SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from:
Commission File No. 1-12451
NEW YORK HEALTHCARE, INC.
(Name of small business issuer in its charter)
New York 11-2636089
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1850 McDonald Avenue, Brooklyn, New York 11223
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (718) 375-6700
Securities issued pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
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Common Stock $.01 par value Boston Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $11,920,017
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past sixty
(60) days. $ 5,000,000 (as of 3/19/97).
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities under
a plan confirmed by a court.
Yes __ No __
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date: 3,750,000
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statements; and (3) any prospectus filed pursuant
to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The list
of documents should be clearly described for identification purposes.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
(a) General Development of Business.
New York Health Care, Inc. (the "Company") is a licensed home health care
agency engaged primarily in supplying the services of paraprofessionals who
provide a broad range of health care support services to patients in their
homes.
The Company operates 24 hours a day, seven days a week to receive referrals
and coordinate services with physicians, case managers, patients and their
families.
The Company operates in all five boroughs of New York City and the counties
of Nassau, Westchester, Rockland, Orange, Dutchess, Ulster, Putnam and Sullivan,
in the State of New York. The Company's services are supplied principally
pursuant to contracts with health care institutions and agencies such as various
county departments of social services, Beth Abraham Health Services in the Bronx
and Westchester County, Kingsbridge Medical Center, Mt Sinai Medical Center and
New York Methodist Hospital in Brooklyn.
When the Company was initially organized under the laws of the State of New
York, in February 1983, it engaged principally in the business of providing
nursing staff in nursing homes.
In 1988, the Company purchased the equipment, fixtures, client lists and
paraprofessional aide lists of National Medical Home Care, Inc. located in
Brooklyn, Queens Village, Rockville Centre and Mount Vernon, New York.
Thereafter, the Company maintained offices in Brooklyn, Hempstead and Mount
Vernon, New York and shifted the focus of its business to the provision of home
health care support services.
In 1992, the Company opened a fourth office, in Spring Valley, New York
and, in 1993, opened its fifth office, in Newburgh, New York. Each of the
Company's five offices are responsible for the sales and health care operations
within their respective territories and maintain their own recruitment,
scheduling, training and quality assurance programs.
In August 1993, the Company established a maternal/child care division,
called "Special Deliveries," which presently accounts for approximately 5% of
the Company's business and which supplies comprehensive nursing services for
women during pregnancy, and for them and their newborn children after
childbirth. The Company provides its skilled nursing staff with special
additional training in this division, which offers a wide range of quality
health services to patients at home through the provision of Registered Nurses,
including those with at least two years of
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experience in maternal child care, Neonatal Intensive Care Unit ("NICU") Nurses,
Maternal/Newborn Registered Nurses, Certified Childbirth Educators and Certified
Lactation Consultants. Referral services are also available for support programs
providing social workers, bereavement counselors and nutritionists. Each
patient's individual treatment plan and insurance coverage is reviewed prior to
commencement of services being rendered, except for childbirth education, which
is privately contracted.
The Company's primary objective is to enhance its position in the home
health care market by increasing the promotion of its full service and specialty
health care capabilities to existing and new referral sources; expand its
markets and enter new markets by establishing additional branch offices and
acquiring other related health care businesses; expand its provision of skilled
nursing services, principally infusion therapy and the care of women during
pregnancy and their newborn children; and develop complimentary home health care
products and services, as well as maintaining its regular training and testing
programs, and recruitment activities.
The Company had been treated as an "S Corporation" under Subchapter S of
the Internal Revenue Code since its inception. As a result, the Company was
exempt from federal and certain state income taxes attributable to its earnings
and such income taxes were instead the obligation of the Company's stockholders.
The Company terminated its S Corporation status during the last quarter of 1996.
As a result of the termination, the Company is subject to federal income taxes
at rates of up to 35% and may, in certain circumstances, become subject to the
federal alternative minimum tax imposed on corporations. The Company is also
subject to state and local income taxes.
The Company maintains its principal offices at 1850 McDonald Avenue,
Brooklyn, NY 11223, telephone (718) 375-6700.
Industry Background.
The home health care industry has grown substantially over the past decade
according to published industry information. The New York State Association of
Home Care Providers estimates (from annual reports submitted by agencies) that
Medicaid and Medicare spending on home health care has grown from approximately
$2.9 billion in 1985 to in excess of approximately $19.4 billion in 1994. The
Company believes that the primary reasons for the growth in the home health care
market include the aging of the U.S. population; the realization of substantial
cost savings through treatment at home as an alternative to hospitalization;
advances in medical technology which have enabled a growing number of treatments
to be provided in the home rather than requiring hospitalization; the general
preference of patients to receive treatment in a familiar environment;
reductions in the length of hospital stays as a result of increasing cost
containment efforts in the health care industry; growing acceptance within the
medical profession of home health care and the rapid increase in the incidence
of AIDS-related diseases and cancer.
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Aging Population.
The number of individuals over age 65 in the United States is estimated to
have grown from 25.7 million in 1980, or 11.3% of the population, to
approximately 34.1 million in 1996, or 12.9% of the population, and is projected
to increase to more than 35 million, or 12.8% of the population, by the year
2000. The elderly have traditionally accounted for two to three times the
average per capita share of health care expenditures. As the number of Americans
over age 65 increases, the need for home health care services is also expected
to increase.
Cost Effectiveness of Home Health Care Services.
National health care expenditures increased from approximately $697 billion
in 1990 (12.6% of the United States gross national product) to approximately
$1,008 billion in 1995 (14.2% of the United States gross national product), and
is projected to increase to more than $1,481 billion (15.9% of the United States
cross national product) by the year 2000. In response to rapidly rising costs,
governmental and private payors have adopted cost containment measures that
encourage reduced hospital admissions, reduced lengths of stay in hospitals and
delayed nursing, home admissions. Changes in hospital reimbursement methods
under Medicare from a cost-based method to a fixed reimbursement method based on
the patient's diagnosis have created an incentive for earlier discharge of
patients from hospitals. These measures have in turn fostered an increase in
home health care which, when appropriate, provides medically necessary care at
significantly less expense than similar care provided in an institutional
setting.
Advances in Technology.
Advances in technology in the past decade now enable patients who
previously required hospitalization to be treated at home. For example, the
development of a compact and portable phototherapy blanket performing the same
functions as bilirubin lighting systems in hospitals for the treatment of
newborn children with jaundice, a common condition, permits these infants to be
treated at home. Prior to the development of this device, these infants were
kept in the neonatal unit of a hospital even after the mother was discharged.
This practice delayed mother-infant bonding, made breast-feeding difficult and
otherwise caused substantial inconvenience and concern to families at a time
when the mother was in a weakened state. Similar advances have been made in home
infusion therapy (which is provided by the Company on a limited basis) and
rehabilitation equipment permitting treatments at home which used to require
hospital settings.
Patient Preference and Physician Acceptance.
The Company believes that, if possible in any given case, a patient will
prefer to be treated at home rather than in an institutional setting. Further,
in the last decade, the medical profession has shown greater acceptance of home
health care in the clinical management of patients. As evidence of this greater
acceptance, the American Medical Association Councils on Scientific
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Affairs and Medical Education has recommended that training in the principles
and practice of home health care be incorporated into the undergraduate,
graduate and continuing education of physicians.
Incidences of AIDS and Cancer.
Increases in the incidence of AIDS/HIV infections and cancer have also been
responsible for a significant portion of the growth in the home care market. As
of December 1995, more than 513,486 cases of AIDS had been reported to the
Center for Disease Control (not including those with less advanced HIV who could
still benefit from treatment). During their treatment, AIDS/HIV patients may
receive several courses of infusion and other therapies typically administered
by infusion therapy companies, including AZT, aerosolized Pentamidine(TM),
antibiotics and nutritional support. The Company presently provides a limited
amount of infusion therapy with pharmaceuticals provided by licensed suppliers.
The Company plans to expand its infusion therapy operations during the next
year. See "Home Health Care Services."
The American Cancer Society estimates that 83 million (or 33%) of Americans
now living will eventually be diagnosed with cancer. Approximately one million
new cases are reported annually. At the same time, improvements in cancer
diagnosis and treatment have caused mortality rates to increase more slowly than
the increase in incidence rates. Cancer treatment is one of the fastest growing
segments of outpatient infusion therapy due to increasing numbers of patients
and new technologies that allow for the therapy's safe and effective
administration in the home and at alternate site locations. Over the course of
their treatment, cancer patients may require a range of infusion therapies,
including chemotherapy, pain management and nutritional support.
(b) Financial Information About Industry Segments
Not Applicable
(c) Narrative Description of Business
The Company currently offers a broad range of support services, including
assistance with personal hygiene, dressing and feeding, meal preparation, light
housekeeping and shopping, and, to a limited extent, physical therapy and
standard skilled nursing services such as the changing of dressings, injections,
catheterizations and administration of medications. The Company's personnel also
train patients in their own care, monitor patient compliance with treatment
plans, make reports to the physicians and process reimbursement claims to
third-party payors. Among the paraprofessionals and nurses supplied by the
Company are those fluent in Spanish, Yiddish and Russian as well as personnel
knowledgeable in the requirements and practices of Kosher homes.
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Home Health Care Services
The Company's home health care services are provided principally by its
paraprofessional staff, who provide personal care to patients and, to a lesser
extent, by its skilled nursing staff, who provide various therapies employing
medical supplies and equipment and, to a lesser extent, infusion therapy.
Personal care and nursing services for a particular patient can extend from a
few visits to years of service and can involve intermittent or continuous care.
Approximately 95% of the Company's total net revenues in 1996 were attributable
to services by its paraprofessional staff.
Certified Paraprofessionals
The Company's certified paraprofessional staff provide a combination of
unskilled nursing and personal care services to patients, as well as assistance
with daily living, tasks such as hygiene and feeding,. Consistent with
applicable regulations, all of the Company's aides are certified and work under
the supervision of a licensed professional nurse. Certain aides have been
specially trained by the Company to work with patients with particular needs,
such as new mothers and their newborn infants, patients with particular diseases
such as cancer, AIDS or Alzheimer's Disease and particular classes of patients
such as the developmentally disabled and terminal.
The Company is approved by the New York State Department of Health to train
"Home Health Aides" and by the New York Department of Social Services to train
"Personal Care Aides." Medicaid provides reimbursement for services performed by
both Home Health Aides and Personal Care Aides, while Medicare provides
reimbursement only for the services provided by Home Health Aides. In order to
provide a qualified and reliable staff, the Company continuously recruits,
trains, provides continuing education for and offers benefits and other programs
to encourage retention of its staff. Recruiting is conducted primarily through
advertising, direct contact with community groups and employment programs, and
the use of benefits programs designed to encourage new employee referrals by
existing employees.
All paraprofessional personnel must pass a written exam and a skills
competency test prior to employment, with all certificates having been validated
by the issuing agency. The Director of Nursing or Director of Maternal/Child
Health in each of the Company's branch offices validates the professional
competency of all new hires. Newly hired employees are re-evaluated as to
competency within six months of their employment and all employees are
re-evaluated on an on-going, basis at least semi-annually. In addition, they
undergo an orientation program which includes material regarding HIV patients,
Hepatitis B, universal precautions which must be taken with all patients,
patient's rights issues, and the Company's policies and procedures. An
orientation manual is also provided to each employee.
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Competition for qualified staff has been intense in recent years. The
Company competes to attract and retain personnel on the basis of compensation
and working conditions. Among the benefits which the Company provides to its
staff are competitive salaries, a 401(k) Plan and unlimited Company-paid visits
to a walk-in clinic. The Company has generally not experienced difficulties in
the past in attracting and retaining personnel. It believes it will be able to
compete effectively in this area and satisfy its overall staffing requirements.
However, there can be no assurance that shortages of health care professionals
in the future will not occur and such shortages could materially effect the
Company's ability to maintain or increase its current commitments.
Licensed Professional Nurses
The Company employs licensed professional nurses (both registered nurses
and licensed practical nurses) who provide special and general professional
nursing services (these nurses are employed on a per diem basis). The Company
also employs registered nurses who are responsible for training and supervising
the Company's paraprofessional staff, as well as providing backup in the field
for the nursing staff which is providing care (these nurses are employed on a
salaried basis). General nursing care is provided by registered and licensed
practical nurses and includes periodic assessments of the appropriateness of
home care, the performance of therapy procedures, and patient and family
instruction. Patients receiving such care include stabilized postoperative
patients recovering at home, patients who, although acutely ill, do not need to
be cared for in an acute care facility and patients who are chronically or
terminally ill.
