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, 1998
[ ] 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. $20,223,674
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. $1,510,038 (as of 4/13/99).
(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: 3,708,030
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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FORWARD LOOKING STATEMENTS
Information provided by the Company in this annual report contains, and
from time to time the Company may disseminate materials and make statements
which may contain, "forward-looking" information, as that term is defined by the
Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources" contains
information concerning the ability of the Company to service its obligations and
other financial commitments as they come due and "Company Strategy" contains
information regarding management's belief concerning the growth opportunities
available to the Company. The aforementioned forward looking statements, as well
as other forward looking statements made in this annual report are qualified in
their entirety by these cautionary statements, which are being made pursuant to
the provisions of the Act and with the intention of obtaining the benefits of
the "safe harbor" provisions of the Act.
The Company cautions investors that any forward-looking statements made by
the Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors, including, but not limited to, the following:
(a) In recent years, an increasing number of legislative proposals
have been introduced or proposed by Congress and in some state legislatures
which would effect major changes in the healthcare system. However, the
Company cannot predict the form of healthcare reform legislation, which may
be proposed or adopted by Congress or by state legislatures. Accordingly,
the Company is unable to assess the effect of any such legislation on its
business. There can be no assurance that any such legislation will not have
a material adverse impact on the future growth, revenues and net income of
the Company.
(b) The Company derives substantial portions of its revenues from
third-party payers including, both directly and indirectly, government
reimbursement programs such as Medicare and Medicaid and some portions of
its revenues from non-governmental sources, such as commercial insurance
companies, health maintenance organizations and other charge-based
contracted payment sources. Both government and non-government payers have
undertaken cost-containment measures designed to limit payments to
healthcare providers. There can be no assurance that payments under
governmental and non-governmental payer programs will be sufficient to
cover the costs allocable to eligible patients. The Company cannot predict
whether or what proposals or cost-containment measures will be adopted or,
if adopted and implemented, what effect, if any, such proposals might have
on the operations of the Company.
(c) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing
facilities, construction of new facilities, purchase or lease of existing
facilities, addition of new services, certain capital expenditures,
cost-containment and reimbursement for services rendered. The failure to
obtain or renew required regulatory approvals or licenses, the delicensing
of facilities owned, leased or operated by the Company or the
disqualification of the Company from participation in certain federal and
state reimbursement programs could have a material adverse effect upon the
operations of the Company.
(d) There can be no assurance that the Company will be able to
continue its substantial historical growth or be able to fully implement
its business strategies or that management will be able to successfully
integrate the operations of its various acquisitions.
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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,
Coram Network, Aetna US Healthcare, Prudential Tri-State, Olsten and New York
Methodist Hospital.
As a result of recent acquisitions, described elsewhere in this annual
report, the Company also operates in Budd Lake, Edison, Shrewsbury, Toms River,
East Orange and Hackensack, New Jersey, where it recently acquired branch
offices whose operations are being integrated with the Company's existing branch
office structure.
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.
On December 8, 1997, a newly-formed wholly-owned subsidiary of the Company,
named "NYHC Newco Paxxon, Inc.", a New York corporation ("NYHC Newco"),
purchased from Metro Healthcare Services, Inc., a New Jersey corporation
("Metro"), the home care business assets (other than accounts receivable) which
Metro operated in West Orange, Budd Lake and Jersey City, New Jersey for a
purchase price consisting of $580,000 paid at closing and a promissory note in
the principal sum of $200,000 payable in eight equal quarterly installments
commencing March 5, 1998 together with accrued interest at a rate equal to 1%
per annum over the prime interest rate published by the Wall Street Journal on
December 8, 1997, adjusted quarterly. The promissory note is subordinated to all
obligations due to the Company's banks or other institutional lenders. The
promissory note and the covenants of NYHC Newco are guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the three offices located in West Orange (expiring October 31, 2000), Budd
Lake (expiring November 30, 2001) and Jersey City, New Jersey (expiring June 30,
1998) in the aggregate sum of $5,638.67 per month, together with various
equipment leases for items of business equipment.
On February 8, 1998, NYHC Newco purchased from Metro the home care business
assets (other than accounts receivable) which Metro operated in Edison,
Shrewsbury and Toms River, New Jersey for a purchase price consisting of
$500,000 paid at closing and a promissory note in the principal sum of $580,000
payable in twelve equal quarterly installments commencing May 5, 1998 together
with accrued interest at a rate equal to 1% per annum over the prime interest
rate published by the Wall Street Journal on February 8, 1998, adjusted
quarterly. The promissory note is subordinated to all obligations due to the
Company's banks or other institutional lenders. The promissory note and the
covenants of NYHC Newco are guaranteed by the Company. As part of the
acquisition transaction, NYHC Newco assumed a leasehold obligation for the one
office located in Toms River, New Jersey (expiring May 1, 1998) in the aggregate
sum of $2,400 per month, together with various equipment leases for items of
business equipment. It also entered into two leases for additional office space;
one in Shrewsbury, New Jersey (expiring February 28, 2001) at a rent of $700 per
month and the other in Edison, New Jersey (expiring May 31, 1999) at a rent of
$1,140 per month.
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On March 26, 1998, NYHC Newco purchased from Heart to Heart Healthcare
Services, Inc., a New Jersey corporation ("Heart to Heart") the home care
business assets (other than accounts receivable) which Heart to Heart operated
in East Orange and Hackensack, New Jersey for a purchase price consisting of a
promissory note in the principal sum of $1,150,000 payable in 24 equal quarterly
installments commencing June 26, 1998 together with accrued interest at a rate
equal to 1% per annum over the prime interest rate published by the Wall Street
Journal on March 26, 1998, adjusted quarterly. The promissory note is
subordinated to all obligations due to the Company's banks or other
institutional lenders. The promissory note and the covenants of NYHC Newco are
guaranteed by the Company. As part of the acquisition transaction, NYHC Newco
assumed leasehold obligations for the two offices located in East Orange
(expiring August 31, 2002) and Hackensack, New Jersey (expiring May 31, 1998) in
the aggregate sum of $1,815 per month, together with various equipment leases
for items of business equipment.
As noted in the Company's December 20, 1996 prospectus and in Item 12. -
Certain Relationship and Related Transactions, certain of its directors are the
sole stockholders of Heart to Heart. The Company therefore obtained an
independent opinion that the terms and conditions of the acquisition are, under
all circumstances, fair to the Company.
The Company is accounting for each of these acquisitions as a "purchase" in
accordance with Generally Accepted Accounting Principles.
On February 22, 1999 NYHC Newco completed the acquisition of the assets of
a home health care office in Shrewsbury, New Jersey, formerly owned by Staff
Builders Services, Inc. for the purchase price of $65,000. The newly acquired
Shrewsbury office had generated annualized revenues of approximately $600,000 by
providing home care services throughout Central New Jersey.
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. In 1997, HCFA estimated that 3.4
million enrollees received fee-for-service home health services in 1997,
representing a greater than 40% rise from the number of home health recipients
in 1990. For the period 1990-1997, Medicare home health expenditures increased
from $3.9 billion to an estimated $17.2 billion. Most of the rise in spending
occurred as a result of the increase in visits, from 70 million inn 1990 to an
estimated 270 million in 1997. Medicaid home health benefits between 1994 and
1997 have increased from approximately $7 billion and $12 billion. 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 approximately to $1,147 billion in 1998 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 payers 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) and rehabilitation equipment
permitting treatments at home, which used to require hospital settings for
pediatric and adult populations.
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 June 1998, 665,357 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 National Cancer Institute estimates that 8.2 million of Americans
alive today have a history of cancer. About 1,221,800 new cancer cases are
expected to be diagnosed in 1999. 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 payers. 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
professional and 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 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 70% of the Company's total net revenues in 1998 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." The Company is also approved by the Board of Nursing in
New Jersey to train "Certified Home Health 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 employee-funded health
insurance. 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. All nurses
working in specialty areas, must have at least two years of experience.
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While the provision of licensed professional nursing services accounted for
less than 30% of the Company's net revenues in 1998, the Company has expanded
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 continues to move rapidly towards its objective 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, 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.
On December 8, 1997, a newly-formed wholly-owned subsidiary of the Company,
named "NYHC Newco Paxxon, Inc.", a New York corporation ("NYHC Newco"),
purchased from Metro Healthcare Services, Inc., a New Jersey corporation
("Metro"), the home care business assets (other than accounts receivable) which
Metro operated in West Orange, Budd Lake and Jersey City, New Jersey for a
purchase price consisting of $580,000 paid at closing and a promissory note in
the principal sum of $200,000 payable in eight equal quarterly installments
commencing March 5, 1998 together with accrued interest at a rate equal to 1%
per annum over the prime interest rate published by the Wall Street Journal on
December 8, 1997, adjusted quarterly. The promissory note is subordinated to all
obligations due to the Company's banks or other institutional lenders. The
promissory note and the covenants of NYHC Newco are guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the three offices located in West Orange (expiring October 31, 2000), Budd
Lake (expiring November 30, 2001) and Jersey City, New Jersey (expiring June 30,
1998) in the aggregate sum of $5,638.67 per month, together with various
equipment leases for items of business equipment.
