuant to the PCL agreement. In the Fairfield Facility, the weighted
average facility-wide rate is currently $167 per day, whereas under the PCL
contract the daily rate would be $450. The services provided to other patients
at the Facilities are the same routine nursing services as those provided to
patients referred by PCL included in the $450 daily rate, except that under the
PCL agreement the Company is responsible for up to $225 per day in
pharmaceutical products. The routine services include room & board, routine
medical services and products. Not included in the $167 rate are prescriptions
and special rehabilitation services and Medicare Part B qualified services
needed by the patients such as enteral nutrition and/or urological products
which are provided by outside vendors and billed directly to Medicare. The
increase in subacute patients has thus far been limited due to the needed
renovations and capital expenditures to the Fairfield and Country Manor
Facilities for which the Company has allocated $200,000 of the net proceeds
which renovations will be made within 60 days after the Offering. The Company
expects to purchase new equipment necessary to provide subacute care

including new physical therapy equipment, respiratory equipment, durable medical
equipment (such as specialized beds) and an on-site x-ray room. See "Use of
Proceeds." Although the Company intends to accept PCL referrals at all of its
Facilities, those patients that require special equipment will be referred to
the Fairfield and Country Manor Facilities. PCL patients admitted at the other
Facilities will be patients who do not require specially skilled subacute
medical personnel. As the Company receives more patients from the PCL contract
it expects to hire additional skilled subacute medical personnel. The Company
expects to use revenues from the PCL contract to pay for such personnel. In the
event of a decline in patients referred by PCL, the Company may have slightly
higher operating costs as a result of the hiring of such additional personnel
which may adversely affect the Company's future results of operations.

As a result of the acquisitions of BALZ and PRN which are not currently
operated by the Company, the Company is expected to be able to generate general
and administrative cost savings, although not in a significant amount, in the
operation of the combined entities compared to separate operations primarily in
the clerical area. In addition, the combined level of business for the PRN
should increase as a result of referrals from the nursing homes to PRN.
Currently, the facilities do not refer any business to PRN. This additional
business will allow cost reductions in purchasing due to greater volume without
a corresponding increase in PRN's marketing staff.

As a result of the combination of the companies, internally-generated cash
flow will increase with the addition of BALZ and PRN the Company believes the
need for external financing should be lessened.

RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD") VS. SIX MONTHS ENDED
DECEMBER 31, 1995 ("1995 PERIOD")

For the six months ended December 31, 1996, LHG had total revenues of
$17,447,000 and total expenses of $17,215,000. These expenses consisted of
salaries and benefits of $13,010,000, food, medical and other supplies of
$1,075,000, other operating expenses (including rent of $1,236,000) of
$2,574,000, corporate, general and administrative expenses of $486,000 and
interest expense of $70,000. LHG had net income of $232,000 for the six months
ended December 31, 1996.

For the six months ended December 31, 1995, LHG had total revenues of
$16,939,000 and total expenses of $16,215,000. These expenses consisted of
salaries and benefits of $12,260,000, food, medical and other supplies of
$1,073,000, other operating expenses (including rent of $1,241,000) of
$2,305,000, corporate, general and administrative expenses of $477,000 and
interest expense of $100,000. LHG had net income of $724,000 for the six months
ended December 31, 1995.

Revenues in the 1996 period increased over the 1995 period by $508,000 or
3%; $391,000 of this increase was a result of increased occupancy and $116,000
is due to an additional unrelated-party management fees.

Costs in the 1996 period increased over the 1995 period by $1,000,000 or
6.2%. The major increase was for higher salaries and benefits including $750,000
for additional nursing, dietary, and housekeeping staffing (as a result of
higher occupancy and union and non-union wage increases of approximately 4%),
higher therapy costs of approximately $380,000 and occupancy-driven higher
operating expenses in housekeeping, laundry, and nursing.

RESULTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1995 ("COMMENCEMENT OF OPERATIONS") TO
JUNE 30, 1996

LHG had total revenues of $33,641,000 for the period ended June 30, 1996.
LHG had total expenses of $33,180,000 for the period ended June 30, 1996. These
expenses consisted of salaries and benefits of $24,839,000, food, medical and
other supplies of $2,065,000, other operating expenses (including rent of

$2,468,000) of $4,896,000, corporate, general and administrative expenses of
$1,126,000 and interest expense of $254,000. LHG had net income of $461,000 for
the period ended June 30, 1996.

LHG's financial statements have been prepared under the assumption that it
has converted to a corporation, which will occur immediately prior to the
Effective Date; therefor, it would have been obligated to pay $195,000 in income
taxes and would have had net income of $266,000.

During this period, the Company began its operations of the nursing homes
and incurred startup and financing costs which have been reduced in later
periods. Revenues in the second six months of this period decreased as the
Company experienced some vacancies due to construction of a sub wing at the
Fairfield Facility but implemented plans to improve patient mix and census.
Expenses in the second six months increased by a total of $750,000 or 4.8% due
to higher salaries and benefits ($319,000), higher legal, accounting and
professional costs ($172,000), higher laundry and housekeeping costs to improve
service ($283,000) and higher interest ($54,000).

LIQUIDITY AND CAPITAL RESOURCES

LHG has primarily financed its operations through operating revenues,
borrowings from the prior operator of the facilities, the Medicaid overpayment
from the State of Connecticut and other private lenders including stockholders,
by financing its accounts receivable and through a private placement of 500,000
shares of Common Stock and 500,000 Warrants which resulted in net proceeds of
approximately $215,000, which was net of underwriting commissions of $25,000 and
professional and other expenses of approximately $10,000. The Company used the
proceeds of the private placement for working capital, including certain
expenses of the Offering. The Company repurchased $125,000 of such securities,
by using $25,000 from cash flow and $100,000 paid by Mr. Friedler on behalf of
Lexington House. The commissions paid to the Underwriter of $25,000 will not be
repaid to the Company.

Start up and initial period operations have consumed a large amount of the
Company's cash and working capital; going forward certain earlier needs will not
re-occur. As a result of the acquisitions, internally-generated cash flow will
increase from the addition of BALZ and PRN and the need for external financing
should be lessened.

The arrangement providing for collection by the Company of certain
receivables of Beverly's arose in as much as Beverly's outstanding Medicaid
billings (constituting the overwhelming majority of its receivables) were paid
by Connecticut in accordance with procedure to the then current operator of the
facility where the services were performed. Accordingly, the only way to enable
Beverly to collect its fees for services rendered through cessation of its
operations was to have the subsequent operator collect on its behalf and remit.
This constituted a standard operating procedure.

However, because of certain delays experienced by the Company in billing and
collection which arose during the earlier months of its operation of the
facilities, Beverly agreed to allow the Company to repay collections made on
behalf of Beverly over time, with interest at 12%. The amounts collected were
memoralized in a promissory note, dated December 5, 1995 which amounts bear
interest at 12%. As of March 1, 1997, there was a $153,000 balance on the note
which is to be repaid out of the proceeds of the Offering. In addition, as of
March 31, 1997 the Company owes Beverly an additional $393,700 which is treated
as an account payable. Such amounts are due to Beverly for collection of
receivables. That amount is net of approximately $200,000 of chargebacks from
Medicaid which, in the Company's belief, are offsettable against amounts
otherwise owing to Beverly, since the chargebacks pertained to periods prior to
June 30, 1995. The Company intends to pay such amounts out of operating cash
flow, as available. These amounts are subject to chargebacks from Medicaid
pertaining to periods prior to June 30, 1995. To date, the Company has paid
approximately $2,500,000 to Beverly in consideration for amounts collected on
its behalf.

In July 1995, LHG borrowed an aggregate of $50,000 on an interest free basis
from South Side Agency, an unaffiliated investor. South Side Agency was
originally hired to provide payroll services. As part of the arrangement, South
Side advanced a $50,000 payment for FICA. The Company was not satisfied with
South Side's services and terminated them. It was agreed that the $50,000
advanced by South Side would be repaid by the Company, at a later date, without
interest. The balance as of April 30, 1997, on the loan from South Side is
$5,500.

In March 1996, LHG entered into a revolving credit facility collateralized
by LHG's accounts receivable. The facility bore interest at 9.75% and was paid
in its entirety in July 1996. The proceeds were used for working capital. The
Company terminated such arrangement because of high expenses related to
monitoring the loan and because it received the loan from Iatros.

In May 1996, LHG borrowed an aggregate of $350,000 from Hirsh Wolf, an
unaffiliated lender which loan bears interest at the rate of 15%. The loan which
is personally guaranteed by Jack Friedler, the Company's Chief Executive
Officer, had a balance of $300,000 as of December 31, 1996. Such loan will be
repaid from the proceeds of the Offering. In July 1996, LHG borrowed $500,000
from Iatros Health Network, Inc. ("Iatros") a non-affiliated entity. This loan
bore interest at the prime rate plus 2%. The loan which was due at the end of
January, 1997, was paid $50,000 in October 1996 and the balance was repaid in
full in December, 1996. Iatros had sought to enter into a joint venture with the
Company or to acquire it. During such negotiations, Iatros loaned the Company
$500,000 for working capital purposes. Since the Company paid the note early,
Iatros agreed to waive the interest. The loan was paid from the Medicaid
overpayment.

In addition, between October 1995 and July 1996, LHG borrowed an aggregate
of $286,000 from Jack Friedler and Harry Dermer with an annual interest rate of
10%. $104,000 of such loan was repaid in August 1996 to Mr. Friedler, because
Mr. Friedler had borrowed the money personally on a short-term basis. The source
of repayment was normal operating revenues and receipt of accounts receivable
which declined in August from $4,800,000 to $4,300,000. The loan, which was used
for working capital, is payable on demand but is not anticipated to be repaid in
the next 12 months.

The Company believes that by eliminating outlays such as the $1,300,000
payment to Beverly, which was deemed a security deposit paid to Fairfield, which
is 33.33% owned by Jack Friedler and the payments of approximately $388,000 made
on behalf of Lexington House, Inc. which is owned by Jack Friedler, the
Company's Chief Executive Officer and principal stockholder and his wife, it can
substantially improve its liquidity. The $1,300,000 payment was required as a
condition to lease the Facilities to the Company. As of April 30, 1997,
Lexington House is indebted to the Company in the amount of $520,393 plus
$47,000 of interest which has not been accrued by the Company. Jack Friedler
paid $100,000 to the Company against such indebtedness, which amount was used
towards the repurchase of a Private Placement investor's securities. In
addition, Mr. Friedler agreed to off set a $165,000 loan owed to him by the
Company towards such indebtedness. Also, Lexington House has agreed to pay the
Company $10,000 per month commencing May 20, 1997 against such indebtedness. Of
the $520,393, $132,660 relates to management fees owed to the Company pursuant
to its management agreement. The management agreement calls for a $6,030 monthly
management fee for certain management services provided by the Company for
Lexington House, none of which have been paid. Lexington House has not paid the
Company because it was awaiting certain amounts owed to it from Medicare.
Commencing on May 20, 1997, Lexington House has agreed to pay the Company
$10,000 per month towards its indebtedness. Upon the expiration of the
management agreement on June 30, 1997, the Company intends to consider
discontinuing to provide management services to Lexington House. As part of the
lease, the Company paid approximately $1,300,000 to Beverly on behalf of
Fairfield. In addition, the original lease called for higher rental payments
throughout the term of the lease. The lease was subsequently and retroactively
renegotiated to a lower rent throughout the life of the lease. The amounts paid
to Beverly and the difference ($1,000,000) between the old rent for the first
year which had been previously paid by the Company prior to renegotiation and
the new rent were treated as a security deposit of $2,300,000 and were so
identified in the lease. Management believed that the landlord's requirement of
such security deposit was reasonable considering the value of the property and
the fact that at the time it entered into the lease the Company was a new entity
with no operating history. The Company intends to apply the amounts deemed as a
security deposit to its last year of rental payments as permitted in the lease.
In addition, the Company expended approximately $600,000 in capital improvements
to the Facilities. The Company expects that capital expenditures for the
Facilities should not exceed $200,000

over the next 12 months. The Company has allocated a portion of the net proceeds
for this purpose. See "Use of Proceeds." Any capital improvements made to the
Facilities belong to the landlord. However, any amounts expended for capital
improvements are generally recouped in their entirety beginning the next fiscal
year through the state reimbursement system, which sets the following year's
rate based on all costs associated with operating a facility, including capital
expenditures. In addition, the interest on short-term borrowings of $254,000 was
higher during the first year of operations and has subsequently decreased to
$70,000 in the six months ended December 31, 1996. Interest costs are expected
to further decrease after the Offering when the debt is repaid out of the
Offering proceeds. The Company has intensified its efforts to collect accounts
receivable which have decreased by $1,249,000 from June 30, 1996 to December 31,
1996. Proceeds of the Offering not immediately used will be invested and any
interest earned will be added to the Company's working capital.

The Company believes that the acquisitions of BALZ and PRN will improve its
liquidity by enabling the Company to utilize those entities positive cash flows.
The Company is acquiring PRN in exchange for $1,620,000 in cash and 108,000
shares of Common Stock. The cash portion is to be paid out of the net proceeds
of the Offering. The acquisition will be accounted for as a purchase. The
Company is acquiring BALZ in exchange for 300,000 shares of Common Stock. The
acquisition will be accounted for as a purchase.

The Company expects to integrate the computer systems of each of its units
and to otherwise consolidate responsibilities and streamline operations. The
Company believes that following the acquisitions of BALZ and PRN and its receipt
of the net proceeds of the Offering that the Company's working capital needs
will allow it to continue its operations for at least 12 months following the
Offering. The Company intends to utilize $200,000 of the Offering proceeds to
make capital improvements at the Fairfield and Country Manor Facilities,
$300,000 to expand the operations of LEV and to purchase rehab equipment and
$400,000 to establish an institutional pharmacy. The $300,000 directed to LEV
will be utilized for working capital to hire personnel and to purchase rehab
equipment. The $400,000 allocated to the institutional pharmacy is for the
purchase of a pharmaceutical computer system, leasehold improvements, other
equipment and working capital. All other obligations of the Company will be paid
out of cash flow. The operations of BALZ and PRN are cash flow positive and are
expected, based on historical and projected earnings, although there can be no
assurance, to contribute approximately $750,000 to the Company's operations
during the 12 months following the Offering.

At June 30, 1996, LHG had cash of $212,000, accounts receivable of
$5,585,000 and prepaid and other current assets of $159,000. LHG also had
non-current assets of $3,585,000 which consisted primarily of a security deposit
of $2,282,000, equipment and leasehold improvements of $462,000 and an 8% note
in the principal amount of $394,000 due from Lexington House, Inc. (an entity
owned by Jack Friedler). The obligations under the note have resulted in
interest of $47,000 which the Company has not accrued. LHG made certain
expenditures on behalf of Lexington House, Inc. in anticipation that LHG would
acquire Lexington House, Inc. Subsequently, the negotiations for the sale were
terminated because the Company determined that such facility required too many
capital improvements. At April 30, 1997, Lexington House is indebted to the
Company in the aggregate amount of $520,393 which represents $132,660 of
management fees, payments for Lexington House's mortgage of $55,000, the
purchase of equipment of $41,088 and the payment of bills on behalf of Lexington
House of $291,645. Lexington House has agreed to pay the Company $10,000 per
month, towards its obligations, commencing May 20, 1997. In addition, Mr.
Friedler on behalf of the Company paid $100,000 to Mr. Wiseman to repurchase his
stock. This $100,000 is to be deducted from the amounts owed the Company by
Lexington House. Lexington House was not able to pay the Company because it is
owed certain significant amounts (approximately $600,000) by Medicare. The
medicare obligation has accrued over the last 15 months. The Company believes
that the amounts owed it by Lexington House are recoverable. The amounts owed by
Lexington House are collateralized by a building worth approximately $350,000.
In addition, Mr. Friedler has agreed to offset $165,000 owed to him by the
Company. Upon the expiration of the management agreement on June 30, 1997, the
Company intends to consider discontinuing to provide management services to
Lexington House. The Company does not believe that the discontinuance would have
a material effect on its operations and/or cash flows.

At June 30, 1996 and December 31, 1996, LHG had a working capital deficiency
of $2,381,000 and $2,278,000, respectively. As a result of such working capital
deficiency, LHG's accountants included an explanatory paragraph in their report
on LHG's financial statements for the year ended June 30, 1996. The

Company believes its ability to continue as a going concern is dependent on its
ability to materially reduce future outlays for non-current assets and to
increase the occupancy levels at the Facilities, as well as the Company's
receipt of the net proceeds of the Offering of which $1,473,500 has been
allocated to working capital. The Company believes that the acquisitions of BALZ
and PRN will improve its working capital position and that its past outlays for
non-current assets are of a non-recurring nature.

At December 31, 1996, LHG had cash of $1,333,000, accounts receivable of
$4,336,000 and prepaid and other current assets of $324,000. At December 31,
1996, LHG had a working capital deficiency of $2,278,000, essentially unchanged
from June 30, 1996. The $1,249,000 reduction in accounts receivable from June
30, 1996 to December 31, 1996 was because of the timing of the collection of its
Medicaid payments from the State of Connecticut. In June of each year, the State
of Connecticut delays the payment of 50% of its June Medicaid payments into its
next fiscal year. In July, the state pays 50% of its June payment when it pays
the July payment. The Company's July payment included $910,000 from June. In
addition, management instituted new accounts receivable collection and
monitoring procedures which reduced the amount of aging of accounts receivable.
Notes payable decreases were offset by increases in accounts payable and accrued
liabilities. The cash of $1,333,000 includes the amounts received from the
Medicaid over payment. In the event the Company had returned the entire
overpayment it would most likely not have been able to repay Iatros and would
not have been able to pay the vendors the $800,000. However, if the Company made
such payments it would have had cash of $83,000 on December 31, 1996 and most
likely would have had to seek alternative financing. There can be no assurance
that the Company would have been able to obtain such financing on acceptable
terms, or at all.

As a result of the Company receiving the majority of its revenues from third
party payors, there is lag time between when the services are performed and when
they are paid for. Medicaid, which is payable by the State of Connecticut,
remits payment for the previous month on the 15th of the next month. In December
1996, the Company received an overpayment of $2,500,000 from the State of
Connecticut for Medicaid reimbursement as a result of a clerical error by the
State. The Company immediately reimbursed the State $800,000 and made
arrangements with the State to repay the $1,700,000 balance as follows: $450,000
to be deducted each month from its Medicaid payment and the balance of $350,000
to be paid out of the proceeds of the Offering. On April 15, 1997, the state
deducted the balance out of its April Medicaid payment. The balance owed bore no
interest. In the event the balance was not paid in accordance with the
arrangement, the State informed the Company that it would refer the matter to
the Attorney General's Office. Since the State of Connecticut was directly
withholding the amounts due from the Company's monthly Medicaid payments, the
Company did not believe that there was any substantial likelihood that such
matter would be referred to the Attorney General's Office. Medicaid pays the
Company approximately 30 days from its receipt of a bill which the Company
submits at the end of each month. The overpayment was used to repay Iatros
$450,000, which represented its total indebtedness to such party, and to repay
certain vendors an aggregate of approximately $800,000. Because the Company was
aware that its Medicaid payments would be reduced it had to take certain steps
to reduce the burden on its liquidity. These steps included significantly
reducing all overtime and postponing any non-essential purchases and capital
improvements. In addition, the Company met with Medicare and negotiated an
acceleration of some past payments due the Company resulting in a $265,000
payment to the Company. Other than the repayment of the Medicaid overpayment,
the Company is not aware of any claims for reimbursement of amounts previously
received from third party payors, although Medicare and Medicaid have the right
to audit the Company's payments.

Following the Offering, the Company may seek to obtain a line of credit from
a bank, which would likely be secured by its accounts receivables. The Company
has not had any discussions with respect to such line of credit.

Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of LHG.

BALZ MEDICAL SERVICES, INC.

SELECTED FINANCIAL DATA

(DOLLARS IN THOUSANDS)

NOVEMBER 1,
1995
SIX MONTHS (COMMENCEMENT OF NOVEMBER 1, 1995
ENDED OPERATIONS) TO (COMMENCEMENT OF
DECEMBER 31 DECEMBER 31 OPERATIONS) TO
1996 1995 JUNE 30, 1996
--------------- ------------------- -----------------

(UNAUDITED)
Statement of Operations Data:
Net revenue.................................................... $ 658 $ 81 $ 745
Operating costs and expenses................................... 343 78 374
----- --- -----
Income before provision for income taxes......................... 315 3 371
Provision for income taxes....................................... 130 -- 157
----- --- -----
NET INCOME....................................................... $ 185 $ 3 $ 214
----- --- -----
----- --- -----

DECEMBER 31, JUNE 30,
1996 1996
------------- ----------

UNAUDITED
Balance Sheet Data:
Cash and Cash equivalents............................................................. $ 81 $ 16
Working capital....................................................................... 400 219
Total assets.......................................................................... 1,045 756
Short-term borrowings................................................................. 30 60
Total stockholders' equity............................................................ 419 234

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BALZ MEDICAL SERVICES, INC.

OVERVIEW

BALZ was formed in October 1995 and commenced operations on November 1, 1995
to provide medical supplies, durable medical equipment and other medical
supplies to the Facilities, the Managed Facilities and other non-affiliated
nursing homes, doctors and patients at their homes. BALZ markets its products in
Connecticut, Massachusetts and New York. Approximately 42% of its revenues from
its inception through December 31, 1996 were derived from sales to patients in
the Facilities and the Managed Facilities. In addition, BALZ generated 19% of
its revenues from sales to facilities controlled by affiliates of other owners
of BALZ who are not affiliates of the Company. The Company expects those
percentages to be reduced as BALZ's business is expanded.

RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996

BALZ generated net revenues of $658,000 for the six month period ended
December 31, 1996. Costs of goods amounted to $196,000. This resulted in a gross
profit of $462,000.

BALZ incurred general and administrative expenses of $147,000 for the six
month period. These expenses consisted primarily of salaries and rental
expenses. BALZ paid LHG an aggregate of $19,000 for the six months ended
December 31, 1996 for management services, rent and general and administrative
expenses. BALZ had income from operations of $315,000 and provision for income
taxes of $130,000, resulting in a net income of $185,000.

RESULTS OF OPERATIONS--
EIGHT MONTHS ENDED JUNE 30, 1996

BALZ generated net revenues of $745,000 for the eight month period from
November 1, 1995 to June 30, 1996. Costs of goods sold amounted to $247,000.
This resulted in a gross profit of $498,000. Revenues are recognized at the time
the medical supplies are provided to the nursing home facility. Substantially
all of the Company's revenues are billed to Medicare under the provisions of
reimbursement formulas and regulations in effect.

Net operating revenues include amounts estimated by management to be
reimbursable by Medicare; such reimbursements are subject to audit by Medicare
and estimates are recorded for potential adjustments that may result.
Differences between the estimated amounts accrued and final settlements are
reported in operations in the year of settlement.

BALZ incurred general and administrative expenses of $127,000 for the eight
month period. These expenses consisted primarily of salaries and rental
expenses. BALZ paid LLC an aggregate of $25,000 for the period ended June 30,
1996 for management services, rent and general and administrative expenses. BALZ
had income from operations of $371,000 and incurred income taxes of $157,000,
resulting in a net income of $214,000.

LIQUIDITY AND CAPITAL RESOURCES

To date, BALZ has primarily financed its operations through borrowings from
its stockholders, the sale of Common Stock and revenues from operations. BALZ
borrowed an aggregate of $60,000 pursuant to a series of promissory notes which
bear interest at the rate of 10% and are payable on demand. BALZ

raised $30,000 through the sale of shares of Common Stock. BALZ subsequently
repurchased a portion of such shares for an aggregate of $10,000 and has repaid
$30,000 of the demand notes.

As of June 30, 1996, BALZ had cash of $16,000, accounts receivable of
$649,000, net of allowance for uncollectible amounts, inventory of $23,000 and
deferred taxes of $50,000. As of December 31, 1996, BALZ had cash of $81,000,
accounts receivable of $785,000, inventory of $27,000 and deferred taxes of
$130,000. Immediately prior to the Effective Date, the shareholders of BALZ have
agreed to exchange their shares of BALZ for an aggregate of 300,000 shares of
Common Stock of the Company.

Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of BALZ.

PROFESSIONAL RELIEF NURSES, INC.

SELECTED FINANCIAL DATA

(DOLLARS IN THOUSANDS)

SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------

1996 1995 1996 1995
--------- --------- --------- ---------

(UNAUDITED)

Statement of Operations Data:
Net revenue............................................................ $ 2,090 $ 1,686 $ 3,821 $ 3,042
Operating costs and expenses........................................... 1,794 1,575 3,300 2,813
--------- --------- --------- ---------
Income before provision for income taxes................................... 296 111 521 229
Provision for state income taxes........................................... 33 14 70 36
--------- --------- --------- ---------
NET INCOME................................................................. 263 97 451 193
Pro forma federal income taxes............................................. 89 33 143 58
--------- --------- --------- ---------
Pro forma net income....................................................... $ 174 $ 64 $ $308 $ 135
--------- --------- --------- ---------
--------- --------- --------- ---------

JUNE 30,
--------------------
1996 1995
DECEMBER 31, --------- ---------
1996
---------------
(UNAUDITED)

Balance Sheet Data:
Cash and cash equivalents....................................................... $ 130 $ 261 $ 198
Working capital................................................................. 420 433 271
Total assets.................................................................... 792 817 616
Total stockholders' equity...................................................... 485 492 329

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PROFESSIONAL RELIEF NURSES, INC.

OVERVIEW

PRN provides skilled nurses and nursing services in the homes of patients.
Substantially all of PRN's revenues are derived from third party payers such as
Medicare, Medicaid and private insurance companies. PRN bills Medicare and
Medicaid weekly for its claims. PRN is not aware of any material pending claims
or unsettled matters. PRN was formed in 1981.

SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1995.

Net patient service revenue increased by $404,000 or 24%, to $2,090,000 for
the six months ended December 31, 1996 from $1,686,000 for the six months ended
December 31, 1995. This increase was primarily due to the increased number of
patients receiving care from PRN nurses, particularly in therapy services. At
December 31, 1996 revenues from Medicare and Medicaid accounted for 73% of total
revenues compared to 64% for the prior year period. At December 31, 1996, the
revenues derived from Medicare and Medicaid accounted for 73% of revenues with
Medicaid accounting for the majority of the increase. Medicaid reimburses the
Company at a higher rate then Medicare, and also pays every two weeks due to the
fact that PRN is currently an online recipient. The effect on the future results
will be an increase in per patient reimbursement with less turnaround time
between billing and reimbursement.

Salaries and benefits increased $272,000 or 38%, to $988,000 for the six
months ended December 31, 1996 from $716,000 for the six months ended December
31, 1995. The largest portion of this increase is attributable to the increased
amount of service provided, and the addition of another employee involved in
administration. As a percentage of revenues, salaries and benefits amounted to
47% of sales at December 31, 1996, compared to 42% in the prior year period.

Operating expenses decreased by $53,000 or 6%, to $806,000 for the six
months ended December 31, 1996 from $859,000 for the six months ended December
31, 1995. The reduction was due to stringent cost controls including staff
vacancies at a higher rate than previously experienced. As a percentage of
revenue, operating expenses were 39% for the six months ended December 31, 1996
compared to 51% in the prior year.

Income from operations increased $185,000 or 167%, to $296,000 for the six
months ended December 31, 1996 from $111,000 for the six months ended December
31, 1995. This increase was a result of the increase in revenues without a
corresponding increase in operating expenses.

FISCAL YEAR ENDED JUNE 30, 1996 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1995.

Net patient service revenue increased by $779,000, or 26%, to $3,821,000 for
the year ended June 30, 1996 from $3,042,000 for the year ended June 30, 1995.
This increase was primarily due to the increased number of patients receiving
care from PRN nurses, particularly in therapy services. At June 30, 1996,
revenues from Medicare and Medicaid accounted for 62% of total revenues compared
to 64% for the prior year.

Salaries and benefits increased $420,000, or 37%, to $1,563,000 for the year
ended June 30, 1996 from $1,143,000 for the year ended June 30, 1995. The
largest portion of this increase is attributable to the increased amount of
service provided. As a percentage of revenues, salaries and benefits amounted to
41% of sales at June 30, 1996, compared to 38% in the prior year.

Operating expenses increased $67,000, or 4%, to $1,737,000 for the year
ended June 30, 1996 from $1,670,000 for the year ended June 30, 1995. This
increase is principally due to an expanded volume of

services provided. As a percentage of revenue, operating expenses were 45% for
the year ended June 30, 1996 compared to 55% in the prior year. This reduction
was due to the fact that certain fixed expenses did not proportionately increase
with revenues.

Income from operations increased $292,000, or 128%, to $521,000 for the year
ended June 30, 1996 from $229,000 for the year ended June 30, 1995. This
increase was a direct result of the increase in revenues.

Provision for pro forma Federal and historical State income taxes increased
$119,000, or 127%, to $213,000 at June 30, 1996 from $94,000 at June 30, 1996.
This increase in taxes is due to the increase in income from operations.

PRN had pro forma net income of $308,000 for the year ended June 30 1996,
compared to $135,000 for the year ended June 30, 1995. This increase of
$173,000, or 128% was a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES.

PRN's primary source of cash is from operating revenues. For the fiscal year
ended June 30, 1996, net cash provided by operating activities was $363,000. At
June 30, 1996, PRN had $497,000 in trade receivables. Of such receivables 49%
were from Medicare and Medicaid. For the six months ended December 31, 1996 net
cash provided by operating activities was $137,000. At December 31, 1996, PRN
had $549,000 of trade receivables, of which 49% were due from Medicare and
Medicaid.

PRN did not make any significant purchases of capital assets during the two
years ended June 30, 1996. PRN purchased $59,000 of equipment, during the six
months ended December 31, 1996 and does not foresee making any significant
purchases of fixed assets in the next year.

For the year ended June 30, 1996, PRN paid dividends of $288,000. For the
six months ended December 31, 1996, PRN paid dividends of $270,000. Prior to the
Effective Date, PRN plans to pay a dividend equal to its net book value.

Three stockholders of PRN have entered into an agreement to sell, for an
aggregate of $1,620,000 in cash, all of their shares of capital stock in PRN to
the Company immediately prior to the Effective Date. One shareholder, Jack
Friedler, the Company's Chief Executive Officer will be exchanging his shares in
PRN for 108,000 shares of the Company's Common Stock immediately prior to the
Effective Date.

PRN anticipates that cash flow from operations will continue to enable PRN
to meet its cash requirements for the next twelve months.

Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.

PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996

The following pro forma condensed balance sheet reflects the transactions
indicated below as if they had occurred on December 31, 1996: (1) the
acquisitions of BALZ and PRN (the "Acquired Companies") for (i) 408,000 shares
of Common Stock and (ii) cash of $1,620,000, payable from the net proceeds
arising from the sale of 395,000 shares of Common Stock and Warrants, (2)
payment of a cash dividend estimated at $485,000 to the stockholders of PRN
representing its net book value, (3) the assumed repayment of $453,000 of
certain short term notes payable from the net proceeds arising from the sale of
111,000 shares of Common Stock and Warrants and (4) the repurchase of 500,000
shares and 500,000 warrants previously issued in the Private Placement for
$250,000, $125,000 which was paid in cash prior to the Offering and the balance
will be paid from the net proceeds arising from the sale of 31,000 shares of
Common Stock and Warrants at an offering price of $5.00 per Share and $0.10 per
Warrant. The acquisitions are accounted for as purchases.

The pro forma condensed balance sheet should be read in conjunction with the
notes thereto, the financial statements of the Company, BALZ and PRN and the
related notes thereto, and with "Managements Discussion and Analysis of
Financial Condition and Results of Operations," each included elsewhere in this
Prospectus. The pro forma condensed balance sheet is not necessarily indicative
of what the actual financial position would have been had the transactions
occurred at December 31, 1996, nor does it purport to represent the future
financial position of the Company and the Acquired Companies.

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PRO FORMA BALANCE SHEET

DECEMBER 31, 1996

(IN THOUSANDS)

(UNAUDITED)

LEXINGTON
HEALTHCARE
GROUP, INC. BALZ MEDICAL PROFESSIONAL RELIEF
AND SERVICES,
SUBSIDIARY INC. NURSES, INC. ADJUSTMENTS PRO FORMA
----------- ------------- ------------------------ ------------------------------- -----------

ASSETS
- --------------------------------
Cash and cash equivalents....... $ 1,333 $ 81 $ 130 (b) $ 1,620 (a) $ (1,620) $ 934
(c) 453 (f) (485)
(d) 125 (c) (453)
(d) (250)
Accounts receivable............. 4,336 785 549 5,670
Due from related party.......... 94 (g) (94)
Deferred Taxes.................. 130 (e) 236 366
Other current assets............ 324 30 354
----------- ------ ----- -----------
Total current assets.... 6,087 1,026 679 7,324
Fixed assets.................... 610 79 689
Amortizable assets.............. 60 60
Security deposit................ 2,282 2,282
Deferred registration costs..... 286 286
Note receivable - related
party......................... 494 494
Residents' funds................ 340 340
Other assets.................... 19 34 (e) 156 (c) (44) 165
Excess Cost over Fair Value of
Assets........................ (a) 3,241 3,241
----------- ------ ----- -----------
$ 10,159 $ 1,045 $ 792 $ 14,881
----------- ------ ----- -----------
----------- ------ ----- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Notes payable and current
portion of long term debt..... $ 732 $ 13 (c) $ (453) $ 292
Notes payable - officers and
stockholders.................. 182 $ 30 212
Due to related party............ 262 63 30 (g) (94) 261
Accounts payable, accrued
expenses, etc................. 7,189 533 216 7,938
----------- ------ ----- -----------
Total current
liabilities........... 8,365 626 259 8,703
Other liabilities............... 340 340
Notes and capital lease
payable....................... 79 48 127
Deferred rent................... 381 381
----------- ------ ----- -----------
Total liabilities....... 9,165 626 307 9,551
Stockholders' equity............ 994 419 485 (c) (44) (e) 392 5,330
(f) (485) (b) 1,620
(a) (419) (a) 2,040
(d) (250) (c) 453
(d) 125
----------- ------ ----- -----------
$ 10,159 $ 1,045 $ 792 $ 14,881
----------- ------ ----- -----------
----------- ------ ----- -----------

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA UNAUDITED CONDENSED BALANCE SHEET

(IN THOUSANDS, EXCEPT SHARE/WARRANT AND PER SHARE/WARRANT DATA)

(a) To reflect the acquisitions of BALZ and PRN after December 31, 1996 as
follows:

FAIR VALUE COST OVER
OF NET FAIR VALUE
ASSETS OF ASSETS COMMON
COMPANY ACQUIRED ACQUIRED STOCK CASH
- ----------------------------------------------------------------- ----------- ----------- ----------- ---------

BALZ............................................................. $ 419 $ 1,081 $ 1,500
PRN.............................................................. 2,160 540 $ 1,620
----- ----------- ----------- ---------
$ 419 $ 3,241 $ 2,040 $ 1,620
----- ----------- ----------- ---------
----- ----------- ----------- ---------

The fair value of net assets acquired approximates the carrying value.

As required under Statement of Financial Accounting Standards 121, the
Company will continually review goodwill and other intangibles to assess
recoverability from future operations using undiscounted cash flows. The Company
will recognize the impairments in operating results, if a dimunition in value
has occured. An asset impairment exists in the event that the carrying value of
those assets exceeds the estimated future undiscounted cash flows to be
generated from their operations and eventual disposition. To the extent that the
discounted value of such cash flows are less than the carrying amount of the
assets, that differential will be charged to operations.

(b) Reflects the sale of 395,000 shares of Common Stock and Warrants of the
Company at an offering price of $5.00 per Share and $0.10 per Warrant, the
net proceeds of which will be used to pay the cash portion of purchase price
of PRN of $1,620.

(c) Reflects sale of 111,000 shares of Common Stock and Warrants of the Company
at an offering price of $5.00 per Share and $0.10 per Warrant, the net
proceeds of which will be used to repay indebtedness of $453 (See "Use of
Proceeds"). Previously unamortized deferred financing cost of $44 will be
written off.

(d) Reflects the sale of 31,000 shares of Common Stock and Warrants of the
Company at an offering price of $5.00 per Share and $0.10 per Warrant, the
net proceeds of which, together with cash of $125,000 to be paid prior to
the Offering will be used to repurchase 500,000 shares and 500,000 warrants
issued in the Private Placement.

(e) To adjust for deferred taxes.

(f) Dividend to stockholders of PRN's net book value pursuant to the acquisition
agreement.

(g) To eliminate inter-company balances.

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PRO FORMA UNAUDITED CONDENSED
STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JULY 1, 1995 (COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1996

AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

The following pro forma unaudited condensed statements of operations reflect
the transactions indicated below as if such transactions had occurred on July 1,
1995: (1) the acquisitions of BALZ and PRN (the "Acquired Companies"), (2) the
assumed repayment of $453,000 of certain short term notes payable, from the net
proceeds arising from the sale of 111,000 shares of Common Stock and Warrants at
an offering price $5.00 per Share and $0.10 per Warrant and (3) gives effect to
the repurchase of 500,000 shares and 500,000 warrants issued in connection with
the Private Placement. The Acquired Companies are accounted for as purchases. In
the opinion of management of Lexington HealthCare Group Inc. and its subsidiary
(the "Company"), all adjustments necessary to present fairly such pro forma
statements of operations have been made.

These pro forma condensed statements of operations should be read in
conjunction with the notes thereto, the financial statements of the Company,
BALZ and PRN and the related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," each included
elsewhere in this Prospectus. The pro forma condensed statements of operations
are not necessarily indicative of what the actual results of operations would
have been had the transactions occurred at July 1, 1995 nor do they purport to
indicate the results of future operations.

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)

LEXINGTON
HEALTHCARE BALZ PROFESSIONAL
GROUP, INC. MEDICAL RELIEF
AND SUPPLIES, NURSES,
SUBSIDIARY INC. INC. ADJUSTMENTS
----------- ----------- ----------- ------------------------------------------

Net revenue (including related party
management revenue of $36)............. $ 17,447 $ 658 $ 2,090
Operating costs and expenses (including
rent paid to related party of
$1,234)................................ 17,145 343 1,794 (a) 81 (c) (73)
(d) 19 (d) (19)
----------- ----- -----------
Income from operations................... 302 315 296
Other expense:
Interest expense--net.................. 70 (b) (32)
----------- ----- -----------
Income before income taxes............... 232 315 296
Provision for income taxes*.............. 96 130 122 (e) 43
----------- ----- -----------
NET INCOME--PRO FORMA.................... $ 136 $ 185 $ 174
----------- ----- -----------
----------- ----- -----------
Pro forma net income per share...........
Weighted number of common shares
outstanding............................

PRO FORMA
---------

Net revenue (including related party
management revenue of $36)............. $ 20,195
Operating costs and expenses (including
rent paid to related party of
$1,234)................................ 19,290

---------
Income from operations................... 905
Other expense:
Interest expense--net.................. 38
---------
Income before income taxes............... 867
Provision for income taxes*.............. 391
---------
NET INCOME--PRO FORMA.................... $ 476
---------
---------
Pro forma net income per share........... $ 0.13
---------
---------
Weighted number of common shares
outstanding............................ 3,537
---------
---------

- ------------------------

*Historical or pro forma as applicable

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS

SIX MONTHS ENDED DECEMBER 31, 1996

(IN THOUSANDS, EXCEPT SHARE/WARRANT AND PER SHARE/WARRANT DATA)

The following adjustments to the pro forma statement of operations for the
six months ended December 31, 1996 have been made:

(a) The amortization of goodwill arising from the acquisitions of BALZ ($27) and
PRN ($54) over 20 years.

(b) To reflect the reduction of interest expense assuming that the net proceeds
of $453 from the sale of 111,000 shares of Common Stock and Warrants at an
offering price of $5.00 per Share and $0.10 per Warrant had been applied to
the repayment of indebtedness at the beginning of the period.

(c) Adjustment to compensation expense of $73 pursuant to employment agreement
to be effective upon consummation of the acquisition, net of adjustment to
director's fees.

(d) To eliminate intercompany charges.

(e) Tax provision adjustment after giving effect to the adjustments in (b) and
(c) above.

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PRO FORMA STATEMENT OF OPERATIONS

JULY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

LEXINGTON
HEALTHCARE BALZ
GROUP, INC. MEDICAL PROFESSIONAL
AND SERVICES, RELIEF NURSES,
SUBSIDIARY(I) INC.(II) INC.(III) ADJUSTMENTS
------------ ----------- --------------- ------------------------------------------

Net Revenue (including related party
management revenue of $72).......... $ 33,536 $ 745 $ 3,821
Operating costs and expenses
(including rent expense to related
party of $2,468).................... 32,926 374 3,300 (b) 36 (e) (37)
(a) 144
(e) 37
------------ ----- ------
Income from operations................ 610 371 521
Other expense:
Interest expense--net............... 149 (c) (60)
------------ ----- ------
Income before income taxes............ 461 371 521
Provision for income taxes*........... 195 157 213 (d) 10
------------ ----- ------
NET INCOME--PRO FORMA................. $ 266 $ 214 $ 308
------------ ----- ------
------------ ----- ------
Pro forma net income per share........
Weighted number of common shares
outstanding.........................

PRO FORMA
---------

Net Revenue (including related party
management revenue of $72).......... $ 38,102
Operating costs and expenses
(including rent expense to related
party of $2,468).................... 36,780

---------
Income from operations................ 1,322
Other expense:
Interest expense--net............... 89
---------
Income before income taxes............ 1,233
Provision for income taxes*........... 575
---------
NET INCOME--PRO FORMA................. $ 658
---------
---------
Pro forma net income per share........ $ 0.19
---------
---------
Weighted number of common shares
outstanding......................... 3,537
---------
---------

- ------------------------

*Historical or pro forma as applicable

(i) Represents operations from July 1, 1995 (commencement of operations) to June
30, 1996.

(ii) Represent operations from November 1, 1995 (commencement of operations) to
June 30, 1996.

(iii) Represent operations for the year ended June 30, 1996.

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PRO FORMA STATEMENT OF OPERATIONS

JULY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following adjustments to the pro forma statement of operations for the
period July 1, 1995 (commencement of operations) to June 30, 1996 have been
made:

(a) The amortization of goodwill arising from the acquisitions of BALZ ($36) and
PRN ($108) over 20 years, giving effect to BALZ operations for the short
period of eight months.

(b) Adjustment to compensation expense (including bonuses) of $36 pursuant to
employment agreement to be effective upon consummation of the acquisition,
net of adjustments to director's fees.

(c) To reflect the reduction of interest expense assuming that the net proceeds
of $453 from the sale of 111,000 shares of Common Stock and Warrants at an
offering price of $5.00 per Share and $0.10 per Warrant had been applied to
the repayment of indebtedness at the beginning of the period.

(d) Tax provision adjustment after giving effect to the adjustments in (b) and
(c) above.

(e) To eliminate intercompany charges.

BUSINESS

The Company is a long-term and subacute care provider, which operates four
nursing home facilities (the "Facilities") with 628 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). In
addition, the Company has recently begun to offer a variety of products and
services to non-affiliated long-term care facilities. 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 are leased by the Company from a partnership of which Jack
Friedler, the Company's principal stockholder, Chief Executive Officer and
Chariman of the Board is a 33.33% limited partner, pursuant to a long-term
lease. The individuals owning the remaining portion of the partnership are
shareholders of PRN. The four nursing home facilities were previously operated
as traditional nursing homes by Beverly Enterprises, an unrelated entity who
previously leased the facilities from the Company's current landlord. Since the
Company has begun operating the Facilities, it has broadened the services
provided and occupancy and reimbursement rates have increased. In addition, the
Company manages two nursing homes (the "Managed Facilities"), Lexington House,
Inc. in Connecticut and Oak Island Skilled Nursing Center ("Oak Island") in
Massachusetts, pursuant to management agreements. Lexington House, Inc. is owned
by a partnership controlled by Jack Friedler. See "Certain Transactions." Oak
Island is a non-affiliated facility in Massachusetts.

INDUSTRY BACKGROUND

The long-term care industry encompasses a broad range of health care
services provided to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home. Long-term
care facilities offer skilled nursing care, routine rehabilitation therapy and
other support services, primarily to elderly patients. In addition, long-term
care facilities may provide a broad range of specialized health care services
such as care for Alzheimer's patients and subacute care. The Company believes
that the demand for the services provided by long-term care facilities will
increase substantially during the next decade due primarily to the general aging
of the United States population, advances in medical technology and the impact
of cost containment measures. The primary consumers of long-term care services
are persons over the age of 65 years old. The Company believes such age group
will continue to increase resulting in increased demand for long-term care
services. At the same time, government restrictions and high construction and
start-up costs are expected to limit the supply of long-term care facilities.

ADVANCES IN MEDICAL TECHNOLOGY. Advances in medical technology have
increased the demand for long-term care by increasing life expectancies and by
enhancing the ability of long-term care providers to offer, on a more
cost-effective basis, services traditionally provided only in acute care
hospitals. Sophisticated new forms of equipment and treatment have lengthened
life expectancies and extended the survival rate of trauma patients, thereby
increasing the number of individuals requiring specialized care and supervision.
In the past, the level of care required by many of these individuals was not
generally available outside acute care hospitals. However, technological
advances have enabled long-term care providers to expand the range of services
they offer which has made them an attractive alternative to acute care hospitals
in certain instances.

IMPACT OF COST CONTAINMENT MEASURES. In response to rapidly rising health
care costs, governmental and private pay sources have adopted cost containment
measures that have encouraged reduced lengths of stay in hospitals. The federal
government previously acted to curtail increases in health care costs under
Medicare by limiting acute care hospital reimbursement for specific services to
predetermined fixed amounts. Under this payment system, reimbursement for acute
care hospital services is based on regional and national rates established for
diagnosis-related groups ("DRGs") regardless of length of stay. In addition,
private insurers have begun to limit reimbursement to predetermined "reasonable
charges,"

while managed care organizations such as health maintenance organizations
("HMOs") and preferred provider organizations are attempting to limit
hospitalization costs by negotiating discounted rates for hospital services and
by monitoring and reducing hospital utilization. As a result, average hospital
stays have been shortened, with many patients being discharged despite a
continuing need for nursing care. For many of these patients, home health care
is not a viable alternative because of the complexity of medical services and
equipment required. Long-term care facilities, such as those operated by the
Company, are able to provide many of these services at significantly lower costs
than acute care hospitals due to their lower capital costs, overhead and salary
levels.

LIMITS ON SUPPLY OF LONG-TERM CARE FACILITIES. The construction of
long-term care facilities and the addition of beds or services in existing
facilities is regulated in most states. Under Connecticut law, through June 30,
2004, the Department of Public Health and Addiction Services is prohibited from
accepting or approving any requests for additional nursing home beds, with
certain limited exceptions. Other states have implemented health plans which
limit the number of long-term care beds and thus limit the number of new
facilities that can be constructed. High construction costs and start-up
expenses also act to constrain growth in the numbers of facilities. See
"--Government Regulation" and "--Competition."

COMPANY STRATEGY

The Company's operating strategy is to: (i) increase facility profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; (ii) adhere to strict cost standards at the
facility level while providing effective patient care and containing corporate
overhead expenses; and (iii) to become a fully integrated health network whereby
the Company will market medical products and supplies, rehabilitative services,
institutional pharmaceutical services and nursing services to affiliated and
non-affiliated nursing homes and hospitals, as well as patients at home.

PROVIDE HIGH QUALITY CARE. In order to provide quality care to its
residents, the Company seeks to employ highly qualified administrators and
nurses, and to retain the services of reputable medical directors. The Company's
management and committees at the facility level (composed of the facility
administrator and the facility's senior medical professionals) continually
monitor the quality of care provided to ensure compliance with Company and
government standards. The Company believes that its commitment to providing high
quality care has established the reputations of the Facilities in their local
markets. As a result, at December 31, 1996, the Company achieved an overall
occupancy rate of approximately 94%. At the time the Company began operating the
Facilities, the overall occupancy rate was 85%.

ACHIEVE OPERATING EFFICIENCIES. The Company believes that concentrating its
long-terms care facilities within a selected geographic region enables the
Company to achieve operating efficiencies through economies of scale, reduced
corporate overhead and more effective management supervision and financial
controls. Geographic concentration also allows the Company to establish more
effective working relationships with referral sources and regulatory authorities
in the states in which it operates. The Company establishes detailed operating
budgets at its facilities. The responsibility for adherence to these budgets is
at the facility level with supervisory oversight at the corporate headquarters.
By supervising compliance with these budgets at its facilities, the Company
seeks to maintain control over its operating costs.

EXPAND ANCILLARY SERVICES. The Company intends to expand its provision of
specialized ancillary services, such as rehabilitation therapy through LEV, home
healthcare through PRN, medical supplies and products through BALZ, to
nonaffiliated long-term care facilities and to the facilities operated by the
Company, as well as to patients at home, and other institutional facilities. The
Company intends to form a subsidiary to provide institutional pharmaceutical
services to such markets. See "Use of Proceeds". The Company also intends to
provide management services similar to those provided to the Managed Facilities,
to other non-affiliated facilities. The Company believes the provision of these
services is an appropriate complement to the traditional services provided at
the long-term care facilities operated by the Company. The Company bills a
monthly fee of approximately $6,030 for the management of Lexington House, the

Managed Facility in Connecticut. The Company has not received any management
fees from Lexington House. The Company receives an aggregate monthly management
fee of approximately $17,650 for managing the Oak Island nursing home. The
Managed Facilities have achieved a 99% occupancy rate since the Company began
managing them, as compared to a 87.3% occupancy rate before the Company began
managing them.

GROWTH THROUGH SELECTIVE ACQUISITIONS. The Company intends to expand
through the acquisition of long-term care facility operations (which may include
the acquisition of real property) and complementary businesses in geographic
areas in which the Company is currently operating or in other areas in which the
Company can acquire a group of facilities where operational efficiencies can be
achieved. The Company believes that concentrating long-term care facilities
within a selected geographic area reduces corporate overhead and enables the
Company to benefit from marketing efficiencies.

The Company plans to evaluate opportunities to acquire long-term care
facilities and complementary business. In evaluating opportunities, management
will consider, among other factors, location, demographics, price, the
availability of financing on acceptable terms (including lease terms), the
competitive and state regulatory environment and the opportunity to improve
performance through the implementation of the Company's operating strategy.
Although the Company continually considers and evaluates acquisitions and
opportunities for growth, other than with respect to PRN and BALZ, the Company
has not entered into any agreements with respect to future acquisitions.

PATIENT SERVICES

BASIC PATIENT AND ANCILLARY SERVICES. Basic patient services include those
traditionally provided to elderly patients in long-term care facilities with
respect to daily living activities and general medical needs. The Company
provides 24-hour nursing care by registered nurses, licensed practical nurses
and certified nursing aides in all of the Facilities. The Company also provides
a broad range of support services including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies and routine rehabilitation therapy. The
majority of these products and services are provided directly by the Company
through its wholly-owned subsidiaries.

SPECIALIZED SERVICES. Specialized health care services are those provided
to patients with medically complex needs. These services typically generate
higher profit margins because of the higher complexity of the patients' medical
conditions. The Company intends to expand the scope and range of its specialty
medical services and programs, with the goal of further enhancing revenue and
profitability and further improving upon the reputation of the Facilities as
providers of quality care.