Specialty nurses are registered nurses with experience or certification in
particular specialities, such as emergency service, intensive care, oncology,
intravenous therapy or infant and pediatric nursing. The Company employs
specialty nurses to provide a variety of therapies and special care regimes to
patients in their homes. These specialty nurses also instruct patients and their
families in the self administration of certain therapies and in infection
control, emergency procedures and the proper handling and usage of medications,
medical supplies and equipment.
The Company's licensed professional nurses also provide a very limited
amount of in-home administration to patients of nutrients, antibiotics and other
medications intravenously (into a vein), subcutaneously (under the skin) or
through feeding tubes, utilizing supplies provided by licensed suppliers. Such
intravenous therapy is used for antibiotic treatment, parenteral nutrition (the
administration of nutrients), enteral nutrition (the administration of nutrients
directly into the digestive tract), growth hormone therapy, pain management, and
chemotherapy. The duration, progression and complexity of infusion therapy is
governed by the patient's disease and condition and can range anywhere from a
few weeks to many years.
All nurses hired by the Company must have at least one year of current,
verifiable experience, including references and license verification.
Maternal/Child care nurses must have at least two years of experience.
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While the provision of licensed professional nursing services accounted for
less than 5% of the Company's net revenues in 1996, the Company intends to
expand its maternal/child care and infusion therapy operations in its existing
markets as well as new Geographic locations. See "Company Strategy."
Company Strategy
The Company's objective is to become a comprehensive provider of efficient
and high quality home health care to an increased share of expanding markets.
The primary elements of the Company's strategy to achieve this objective are
geographic expansion of its branch office network by investment in additional
branch offices and by the acquisition of other home health care companies, and
by expansion of the services provided by its licensed professional nurses,
principally in the areas of infusion therapy, pediatrics and maternal/child
care. The Company intends to initially concentrate its expansion efforts in its
current market areas and the counties surrounding those market areas. In
addition to expansion into geographic areas in proximity to the Company's
current branch offices, the Company will generally seek to enter and expand into
new metropolitan areas in the Northeast and Southeast regions of the United
States which have large patient populations and, in particular, patients
traveling between these regions.
Acquisitions
A major element of the Company's strategy is to acquire home health care
and related companies in order to diversify in additional geographic markets and
to increase market share in the Company's current markets and add patients and
referral sources to existing branch offices without adding substantial overhead
cost. The Company is interested in home health care agencies (which are expected
to cost between $500,000 and $ 1,000,000 each), infusion therapy companies
(which are expected to cost between $750,000 and $1,500,000 each) and durable
medical equipment businesses (which are expected to cost between $400,000 and
$800,000 each) in the states of New York, New Jersey, Pennsylvania, Connecticut,
North Carolina, Georgia and Florida. However, the Company has not yet identified
any particular potential acquisition and there can be no assurance that any such
acquisition which may be consistent with the Company's strategy will be
available or, if available, that it will be at a price which the Company deems
to be favorable.
Branch Offices
The home health care industry is, fundamentally, a local one in which both
the patients and the referral sources (such as hospitals, home health agencies,
social service agencies and physicians) are located in the local geographic area
in which the services are provided. The Company seeks to serve local market
needs through its branch office network, run by branch managers who are
responsible for all aspects of local office decision-making, including
recruiting, training, staffing, and marketing. The Company intends to open
additional branch offices, using a portion of the net proceeds of its recently
completed public offering in the Counties of Suffolk,
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Putnam, Ulster and Dutchess, in New York State, subject to entering agreements
with the local New York Department of Social Services agencies. In addition, the
Company hopes to expand into New Jersey, Pennsylvania and Connecticut in order
to offer a wider geographic coverage to the health maintenance organizations
("HMO's") and health care insurance organizations with which it deals, and to
add additional organizations. This further expansion is subject to the
completion of market surveys in the various locations to ascertain the extent to
which existing home care medical needs are not being met as well as competition
and recruitment issues.
Expansion of Infusion Therapy
The Company presently provides a limited amount of infusion therapy service
to patients, utilizing pharmaceuticals provided by licensed suppliers.
Management believes that the total market for home infusion therapy is
continuing its growth and that increasing the provision of infusion therapy will
build on the Company's strength in providing nursing services, because such
therapies generally require administration by specialty nurses. The Company will
also seek to supply infusion therapy patients with the other home health care
services and therapies which they often require and which are offered by the
Company. While the Company has no current commitments to establish infusion
therapy facilities, it intends to pursue the establishment of such facilities
during the next 18 months in order to increase its very small market share.
However, there can be no assurance that the Company will succeed in expanding an
infusion therapy business or, if expanded, that it will conduct such a business
on a profitable basis.
Professional Care Resources
The Company intends to expand its maternal/child care division, Special
Deliveries, as well as its pediatric care programs in order to meet the needs
which management believes are being created by early discharge programs. The
existing referral base utilized by the Company from the various agencies, social
workers, case managers and physicians will be used to meet what management
perceives to be a need not being met by the current pool of home health care
agencies. The Company expects that the expansion of this program will require
the hiring of an additional services director with an extensive background in
pediatrics to assist the Directors of Nursing in each of the Company's branch
offices. Additional support staff will also be required, as well as new
training, materials, assistant directors, coordinators and marketing staff. The
Company also expects that expansion of the Special Deliveries division will
result in the acquisition of additional office facilities.
Organization and Operations
The Company operates 24 hours a day, seven days a week, to receive
referrals and coordinate services with physicians, case managers, patients and
their families. The Company provides services through its five principal and
branch offices and one recruitment and training, office. The Company seeks to
achieve economies of scale by having each branch office serve a large
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patient population. Each office conducts its own marketing efforts, negotiates
contracts with referral sources, recruits and trains professionals and
paraprofessionals and coordinates patient care and care givers. Each office is
typically staffed with a branch manager, director of nursing, home care
coordinators, clerical staff and nursing services staff.
The Company's principal office retains all functions necessary to ensure
quality of patient care and to maximize financial efficiency. Services performed
at the principal office include billing and collection, quality assurance,
financial and accounting functions, policy and procedure development, system
design and development, corporate development and marketing. The Company uses
financial reporting systems through which it monitors data for each branch
office, including patient mix, volume, collections, revenues and staffing. The
Company's systems also provide monthly budget analysis, financial comparisons to
prior periods and comparisons among the Company's branch offices. The Company is
in the process of acquiring new computer hardware and upgrade its software and
other systems with the intention of increasing its processing capacity,
enhancing its database capabilities and clinical management capacities and
improving collections and financial management.
Work Flow
A case is initiated by one of the Company's referral sources contacting a
branch office and advising it of the patient's general location, diagnosis,
types of services required, hours of service required and the time of day when
the services are to be rendered. The branch office then contacts the referral
source as promptly as possible with the identification of the staff person who
will be rendering the service, after which the referral source transmits to the
branch office a detailed copy of the plan for the patient's home care, which
includes the type of care to be rendered, the method by which it should be
rendered, the precise location and hours.
The supervisory staff at the branch office then reviews the care plan with
the staff member(s) who will be providing the care and then dispatches the staff
member(s) to begin rendering the care, usually the next day.
The clerical staff at the branch office enters all of the information
regarding the case into the local area computer network of the branch office,
which then generates the work schedule for the staff member(s), which provides a
detailed description of the services to be rendered, the hours and number of
days during which the care is to be provided. All of this information is
spontaneously received by the Company's principal office by way of the wide area
computer network linking the principal office to each of the branch offices.
This information is then processed by the principal office computer system on a
weekly basis to (generate the documentation of the services being provided. Such
documentation is then used to generate the billing for the service as well as
process the payroll for the staff member(s) providing the service.
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Referral Sources
The Company obtains patients primarily through referrals from hospitals,
community-based health care institutions and social service agencies. Referrals
from these sources accounted for substantially all of the Company's net revenues
in 1996. The Company generally conducts business with most of its institutional
referral sources, including those referred to below, under one-year contracts
which fix the rates and terms of all future referrals but do not require that
any referrals be made. Under these contracts, the referral sources refer
patients to the Company and the Company bills the referral sources for services
provided to patients. These contracts also generally designate the kinds of
services to be provided by the Company's employees, liability insurance
requirements, billing and recordkeeping responsibilities, complaint procedures,
compliance with applicable laws, and rates for employee hours or days depending
on the services to be provided. A total of 52 such contracts were in effect as
of December 31, 1996.
One or more referring institutions have accounted for more than 5% of the
Company's net revenues during the Company's last two fiscal years, as set forth
in the following table:
Percentage of Net Revenues
Referring Institution 1995 1996
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County Departments of Social Services(l) 26.8% 24.1%
Beth Abraham Health Services 12.5% 9.6%
Revival Home Health Care 3.9% 5.5%
Kingsbridge Medical Center 6.1% 5.3%
Mt. Sinai Medical Center(2) 6.0% 5.8%
Methodist Medical Center 5.1% 3.1%
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(1) The various county departments of social services are funded by the New
York State Department of Health which, as of October 1, 1996, assumed the
responsibility for the overall administration of Medicaid programs in New
York formerly administered by the New York Department of Social Services.
(2) The Mount Sinai Medical Center contract was established in March 1995.
Overall, the Company's ten largest referring institutions accounted for
approximately 69% of net revenues for 1996 and 75% of net revenues for 1995.
Billing and Collection
The Company screens each new case to determine whether adequate
reimbursement will be available and has developed substantial expertise in
processing claims. The Company makes a concerted effort to provide complete and
accurate claims data to the relevant payor sources in order
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to accelerate the collectibility of its accounts receivable. For the years ended
December 31, 1995 and 1996, the Company's days' sales outstanding ("DSO"), which
are measured from the date services are billed, were 130 days and 87 days,
respectively. As a result of the Receivable Sale Agreement, the amount of
receivables outstanding, as at December 31, 1996 decreased 26.2% to $3,097,821
as compared to $4,198,512 at December 31, 1995. The reduction of approximately
33% in DSO during 1996 is principally the result of the Company having, received
the purchase price of $3,150,000 pursuant to the Receivables Sale Agreement and
is therefore not indicative of any trend. Certain accounts receivable are
outstanding for more than 90 days, particularly where the agreement provides for
payment terms of 90 days or more, the services relate to new patients, or
existing patients receive additional services requiring medical review. The DSO
may increase in subsequent periods due to the accounts receivable increasing to
levels comparable to those prevailing before the Receivable Sale Agreement was
executed. There can therefore be no assurance that the Company's DSO will not
increase in subsequent fiscal periods.
The Company licenses the Dataline Home Care System, a computerized payroll
system designed to produce invoices for services rendered as a by-product of
employee compensation. Automated schedules and staffing requirements are
maintained in the Company's offices, with the ability to enter all relevant
patient and employee demographic information. The payroll is processed weekly at
the Company's principal office in Brooklyn. This office is responsible for the
processing of data, ensuring the availability of all required billing
documentation and its accuracy, and the printing and distributing of payments.
Once payroll processing is completed, the Company's computer system
generates the resulting invoices automatically. The necessary documentation is
attached to all invoices that are mailed to clients.
Management reviews reports for all phases of the billing process and
prepares reconciliations for the purpose of ensuring accuracy and maintenance of
controls. When errors are found, new processes are developed, as appropriate, to
ensure and improve the quality and accuracy of the billing process and
responsiveness to clients' needs and requirements.
Accounts receivable reports are produced weekly and are analyzed and
reviewed by staff and management to locate negative trends or emerging problems
which would require immediate attention. All unpaid invoices are reviewed and
telephone contacts established for invoices over 90 days old. The Company's
experience with collection of accounts receivable has been favorable, with
uncollectible accounts within the allowances provided by the Company.
Private patients are required to pay the one week fee for their service in
advance, as a deposit for services to be provided. For patients with insurance
covering home health services, the Company accepts assignment of the insurance
and submits claims if the carrier first verifies coverage and eligibility.
Payments from private patients are required to be made weekly, as invoices are
submitted and, if unpaid over three weeks, result in follow-up telephone calls
to ensure prompt
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payment. Requests for terms from private patients are generally honored and
payment arrangements structured based on the patient's financial resources and
ability to pay. Unresponsive accounts are referred to outside collection
agencies.
Reimbursement
The Company is reimbursed for its services, primarily by referring
institutions, such as health care institutions and social service agencies,
which in turn receive their reimbursement from Medicaid, Medicare and, to a much
lesser extent, through direct payments by insurance companies and private
payers. New York State Medicaid programs constitute the Company's largest
reimbursement source, when including both direct Medicaid reimbursement and
indirect Medicaid payments through many of the Company's referring institutions.