On February 8, 1998, NYHC Newco purchased from Metro the home care business
assets (other than accounts receivable) which Metro operated in Edison,
Shrewsbury and Toms River, New Jersey for a purchase price consisting of
$500,000 paid at closing and a promissory note in the principal sum of $580,000
payable in twelve equal quarterly installments commencing May 5, 1998 together
with accrued interest at a rate equal to 1% per annum over the prime interest
rate published by the Wall Street Journal on February 8, 1998, adjusted
quarterly. The promissory note is subordinated to all obligations due to the
Company's banks or other institutional lenders. The promissory note and the
covenants of NYHC Newco are guaranteed by the Company. As part of the
acquisition transaction, NYHC Newco assumed a leasehold obligation for the one
office located in Toms River, New Jersey (expiring May 1, 1998) in the aggregate
sum of $2,400 per month, together with various equipment leases for items of
business equipment. It also entered into two leases for additional office space;
one in Shrewsbury, New Jersey (expiring February 28, 2001) at a rent of $700 per
month and the other in Edison, New Jersey (expiring May 31, 1999) at a rent of
$1,140 per month.
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On March 26, 1998, NYHC Newco purchased from Heart to Heart Healthcare
Services, Inc., a New Jersey corporation ("Heart to Heart") the home care
business assets (other than accounts receivable) which Heart to Heart operated
in East Orange and Hackensack, New Jersey for a purchase price consisting of a
promissory note in the principal sum of $1,150,000 payable in 24 equal quarterly
installments commencing June 26, 1998 together with accrued interest at a rate
equal to 1% per annum over the prime interest rate published by the Wall Street
Journal on March 26, 1998, adjusted quarterly. The promissory note is
subordinated to all obligations due to the Company's banks or other
institutional lenders. The promissory note and the covenants of NYHC Newco are
guaranteed by the Company. As part of the acquisition transaction, NYHC Newco
assumed leasehold obligations for the two offices located in East Orange
(expiring August 31, 2002) and Hackensack, New Jersey (expiring May 31, 1998) in
the aggregate sum of $1,815 per month, together with various equipment leases
for items of business equipment.
As noted in the Company's December 20, 1996 prospectus and in Item 12. -
Certain Relationship and Related Transactions, certain of its directors are the
sole stockholders of Heart to Heart. The Company therefore obtained an
independent opinion that the terms and conditions of the acquisition are, under
all circumstances, fair to the Company.
On February 22, 1999, NYHC Newco completed the acquisition of the assets
of a home health care office in Shrewsbury, New Jersey, formerly owned by Staff
Builders Services, Inc., for a purchase price of $65,000. The newly acquired
Shrewsbury office generated annualized revenues of approximately $600,000 by
providing home care services throughout central New Jersey.
The Company management believes that it has successfully integrated all of
its acquisitions, with minimum interruptions to its daily operations. This has
been accomplished by the formation of a mergers and acquisitions ("M&A") group,
which includes Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Vice President of Clinical Operations. The Company has integrated
its billing, payroll and clinical services to all new locations to ensure they
meet its high quality standards. The experience acquired during this process
should allow the Company to continue down its path of significant M&A activity
in order to become one of the leading home health agencies in the New York
metropolitan area.
The Company is accounting for each of these acquisitions as a "purchase" in
accordance with Generally Accepted Accounting Principles.
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. In December 1997, the Company
acquired three branch offices in West Orange, Budd Lake and Jersey City, New
Jersey. In February 1998, the Company acquired an additional three branch
offices in Edison, Shrewsbury and Toms River, New Jersey. In March 1998, the
Company acquired another two branch offices in East Orange and Hackensack, New
Jersey. In February 1999, the Company acquired the assets of a branch office of
Staff Builders in Shrewsbury, New Jersey. See Item 1(a) - General Development of
Business; Item 2 - Description of Properties; Item 6 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources; and Item 12 - Certain Relationships and Related Transactions.
The Company intends to open additional branch offices
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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
further 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 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 in order to increase its very
small market share. However, there can be no assurance that the Company will
expand its infusion therapy business or, if expanded, that it will conduct such
a business on a profitable basis.
Professional Care Resources
The Company intends to continue its expansion of 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 service directors 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 12 principal and
branch offices and three recruitment and training, offices. 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, nursing
supervisor, 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 contracts, referrals from
hospitals, community-based health care institutions and social service agencies,
case management and insurance companies. Referrals from these sources accounted
for substantially all of the Company's net revenues in 1998. 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.
Approximately 150 such contracts were in effect as of December 31, 1998.
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 1998 1997
--------------------- ----------- ---------
New Jersey Medical Assistance Program 21.4% .7%
County Departments of Social Services(l) 18.6% 22.7%
Beth Abraham Health Services 8.3% 10.0%
Kingsbridge Medical Center 5.5% 6.4%
Center for Nursing and Rehabilitation 2.7% 5.0%
- ----------
(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.
Overall, the Company's ten largest referring institutions accounted for
approximately 67% of net revenues for 1998 and 68% of net revenues for 1997.
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 payer sources in order
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to accelerate the collectibility of its accounts receivable.
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 year ended December 31, 1998, the Company's
DSO was 103, compared to 122 days for the year ended December 31, 1997. The
improvement of 19 days in DSO is the net effect of combining the New Jersey
DSO's (which consist primarily of medicaid billings) of 39 days and the New
York's DSO's which are 135 days.
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.
In the opinion of management, there is no reason to believe that any
computer system or software used internally by the Company will materially
affect transactions with any customer, supplier or business partner, now or in
the future. The Company cannot predict the impact that year 2000 failure of any
computer system operated by the Company's suppliers and customers will have on
the Company's operations.
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 and New Jersey 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 1997 and 1998, payments from referring institutions which
receive direct payments from Medicare and Medicaid, together with direct
reimbursement to the Company from Medicaid, accounted for approximately 94% and
95%, respectively, of net revenues. For the same periods, a significant number
of referring institutions with home health care programs accounted for
approximately 69% and 54%, respectively, of net revenues for 1997 and 1998.
Direct reimbursements from private insurers, prepaid health plans, patients and
other private sources accounted for approximately 6% and 5% of net revenues for
the calendar years 1996 and 1997, 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
and 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 total quality management program including 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" from
JCAHO after its triannual survey in November 1997. 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 Professional Advisory Board
for its branch offices, which consists of a physician, nursing professionals and
representatives of branch management. The Professional 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 the director of nursing and branch
managers. The Company believes that the internal review process is an effective
management tool for the director of nursing and 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 States of New York and New Jersey, 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
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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
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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 has 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.
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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., Pediatric Services of America, 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
On March 31, 1999, the Company had 1,335 employees, of whom 85 are
salaried, including 3 executive officers, 1 vice president of operations, 2
regional managers, 1 program director, 1 administrative director of field
operations, 9 branch managers, 8 directors of nursing, 7 nursing supervisors, 1
director of patient services, 22 accounting/clerical staff and 30 field staff
supervisors. The remaining 1,250 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
are 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.
The following is the amount of net offering proceeds which have been used
for each of the purposes listed below as of December 31, 1998.
Acquisition of other businesses $2,711,663
Funding of infusion therapy division (1) $ 45,000
Funding of pediatric division (2) --
Establishment of new branch offices (3) $ 92,593
Sales and marketing $ 143,000
Establishment of new principal office $ 106,283
Upgrade of facilities and computer systems $ 153,132
Working capital (1)(2)(3)(4) $ 587,363
The uses and proceeds described above and in the footnotes below do not
represent a material change in the uses of proceeds described in the
Registrant's December 20, 1996 prospectus.
1. Working capital of approximately $30,000 has also been used to fund the
Company's infusion therapy division receivables.
2. Working capital of approximately $70,000 has been used to fund the
Company's pediatric division receivables.
3. The balance of the $500,000 use of proceeds allocation for establishing new
branch offices has been used for that purpose in the acquisition of other
businesses.
4. Approximately $400,000 of working capital has been used to finance the
receivables of the eight New Jersey branch offices which were acquired from
other businesses.
The Registrant's current bank credit lines have increased from $3,500,000
to $6,000,000 (after the repayment noted above) of which $2,600,000 has been
utilized as of December 31, 1998. The Registrant will draw down from its bank
credit lines, as disclosed in the prospectus, to fund the additional uses of
proceeds which remain unfunded.
A portion of the proceeds allocated to acquisition of other businesses were
used to acquire the home care business assets of Heart to Heart Healthcare
Services, Inc. ("Heart to Heart"), which was an affiliate of the Registrant as
described below.
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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
<PAGE>
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 outstanding 480,000 of its Class A Convertible
Preferred Stock, each share of which is convertible into one share of its common
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 recently recaptured a 2,500 square foot sublet
portion to house its new HRA division.
The Company acquired the lease and sublease from an unaffiliated person
pursuant to an agreement dated October 8, 1996 in consideration for $90,000.
20
<PAGE>
The table below sets forth certain information with respect to each of the
Company's existing branch and recruitment 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 11/01/99 $41,674
Nassau County
Branch Office
175 Fulton Avenue
Hempstead, NY 11550 9/93 1,600 10/31/03 $24,225
Westchester County
Branch Office
6 Gramatan Avenue
Mt. Vernon, NY 10550 12/96 2,000 10/30/01 $25,200
Rockland County
Branch Office
49 South Main Street
Spring Valley, NY 10977 10/94 1,500 9/30/00 $17,568
Orange County
Branch Office
45 Grand Street
Newburgh, NY 11250 9/92 1,500 4/30/01 $10,800
Queens
Recruitment Office
91-31 Queens Blvd.