SUBACUTE CARE. Subacute care includes those services provided to patients
with medically complex conditions who require ongoing medical and nursing
supervision and access to specialized equipment and services, but do not require
many of the other services provided by an acute care hospital. Services in this
category also include ventilator care, intravenous therapy, complex wound care,
traumatic brain injury care, post-stroke care and hospice care. The Company
provides a range of subacute care services. Although the Company currently
operates only one segregated subacute care unit, many of these services are
provided at each of the Facilities. The Company plans to continue to expand its
subacute care services by supplementing and expanding currently available
services and by developing expertise in additional areas. Subacute care services
can be provided by the Company under existing licenses held by the Facilities,
subject to prior approval of policies and procedures by appropriate regulatory
agencies.

REHABILITATION THERAPY SERVICES. The Company provides rehabilitation
therapy services at each of the Facilities. To complement the routine
rehabilitation therapy services provided to its long-term care patients, the
Company has developed specialized rehabilitation therapy programs to serve
patients with complex care needs, such as motor vehicle and other accident
victims, persons suffering from job-related injuries and disabilities,
joint-replacement patients and stroke victims. Plans have been developed to
expand the Company's provision of rehabilitation therapy services and to
increase the marketing of such

services to non-affiliated facilities. The Company recently formed LEV to
provide rehabilitative services to patients at the Facilities, the Managed
Facilities and to facilities not operated by the Company. The services to be
provided by LEV include physical, occupational and speech therapy services to
both nonaffiliated long-term care facilities and the Facilities. LEV has not
commenced any substantial activities and has only produced limited revenues to
date.

INSTITUTIONAL PHARMACEUTICAL SERVICES. Many facilities are provided with
pre-packaged pharmaceuticals and admixtures prepared by independent providers.
In order to control the cost of healthcare services and maximize profitability,
the Company intends to operate an institutional pharmacy business. The Company
is not currently operating such pharmacy and all pharmaceutical needs are being
provided by an unaffiliated third party. The Company's plan is to provide
pharmaceutical products and services to the Facilities, the Managed Facilities
and gradually to nonaffiliated facilities. There can be no assurance that it
will provide institutional pharmaceutical services to a significant number of
non-affiliated facilities. In addition to pre-packaged pharmaceuticals and
admixtures, the institutional pharmacy business maintains consultant pharmacists
and assists in preparation of billing documentation.

OPERATIONS

GENERAL. The day-to-day operations of the Facilities are managed by on-site
state licensed administrators who are responsible for the overall operation of
the Facilities, including quality of care, marketing and financial performance.
The administrators are assisted by an array of professional and non-professional
personnel (some of whom may be independent providers), including medical
directors, nurses and nursing assistants, social workers, therapists, dietary
personnel, therapeutic recreation staff and housekeeping, laundry and
maintenance personnel. The business office staff at each of the Facilities
manages the day-to-day administrative functions, including data processing,
accounts payable, billing and payroll. Members of the Company's management
review and supervise the activities of the Facility's business office.

The medical management of patients is supervised by a medical director who
is a licensed physician and receives a monthly stipend. The medical director
monitors all aspects of patient treatment. The treatment of patients is the
responsibility of the patients' attending physicians, who are not employed by
the Company and bill their patients directly for services. Attending physicians
serving patients at the Facilities are required to comply with certain
guidelines. The medical director's responsibilities include ensuring that
attending physicians comply with such guidelines. Other medical personnel such
as psychiatrists, podiatrists and audiologists are also independent providers
who serve the Facilities pursuant to contractual arrangements and bill patients
directly for services. A state-registered director of nursing at each of the
Facilities supervises that Facility's nursing staff and oversees the nursing and
clinical services provided to residents. The support services provided by the
Company, including therapeutic recreation, speech, occupational and physical
therapy, dietary advice, housekeeping, laundry and pharmaceutical services, are
performed by independent providers under contractual commitments. These
agreements are generally for a one year term and are either at a fixed fee or
provide for a fee based on the amount of services actually provided. A medical
records clerk at each of the Facilities is responsible for maintaining medical
record files, and management visits each of the Facilities regularly to ensure
compliance with Federal and state regulations.

MANAGEMENT AND FINANCIAL CONTROLS. Consistent with its strategy of
providing quality patient care and maintaining control over costs, the Company
has developed an organizational structure of centralized management intended to
increase operating efficiency. The Company stresses frequent communication among
personnel at the Facilities and executive personnel and active involvement by
management in the operation of the Facilities.

The Company conducts monthly review meetings. At such meetings, the
Company's management reviews operations of each of the Facilities, including
financial and patient care, and reviews the operational and marketing needs of
each of the Facilities. At each Facility, reports are prepared that are used by

corporate management to monitor its operations. The President of the Company
attends these monthly meetings.

The Company's integrated management and financial information systems enable
management to monitor key operations and financial data on a timely basis. Key
operating data, such as payables and billing data, cash collections and
admissions/discharge data, are entered into the system daily from workstations
located at each Facility. This information forms the basis for a variety of
management and financial reports, including monthly financial statements for
each Facility.

Each Facility operates under a detailed budget prepared through the
cooperation of the Facility and corporate personnel. Budgets are initially
prepared by corporate personnel and are then revised based on discussions with
facility personnel. Adherence to budgets is closely monitored by all levels of
management on an ongoing basis and through a monthly budget review process.

QUALITY ASSURANCE. The Company has developed a comprehensive quality
assurance program involving personnel at all levels and designed to maintain
standards of care at the Facilities. Each Facility maintains a quality assurance
committee consisting of the Facility administrator and the Facility's senior
medical professionals. The committee is responsible for monitoring and
evaluating all aspects of the Facility's operations, including patient care,
physical environment, staff appearance, patient rights, patient activities and
dietary regimen. Facility and corporate administrators are encouraged to play an
active role in quality assurance by maintaining a high-profile presence and
closely monitoring all aspects of operations. All medical and other consulting
personnel are required to prepare and submit reports at the end of each
scheduled visit identifying any patient care or other quality related issues.
Patient satisfaction surveys are conducted periodically and provide a
confidential method for patients and their families to comment on the Company's
patient care services. Discharge interviews allow the Company to assess patient
satisfaction and to isolate potential patient care issues.

MARKETING

The Company engages in local marketing efforts to promote the Facilities so
as to maintain and improve occupancy rates and mix. The Company's marketing
activities are conducted primarily by each Facility's admissions director and
administrator who together seek to establish relationships with referring
physicians, hospital discharge planners, social workers, community
organizations, local attorneys, bank trust officers and senior citizens',
Alzheimer's and other support groups. The Company intends to employ a marketing
director to conduct marketing activities at its Facilities.

The Company believes that many of the services and programs provided by the
Facilities supplement formal marketing efforts which seek to establish the
Facility's reputation in the community as a provider of quality patient care.
For example, the availability of specialized health care services can be a key
factor in the selection of the Facility. Based on the Company's experience of
the importance that patients place on the provision of specialized services in
the Facilities, the Company believes these programs also contribute to increased
occupancy by making the Facilities more attractive choices to prospective
residents. In this regard, community groups are encouraged to visit the
Facilities both to provide and to participate in entertainment events such as
musical and drama productions, and to participate in group discussion and
therapy sessions. In addition, Facility staff members serve as an information
source for local communities through speaking engagements and participation in
seminars and other events relating to healthcare issues. The Company has
developed promotional literature for each Facility focusing on the Facility's
philosophy of care and provision of services.

The Company is increasingly concentrating its market efforts on private
third party payors, such as managed care and insurance companies, as well as
hospital discharge planners, thereby developing referral sources for both its
long-term care and specialty medical services. The Company's former director of
marketing expanded the Company's marketing programs in these areas and increased
its referral base for its specialty medical programs.

In March 1997, the Company entered into an agreement with Physicians Choice,
LLC ("PCL") whereby it agreed to provide skilled nursing and rehabilitation
services to patients in the PCL network at the Company's affiliated facilities.
PCL operates a nationwide network of approximately 1,000 physicians and other
medical providers and contracts with health insurers, HMO's and managed care
companies to become part of their group. The agreement provides that commencing
in April 1997, the Company will use its best efforts to provide vacancies for
patients referred by physicians in the PCL network. These patients will be short
term stay (generally between 10 and 20 days) patients who require rehabilitative
services such as patients recovering from strokes and accidents. The Company
will receive $450 per day from the patient's insurance company, for any patient
referred by PCL and in turn will provide for total care of the patient
including, but not limited to room, board, routine medical supplies (I.E.
band-aids, over-the-counter medication, ointments, etc.), general therapy and
pharmaceutical products (up to $225 per day). However, in the event the Company
supplies more than $225 in pharmaceutical products in one day, to a patient
referred by PCL, the Company will bill the patient's insurance company for any
amount in excess of $225. Any non-routine medical supplies or rehabilitation
services provided by outside providers, as well as pharmaceuticals above $225
per day are billed, at cost, to the patient's insurance company. The Company
bills the insurance company either at the end of the patient's stay (if such
stay is shorter than 30 days) or at the end of the month. In the event that such
insurance company does not make payment within 30 days, PCL is obligated to make
payment to the Company (within 30 days of the insurance companies rejection).
The Company then reimburses that third party provider. The Company pre-approves
any additional products or services with the patient's insurance company. PCL is
a subsidiary of PhyMatrix, Inc. See "Certain Transactions."

SOURCES OF REVENUES

The Company's revenues from long-term care services are influenced by a
number of factors, including: (i) the licensed bed capacity of the Facilities,
(ii) the occupancy rates at the Facilities, (iii) the mix of patients and the
rates of reimbursement among payor categories (Private, Medicaid and Medicare)
and (iv) the extent to which certain ancillary services available to patients in
the Facilities are utilized by the patients and paid for by the respective payor
sources. The Company's management monitors both Medicaid and Medicare regulatory
developments, to assist in compliance with all reporting requirements and to
increase reimbursable services. While the Company believes that is has been
successful in meeting applicable cost ceilings and in obtaining reimbursement,
there can be no assurance that reimbursement rates will remain at present
levels. In particular, cost containment proposals at both the federal and state
levels may have an adverse effect on the Company's ability to recover its costs
of providing services to Medicaid and Medicare patients. As a result of
government regulations and moratoriums, it is difficult to increase the amount
of licensed beds that the Company can maintain. See "--Governmental Regulation."

MEDICAID. The Medicaid program refers to the various state administered
reimbursement programs created by federal law. Although Medicaid programs vary
from state to state, typically they provide for fixed rate payment to health
care providers at levels designed to compensate an efficiently and economically
operated facility. Reimbursement rates are typically determined by the state
from "cost reports" filed annually by each facility, on a prospective or in a
limited number of states on a retrospective basis. Under a prospective system,
the state sets its rate of payment for the period in advance of services
rendered. In Connecticut the formula by which the per diem rates are established
is subject to change annually and state law does not prohibit retroactive
revisions to the formula. The provider can accept the prospective rate as
payment in full for all services rendered or they can appeal the rate as not
sufficient to recoup their actual costs. Subsequent audits, can provide a basis
for the state program or the facility to retroactively recoup monies. Actual
costs incurred during the period are used to establish the prospective rate for
a subsequent period. The Connecticut Medicaid programs currently include
incentive allowances for providers whose costs are less than certain ceilings
and who meet other requirements. See "--Government Regulation."

All of the Facilities participate in the Medicaid program. Under the Federal
Medicaid statute and regulations, state Medicaid programs must provide facility
rates that are reasonable and adequate to cover

the costs that must be incurred by efficiently and economically operated
facilities in providing services in conformity with state and federal laws,
regulations and quality and safety standards. Furthermore, payments must be
sufficient to enlist enough providers so that services under the state's
Medicaid plan are available to recipients at least to the extent that those
services are available to the general population. There can be no assurance that
Medicaid reimbursement will be sufficient to cover actual costs incurred by the
Company with respect to Medicaid services rendered.

In December 1996, the Company received an overpayment of $2,500,000 from the
State of Connecticut for Medicaid reimbursement as a result of a clerical error
by the State. The Company immediately reimbursed the State $800,000 and made
arrangements with the State to repay the $1,700,000 balance as follows: $450,000
to be deducted each month from its Medicaid payment and the balance of $350,000
to be paid out of the proceeds of the Offering. On April 15, the state deducted
the $350,000 balance out of its April Medicaid payment. The balance owed bears
no interest. In the event the balance was not paid in accordance with the
arrangement, the State had informed the Company that it would refer the matter
to the Attorney General's Office. Since the State of Connecticut was directly
withholding the amounts due from the Company's monthly Medicaid payments, the
Company did not believe that there was any substantial likelihood that such
matter will be referred to the Attorney General's Office. Medicaid pays the
Company approximately 30 days from its receipt of a bill which the Company
submits at the end of each month. Medicare pays the Company approximately 30
days from its receipt of a bill which the Company submits at the end of the
month. Other than the repayment of the Medicaid overpayment, the Company is not
aware of any claims for reimbursement of amounts previously received from third
party payors, although Medicaid has the right to audit the Company's payments.

To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. While there can be no assurance that future adjustments
will not have a material adverse effect on the Company, the Company believes
that it has properly applied the various payment formulas and that the
possibility of adjustments that would be materially adverse financially is
remote.

MEDICARE. All of the Facilities are certified to receive benefits provided
under Medicare. Medicare is a federally funded and administered health insurance
program primarily designed for individuals who are age 65 or over and are
entitled to receive Social Security benefits. The Medicare program consists of
two parts. The first part ("Part A") covers inpatient hospital services and
services furnished by other institutional healthcare providers, such as
long-term care facilities. The second part ("Part B") covers the services of
doctors, suppliers of medical items and services, and various types of
outpatient services. Part B services include physical, speech and occupational
therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation
and psychiatric services, ancillary diagnostic and other services of the type
provided by long-term care or acute care facilities. Part A coverage is limited
to a specified term (generally 100 days in a long-term care facility) and
requires beneficiaries to share some of the cost of covered services through the
payment of deductible or a co-insurance payment. There are no limits on duration
of coverage for Part B services, but there is a co-insurance requirement for
most services covered by Part B.

Under the Medicare program, the Company is reimbursed for its direct costs
plus an allocation of indirect costs up to a regional limit. As the Company
expands its specialty medical and institutional pharmacy services, the costs of
care for these patients are expected to exceed the regional reimbursement
limits. As a result, the Company will be required to submit exception requests
to recover the excess costs from Medicare. There is no assurance the Company
will be able to recover such excess costs. The failure to recover these excess
costs in the future would adversely affect the Company's financial position and
results of operations.

PRIVATE PAY SOURCES. Private pay revenues include payments from individuals
who pay directly for services without governmental assistance, revenues from
commercial insurers, Blue Cross organizations, HMOs, providers organizations,
workers compensation programs and other similar payment sources. Payments from
these private pay sources may be charge-based, cost-based or based on
periodically renewable contracts negotiated with these payors. Many conditions
treated by rehabilitation services are covered by liability insurance, rather
than health benefits policies. In such cases, reimbursement rates are
established on a case-by-case basis.

Although the level of charges by the Company to private patients in the
Facilities is not subject to the same regulatory control as with Medicaid or
Medicare, the Company's charges are still generally limited to customary and
reasonable charges for such health care services.

REHABILITATION THERAPY SERVICES TO NONAFFILIATES. Revenues from
rehabilitation therapy services to nonaffiliates will be derived from LEV, the
Company's rehabilitation therapy business which intends to provide physical,
occupational and speech therapy to patients at the Facilities, the Managed
Facilities and to long-term care facilities not operated by the Company. In
general, payments for these rehabilitation therapy services are received
directly from the long-term care facilities. Revenues from rehabilitation
therapy services provided to the Facilities are included in the Medicaid,
Medicare and private pay sources of revenues of the Company. The Company's
charges to nonaffiliates, though not directly regulated, are effectively limited
by regulatory reimbursement policies imposed on the long-term care facilities
which receive these therapy services as well as competitive market factors.

GOVERNMENT REGULATION

The health care industry is subject to substantial Federal, state and local
regulation. The various layers of government regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its properties and controlling reimbursement
to the Company for services provided. See "Sources of Revenue." Licensing,
certification and other applicable government regulations vary from jurisdiction
to jurisdiction and are revised periodically. It is not possible to predict the
content or impact of future legislation and regulations affecting the health
care industry.

The State of Connecticut has adopted a Certificate of Need statute
applicable to the services provided by the Company. The statute provides
generally that, prior to the construction of new beds, or the making of certain
capital expenditures exceeding defined levels, a state agency must determine
that a need exists for such proposed activities. Failure to obtain the necessary
state approval can result in the inability to provide the service, operate the
facility or complete the addition or other change, and can also result in the
imposition of sanctions or adverse action on the facility's license and
reimbursement. However, a Certificate of Need is not required for the Company's
plan to expand the operations of LEV or to establish an institutional pharmacy.
The State of Connecticut has currently imposed a moratorium on the construction
of any new facilities until June 30, 2004.

All of the Facilities are licensed under Connecticut law and are certified
or approved as providers under one or more of the Medicaid or Medicare programs.
Initial and continuing qualification of a long-term care facility to participate
in such programs depend upon many factors, including accommodations, equipment,
services, patient care, safety, personnel, physical environment and adequate
policies, procedures and controls. Licensing certification and other applicable
standards vary from jurisdiction to jurisdiction and are revised periodically.
State agencies survey all long-term care facilities on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in government sponsored third party payor programs.

The Company believes that the Facilities are in substantial compliance with
the various Medicare and Medicaid regulatory requirements applicable to them.
However, in the ordinary course of its business, the Company receives notices of
deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and seeks to take appropriate corrective action. In
most cases, the Company and the reviewing agency will agree upon the measures to
be taken to bring the Facility into compliance. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid program and, in
extreme circumstances, revocation of a facility's license. These actions would
adversely affect a facility's eligibility to participate in the Medicare or
Medicaid programs. Additionally, conviction of

abusive or fraudulent behavior with respect to one facility could subject other
facilities under common control or ownership to disqualification from
participation in the Medicare and Medicaid programs.

All of the Facilities are certified to receive benefits provided under
Medicare. In order to participate in the Medicare program, a facility must be
licensed and certified as a provider of Medicare certified nursing services.

LEV intends to provide Medicare and Medicaid covered rehabilitative services
and supplies to long-term care facilities under arrangements with the Facilities
and non-affiliated long-term care facilities. Under these arrangements, LEV will
bill and be paid by the long-term care facility for the services actually
rendered and the details of billing the Medicare and Medicaid programs are
handled directly by the long-term care facility. As a result, the Company's
rehabilitation therapy generally is not Medicare and Medicaid certified and does
not enter into provider agreements with the Medicare and Medicaid programs.

Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under the Medicaid Program in favor of a
single "nursing facility" standard. This standard requires, among other things,
that the Company have at least one registered nurse on each day shift and one
licensed nurse on each other shift and increases training requirements for
nurse's aides by requiring a minimum number of training hours and a
certification test before a nurse's aide can commence work. States continue to
be required to certify that nursing facilities provide "skilled care" in order
to obtain Medicare reimbursement.

Various state and federal laws regulate the relationship between providers
of health care services and physicians, including employment or service
contracts, and investment relationships. These laws include the broadly worded
fraud and abuse provisions of the Medicare and Medicaid statutes (the "Fraud and
Abuse Provisions"), which prohibit various transactions involving Medicare or
Medicaid covered patients or services. Violations of these provisions may result
in civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare and Medicaid programs. The Company believes that
it has not entered into any relationship with physicians or other health care
providers which might be considered to fall within the coverage of the Fraud and
Abuse Provisions and other related state and federal laws. The Company believes
that it will be able to arrange its future business relationships so as to
comply with the Fraud and Abuse Provisions and any safe harbor guidelines issued
pursuant thereto.

In addition, there are specific laws regulating aspects of the Company's
business, such as civil commitment of patients to psychiatric hospitals and
disclosure of information regarding patients being treated for chemical
dependency. All states have adopted a "patient's bill of rights" that set forth
standards dealing with such issues as using the least restrictive treatment,
patient confidentiality, allowing patient access to the telephone and mail,
allowing the patient to see a lawyer and requiring the patient to be treated
with dignity.

COMPETITION

The Company operates in a highly competitive industry. Each Facility
operates in communities in Connecticut that are generally served by
approximately five similar facilities operated by others. Some competing
facilities are located in buildings which 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. Sun Healthcare, Inc. operates nursing homes in
Norwalk and Milford which compete with Fairfield and Pond. 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 provide long-term
care services are also a potential source of competition to the Company. The
Company will compete with other companies in providing rehabilitation services,
medical supplies, home health care, and pharmaceutical products and services.
Many of these competing companies have greater financial and

other resources than the Company. There can be no assurance that the Company
will not encounter increased competition in the future that would adversely
affect the Company's results of operations.

The Facilities compete with other facilities based on such key competitive
factors as the reputation for the quality and comprehensiveness of care
provided; the commitment and expertise of its staff; the innovativeness of
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. There is limited, if any, competition in price with respect to
Medicaid and Medicare patients, because revenues for services to such patients
are strictly controlled and based on fixed rates and uniform cost reimbursement
principles. See "--Sources of Revenue."

FACILITIES

All of the Facilities are subject to a long-term operating lease. The
Company considers the properties to be in good operating condition and suitable
for the purposes for which they are being used. The Company's rights as lessee
could be subject to termination upon a foreclosure by the underlying lender.

The following table sets forth certain information concerning the Facilities
as of June 30, 1996. All of the long-term facilities are leased or subleased
unless otherwise indicated.

OCCUPANCY OF
LICENSED LICENSED BEDS AT
NAME LOCATION BEDS(2) DECEMBER 31, 1996
- --------------------------- ------------------------------ ----------- ---------------------

1) Pond Point Milford, Connecticut
06460-7697 140 91.4%(3)
2) Country Manor Prospect, Connecticut
06712-7060 150 99.3%
3) Bentley Gardens West Haven, Connecticut
06516-2598 98 99.0%
4) Fairfield Manor Norwalk, Connecticut
06850 240 90.8%
---
Total number of
licensed beds 628
---
---

- ------------------------

(1) "Occupancy" is computed by dividing the total beds occupied by the total
licensed beds available for use during the period indicated.

(2) "Licensed Beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from beds available for use.

(3) Although Pond Point is licensed for 140 beds, six (6) of these beds have
been removed to create a therapy area and are not available for patient use.
Pond Point has an occupancy rate of 97% of available beds as of December 31,
1996. The Company intends to transfer the license for these beds to the
Bentley Gardens' Facility. The Company has applied to transfer such license.
The Company believes, although there can be no assurance, that such approval
will be granted.

The Company operates the Facilities pursuant to a ten-year lease commencing
July 1, 1995 between Fairfield and the Company. The lease, which is triple net,
provides for an annual rent of $2,520,000 through the end of its term. The lease
is automatically renewable for four additional five year periods at an annual
rental of $2,520,000, provided, the Company is not in default. The Company paid
$2,000,000 in the first year of the lease. Jack Friedler is a 33.33% partner of
Fairfield. Fairfield has a mortgage with a bank for the Facilities which expires
in 2007, which is secured by the Facilities. The payments on the mortgage

are current. See "Certain Transactions" and the Company's financial statements
and the related notes thereto included elsewhere in this Prospectus.

EMPLOYEES

As of April 30, 1997, LHG and LEV had an aggregate of approximately 681
full-time and regular part-time employees. Of this total, there were
approximately 669 employees at the Facilities, one (1) employee involved in
providing rehabilitation therapy services through LEV and ten (10) employees at
the corporate headquarters. BALZ had six (6) employees as of December 31, 1996.
PRN had an average of 205 employees for the six months ended December 31, 1996.
PRN's employees vary on a week-to-week basis. Approximately 338 of the Company's
employees are covered by collective bargaining contracts which expire in
November 1998. These employees are primarily nurses aides, dietary aides,
janitorial staff and cooks. The Company believes it has had good relationships
with New England Health Care Employees Union Local 1199, the union which
represents its employees, but it cannot predict the effect of continued union
representation or organizational activities on its future activities.

Although the Company believes it is able to employ sufficient nurses and
therapists to provide its services, a shortage of health care professional
personnel in any of the geographic areas in which the Company operates could
affect the ability of the Company to recruit and retain qualified employees and
could increase its operating costs. The Company competes with other health care
providers for both professional and non-professional employees and with
non-health care providers for non-professional employees.

INSURANCE

Health care companies are subject to medical malpractice, personal injury
and other liability claims that are customary risks inherent in the operation of
health facilities and are generally covered by insurance. The Company maintains
property insurance in the amount of $19,000,000, liability and professional
malpractice insurance in the aggregate amount of $3,000,000 and $1,000,000 per
occurrence with deductibles that are deemed appropriate by management, based
upon historical claims, industry standards and the nature and risks of its
business. The Company also requires that physicians practicing at the Facilities
carry medical malpractice insurance to cover their respective individual
professional liabilities. There can be no assurance that a future claim will not
exceed available insurance coverages or that such coverages will continue to be
available for the same scope of coverages at reasonable premium rates. Any
substantial increase in the cost of such insurance or the unavailability of any
such coverages could have an adverse effect on the Company's business.

LEGAL PROCEEDINGS

There is no material litigation pending or threatened against the Company.

ACQUISITION OF BALZ

The Company entered into an agreement with all of the shareholders (the
"BALZ Sellers") of BALZ Medical Services, Inc. ("BALZ") to acquire all of the
capital stock of BALZ immediately prior to the Effective Date for Common Stock
having an aggregate value of $1,500,000 based on the Offering price. The Company
is not currently operating BALZ. For a discussion of the relationships between
the Company and the BALZ Sellers. See "Certain Transactions."