For 1995 and 1996, payments from referring institutions which receive direct
payments from Medicare and New York State Medicaid, together with direct
reimbursement to the Company from New York State Medicaid, accounted for
approximately 92% and 91%, respectively, of net revenues. For the same periods,
a significant number of referring institutions with home health care programs
accounted for approximately 73% and 76%, respectively, of net revenues for 1995
and 1996. Direct reimbursements from private insurers, prepaid health plans,
patients and other private sources accounted for approximately 8% and 9% of net
revenues for the calendar years 1995 and 1996, respectively.
The New York State Department of Health, in conjunction with local
Departments of Social Services, promulgates annual reimbursement rates for
patients covered by Medicaid. These rates are generally established on a
county-by-county basis, using a complex reimbursement formula applied to cost
reports filed by providers. The Company has filed all required annual cost
reports for each of its offices which provide services to Medicaid recipients.
Generally, the first report filed (called a "budgeted" report) uses projections
to develop the current year's reimbursement rate, subject to retroactive
recapture of any monies paid by local Departments of Social Services for
budgeted expenses which are greater than the actual expenses incurred. The
Company's expenses have always equaled or exceeded the budgeted amounts.
Third party payers, including Medicaid, Medicare and private insurers, have
taken extensive steps to contain or reduce the costs of health care. These steps
include reduced reimbursement rates, increased utilization review of services,
negotiated prospective or discounted pricing and adoption of a competitive bid
approach to service contracts. Home health care, which is generally less costly
to third party payers than hospital-based care, has benefited from many of these
cost containment measures.
The New York State Department of Health issues Certificates of Need for
Certified Home Health Agencies ("CHHA's"), which provide post-acute home care
services for people who have just been discharged from a hospital but are not
yet fully recovered, and Long-Term Home
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Health Care Programs ("LTHHCP's"), also known as the "Nursing Home Without
Walls," which is intended to provide elderly people with an alternative for
long-term care other than by entering a nursing home at less than the cost of
nursing home care. The Company negotiates its contracts with CHHA's and LTHHCP's
on the basis of services to be provided, in connection with contracts either
currently in effect with the Company or with other agencies. Prevailing market
conditions are such that, despite escalating operating expenses, reduced
contract rates are regularly "demanded" as a result of internal budget
restraints and reductions mandated by managed care contracts between the
Company's clients and HMO's and other third party administrators. While
management anticipates that this trend is likely to continue for the foreseeable
future, it does not expect the impact on the Company to be significant, since
its rates are competitive and, therefore, are expected to be subject to only
minor reductions. However, as expenditures in the home health care market
continue to grow, initiatives aimed at reducing the costs of health care
delivery at non-hospital sites are increasing. A significant change in coverage
or a reduction in payment rates by third party payers, particularly New York
State Medicaid, would have a material adverse effect upon the Company's
business.
Quality Assurance
The Company has established a quality assurance program to ensure that its
service standards are implemented and that the objectives of those standards are
met. The Company believes that it has developed and implemented service
standards that comply with or exceed the service standards required by JCAHO.
The Company received "Accreditation with Commendation" from JCAHO after its
initial, and only, review in 1994. In February 1996, the Company was selected by
the University of Colorado Health Sciences Center as one of only 22 home health
care agencies participating in a two to three year study known as the New York
State Outcome-Based Quality Improvement in Home Care Demonstration project being
funded by the New York State Department of Health, by reason of the Company's
commitment to both quality assurance and improvement. The Company believes that
its reputation for quality patient care has been and will continue to be a
significant factor in its success. An adverse determination by JCAHO regarding
the Company on any branch office could adversely affect the Company's reputation
and competitive position.
The Company's quality assurance program includes the following:
Quality Advisory Board. The Company maintains a Quality Advisory Board for
its branch offices, which consists of a physician, nursing professionals and
representatives of branch management. The Quality Advisory Board identifies
problems and suggests ways to improve patient care based on internal quality
compliance audits and clinical and personnel record reviews.
Internal Quality Compliance Review Process. Periodic internal reviews are
conducted by the Company's management to ensure compliance with the
documentation and
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operating procedures required by state law, JCAHO standards and internal
standards. Written reports are forwarded to branch managers. The Company
believes that the internal review process is an effective management tool for
branch managers.
Case conferences. Staff professionals regularly hold case conferences to
review problem and high risk cases, the physician's treatment and Company
services provided for such cases in order to ensure appropriate, safe patient
care and to evaluate patient progress and plans for future care.
Clinical Record Review. Clinical record review is the periodic evaluation
of the documentation in patient clinical records. In this review process, the
Company evaluates the performance of the nursing services staff to ensure that
professional and patient care policies are followed in providing appropriate
care and that the needs of patients are being met. Clinical record review
findings are documented and reviewed by the applicable Quality Advisory Board
for recommendations.
Sales and Marketing
The Company's executive officers, Jerry Braun and Jacob Rosenberg, are
principally responsible for the marketing of the Company's services. Each branch
office director is also responsible for sales activities in the branch office's
local market area. The Company attempts to cultivate strong, long-term
relationships with referral sources through high quality service and education
of local health care personnel about the appropriate role of home health care in
the clinical management of patients.
Government Regulation
The federal government and the State of New York, where the Company
currently operates, regulates various aspects of the Company's business. Changes
in the law or new interpretations of existing laws can have a material effect on
permissible activities of the Company, the relative costs associated with doing
business and the amount of reimbursement by government and other third-party
payers.
The Company is licensed by New York State as a home care services agency.
The state requires approval by the New York State Public Health Council
("Council") of any change in "the controlling person" of an operator of a
licensed home care services agency ( a "LHCSA"). Control of an entity is
presumed to exist if any person owns, controls or holds the power to vote 10% or
more of the voting securities of the LHCSA. A person seeking approval as a
controlling person of a LHCSA, or of an entity that is the operator of a LHCSA,
must file an application for Council approval within 30 days of becoming
controlling person and, pending a decision by the Council, such person may not
exercise control of the LHCSA. If any person should become the owner or holder,
or acquire control of or the right to vote 10% or more of the issued and
outstanding Common
15
<PAGE>
Stock of the Company, such person could not exercise control of the Company's
LHCSA until an application for approval of such ownership, control or holding,
has been submitted to the Council and approved. In the event such an application
is not approved, such owner or holder may be required to reduce their ownership
or holding to less than 10% of the Company's issued and outstanding Common
Stock.
The Company is also subject to federal and state laws prohibiting payments
for patient referrals and regulating reimbursement procedures and practices
under Medicare, Medicaid and state programs. The federal Medicare and Medicaid
legislation contains anti-kickback provisions which prohibit any remuneration in
return for the referral of Medicare and Medicaid patients. Courts have, to date,
interpreted these anti-kickbacks laws to apply to a broad range of financial
relationships. Violations of these provisions may result in civil and criminal
penalties, including fines of up to $15,000 for each separate service billed to
Medicare in violation of the antikickback provisions, exclusion from
participation in the Medicare and state health programs such as Medicaid and
imprisonment for up to five years.
The Company's healthcare operations potentially subject it to the Medicare
and Medicaid anti-kickback provisions of the Social Security Act. These
provisions are broadly worded and often vague, and the future interpretation of
these provisions and their applicability to the Company's operations cannot be
fully predicted with certainty. There can be no assurance that the Company will
be able to arrange its acquisitions or business relationships so as to comply
with these laws or that the Company's present or future operations will not be
accused of violating', or be determined to have violated, such provisions. Any
such result could have a material adverse effect on the Company.
Various Federal and state laws regulate the relationship among providers of
healthcare services, including employment or service contracts, and investment
relationships. These laws include the broadly worded fraud and abuse provisions
of the Social Security Act that are applicable to the Medicare and Medicaid
programs, which prohibit various transactions involving Medicare or Medicaid
covered patients or services. Among other things, these provisions restrict
referrals for certain designated health services by physicians to entities with
which the physician or the physician's immediate family member has a "financial
relationship" and the receipt of remuneration by anyone in return for, or to
induce, the referral of a patient for treatment or purchasing or leasing
equipment or services that are paid for, in whole or in part, by Medicare or
Medicaid. 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 future interpretation of these provisions
and their applicability to the Company's operations cannot be fully predicted
with certainty.
In May 1991, the United States Department of Health and Human Services
adopted regulations creating certain "safe harbors" from federal criminal and
civil penalties by identifying certain types of joint venture and management
arrangements that would not be treated as violating
16
<PAGE>
the federal anti-kickback laws relating to referrals of patients for services
paid by the Medicare and Medicaid programs. It is not possible to accurately
predict the ultimate impact of these regulations on the Company's business.
New York and other states also have statutes and regulations prohibiting
payments for patient referrals and other types of financial arrangements with
health care providers which, while similar in many respects to the federal
legislation, vary from state to state, are often vague and have infrequently
been interpreted by courts or regulatory agencies. Sanctions for violation of
these state restrictions may include loss of licensure and civil and criminal
penalties. In addition, the professional conduct of physicians is regulated
under state law. Under New York law, it is unprofessional conduct for a
physician to receive, directly or indirectly, any fee or other consideration for
the referral of a patient. Finally, under New York law, a physician with a
financial interest in a health care provider must disclose such information to
the patients and advise them of alternative providers.
The Company believes that the foregoing arrangements in particular and its
operations in general comply in all material respects with applicable federal
and state laws relating to anti-kickbacks, and that it will be able to arrange
its future business relationships so as to comply with the fraud and abuse
provisions.
Management believes that the trend of federal and state legislation is to
subject the home health care and nursing services industry to greater
regulation, particularly in connection with third-party reimbursement and
arrangements designed to induce or encourage the referral of patients to a
particular provider of medical services. The Company is attempting to be
responsive to such regulatory climate. However, the Company is unable to
accurately predict the effect, if any, of such regulations or increased
enforcement activities on the Company's future results of operations.
In addition, the Company is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws (which relate, among other things, to the
disposal, transportation and handling of hazardous and infectious wastes). None
of these laws and regulations have had a material adverse effect on the
Company's business or competitive position or required material expenditures on
the part of the Company, although no assurance can be given that such will
continue to be the case in the future.
The Company is unable to accurately predict what additional legislation, if
any, may be enacted in the future relating to the Company's business or the
health care industry, including third-party reimbursement, or what effect any
such legislation may have on the Company.
The Company has never been denied any license it has sought to obtain. The
Company believes that its operations are in material compliance with all state
and federal regulations and licensing requirements.
17
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Competition
The home health care market is highly fragmented and significant
competitors are often localized in particular geographical markets. The
Company's largest competitors include U.S. Home Care, Inc., Star Multicare,
Inc., TransWorld Home Health Care, Inc., Patient Care, Inc., Plaza Nurses
Agency, Inc. and Personal Touch Home Care Services, Inc. The home health care
business is marked by low entry costs. The Company believes that, given the
increasing level of demand for nursing services, significant additional
competition can be expected to develop in the future. Some of the companies with
which the Company presently competes in home health care have substantially
greater financial and human resources than the Company. The Company also
competes with many other small temporary medical staffing agencies.
The home infusion therapy market is highly competitive and the Company
expects that the competition will intensify. As the Company seeks to expand its
provision of infusion therapy services, it will compete with a large number of
companies and programs in the areas in which its facilities are located. Many of
these are local operations servicing a single area; however, there are a number
of large national and regional companies, including Olsten Kimberly QualityCare,
Inc., Coram Health Care Corp., Staff Builders, Inc. and Interim Personnel, Inc.
In addition, certain hospitals, clinics and physicians, who traditionally may
have been referral sources for the Company, have entered or may enter the market
with local programs.
The Company believes that the principal competitive factors in its industry
are quality of care, including responsiveness of services and quality of
professional personnel; breadth of therapies and nursing services offered;
successful referrals from referring Government agencies, hospitals and health
maintenance organizations; general reputation with physicians, other referral
sources and potential patients; and price. The Company believes that its
competitive strengths have been the quality, responsiveness, flexibility and
breadth of services and staff it offers, and to some extent price competition,
as well as its reputation with physicians, referral sources and patients.
The United States health care industry generally faces a shortage of
qualified personnel. Accordingly, the Company experiences intense competition
from other companies in recruiting qualified health care personnel for its home
health care operations. The Company's success to date has depended, to a
significant degree, on its ability to recruit and retain qualified health care
personnel. Most of the registered and licensed nurses and health care
paraprofessionals who are employed by the Company are also registered with, and
may accept placements from time to time through, competitors of the Company. The
Company believes it is able to compete successfully for nursing and
paraprofessional personnel by aggressive recruitment through newspaper
advertisements, flexible work schedules and competitive compensation
arrangements. There can be no assurance, however, that the Company will be able
to continue to attract and retain qualified personnel. The inability to either
attract or retain such qualified personnel would have a material adverse effect
on the Company's business.