Elmhurst, NY 11373 10/95 500 10/31/00 $11,400
Staten Island
Recruitment Office
37 New Dorp Plaza
Staten Island, NY 10306 6/97 500 5/31/98 $ 9,300
White Plains (3)
Recruitment Officer
237 Mamaroneck Avenue
White Plains NY 10605 1/12/99 500 1/31/99 $ 6,915
West Orange
Branch Office (4)
111 Northfield Avenue
Suite 310
West Orange, NJ 07052 12/97 1,500 12/31/99 $28,424
Jersey City
Branch Office
2780 Kennedy Blvd.
Jersey City, NJ 07306 12/97 1,000 4/01/01 $17,400
Budd Lake
Branch Office
389 Route 46
Budd Lake, NJ 07828 12/97 1,700 11/30/01 $12,000
Shrewsbury
Branch Office
167 Avenue at the Commons,
Suite 11B
Shrewsbury, NJ 07702 2/98 700 2/28/01 $ 8,601
Toms River
Branch Office
617 Highway 37 West
Toms River, NJ 08753 2/98 2,400 5/01/01 $28,200
Edison
Branch Office
85 Route 27
Edison, NJ 08820 2/98 1,500 5/31/99 $13,680
East Orange
Branch Office
60 Evergreen Place
East Orange, NJ 07018 3/98 1,500 8/31/02 $19,200
Hackensack
Recruitment Office
144 Main Street
Suite 212
Hackensack, NJ 07601 5/97 300 6/30/99 $ 4,140
- ----------
(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.
(3) The Company did not renew this lease.
(4) The Company's West Orange location has been merged into the East Orange
office.
21
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's results of operations or financial position.
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
There were no matters submitted to a vote of the Registrant's security
holders during the fourth quarter of 1998 through the solicitation of proxies or
otherwise.
<PAGE>
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 1998
- -----------
First Quarter 3.50 1.50
Second Quarter 1.958 1.562
Third Quarter 1.50 1.125
Fourth Quarter 1.187 .83
Fiscal 1999
- -----------
First Quarter 1.312 .771
At March 26, 1999 the Company had 49 holders of record and more than 492
beneficial holders of its shares of Common Stock.
On April 13, 1999, the last sale price of the shares of Common Stock as
reported by NASDAQ was $1.250 per share.
22
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fiscal year ended December 31, 1998 compared with fiscal year ended December 31,
1997.
Results of operations
Revenues for the year ended December 31, 1998 increased 52.9% to
approximately $20,224,000 from approximately $13,231,000 for the year ended
December 31, 1997. Approximately 5.4% or $380,000 of the increase is
attributable to increased hours of service provided under existing and new
contracts in the State of New York. The remaining increase of $6,613,000 is a
result of the acquisition of seven offices in New Jersey in December 1997,
February 1998 and March 1998.
Cost of professional care of patients for the year ended December 31, 1998
increased to approximately $13,795,000 from approximately $9,248,000 for the
year ended December 31, 1997. The increase resulted from hiring additional home
health care personnel to service the increased business in New York and hiring
the staff of the seven offices purchased in New Jersey. The cost of professional
care of patients as a percentage of revenues decreased 1.7% to approximately
68.2% for the year ended December 31, 1998 from approximately 69.9% for year
ended December 31, 1997. The decrease was primarily caused by reduced rates of
unemployment taxes and workers compensation insurance as a result of the
Company's improved experience ratings.
Selling, general and administrative expenses for the year ended December 31,
1998 increased to approximately $5,237,000 from approximately $3,535,000 for the
year ended December 31, 1997. The increase resulted primarily from the
acquisition of seven offices in New Jersey. Selling, general and administrative
expenses as a percentage of revenue decreased to 25.9% from 26.7% due to
allocation of corporate overhead over a larger revenue base.
Interest expense for the year ended December 31, 1998 increased to approximately
$321,000 as compared to approximately $22,000 for the year ended December 31,
1997, primarily as a result of increased borrowing to finance the purchases of
the New Jersey offices and, secondarily, the need to fund the operations of
these offices as the receivables grew to normal levels.
The provision for Federal, State and Local taxes for the year ended December 31,
1998 increased to approximately $256,000 from approximately $187,000 for the
year ended December 31, 1997. This increase is as a result of increased income
for the period.
In view of the foregoing, net income for the year ended December 31, 1998
increased 85.3% to approximately $341,000 as compared to approximately $184,000
for the year ended December 31, 1997.
Liquidity and Capital Resources
For the year ended December 31, 1998, net cash used in operations was $309,000
as compared to $1,413,000 during the year ended December 31, 1997, a decrease of
$1,104,000 or 78.1%. The $295,000 used in the year ended December 31, 1998 was
principally for interest paid on liabilities incurred for the purchases of the
New Jersey offices. The $1,413,000 used in the year ended December 31, 1997 was
principally due to the approximately $1,930,000 increase in accounts receivable
and unbilled services, offset by an approximately $264,000 increase in accrued
payroll and accounts payable and approximately $184,000 in net income, whereas
the increase in accounts receivable in 1997 was primarily the result of the sale
of receivables in 1996 and their subsequent growth back to normal levels. Net
cash used in investing activities approximates $726,000 primarily for the
acquisition of the New Jersey offices. Net cash provided by financing activities
for the year ended December 31, 1998 totaled $1,056,000 compared to the
$1,132,000 provided in the year ended
23
<PAGE>
December 31, 1997. Approximately $800,000 borrowed in the year ended December
31, 1998 was used for the acquisition of the New Jersey offices and $70,000 was
used to fund the start up of the HRA contract, which began servicing patients on
January 6, 1999.
As of December 31, 1998, approximately $5,869,000 (approximately 59%) of the
Company's total assets consisted of accounts receivable from clients who are
reimbursed by third-party payors, as compared to $4,748,000 (approximately 74%)
as of December 31, 1997, a decrease of 15%. Such payors generally require
substantial documentation in order to process claims. The decrease of accounts
receivable from clients who are reimbursed by third-party payors as a percentage
of total assets is the result of an increase in total assets due to the
acquisition of intangible assets purchased with the New Jersey offices in 1998.
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 year ended December 31, 1998, the Company's DSO was
103, compared to 122 days for the year ended December 31, 1997. The improvement
of 19 days in DSO is the net effect of combining the New Jersey DSO's (which
consist primarily of medicaid billings) of 39 days and the New York's DSO's
which are 135 days.
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 and 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.
The Company 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.
Potential Regulatory Changes
There have been recent news reports concerning federal budget negotiations
regarding potential changes in the way the Government will reimburse home health
care companies in the future, including the possibility of capitation. While the
Company is not currently a Medicare-Certified Home Health Agency subject to
these changes, most of the Company's referral sources are and they may be
negatively impacted by future legislation which may be adopted to control home
health care costs. While it is still premature to discern what impact, if any,
the potential changes may have on the Company's operations, there can be no
assurance that future legislation will not result in reduced reimbursement rates
from referral sources.
24
<PAGE>
Year 2000 Issues
The "Year 2000" Issue is the result of computer systems and programs using
two digits rather than four digits to define the applicable year. Computer
systems and programs that have date-sensitive applications may recognize a date
using "00" as the year 1900 rather than the Year 2000. This can result in system
failures or miscalculations causing disruption of operations including, but not
limited to, complete system failures, erroneous results and inability to process
transactions, send invoices, make payments or otherwise conduct normal business
activities.
The Company has initiated a "Year 2000" compliance program in which it has
identified the following areas of significant risk; computer hardware, computer
software and cash flow.
The Company presently operates two independent computer networks; a
Unix-based system for payroll and billing functions and a Windows NT-based
system for other accounting, word processing and database functions. The
Company's billing system has been modified by the software vendor and is
expected to be Year 2000 compliant. The Company expects to complete testing of
the software by the end of the second quarter of 1999. The Windows NT-based
system for the Company's general ledger and accounting software, as well as its
Microsoft Office software package for word processing and database functions,
are already Year 2000 compliant.
The Company has obtained the services of an outside consultant to make an
inventory of all of its computer hardware and software in all of its offices and
to design and implement a communications network that will link all of the
Company's facilities and computer systems. The principal focus of that
assessment is on the Company's hardware and operating systems for its computer
network and telephone system, which have the most significant effect on the
Company's ability to conduct business in a normal manner. The new communications
network, and all new hardware and software, will be Year 2000 compliant. At the
present time, all computers in the corporate headquarters have been replaced.
Upgrading and implementation of the new system will be completed at the branch
office level in the second quarter of 1999, where the Company anticipates
replacing approximately 25 desktop computers which may not function properly on
the Year 2000 compliant network, which is expected to be fully operational
during the second quarter of 1999.