BUSINESS OF BALZ

GENERAL

BALZ is a provider of a variety of healthcare products and supplies. BALZ
provides such products to affiliated and non-affiliated nursing homes and other
institutional facilities. The medical supplies provided include an array of
medical products ranging from band aids to woundcare supplies. BALZ also
provides nutritional supplements, durable medical equipment (primarily
wheelchairs and beds), institutional cleaning products, linens and primary care
products including toothpaste and incontinence products. The Company's strategy
is to expand BALZ' business to become more of a traditional medical supply
company by supplying products to hospitals, doctor's offices and persons at
their homes through PRN, visiting nurse associations and other home care
organizations.

INDUSTRY BACKGROUND

Patients at long-term care facilities, including the Facilities and the
Managed Facilities, require an extensive array of healthcare products and
supplies. BALZ coordinates with the personnel at such facilities to fill
particular patient needs. In addition, facilities require a variety of everyday
products of the type provided by BALZ. See "Products and Services."

The Federal Medicare program is broken down into two major programs.
Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance).
Medicare Part A covers hospital inpatient services, skilled nursing home
inpatient services, home health agency services and hospice care. Medicare Part
B is an elective supplemental insurance that pays for durable medical equipment,
prosthetic devices and other medical supplies.

A nursing home has three possible programs for Medicare B billing. The first
program is for a skilled nursing home facility to provide Part B supplies and
bill Medicare Part A, only if the resident in on Part A stay, or Part B only if
the resident has exhausted his Part A stay and is Part B eligible. The second
option is to provide Part B supplies "under contract." Under contract means an
outside vendor supplies and bills the nursing facility directly for the products
and also charges the nursing home facility for submission of bills to Medicare
Part B. The nursing home facility shares the profit with the outside vendor
(ie., BALZ). The third option is for the facility to permit an outside supplier,
such as BALZ, to provide the Part B supplies directly to the patient and the
outside provider to receive reimbursement directly from Medicare. This is the
payment option utilized by the Company.

Under the first program, nursing facilities direct billing, the nursing
facility bills for Part B supplies to Part A on the nursing home facility's
Medicare cost report. Under the second program the charge of the outside
supplier who provides products "under contract" becomes the "cost" to the
facility and is cost settled at the end of the facility's fiscal year. Under
either of these programs, the facility is limited to a cost reimbursement and
therefore cannot profit from the Medicare Part B supplies.

PRODUCTS AND SERVICES

BALZ currently provides medical products and services to each of the
Facilities, the Managed Facilities and to four non-affiliated nursing homes.
BALZ coordinates with the nursing home facility and medical personnel to fill
particular patient needs and general facility requirements. BALZ sets up the
equipment as necessary and spends time with the caregivers to explain the proper
use of the medical equipment.

The primary categories of products provided by BALZ (and examples of the
products available in each category) are set forth below:

Disposable Medical -- Incontinent products (diapers, liners, chux)
Supplies
-- Wound care products and bandages (sterile and non-sterile)
for treating decubitus ulcers,
surgical incisions and skin graft sites
-- Nutritional products (Ensure, Sustacal, etc.)
-- Diabetic products/supplies
-- Ostomy supplies
-- Urological supplies (catheters, etc.)
-- Blood pressure products
-- Skin care products
-- Tracheostomy supplies
-- Examination gloves
Durable medical equipment -- Hospital beds
-- Wheelchairs
-- Walking aids
-- Bathroom safety equipment
-- Patient lifts
Rehabilitation Products -- Power operated vehicles (such as wheelchairs and scooters)
-- Advanced support surfaces (low air loss beds, alternating
pressure mattresses)
-- Specialized seating
Institutional Cleaning and -- Deodorant
Everyday Products -- Toothpaste
-- Linens
-- Toilet paper
-- Paper towels

Generally, the cost of BALZ' products and supplies is covered by third party
payor arrangements such as Medicaid, Medicare or private insurance. As an
example, purchased equipment covered by Medicare is generally sold pursuant to
an approved price range or a cost plus fee basis. Private insurance payors use
customary and usual standards for their reimbursement terms which are generally
comparable to Medicare fee screens. BALZ usually receives payment within 75 to
90 days of invoicing, but delays can be up to six months.

MARKETING

BALZ engages in local marketing efforts and directs such marketing
activities toward a wide range of affiliated and non-affiliated nursing homes
and other institutional facilities. BALZ marketing area includes Connecticut,
Massachusetts, Rhode Island and New York. In order to develop existing accounts,
as well as procure additional accounts, BALZ works to maintain and improve
current products lines and service levels.

COMPETITION

The medical supplies industry is highly competitive and fragmented. While
there are a few selected national providers, BALZ currently encounters its most
significant competition in providing health care products from small commercial
providers operating in the New England and New York areas. BALZ believes that
health care facilities in the geographic area serviced by BALZ consider
reliability of services and cost to be the most important factors in contracting
with a medical supply company, although other

factors such as financial stability of a medical supply company and the
Company's integrity are also considered as well as personnel policies and
practices and cost. In addition to present competition, other companies that do
not currently provide health care products may enter the business.

GOVERNMENT REGULATION AND REIMBURSEMENT

BALZ must comply with various requirements in connection with its
participation in Medicaid and Medicare. Medicaid is a combined federal-state
program for medical assistance to impoverished individuals who are aged, blind,
or disabled or members of families with dependent children. The Medicaid
programs in many states are subject to federal requirements. The state has the
authority to set levels of reimbursement within Federal guidelines. BALZ
receives, from its customers who are covered by Medicaid, only the reimbursement
permitted by Medicaid and is not permitted to collect from the patient any
difference between its customary charge to users and the amount reimbursed. Any
difference between BALZ' customary charge to its customers who are covered by
Medicaid and amounts reimbursed by Medicaid are not material to BALZ' operating
results because BALZ' customary charges to such customers generally do not
exceed amounts reimbursable by Medicaid.

Medicare is a federal health insurance program, for the elderly and for
chronically disabled individuals, which pays for equipment and services when
medically necessary. Medicare uses a charge-based reimbursement system for
purchased medical equipment based on approved published prices. Equipment such
as hospital beds, wheelchairs and patient lifters is generally paid for on a
rental basis over a 15 month term, with maintenance payments semi-annually
thereafter.

The Company believes BALZ is in substantial compliance with all material
statutes, regulations, standards and conditions applicable to its business.
However, new laws and/or regulations, standards or conditions may be adopted or
existing laws, regulations, standards or conditions may be interpreted by
governmental authorities in a manner which could adversely impact BALZ'
operations. Many of the regulations applicable to the Company's facilities are
also applicable to BALZ. For a more detailed discussion of Government Regulation
see "Business--Government Regulation." BALZ cannot predict whether any such
proposals or interpretations will be adopted and, if adopted, what effect such
proposals or interpretations would have on BALZ's business.

ACQUISITION OF PRN

Three stockholders of PRN have entered into an agreement to sell, for an
aggregate of $1,620,000 in cash, all of their shares of capital stock in PRN to
the Company immediately prior to the Effective Date. One shareholder will be
exchanging his shares in PRN for 108,000 shares of the Company immediately prior
to the Effective Date. See "Use of Proceeds." In connection with the
acquisition, PRN will distribute 100% of its book value to its shareholders. At
the time of the acquisition, PRN will have a book value of zero. The Company is
not currently operating PRN. For a discussion of the relationships between the
Company and the PRN Sellers, see "Certain Transactions."

BUSINESS OF PRN

GENERAL

and rehabilitation therapists who provide services related to the reduction of
pain and improved rehabilitation of joints and muscles; and (iv) certified
nurses aides, who, under the supervision of a nurse, provide health-related
services and personal care such as assistance with ambulation, limited
range-of-motion exercises, monitoring of vital signs, non-sterile dressing
changes and bathing.

INDUSTRY BACKGROUND

Due to a variety of factors the home health care market has increased
rapidly in the last decade. The Company anticipates continued growth in the home
health care market due to increasing emphasis on cost effective medical
treatment, the "Greying of Our Society" and continuing advances in medical
technology. The over-65 population, which has a higher incidence of illness and
disability, continues to increase. At the same time, home treatment of medical
needs as compared with hospital treatment is generally considered more cost
effective. The increased acceptance of home care has been bolstered by medical
technological advances which have facilitated the maintenance of high medical
standards in home care. The Company believes that cost containment initiatives
will continued to increase the demand for home health care.

STRATEGY

The Company plans to increase the scope of the services PRN provides to
patients at home, as well as the number of patients it provides such services
to. PRN targets hospitals, clinics, nursing homes, physician groups, assisted
living facilities, health maintenance organizations and other health care
providers as sources of home health care referrals. PRN has become involved in
the communities it serves through participation in senior service provider
councils and coalitions. PRN's active participation in such meetings provides it
with a high level of exposure to key sources and the opportunity to obtain new
contracts. PRN also relies on advertising, direct mail and other forms of
consumer marketing, as well as general word of mouth, to develop its clientele.
PRN has been accredited with commendation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO").

The Company intends to expand the scope of services provided by PRN to
include the provision of intravenous therapy to patients at home. The Company
believes that as technology advances an increasing level of medical problems can
be treated effectively at home. The Company also intends to establish PRN as a
nursing pool agency whereby it supplies nurses and other skilled personnel to
hospitals, affiliated and non-affiliated nursing homes and other home healthcare
agencies on a temporary basis. The Company believes that staffing limitations at
hospitals, nursing homes and other institutional facilities have increased the
need for temporary nurses and other skilled personnel.

MARKETING

PRN markets a multi-dimensional package of nursing care. PRN's marketing is
focussed at the local level and is conducted by PRN's employees who call on
referral sources such as doctors, hospitals and various community and
professional organizations. Besides actively soliciting business from these
sources, PRN's marketing objective is to maintain a public awareness of its
services. These efforts are supplemented through marketing materials. PRN seeks
to expand its existing relationships with local and regional health care
providers as sources of referral.

COMPETITION

PRN faces competition from hospitals with their own home care agencies,
divisions of major pharmaceutical companies and other home care organizations.
Many of these competitors have greater capital and other resources than are
available to the Company. The national home care market is, however, highly
fragmented, and management estimates that the top 10 companies active in home
care collectively account for less than a 25% share of the home care market.
Because most home care business is generated by referral from local third party
payors and medical-related organizations, home care

providers compete on a local basis to develop relationships with key referral
sources. The Company believes the most important competitive factors in the home
care industry are the ability to provide qualified personnel on a timely basis,
price and range of services offered. Management believes the Company's plans for
diversification of the services offered by PRN will improve PRN's ability to
compete within the home health care market.

GOVERNMENT REGULATION

Much of the regulations imposed upon the Company also apply to the
activities of PRN. The Company's health care business is subject to extensive
and frequently changing regulation by federal, state and local authorities.
Regulation imposes a significant compliance burden on the Company, including
state licensing and federal and state eligibility standards for certification as
a Medicare and Medicaid provider. In Connecticut, PRN need only be licensed as a
Medicare and Medicaid provider. In other states, home care providers must
receive a certificate of need ("CON") from the state in order to directly
provide Medicare and Medicaid services. CON requirements and restrictions vary
substantially from state to state.

The Company believes PRN is in substantial compliance with all material
statutes, regulations, standards and conditions applicable to its business.
However, new laws and/or regulations, standards or conditions may be adopted or
existing laws, regulations, standards or conditions may be interpreted by
governmental authorities in a manner which could adversely impact PRN's
operations. The Company cannot predict whether any such proposals or
interpretations will be adopted and, if adopted, what effect such proposals or
interpretations would have on PRN's business.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, together with their
ages and present positions with the Company are as follows:

NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------

Jack Friedler.............................. 64 Chief Executive Officer, Chairman of the
Board and Director
Harry Dermer............................... 45 President, Chief Operating Officer and
Director
Thomas E. Dybick........................... 48 Chief Financial Officer
Jon Mills.................................. 57 Director
Mary Archambault........................... 46 Executive Vice President (upon the
Effective Date), Secretary
Suzanne J. Nettleton....................... 50 Executive Vice President (upon the
Effective Date)
Eric D. Moskow, MD......................... 38 Director

All directors of the Company hold office until the next annual meeting of
the stockholders and until their successors have been elected and qualified. The
officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.

The following is a brief summary of the background of each director and
executive officer of the Company:

JACK FRIEDLER has been Chief Executive Officer and Chairman of the Board
since the Company's inception in February 1995. Since 1988, Mr. Friedler served
as President of Lexington House, formerly Lexington Convalescent Home, which is
currently managed by the Company. Mr. Friedler and his wife own 100% of
Lexington House. He is currently Secretary and a Director of Professional Relief
Nurses, Inc., a multi-dimensional provider of nursing care, positions he has
held since 1981. From 1990 to 1993, Mr. Friedler served as President of
Bridgeport Healthcare Center of which he was a shareholder. He managed Fairfield
Manor Health Care Center, Pond Point Health Care Center, Country Manor Health
Care Center and Bentley Gardens Health Care Center from 1981 to 1986. Mr.
Friedler spends approximately 35 hours per week on matters relating to the
Company's business. Mr. Friedler owns 24% and 25% of BALZ and PRN, respectively.

HARRY DERMER has served as President, Chief Financial Officer and Director
of the Company since its inception in February 1995. Prior thereto, Mr. Dermer
co-founded Prometheus Pharmacy and Nursing Homes America, Inc., which are
divisions of the Olympus Healthcare Group, where he served as Chief Financial
Officer from 1994 to 1995, and Mediscript Pharmacy, Inc., a division of
Mediplex, where he served as Chief Financial Officer from 1993 to 1994.
Subsequent to founding these pharmaceutical companies he remained employed by
these companies and successfully expanded their operations. From 1990 to 1993,
Mr. Dermer served as Vice-President of Operations and Chief Financial Officer of
Reliance Pharmacy Corp. From 1987 to 1990, he served as Chief Financial Officer
of Arrow Prescription Center Corp. From 1986 to 1987, Mr. Dermer was employed by
Gulf and Western as a Senior Financial Analyst. He served as Plant Controller of
DAP, Inc., the manufacturing division of Schering Plough, from 1982 to 1985. Mr.
Dermer received a B.S. in Marketing from Rutgers University, an M.B.A. from the
University of Dallas, and also completed one year of medical school at Bucharest
University. In addition, Mr. Dermer has a Connecticut nursing home
administrator's license. Mr. Dermer owns 20% of BALZ.

THOMAS E. DYBICK has served as the Company's Chief Financial Officer since
September, 1996. He is a Certified Public Accountant. Prior thereto, from 1992
to 1996 Mr. Dybick was Chief Financial Officer of

AHF/Connecticut Management, Inc. which managed six nursing homes in CT and MA.
Previously, Mr. Dybick was employed by the law firm of Levy & Droney, PC as
Executive Director (1985-1992), as Director of Internal Auditing for The Stanley
Works (1980-1985) and as an Audit Principal for Ernst & Young (1970-1980). Mr.
Dybick received a B.S. in Accounting from Fairfield University and has completed
the Management Development Program at the Hartford Graduate Center.

JON MILLS has served as a Director of the Company since March 1996. He is
currently President and a Director of Medline Industries, Inc., a national
manufacturer of healthcare products, positions he has held since 1966. Mr. Mills
obtained a B.S. in Marketing from Northwestern University.

MARY ARCHAMBAULT has served as President of BALZ since its inception in
1995. Prior thereto, Ms. Archambault co-founded Prometheus Pharmacy and Nursing
Homes America, Inc., where she served as Executive Vice President from 1994 to
1995. She also co-founded Mediscript Pharmacy, Inc.'s Medicare Part B division,
which was a division of Mediplex, where she served as Executive Vice-President
from 1993 to 1994. Ms. Archambault was employed in a supervisory capacity at
Allcare Medication Services, Inc. from 1990 to 1993. She served as the Director
of Operations of MedCare North from 1987 to 1990. Ms. Archambault received a
B.A. in English and a B.S. from the University of Eastern Connecticut State
College, obtained a Nursing Home Administrator's license from the University of
Connecticut Graduate Center, and is a licensed Practical Nurse in the State of
Connecticut. Ms. Archambault owns 20% of BALZ. Ms. Archambault became the
Company's secretary in October 1996.

SUZANNE J. NETTLETON has served as President and Administrator of PRN since
its inception in 1981. In January 1994, Ms. Nettleton co-founded the Connecticut
Home Care Alliance. From 1980 to 1981, Ms. Nettleton was employed as Area Sales
Manager and State Administrator of Olsten Kimberly Quality Care, a national home
healthcare agency that Ms. Nettleton brought through Connecticut state
licensure. From 1978 to 1979, she served as Director of Nursing of the Queens
Convalescent Center, and from 1976 to 1978 she was the Director of Staff
Development of Middlesex Memorial Hospital. Ms. Nettleton received a B.S. in
Science and Nursing at Long Island University and a Masters Degree in Health
Administration at the Hartford Graduate Center. She obtained a Nursing Home
Administrator's License from the State of Connecticut and is licensed as a
Registered Nurse in both New York and Connecticut. Ms. Nettleton owns 25% of
PRN. Until the Effective Date, Ms. Nettleton is not affiliated with the Company.

ERIC D. MOSKOW, MD has served as a director of the Company since March 1997.
Dr. Moskow has been the Executive Vice President of Strategic Planning for
PhyMatrix, Inc. and has served as a member of the PhiMatrix Board of Directors
since that time. In 1993, he founded Physician's Choice Management, LLC and
served as its Executive Vice President until 1996. Prior to establishing
Physician's Choice, he served as Medical Director for US Healthcare in
Connecticut. Dr. Moskow is board-certified in internal medicine and has served
as President of the Family Medical Associates of Ridgefield, Connecticut for the
past nine years.

The by-laws of the Company provide that the authorized number of directors
shall be as set by the Board of Directors but shall not be less than three,
unless all of the outstanding shares are owned beneficially and of record by
less than three stockholders, in which event the number of directors shall not
be less than the number of stockholders permitted by statute. The authorized
number is presently five. There are no agreements with respect to the election
of directors except that the Representative has the right to appoint a designee
as an observer to the Board of Directors and the Company's President and Chief
Executive Officer have entered into a shareholder's agreement. As of the
Effective Date, the Representative has not appointed a designee as an observer
to the Board of Directors. See "Underwriting".

COMPENSATION OF DIRECTORS

None of the directors has received or currently receives any cash
compensation for serving on the Board of Directors; however, directors may be
reimbursed for expenses incurred in connection with their services as such.

COMMITTEES OF THE BOARD

No committees of the Board have been established to date. Pursuant to the
listing requirements for Nasdaq, the Company is required to establish an
independent audit committee. The Company intends to satisfy this requirement
within 90 days of the Effective Date. The audit committee will consist of Harry
Dermer, Eric Moskow, M.D. and Jon Mills. A failure by the Company to comply with
this requirement may result in the delisting of the Common Stock and Warrants
from Nasdaq.

EXECUTIVE COMPENSATION

The following table sets forth the cash compensation, as well as certain
other compensation paid or accrued, by LHG to Jack Friedler, its Chief Executive
Officer, and Harry Dermer, its President and Chief Financial Officer during the
fiscal year ended June 30, 1996, during which period Messrs. Friedler and Dermer
had no formal agreements with the Company. Other than Messrs. Friedler and
Dermer, no other executive officer of LHG had a total annual salary and bonus of
$100,000 during the reported periods. The executive compensation received from
PRN by Suzanne Nettleton, its President and that received by Mary Archambault,
BALZ President is also disclosed below.

LONG TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION STOCK
------------------------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED
- ---------------------------------------------- -------------- ---------- --------- -----------------------------

Jack Friedler................................. Fiscal 1996 $ 210,000(1) -- --
Chief Executive Officer and Director
Harry Dermer.................................. Fiscal 1996 $ 127,204 -- --
President, Chief Operating Officer
and Director
Suzanne Nettleton(2).......................... Fiscal 1996 $ 122,237(1) $ 38,121 --
President of PRN
Mary Archambault(2)........................... Fiscal 1996* $ 54,256 -- --
President of BALZ

- ------------------------

(1) In addition, Jack Friedler and Suzanne Nettleton each received director fees
of $40,000 for serving on the Board of Directors of PRN. Following the
consummation of the Offering, they will not be entitled to such fees.

(2) Such salaries were not paid by the Company. Such sums were paid by PRN and
BALZ, respectively.

* Represents salary for an eight month period since BALZ only commenced
operations in November 1995.

The Company has obtained individual term life insurance policies covering
Messrs. Friedler and Dermer in the amount of $1,000,000 per person. The Company
is the sole beneficiary under these policies and the Company will keep such
policies in force for a minimum of three years from the completion of this
Offering.

EMPLOYMENT AGREEMENTS

Prior to the Effective Date, the Company will enter into a separate
employment agreement with Suzanne J. Nettleton, to be effective upon
consummation of the Offering. The Company has entered into

employment agreements with Mary Archambault, Jack Friedler and Harry Dermer
which are effective upon consummation of the Offering. The agreements will
provide that such individuals shall devote substantially all of their working
time and attention to the business of the Company and will contain certain
non-compete provisions. Each of Mr. Friedler and Mr. Dermer's agreements have an
initial term of five years and shall be automatically renewable for successive
one-year periods unless either the Company or the employee elects not to renew
his employment. Ms. Nettleton and Ms. Archambault's agreements have an initial
term of three years and shall be automatically renewable for successive one-year
periods unless either the Company or the employee elects not to renew her
employment.

Mr. Friedler's employment agreement provides that Mr. Friedler will receive
a $250,000 annual salary, with cost of living increases and a bonus equal to one
(1%) percent of the Company's net income before taxes. Mr Dermer's employment
agreement is identical except that Mr. Dermer will be entitled to a $175,000
salary. If their employment agreements had been in effect on June 30, 1996 they
would have each received approximately $4,600 as a bonus.

The agreement with Ms. Archambault provides that Ms. Archambault will
receive a base annual salary of $100,000, subject to five percent annual
increases. In addition to her base salary, Ms. Archambault will be entitled to
receive 3.75% of BALZ's net profits before taxes. If her employment agreement
was in effect on June 30, 1996 she would have received approximately $12,000 as
a bonus.

The agreement with Ms. Nettleton provides that Ms. Nettleton will receive a
base annual salary of $155,000, subject to five percent annual increases.

SHAREHOLDER'S AGREEMENT

In October 1996, Jack Friedler and Harry Dermer entered into a stockholder's
agreement, effective upon consummation of the Offering, which includes, among
other things, the grant of a mutual right of first refusal to purchase any
shares of Common Stock beneficially owned by the other stockholder, and a mutual
agreement to vote for the other stockholder as a director of the Company.

STOCK OPTION PLAN

The Company adopted the 1997 Stock Option Plan (the "Plan" or the "1997
Stock Option Plan"). The purpose of the Plan is to promote the success of the
Company by providing a method whereby eligible participants may be awarded
additional remuneration for services rendered, thereby increasing their personal
interest in the Company. The Plan is also intended to aid the Company in
attracting persons of suitable ability to becoming employees of the Company.
Pursuant to the Plan, options to acquire an aggregate of 450,000 shares of
Common Stock may be granted, none of which have been granted to date. The Plan
provides for grants to employees, consultants and directors of the Company.

The 1997 Stock Option Plan authorizes the Board to issue incentive stock
options ("ISOs"), as defined in Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"), as well as stock options that do not conform to
the requirements of the Code section ("Non-ISOs"). Consultants and directors who
are not also employees of the Company could be granted only Non-ISOs. The
exercise price of each ISO may not be less than 100% of the fair market value of
the Common Stock at the time of grant, except that in the case of a grant to an
employee who owns 10% or more of the outstanding stock of the Company or a
subsidiary or parent of the Company (a "10% Stockholder"), the exercise price
may not be less than 110% of the fair market value on the date of grant. The
exercise price of each Non-ISO shall be at least 100% of the fair market value
of the Common Stock on the date of grant. ISOs may not be exercised after the
tenth anniversary (fifth anniversary in the case of any option granted to a 10%
Stockholder) of their grant. Non-ISOs may not be exercised after the tenth
anniversary of the date of grant. Options may not be transferred during the
lifetime of an option holder. No stock options could be granted under the Plan
after , 2007.

Subject to the provisions of the Plan, the Board had 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. Payments by optionholders upon exercise of an option may
be made (as determined by the Board) in cash or such other form of payment as
may be permitted under the Plan, including without limitation, by promissory
note or by shares of Common Stock.

LIMITATION ON LIABILITY

Delaware law permits a corporation through its Certificate of Incorporation
to indemnify its directors and officers from personal liability to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, other than (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent violations of provisions regarding the
unlawful payment of dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Company's Certificate of Incorporation exonerates its directors and
officers from monetary liability to the extent permitted by the statutory
provisions.

CERTAIN TRANSACTIONS

Immediately prior to the Effective Date, the members of Lexington Health
Care Group, LLC, Jack Friedler, Stephanie Friedler and Harry Dermer, have agreed
to exchange their respective interests (37.5%, 37.5% and 25%) in the LLC in
exchange for an aggregate of 2,462,000 shares of Common Stock of the Company
(the "Reorganization"). Stephanie Friedler has directed that her shares be
issued to her husband, Jack Friedler. In connection with the Reorganization, all
of the assets, liabilities and operations of the LLC will be transferred to the
Company. In addition, all undistributed earnings of the LLC will be contributed
to the capital of the Company.