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Employees
At December 31, 1996, the Company had 623 employees, of whom 49 are
salaried, including 3 executive officers, 1 director of operations, 5 branch
managers, 6 directors of nursing, 1 director of maternal/child health, 1
director of patient services, 1 director of business development, 8
accounting/clerical staff and 23 field staff supervisors. The remaining 574
employees are paid on an hourly basis and consist of professional and
paraprofessional employees. None of the Company's employees are compensated on
an independent contractor basis. The Company believes that its employee
relations are good. None of the Company's employees is represented by a labor
union.
Other Matters
The Company's authorized capital stock consists of 12,500,000 shares of
Common Stock, par value $.01 per share and 2,000,000 shares of Preferred Stock,
par value $.01 per share. The authorized shares of capital stock give effect to
a 56,625 for 1 stock split effected March 26, 1996, a 1.25 for 1 stock split
effected October 17, 1996 and a .8830022 for 1 stock split effected December 4,
1996.
In December 1996 the Company successfully completed an initial public
offering ("IPO") with H.J. Meyers & Co., Inc., as underwriter (the"Underwriter")
in which it issued 1,250,000 shares of Common Stock at a price of $4.00 per
share. This offering resulted in net proceeds to the Company, after the payment
of all costs relating to the offering, of $3,765,703.
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 of Common Stock can elect all of the
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having preference
over the Common Stock, as such, having no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock.
Preferred Stock
The Board of Directors of the Company is authorized to issue up to
2,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of
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redemption (including sinking fund provisions), redemption price or prices,
liquidations preferences and the number of shares constituting any series or the
designations of such series, without any further vote or action by the
stockholders. It would be possible for the Board of Directors to issue shares of
such preferred stock in a manner which would make acquisition of control of the
Company, other than as approved by the Board, exceedingly difficult.
The Company currently has no plans to issue any shares of Preferred Stock.
Transfer Agent
Continental Stock Transfer & Trust Company, New York, New York, is the
transfer agent for the shares of Common Stock.
Item 2. DESCRIPTION OF PROPERTIES.
The Company's principal place of business is a one-story commercial
building of approximately 6,000 square feet located at 1850 McDonald Avenue,
Brooklyn, New York 11223, which is leased from an unaffiliated person. The lease
is for a period ending March 31, 2000 and is subject to a renewal option for
five years in favor of the Company. The rent is $5,200 per month and is subject
to annual increases, beginning April 1, 1997, equal to 4% of the total prior
year's monthly rent and all increases in real estate taxes for the original and
renewal terms. The Company sublets approximately 2,500 square feet to an
unaffiliated third party for a period and with a renewal option the same as that
in the Company's lease. The rent is $2,860 per month and is subject to annual
increases beginning June 1, 1997 equal to 4% of the total prior years monthly
rent and 30% of all increases in real estate taxes for the original and renewal
term.
The Company acquired the lease and sublease from an unaffiliated person
pursuant to an agreement dated October 8, 1996 in consideration for $90,000.
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The table below sets forth certain information with respect to each of
the Company's existing branch office locations, all of which are leased from
non-affiliated lessors.
Lease Terms
Approximate ----------------------
Opening Square Expiration Annual
Location Date Footage Date Rental(l)
-------- ---- ------- ---- ---------
Kings County (2)
Branch Office
1667 Flatbush Avenue
Brooklyn, NY 11210 11/95 2,000 10/31/00 $37,800
Nassau County
Branch Office
175 Fulton Avenue
Hempstead, NY 11550 9/93 1,600 10/31/98 $20,187
Westchester County
Branch Office
6 Gramatan Avenue
Mt. Vernon, NY 10550 12/96 2,000 12/31/01 $25,200
Rockland County
Branch Office
49 South Main Street
Spring Valley, NY 10977 10/94 1,500 9/30/98 $16,200
Orange County
Branch Office
45 Grand Street
Newburgh, NY 11250 9/92 1,500 8/31/97 $12,000
Queens Recruitment
Office
91-31 Queens Blvd.
Elmhurst, NY 11373 10/95 750 9/30/97 $17,400
- ----------
(1) The leases provide for additional rentals based upon increases in real
estate taxes and other cost escalations.
(2) The Company's Kings County Branch Office occupies two of the three floors
of a commercial building owned by 1667 Flatbush Avenue, LLC, a New York
limited liability company owned by the Company's current stockholders. See
"Certain Relationships and Related Transactions." The lease is subject to a
renewal option for five years in favor of the Company. The rent is subject
to annual increases, beginning November 1, 1997, equal to 5% of the total
prior year's monthly rent for the original term and all renewal terms of
the lease.
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Item 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no material legal
proceedings pending or threatened against the Company or its properties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
PART II
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") SmallCap Market and is
traded on the Boston Stock Exchange. The following table sets forth the range of
the last price on NASDAQ for the Company's Common Stock for the periods
indicated. Quotations do not necessarily present actual transactions and do not
reflect related mark-ups, mark-downs or commissions:
High Low
---- ---
Fiscal 1996
- -----------
Fourth Quarter 4-5/8 4
Fiscal 1997
- -----------
First Quarter 4-5/8 3-3/8
At March 19, 1997 the Company had 14 holders of record and more than 870
beneficial holders of its shares of Common Stock.
On March 19, 1997, the last sale price of the shares of Common Stock as
reported by NASDAQ was $4.00 per share.
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<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year Ended December 31, 1996 Compared With Fiscal Year Ended
December 31, 1995
Revenues for the year ended December 31, 1996 ("1996") increased 1.0% to
$11,920,000 from $11,810,000 for the year ended December 31, 1995 ("1995"). The
increased revenues are attributable to increased hours of service provided to
existing contracts.
Cost of professional care of patients for 1996 increased 0.6% to $8,173,000
from $8,127,000 in 1995. The increase is attributable to the increased hours of
services provided. The cost of professional care of patients as a percentage of
revenue remained stable at 69% for both years.
Selling, general and administrative expenses increased 19.5% to $2,818,000
in 1996 from $2,358,000 in 1995. The increase in selling, general and
administrative expenses resulted primarily from increased management,
recruitment and staffing expenses to manage the supervision of the care of
patients requiring extended nursing and technical support, the hiring of
additional office staff to support anticipated growth in the Company's business
(including a Director of Business Development and a Director of Patient
Services) and a provision for doubtful accounts in the amount of $156,000.
Interest expense, net of interest income, increased 87.8% to $154,000
compared to $82,000 for 1995, primarily as a result of an increase in borrowing
in 1996 to finance an increase in accounts receivable that occurred during the
month of December 1995, distributions to shareholders during the first three
quarters of 1996 and operations during the third and fourth quarters of 1996 (as
a result of the July 5, 1996 sale of receivables for which payment was received
during August, September and October 1996).
The current provision for New York State and New York City taxes for 1996
increased to $168,000 from $35,000 in 1995, as a result of increased cash basis
taxable income for the period up to the termination of the Company's Subchapter
S tax basis on December 17 and the accrual of taxes from December 18th through
the year end, as well as a deferred tax credit of $184,000 for 1996, compared to
a deferred tax provision of $46,000 for 1995. As a result of the change in tax
status, the net tax for 1996 decreased $97,000 from 1995.
The Company recognized a non-recurring net charge to earnings of $204,000
during the third quarter as a result of the Receivables Sale Agreement pursuant
to which accounts receivable
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aggregating $3,500,000 was sold to a related company for $3,150,000, which was
less than their face value.
In view of the foregoing, net income for 1996 decreased 49.4% to $571,000,
compared to $1,128,000 in 1995.
Fiscal Year Ended December 31, 1995 Compared
With Fiscal Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 ("1995") increased 31.5% to
approximately $11,810,000 from approximately $8,981,000 for the year ended
December 31, 1994 ("1994"). The increase resulted primarily from an increase in
services provided to existing clients and increased new business.
Cost of professional care of patients for 1995 increased 29% to
approximately $8,127,000 from approximately $6,301,000 for 1994. The increase
resulted primarily from the hiring of additional home health care personnel to
service the increased new business and increase in services rendered to existing
clients. The cost of professional care of patients as a percentage of revenues
approximate 69% for 1995 as compared to 70% of 1994.
Selling, general and administrative expenses for 1995 increased 33.3% to
approximately $2,358,000 from approximately $1,769,000 for 1994. The increase
resulted primarily from the hiring of additional office support staff to support
the growth in the Company's business.
Interest expense for 1995 decreased 3.7% to approximately $82,000, as
compared to approximately $85,000 for 1994, primarily as a result of a reduction
in borrowings resulting from the Company's increased cash flow.
In view of the foregoing, net income for 1995 increased 46.3% to
approximately $1,128,000, as compared to approximately $771,000 for 1994.
Liquidity and Capital Resources
For 1996, net cash used in operations was $1,430,000 as compared to the
$698,000 provided by operations for 1995, a decrease of 304.9%. This $2,128,000
decrease in net cash from operations was primarily a result of the 430.7%
increase in accounts receivable and unbilled services to $2,409,000, compared to
an increase of $454,000 for 1995. Net cash used in financing activities for 1996
increased 77.7% to $691,000, as compared to $389,000 used in 1995, primarily the
result of payment of S Corporation distributions to the Company's stockholders
which aggregated $3,225,000 during the year, as compared to $695,000 for 1995,
an increase of 364.1%; repayment of bank notes payable during 1996 of
$1,225,000, as compared to $325,000 provided by bank
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<PAGE>
borrowings during 1995, an increase of 277.0%; offset by approximately
$3,766,000 of proceeds received from issuance of Common Stock in December 1996.
As of December 31, 1996, approximately $2,979,000 (approximately 63%) of
the Company's total assets consisted of accounts receivable derived from
payments made to contractors by third-party payors, compared to $3,974,000
(approximately 82%) as of December 31, 1995, a decrease of 25%. Such payors
generally require substantial documentation in order to process claims.
Days Sales Outstanding ("DSO") is a measure of the average number of days
taken by the Company to collect its accounts receivable, calculated from the
date services are billed. for the years ended December 31, 1996 and 1995, the
Company's DSOs were 87 days and 130 days, respectively, a reduction of 33.1%.
This decrease is due, principally, to the sale of $3.5 million of receivables,
and is, therefore, not indicative of any trend.
The Company's liquidity and long-term capital requirements depend upon a
number of factors, including the lag time to realize collections of amounts
billed to clients for services provided, the rate at which new offices and
facilities are established and acquisitions, if any, are completed. The Company
believes that the development and start-up costs for a new branch office
aggregate approximately $100,000, including leasehold improvements, lease
deposits, office equipment, marketing, recruiting, labor and operating costs
during the pre-opening and start-up phase, and also the provision of working
capital to fund accounts receivable. Such costs will vary depending upon the
size and location of each facility and, accordingly, may vary substantially from
these estimates.
Although the Company does not have any pending commitment to purchase any
home health company, it is actively pursuing potential acquisitions. Further
expansion of the Company's business may require the Company to incur additional
debt or offer additional equity if internally generated funds, cash on hand and
amounts available under its bank credit facilities are inadequate to meet such
needs. There can be no assurance that such additional debt or equity will be
available to the Company, or, if available, will be on terms acceptable to the
Company.
Inflation
Inflation has not had a significant impact on the Company's operations to
date.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 26-41 of this Annual Report on Form 10-KSB.
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<PAGE>
NEW YORK HEALTH CARE, INC.
INDEX TO FINANCIAL STATEMENTS
NEW YORK HEALTH CARE, INC.:
Independent Auditors' Report 27
Balance Sheet at December 31, 1996 28
Statements of Income for the Years
Ended December 31, 1995 and 1996 29
Statements of Shareholders' Equity for
the Years Ended December 31,
1995 and 1996 30
Statements of Cash Flows for the Years
Ended December 31, 1995 and 1996 31
Notes to Financial Statements 32-41
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
New York Health Care, Inc.
We have audited the accompanying balance sheet of New York Health Care, Inc.
(the "Corporation") as of December 31, 1996, and the related statements of
income, shareholders' equity and cash flows for the years ended December 31,
1995 and 1996. These financial statements are the responsibility of the
Corporation'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 referred to above present fairly, in
all material respects, the financial position of New York Health Care, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
/s/ M. R. Weiser & Co. LLP
---------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, NY
February 3, 1997
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NEW YORK HEALTH CARE, INC.