The Company has begun formal communications with its significant payors
and vendors to determine the extent to which the Company may be vulnerable to
those third parties' failures to remediate their own Year 2000 issues. The
Company's management believes that the failure of such vendors to remediate
their Year 2000 issues in a timely manner will not have a material adverse
effect upon the Company. However, there can be no assurance that the computer
systems of such third parties will be remedied in a timely manner or that
failures or incompatibility issues arising out of the remediation methods of
such third parties will not have a material adverse effect on the Company.
Management believes that, so long as the Company's ability to provide its
services and process its payroll and billing is unaffected by Year 2000 issues,
the Company's available line of credit
25
<PAGE>
will be adequate to sustain operations in the event significant payors are
temporarily unable to make timely payment of their obligations to the Company.
At the present time, the Company has a Year 2000 remediation budget of
approximately $50,000; $25,000 of which is for the replacement of non-compliant
hardware, $15,000 for consulting services and $10,000 for software and
contingencies.
The Company's assessment of its Year 2000 issues is based upon
management's best estimates, which have been derived utilizing assumptions of
future events, including the availability of certain resources, third-party
modification plans and other factors, and there can be no assurance that
management's assessment of the Company's Year 2000 issues will not have to be
revised as a result of Year 2000 compliance problems which may be revealed in
the future and which could have a material adverse effect on the Company.
26
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NEW YORK HEALTH CARE, INC.:
Independent Auditors' Report 28
Consolidated Balance Sheet at December 31, 1998 29
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1998 30
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1998 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 32
Notes to Consolidated Financial Statements 42-47
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
New York Health Care, Inc.
We have audited the accompanying consolidated balance sheet of New York Health
Care, Inc. and Subsidiary (the "Corporation") as of December 31, 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1997 and 1998. 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. and
Subsidiary as of December 31, 1998, and the results of its operations and its
cash flows for the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
M.R. Weiser & Co.LLP
Certified Public Accountants
New York, NY
March 29, 1999
28
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
A S S E T S
Current assets:
Cash and cash equivalents $ 192,675
Accounts receivable, net of allowance for uncollectible
amounts of $168,000 5,722,406
Unbilled services 293,877
Prepaid expenses 140,947
Due from affiliates 6,475
Deferred tax assets 77,000
-----------
Total current assets 6,433,380
Property and equipment, net 484,667
Intangibles, net 3,024,548
Deposits 45,852
-----------
Total assets $ 9,988,447
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 564,957
Note payable - bank 2,600,000
Current maturities of long term debt 517,323
Accounts payable and accrued expenses 379,684
Income taxes payable 35,215
-----------
Total current liabilities 4,097,179
-----------
Deferred tax liability 54,000
Long-term debt, less current maturities 624,038
-----------
678,038
-----------
Commitments, contingencies and other comments
Shareholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized;
480,000 issued 4,800
Common stock, $.01 par value, 12,500,000 shares authorized;
3,750,000 shares issued; 3,708,030 outstanding 37,500
Additional paid-in capital 4,659,518
Retained earnings 562,336
-----------
5,264,154
Less: Treasury stock (41,970 common shares at cost) (50,924)
-----------
Total shareholders' equity 5,213,230
-----------
Total liabilities and shareholders' equity $ 9,988,447
===========
See accompanying notes to consolidated financial statements
29
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended
December 31,
-----------------------------
1997 1998
---- ----
Net patient service revenue $ 13,231,066 $ 20,223,674
------------ ------------
Expenses:
Professional care of patients 9,248,446 13,794,969
General and administrative 3,534,955 5,236,740
Bad debts expense 51,000 150,000
Depreciation and amortization 75,461 197,826
------------ ------------
Total operating expenses 12,909,862 19,379,535
------------ ------------
Income from operations 321,204 844,139
------------ ------------
Nonoperating income (expenses):
Interest income 45,190 56,720
Other income 26,391 17,273
Interest expense (21,622) (320,980)
------------ ------------
Nonoperating income (expenses), net 49,959 (246,987)
------------ ------------
Income before provision for income taxes 371,163 597,152
------------ ------------
Provision (credit) for income taxes:
Current 232,300 234,000
Deferred (45,000) 22,000
------------ ------------
187,300 256,000
------------ ------------
Net income $ 183,863 $ 341,152
============ ============
Basic and diluted earnings per share $ 0.05 $ 0.09
============ ============
Weighted average shares outstanding 3,750,000 3,739,864
============ ============
Diluted weighted average shares outstanding 3,750,000 3,933,179
============ ============
See accompanying notes to consolidated financial statements
30
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Preferred Treasury
Common Stock Stock Additional Stock
------------ -------------- Paid-In ---------------- Retained
Shares Amount Shares Amount Capital Shares Amount Earnings Total
---------- ------ ------ ------ ----------- ------ ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,750,000 $37,500 $4,076,783 $ 37,321 $4,151,604
Net income 183,863 183,863
Additional costs of initial
public offering common
stock (11,976) (11,976)
--------- ------- ------- ------ ---------- ------ -------- -------- ----------
Balance at December 31,
1997 3,750,000 37,500 4,064,807 221,184 4,323,491
Treasury stock purchased
during June through December
($1.30 average per share) 51,970 $(67,663) (67,663)
Exercise of stock warrants
on June 2, 1998 (489) (10,000) 16,739 16,250
Issuance of preferred stock on
August 6, 1998 in exchange
for promissory note ($1.25
per share) 480,000 $4,800 595,200 600,000
Net income 341,152 341,152
--------- ------- ------- ------ ---------- ------ -------- -------- ----------
Balance at December 31, 1998 3,750,000 $37,500 480,000 $4,800 $4,659,518 41,970 $(50,924) $562,336 $5,213,230
========== ======= ======= ====== ========== ======= ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 183,863 $ 341,152
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 61,532 197,826
Bad debts expense 51,000 150,000
Deferred tax (credit) provision (45,000) 22,000
Deferred revenue (36,000)
Changes in operating assets and liabilities:
Increase in accounts receivable and unbilled services (1,749,179) (1,370,283)
Increase in due from affiliates (6,475)
Decrease (increase) in prepaid expenses 57,043 (15,953)
Increase in deposits (1,110) (19,053)
(Increase) decrease in accounts receivable due after one year (180,604) 180,604
Increase in accrued payroll 102,571 207,483
Increase in accounts payable and accrued expenses 161,312 107,153
Decrease in income taxes payable (54,537) (67,818)
----------- -----------
Net cash used in operating activities (1,413,109) (309,364)
----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (108,488) (154,507)
Payments for purchase acquisitions and associated costs (624,728) (571,602)
Costs incurred for future acquisitions (2,577)
----------- -----------
Net cash used in investing activities (735,793) (726,109)
----------- -----------
Cash flows from financing activities:
Borrowings under notes payable 1,150,000 1,450,000
Repayment of long-term debt (5,713) (342,298)
Exercise of warrants 16,250
Net charges from issuance of common stock (11,976)
Purchase of treasury stock __________ (67,663)
-----------
Net cash provided by financing activities 1,132,311 1,056,289
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,016,591) 20,816
Cash and cash equivalents at beginning of year 1,188,450 171,859
----------- -----------
Cash and cash equivalents at end of year $ 171,859 $ 192,675
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and the Company:
The accompanying consolidated financial statements include the accounts
of New York Health Care, Inc. ("NYHC") and its wholly owned subsidiary
which was formed on August 20, 1997, NYHC Newco Paxxon, Inc. D/B/A
Helping Hands Healthcare ("Helping Hands"), (the "Corporation"). All
material intercompany transactions and accounts have been eliminated in
consolidation.
The Corporation provides services of registered nurses and
paraprofessionals to patients throughout New York and New Jersey.
On December 7, 1997, the Corporation purchased the customer lists,
employee lists and other intangible assets of three offices of Metro
Healthcare Services, Inc. at a cost of $780,000. The Company also
incurred costs of approximately $75,000 related to the acquisition.
Except for $30,000 which was allocated to fixed assets, the aggregate of
the purchase price and these costs have been allocated to goodwill, which
is being amortized using the straight-line method over a period of
twenty-five years.
On February 8, 1998, the Corporation purchased the customer lists and
other intangible assets of an additional three offices in the State of
New Jersey from Metro Healthcare Services, Inc. for $500,000 cash and a
promissory note in the amount of $580,000. The acquisition was accounted
for as a purchase and, accordingly, the assets acquired have been
recorded at their estimated fair values at the date of acquisition. The
excess of cost over fair values of the purchased business has been
allocated to goodwill, customer lists and other intangible assets and is
being amortized over 25 and 10 years, respectively. Operating results of
the business have been included in the consolidated financial statements
of the Corporation since the date of acquisition.
The purchase price of $1,080,000 plus costs incurred in making the
acquisition ($73,000), aggregating $1,153,000, exceeded the fair value of
the net assets acquired at the date of acquisition by $1,123,000. The
purchase price has been allocated to furniture and fixtures for $30,000,
$79,000 was assigned to contract value and employee lists and $1,044,000
was assigned to goodwill.
On March 26, 1998, the Corporation purchased the customer lists and other
intangible assets of Heart to Heart Health Care Services, Inc. (Heart to
Heart). The entity is related to the Corporation through common ownership
and management. The aggregate purchase price is $1,150,000. This amount
was paid through issuance of a promissory note. The acquisition was
accounted for as a purchase and, accordingly, the assets acquired have
been recorded at their estimated fair values at the date of acquisition.