In February 1995 (effective July 1, 1995), the Company entered into a
ten-year lease, which was subsequently and retroactively amended, for the four
Facilities, Jack Friedler, the Company's Chief Executive Officer is a 33.33%
limited partner of the lessor, Fairfield. The partners owning the remaining
66.66% interest in Fairfield are also owners of an aggregate of 50% of the
capital stock of PRN. See "Business--PRN Acquisition." Fairfield acquired the
Pond Point and Country Manor Facilities in 1983, Bentley Gardens in 1984 and
Fairfield Manor in 1981. The Company paid $2,000,000 for the first year of the
lease. Thereafter, the annual payment is $2,520,000 per year. The lease is
automatically renewable for four additional five year periods at the same rent
provided the Company is not in default of its obligations under the lease. As
part of the lease, the Company paid approximately $1,300,000 to Beverly on
behalf of Fairfield. In addition, the original lease called for higher rental
payments. The lease was subsequently and retroactively renegotiated to a lower
rent. Any amounts paid to Beverly by the Company and the difference between the
old rent previously paid by the Company prior to renegotiation and the required
rent for the first year under the amended lease, were treated as a security
deposit of $2,282,000 and were so identified in the lease. 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 landlord has informed the
Company that a third party offered to lease the Facilities on substantially the
same terms.

The Company leases its executive offices from a company controlled by Jack
Friedler and his wife pursuant to a three-year lease for a monthly rental fee of
$1,100 per month. The Company compared similar space and found the rent charged
to be reasonable. The Company made certain expenditures on behalf of Lexington
House in anticipation that it would acquire Lexington House, Inc. The
negotiations for the acquisition were terminated because the Company determined
that such facility required too many capital improvements. As of April 30, 1997,
Lexington House, Inc. is indebted to the Company in the amount of $520,393
excluding interest of approximately $47,000, which has not been accrued. The
$520,393 consists of management fees of $132,660, payments for Lexington House's
mortgage of $55,000, the purchase of equipment of $41,088 and the payment of
bills on behalf of Lexington House in the aggregate of $291,645. Lexington
House, Inc. is obligated to pay the Company $6,030 per month in exchange for
certain management services. To date, Lexington House has not made any of such
payments. Lexington House has agreed to pay the Company $10,000 per month
commencing May 20, 1997 against such indebtedness. In May 1997, Jack Friedler
paid $100,000 to the Company against such indebtedness, which amount was used
towards the repurchase of a Private Placement investor's securities. In
addition, Mr. Friedler agreed to off set certain amounts owed to him in the
amount of $165,000 against Lexington House's obligation. Upon the expiration of
the management agreement on June 30, 1997, the Company intends to consider
discontinuing to provide management services to Lexington House. To date, the
interest has not been paid. Commencing in January 1998, Mr. Friedler has agreed
that the rent payments for the executive offices will be applied towards payment
of any amounts owed by Lexington House.

The Company, as the operator of the Facilities, received certain Medicaid
reimbursement in the aggregate amount of approximately $3,100,000 (net of
Medicaid charge backs) that related to the time that the Facilities were
operated by Beverly. The Company utilized such amounts and agreed to repay them
to Beverly with 12% interest. Jack Friedler, the Company's Chief Executive
Officer, personally guaranteed this obligation. The obligation bears interest at
the rate of 12% per annum. As of February 1, the current balance of the loan is
$153,000. The Company was obligated to repay the note on December 31, 1996,

which payment was not made. In accordance with its verbal understanding with the
lender, the Company intends to repay such loan with a portion of the net
proceeds of the Offering. See "Use of Proceeds." In addition, as of March 31,
1997, the Company owes Beverly an additional $393,700 which is treated as an
account payable. To date, the Company has paid approximately $2,500,000 to
Beverly in consideration for amounts collected on its behalf.

In July 1995, the Company entered into an agreement to manage the day-to-day
business affairs of Lexington House, Inc., a nursing home with 67 licensed beds.
Lexington House is owned by Samir Realty, a Company owned by Jack Friedler and
his wife. The management agreement is for a period of two years expiring June
30, 1997 and provides for a $6,030 monthly fee to be paid to the Company. None
of such monthly management fees have been paid. The Company believes that the
terms of the management agreement are fair and reasonable.

Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer which loan bears interest an an
annual rate of 10%. $104,000 of such loan was repaid to Mr. Friedler as of
December 31, 1996. The $104,000 was repaid in August 1996. The loan which was
used for working capital is payable on demand but is not anticipated to be
repaid in the next 12 months. Mr. Friedler has agreed that $165,000,
representing the amount owed to him, will be applied against Lexington House's
obligation to the Company.

Upon the Effective Date, the Company will acquire all of the capital stock
of PRN from its existing stockholders. Jack Friedler is the owner of 25% of such
capital stock. In exchange for Mr. Friedler's 25% interest in PRN, the Company
will issue Mr. Friedler an amount of shares of the Company's Common Stock with a
value of $540,000 (108,000 shares based on the proposed initial public offering
price). Suzanne J. Nettleton, who will become an officer of the Company upon
consummation of the acquisition, is the owner of 25% of the capital stock of
PRN. The Company is purchasing Ms. Nettleton's interest for $540,000. Abraham
Sova, Esther Sova and Joseph Sova (the "Sova Family") collectively own 25% of
the capital stock of PRN which the Company is purchasing for an aggregate of
$540,000. The Sova Family is a 33.33% limited partner of Fairfield. Israel
Berger, Mark Berger and Julius Berger (the "Berger Family") collectively own the
remaining 25% of the capital stock of PRN which the Company is purchasing for an
aggregate of $540,000. The Berger Family is a 33.33% limited partner of
Fairfield. In connection with the acquisition, PRN will distribute 100% of its
net book value to its shareholders. At the time of the acquisition, PRN will
have a book value of zero. The acquisition terms were negotiated between the
Company's president and Suzanne Nettleton, the President of PRN. The Company
believes that based on PRN's past performance and projections that the
acquisition price is at least as favorable for the Company as could be obtained
from a non-related party, however, the Company did not obtain an independent
appraisal in connection with the acquisition.

Upon the Effective Date, the Company will acquire all of the capital stock
of BALZ from its existing stockholders (Harry Dermer, Jack Friedler, Mary
Archambault, Joseph Stern, Craig Loren, Jackueline Braunstein and Steven Neuman)
in exchange for an aggregate of 300,000 shares of the Company's Common Stock
(valued at $1,500,000 based on the proposed initial public offering price). Jack
Friedler is the owner of 24% of such capital stock. In exchange for Mr.
Friedler's 24% interest in BALZ, the Company will issue Mr. Friedler 72,000
shares of the Company's Common Stock. Also, in exchange for Harry Dermer's, the
Company's President, 20% interest in BALZ, the Company will issue Mr. Dermer
60,000 shares of the Company's Common Stock. Mary Archambault, the Company's
Secretary who will become an executive vice president of the Company upon
consummation of the acquisition, is the owner of 20% of the capital stock of
BALZ. The Company is purchasing Ms. Archambault's interest on the same terms and
conditions as that of Mr. Dermer. The Company based the acquisition price on
BALZ, net worth past performance and projections, as well as Mr. Dermer's
evaluation of acquisitions of other medical supply companies. BALZ was formed in
October 1995. The owners of BALZ have contributed an aggregate of approximately
$25,000 since its inception which was the aggregate price for their common stock
in BALZ. The shareholders of BALZ loaned it an aggregate of $60,000 pursuant to
a series of

promissory notes which bear interest at the rate of 10% and are payable on
demand. BALZ repaid an aggregate of $30,000 of such amounts. Since BALZ's
inception, the Company has provided certain management services and office space
to BALZ. In consideration for the rent and services, BALZ paid the Company an
aggregate of $25,000 for the year ended June 30, 1996 and $19,000 for the six
months ended December 31, 1996. Approximately 42% of BALZ' revenues from October
1995 to December 31, 1996 were derived from sales to patients in the Facilities
and the Managed Facilities.

In March 1997, the Company entered into an agreement with Physicians Choice,
LLC ("PCL") whereby it agreed to provide skilled nursing and rehabilitation
services to patients in the PCL network at the Company's affiliated facilities.
PCL is a subsidiary of PhyMatrix, Inc. Edward D. Moskow, MD, a director of the
Company, is a Director of PhyMatrix, Inc. For a description of the agreement
with PhyMatrix see "Business--Marketing".

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.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of (i) each person who is known by the Company to be the
beneficial owner of 5% or more of its outstanding shares of Common Stock; (ii)
each director of the Company (iii) each named executive officer of the Company;
and (iv) all directors and named executive officers as a group, together with
their respective percentage ownership of such shares before the Offering and as
adjusted to reflect the sale of the Shares offered hereby.

PERCENTAGE OF
----------------------
COMMON STOCK OWNED
----------------------
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP BEFORE AFTER
NAME AND ADDRESS(1) SHARES OWNED(2) OFFERING OFFERING(3)
- ------------------------------------------------------ ---------------- --------- -----------

Jack Friedler(4)...................................... 2,026,500 67.55% 49.13%
Harry Dermer(5)....................................... 675,500 22.52% 16.38%
Suzanne J. Nettleton.................................. 0 0% 0%
Mary Archambault(5)................................... 60,000 2.00% 1.45%
John Mills............................................ 0 0% 0%
Thomas Dybick......................................... 0 0% 0%
Eric D. Moskow, MD.................................... 0 0% 0%
All officers and directors as a group
(7 persons)(4)(5)................................... 2,762,000 92.07% 66.96%

- ------------------------

(1) Unless otherwise indicated, the address of each beneficial owner is c/o the
Company, 35 Park Place, New Britain, Connecticut 06052.

(2) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act ("Rule 13d-3") and unless otherwise indicated, represents
shares for which the beneficial owner has sole voting and investment power.

(3) The percentage of class if calculated in accordance with Rule 13d-3 and
assumes that the beneficial owner has exercised any option or other rights
to subscribe which are exercisable within sixty (60) days and that no other
options or rights to subscribe have been exercised by anyone else.

(4) As a result of the Reorganization, Mr. Friedler will receive an aggregate of
1,846,500 shares of the Company's Common Stock for his and his wife's 75%
collective ownership interest in the LLC. Includes 108,000 and 72,000 shares
to be issued in connection with the acquisitions of PRN and BALZ,
respectively. Mr. Friedler's ownership of PRN and BALZ is 25% and 24%,
respectively.

(5) Includes 60,000 shares to be issued to each of Mr. Dermer and Ms.
Archambault in connection with the acquisition of their respective ownership
of BALZ.

DESCRIPTION OF SECURITIES

The following descriptions of the Company's securities are qualified in all
respects by reference to the Articles of Incorporation and By-laws of the
Company, copies of which are filed as Exhibits to the Registration Statement of
which this Prospectus is a part. The Company is authorized to issue 15,000,000
shares of Common Stock, $.01 par value and 1,000,000 shares of Preferred Stock,
$.01 par value. As of the date hereof, the Company has 3,000,000 shares of
Common Stock outstanding, including the 408,000 shares to be issued in
connection with the acquisitions of BALZ and PRN, held by 8 stockholders of
record and excluding the 500,000 shares repurchased by the Company. After the
Offering, the Company will have 4,125,000 shares of Common Stock outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
in its discretion out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preferences over the Common
Stock. Holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are and the shares of Common Stock offered hereby, when issued against the
consideration set forth in this Prospectus, will be, fully paid and
nonassessable.

PREFERRED STOCK

The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of Preferred Stock with designations, rights and preferences determined
from time to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any shares of its Preferred Stock and the Company has committed not to
issue any shares of Preferred Stock without the consent of the Representative,
except in connection with an acquisition, for a period of two years from the
Effective Date, there can be no assurance that it will not do so in the future.
See "Dividend Policy."

WARRANTS

Each Warrant entitles its holder to purchase one share of Common Stock at an
exercise price of $6.00 per share (the "Exercise Price"). The Warrants are
exercisable commencing one year from the Effective Date and expire six years
after the Effective Date.

The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Underwriter and the warrant agent (the
"Warrant Agent"), and will be evidenced by warrant certificates in registered
form.

The Exercise Price of the Warrants and the number and kind of shares of
Common Stock or other securities and property issuable upon exercise of the
Warrants are subject to adjustment in certain circumstances, including stock
splits, dividends, or subdivisions, combinations or recapitalizations of the
Common Stock. Additionally, an adjustment will be made upon the sale of all or
substantially all of the assets of the Company in order to enable Warrantholders
to purchase the kind and number of shares of

stock or other securities or property (including cash) receivable in such event
by a holder or the number of shares of Common Stock that might otherwise have
been purchased upon exercise of the Warrant.

The Warrants do not confer upon the holder any voting or any other rights of
a stockholder of the Company. Upon notice to the Warrantholders, the Board of
Directors has the right to reduce the exercise price or extend the expiration
date of the Warrants.

No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
shares of Common Stock issuable upon exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the Warrantholder. The Company has undertaken to use its best
efforts to maintain a current prospectus relating to the issuance of shares of
Common Stock upon the exercise of the Warrants. While it is the Company's
intention to maintain a current prospectus, there can be no assurance that it
will be able to do so.

The Warrants are redeemable by the Company at a price of $.05 per Warrant,
commencing one year after the Effective Date and prior to their expiration, on
30 days' prior written notice to the registered holders of the Warrants,
provided the last sales price per share of the Common Stock for 20 consecutive
trading days equals or exceeds $10.00. The Warrants shall be exercisable until
the close of the business day preceding the date fixed for redemption. Under
certain circumstances the Representative will receive a warrant solicitation
fee. See "Underwriting."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and Warrants is
Continental Stock Transfer & Trust Company located at 2 Broadway, New York, New
York 10004.

SHARES ELIGIBLE FOR FUTURE SALE

Of the 4,125,000 shares of Common Stock of the Company outstanding as of the
date of this Prospectus, including the shares issued in connection with the
acquisition of BALZ and PRN, 3,000,000 are "restricted securities" of which
2,762,000 are beneficially owned by "affiliates" of the Company, as those terms
are defined in Rule 144 promulgated under the Securities Act. Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144, as promulgated under the Securities Act. All of the Company's existing
stockholders have agreed not to sell or otherwise dispose of any shares of
Common Stock, without the prior written consent of the Representative, for a
period of 24 months after the Effective Date.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
as such term is used in Rule 144 under the Act) for at least one year, including
persons who may be deemed to be affiliates of the Company, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock (which number,
immediately following the Offering made by, will be 41,250 shares, assuming the
Underwriters do not exercise their over-allotment option) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale, provided that the Company has filed certain periodic reports with the
Commission (or made publicly available certain information concerning it) and
the sale is made in a "broker's transaction" or in a transaction directly with a
"market-maker," as those terms are used in Rule 144, without the solicitation of
buy orders by the broker or such person, and without such person making any
payment to any person other than the broker who executes the order to sell the
shares of Common Stock. A person (or person whose shares are aggregated) who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale by such person, and who has beneficially owned restricted
shares for at least two years, would be entitled to sell such shares under Rule
144 without regard to the volume limitations and public information and manner
of sale requirements described above. Restricted shares properly sold in
reliance upon Rule 144 are thereafter freely tradeable without restriction or
registration under the Act, unless thereafter held by an affiliate of the
Company.

Prior to this Offering, there has been no public market for the Company's
Common Stock. The Company cannot predict the number of shares of Common Stock
which may be sold in the future pursuant to Rule 144 or other applicable
exemptions form the registration requirements of the Act because such sales will
depend on whether persons choose to exercise any registration rights they may
have, the market price of the Common Stock, the individual circumstances of
holders thereof and other factors. Nevertheless, there is the possibility that
substantial amounts of restricted or registrable shares may be resold in the
public market which may adversely affect prevailing market prices for the Common
Stock.

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the Underwriters, the
Company has agreed to sell to the Underwriters, and the Underwriters have agreed
to purchase, on a "firm commitment" basis, all of the 1,125,000 shares of Common
Stock and the 1,687,500 Warrants offered hereby.

The Underwriting Agreement provides that the Underwriters, severally and not
jointly, will be obligated to purchase all of the Shares and Warrants offered
hereby on a "firm commitment" basis, if any are purchased, as follows:

UNDERWRITERS SHARES WARRANTS
- -------------------------------------------------------------------------- ----------- -----------

Mason Hill & Co., Inc.....................................................
J. W. Barclay & Co., Inc..................................................

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent including the current effectiveness
of the Registration Statement, delivery of an opinion of Company's counsel, a
"comfort letter" from the Company's accountants, the delivery of an officer's
certificate certifying that all representations and warranties are true and
correct, the appointment of the Transfer and Warrant Agent and NASD approval of
the Underwriters' compensation. The Underwriting Agreement also provides that
the Underwriters will be obligated to purchase all of the shares of Common Stock
and Warrants if any are purchased.

The Underwriters have advised the Company that they propose to offer the
shares of Common Stock and Warrants to the public at the offering prices set
forth on the cover page of this Prospectus and that the Underwriters may allow
to certain dealers, who are members of the National Association of Securities
Dealers, concessions not in excess of $ per share of Common Stock and
$ per Warrant. After the Offering, the public offering price and
concessions and discounts and other offering terms may be changed.

The Company has granted an option to the Underwriters exercisable during the
45-day period from the date of this Prospectus, to purchase up to a maximum of
168,750 additional shares of Common Stock and 253,125 additional Warrants solely
to cover over-allotments, if any, in the sale of the shares of Common Stock and
Warrants, at the Offering price, less the underwriting discounts and commission
set forth on the cover page of this Prospectus.

The Company has agreed to pay the Underwriters a non-accountable expense
allowance equal to 3% of the gross proceeds of the Offering, including the
proceeds of the Over-allotment Option, if and to the extent exercised. The
Underwriting Agreement provides for reciprocal indemnification between the
Company and the Underwriter against certain liabilities in connection with this
Offering, including liabilities under the Securities Act of 1933, as amended
(the "Act").

As additional compensation in connection with this Offering the Company has
agreed to sell to the Representative, for nominal consideration, the
Representative's Warrants to purchase 112,500 shares of Common Stock and 168,750
the Representative's Warrant is exercisable for a four-year period commencing
one year from the Effective Date and entitles the Representative to purchase
each share of Common Stock and Warrant covered thereby at an exercise price
equal to 150% of the initial public Offering price per share of Common Stock and
Warrant, subject to adjustment in certain events. The Representative's Warrants
may not be sold, transferred, assigned or hypothecated for a period of one year
after the Effective Date, except to officers and partners of the Underwriters or
members of the selling group or any officer or partner of any member of the
selling group. The prices payable for the securities upon exercise of the
Representative's Warrant and the number of securities underlying the
Representative's Warrant are subject to adjustment to prevent dilution.

For the term of the Representative's Warrant, the holder or holders thereof
are given, at a nominal cost, the opportunity to profit from a rise in the
market price of the shares of Common Stock subject to the Representative's
Warrants with a resulting dilution in the interests of other stockholders. The
Company may find it more difficult to raise additional equity capital if it
should be needed for its business while the Representative's Warrants are
outstanding; and at any time when the holders of the Representative's Warrants
might be expected to exercise such Warrants, the Company would in all likelihood
be able to obtain additional equity capital on terms more favorable than those
provided in the Representative's Warrants. Any profit realized on the sale of
the Representative's Warrants and shares of Common Stock and Warrants subject to
the Representative's Warrants may be deemed additional underwriting
compensation.

All of the Company's officers, directors and all stockholders have agreed
not to publicly sell, prior to 24 months from the date hereof, any securities of
the Company owned by them, without the prior written approval of the
Representative.

The Underwriting Agreement gives the Representative the right to appoint a
designee to attend all meetings of the Company's Board of Directors for a period
of three years following the closing of this Offering.

The Underwriting Agreement also provides that the Company may not issue
shares of Common Stock or any warrants, options or other rights to purchase
Common Stock (other than pursuant to its Stock Option Plan) for a period of two
years following the Effective Date without the Representative's prior written
consent, which may not be unreasonably withheld. Furthermore, the Company has
granted the Representative a three-year right of first refusal with respect to
subsequent offerings, if any.

The Company has agreed to retain the Representative as a financial
consultant, for a period of three years from the date of this Prospectus at an
annual fee of $33,333.36, all of which fees (an aggregate of $100,000) will be
payable in advance on the completion of this Offering. The Representative will
seek out and review potential acquisition and joint venture targets for the
Company, as well as assisting the Company in responding to any acquisitions for
the Company.

Upon the exercise of any Warrant for a period of four years commencing one
year after the date of this Prospectus, the Company has agreed to pay to the
Representative a fee of 5% of the exercise price for each Warrant exercised;
provided, however, that the Representative will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
Common Stock at the time of exercise is lower than the exercise price of the
Warrants; (ii) the Warrants are held in any discretionary account; (iii)
disclosure of compensation arrangements is not made, in addition to the
disclosure provided in this Prospectus, in documents provided to holders of the
Warrants at the time of exercise; (iv) the exercise of the Warrants is
unsolicited by the Representative; or (v) the solicitation of exercise of the
Warrants was in violation of Regulation M promulgated under the Exchange Act.

The Representative was organized in March 1995, was first registered as a
broker dealer in December 1995, and became a member firm of the NASD in December
1995. The Representative is principally engaged in retail brokerage and market
making activities and various corporate finance projects. Although the
Representative has acted as a placement agent in private offerings and has
participated as a member of the Underwriting syndicate or as a selected dealer
in four prior public offeirngs, it only has acted as the lead managing
underwriter in one prior public offering and has co-managed two other public
offerings. No assurance can be given that the Representative's lack of
experience as a lead managing underwriter of public offerings will not adversely
affect the Offering and the subsequent development of a liquid public trading
market in the Company's securities.

In connection with this Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the

Common Stock and Warrants. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase Common Stock or Warrants for the
purpose of stabilizing their respective market prices. The Underwriters also may
create a short position for the account of the Underwriters by selling more
shares of Common Stock or Warrants in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase shares of
Common Stock or Warrants in the open market following completion of the Offering
to cover all or a portion of such short position. The Underwriters may also
cover all or a portion of such short position by exercising the Over-Allotment
Option. In addition, the Underwriters may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to shares of Common Stock and
Warrants that are distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock and Warrants at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken they may be discontinued at any time.

The Company has agreed to indemnify the Underwriters against liabilities
incurred by the Underwriters by reason of misstatements or omissions to state
material facts in connection with the statements made in this Prospectus and the
Registration Statement of which it forms a part. The Underwriters, in turn, have
agreed to indemnify the Company against liabilities incurred by the Company by
reason of misstatements or omissions to state material facts in connection with
statements made in the Registration Statement and Prospectus based on
information furnished by the Underwriters.

The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement. Reference is made to a copy of the
Underwriting Agreement, which is an exhibit to the Registration Statement of
which this Prospectus forms a part.

DETERMINATION OF OFFERING PRICE

There is currently no public market for the Company's securities.
Consequently, the Offering price has been determined by negotiations between the
Company and the Underwriters and does not necessarily bear any relationship to
any recognized criteria of value. In their negotiations of the Offering price,
the Company and the Underwriters took in account estimates of the business
potential and earning prospects of the Company, the present state of the
Company's development and prevailing market conditions. In this regard, greater
significance was given to the business potential and earnings prospects of the
Company than was given to historical financial information. On November 1, 1996,
the Company sold an aggregate of 500,000 shares of Common Stock and 500,000
warrants for an aggregate of $250,000. This price was not taken into
consideration in connection with the pricing of this Offering. As a condition to
listing the Company on the NASDAQ Stock Market, the Company intends to
repurchase such shares and warrants for an aggregate of $250,000 ($125,000 of
which will be paid prior to the Offering and $125,000 will be paid out of the
Offering proceeds). See "Use of Proceeds". The Offering price set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the securities of the Company. Such market price is
subject to change as a result of market conditions and other factors.

There can be no assurance that an established trading market will develop
for the Common Stock, or, if such market develops and continues, that the
prevailing market price of such securities will bear a favorable relationship to
the Offering price of the Common Stock and Warrants. See "Risk Factors--Lack of
Market; Possible Volatility of Stock Price; Arbitrary Determination of Offering
Price."

LEGAL MATTERS

The validity of the securities which are being offered hereby and certain
other legal matters will be passed upon for the Company by Gersten, Savage,
Kaplowitz, Fredericks & Curtin, LLP ("Gersten Savage"), 101 East 52nd Street,
New York, New York 10022. Certain members of Gersten Savage are the owners of
130,000 shares of the Company's Common Stock. Gersten Savage has in the past,
represented the Representative and may do so in the future. Certain legal
matters will be passed upon for the Underwriters by Schneck Weltman Hashmall &
Mischel LLP, 1285 Avenue of the Americas, New York, New York 10019.

EXPERTS

The financial statements of Lexington Healthcare Group, Inc., BALZ Medical
Services, Inc. and Professional Relief Nurses, Inc. included elsewhere in this
Prospectus and the Registration Statement have been so included in the reliance
on the reports of Richard A. Eisner & Company, LLP, independent auditors, for
the periods indicated in said reports, given on the authority of said firm as
experts in accounting and auditing. The financial statements of Bentley Gardens
Health Care Center, Country Manor Health Care Center, Fairfield Manor Health
Care Center and Pond Point Health Care Center which have been presented on a
combined basis included elsewhere in this Prospectus and the Registration
Statement have been so included in the reliance on the reports of Baird, Kurtz &
Dobson, independent accountants, for the periods indicated in said reports,
given on the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

Prior to this Offering, the Company has not been subject to the reporting
requirements of the Exchange Act. The Company will become subject to the
Exchange Act reporting requirements upon effectiveness of the Registration
Statement of which this Prospectus is a part.

The Company has filed a Registration Statement on Form S-1 with the
Commission in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby (such Registration Statement with all exhibits
and amendments thereto being referred to hereinafter as the Registration
Statement). This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement. Statements herein contained
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement. The Registration Statement, including
exhibits, may be inspected without charge and copied at the Commission's Public
Reference Section located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048
upon payment of the fees prescribed by the Commission. This Registration
Statement, amendments hereto and electronically filed exhibits are also
available to the public through an Internet Web Site (http://www.sec.gov)
maintained by the Commission. In addition, application has been made to have the
Common Stock and the Warrants approved for quotation on the Nasdaq. Reports and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.