BALANCE SHEET
DECEMBER 31, 1996
A S S E T S
Current assets:
Cash (Notes 2 and 8) $1,188,450
Accounts receivable, net of allowance
for uncollectible amounts of $100,000
(Notes 4, 8 and 13) 2,850,159
Unbilled services (Note 2) 247,662
Prepaid expenses 182,037
----------
Total current assets 4,468,308
Property and equipment, net (Notes 2 and 3) 207,648
Acquisition costs, net (Note 2) 16,829
Deposits 25,689
----------
Total assets $4,718,474
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 254,903
Accounts payable and accrued expenses (Note 8) 147,219
Income taxes payable (Note 2) 157,570
Current maturities of long term debt (Note 6) 5,650
----------
Total current liabilities 565,342
----------
Long-term debt, less current maturities (Note 6) 1,528
----------
Commitments, contingencies and other comments (Note 8)
Shareholders' equity (Notes 2, 7 and 10):
Preferred stock $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.01 par value, 12,500,000
shares authorized; 3,750,000 shares issued
and outstanding 37,500
Additional paid-in capital 4,076,783
Retained earnings 37,321
----------
Total shareholders' equity 4,151,604
----------
Total liabilities and shareholders' equity $4,718,474
==========
See accompanying notes to financial statements
28
<PAGE>
NEW YORK HEALTH CARE, INC.
STATEMENTS OF INCOME
For the Years Ended
December 31,
-----------------------------
1995 1996
----------- -----------
Net patient service revenue (Note 2) $11,809,728 $11,920,017
----------- -----------
Expenses:
Professional care of patients 8,127,447 8,172,859
General and administrative 2,358,487 2,661,516
Bad debts expense 155,764
Depreciation 32,455 31,953
----------- -----------
Total operating expenses 10,518,389 11,022,092
----------- -----------
Income from operations 1,291,339 897,925
----------- -----------
Nonoperating income (expenses):
Interest income 9,480
Other income 15,000
Loss on sale of accounts receivable
(Note 13) (204,137)
Interest expense (82,328) (163,630)
----------- -----------
Nonoperating expenses, net (82,328) (343,287)
----------- -----------
Income before provision for income taxes 1,209,011 554,638
----------- -----------
Provision (credit) for income taxes (Note 2):
Current 35,000 168,000
Deferred 46,000 (184,000)
----------- ----------
81,000 (16,000)
----------- -----------
Net income $ 1,128,011 $ 570,638
=========== ===========
Pro forma (unaudited) (See Note 2):
Historical income before provision
for income taxes $ 1,209,011 $ 554,638
Pro forma provision for income taxes 520,000 238,000
----------- -----------
Pro forma net income $ 689,011 $ 316,638
=========== ===========
Pro forma net income per common share
and common share equivalents $ .20 $ .09
=========== ===========
Pro forma weighted average number
of common shares and common
share equivalents 3,405,437 3,409,469
=========== ===========
See accompanying notes to financial statements
29
<PAGE>
NEW YORK HEALTH CARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1995 and 1996 (a)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 2,500,000 $ 25,000 $ 5,000 $ 2,722,715 $ 2,752,715
Net income 1,128,011 1,128,011
Distributions ($.34 per share) (840,032) (840,032)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 2,500,000 25,000 5,000 3,010,694 3,040,694
Net income 570,638 570,638
Distributions ($1.29 per share) (3,225,431) (3,225,431)
Net proceeds from issuance
of common shares 1,250,000 12,500 3,753,203 3,765,703
Reclassification of S-Corporation
earnings (Note 10) 318,580 (318,580)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 3,750,000 $ 37,500 $ 4,076,783 $ 37,321 $ 4,151,604
=========== =========== =========== =========== ===========
</TABLE>
(a) Retroactive effect has been given to the March 26, 1996, October 17, 1996
and December 4, 1996 recapitalizations referred to in Note 10.
See accompanying notes to financial statements.
30
<PAGE>
NEW YORK HEALTH CARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,128,011 $ 570,638
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 59,403 45,881
Bad debts expense 155,764
Deferred tax expense (credit) 46,000 (184,000)
Loss on sale of accounts receivable 204,137
Changes in operating assets and liabilities:
Increase in accounts receivable and unbilled services (453,893) (2,409,210)
Decrease in due from affiliate 68,149
(Increase) decrease in due from shareholders (145,000) 145,000
Decrease (increase) in prepaid expenses 7,159 (135,170)
Increase in deposits (3,600) (5,870)
Decrease in sundry assets 2,000
Increase (decrease) in accrued payroll 95,374 (33,120)
(Decrease) increase in accounts payable and
accrued expenses (135,563) 88,081
Increase in income taxes payable 29,737 127,833
----------- -----------
Net cash provided by (used in) operating activities 697,777 (1,430,036)
----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (27,416) (143,170)
Proceeds from sale of accounts receivable 3,150,000
(Increase) decrease in note receivable - shareholder (125,000) 125,000
----------- -----------
Net cash (used in) provided by investing activities (152,416) 3,131,830
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under note payable 325,000 (1,225,000)
Repayment of long-term debt (18,887) (6,304)
Net proceeds from issuance of common stock 3,765,703
Distributions (695,105) (3,225,431)
----------- -----------
Net cash used in financing activities (388,992) (691,032)
----------- -----------
Net increase in cash and cash equivalents 156,369 1,010,762
Cash and cash equivalents at beginning of year 21,319 177,688
----------- -----------
Cash and cash equivalents at end of year $ 177,688 $ 1,188,450
=========== ===========
</TABLE>
(See Note 12)
See accompanying notes to financial statements
31
<PAGE>
NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
New York Health Care, Inc. (the "Corporation") was incorporated in February
1983 under the laws of the State of New York. The Corporation was formed to
provide the services of registered nurses and nurses aides to hospitals,
nursing homes and other healthcare providers and patients within the New
York metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
Revenue Recognition:
The Corporation recognizes net patient service revenue based upon the date
services are rendered. Net patient service revenue is reported at the
estimated net realizable amounts from patients, third-party payers and
others. Unbilled services represent amounts due for services rendered which
were not billed at the end of each period.
Property, Plant and Equipment:
Property, plant and equipment is carried at cost and is being depreciated
under the straight-line method over the following estimated useful lives of
the assets or the life of the lease, whichever is shorter.
Machinery and equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 9 years
Acquisition Costs:
On March 17, 1988, the Corporation purchased the customer lists, employee
lists and other intangible assets of National Medical Home Care at a cost
of $139,273. This cost is being amortized using the straight-line method
over a period of ten years. At December 31, 1996, the accumulated
amortization was $122,444.
32
<PAGE>
Income Taxes:
The Corporation changed its tax status from nontaxable to taxable effective
December 17, 1996. Previously, its earnings and losses were included in the
personal tax returns of the stockholders, and the Company did not record a
federal income tax provision. Effective with the change, income taxes are
provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes.
The Corporation uses the asset and liability method to calculate deferred
tax assets and liabilities. Deferred taxes are recognized based on the
differences between financial reporting and income tax bases of assets and
liabilities using enacted income tax rates. Prior to December 17, 1996,
deferred state and city income taxes arose from the use of the cash basis
of accounting for income tax purposes.
As a result of its change in tax status, the deferred tax liability at the
date of termination of S Corporation status (approximately $184,000) was
recorded as a credit to the deferred tax provision.
Pro forma Information (Unaudited):
a. Pro forma Net Income Per Common Share and Common Share Equivalents:
Pro forma net income per common share and common share equivalents has
been computed based upon the weighted average number of shares and
common share equivalents outstanding during each year. Common share
equivalents recognize the potential dilutive effects of the exercise
of outstanding options and warrants to acquire common stock. The
Corporation has used the initial public offering price of $4.00 per
common share for each year presented for purposes of computing the
potential dilutive effects of common share equivalents. The issuance
of a stock option had the effect of increasing the weighted average
shares outstanding for each year by 23,437 shares calculated by using
the treasury stock method. The issuance of the warrants (see Note 10)
had an antidilutive effect and were not included in the weighted
average shares outstanding.
Pursuant to the rules of the Securities and Exchange Commission,
dividends declared in the latest twelve month period would be deemed
to be in contemplation of the offering with the intention of repayment
out of offering proceeds to the extent that the dividend exceeded
earnings during the previous twelve months. The shares whose proceeds
would be necessary to pay the S-Corporation distribution paid during
the year ended December 31, 1996 of $3,225,431 has the pro forma
effect of increasing the weighted average shares outstanding for each
year by approximately 882,000 shares.
33
<PAGE>
b. Pro Forma Statement of Income Adjustment:
The pro forma statement of income information presents the pro forma
effects on the historical financial information of the Corporation's
termination of its S corporation status on December 17, 1996. The
unaudited proforma adjustment included in the statements of income
gives effect to a charge in lieu of income taxes that would have been
included in the provision for income taxes had the Corporation been
taxed as a C Corporation.
Cash Equivalents:
For purposes of the statement of cash flows, the Corporation considers all
highly liquid investments with maturities of three months or less when
purchased to be cash equivalents.
Stock Based Compensation:
a. Effective January 1, 1996, the Corporation adopted SFAS No. 123,
"Accounting for Stock- Based Compensation." This statement defines a
fair value based method of accounting for the issuance of stock
options and other equity instruments. However, it allows the
Corporation to continue to account for such transactions using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." Under the fair value based method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date, or other measurement date, over the amount an employee
must pay to acquire the stock. The Corporation has elected to continue
to account for employee stock-based transactions under APB Opinion No.
25.
Warrants have not been considered for this computation since they are
not deemed to be an employee stock based transaction and the effect of
their exercise, under the fair value based method, would have been to
reduce the proceeds of the offering rather than as a charge to
operations. The estimated fair value of the warrants was determined to
be insignificant and, accordingly, has not been reflected on the
balance sheet at December 31, 1996.
34
<PAGE>
b. Had compensation cost for the option granted on March 26, 1996 (see
Note 10) been determined based on the fair value at the grant date
($.81 per share for 93,750 shares) consistent with the method of SFAS
No. 123, the Corporation's proforma net income and earnings per common
share and common share equivalents would have been reduced to proforma
amounts indicated below:
SFAS
No. 123
As Reported Pro forma
----------- ---------
Pro forma net income $316,638 $272,893
======== ========
Pro forma net income per common
share and common share equivalents $.09 $.08
==== ====
Under SFAS No. 123, the fair value of the option is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of zero percent, expected
volatility of zero percent, risk-free interest rate of 6.38%, and
expected life of 5 years.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of:
The Company has adopted Statement of Financial Accounting Standards ("FAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," in the first quarter of 1996. FAS No.
121 establishes new accounting standards for measuring the impairment of
long-lived assets. The adoption of this new standard does not have a
significant effect on the Corporation's financial statements.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1996:
Machinery and equipment $173,136
Furniture and fixtures 81,524
Leasehold improvements 90,783
--------
345,443
Less accumulated depreciation and amortization 137,795
--------
$207,648
========
4. NOTE PAYABLE - BANK:
On May 9, 1996, the Corporation entered into a promissory note with its
bank which increased its line of credit from $2,000,000 to $3,500,000 and
adjusted the interest payable to .75% above the market prime as posted in
the Wall Street Journal (8.25% at December 31, 1996). The line of credit is
collateralized by the Corporation's accounts receivable and is guaranteed
by certain shareholders. The line of credit is renewable in May 1997. At
December 31, 1996, no amount was outstanding to the bank.
35
<PAGE>
5. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE:
Approximately 27% and 24% of net patient service revenue was derived under
New York State third-party reimbursement programs during the years ended
December 31, 1995 and 1996, respectively. These revenues are based, in
part, on cost reimbursement principles and are subject to audit and
retroactive adjustment by the respective third-party fiscal intermediaries.
Provision for estimated amounts due to/from the Corporation has been made
in the financial statements. Differences between estimated revised rates
and subsequent revisions will be reflected in the statement of income in
the year revisions are calculated.
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
Capital leases collateralized by various machinery
and equipment are payable through April 1998. $7,178
Less current maturities 5,650
------
$1,528
======
7. PERFORMANCE INCENTIVE PLAN AND 401(K) PLAN:
Performance Incentive Plan:
On March 26, 1996, the Corporation's Board of Directors adopted the
Performance Incentive Plan (the "Option Plan"). Under the terms of the
Option Plan, 262,500 shares of common stock may be granted. The Option Plan
will be administered by a Committee appointed by the Board of Directors.
The Committee will determine which key employee, officer or director on the
regular payroll of the Company, shall receive stock options. Granted
options are exercisable in three equal annual installments, commencing six
months after the date of grant, and expire ten years after the date of
grant. The exercise price of any incentive stock option or nonqualified
option granted under the Option Plan may not be less than 100% of the fair
market value of the shares of common stock of the Company at the time of
the grant. No options have been granted under the Option Plan.