The excess of cost over fair values of the purchased business has been
allocated to goodwill, customer lists and other intangible assets and is
being amortized over 25 and 10 years, respectively. Operating results of
the business have been included in the consolidated financial statements
of the Corporation since the date of acquisition.
33
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price of $1,150,000 plus costs incurred in making the
acquisition ($45,000), aggregating $1,195,000 exceeded the fair value of
the net assets acquired at the date of acquisition by $1,185,000. The
purchase price has been allocated to furniture and fixtures for $10,000;
$55,000 was assigned to contract value and employee lists and $1,130,000
was assigned to goodwill.
The following unaudited pro forma summary for 1997 and 1998 combines the
results of operations of the Corporation and the other entity acquired
March 26, 1998 as if the acquisition had occurred on January 1, 1997. The
proforma summary for 1998 does not include the results of operations from
January 1, 1998 to the date of acquisition for the February 8, 1998
purchase because it occurred near the beginning of the year. The
unaudited proforma summary is not necessarily indicative either of the
results of operations that would have occurred had the purchase been made
during the periods presented, or of future results of operations of the
combined companies:
Unaudited 1997 1998
------------------------------- ----------- -----------
Proforma revenues $20,881,956 $20,719,738
Proforma net income 394,924 370,924
Proforma basic and dilutive
earnings per share $.11 $.10
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 on the date
services are rendered. In 1997, the Corporation entered into a contract
that has payment terms greater than one year. For these services, the
Corporation records the accounts receivable at the present value of the
face amount of the bill on the date services are rendered. In 1998, this
contract was amended and payment terms are less than one year. Unbilled
services represent amounts due for services rendered which were not
billed at the end of each period.
34
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Long-lived Assets:
The Corporation's policy is to evaluate long-lived assets, goodwill and
certain identifiable intangibles for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. This evaluation is based on a number of
factors, including expectations for operating income and undiscounted
cash flows that will result from the use of such assets. The Corporation
has not identified any such impairment or losses.
Income 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. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
Cash Equivalents:
For purposes of the statements 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:
The Corporation applies SFAS 123 "Accounting for Stock Based
Compensation" in accounting for its stock based compensation plan. As
permitted by SFAS 123, the Corporation applies Accounting Principles
Board Opinion No. 25 and related interpretations for expense recognition.
35
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warrants issued in connection with the Corporation's initial public
offering (see Note 12) 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 a charge to
operations. The estimated fair value of the warrants was determined to be
insignificant and, accordingly, has not been reflected on the
Corporation's balance sheet and other stock based compensation
agreements.
Earnings Per Share:
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period.
Diluted earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive
securities including the presumed conversion of the Preferred Stock from
the date of its issuance. The options and warrants were not included in
the computation of diluted earnings per share because the exercise price
was greater than the average market price of the stock. Dividends on the
Class A Convertible Preferred Stock are noncumulative and not payable
until 1999. Accordingly, the 9% dividends have not been included in the
computation of basic or diluted earnings per share.
Start-Up Costs:
During the year ending December 31, 1998, the Corporation adopted
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." Start-up activities, which include (i) one-time activities
relating to the introduction of a new product or service, conducting
business in a new territory, conducting business with a new class of
customer or commencing a new operation and (ii) organization costs, are
expensed as incurred. The Company believes that there is no cumulative
effect on the amount of retained earnings at December 31, 1998 resulting
from the adoption of SOP 98-5. During the year ended December 31, 1998,
start up costs of approximately $34,000 was expensed as incurred.
New Accounting Pronouncements:
In 1998, SFAS 130, "Reporting Comprehensive Income" and SFAS 131
"Disclosures about Segments of an Enterprise and Related Information"
became effective. The Corporation operates in one business segment. These
standards expand or modify disclosures and, accordingly, have no effect
on the Corporation's financial position, results of operations or cash
flows.
36
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This statement, which becomes effective in
1999, requires that certain costs of developing or obtaining software for
internal use be capitalized. The Corporation does not expect the
statement to have a material affect on the Company's financial position,
results of operations or cash flows.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1998:
Machinery and equipment $465,498
Furniture and fixtures 177,904
Leasehold improvements 116,745
---------
760,147
Less accumulated depreciation and amortization 275,480
---------
$484,667
=========
At December 31, 1998, the amounts shown above include assets of
approximately $160,750 under capitalized leases and accumulated
depreciation of approximately $ -0-, relating thereto.
3. INTANGIBLES:
Intangibles consist of the following at December 31, 1998:
Lives
Goodwill $3,008,834 25 years
Contract value 62,000 10 years
Customer lists 72,000 10 years
----------
3,142,834
Less accumulated amortization 118,286
----------
$3,024,548
==========
4. LINE OF CREDIT:
On January 26, 1998, the Corporation entered into a $6,000,000 line of
credit agreement with a bank which expires June 30, 1999. The
availability of the line of credit is based on a formula of eligible
accounts receivable. The line is collateralized by all property and
assets of the Corporation. The Corporation has also guaranteed the line
of credit. At December 31, 1998, $2,600,000 was outstanding. Certain
borrowings under the agreement bear interest at prime plus 1/2 (8.25% at
December 31, 1998), and other borrowings are due between March and May
1999 and bear interest between 7.8% and 7.6%.
37
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1998:
Capitalized computer equipment lease, payable
in equal monthly installments of approximately
$1,100, including principal and interest through
December 2003, collateralized by computer
equipment costing approximately $51,400 $ 49,211
Capitalized computer equipment lease, payable
in equal monthly installments of approximately
$2,570, including principal and interest through
November 2001, collateralized by computer
equipment costing approximately $81,200 76,046
Capitalized phone sYstem lease, payable in equal
monthly installments of approximately $600,
including principal and interest through
October 2003, collateralized by the phone
system costing approximately $28,150 26,937
Note payable in 12 equal quarterly installments
commencing May 1998 of $48,333, including
principal only, bearing interest at prime rate
plus 1% per annum (9.50% at December 31, 1998) 435,000
Note payable in 8 quarterly installments commencing
May 1998 of $25,000, including principal only,
bearing interest at prime rate plus 1% per annum
(9.5% at December 31, 1998) 100,000
Note payable, to a related party, in 11 quarterly
installments commencing June 1998 of $47,917,
including principal only, bearing interest at
prime rate plus 1% per annum (9.5% at December
31, 1998) 454,167
-----------
1,141,361
Less current maturities 517,323
-----------
$ 624,038
===========
38
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are maturities of long-term debt (excluding capitalized
leases):
For the Years
Ended
December 31,
------------
1999 $485,000
2000 385,000
2001 119,000
6. INCOME TAXES:
The components of deferred tax assets and liabilities as of December 31,
1998 are as follows:
Deferred tax assets:
Accounts receivable reserve $77,000
=======
Deferred tax liabilities:
Property and equipment $23,000
Intangibles 31,000
-------
$54,000
=======
Differences between book and tax are primarily due to temporary
differences resulting from use of the direct write-off method for
receivables, using accelerated methods of amortization and depreciation
for property and equipment, and using statutory lives for intangibles for
tax purposes.
The historical provision (credit) for income taxes is comprised of the
following:
1997 1998
-------- --------
Current:
Federal $164,200 $180,000
State 68,100 54,000
-------- --------
232,300 234,000
-------- --------
Deferred:
Federal (26,000) 13,200
State (19,000) 8,800
-------- --------
(45,000) 22,000
-------- --------
$187,300 $256,000
======== ========
39
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory Federal income tax rate and the effective rate of the
provision for income taxes is reconciled as follows:
1997 1998
Statutory Federal income tax rate 34% 34%
State taxes, net of Federal tax benefit 16 9
-- --
50% 43%
== ==
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1998, the carrying amount of accounts receivable,
unbilled services, accounts payable and accrued payroll approximates fair
value due to the short-term maturities of these instruments.
8. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE:
Approximately 24% and 19% of net patient service revenue was derived
under New York State third-party reimbursement programs during the years
ended December 31, 1997 and 1998, 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.
9. PERFORMANCE INCENTIVE PLAN, OPTIONS 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
amended Option Plan, 682,500 shares of common stock may be granted,
including the June 25, 1998 authorization for the reservation of an
additional 210,000 shares of $.01 par value common stock, for each of two
additional years, for a total of 420,000 additional shares. 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
up to 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.
40
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 2, 1998 and December 23, 1998, the Corporation granted 247,500
and 191,000 stock options, respectively, pursuant to the option plan, to
key employees at the exercise prices of $1.625 and $.938, respectively.
The options expire in 5-10 years. The exercise prices of these options
was equal to the fair market price of the Common Stock as of the date of
grant.
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. These options were not issued under the Option Plan. None
of these options have been exercised or cancelled.