INDEX TO FINANCIAL STATEMENTS

PAGE
NUMBER
-------------

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

Report of Independent Auditors..................................................................... F-3

Consolidated Balance Sheets as at December 31, 1996 (unaudited) and June 30, 1996.................. F-4

Consolidated Statements of Income for the six months ended December 31, 1996 (unaudited), December
31, 1995 (unaudited) and for the period from July 1, 1995 (commencement of operations) to June
30, 1996......................................................................................... F-5

Consolidated Statements of Changes in Members/Stockholders' Equity for the period from July 1, 1995
(commencement of operations) to June 30, 1996 and for the six months ended December 31, 1996
(unaudited)...................................................................................... F-6

Consolidated Statements of Cash Flows for the six months ended December 31, 1996 (unaudited),
December 31, 1995 (unaudited) and for the period from July 1, 1995 (commencement of operations)
to June 30, 1996................................................................................. F-7

Notes to Financial Statements...................................................................... F-8 - F-16

BALZ MEDICAL SERVICES, INC.

Report of Independent Auditors..................................................................... F-17

Balance Sheets as at December 31, 1996 (unaudited) and June 30, 1996............................... F-18

Statements of Income for the six months ended December 31, 1996 (unaudited), for the period
November 1, 1995 (commencement of operations) to December 31, 1995 (unaudited) and for the period
from November 1, 1995 (commencement of operations) to June 30, 1996.............................. F-19

Statements of Changes in Stockholders' Equity for the period from November 1, 1995 (commencement of
operations) to June 30, 1996 and for the six months ended December 31, 1996 (unaudited).......... F-20

Statements of Cash Flows for the six months ended December 31, 1996 (unaudited), the period from
November 1, 1995 (commencement of operations) to December 31, 1995 (unaudited) and for the period
from November 1, 1995 (commencement of operations) to June 30, 1996.............................. F-21

Notes to Financial Statements...................................................................... F-22 - F-24

PROFESSIONAL RELIEF NURSES, INC.

Report of Independent Auditors..................................................................... F-25

Balance Sheets as at December 31, 1996 (unaudited), June 30, 1996 and June 30, 1995................ F-26

Statements of Income for the six months ended December 31, 1996 (unaudited) and December 31, 1995
(unaudited) and for the years ended June 30, 1996 and June 30, 1995.............................. F-27

Statements of Changes in Stockholders' Equity for the years ended June 30, 1995 and June 30, 1996
and for the six months ended December 31, 1996 (unaudited)....................................... F-28

Statements of Cash Flows for the six months ended December 31, 1996 (unaudited) and December 31,
1995 (unaudited) and for the years ended June 30, 1996 and June 30, 1995......................... F-29

Notes to Financial Statements...................................................................... F-30 - F-33

F-1

PAGE
NUMBER
-------------

PREDECESSOR FINANICAL STATEMENTS (BENTLEY GARDENS HEALTH CARE CENTER, COUNTRY MANOR HEALTH CARE
CENTER, FAIRFIELD MANOR HEALTH CARE CENTER AND POND POINT HEALTH CARE CENTER).................... F-34

Report of Independent Accountants.................................................................. F-35

Combined Balance Sheet, June 30, 1995.............................................................. F-36

Combined Statements of Operation, Six Months Ended June 30, 1995 and Years Ended December 31, 1994
and 1993 ........................................................................................ F-37

Combined Statements of Excess of Liabilities Over Assets, Six Months Ended June 30, 1995 and Years
Ended December 31, 1994 and 1993................................................................. F-38

Combined Statements of Cash Flows, Six Months Ended June 30, 1995 and Years Ended December 31, 1994
and 1993......................................................................................... F-39

Notes to Financial Statements...................................................................... F-40 to F-43

F-2

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Lexington Healthcare Group, Inc.
New Britain, Connecticut

We have audited the accompanying consolidated balance sheet of Lexington
Healthcare Group, Inc. and subsidiary as at June 30, 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the period from July 1, 1995 (commencement of operations) through June
30, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Lexington Healthcare Group,
Inc. and subsidiary at June 30, 1996, and the results of their operations and
their cash flows for the period from July 1, 1995 (commencement of operations)
through June 30, 1996 in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has a net working capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B
including the need to raise additional equity such as that contemplated by this
offering (see Note K). The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

RICHARD A. EISNER & COMPANY, LLP

New York, New York
October 18, 1996

(November 5, 1996
with respect to Note B)

(May 9, 1997
with respect to Note N)

F-3

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1996 1996
------------- ------------- ------------

(PRO FORMA
NOTE N
UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash............................................................... $ 1,333,000 $ 1,333,000 $ 212,000
Accounts receivable--net of allowance for uncollectible amounts of
$75,000.......................................................... 4,336,000 4,336,000 5,585,000
Due from related parties........................................... 94,000 94,000 73,000
Prepaid and other current assets................................... 324,000 324,000 159,000
------------- ------------- ------------
Total current assets........................................... 6,087,000 6,087,000 6,029,000
Equipment and leasehold improvements, net............................ 610,000 610,000 462,000
Security deposit--related party...................................... 2,282,000 2,282,000 2,282,000
Residents' funds..................................................... 340,000 340,000 147,000
Deferred registration costs.......................................... 286,000 286,000 198,000
Other assets, net.................................................... 60,000 60,000 102,000
Note receivable--related party....................................... 494,000 494,000 394,000
------------- ------------- ------------
TOTAL.......................................................... $ 10,159,000 $ 10,159,000 $ 9,614,000
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES
Current liabilities:
Notes payable...................................................... $ 703,000 $ 703,000 $ 2,267,000
Notes payable--officers/stockholders............................... 182,000 182,000 286,000
Obligation to repurchase common shares--current portion.......... 125,000 -- --
Accounts payable and accrued expenses............................ 7,189,000 7,189,000 5,568,000
Capital leases payable (current portion)......................... 29,000 29,000 27,000
Due to related party............................................. 262,000 262,000 262,000
------------- ------------- ------------
Total current liabilities...................................... 8,490,000 8,365,000 8,410,000
Obligation to repurchase common shares............................. 125,000 -- --
Capital leases payable (less current portion)...................... 79,000 79,000 102,000
Residents' funds payable........................................... 340,000 340,000 147,000
Deferred rent...................................................... 381,000 381,000 468,000
------------- ------------- ------------
Total liabilities.............................................. 9,415,000 9,165,000 9,127,000
------------- ------------- ------------
Commitments and contingencies

MEMBERS'/STOCKHOLDERS' EQUITY
Members'/Stockholders' equity........................................ 744,000 994,000 487,000
------------- ------------- ------------
TOTAL.......................................................... $ 10,159,000 $ 10,159,000 $ 9,614,000
------------- ------------- ------------
------------- ------------- ------------

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-4

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

JULY 1, 1995
(COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS)
DECEMBER 31, TO
---------------------------- JUNE 30,
1996 1995 1996
------------- ------------- ---------------

(UNAUDITED)
Revenues:
Net patient service revenue..................................... $ 17,295,000 $ 16,903,000 $ 33,536,000
Management fees and other revenue (including related party
management revenue of $36,000, $36,000 and $72,000)......... 152,000 36,000 105,000
------------- ------------- ---------------
Total revenues.............................................. 17,447,000 16,939,000 33,641,000
------------- ------------- ---------------
Expenses:
Facility operating expenses:
Salaries and benefits......................................... 13,010,000 12,260,000 24,839,000
Food, medical and other supplies.............................. 1,075,000 1,073,000 2,065,000
Other operating expenses (including rent expense to related
party of $1,234,000, $1,234,000 and $2,468,000)............. 2,574,000 2,305,000 4,896,000
Corporate, general and administrative expenses.................. 486,000 477,000 1,126,000
Interest expense................................................ 70,000 100,000 254,000
------------- ------------- ---------------
Total expenses.............................................. 17,215,000 16,215,000 33,180,000
------------- ------------- ---------------
NET INCOME........................................................ 232,000 724,000 461,000
Pro forma income taxes............................................ 96,000 294,000 195,000
------------- ------------- ---------------
Pro forma net income.............................................. $ 136,000 $ 430,000 $ 266,000
------------- ------------- ---------------
Pro forma net income per share.................................... $ .04 $ .14 $ .09
------------- ------------- ---------------
------------- ------------- ---------------
Weighted average number of shares outstanding .................... 3,092,000 3,092,000 3,092,000
------------- ------------- ---------------
------------- ------------- ---------------

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-5

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/STOCKHOLDERS' EQUITY

COMMON STOCK MEMBERS'
(PAR VALUE $0.01)(B) UNDISTRIBUTED
PREFERRED --------------------- ADDITIONAL EARNINGS/
MEMBERS' STOCK NUMBER OF PAID-IN RETAINED
CAPITAL (PAR VALUE SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- $0.01)(A) ---------- --------- ---------- ------------- ----------
----------

Capital contribution................ $ 26,000 $ 26,000
Net income for the period........... $ 461,000 461,000
----------- ---------- --------- ---------- ------------- ----------
Balance--June 30, 1996.............. 26,000 461,000 487,000
Issuance of common stock and
warrants for cash in November
1996.............................. 500,000 5,000 210,000 215,000
Issuance of common stock for
services capitalized as deferred
registration costs................ 130,000 1,000 59,000 60,000
Exchange of members' interests for
common stock upon
reorganization.................... (26,000) 2,462,000 25,000 1,000 -- --
Net income for the period........... 232,000 232,000
----------- ---------- --------- ---------- ------------- ----------
BALANCE--DECEMBER 31, 1996
(UNAUDITED)....................... -0- 3,092,000 $ 31,000 $ 270,000 $ 693,000 $ 994,000
----------- ---------- --------- ---------- ------------- ----------
----------- ---------- --------- ---------- ------------- ----------

- ------------------------

(a) Authorized and unissued 1,000,000 shares.

(b) Authorized 15,000,000 shares.

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-6

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

JULY 1, 1995
(COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS)
DECEMBER 31, TO
---------------------------- JUNE 30,
1996 1995 1996
------------- ------------- ---------------

(UNAUDITED)
Cash flows from operating activities:
Net income...................................................... $ 232,000 $ 724,000 $ 461,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 34,000 23,000 47,000
Provision for uncollectible amounts......................... 75,000 75,000
Deferred rent............................................... (87,000) 226,000 468,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................. 1,249,000 (5,378,000) (5,660,000)
Increase (decrease) in due to related parties--net.......... (21,000) 262,000 189,000
(Increase) in prepaid and other current assets.............. (165,000) (266,000) (159,000)
(Increase) in organization costs............................ (3,000) (70,000) (70,000)
Increase in accounts payable and accrued expenses........... 1,621,000 5,406,000 5,814,000
------------- ------------- ---------------
Net cash provided by operating activities................. 2,860,000 1,002,000 1,165,000
------------- ------------- ---------------
Cash flows from investing activities:
Acquisition of fixed assets..................................... (173,000) (346,000) (346,000)
(Increase) in security deposit--related party................... (2,105,000) (2,282,000)
Note receivable--related part................................... (64,000) (145,000) (394,000)
------------- ------------- ---------------
Net cash (used in) investing activities................... (237,000) (2,596,000) (3,022,000)
------------- ------------- ---------------
Cash flows from financing activities:
Proceeds of short-term borrowings and Beverly receivables..... 500,000 2,921,000 3,527,000
Repayment of short-term borrowing............................. (2,064,000) (894,000) (1,573,000)
Proceeds of notes payable to officers......................... 194,000 392,000
Repayment of notes payable to officers........................ (104,000) (106,000) (106,000)
Members' Capital Contribution/Issuance of common stock........ 215,000 22,000 26,000
Repayments of capital lease obligations....................... (21,000) (19,000)
Registration costs............................................ (28,000) (131,000)
Financing costs............................................... (47,000)
------------- ------------- ---------------
Net cash provided by (used in) financing activities....... (1,502,000) 2,137,000 2,069,000
------------- ------------- ---------------
NET INCREASE IN CASH.............................................. 1,121,000 543,000 212,000
Cash--beginning of period......................................... 212,000 -0- -0-
------------- ------------- ---------------
CASH--END OF PERIOD............................................... $ 1,333,000 $ 543,000 $ 212,000
------------- ------------- ---------------
Supplemental disclosures of noncash investing and financing
activities:
Equipment acquired by capital leases.......................... $ 108,000 $ 148,000
Accounts payable financed by short-term borrowings............ 313,000
Issuance of common stock for services capitalized as deferred
registration costs.......................................... $ 60,000
Deferred registration costs accrued........................... 109,000 67,000
Supplemental disclosure of cash flow information:
Interest paid................................................... 60,000 24,000 217,000

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-7

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE A)--THE COMPANY AND PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include Lexington Healthcare Group,
Inc. and its wholly owned subsidiary LEV Rehab Services, Inc. ("LEV")
(collectively, the "Company").

The Company was incorporated in 1996. Upon consummation of the proposed
public offering contemplated herein the Company will be the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"). Each of
the members of LLC have agreed to exchange their respective membership interests
in the LLC upon consummation of the public offering, for an aggregate of
2,462,000 shares of the Company's Common Stock. The reorganization has been
accounted for using LLC's historical cost basis. (see Note C(5)) The financial
statements have been prepared as if such reorganization took place effective
December 31, 1996.

LLC is a long-term and subacute care provider, which operates four nursing
home facilities in the State of Connecticut. These facilities, which are leased
under a long-term lease from a partnership, (of which a 33% partner is presently
the controlling member of LLC) had previously been leased from that partnership
and operated by Beverly Enterprises, Inc. ("Beverly"), an unrelated entity.
Subacute care is generally provided to patients who have been discharged from an
acute care hospital and require additional care in specialized clinical programs
before being discharged.

LLC includes in revenues all room and board, nursing, therapies, medical
supplies and pharmacy charges. Basic care generally is provided to geriatric and
chronic care patients requiring routine nursing services.

LLC also provides management services to a nursing facility owned by a
partnership controlled by its principal member and to a nonaffiliated entity.

LLC was formed on March 8, 1995 and commenced operations on July 1, 1995
(see Note E).

LEV was incorporated in 1996 and commenced operations in May 1996 to provide
physical, occupational, speech and other therapies to patients at the nursing
home facilities owned or managed by LLC, unaffiliated facilities and persons in
their homes. LEV has not generated any significant revenues to date.

The Company intends to acquire contingently upon and simultaneously with the
closing of the proposed public offering (see Note K) all of the capital stock of
Balz Medical Services, Inc. ("Balz") and Professional Relief Nurses, Inc.
("PRN"). The stockholders owning 100% of the Company presently own 44% and 25%
of Balz and PRN, respectively.

The Company will acquire all of the capital stock of Balz through an
exchange of 300,000 shares of the Company which are valued at $1,500,000 based
on the offering price of the proposed public offering. Furthermore, in
connection with the acquisition, PRN will distribute 100% of its net book value
to its stockholders.

The purchase price of PRN consists of $1,620,000 payable in cash and
exchange of 108,000 shares of the Company which are valued at $540,000 based on
the offering price of the proposed public offering.

The excess of cost over the fair value of the assets acquired from Balz and
PRN will be amortized over 20 years.

F-8

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE B)--BASIS OF PRESENTATION:

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In the course of developing its
business, in the fiscal year ended June 30, 1996, the Company has expended a
substantial amount of current resources for fixed assets and a security deposit.
As of June 30, 1996 and December 31, 1996, the Company has a working capital
deficiency of approximately $2.3 million.

The Company concluded a private placement of 500,000 shares of common stock
and 500,000 warrants. Net proceeds ($215,000) were received in November 1996.

Management's plans include the following:

i) Materially reduce future outlays for noncurrent assets.

ii) Vigorously promote the Company's business by increasing patient
occupancy levels, as well as the businesses of PRN and Balz in order to
enhance profitability and cash flows.

iii) To make a public offering of 1,000,000 shares of common stock and
warrants as provided, the net proceeds of which are estimated at $4.0
million.

The Company's ability to continue as a going concern is dependent upon its
ability to implement its plans described above and to consummate its initial
public offering as described in Note K. Accordingly, the Company's financial
statements do not reflect such adjustments, if any, that might result should the
Company be unable to continue as a going concern.

(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Significant accounting policies in the preparation of the financial
statements are as follows:

[1] REVENUE RECOGNITION:

Revenues are recognized at the time the service is provided to the patient.
Substantially all of the Company's revenues are billed to third party payors,
i.e., Medicaid, Medicare and others under the provisions of reimbursement
formulas and regulations in effect.

Net operating revenues include amounts estimated by management to be
reimbursable by the third party payors; such reimbursements are subject to audit
by the payors, and estimates are recorded for potential adjustments that may
result. The Company has revised its estimate of reimbursable costs to be
received from Medicaid and other third party payors. Accordingly, included as
patient revenues during the period ended December 31, 1996 is $50,000 applicable
to patient services performed in the prior period ended June 30, 1996.
Furthermore, differences between the estimated amounts accrued and final
settlements are reported in operations in the year of settlement. To date, no
such audits or settlements have taken place.

The Company recognizes management fees as they are earned and accrues
related fees payable to subcontractors as they are incurred (see Notes F and H).

F-9

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[2] 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.

[3] ACCOUNTS RECEIVABLE, NET AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Accounts receivable, net is comprised principally of amounts expected to be
collected from third party payors for services provided.

[4] EQUIPMENT AND LEASEHOLD IMPROVEMENTS:

Equipment and leasehold improvements are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
equipment. The useful lives of equipment range from five to seven years.
Leasehold improvements are amortized over the period of the respective leases or
the estimated useful lives of the assets, whichever is shorter.

[5] INCOME TAXES:

Since LLC is a limited liability company, it is the obligation of the
individual members of LLC to separately report their proportionate share of
LLC's taxable income. As a result, as long as LLC remains a limited liability
company, members can withdraw such income without any further tax consequences.
Upon the closing of the proposed public offering and related reorganization,
LLC's status as a limited liability company will terminate. The LLC does not
intend to distribute its undistributed earnings to its members. Accordingly,
such undistributed earnings will be reclassified to paid in capital. The Company
has adopted Statement of Accounting Standards No. 109, "Accounting for Income
Taxes" which requires the use of the liability method of accounting for income
taxes (see Note L).

[6] USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

[7] RECENTLY ISSUED ACCOUNTING STANDARDS:

The Company has not elected to adopt early, the provisions of two recently
issued accounting standards regarding impairment of long-lived assets ("FAS
121") and stock-based compensation ("FAS 123"). FAS 121 requires entities to
review long-lived assets and certain identifiable intangibles to be held and
used for indicia of impairment whenever changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. FAS 123 permits
accounting for stock-based compensation for employees pursuant to a fair value
based method. The Company does not expect to adopt the accounting provisions of
FAS 123, however, it will make disclosure of pro forma net income and pro forma
earnings

F-10

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE C)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
per share on a fair value basis as required. The Company does not believe that
the potential impact, if any, of the adoption of these standards on its
financial position or results of operations will, when adopted, be material.

[8] EARNINGS PER SHARE:

Net income per share is computed using the weighted average number of shares
deemed outstanding during the period as adjusted for the exchange of shares to
be issued in the proposed reorganization described in Note A. In accordance with
Securities and Exchange Commission requirements all common shares issued
including shares issued in the proposed reorganization by the Company at a price
below the proposed public offering price during the twelve-month period prior to
the filing of a proposed initial public offering have been included in the
calculation as if they were outstanding for all periods.

Had the transactions described in Note N never occurred, supplemental pro
forma net income per share would have been $.05, $.17 and $.10 for the six
months ended December 31, 1996 and 1995 and for the period from July 1, 1995 to
June 30, 1996, respectively.

[9] RELATED PARTY TRANSACTIONS:

Related party transactions have been recorded and their accounting effects
are described in Notes (A), (F), (H) and (I).

(NOTE D)--EQUIPMENT AND LEASEHOLD IMPROVEMENTS:

Equipment and leasehold improvements (at cost) consist of the following:

DECEMBER 31, JUNE 30,
1996 1996
------------ ----------

(UNAUDITED)
Equipment.............................................................................. $ 314,000 $ 231,000
Leasehold improvements................................................................. 353,000 263,000
------------ ----------
667,000 494,000
Less accumulated depreciation and amortization......................................... 57,000 32,000
------------ ----------
Total.............................................................................. $ 610,000 $ 462,000
------------ ----------
------------ ----------

F-11

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE E)--SHORT-TERM NOTES PAYABLE:

Short-term borrowings consisted of the following:

DECEMBER 31, JUNE 30,
1996 1996
------------ ------------

(UNAUDITED)
10% note payable to a medical supplies vendor; principal and interest of $27,000
payable monthly through May 1997................................................... $ 224,000 $ 313,000
Payable to a noninstitutional lender, bearing interest at the 30-day LIBOR plus 4.5%;
collateralized by patient receivables (repaid July 1996)........................... 852,000
12% note payable to Beverly. Under an agreement with Beverly, the Company collected
Beverly's receivables and has agreed to repay such proceeds in monthly installments
through December 1996(1)(2)........................................................ 153,000 702,000
15% demand note (due December 1996)(2)............................................... 300,000 350,000
Demand note payable, noninterest bearing............................................. 26,000 50,000
------------ ------------
Total............................................................................ $ 703,000 $ 2,267,000
------------ ------------
------------ ------------

(1) In addition, $490,000 included in accounts payable (at December 31, 1996)
are also due to Beverly for collection of receivables. That amount is net of
approximately $200,000 of chargebacks from Medicaid which, in the Company's
belief, are offsettable against amounts otherwise owing to Beverly, since
the chargebacks pertained to periods prior to June 30, 1995.

(2) The notes were not paid when due and the Company has verbal understandings
with the lenders that these notes will be repaid from the net proceeds of
the public offering contemplated herein.

(NOTE F)--NOTE RECEIVABLE--RELATED PARTY:

The note receivable is due from an entity in which the principal stockholder
of the Company has a controlling ownership interest. The Company has been
granted a security interest in real property to collateralize the note. The
obligation arose out of advances and payment of certain expenses on behalf of
this entity and bears interest at 8%, per annum, payable quarterly. The note is
due in full on June 30, 2001.

The note receivable includes a monthly management fee of $6,030 which
commenced July 1, 1995. During the periods ended December 31, 1996, December 31,
1995 and June 30, 1996, the Company accrued management fees of $36,180, $36,180
and $72,360, respectively. The agreement expires on June 30, 1997.

F-12

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE G)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

DECEMBER 31, JUNE 30,
1996 1996
------------ ------------

(UNAUDITED)
Accounts payable................................................. $3,663,000 $ 3,566,000
Accrued payroll and payroll taxes................................ 1,250,000 1,466,000
Due to the State of Connecticut.................................. 1,616,000*
Other accrued expenses........................................... 660,000 536,000
------------ ------------
Total........................................................ $7,189,000 $ 5,568,000
------------ ------------
------------ ------------

- ------------------------

* The amount is payable to the State of Connecticut as a result of an
erroneous Medicaid reimbursement received from the State. The Company is to
repay the State at the monthly rate of approximately $450,000, with final
payment due in March 1997. The State has indicated that failure to adhere to
this repayment schedule may result in further action against the Company,
including referral to the State Attorney General.

(NOTE H)--MANAGEMENT FEE:

The Company manages two nursing homes. One of the homes is owned by an
entity in which the principal stockholder of the Company has a controlling
interest. (See Note F) The second is with an unrelated entity and is for a year
ending April 1997, and provides for an annual fee of approximately $212,000. The
Company subcontracts the management of this facility at an annual cost of
approximately $193,000.

(NOTE I)--LEASES:

[1] OPERATING LEASES:

The Company leases its nursing home facilities (including certain equipment)
under an operating lease with a related partnership (Note A). The Company is
responsible for property taxes, maintenance, insurance, etc. under the lease.
The lease agreement, as amended, commenced on July 1, 1995 and is for a ten-year
period, with four five-year renewal options at specified rents. In addition, the
Company leases office space under an operating lease which expires June 30, 1998
from the principal stockholder.

F-13

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE I)--LEASES: (CONTINUED)

Future minimum lease payments required under these obligations are as
follows:

DECEMBER 31, JUNE 30,
1996 1996
------------- -------------

(UNAUDITED)
1997............................................................................... $ 2,536,000 $ 2,535,000
1998............................................................................... 2,528,000 2,537,000
1999............................................................................... 2,520,000 2,520,000
2000............................................................................... 2,520,000 2,520,000
2001............................................................................... 2,520,000 2,520,000
Thereafter......................................................................... 8,820,000 10,080,000
------------- -------------
Total.......................................................................... $ 21,444,000 $ 22,712,000
------------- -------------
------------- -------------

Rent expense charged to operations aggregated $2,481,000 during the year
ended June 30, 1996 and $1,236,000 and $1,241,000 during the six months ended
December 31, 1996 and December 31, 1995, respectively.

The Company has deposited with the landlord a non-interest bearing security
deposit approximating $2.3 million as of June 30, 1996 and December 31, 1996.
Such amount of deposit is comprised as follows:

Approximately $1,300,000 arose as a result of a payment made by the Company
to Beverly on the landlord's behalf; the remaining $1,000,000 represented the
excess of rent which was paid to the landlord prior to its retroactive reduction
of periodic rent payments.

Deferred rent payable represents the excess of rental expense determined on
a straight-line basis over the amounts currently payable pursuant to the leases.

[2] CAPITAL LEASES:

The Company is obligated under capital leases for office equipment.