401 (K) Plan:
The Corporation maintains an Internal Revenue Code Section 401 (k) salary
deferred savings plan (the "Plan") for eligible employees who have been
employed for at least one year and are at least 21 years old. Subject to
certain limitations, the Plan allows participants to voluntarily contribute
up to 15% of their pay on a pre-tax basis. The Corporation currently
contributes 50% of each dollar contributed to the Plan by participants up
to a maximum of 6% of the participants' salary. The Plan also provides for
certain discretionary contributions by the Corporation as determined by the
Board of Directors. The Corporation's contributions amounted to $41,900 and
$34,000 for the years ended December 31, 1995 and 1996, respectively.
36
<PAGE>
8. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS:
Lease Commitments:
The Corporation leases office space under noncancellable operating leases
in the New York metropolitan area that expire between December 1996 and
November 2000.
On October 8, 1996, the Corporation entered into an agreement to acquire a
lease, for new office space, and a sub-lease from an unaffiliated person
for $90,000. The lease is for a term expiring March 31, 2000, and is
subject to renewal by the Corporation for an additional five years. The
rent is $62,400 per annum, and is subject to annual increases beginning
April 1, 1997. The Corporation sub-leases a portion of the space for
$34,320 per annum. The sublease is subject to the same renewal option and
annual increases as the Corporation's lease.
At December 31, 1996, future minimum lease payments due under operating and
capital leases approximate:
Operating Capital
Leases Leases
--------- -------
1997 $103,770 $7,394
1998 99,435 1,447
1999 73,681
2000 46,187
--------- -------
Total minimum future payments $323,073 8,841
========
Less amounts representing interest 1,663
-------
Present value of net minimum lease payments $7,178
=======
Rental expense charged to operations was approximately $86,000 and $128,000
for the years ended December 31, 1995 and 1996, respectively.
Employment Agreements:
In 1996, the Corporation entered into employment agreements with three
officers, with terms expiring in 1999. The agreements call for aggregate
annual compensation of approximately $395,000 and provide for certain
additional benefits.
Bonus Plan:
In 1996, the Corporation established a bonus plan pursuant to which 10% of
the Corporation's pre-tax net income is contributed to a bonus pool which
is available for distribution to all employees as decided upon by the
Corporation's Compensation Committee. The Corporation has accrued $65,000
for its contribution to the bonus pool for 1996.
37
<PAGE>
Concentrations of Credit Risk:
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist primarily of temporary cash
investments which from time to time exceed the Federal depository insurance
coverage and commercial accounts receivable. The Corporation has cash
investment policies that restrict placement of these investments to
financial institutions evaluated as highly creditworthy. Cash and cash
equivalents exceeding federally insured limits approximated $1,100,000 at
December 31, 1996. The Corporation does not require collateral on
commercial accounts receivable as the customer base consists of large,
well-established institutions. No concentrations of credit risk existed at
December 31, 1996 (see Note 13).
Major Customers:
One major customer accounted for approximately 12.5% and 9.6% of net
patient service revenue for the years ended December 31, 1995 and 1996,
respectively.
Business Risks:
Certain factors relating to the industry in which the Corporation operates
and the Corporation's business should be carefully considered. The
Company's primary business, offering home health care services, is heavily
regulated at both the federal and state levels. While the Corporation is
unable to predict what regulatory changes may occur or the impact on the
Corporation of any particular change, the Corporation's operations and
financial results could be negatively affected.
Further, the Corporation operates in a highly competitive industry which
may limit the Corporation's ability to price its services at levels that
the Corporation believes appropriate. These competitive factors may
adversely affect the Corporation's financial results.
9. RELATED PARTY TRANSACTIONS:
In September 1995, the Corporation entered into a loan agreement with a
shareholder wherein the Corporation lent the shareholder $125,000. The note
was due at the earlier of (i) 30 days after notice of the filing of a
registration statement, or (ii) September 28, 1997. Interest was payable
monthly at the rate charged by the Corporation's lender. (See Note 4). The
shareholder's stock certificates were being held as collateral for the
note. The note was repaid on August 1, 1996.
In January 1996, the Corporation entered into a Service Agreement with a
company affiliated through common ownership. The Corporation has agreed to
provide administrative services relating to payroll, benefits management
and data processing to the company through June 30, 1997. The company will
be reimbursed for all expenses attributable to such operations, presently
totaling $15,000 per year.
38
<PAGE>
On November 1, 1995, the Corporation transferred the land and building
which it had acquired on April 18, 1994 to a company related through common
ownership. As a result of the transaction, the Corporation was relieved of
its mortgage obligation of $146,250 and the shareholders received a
non-cash distribution in 1995 of $144,927 which represented the net book
value of the land and building. No gain or loss was recognized upon the
transfer.
10. SHAREHOLDERS' EQUITY:
Common Stock and Recapitalization:
As effected on March 26, 1996, the shareholders and Board of Directors
authorized an increase in the number of authorized shares of common stock
from 200 to 10,000,000, an increase in par value to $.01 per share, a stock
split of 56,625 for 1 of the Corporation's common stock outstanding, and a
stock split of 48,343.75 for 1 of the Corporation's unissued common stock.
On October 17, 1996, the shareholders and Board of Directors effected a
stock split of 1.25 for 1 of the Corporation's common stock and an increase
in the number of authorized shares of common stock from 10,000,000 to
12,500,000. On December 4, 1996, the shareholders and Board of Directors
effected a stock split of .8830022 for 1 of the Corporation's common stock
issued and outstanding. As a result, all historic share amounts and per
share amounts in the accompanying financial statements and notes have been
adjusted to reflect the stock splits and increase in par value.
On December 27, 1996, the Corporation completed the initial public offering
of 1,250,000 shares of its common stock at $4.00 per share. The proceeds
received by the Corporation of $3,765,703 are net of costs relating to the
offering of $1,234,297.
Preferred Stock:
On March 26, 1996, the shareholders and Board of Directors approved the
authorization of a total of 2,000,000 shares of preferred stock which may
be issued in one or more series with rights and preferences to be
determined by the Board of Directors.
Options and Warrants:
On March 26, 1996, the Corporation issued an option to purchase 93,750
shares of common stock to the President of the Corporation at an exercise
price of $3.00 per share. The option may be exercised at any time through
March 26, 2006. (See Note 2 - Stock Based Compensation).
39
<PAGE>
In connection with the initial public offering of the Corporation's common
stock, the underwriter acquired for nominal consideration warrants to
purchase an aggregate of 125,000 shares of common stock. The warrants are
exercisable at a price of $5.20 for a period of four years commencing one
year from December 20, 1996. These warrants grant to the holder certain
"piggyback" registration rights for a period of seven years from December
20, 1997, and demand registration rights for a period of five years from
December 20, 1996 with respect to the registration under the Securities Act
of the securities issuable upon the exercise of the warrants. (See Note 2 -
Stock Based Compensation.)
Dividend Policy:
The Corporation had operated as an S Corporation prior to the public
offering effected December 20, 1996 and has paid out a substantial portion
of its earnings to its current shareholders as S Corporation distributions.
The Board of Directors intends to retain and reinvest any future earnings
into the development of the business. Any future payment of dividends will
be subject to the discretion of the Board of Directors.
Reclassification of S-Corporation Earnings:
As of December 17, 1996, S Corporation undistributed earnings of $318,580
has been reclassified from retained earnings to additional paid-in-capital.
This reclassification assumes a constructive dividend to the S Corporation
shareholders followed by a contribution to the capital of the Corporation.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The amounts included in the balance sheet at December 31, 1996 for cash,
accounts receivable, unbilled services, accrued payroll, accounts payable
and accrued expenses, and current maturities of long-term debt approximate
fair value because of the short-term nature of these instruments. The
carrying value of long-term debt approximates the estimated fair value
because the long-term debt is at interest rates comparable to notes
currently available to the Company for debt with similar terms and
remaining maturities.
40
<PAGE>
12. SUPPLEMENTAL CASH FLOW DISCLOSURES:
For the Years Ended
December 31,
---------------------
1995 1996
--------- --------
Cash paid during the year for:
Interest $ 93,439 $163,630
========= ========
Income taxes $ -- $ 10,430
========= ========
Supplemental disclosure of non-cash investing
and financing activities:
Transfer of ownership of building to a
separate corporation:
Decrease in fixed assets $ 291,177
Decrease in long-term debt 146,250
---------
Non-cash distribution to shareholders $ 144,927
=========
Reclassification of S-Corporation earnings $ 318,580
=========
13. SALE OF ACCOUNTS RECEIVABLE:
On July 8, 1996, the Corporation entered into an agreement with 1667
Flatbush LLC ("1667 Flatbush") a limited liability company owned by the
Corporation's officers and directors, whereby 1667 Flatbush purchased
$3,500,000 of the Corporation's accounts receivable for a purchase price of
$3,150,000. As a result of the Corporation's sale of accounts receivable
for less than their face value, the Corporation recognized a net charge to
its earnings during the year ended December 31, 1996 in the amount of
$204,137. The purchase price was represented by a negotiable promissory
note which bore interest at the rate of 12% per annum, and was payable
$1,100,000 on August 1, 1996, $1,100,000 on September 1, 1996, and $950,000
at the earlier of October 1, 1996 or the effective date of the initial
public offering. The note was collateralized by a lien on the accounts
receivable purchased from the Corporation, and was personally guaranteed by
each of the members of 1667 Flatbush. The final installment of the note was
paid in full on September 30, 1996.
41
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Jerry Braun 39 President, Chief Executive Officer and
Director
Jacob Rosenberg 39 Vice President, Chief Operating Officer,
Secretary and Director
Gilbert Barnett 51 Chief Financial Officer and Chief
Accounting Officer
Samson Soroka 40 Director
Hirsch Chitrik 68 Director
Sid Borenstein 42 Director
Jerry Braun has been the President, Chief Executive Officer and Chief
Operating Officer of the Company since its inception in 1983.
Jacob Rosenberg, has been Secretary and a Director since the Company's
inception in 1983, and Vice President and Chief Operating Officer since February
1995.
Gilbert Barnett has been the Chief Accounting Officer and Chief Financial
Officer of the Company since April 1995. From 1989 to 1995, he was Director of
Finance for the Mt. Sinai Medical Center in New York, where he was responsible
for the Patient Accounting Department. From 1981 to 1988, Mr. Barnett was the
President of Grand Graham Medical Center, a shared health facility located in
Brooklyn, New York. In 1981, he was the treasurer of Accredited Care, Inc., a
42
<PAGE>
licensed home care company in White Plains, New York. Mr. Barnett is a Certified
Public Accountant, a Fellow of the Health Care Financial Management Association
and a Certified Manager of Patient Accounts.
Samson Soroka has been a Director of the Company since its inception in
1983. From 1988 to February 1995, Mr. Soroka was employed by the Company as its
Chief Financial Officer. Since then, Mr. Soroka has been employed as an
independent consultant. Mr. Soroka is a graduate of Brooklyn College of the City
University of New York (BS, Accounting and Computer Science, 1979).
Hirsch Chitrik has been a Director of the Company since May 1995. For more
than the last five years, Mr. Chitrik has been the President of Citra Trading
Corporation, a privately-held company in New York engaged in the jewelry
business.
Sid Borenstein has been a Director of the Company since May 1995. For more
than the last five years, Mr. Borenstein, a Certified Public Accountant, has
been a General Partner in Sid Borenstein & Co., CAPS, in Brooklyn, New York.
There are no committees of the Board of Directors. Directors hold their
offices until the next annual meeting of the stockholders and thereafter until
their successors have been duly elected and qualified. Executive officers are
elected by the Board of Directors on an annual basis and serve at the direction
of the Board. All of the executive officers devote approximately 90% of their
time to the business affairs of the Company. See "Certain Relationships and
Related Transactions." The Company intends to appoint a Compensation Committee
in fiscal 1997.
Employment Agreements
On March 26, 1996, the Company entered into employment agreements with
Jerry Braun and Jacob Rosenberg, each of which is for a term ending December 31,
1999. On August 27,1996, the Company entered into an employment agreement with
Gilbert Barnett, its Chief Financial and Accounting Officer, with a term ending
July 30, 1999.
Mr. Braun's agreement provides that he will serve as President and Chief
Executive Officer in consideration of (i) initial annual compensation of
$175,000; (ii) reimbursement of authorized business expenses incurred in
connection with the conduct of the Company's business; (iii) participation in
the Company's 401 (k) Plan and stock option plan; (iv) an automobile
reimbursement allowance of $500 per month toward automobile leasing cost and
reimbursement of automobile insurance cost; (v) an allowance of $3,500 per year
towards the cost of $500,000 of term life insurance, and disability insurance;
(vi) four weeks paid vacation; and (vii) annual increase in salary of 10% for
each year. He is required to devote a majority of his business time to the
Company's affairs and is permitted to devote a limited amount of his business
time to the affairs of
43
<PAGE>
Heart to Heart, provided those activities do not compete with the Company's
business. See "Certain Relationships and Related Transactions."