Activity in stock options, including those outside the Performance
Incentive Plan, is summarized as follows:
<TABLE>
<CAPTION>
Shares
Under Weighted Average
Options Exercise Price
------- --------------
<S> <C> <C>
Balance at December 31, 1997 93,750 $3.00
Options granted 438,500 1.38
Options cancelled (6,000) 1.63
------- -----
Balance at December 31, 1998 526,250 $1.73
======= =====
Eligible for exercise at December 31, 1998 174,250 $2.37
======= =====
</TABLE>
The following table summarizes information about options outstanding and
exercisable at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Weighted Weighted
Range of Average Weighted Average
Exercise Options Remaining Average Options Options
Price Outstanding Contractual Life Exercise Price Exercisable Exercisable
-------- ----------- ---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.63-$1.79 241,500 7.72 years $1.70 80,500 $1.70
$.94-$1.03 191,000 8.17 years .97 -- --
$3.00 93,750 8.25 years 3.00 93,750 3.00
------- --------
526,250 7.98 years $1.73 174,250 $2.37
======= ===== ======= =====
</TABLE>
41
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation does not recognize compensation expense for stock options
granted at or above fair market value, as permitted by the accounting
standards. The fair value of options granted during 1998 was $372,500.
Fair value is estimated based on the Black-Scholes option-pricing model
with the following assumptions for grants in 1998: expected volatility of
55%; risk free interest rates ranging from 4.81% through 5.56% in 1998
and expected lives of approximetely 8 years. Had compensation expense
been determined based on the fair value of the options on the grant
dates, the Corporation's net income would have been decreased by
$372,500, ($.09 per share) in 1998.
401 (K) Plan:
NYHC 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
$43,000 and $41,000 for the years ended December 31, 1997 and 1998,
respectively.
10. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS:
Lease Commitments:
The Corporation leases office space under noncancellable operating leases
in New York and New Jersey that expire between January 1999 and October
2003.
At December 31, 1998 future minimum lease payments due under operating
and capital leases approximate:
Rental Expense
Operating Capital
Leases Leases
--------- --------------
1999 $323,000 $ 47,000
2000 222,000 51,000
2001 96,000 49,000
2002 37,000 20,000
2003 20,000 19,000
-------- ---------
Total minimum future payments $698,000 186,000
========
Less amounts representing interest (34,000)
---------
Present value of net minimum lease payments $ 152,000
=========
42
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense charged to operations was approximately $181,000 and
$302,000 for the years ended December 31, 1997 and 1998, respectively.
Rental income under the sublease agreement in the amount of $36,000 and
$28,000 for the years ended December 31, 1997 and 1998 has been offset
against rental expense.
Interest rates on capitalized leases vary from 9.2% to 11.0%.
Employment Agreements:
The Corporation has entered into employment agreements with two officers,
with terms expiring in 1999. The agreements call for aggregate annual
compensation of approximately $315,000 and provide for certain additional
benefits.
Bonus Plan:
The Corporation has 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 the
Corporation's Compensation Committee. The Corporation has accrued
approximately $41,000 and $65,000 for its contributions to the bonus pool
for 1997 and 1998.
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 $77,000 at
December 31, 1998. The Corporation does not require collateral on
commercial accounts receivable at the customer base generally consists of
large, well-established institutions.
Major Customers:
One major customer accounted for approximately 10% and 8.3% of net
patient service revenue for the years ended December 31, 1997 and 1998,
respectively. In addition, the Corporation has another customer whose
accounts receivable balance represents approximately 18% of accounts
receivable at December 31, 1998.
43
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During 1998, the Corporation entered into an agreement with the City of
New York acting through the Department of Social Services of the Human
Resources Administration ("HRA") to provide personal care services to
certain qualified individuals as determined by HRA commencing January 1,
1999.
Other Comments:
11. RELATED PARTY TRANSACTION:
The Corporation has entered into a Service Agreement with Heart to Heart,
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 December 31, 1998.
The fee for these services approximated $26,000 and $12,000 for the years
ended December 31, 1997 and 1998, respectively. As referred to in Note 1,
the Corporation purchased certain of the intangible assets of the
company.
The Corporation leases one of its offices from an affiliated company. The
lease expires on October 31, 2000. Rent expense for the years ended
December 31, 1997 and 1998 amounted to approximately $38,000 and $40,000,
respectively.
12. SHAREHOLDERS' EQUITY:
Preferred Stock:
On August 6, 1998, the Board of Directors created a series of Preferred
Stock to consist initially of 480,000 shares of Class A Convertible
Preferred Stock. The holders of the Preferred Stock shall be entitled to
a dividend equal to 9% of the purchase price for shares of the Preferred
Stock before any dividend is paid on Common Stock. Dividends shall be
payable quarterly commencing with the first calendar quarter of 1999 and
are not cumulative. The holders of Preferred Stock receive no preference
on liquidation and such shares may be converted into one share of Common
Stock at any time.
44
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 6, 1998, Heart to Heart Health Care Services, Inc. ("Heart to
Heart"), which is the holder of the Corporation's promissory note in the
face amount of $1,150,000 currently bearing interest at the rate of 9%
per annum, converted $600,000 of the principal amount of that promissory
note into 480,000 shares of the Corporation's newly authorized Class A
Convertible Preferred Stock at a conversion price of $1.25 per share,
each share of which is convertible at any time into shares of the
Corporation's $.01 par value common stock. Heart to Heart is owned by
Jerry Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrik and Sid
Borenstein. Messrs. Braun, Rosenberg, Chitrik and Borenstein are officers
or directors of the Corporation and together with Mr. Soroka are all
principal shareholders. The Corporation has therefore obtained an
independent opinion that the terms and conditions of the transaction are,
under the circumstances, fair to the Corporation.
Warrants:
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 seven
years from December 20, 1996 with respect to the registration under the
Securities Act of the securities issuable upon the exercise of the
warrants.
On June 2, 1998, the Corporation granted two of its board members a
warrant for each to purchase up to 10,000 shares of Common Stock at
($1.625 per share) at any time until June 1, 2008. On June 2, 1998, one
of the board members exercised his warrant and purchased 10,000 shares of
Common Stock at a price of $16,250.
Treasury Stock:
During 1998, the Corporation purchased 51,970 shares of Common Stock for
treasury at a cost of $67,663. The treasury stock is shown at cost. On
June 2, 1998, the Corporation issued 10,000 shares of Common Stock
previously held in treasury in connection with the exercise of the
warrants issued on June 2, 1998. The aggregate cost of the treasury
shares issued exceeded the aggregate proceeds from the exercise of the
warrants by $489, which amount has been charged to additional
paid-in-capital.
Reserves:
The Corporation has reserved an aggregate of 807,500 shares of Common
Stock for the exercise of options under the Option Plan referred to in
Note 9 and the warrants issued on June 2, 1998.
45
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EARNINGS PER SHARE:
Earnings per share are computed as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1997 1998
---- ----
<S> <C> <C>
Basic and diluted earnings per share:
Earnings:
Net income applicable to common stock $ 183,863 $ 341,152
========== ==========
Shares:
Weighted average number of common shares
outstanding - basic 3,750,000 3,739,864
Effect of dilutive convertible preferred stock 193,315
--------- ---------
Diluted weighted average shares outstanding 3,750,000 3,933,179
========= =========
Basic earnings per share $.05 $.09
==== ====
Diluted earnings per share $.05 $.09
==== ====
</TABLE>
14. SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1997 1998
---- ----
<S> <C> <C>
Cash paid during the year for:
Interest $20,567 $295,338
======= ========
Income taxes $268,062 $300,685
======== ========
Supplemental schedule of noncash investing and financing activities:
The Company purchased customer lists, furniture and other
intangibles which were partially acquired through the issuance
of promissory notes $200,000 $1,730,000
======== ==========
The Corporation issued preferred stock
in exchange for a promissory note $600,000
========
The Corporation entered into capital lease obligations
for certain equipment $160,750
========
</TABLE>
46
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS:
On Febuary 22, 1999, the Corporation purchased the customer lists and
other intangible assets from Staff Builders' Shrewbury office for
$65,000.
47
<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 42 President, Chief Executive Officer and
Director
Jacob Rosenberg 41 Vice President, Chief Operating Officer,
Secretary and Director
David Grossman 31 Chief Financial Officer and Chief
Accounting Officer
Hirsch Chitrik 70 Director
Sid Borenstein 45 Director
H. Gene Berger 58 Director
Charles J. Pendola 53 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.
David Grossman has been the Company's chief financial officer and chief
accounting officer since December 1997. From 1991 to 1997, Mr. Grossman was
employed as a certified public accountant at M.R. Weiser & Co., LLP, who are the
independent auditors of the Company. Mr. Grossman is a graduate of Pace
University (BBA, Public Accounting, 1991).
48
<PAGE>
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., CPA's, in Brooklyn, New York.
H. Gene Berger has been a director of the Company since February 1998.
Since 1981 Mr. Berger has been the president of Jay Isle Associates, a
consulting firm to the health care industry. From October 1991 to October 1997,
Mr. Berger was employed by Transworld Health Care, Inc., which is a regional
provider of alternate site health care services and products, in a number of
capacities including executive vice president, president, chief operating
officer and chief executive officer.
Charles J. Pendola has been a director of the Company since February 1998.
Since April 1997, Mr. Pendola has been an independent management consultant to
various organizations in the health care industry. From August 1996 to March
1997 Mr. Pendola was the president and chief executive officer of First Medical
Corporation, an international health care management firm providing services to
health care networks, managed care organizations and independent health
providers in the United States and Europe. From April 1989 to June 1996, Mr.