Future minimum lease payments required under these obligations are as
follows:

DECEMBER 31, JUNE 30,
1996 1996
------------ ----------

(UNAUDITED)
1997................................................................................... $ 29,000 $ 27,000
1998................................................................................... 34,000 34,000
1999................................................................................... 34,000 34,000
2000................................................................................... 11,000 32,000
2001................................................................................... 2,000
------------ ----------
Total.............................................................................. 108,000 129,000
Less current portion................................................................... 29,000 27,000
------------ ----------
Long-term portion...................................................................... $ 79,000 $ 102,000
------------ ----------
------------ ----------

F-14

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE J)--COMMITMENT:

UNION CONTRACT:

Employees subject to collective bargaining agreements participate in union
pension plans which are funded by contributions by the Company. For the year
ended June 30, 1996, contributions were approximately $397,000. For the
six-month periods ended December 31, 1996 and December 31, 1995, contributions
were $253,000 and $231,000, respectively. Information as to the Company's
portion of accumulated plan benefits and plan net assets is not determinable.

Under the Employee Retirement Income Security Act of 1974 as amended, an
employer upon withdrawal from a multi-employer plan is required to continue
funding its proportionate share of the plan's unfunded vested benefits. The
Company has no intention of withdrawing from the plan.

OTHER:

The Company does not believe it has any contingent liabilities with respect
to the operations of the nursing homes, if any, which arose during the period
they were operated by Beverly.

(NOTE K)--CONCENTRATION OF RISK:

Revenues from principal sources are as follows:

SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1996 1995 1996
----- ----- ---------------

(UNAUDITED)
Medicare and Medicaid................................................................. 89% 91% 89%
Private insurance and other nongovernment agencies.................................... 9 8 9
Other................................................................................. 2 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---

The Company derives the majority of its revenues from reimbursement by
third-party payors, particularly Medicaid and Medicare, typically invoicing and
collecting payments directly from the third-party payor.

Reimbursement can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors.

The Company, like other Medicaid and Medicare providers, is subject to
governmental audits of its Medicaid and Medicare reimbursement claims, but to
date has not experienced any such audit. As a provider of services under the
Medicaid and Medicare programs, the Company is also subject to the Medicaid and
Medicare fraud and abuse laws.

The primary geographic sources of the Company's patients are the local
communities in the State of Connecticut in which the Company's facilities are
located.

F-15

LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 IS UNAUDITED)

(NOTE K)--CONCENTRATION OF RISK: (CONTINUED)
At June 30, 1996, 91% of accounts receivable was due from Medicaid and
Medicare and 9% from private insurers and other nongovernment sources. At
December 31, 1996, 87% of accounts receivable was due from Medicaid and Medicare
and 13% from private insurers and other nongovernment sources.

(NOTE L)--PROPOSED PUBLIC OFFERING:

The Company is in the process of filing a Registration Statement covering an
initial public offering of 1,000,000 shares of common stock and warrants to
purchase common stock for gross proceeds estimated at $5,100,000. Deferred
registration costs at June 30, 1996 and costs incurred subsequently which
pertain to the offering will be charged against the proceeds or written-off if
the contemplated offering is not consummated.

(NOTE M)--PRO FORMA INCOME TAXES:

The pro forma net income in the accompanying consolidated statement of
income includes a pro forma adjustment for income taxes which would have been
provided for had LLC been subject to tax as a regular corporation.

Expected tax expense based on the federal statutory rate is reconciled with
the actual expense as follows:

SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1996 1995 1996
----- ----- ---------------

(UNAUDITED)
Expected tax expense.................................................................. 34% 34% 34%
Increase in taxes resulting from:
State income tax net of federal benefit............................................. 7 7 7
Other............................................................................... 1
-- -- --
41% 41% 42%
-- -- --
-- -- --

(NOTE N)--PRIVATE PLACEMENT:

In November 1996, the Company completed a Private Placement of 500,000
shares at $.50 per share together with (six-year) warrants to acquire an
additional 500,000 shares of common stock at $6.00 per share, and realized net
proceeds of $215,000 therefrom.

In May 1997, at the request of NASDAQ as a condition for the approval of the
Company's listing, the transaction was rescinded. The purchasers in the Private
Placement (who have both verbally agreed to the rescission) were not otherwise
obligated to sell back their securities to the Company, but nonetheless have
agreed to do so whether or not the initial public offering contemplated herein
is completed. The rescinding purchasers will not receive consideration for their
agreement to rescind, other than as described herein. The Company agreed to
purchase 500,000 shares of common stock and warrants to acquire an additional
500,000 shares for an amount equal to the gross proceeds of $250,000. The pro
forma balance sheet reflects this rescission as if it had occurred on December
31, 1996.

F-16

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Balz Medical Services, Inc.
New Britain, Connecticut

We have audited the accompanying balance sheet of Balz Medical Services,
Inc. as at June 30, 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the period from November 1, 1995
(commencement of operations) through June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Balz Medical Services, Inc. at
June 30, 1996, and the results of its operations and its cash flows for the
period from November 1, 1995 (commencement of operations) to June 30, 1996 in
conformity with generally accepted accounting principles.

RICHARD A. EISNER & COMPANY, LLP

New York, New York
October 18, 1996

(October 30, 1996
with respect to Note G)

F-17

BALZ MEDICAL SERVICES, INC.

BALANCE SHEETS

DECEMBER 31, JUNE 30,
1996 1996
------------ ----------

(UNAUDITED)
ASSETS
Current assets:
Cash................................................................................. $ 81,000 $ 16,000
Accounts receivable, less allowance for uncollectible amounts of $120,000 at June 30
and $312,000 at December 31........................................................ 785,000 649,000
Inventory.......................................................................... 27,000 23,000
Prepaid expenses................................................................... 3,000 3,000
Deferred taxes....................................................................... 130,000 50,000
------------ ----------
Total current assets............................................................. 1,026,000 741,000
Other assets........................................................................... 19,000 15,000
------------ ----------
TOTAL............................................................................ $1,045,000 $ 756,000
------------ ----------
------------ ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders........................................................ $ 30,000 $ 60,000
Accounts payable and accrued expenses................................................ 123,000 212,000
Due to related party............................................................... 63,000 43,000
Income taxes payable............................................................... 410,000 207,000
------------ ----------
Total current liabilities........................................................ 626,000 522,000
------------ ----------
------------ ----------
Stockholders' equity:
Common stock, par value $10 per share; authorized 10,000 shares; issued 2,500
shares............................................................................. 25,000 25,000
Retained earnings.................................................................... 394,000 209,000
------------ ----------
Total stockholders' equity....................................................... 419,000 234,000
------------ ----------
TOTAL............................................................................ $1,045,000 $ 756,000
------------ ----------
------------ ----------

The accompanying notes to financial statements are an integral part hereof.

F-18

BALZ MEDICAL SERVICES, INC.

STATEMENTS OF INCOME

NOVEMBER 1, NOVEMBER 1,
1995 1995
(COMMENCEMENT (COMMENCEMENT
OF OF
SIX MONTHS OPERATIONS) OPERATIONS)
ENDED TO TO
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1995 1996
------------ ------------ -----------

(UNAUDITED) (UNAUDITED)
Net sales.............................................................. $ 658,000 $ 81,000 $ 745,000
Cost of goods sold..................................................... 196,000 54,000 247,000
------------ ------------ -----------
Gross profit........................................................... 462,000 27,000 498,000
General and administrative expenses.................................... 147,000 24,000 127,000
------------ ------------ -----------
Income before income taxes............................................. 315,000 3,000 371,000
Income taxes........................................................... 130,000 157,000
------------ ------------ -----------
NET INCOME............................................................. $ 185,000 $ 3,000 $ 214,000
------------ ------------ -----------
------------ ------------ -----------

The accompanying notes to financial statements are an integral part hereof.

F-19

BALZ MEDICAL SERVICES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

COMMON STOCK
----------------------

(PAR VALUE $10)
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- --------- ---------- ----------
Issuance of stock, October 1995....................................... 3,000 $ 30,000 $ 30,000
Repurchase and retirement of stock, February 1996..................... (500) (5,000) $ (5,000) (10,000)
Net income for the period............................................. 214,000 214,000
----- --------- ---------- ----------
Balance--June 30, 1996................................................ 2,500 25,000 209,000 234,000
Net income for the period............................................. 185,000 185,000
----- --------- ---------- ----------
BALANCE--DECEMBER 31, 1996 (UNAUDITED)................................ 2,500 $ 25,000 $ 394,000 $ 419,000
----- --------- ---------- ----------
----- --------- ---------- ----------

The accompanying notes to financial statements are an integral part hereof.

F-20

BALZ MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS

NOVEMBER 1,
1995 NOVEMBER 1,
(COMMENCEMENT 1995
SIX MONTHS OF OPERATIONS) (COMMENCEMENT
ENDED TO OF OPERATIONS)
DECEMBER 31, DECEMBER 31, TO JUNE 30,
1996 1995 1996
------------ --------------- ---------------

(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income..................................................... $ 185,000 $ 3,000 $ 214,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 2,000
Provision for uncollectible amounts........................ 192,000 17,000 120,000
Deferred tax provision..................................... (80,000) (50,000)
Increase in due to related party........................... 20,000 9,000 43,000
Changes in assets and liabilities:
(Increase) in accounts receivable........................ (328,000) (99,000) (769,000)
(Increase) in inventory.................................. (4,000) (22,000) (23,000)
(Increase) in prepaid expenses........................... (3,000)
Increase (decrease) in accounts payable and accrued
expenses............................................... (89,000) 57,000 212,000
Increase in income taxes payable......................... 203,000 207,000
------------ --------------- ---------------
Net cash provided by (used in) operating activities.... 101,000 (35,000) (49,000)
------------ --------------- ---------------
Cash flows from investing activities:
(Increase) in other assets..................................... (6,000) (1,000) (15,000)
------------ --------------- ---------------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable to stockholders.... (30,000) 20,000 60,000
Proceeds from issuance of common stock......................... 30,000 30,000
Repurchase of common stock..................................... (10,000)
------------ --------------- ---------------
Net cash provided by (used in) financing activities.... (30,000) 50,000 80,000
------------ --------------- ---------------
NET INCREASE IN CASH............................................. 65,000 14,000 16,000
Cash--beginning of period........................................ 16,000 -0 - -0 -
------------ --------------- ---------------
CASH--END OF PERIOD.............................................. $ 81,000 $ 14,000 $ 16,000
------------ --------------- ---------------
------------ --------------- ---------------

The accompanying notes to financial statements are an integral part hereof.

F-21

BALZ MEDICAL SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)

(NOTE A)--ORGANIZATION AND BASIS OF PRESENTATION:

Balz Medical Services, Inc. (the "Company") is a provider of medical
supplies and durable medical equipment to nursing home facilities in New York
and Connecticut. All medical supplies are provided for specific patients
residing at these homes. Stockholders who own 44% of the Company presently own
100% of Lexington Health Care Group, LLC ("Lexington") (see Note E). The Company
was incorporated on October 5, 1995 and commenced operations on November 1,
1995.

(NOTE B)--SIGNIFICANT ACCOUNTING POLICIES:

Significant accounting policies in the preparation of the financial
statements are as follows:

[1] REVENUE RECOGNITION:

Revenues are recognized at the time the medical supplies are provided to the
nursing home facilities. Substantially all of the Company's revenues are billed
to Medicare under the provisions of reimbursement formulas and regulations in
effect.

Net operating revenues include amounts estimated by management to be
reimbursable by Medicare; such reimbursements are subject to audit by Medicare,
and estimates are recorded for potential adjustments that may result.
Differences between the estimated amounts accrued and final settlements are
reported in operations in the year of settlement. To date no such audits have
taken place.

[2] INVENTORY:

Inventory is stated at the lower of cost (first-in, first-out) or market,
and consists of medical supplies held for sale.

[3] INCOME TAXES:

The Company has adopted Statement of Accounting Standards No. 109,
"Accounting for Income Taxes" which requires the use of the liability method of
accounting for income taxes.

Deferred income taxes are provided for temporary differences resulting from
the timing of certain deductions for financial reporting and income tax
purposes.

[4] USE OF ESTIMATES:

(NOTE C)--SHORT-TERM NOTES PAYABLE:

Short-term borrowings at June 30, 1996 consisted of notes payable due to
stockholders aggregating $60,000 ($30,000 at December 31, 1996), due on demand.
These notes bear interest at 10%. Total interest

F-22

BALZ MEDICAL SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)

(NOTE C)--SHORT-TERM NOTES PAYABLE: (CONTINUED)
expense for the period ended June 30, 1996 was $2,000; interest expense for the
six months ended December 31, 1996 was $3,000.

(NOTE D)--INCOME TAXES:

[1] The provision for federal and state income taxes is comprised of the
following:

SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------

Current:
Federal.......................................................... $ 153,000 $ 151,000
State............................................................ 57,000 56,000
------------ ----------
210,000 207,000
------------ ----------
Deferred:
Federal.......................................................... (66,000) (41,000)
State............................................................ (14,000) (9,000)
------------ ----------
(80,000) (50,000)
------------ ----------
Total........................................................ $ 130,000 $ 157,000
------------ ----------
------------ ----------

Expected tax expense (benefit) based on the statutory rate is reconciled
with the actual expense as follows:

Expected tax expense................................................... 34%
Increase in taxes resulting from:
State income tax net of federal benefit.............................. 7
Other................................................................ 1
--
42%
--
--

[2] The temporary difference which gives rise entirely to the deferred tax
asset is the allowance for uncollectibles.

No valuation allowance has been established because the Company expects the
deferred tax asset to be fully realizable.

(NOTE E)--RELATED PARTY TRANSACTIONS:

The Company has an agreement to pay Lexington $3,100 a month for management
services, rent and general and administrative expenses. The agreement continues
to be in effect until modified by either party. The Company paid approximately
$25,000 for the period ended June 30, 1996 and $19,000 for the six months ended
December 31, 1996.

F-23

BALZ MEDICAL SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
NOVEMBER 1, 1995 TO DECEMBER 31, 1995 IS UNAUDITED)

(NOTE E)--RELATED PARTY TRANSACTIONS: (CONTINUED)
For the period from November 1, 1995 through June 30, 1996, approximately
43% of the Company's revenues were derived from patients at facilities operated
or managed by Lexington. Revenues from other related parties accounted for
approximately 19% of the Company's net sales. In addition, two unrelated
customers individually accounted for 22% and 16% of the Company's net sales.

For the six months ended December 31, 1996, net sales to Lexington operated
or managed facilities approximated 41% and net sales to other related parties
were approximately 20% of the Company's net sales. Additionally, two unrelated
customers comprised 22% and 17% of net sales.

(NOTE F)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

JUNE 30, DECEMBER 31,
1996 1996
---------- ------------

(UNAUDITED)
Accounts payable................................................... $ 180,000 $ 99,000
Accrued payroll and payroll taxes.................................. 16,000 6,000
Other accruals..................................................... 16,000 18,000
---------- ------------
Total........................................................ $ 212,000 $ 123,000
---------- ------------
---------- ------------

(NOTE G)--PROPOSED ACQUISITION OF THE COMPANY:

The stockholders of the Company have agreed to exchange all of their capital
stock for stock in the successor corporation to Lexington. The exchange is
contingent upon completion of a proposed public offering by Lexington. Under the
agreement, stockholders of the Company will receive 300,000 shares of the
successor's common stock.

F-24

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Professional Relief Nurses, Inc.
Middletown, Connecticut

We have audited the accompanying balance sheets of Professional Relief
Nurses, Inc. as at June 30, 1996 and June 30, 1995 and the related statements of
income, changes in stockholders' equity and cash flows for each of the years in
the two-year period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Professional Relief Nurses,
Inc. at June 30, 1996 and June 30, 1995 and the results of its operations and
its cash flows for each of the years in the two-year period ended June 30, 1996
in conformity with generally accepted accounting principles.

RICHARD A. EISNER & COMPANY, LLP

New York, New York
October 17, 1996

(October 30, 1996
With respect to Note G)

F-25

PROFESSIONAL RELIEF NURSES, INC.

BALANCE SHEETS

DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ---------- ----------

(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 130,000 $ 261,000 $ 198,000
Trade receivables, less allowance of $40,000 at June 30, 1996 and $30,000
at June 30, 1995....................................................... 549,000 497,000 354,000
Prepaid expenses......................................................... 6,000
------------ ---------- ----------
Total current assets................................................. 679,000 758,000 558,000
Property and equipment, net................................................ 79,000 32,000 39,000
Other assets (principally cash surrender value of officer's life
insurance)............................................................... 34,000 27,000 19,000
------------ ---------- ----------
TOTAL................................................................ $ 792,000 $ 817,000 $ 616,000
------------ ---------- ----------
------------ ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................... $ 201,000 $ 285,000 $ 272,000
Due to affiliate......................................................... 30,000 30,000 15,000
Note payable--bank--current portion...................................... 13,000
Income taxes payable..................................................... 15,000 10,000
------------ ---------- ----------
Total current liabilities............................................ 259,000 325,000 287,000
------------ ---------- ----------
Note payable--bank (net of current portion)................................ 48,000
------------ ---------- ----------
Stockholders' equity:
Common stock, no par value; authorized 5,000 shares; issued 400 shares... 1,000 1,000 1,000
Retained earnings........................................................ 484,000 491,000 328,000
------------ ---------- ----------
Total stockholders' equity........................................... 485,000 492,000 329,000
------------ ---------- ----------
TOTAL................................................................ $ 792,000 $ 817,000 $ 616,000
------------ ---------- ----------
------------ ---------- ----------

The accompanying notes to financial statements
are an integral part hereof.

F-26

PROFESSIONAL RELIEF NURSES, INC.

STATEMENTS OF INCOME

SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- --------------------------

1996 1995 1996 1995
------------ ------------ ------------ ------------

(UNAUDITED)

Net patient service revenue.............................. $ 2,090,000 $ 1,686,000 $ 3,821,000 $ 3,042,000
------------ ------------ ------------ ------------
Expenses:
Salaries and benefits.................................. 988,000 716,000 1,563,000 1,143,000
Operating expenses..................................... 806,000 859,000 1,737,000 1,670,000
------------ ------------ ------------ ------------
Total expenses..................................... 1,794,000 1,575,000 3,300,000 2,813,000
------------ ------------ ------------ ------------
Income before provision for income taxes................. 296,000 111,000 521,000 229,000
Provision for state income taxes......................... 33,000 14,000 70,000 36,000
------------ ------------ ------------ ------------
NET INCOME............................................... 263,000 97,000 451,000 193,000
Pro forma federal income taxes........................... 89,000 33,000 143,000 58,000
------------ ------------ ------------ ------------
PRO FORMA NET INCOME..................................... $ 174,000 $ 64,000 $ 308,000 $ 135,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

The accompanying notes to financial statements are an integral part hereof.

F-27

PROFESSIONAL RELIEF NURSES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

COMMON STOCK
----------------------

NUMBER
OF
SHARES RETAINED
ISSUED AMOUNT EARNINGS TOTAL
----------- --------- ----------- -----------
Balance--July 1, 1994............................................... 400 $ 1,000 $ 543,000 $ 544,000
Dividends paid...................................................... (408,000) (408,000)
Net income.......................................................... 193,000 193,000
--- --------- ----------- -----------
Balance--June 30, 1995.............................................. 400 1,000 328,000 329,000
Dividends paid...................................................... (288,000) (288,000)
Net income.......................................................... 451,000 451,000
--- --------- ----------- -----------
Balance--June 30, 1996.............................................. 400 1,000 491,000 492,000
Dividends paid for the period....................................... (270,000) (270,000)
Net income for the period........................................... 263,000 263,000
--- --------- ----------- -----------
BALANCE--DECEMBER 31, 1996 (UNAUDITED).............................. 400 $ 1,000 $ 484,000 $ 485,000
--- --------- ----------- -----------
--- --------- ----------- -----------

The accompanying notes to financial statements
are an integral part hereof.

F-28

PROFESSIONAL RELIEF NURSES, INC.

STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------- ----------------------

1996 1995 1996 1995
---------- ---------- ---------- ----------

(UNAUDITED)

Cash flows from operating activities:
Net income..................................................... $ 263,000 $ 97,000 $ 451,000 $ 193,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 12,000 7,000 10,000 15,000
(Reversal of) provision for uncollectible amounts.......... (40,000) 10,000
Deferred income taxes...................................... 4,000
Changes in assets and liabilities:
(Increase) decrease in trade receivables................... (12,000) 44,000 (153,000) (43,000)
Increase in due to affiliate............................... 15,000 15,000
Decrease (increase) in prepaid expenses.................... (6,000) 7,000 6,000 (6,000)
Increase (decrease) in accounts payable and accrued
expenses................................................. (84,000) (77,000) 13,000 (14,000)
Increase (decrease) in income taxes payable................ 5,000 (10,000) 10,000
Other...................................................... (1,000) 5,000 1,000 1,000
---------- ---------- ---------- ----------
Net cash provided by operating activities................ 137,000 73,000 363,000 165,000
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment............................. (59,000) 2,000 (3,000) (1,000)
Premiums paid for officer's life insurance..................... (9,000) (9,000)
---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities...... (59,000) 2,000 (12,000) (10,000)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from (payments of) loan............................... 61,000 (2,000)
Dividends paid................................................. (270,000) (160,000) (288,000) (408,000)
---------- ---------- ---------- ----------
Net cash (used in) financing activities.................. (209,000) (162,000) (288,000) (408,000)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH.................................. (131,000) (87,000) 63,000 (253,000)
Cash balance--beginning of year.................................. 261,000 198,000 198,000 451,000
---------- ---------- ---------- ----------
CASH BALANCE--END OF YEAR........................................ $ 130,000 $ 111,000 $ 261,000 $ 198,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes..................... $ 17,000 $ 14,000 $ 40,000 $ 26,000

The accompanying notes to financial statements are an integral part hereof.

F-29

PROFESSIONAL RELIEF NURSES, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

AND DECEMBER 31, 1995 IS UNAUDITED)

(NOTE A)--ORGANIZATION AND BASIS OF PRESENTATION:

Professional Relief Nurses, Inc. (the "Company") provides health care
services in the homes of its patients; it operates three regional offices in the
State of Connecticut.

Nursing services are provided to patients under the direct orders of a
physician following a hospital or health care facility stay. Care generally is
provided to geriatric and chronic care patients requiring services.

The Company includes in revenues all nursing, therapy, medical supplies and
home health aide charges; the majority of charges by the Company are regulated
under the federal Medicare and state Medicaid programs.

A shareholder who owns 25% of the Company presently owns 75% of Lexington
Health Care Group, LLC ("Lexington").

(NOTE B)--SIGNIFICANT ACCOUNTING POLICIES:

Significant accounting policies in the preparation of the financial
statements are as follows:

[1] REVENUE RECOGNITION:

Revenues are recognized at the time the service is provided to the patient.
Substantially all of the Company's revenues are billed to third party payors,
i.e. Medicaid, Medicare and others under the provisions of reimbursement
formulas and regulations in effect.

Net patient revenue include amounts estimated by management to be
reimbursable by the third party payors; such reimbursements are subject to audit
by the payors, and estimates are recorded for potential adjustments that may
result. Differences between the estimated amounts accrued and final settlements
are reported in operations in the year of settlement.

[2] PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the equipment. The useful
lives range from five to seven years.

[3] INCOME TAXES:

The Company has elected in a prior year to be treated as an S corporation
pursuant to Section 1362(a) of the Internal Revenue Code for federal income tax
purposes. As a result of this election, the income is taxed directly to
individual stockholders (see Note H).

[4] USE OF ESTIMATES:

F-30

PROFESSIONAL RELIEF NURSES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

AND DECEMBER 31, 1995 IS UNAUDITED)

(NOTE C)--EQUIPMENT:

Equipment, furniture and fixtures (at cost) consist of the following :

DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ----------- -----------

(UNAUDITED)
Furniture and fixtures................................................... $ 49,000 $ 43,000 $ 43,000
Equipment................................................................ 181,000 130,000 127,000
Less accumulated depreciation and amortization........................... (151,000) (141,000) (131,000)
------------ ----------- -----------
Total.............................................................. $ 79,000 $ 32,000 $ 39,000
------------ ----------- -----------
------------ ----------- -----------

(NOTE D)--NOTE PAYABLE TO BANK:

In November 1996, the Company borrowed $63,000 from a bank, bearing interest
at 6.5%, collateralized by the Company's cash account. The loan is due November
11, 2001 and is payable in monthly installments of approximately $1,000.

The long-term portion of the Company's debt at December 31, 1996 is payable
as follows:

YEAR ENDING
DECEMBER 31,
-------------

(UNAUDITED)
1997............................................................................... $ 13,000
1998............................................................................... 13,000
1999............................................................................... 13,000
2000............................................................................... 13,000
2001............................................................................... 9,000
---------
Total........................................................................ $ 61,000
---------
---------

(NOTE E)--LEASES:

OPERATING LEASES:

The Company leases its office facilities under operating leases. The Company
is responsible for property taxes, maintenance, insurance, etc. under the lease.

F-31

PROFESSIONAL RELIEF NURSES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

AND DECEMBER 31, 1995 IS UNAUDITED)

(NOTE E)--LEASES: (CONTINUED)
Future minimum lease payments required under these lease obligations are as
follows:

DECEMBER 31, JUNE 30,
------------ ----------

(UNAUDITED)
1997............................................................... $ 67,000 $ 67,000
1998............................................................... 45,000 62,000
1999............................................................... 23,000 32,000
2000............................................................... 14,000 14,000
2001............................................................... 10,000 14,000
Thereafter......................................................... 3,000
------------ ----------
Total........................................................ $ 159,000 $ 192,000
------------ ----------
------------ ----------

Rent expense charged to operations aggregated $68,000 for each of the years
ended June 30, 1996 and June 30, 1995. Rent expense charged to operations
aggregated $33,500 and $40,000 for the six months ended December 31, 1996 and
December 31, 1995, respectively.