Mr. Rosenberg's agreement has the same general terms and conditions as Mr.
Braun's, except that he will serve as Chief Operating Officer, and the annual
compensation is $140,000.
Mr. Barnett's agreement provides that he will serve as Chief Financial
Officer in consideration of (i) initial annual compensation of $80,000; (ii)
reimbursement of authorized business expenses incurred in connection with the
conduct of the Company's business; (iii) participation in the Company's 401(k)
Plan; (iv) a reimbursement allowance of $1,000 per year toward professional dues
and continuing professional education; and (v) up to three weeks paid vacation.
He is required to devote his entire business time to the Company's affairs.
Mr. Braun, Mr. Rosenberg and Mr. Barnett also participate, together with
all employees of the Company, in a bonus plan pursuant to which 10% of the
Company's annual pre-tax net income is contributed to the bonus pool which is
distributed to such persons and in such amounts as decided upon by the Company's
Compensation Committee.
During the Company's fiscal year ended December 31, 1996, Jerry Braun,
Jacob Rosenberg, Samson Soroka, Hirsch Chitrik and Sid Borenstein did not file
on a timely basis reports on Form 3 required by Section 16(a) of the Securities
Exchange Act of 1934.
44
<PAGE>
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the fiscal years ended December 31,
1996 and 1995, the cash compensation paid by the Company, as well as certain
other compensation paid with respect to those years, to the chief executive
officer and, to the extent applicable, each of the three other most highly
compensated executive officers of the Company in all capacities in which they
served.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------- -----------------------------------------------------------
Awards Payouts
--------------- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Name and Other Annual Restricted underlying LTIP All other
Principal Position(1) Year Salary($) Bonus($) Compensation($) Stock Awards($) options/SARs Payouts(#) compensation($)
- ---------------------- ---- --------- -------- --------------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Jerry Braun 1996 $123,558 $22,124(1) 93,750
President and Chief 1995 $116,177 $16,699(1) Shares
Executive Officer
Jacob Rosenberg 1996 $ 97,115 $23,231(2)
Chief Operating Officer 1995 $100,096 $17,885(2)
Gilbert Barnett(3) 1996 $ 79,751 $2,760(3)
Chief Financial and 1995 $ 57,692 $ 851
Accounting Officer
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Includes $10,413 and $8,817 of medical insurance premiums paid on behalf of
such individual for each of the years ended 1996 and 1995, respectively,
$8,211 and $7,882 for automobile and automobile-related costs, including
insurance, incurred on behalf of such individual, respectively, for each of
the years ended 1996 and 1995 and 1994 and $3,500 in expense allowance for
the fiscal year ended 1996.
(2) Includes $10,413 and $8,817 of medical insurance premiums paid on behalf of
such individual for each of the years ended 1996 and 1995, respectively,
$9,318 and $9,068 for automobile and automobile-related costs, including
insurance, incurred on behalf of such individual, respectively, for each of
the years ended 1996 and 1995 and $3,500 in expense allowance for the
fiscal year ended 1996.
(3) Included $2,760 of medical insurance premiums paid on behalf of such
individual for the fiscal year ended 1996. Mr. Barnett joined the Company
in April 1995.
45
<PAGE>
Directors Compensation
The Company currently reimburses each non-employee director for their
expenses in connection with attending meetings.
Savings and Stock Option Plans
401(k) Plan
The Company maintains an Internal Revenue Code Section 401(k) salary
deferral savings plan (the "Plan") for all of its eligible employees who have
been employed for at least one year and are at least 21 years old (effective
July 1, 1996, field staff employees at the Company's Orange County branch office
in Newburgh, New York ceased being, eligible to participate in the Plan).
Subject to certain limitations, the Plan allows participants to voluntarily
contribute up to 15% of their pay on a pre-tax basis. Under the Plan, the
Company may make matching contributions on behalf of the pre-tax contributions
made by participants. For 1995 and for the first half of 1996, the Company
contributed 50% of each dollar contributed to the Plan by participants up to a
maximum of 6% of the participant's salary. All participants are fully vested in
their accounts in the Plan with respect to their salary deferral contributions
and are vested in Company matching contributions at the rate of 20% per year for
two years through four years of service, with 100% vesting after five years of
service. However, participants who are first hired after December 31, 1994 will
not be vested in the Company matching contributions until the completion of five
years service, when they become 100% vested. The Company has agreed with the
Underwriter that no discretionary contributions to the Plan may be made for
officers or stockholders of the Company.
Stock Option Plan
In March 1996, the Company's Board of Directors and stockholders approved
and adopted the New York Health Care, Inc. Performance Incentive Plan (the
"Option Plan"). Under the terms of the Option Plan, options to purchase up to
262,500 shares of Common Stock may be granted to key employees of the Company.
To date, no options have been granted under the Plan. Moreover, the Company's
Board of Directors has approved a resolution which proposes to provide for an
increase in the number of shares of Common Stock available for options under the
Option Plan equal to an additional 262,500 shares for each of two additional
years, subject to approval by the Company's shareholders at the first annual
meeting of shareholders. The Option Plan is to be administered by a Compensation
Committee to be appointed by the Board of Directors (the "Committee"), which is
authorized to grant incentive stock options and non-qualified stock options to
selected employees of the Company and to determine the participants, the number
of options to be granted and other terms and provisions of each option.
The exercise price of any incentive stock option or nonqualified option
granted under the Option Plan may not be less than 100% of the fair market value
of the shares of Common Stock
46
<PAGE>
of the Company at the time of the grant. In the case of incentive stock options
granted to holders of more than 10% of the voting power of the Company, the
exercise price may not be less than 110% of the fair market value.
Under the terms of the Option Plan, the aggregate fair market value
(determined at the time of grant) of shares issuable to any one recipient upon
exercise of incentive stock options exercisable for the first time during any
one calendar year may not exceed $ 100,000. Options granted under the Option
Plan become exercisable in whole or in part from time to time as determined by
the Committee, but in no event may a stock option granted in conjunction
therewith be exercisable prior to the expiration of six months from the date of
grant, unless the grantee dies or becomes disabled prior thereto. Stock options
granted under the Option Plan have a maximum term of 10 years from the date of
grant, except that with respect to incentive stock options granted to an
employee who, at the time of the grant, is a holder of more than 10% of the
voting power of the Company, the stock option shall expire not more than five
years from the date of the grant. The option price must be paid in full on the
date of exercise and is payable in cash or in shares of Common Stock having a
fair market value on the date the option is exercised equal to the option price.
If a grantee's employment by, or provision of services to, the Company
shall be terminated, the Committee may, in its discretion, permit the exercise
of stock options for a period not to exceed one year following such termination
of employment with respect to incentive stock options and for a period not to
extend beyond the expiration date with respect to non-qualified options, except
that no incentive stock option may be exercised after three months following the
grantee's termination of employment, unless it is due to death or permanent
disability, in which case they may be exercised for a period of up to one year
following such termination.
The underwriting agreement between the Company and the underwriter provides
that, until December 20, 1999, the Company will not adopt, propose to adopt or
otherwise permit to exist any employee, officer, director or compensation plan
or arrangement permitting the grant, issue or sale of any shares of Common Stock
or other securities of the Company in an amount greater than 262,500 shares,
other than the proposed increase in the Option Plan described above. The
underwriting agreement also provides that, (i) for the three year period the
exercise price for any option granted pursuant to the Option Plan or otherwise
during such period cannot be less than the greater of the fair market value per
share of the Common Stock on the date of grant or $4.00 per share and (ii) if
the Company's shareholders approve an increase of an additional 262,500 shares
for each of two additional years, then any option granted in the three years
following such an increase will have an exercise price no lower than the greater
of the fair market value per share of the Common Stock upon the date of the
option grant or $4.00 per share.
47
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted Fiscal Year Price Expiration Date
- ----------- ------------- ------------ ----------- --------------
Jerry Braun 93,750 Shares 100% $3.00/Share March 31, 2006
- --------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last fiscal Year
and Fiscal Year-End Option/SAR Values
- --------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ----------- --------------- -------------- ------------- -------------
Jerry Braun - - 93,750/0 Shares $93,750/0
- --------------------------------------------------------------------------------
Other than the stock option which has been issued outside of the Option
Plan to Jerry Braun for 93,750 shares of the Company's Common Stock at an
exercise price of $3.00 per share, the Company has not issued any options under
the Option Plan, or otherwise. The Company does not have any other existing
stock option or other deferred compensation plans, but may adopt such plans in
the future. However, the Company has agreed with the Underwriter not to adopt
any other stock option or deferred compensation plans during the three-year
period commencing on the Effective Date without the written consent of the
underwriter of its public offering completed in December 1996.
48
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding shares of the
Common Stock beneficially owned as of December 31, 1996 by (i) each person,
known to the Company, who beneficially owns more than 5% of the Common Stock,
(ii) each of the Company's directors and (iii) all officers and directors as a
group:
Shares Percentage
Name and Address of Beneficially of Stock
Beneficial Owner Owned(l) Outstanding(l)
---------------- -------- --------------
Jerry Braun(2) 1,014,248 26.39%
929 East 28th Street
Brooklyn, NY 11210
Jacob Rosenberg 430,401 11.48%
932 East 29th Street
Brooklyn, NY 11210
Samson Soroka 460,401 12.28%
1228 East 22nd Street
Brooklyn, NY 11210
Hirsch Chitrik 500,000 13.33%
1401 President Street
Brooklyn, NY 11213
Sid Borenstein 125,000 3.33%
1246 East 10th Street
Brooklyn, NY 11230
All officers and directors
as a group (5 persons)(1)(2) 2,530,050 67.47%
- ----------
(1) The shares of Common Stock owned by each person or by the group, and the
shares included in the total number of shares of Common Stock outstanding,
have been adjusted in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, to reflect the ownership of shares
issuable upon exercise of outstanding options, warrants or other common
stock equivalents which are exercisable within 60 days. As provided in such
Rule, such shares issuable to any holder are deemed outstanding for the
purpose of calculating such holder's beneficial ownership but not any other
holder's beneficial ownership.
(2) Includes 93,750 shares of Common Stock issuable upon the exercise of a
stock option granted to Mr. Braun at an exercise price of $3.00 per share.
49
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company operated as an S Corporation prior to the end of 1996 and has
paid out a substantial portion of its earnings to the current stockholders.
These distributions aggregated $100,230, $840,302 and $3,225,431 for the years
ended December 31, 1994, 1995 and 1996, respectively.
The Company's directors are the sole stockholders of a New Jersey
corporation named Heart to Heart Health Care Services, Inc. ("Heart to Heart"),
with offices located at 7 Glenwood Avenue, East Orange, New Jersey 07017. Heart
to Heart, which began its operations in 1995, engages in the home health care
business in northern New Jersey, but not in the State of New York, and had net
revenues of $1,181,174 in the year ended December 31, 1996. Since its inception,
Heart to Heart has utilized Company personnel for its administrative functions
regarding payroll, benefits management and data processing. The Company and
Heart to Heart have entered into a Service Agreement, pursuant to which the
Company will provide administrative services relating to payroll, benefits
management and data processing for a term of 18 months ending June 30, 1997 for
which the Company will be reimbursed for all expenses attributable to such
operations, presently totalling approximately $15,000 per year. The Company is
not a Guarantor of any obligations of Heart to Heart, nor is it engaged in any
business or financing, transactions with Heart to Heart, other than as described
herein.
On February 13, 1995, Samson Soroka resigned as Chief Financial Officer of
the Company. Mr. Soroka entered into a Settlement Agreement and General Release
with the Company on September 28, 1995 (the "Settlement Agreement"), pursuant to
which the Company agreed to pay his base salary of $85,000 per year through
August 13, 1995 and continue his medical insurance coverage through February 13,
1996. In addition, the Company agreed to advance to Mr. Soroka, without
interest, the sum of $25,000 against the cash distributions payable to the
Company's current stockholders and loaned to Mr. Soroka the sum of $125,000,
bearing interest at the same rate charged to the Company under its credit lines.
Mr. Soroka has since repaid his loan, together with accrued interest. Mr. Soroka
agreed to keep confidential all commercial, financial or technical information
concerning the Company which he learned during his employment. The Company and
Mr. Soroka also entered into mutual releases of all claims which they might have
had against each other.