Pendola was the president and chief executive officer of Preferred Health
Network, a not-for-profit corporation which managed a diversified group of
health care providers and health related organizations including five acute care
hospitals and 20 ambulatory care centers. Mr. Pendola is a certified public
accountant.
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's Board of Directors met a total of 9 times during the fiscal
year ended December 31, 1997. Each of the directors attended at least 90% of the
aggregate of the total meetings of the Board of Directors.
The Company has an Audit Committee which was formed in February 1998 and
consists of three non-employee directors: Mr. Borenstein, Mr. Pendola and Mr.
Berger. The Audit Committee assists in selecting the independent auditors,
designating services they are to perform and maintaining effective
communications with those auditors.
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.
Mr. Braun's agreement provides for his services 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.
49
<PAGE>
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 $140,000.
Mr. Braun and Mr. Rosenberg also participate, together with all employees
of the Company, in a bonus plan pursuant to which 10% of the Company's annual
pre-tax net income is contributed to the bonus pool which is distributed to such
persons and in such amounts as decided upon by the Company's Compensation
Committee.
During the Company's fiscal year ended December 31, 1998, Jerry Braun and
Jacob Rosenberg did not file on a timely basis a report on Form 4 required by
Section 16(a) of the Securities Exchange Act of 1934.
50
<PAGE>
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the fiscal years ended December 31,
1997 and 1998, the cash compensation paid by the Company, as well as certain
other compensation paid with respect to those years, to the chief executive
officer and, to the extent applicable, each of the three other most highly
compensated executive officers of the Company in all capacities in which they
served.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------- -----------------------------------------------------------
Awards Payouts
--------------- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Name and Other Annual Restricted underlying LTIP All other
Principal Position(1) Year Salary($) Bonus($) Compensation($) Stock Awards($) options/SARs Payouts(#) compensation($)
- ---------------------- ---- --------- -------- --------------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Jerry Braun 1998 $196,943 $24,600 $23,765(1) 273,750
President and Chief 1997 $175,737 36,530 $22,721(1) Shares
Executive Officer
Jacob Rosenberg 1998 $157,554 16,400 $26,337(2) 180,000
Chief Operating Officer 1997 $140,267 $24,255 $26,209(2) Shares
David Grossman 1998 $88,270 17,500
Chief Financial and 1997 $ 3,923 Shares
Accounting Officer
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Includes $13,290 and $13,031 and of medical insurance premiums paid on
behalf of such individual for each of the years ended 1998 and 1997
respectively, $7,234 and $5,931, for automobile and automobile-related
costs, including insurance, incurred on behalf of such individual,
respectively, for each of the years ended 1998 and 1997 and $3,500 in
expense allowance for each of the fiscal years ended 1998 and 1997.
(2) Includes $13,031 and $17,290 of medical insurance premiums paid on behalf
of such individual for each of the years ended 1998 and 1997
respectively, $9,806 and $9,419 for automobile and automobile-related
costs, including insurance, incurred on behalf of such individual,
respectively, for each of the years ended 1998 and 1997 and $3,500 in
expense allowance for each of the fiscal years ended 1998 and 1997.
51
<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 New York 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") providing for options to purchase up to 262,500 shares of Common
Stock for to key employees of the Company. On June 25, 1998, the Company's
shareholders ratified an amendment to the Option Plan authorizing the
reservation of an additional 210,000 shares of Common Stock for issuance under
that plan for each of two additional years, resulting in a total of 682,500
shares in the Option Plan. To date, options have been granted under the plan for
a total of 426,500 shares. The Option Plan is administered by a Compensation
Committee 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
52
<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 provided
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.
53
<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
Name Granted Fiscal Year Base Price Expiration Date
- ----------- ------------- ------------ ----------- --------------
Jerry Braun 55,000 Shares 11.65% $1.7875/Share June 2, 2003
55,000 Shares 11.65% $1.625/Share June 2, 2008
35,000 Shares 7.42% $1.0318/Share December 23, 2003
35,000 Shares 7.42% $.938/Share December 23, 2008
Jacob Rosenberg 55,000 Shares 11.65% $1.7875/Share June 2, 2003
55,000 Shares 11.65% $1.625/Share June 2, 2008
35,000 Shares 7.42% $1.0318/Share December 23, 2003
35,000 Shares 7.42% $.938/Share December 23, 2008
David Grossman 7,500 Shares 1.59% $1.625/Share June 2, 2008
10,000 Shares 2.19 $.938/Share December 23, 2008
- --------------------------------------------------------------------------------
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 Braum 93,750/0 Shares --
55,000/0 Shares --
55,000/0 Shares $3,410
35,000/0 Shares --
35,000/0 Shares $2,170
Jacob Rosenberg 55,000/0 Shares --
55,000/0 Shares $3,410
35,000/0 Shares --
35,000/0 Shares $2,170
David Grossman 7,500/0 Shares
10,000/0 Shares $620
- --------------------------------------------------------------------------------
Other than the stock options described in the tables above, the Company has
not issued any options to officers and directors under the Option Plan, or
otherwise, except common stock purchase warrants issued to two outside directors
during 1998. On June 2, 1998, the Registrant issued warrants pursuant to warrant
agreements with each of H. Gene Berger and Charles J. Pendola, who are directors
of the Registrant. Each warrant provided that the holder could purchase up to an
aggregate of 10,000 shares of the Registrant's $.01 par value common stock at an
exercise price of $1.625 per share at any time up until June 1, 2008. On June
10, 1998, Mr. Pandola exercised his warrant and purchased 10,000 shares of the
$.01 par value common stock of the Registrant for an aggregate purchase price of
$16,250.
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
agreed with its Underwriter not to adopt any other stock option or deferred
compensation plans during the three-year period December 20, 1999.
54
<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 March 31, 1999 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) 1,204,248 29.13%
929 East 28th Street
Brooklyn, NY 11210
Jacob Rosenberg(3) 549,401 13.90%
932 East 29th Street
Brooklyn, NY 11210
Samson Soroka(4) 530,911 13.82%
1228 East 22nd Street
Brooklyn, NY 11210
Hirsch Chitrik(5) 596,000 15.52%
1401 President Street
Brooklyn, NY 11213
Sid Borenstein(6) 131,178 3.48%
1246 East 10th Street
Brooklyn, NY 11230
H. Gene Berger (7) 10,000 .27%
11 Fenimore Drive
Scotch Plains, NJ 07076
Charles J. Pendola 10,000 .27%
18 Guild Court
Plainview, NY 11803-3932
All officers and directors
as a group (6 persons)(1)(2)
(3)(4)(5)(6)(7) 2,500,824 56.1%
- ----------
(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 a total of 273,750 shares of Common Stock issuable upon the
exercise of stock options granted to Mr. Braun and 180,000 shares issuable
upon the conversion of shares of Class A Convertible Preferred Stock.
(3) Includes a total of 110,000 shares of Common Stock issuable upon the
exercise of stock options granted to Mr. Rosenberg and 90,000 shares
issuable upon the conversion of his shares of Class A Convertible Preferred
Stock.
(4) Includes 90,000 shares of Common Stock issuable upon the conversion of Mr.
Soroka's shares of Class A Convertible Preferred Stock.
(5) Includes 96,000 shares of Common Stock issuable upon the conversion of Mr.
Chitrik's shares of Class A Convertible Preferred Stock.
(6) Includes 24,000 shares of Common Stock issuable upon the conversion of Mr.
Borenstein's shares of Class A Convertible Preferred Stock.
(7) Includes 10,000 shares of Common Stock issuable upon the exercise of a
Common Stock Purchase Warrant granted to Mr. Berger.
55
<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.
Jerry Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrik and Sid
Borenstein, who are directors of the Company, have been the sole stockholders of
a New Jersey corporation named Heart to Heart Health Care Services, Inc. ("Heart
to Heart"), which began its home health care business in 1995 in northern New
Jersey, but not in the State of New York, and sold its assets to the Company on
March 26, 1998. Heart to Heart had net revenues of $1,950,890 in the year ended
December 31, 1997. Since its inception, Heart to Heart utilized Company
personnel for its administrative functions regarding payroll, benefits
management and data processing. The Company and Heart to Heart had a Service
Agreement pursuant to which the Company provided administrative services
relating to payroll, benefits management and data processing for which the
Company was reimbursed for all expenses attributable to such operations of
approximately $15,000 per year.
On March 26, 1998, NYHC Newco, a wholly-owned subsidiary of the Company,
purchased Heart to Heart's home care business assets (other than accounts
receivable) for a purchase price consisting of a promissory note in the
principal sum of $1,150,000 payable in 24 equal quarterly installments
commencing June 26, 1998 together with accrued interest at a rate equal to 1%
per annum over the prime interest rate published by the Wall Street Journal on
March 26, 1998, adjusted quarterly. The promissory note is subordinated to all
obligations due to the Company's banks or other institutional lenders. The
promissory note and the covenants of NYHC Newco are guaranteed by the Company.
As part of the acquisition transaction, NYHC Newco assumed leasehold obligations
for the two offices located in East Orange (expiring August 31, 2002) and
Hackensack, New Jersey (expiring May 31, 1998) in the aggregate sum of $1,815
per month, together with various equipment leases for items of business
equipment. Because directors of the Company are the owners of Heart to Heart,
the Company obtained an independent opinion that the terms and conditions of the
acquisition agreement with Heart to Heart are, under all circumstances, fair to
the Company.