(NOTE F)--CONCENTRATION OF RISK:

Revenues from principal sources are as follows:

SIX MONTHS ENDED
YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------

1996 1995 1996 1995
----- ----- ----- -----

(UNAUDITED)

Medicare and Medicaid.................................... 73% 64% 62% 64%
Private insurance and other nongovernment agencies....... 27 36 38 36
--- --- --- ---
Total.............................................. 100% 100% 100% 100%
--- --- --- ---
--- --- --- ---

Reimbursement can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors. The State of Connecticut Medicare Maximization Project requires
providers to rebill Medicare upon notification of specific claims for which
services might be covered by Medicare but were earlier paid by the State. The
effect of this program may be to delay the ultimate resolution of these types of
claims. Although Connecticut reserves the right to recoup such prior paid monies
in the future, even if they are not ultimately recouped by the Company from
Medicare, to date, the Company has not experienced any losses as a result of
this State program.

F-32

PROFESSIONAL RELIEF NURSES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION WITH RESPECT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

AND DECEMBER 31, 1995 IS UNAUDITED)

(NOTE F)--CONCENTRATION OF RISK: (CONTINUED)
At June 30, 1996 and December 31, 1996, 49% of accounts receivable was due
from Medicaid and Medicare and 51% from private insurers and other nongovernment
sources.

The primary geographic sources of the Company's patients are the local
communities in the state of Connecticut.

(NOTE G)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ---------- ----------

(UNAUDITED)
Accounts payable........................................................... $ 57,000 $ 110,000 $ 76,000
Amount due Medicaid........................................................ 69,000 92,000 135,000
Accrued payroll............................................................ 75,000 64,000 39,000
Accrued vacation........................................................... 9,000 12,000
Deferred income taxes...................................................... 10,000 10,000
------------ ---------- ----------
Total................................................................ $ 201,000 $ 285,000 $ 272,000
------------ ---------- ----------
------------ ---------- ----------

(NOTE H)--PROPOSED ACQUISITION OF THE COMPANY:

Three stockholders of the Company have entered into an agreement to sell,
for an aggregate of $1,620,000 in cash, all of their shares of capital stock to
Lexington or its successor corporation. One stockholder will exchange his shares
for 108,000 shares of capital stock in the successor corporation. Prior to the
sale, the Company intends to distribute all of its previously undistributed
earnings. The exchange is contingent upon completion of a proposed public
offering by the successor to Lexington.

(NOTE I)--PRO FORMA INCOME TAXES:

The pro forma net income in the accompanying statements of income include a
pro forma adjustment for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which represents
federal taxes which would have been provided for, had the Company been subject
to tax as a C corporation for the periods presented. The Company's S corporation
status will automatically terminate upon its sale as described in Note G.

F-33

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER
Accountants' Report and
Combined Financial Statements
Six Months Ended June 30, 1995 and
Years Ended December 31, 1994 and 1993

F-34

INDEPENDENT ACCOUNTANTS' REPORT

Board of Directors and Stockholders
Beverly Enterprises, Inc.
Fort Smith, Arkansas

We have audited the accompanying combined balance sheet of BENTLEY GARDENS
HEALTH CARE CENTER, COUNTRY MANOR HEALTH CARE CENTER, FAIRFIELD MANOR HEALTH
CARE CENTER AND POND POINT HEALTH CARE CENTER (COLLECTIVELY, THE "CENTERS") as
of June 30, 1995, and the related combined statements of operations, excess of
liabilities over assets and cash flows for the six months in the period ended
June 30, 1995, and each of the two years in the period ended December 31, 1994.
These financial statements are the responsibility of the Centers' management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of BENTLEY GARDENS
HEALTH CARE CENTER, COUNTRY MANOR HEALTH CARE CENTER, FAIRFIELD MANOR HEALTH
CARE CENTER AND POND POINT HEALTH CARE CENTER as of June 30, 1995, and the
results of their operations and their cash flows for the six months in the
period ended June 30, 1995, and each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.

As more fully discussed in Note 8, the Centers terminated their lease of the
nursing facilities effective July 1, 1995, and ceased management of those
facilities.

BAIRD, KURTZ & DOBSON

Fort Smith, Arkansas
April 25, 1997

F-35

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

COMBINED BALANCE SHEET

JUNE 30, 1995

ASSETS

CURRENT ASSETS
Cash.......................................................................... $ 412,488
Patient accounts receivable, less allowance for uncollectible accounts of
$108,864.................................................................... 3,547,940
Prepaid expenses and supplies................................................. 450,375
---------
Total current assets...................................................... 4,410,803
---------

PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements........................................................ 4,501,249
Furniture and equipment....................................................... 1,408,026
---------
5,909,275
Less accumulated depreciation and amortization................................ 4,619,521
---------
1,289,754
---------

OTHER ASSETS
Lease security deposit........................................................ 774,990
Residents' funds.............................................................. 162,076
Other, net.................................................................... 21,936
---------
959,002
---------
$6,659,559
---------
---------

LIABILITIES AND EXCESS OF LIABILITIES OVER ASSETS

CURRENT LIABILITIES
Accounts payable............................................................. $ 919,461
Accrued payroll.............................................................. 1,196,902
Accrued rent................................................................. 429,168
Accrued expense.............................................................. 291,343
-----------
Total current liabilities................................................ 2,836,874

RESIDENTS' FUNDS PAYABLE....................................................... 162,076

PAYABLE TO AFFILIATE........................................................... 16,636,948

EXCESS OF LIABILITIES OVER ASSETS.............................................. (12,976,339)
-----------
$ 6,659,559
-----------
-----------

See Notes to Combined Financial Statements

F-36

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

COMBINED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

1995 1994 1993
------------- ------------- -------------

NET PATIENT SERVICE REVENUE......................................... $ 15,186,671 $ 29,857,711 $ 31,791,171
------------- ------------- -------------

EXPENSES
Salaries and benefits............................................. 11,715,081 21,884,521 22,035,034
Purchased services and professional fees.......................... 758,369 1,304,218 1,688,482
Management fees................................................... 393,644 756,590 763,418
Depreciation and amortization..................................... 387,386 713,613 637,736
Provision for bad debts........................................... -- 175,980 410,655
Facility rent..................................................... 1,575,858 3,151,717 3,151,028
Supplies and other................................................ 2,681,024 4,721,217 4,840,543
------------- ------------- -------------
17,511,362 32,707,856 33,526,896
------------- ------------- -------------
NET LOSS............................................................ $ (2,324,691) $ (2,850,145) $ (1,735,725)
------------- ------------- -------------
------------- ------------- -------------

See Notes to Combined Financial Statements

F-37

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

COMBINED STATEMENTS OF EXCESS OF LIABILITIES OVER ASSETS

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

1995 1994 1993
-------------- -------------- -------------

BALANCE, BEGINNING OF PERIOD...................................... $ (10,651,648) $ (7,801,503) $ (6,065,778)

NET LOSS.......................................................... (2,324,691) (2,850,145) (1,735,725)
-------------- -------------- -------------

BALANCE, END OF PERIOD............................................ $ (12,976,339) $ (10,651,648) $ (7,801,503)
-------------- -------------- -------------
-------------- -------------- -------------

See Notes to Combined Financial Statements

F-38

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

COMBINED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

1995 1994 1993
------------- ------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................... $ (2,324,691) $ (2,850,145) $ (1,735,725)
Items not requiring cash:
Depreciation and amortization.................................... 387,386 713,613 637,736
Changes in:
Patient accounts receivable, net................................. (1,359,859) (156,869) 516,584
Accounts payable and accrued expenses............................ 1,421,610 (330,693) (143,856)
Other current assets and liabilities............................. 47,831 (4,226) (29,700)
------------- ------------- -------------
Net cash used in operating activities.......................... (1,827,723) (2,628,320) (754,961)
------------- ------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................ (63,657) (272,346) (261,198)
------------- ------------- -------------
Net cash used in investing activities.......................... (63,657) (272,346) (261,198)
------------- ------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate............................................ 2,281,251 2,787,282 928,435
------------- ------------- -------------
Net cash provided by financing activities...................... 2,281,251 2,787,282 928,435
------------- ------------- -------------

INCREASE (DECREASE) IN CASH.......................................... 389,871 (113,384) (87,724)

CASH, BEGINNING OF PERIOD............................................ 22,617 136,001 223,725
------------- ------------- -------------
CASH, END OF PERIOD.................................................. $ 412,488 $ 22,617 $ 136,001
------------- ------------- -------------
------------- ------------- -------------

See Notes to Combined Financial Statements

F-39

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

NOTES TO COMBINED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

NATURE OF OPERATIONS

Beverly Enterprises, Inc. ("Beverly") provided long-term healthcare in the
state of Connecticut through the nursing facilities located at Bentley Gardens
Health Care Center, Country Manor Health Care Center, Fairfield Manor Health
Care Center and Pond Point Health Care Center (collectively referenced as the
"Centers") and continues to provide long-term healthcare in the state of
Connecticut through three other nursing facilities. The Centers were leased and
operated, along with the other nursing facilities not shown herein, by Beverly
Enterprises--Connecticut, Inc. ("BEC") (a wholly-owned subsidiary of Beverly
Health and Rehabilitation Services, Inc. which is a wholly-owned subsidiary of
Beverly Enterprises, Inc.).

PRINCIPLES OF COMBINATION

The combined financial statements include the accounts of the Centers. All
significant accounts and transactions among the Centers have been eliminated in
combination.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Centers' management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

PROPERTY AND EQUIPMENT

Property and equipment are depreciated on a straight-line basis over the
estimated useful life of each asset (principally 5 to 15 years). Leasehold
improvements are amortized over the shorter of the lease term or their
respective estimated useful lives. Amortization of assets subject to leases is
reported as part of depreciation expense.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Centers' financial instruments consist of cash and payable to affiliate
(Beverly). The carrying amount of cash is a reasonable estimate of fair value.
It was not practical to estimate the fair value of the "payable to affiliate"
account because no formal agreement exists for repayment of the balance.

INCOME TAXES

The Centers are included in the consolidated income tax returns filed by
Beverly. Each Center in the consolidated group determines its tax expense as if
it were filing a separate income tax return. Any difference between the
individual Centers' current tax provisions and the consolidated tax paid or
refunded is recorded in Beverly's financial statements.

F-40

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)

The Centers have incurred cumulative net operating losses. Consequently, no
provision for income taxes has been provided.

Deferred income tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of assets
and liabilities. Temporary differences principally relate to net operating
losses, depreciation and amortization and prepaid supplies. A valuation
allowance has been established to offset the net deferred tax assets because it
is more likely than not that the deferred tax asset will not be realized.

NET PATIENT SERVICE REVENUE

Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered.
Approximately, 90%, 90% and 91% of the Centers' net patient service revenue for
the six months ended June 30, 1995 and the years ended December 31, 1994 and
1993, respectively, were derived from funds under federal and state medical
assistance programs.

Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.

NOTE 2: MEDICARE AND MEDICAID REIMBURSEMENT ADJUSTMENTS

The Centers have been reimbursed for services rendered to patients covered
by the federal Medicare program on the basis of estimated costs. Provisions for
adjustment of the estimated costs to actual reimbursement based on the Medicare
cost report for the period have been included in the accompanying financial
statements. The Medicare cost report is subject to audit and retroactive
adjustment under the terms of the Centers' Medicare reimbursement agreement
which may affect the actual reimbursement for the period. Any liabilities
resulting from any retroactive adjustments would be Beverly's responsibility.

The Centers have been reimbursed for services rendered to Title XIX Medicaid
patients on the basis of predetermined per diem rates. The reimbursement plan is
on a prospective basis, and no additional settlement will be made on the
difference between the interim per diem rates paid and actual costs.

NOTE 3: RESIDENTS' FUNDS PAYABLE

The Centers are the trustees of approximately $162,000 at June 30, 1995, in
funds received on behalf of various residents. The Centers have fiduciary
responsibility for the administration of the bank accounts and the distribution
of the funds to residents.

F-41

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

NOTE 4: OPERATING LEASE

BEC entered into an agreement on behalf of the Centers to lease the nursing
facilities, together with all improvements, furniture, furnishings, fixtures,
machinery, equipment and personal property for an initial period of ten years
commencing April 1986. BEC had the option to renew this lease for two successive
periods of five years each. BEC also had the right of first refusal to purchase
the Centers on the same terms and conditions as offered by any other bona fide
offeror during the term of the lease. The lease required BEC to pay all
executory costs (property taxes, repairs, maintenance, insurance, utilities).
This lease was terminated on July 1, 1995. See Note 8.

Lease expense associated with this lease approximated $1,576,000, $3,152,000
and $3,151,000 for the six months ended June 30, 1995, and the years ended
December 31, 1994 and 1993, respectively. Total rent expense for all operating
leases was $1,646,000, $3,276,000 and $3,258,000 for the six months ended June
30, 1995, and the years ended December 31, 1994 and 1993, respectively.

NOTE 5: RELATED PARTY TRANSACTIONS

The Centers pay a management fee to Beverly which reflects the Centers'
share of expenses incurred by Beverly for managing their operations. The
management fee is composed of general corporate overhead of Beverly's national
and regional corporate offices. This fee approximated $393,000, $757,000 and
$763,000 for the six months ended June 30, 1995, and the years ended December
31, 1994 and 1993, respectively.

The Centers insure auto liability, general liability and workers'
compensation risks through insurance policies with third parties provided for by
Beverly. Premiums paid to Beverly for these policies approximated $518,000,
$1,179,000 and $1,223,000 for the six months ended June 30, 1995, and the years
ended December 31, 1994 and 1993, respectively.

NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Generally accepted accounting principles require disclosure of certain
current vulnerabilities due to certain concentrations. Those matters include the
following:

CREDIT RISK

The Centers grant credit without collateral to their patients, most of whom
are local residents and are insured under third-party payor agreements. The mix
of receivables from patients and third-party payors at June 30, 1995, was:

1995
-----

Medicare............................................................................... 22%
Medicaid............................................................................... 68
Other third-party payors............................................................... 4
Private................................................................................ 6
---
100%
---
---

F-42

BENTLEY GARDENS HEALTH CARE CENTER,
COUNTRY MANOR HEALTH CARE CENTER,
FAIRFIELD MANOR HEALTH CARE CENTER AND
POND POINT HEALTH CARE CENTER

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SIX MONTHS ENDED JUNE 30, 1995 AND
YEARS ENDED DECEMBER 31, 1994 AND 1993

NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
CREDIT RISK (CONTINUED)

Estimates of allowances for adjustments included in net patient revenues are
described in Notes 1
and 2.

LITIGATION

There are various lawsuits and regulatory actions pending against the
Centers as operated by Beverly arising in the normal course of business or as a
result of the early lease termination. Management does not believe that the
ultimate resolution of these matters will have a material adverse effect on the
Centers' combined financial position or results of operations.

NOTE 7: EMPLOYEE STOCK PURCHASE PLAN

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees of Beverly owned and/or operated
facilities, having completed one year of continuous service, to purchase shares
of common stock at the current market price through payroll deductions. Beverly
makes contributions in the amount of 30% of the participant's contribution. Each
participant specifies the amount to be withheld from earnings per two-week pay
period, subject to certain limitations. Total contributions related to this plan
for the above Centers for the six months ended June 30, 1995, and the years
ended December 31, 1994 and 1993, approximated $17,000, $22,000 and $6,000,
respectively.

NOTE 8: EARLY LEASE TERMINATION AND DISCONTINUANCE OF LESSEE OPERATIONS

Effective July 1, 1995, BEC terminated its lease of the facilities and
associated assets. In accordance with the agreement with the lessor, the
operations of the Centers' nursing homes were transferred to the lessor together
with substantially all the related furniture, fixtures, equipment and consumable
goods. The lease security deposit of $774,990 was subsequently used to offset
rent due and agreed-upon physical plant deficiencies in accordance with the
termination agreement. The lessor did not assume any of Beverly's liabilities.
Subsequent to the effective date, the Centers ceased management of the nursing
homes. These financial statements do not reflect any financial statement
adjustments or losses recognized by Beverly as a result of this lease
termination agreement.

The subsequent operator of the nursing homes collected certain of the
accounts receivable outstanding as of the termination date. At March 31, 1997,
the unaudited balance of the amount due the Centers for accounts receivable
collections not yet remitted by the subsequent operator was approximately
$730,000.

F-43

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

PAGE
---------

Prospectus Summary.............................. 3
Risk Factors.................................... 10
Dilution........................................ 20
Use of Proceeds................................. 21
Capitalization.................................. 23
Dividend Policy................................. 24
Selected Financial Data......................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 48
Management...................................... 64
Certain Transactions............................ 69
Principal Stockholders.......................... 72
Description of Securities....................... 73
Shares Eligible for Future Sale................. 75
Underwriting.................................... 76
Legal Matters................................... 79
Experts......................................... 79
Additional Information.......................... 79
Financial Statements............................ F-1

------------------------

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. IN
ADDITION, DEALERS ARE OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.

[LOGO]

LEXINGTON HEALTHCARE
GROUP, INC.
1,125,000 SHARES OF COMMON STOCK
1,687,500 WARRANTS

---------------------

PROSPECTUS

---------------------

MASON HILL & CO., INC.
J.W. BARCLAY & CO., INC.
, 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The Certificate of Incorporation provide for indemnification of its
officers and directors to the full extent authorized by law.

Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Representative agrees to
indemnify the directors and certain officers of the Registrant and certain other
persons against certain civil liabilities.

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following tab sets forth the various statement of the estimated expenses
(other than underwriting discounts and commissions) to be paid by the Company in
connection with the issuance and distribution of the securities being
registered. With the exception of the SEC Registration Fee and the NASD Filing
Fee, all amounts shown are estimates:

SEC Registration Fee.............................................. $ 6,271
NASD Filing Fee................................................... 2,548
Nasdaq Listing Fees and Expenses.................................. 20,000
Printing Expenses................................................. 50,000
Legal Fees and Expenses (other than Blue Sky)..................... 95,000
Accounting Fees and Expenses...................................... 225,000
Blue Sky Fees and Expenses (including legal and filing fees)...... 20,000
Transfer Agent and Registrar Fees and Expenses.................... 3,500
Miscellaneous Expenses............................................ 4,681
---------
Total....................................................... $ 427,000
---------
---------

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

During the past three years, the Company has issued securities to a limited
number of persons, without registering the securities under the Securities Act.
There were no underwriters involved in the transactions and there were no
underwriting discounts or commissions paid in connection therewith, except as
disclosed below.

In July 1996, the Company issued 130,000 shares of Common Stock to Gersten,
Savage, Kaplowitz, Fredericks & Curtin, LLP, in exchange for legal services
rendered to the Company. The issuance was made in reliance upon Section 4(2) of
the Securities Act, which provides an exemption for a transaction not involving
a public offering.

In November 1996, the Company completed a private placement of 500,000
shares of Common Stock and 500,000 warrants for an aggregate of $250,000 in
reliance upon Rule 506 of Regulation D of the Securities Act, which provides a
safe harbor under the Section 4(2) exemption for a transaction not involving a
public offering. The purchasers of the securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the certificates for the securities issued in such transactions. All purchasers
of securities in each such transaction had adequate access to information about
the Company. The Company received $215,000 of net proceeds after deducting
commissions of $25,000 to Mason Hill & Co., Inc., the Underwriter, for acting as
placement agent, and $10,000 for other expenses. The Underwriter

II-1

deferred collection of expenses aggregating $7,500 in connection with the
private placement. In connection with the private placement, the Company issued
the securities described in the following table to two unaffiliated investors,
each an "accredited investor" within the meaning of Regulation D of the
Securities Act.

INVESTOR DATE SHARES WARRANTS AMOUNT
-------------------------------------------- --------- --------- --------- ----------

1. Sean Leahy.................................. 11-1-96 250,000 250,000 $ 125,000
2. Wayne Wiseman............................... 11-1-96 250,000 250,000 $ 125,000

On the Effective Date of the Offering, the Company will issue 1,846,500
shares to Mr. Friedler and 615,500 shares to Mr. Dermer in exchange for their
respective limited interests in the LLC which were issued in connection with the
LLC's formation in March 1995.

ITEM 16. EXHIBITS

II-2

10.13** Promissory Note by Lexington Health Care Group LLC and Jack Friedler payable to
Beverly Health and Rehabilitation Services dated December 5, 1995, together with
Beverly Enterprises' November 28, 1995 letter
10.14** Loan and Security Agreement between Lexington Holding Corporation and Copelco/
American Healthfund, Inc. dated March 14, 1996
10.15** Accounts Purchase and Servicing Agreement among Lexington Health Care Group,
Lexington Holding Corporation and Copelco/American Healthfund, Inc. dated March
14, 1996
10.16** Management Agreement between the Company and Balz Medical Services, Inc. dated
October 1, 1996
10.17** Sub-Acute Care Services Agreement between Physician's Choice, LLC, and Lexington
HealthCare Group, LLC, effective February 1, 1997.
10.18** Shareholder's Agreement between Harry Dermer and Jack Friedler
10.19** Reorganization Agreement
10.20 Repayment Agreement
11.1** Computation of Earnings per share
22.1 Consent of Independent Auditors
22.2 Consent of Independent Auditors
22.3 Consent of Independent Auditors
22.4 Consent of Independent Accountants
23.1** Consent of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP counsel for the
Registrant, (included in Exhibit 5.1)
24.1** Powers of Attorney (included on the signature page to this Registration
Statement)
27** Financial Data Schedule

- ------------------------

* To be filed by amendment.

** Previously filed.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to any charter provision, by-law contract
arrangements statute, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned small business issuer hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in

II-3

the aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to suit information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h), under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.

(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement at that time as the initial bona fide offering of those
securities.

(6) To provide to the Underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirement for filing on Form S-1 and has duly caused this Amendment No. 5
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on May 12, 1997.

LEXINGTON HEALTHCARE GROUP, INC.

BY: /S/ HARRY DERMER
-----------------------------------------
Harry Dermer,
PRESIDENT, CHIEF OPERATING OFFICER AND
DIRECTOR

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Harry Dermer, President, Chief Operating Officer
and Director, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ JACK FRIEDLER Chief Executive Officer, May 12, 1997
---------------------------- Chairman of the Board
Jack Friedler (Principal Executive
Officer) and Director

/s/ HARRY DERMER President, Chief Operating May 12, 1997
---------------------------- Officer and Director
Harry Dermer

/s/ THOMAS E. DYBICK Chief Financial Officer May 12, 1997
---------------------------- (Principal Financial and
Thomas E. Dybick Accounting Officer)

/s/ JON MILLS Director May 12, 1997
----------------------------
Jon Mills

/s/ ERIC D. MOSCOW Director May 12, 1997
----------------------------
Eric D. Moscow, M.D.

II-5

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARY

COL. A COL. B COL. C COL. D COL. E
ADDITIONS

BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
Year Ended June 30,
1996:

Reserves and
allowances
deducted from
asset
accounts:

Allowance for
uncollectible
amounts $ 75,000 $ 75,000

S-1

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------

1.1** Preliminary Form of Underwriting Agreement between the Company and
Mason Hill & Co., Inc.
3.1** Certificate of Incorporation of the Company dated February 23, 1996
3.2** Bylaws of the Company
4.1** Specimen Common Stock Certificate
4.2** Form of Underwriter's Warrant Agreement
4.3** 1997 Stock Option Plan
4.4** Form of Warrant Certificate
5.1** Form of Opinion of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
10.1** Employment Agreement with Jack Friedler, Chief Executive Officer, effective as of the date of this
Prospectus
10.2** Employment Agreement with Harry Dermer, President and Chief Financial Officer, effective as of the date
of this Prospectus
10.3** Form of Employment Agreement with Suzanne J. Nettleton, Executive Vice President, effective as of the
date of this Prospectus
10.4** Employment Agreement with Mary Archambault, Executive Vice President, effective as of the date of this
Prospectus
10.5** Nursing Home Lease between Fairfield Group Healthcare Centers, LP and Lexington Health Care Group, LLC
10.6** Management Agreement between Lexington House, Inc. and Lexington Health Care Group, LLC
10.7** Management Agreement between the Company and Oak Island Skilled Nursing Center
10.8** Form of Public Warrant Agreement
10.9** Acquisition Agreements between the Company and the stockholders of Professional Relief Nurses, Inc.
dated October 29, 1996
10.10** Acquisition Agreements between the Company and the stockholders of Balz Medical Services, Inc. dated
October 28, 1996
10.11** Security Agreement between Lexington House, Inc. and Lexington Health Care Group LLC dated June 30, 1996
10.12** 8% Secured Promissory Note by Lexington House, Inc. payable to Lexington Health Care Group LLC dated
June 30, 1996
10.13** Promissory Note by Lexington Health Care Group LLC and Jack Friedler payable to Beverly Health and
Rehabilitation Services dated December 5, 1995, together with Beverly Enterprises' November 28, 1995
letter
10.14** Loan and Security Agreement between Lexington Holding Corporation and Copelco/American Healthfund, Inc.
dated March 14, 1996
10.15** Accounts Purchase and Servicing Agreement among Lexington Health Care Group, Lexington Holding
Corporation and Copelco/American Healthfund, Inc. dated March 14, 1996
10.16** Management Agreement between the Company and Balz Medical Services, Inc. dated October 1, 1996
10.17** Sub-Acute Care Services Agreement between Physician's Choice, LLC, and Lexington HealthCare Group, LLC,
effective February 1, 1997.
10.18** Shareholder's Agreement between Harry Dermer and Jack Friedler
10.19** Reorganization Agreement
10.20 Repayment Agreement
11.1** Computation of Earnings per share
22.1 Consent of Independent Auditors
22.2 Consent of Independent Auditors
22.3 Consent of Independent Auditors
22.4 Consent of Independent Accountants
23.1** Consent of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP counsel for the Registrant, (included in
Exhibit 5.1)
24.1** Powers of Attorney (included on the signature page to this Registration Statement)
27** Financial Data Schedule

- ------------------------

* To be filed by amendment.

** Previously filed.