On May 8, 1995, Jerry Braun, Jacob Rosenberg and Samson Soroka contributed
back to the Company an aggregate of 625,000 shares of Common Stock and the
Company issued 500,000 shares of its Common Stock to Hirsch Chitrik and 125,000
shares of Common Stock to Sid Borenstein in consideration for their having
obtained a bank line of credit for the Company of not less than $800,000 at an
interest rate no greater than 2% over the prime rate of Citibank N.A. The credit
line was obtained in 1988 pursuant to a March 31, 1988 agreement between Jerry
Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrik, Sid Borenstein and the
Company, in which they subscribed to purchase shares of Common Stock, subject to
New York State Department of Health
50
<PAGE>
and Public Health Council approval (which was granted on March 24, 1995), and
which provided to Messrs. Chitrik and Borenstein nonvoting equity distributions
of 20% and 5%, respectively.
On November 1, 1995, the Company transferred the land and building located
at 1667 Flatbush Avenue, Brooklyn, New York, which houses its Kings County
Branch office, to 1667 Flatbush. This transfer, which relieved the Company of a
first mortgage obligation aggregating $146,250, was a non-cash distribution to
the current stockholders of S Corporation earnings in the aggregate sum of
$144,927. The Company leases its Kings County Branch office from 1667 Flatbush
until October 31, 2000 for $3,150 per month in rent, which is subject to annual
increases beginning November 1, 1997 equal to 5% of the prior year's monthly
rent. Management believes that the terms of the lease are no less favorable to
the Company than could have been obtained from unaffiliated third parties.
On March 26, 1996, the Company issued a stock option to its President and
Chief Executive Officer, Jerry Braun, for the purchase of 93,750 shares of the
Company's Common Stock at an exercise price of $3.00 per share during the period
ending March 31, 2006. See "Management Savings and Stock Option Plans."
On March 26, 1996, the Company entered into employment agreements with
Jerry Braun and Jacob Rosenberg. See "Management - Employment Agreements."
On July 8, 1996, the Company entered into the Receivables Sale Agreement
with 1667 Flatbush pursuant to which 1667 Flatbush purchased $3,500,000 of the
Company's accounts receivable for a purchase price of $3,150,000. The purchase
price was represented by a negotiable promissory note which bore interest at the
rate of 12% per annum and was payable $1,100,000 on August 1, 1996, $1,100,000
on September 1, 1996 and $950,000 on October 1, 1996. The note was
collateralized by a lien on the accounts receivable purchased from the Company
and was personally guaranteed by each of the members of 1667 Flatbush. The note
was paid in full on September 30, 1996. As a result of the Company's sale of
accounts receivable for less than their face value, the Company recognized a net
charge to its earnings during 1996 in the amount of $204,137.
The transactions described above involve actual or potential conflicts of
interest between the Company and its officers or directors. In order to reduce
the potential for conflicts of interest between the Company and its officers and
directors, prior to entering into any transaction in which a potential material
conflict of interest might exist, the Company's policy has been and will
continue to be that the Company does not enter into transactions with officers,
directors or other affiliates unless the terms of the transaction are at least
as favorable to the Company as those which would have been obtainable from an
unaffiliated source. The Company has no plans to enter into any additional
transactions which involve actual or potential conflicts of interest between the
Company and its officers or directors and will not enter into any such
transactions in the future without first obtaining an independent opinion with
regard to the fairness to the Company of the terms and conditions of any such
transaction.
51
<PAGE>
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Report:
(1) FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.
Balance Sheet as at December 31, 1996.
Statements of Income for the Years Ended December 31, 1996 and
1995.
Statements of Stockholders' Equity for the Years Ended December
31, 1996 and 1995.
Statements of Cash Flows for the Years Ended December 31, 1996
and 1995.
Notes to Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
NONE
(3) EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company.*
3.2 Restated Certificate of Incorporation of the
Company.*
3.3 Certificate of Correction of Restated Certificate of
Incorporation of New York Health Care, Inc.*
3.4 Amendment to the Certificate of Incorporation filed
October 17, 1996.*
52
<PAGE>
3.5 By-laws of the Company.*
3.6 Amendment to the Certificate of Incorporation of the
Company filed December 4, 1996.*
4.1 Form of certificate evidencing shares of Common
Stock.*
4.2 Underwriter's Warrant Agreement and Form of
Underwriter's Warrant.*
10.1 Purchase and Sale Agreement by and between the
Company, National Medical Homecare, Inc., Jerry
Braun and Sam Soroka dated March 18, 1988.*
10.2 Lease for 105 Stevens Avenue, White Plains, New
York by and between the Company and Vincent
Rippa as receiver dated October 30, 1992.*
10.3 Lease for 175 Fulton Avenue, Suite 30IA, Hempstead,
New York by and between and the Company and
Hempstead Associates Limited Partnership dated July
22, 1993.*
10.4 Deed for 1667 Flatbush Avenue, Brooklyn, New York
from Tiara Realty Co. to the Company dated April 22,
1994.*
10.5 Agreement between Jerry Braun, Jacob Rosenberg,
Samson Soroka, Hirsch Chitrik, Sid Borenstein and
the Company dated March 31, 1988.*
10.6 Lease for 49 South Main Street, Spring Valley, New
York by and between the Company and Joffe
Management dated November 1, 1994.*
10.7 Agreement for Provisions of Home Health Aide and
Personal Care Worker Services by and between the
Company and Kingsbridge Heights Health Facilities
Long Term Home Health Care Program dated
November 2, 1994.*
53
<PAGE>
10.8 State of New York Department of Health Office of
Health Systems Management Home Care Service
Agency License for the Company doing business in
Rockland, Westchester and Bronx Counties dated
May 8, 1995.*
10.9 State of New York Department of Health Office of
Health Systems Management Home Care Service
Agency License for the Company doing business in
Dutchess, Orange, Putnam, Sullivan and Ulster
Counties dated May 8, 1995.*
10.10 State of New York Department of Health Office of
Health Systems Management Home Care Service
Agency License for the Company doing business in
Nassau, Suffolk and Queens Counties dated May 8,
1995.*
10.11 State of New York Department of Health Office of
Health Systems Management Home Care Service
Agency License for the Company doing business in
Orange and Rockland Counties dated July 1. 1995.*
10.12 Lease Renewal for 45 Grand Street, Newburgh, New
York by and between the Company and Educational
and Charitable Foundation of Eastern Orange County,
Inc. dated July 12, 1995.*
10.13 Lease for 91-31 Queens Boulevard, Elmhurst, New
York by and between the Company and Expressway
Realty Company dated September 15, 1995.*
10.14 Settlement Agreement and General Release by and
between the Company and Samson Soroka dated
September 28, 1995.*
10.15 Personal Care Aide Agreement by and between the
Company and Nassau County Department of Social
Services dated October 18, 1995.*
54
<PAGE>
10.16 Lease for 1667 Flatbush Avenue, Brooklyn, New
York by and between the Company and 1667 Flatbush
Avenue LLC dated November 1, 1995.*
10.17 State of New York Department of Health Office of
Health Systems Management Home Care Service
Agency License for the Company doing business in
Bronx, Kings, New York, Queens and Richmond
Counties dated December 29, 1995.*
10.18 Home Health Agency Agreement by and between the
Company and the Center for Nursing and
Rehabilitation dated January 1, 1996.*
10.19 Homemaker and Personal Care Agreements by and
between the Company and the County of Rockland
Department of Social Services dated January 1,
1996.*
10.20 Home Health Aide/ Personal Care Worker Services
Agreement by and between the Company and Beth
Abraham Hospital dated January 12, 1996.*
10.21 Homemaker Services Agreement by and between the
Company and the Orange County Department of
Social Services dated February 16, 1996.*
10.22 Personal Care Service Agreement by and between the
Company and the Orange County Department of
Social Services dated February 16, 1996.*
10.23 Certified Home Health Agency Agreement by and
between the Company and New York Methodist
Hospital dated February 28, 1996.*
10.24 Employment Agreement by and between the
Company and Jacob Rosenberg dated March 26,
1996.*
10.25 Employment Agreement by and between the
Company and Jerry Braun dated March 26, 1996.*
55
<PAGE>
10.26 Stock Option Agreement by and between the
Company and Jerry Braun dated March 26, 1996.*
10.27 Home Health Agency Agreement by and between the
Company and the Mount Sinai Hospital Home Health
Agency dated April 1, 1996.*
10.28 Absolute, Unconditional, Irrevocable and Limited
Continuing Guaranty of Payment by and between
Jacob Rosenberg and United Mizrahi Bank and Trust
Company dated May 9, 1996.*
10.29 Absolute, Unconditional, Irrevocable and Limited
Continuing Guaranty of Payment by and between
Jerry Braun and United Mizrahi Bank and Trust
Company dated May 9, 1996.*
10.30 Continuing General Security Agreement by and
between the Company and United Mizrahi Bank and
Trust Company dated May 9, 1996.*
10.31 Agreement for the Purchase of Accounts Receivable
between the Company and 1667 Flatbush Avenue
LLC dated July 8, 1996.*
10.32 401 (k) Plan for the Company.*
10.33 Performance Incentive Plan for the Company.*
10.34 Services Agreement between the Company and Heart
to Heart Health Care Services, Inc., dated January 1,
1996.*
10.35 Employment Agreement by and between the
Company and Gilbert Barnett dated August 27,
1996.*
10.36 Assignment of lease dated October 8, 1996, lease
dated March 31, 1995 and sublease dated May 1995
among the Company, as tenant, Prime Contracting
Design Corp., as assignor, Bellox Realty Corp., as
landlord and Nutriplus Corp., as subtenant.*
56
<PAGE>
10.37 Lease for 6 Gramatan Avenue, Mount Vernon, New
York, 10550 by and between the Company and 6
Gramatan Avenue Corp. dated December 1, 1996.*
10.38 Form of Financial Consulting Agreement with H.J.
Meyers & Co., Inc.*
10.39 Forms of Merger & Acquisition Agreement and
Indemnification.*
11 Computation of Earnings Per Common Share of the
Company.
* Incorporated by reference to Exhibits filed as part of the Company's
Registration Statement on Form SB-2 under S.E.C. File No. 333-08152, which
was declared effective on December 20, 1996.
(b) Reports on Form 8-K. The Company has not yet filed any reports on Form
8-K.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 27, 1997
NEW YORK HEALTH CARE, INC.
By: /s/ Jerry Braun
----------------------------
Jerry Braun
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Jerry Braun President, Chief Executive March 27, 1997
- ------------------------- Officer and Director
Jerry Braun
/s/ Jacob Rosenberg Vice President, Chief Operating March 27, 1997
- ------------------------- Officer, Secretary and Director
Jacob Rosenberg
/s/ Gilbert Barnett Chief Accounting March 27, 1997
- ------------------------- and Financial Officer
Gilbert Barnett
/s/ Samson Soroka Director March 27, 1997
- ------------------------
Samson Soroka
/s/ Hirsch Chitrik Director March 27, 1997
- ------------------------
Hirsch Chitrik
/s/ Sid Borenstein Director March 27, 1997
- ------------------------
Sid Borenstein
58
EXHIBIT 11
NEW YORK HEALTH CARE, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Years Ended
December 31,
-----------------------
1995 1996
---------- ----------
Earnings
Pro forma net income applicable to common stock $ 689,011 $ 316,638
========== ==========
Shares
Weighted average number of common shares outstanding 2,500,000 2,504,032
Additional shares assuming exercise of:
Options with an exercise price of $5.00 or less 23,437 23,437
Additional shares whose proceeds would be necessary to
pay the S Corporation dividend 882,000 882,000
---------- ----------
Weighted average number of common shares and common
share equivalents outstanding 3,405,437 3,409,469
========== ==========
Pro forma net income per common share and common
share equivalents $ .20 $ .09
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NEW YORK
HEALTH CARE, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMETENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,188,450
<SECURITIES> 0
<RECEIVABLES> 2,950,159
<ALLOWANCES> (100,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,468,308
<PP&E> 345,443
<DEPRECIATION> (137,795)
<TOTAL-ASSETS> 4,718,474
<CURRENT-LIABILITIES> 565,342
<BONDS> 0
0
0
<COMMON> 37,500
<OTHER-SE> 4,114,104
<TOTAL-LIABILITY-AND-EQUITY> 4,718,474
<SALES> 0
<TOTAL-REVENUES> 11,920,017
<CGS> 8,172,859
<TOTAL-COSTS> 8,172,859
<OTHER-EXPENSES> 2,661,516
<LOSS-PROVISION> 155,764
<INTEREST-EXPENSE> 163,630
<INCOME-PRETAX> 554,638
<INCOME-TAX> (16,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 570,638
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0
</TABLE>