On August 6, 1998, Heart to Heart Health Care Services, Inc. ("Heart to
Heart") which was the holder of the Company's promissory note in the face amount
of $1,150,000 bearing interest at the rate of 9% per annum, converted $600,000
of the principal amount of that promissory note into 480,000 shares of the
Company's newly authorized Class A Convertible Preferred Stock
56
<PAGE>
at a conversion price of $1.25 per share, each share of which is convertible at
any time into shares of the Company's Common Stock. Heart to Heart is owned by
Jerry Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrik, and Sid Borenstein
(the "Affiliated Shareholders") Mr. Braun received 180,000 shares, Messrs.
Rosenberg and Soroka each received 90,000 shares and Mr. Chitrik received 96,000
shares and Mr. Borenstein received 24,000 shares of such preferred stock.
Messrs. Braun, Rosenberg, Chitrik and Borenstein are officers or directors of
the Company and, together with Mr. Soroka, were all principal shareholders. The
Company obtained an independent opinion that the consideration received by the
Company in the transaction was, under the circumstances, fair from a financial
point of view to the Company, not including, the Affiliated Shareholders.
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.
On July 30, 1997, the Company entered into a consulting agreement with H.
Gene Berger, who became a member of the Company's Board of Directors in February
1998. The agreement provides Mr. Berger's services as a healthcare industry
consultant. In the event Mr. Berger introduces an acquisition transaction to the
Company which is completed, a fee will be due upon closing based upon the
"Lehman Formula" equal to 5% of the first $5 million of purchase price, 4% of
the next $1 million, 3% of the next $1 million, 2% of the next $1 million and 1%
of the balance of the purchase price. In January 1998 Mr. Berger received a fee
of $39,000 from the Company by reason of his introduction to the Company of the
December 8, 1997 acquisition of the home care business assets of three offices
in New Jersey from Metro.
In September 1997, the Company entered into an oral agreement with Charles
J. Pendola, who became a member of the Company's Board of Directors in February
1998. The agreement provides Mr. Pendola's services as a healthcare industry
consultant, with particular attention to new business, for a fee of $1,000 per
month. During 1997 Mr. Pendola received consulting fees from the Company
totaling $3,000 pursuant to his agreement.
57
<PAGE>
On June 2, 1998, the Company issued stock options pursuant to Option Plan
to each of Jerry Braun, Jacob Rosenberg and David Grossman. Mr. Braun was
granted an Incentive Stock Option to purchase up to an aggregate of 55,000
shares of the Company's Common Stock at an exercise price of $1.7875 per share
at any time up until June 2, 2003 and a Non-Qualified Stock Option to purchase
up to an aggregate of 55,000 shares of the Company's Common Stock at an exercise
price of $1.625 per share at any time up until June 2, 2008. Mr. Rosenberg was
granted an Incentive Stock Option to purchase up to an aggregate of 55,000
shares of the Company's Common Stock at an exercise price of $1.7875 per share
at any time up until June 2, 2003 and a Non-Qualified Stock Option to purchase
up to an aggregate of 55,000 shares of the Company's Common Stock at an exercise
price of $1.625 per share at any time up until June 2, 2008. Mr Grossman was
granted an Incentive Stock Option to purchase up to an aggregate of 7,500 shares
of the Company's Common Stock at an exercise price of $1.625 per share at any
time up until June 2, 2008.
On June 2, 1998, the Company issued warrants pursuant to warrant agreements
with each of H. Gene Berger and Charles J. Pendola. Each warrant provided that
the holder could purchase up to an aggregate of 10,000 shares of the Company's
$.01 par value common stock at an exercise price of $1.625 per share at any time
up until June 1, 2008. On June 10, 1998, Mr. Pendola exercise his warrant and
purchased 10,000 shares of the $.01 par value common stock of the Company for an
aggregate purchase price of $16,250.
On June 25, 1998. the Company's shareholders ratified an amendment to the
Option Plan authorizing the reservation of an additional 210,000 shares of
Common Stock for issuance under that plan for each of two additional years,
resulting in total of 682,500 shares in the Option Plan. To date, options have
been granted under the Plan for a total of 426,500 shares.
On December 23, 1998, the Company issued stock options pursuant to Option
Plan to each of Jerry Braun, Jacob Rosenberg and David Grossman, Mr. Braun was
granted an Incentive Stock Option to purchase up to an aggregate of 35,000
shares of the Company's Common Stock at an exercise price of $1.0318 per share
at any time up until December 23, 2003 and a Non-Qualified Stock Option to
purchase up to an aggregate of 35,000 shares of the Company's Common Stock at an
exercise price of $.938 per share at any time up until December 23, 2008. Mr.
Rosenberg was granted an Incentive Stock Option to purchase up to an aggregate
of 35,000 shares of the Company's Common Stock at an exercise price of $1.0318
per share at any time up until December 23, 2003 and a Non-Qualified Stock
Option to purchase up to an aggregate of 35,000 shares of the Company's Common
Stock at an exercise price of $.938 per share any any time up until December 23,
2008. Mr. Grossman was granted an Incentive Stock Option to purchase up to an
aggregate of 10,000 shares of the Company's Common Stock at an exercise price of
$.938 per share at any time up until December 23, 2008.
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.
58
<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, 1997.
Statements of Income for the Years Ended December 31, 1997 and
1996.
Statements of Stockholders' Equity for the Years Ended December
31, 1997 and 1996.
Statements of Cash Flows for the Years Ended December 31, 1997
and 1996.
Notes to Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
NONE
(3) EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
1.1 Form of Underwriting Agreement.*
2.1 Purchase and Sale Agreement dated December 7, 1997 among
NYHC Newco Paxxon, Inc. and Metro Healthcare
Services, Inc.**
2.2 Purchase and Sale Agreement dated February 8, 1998 among
NYHC Newco Paxxon, Inc. and Metro Healthcare
Services, Inc.***
2.3 Purchase and Sale Agreement dated February 25, 1998 among
NYHC Newco Paxxon, Inc. and Heart to Heart Healthcare
Services, Inc.***
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.*
59
<PAGE>
3.5 By-laws of the Company.*
3.6 Amendment to the Certificate of Incorporation of the
Company filed December 4, 1996.*
3.7 Certificate of Designations, Rights and Preferences of
New York Health Care, Inc. Class A Convertible Preferred
Stock.*****
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.*
60
<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.*
61
<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.*
62
<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.*
63
<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 with H.J. Meyers & Co., Inc.*
10.40 Consulting Agreement by and between the Company and
H. Gene Berger dated July 30, 1997.****
10.41 Agreement between the Company and Heart to Heart Health
Care Services, Inc. dated August 6, 1998.*****
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.
** Incorporated by reference to Exhibit filed as part of the Company's Form
8-K report with an event date of December 8, 1997.
*** Incorporated by reference to Exhibits filed as part of the Company's Form
8-K report with an event date of February 8, 1998.
**** Incorporated by reference to Exhibits filed as part of the Company's Form
10-KSB report for the year ended December 31, 1997.
*****Incorporated by reference to Exhibits filed as part of the Company's Form
10-QSB report for the quarter ended June 30, 1998.
New York Healthcare, Inc. will furnish a copy of any exhibit described
above to any beneficial holder of its securities upon receipt of a written
request, provided that the holder pays to New York Healthcare, Inc. a fee
compensating it for its reasonable expenses in furnishing the exhibits
requested.
(b) Reports on Form 8-K. The Company filed a Form 8-K report March 31,
1998.
64
<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.
April 15, 1999
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 April 15, 1999
- ------------------------- Officer and Director
Jerry Braun
/s/ Jacob Rosenberg Vice President, Chief Operating April 15, 1999
- ------------------------- Officer, Secretary and Director
Jacob Rosenberg
/s/ David Grossman Chief Accounting April 15, 1999
- ------------------------- and Financial Officer
David Grossman
/s/ Hirsch Chitrik Director April 15, 1999
- ------------------------
Hirsch Chitrik
/s/ Sid Borenstein Director April 15, 1999
- ------------------------
Sid Borenstein
/s/ H. Gene Berger Director April 15, 1999
- ------------------------
H. Gene Berger
/s/ Charles J. Pendola Director April 15, 1999
- ------------------------
Charles J. Pendola
65
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NEW YORK
HEALTH CARE, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 192,675
<SECURITIES> 0
<RECEIVABLES> 5,890,406
<ALLOWANCES> (168,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,433,380
<PP&E> 760,147
<DEPRECIATION> (275,480)
<TOTAL-ASSETS> 9,988,447
<CURRENT-LIABILITIES> 4,097,179
<BONDS> 0
0
4,800
<COMMON> 37,500
<OTHER-SE> 5,221,854
<TOTAL-LIABILITY-AND-EQUITY> 9,988,447
<SALES> 0
<TOTAL-REVENUES> 20,223,674
<CGS> 13,794,969
<TOTAL-COSTS> 13,794,969
<OTHER-EXPENSES> 5,236,740
<LOSS-PROVISION> 150,000
<INTEREST-EXPENSE> 320,980
<INCOME-PRETAX> 597,152
<INCOME-TAX> 256,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,152
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
