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, 1999
[ ] 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 HEALTH CARE, 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. $23,772,346
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. $1,753,095 (as of 3/27/00).
(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: 3,668,730
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in this Form 10-KSB; Proxy
Statement on Form 14A dated December 15, 1999.
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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.
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(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.
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 was initially organized under the laws of the State of New
York in February 1983.
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 and Gentiva
Health Services.
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.
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.
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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.
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.
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 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 the 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.
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On June 11, 1999 NYHC Newco completed the acquisition of the assets of a
home health care office in Hackensack, New Jersey, formerly owned by Staff
Builders Services, Inc. for the purchase price of $25,700. The newly acquired
Hackensack office generated annualized revenues of approximately $300,000 by
providing home health care services throughout Northern New Jersey.
On October 23, 1999 NYHC completed the acquisition of the assets of a home
health care office in Manhattan, New York, formerly owned by Staff Builder
Services, Inc. for the purchase price of $30,000. The newly acquired Manhattan
business generated annualized revenues of approximately $600,000 by providing
home health care services throughout the five boroughs. This business was
transferred to other existing New York Health Care Offices.
The Company has accounted for each of these acquisitions as a "purchase" in
accordance with Generally Accepted Accounting Principles.
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 in 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.
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 in 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
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than $1,481 billion (15.9% of the United States cross national product) in 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 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 1.3 million new cancer cases were
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.
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(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, Mandarin and Cantonese Chinese, Yiddish
and Russian as well as personnel knowledgeable in the requirements and practices
of Kosher homes.
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 90% of the Company's total net revenues in 1999 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
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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.
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 experienced difficulties in the past in
attracting and retaining personnel. However, 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 thefuture 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 specialties, 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 10% of the Company's net revenues in 1999, 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
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 various leasehold
obligations for offices together with various equipment leases for items of
business equipment.
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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 various leasehold obligations.
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 various leasehold obligations 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.
On June 11, 1999 NYHC Newco completed the acquisition of the assets of a
home health care office in Hackensack, New Jersey, formerly owned by Staff
Builders Services, Inc. for the purchase price of $25,700.
On October 23, 1999 NYHC completed the acquisition of the assets of a home
health care office in Manhattan, New York, formerly owned by Staff Builder
Services, Inc. for the purchase price of $30,000. The business was transferred
to other existing New York Health Care offices.
The three purchases in 1999 had an approximate revenue of $350,000.
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.
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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. In June 1999, the Company acquired
the assets of a branch office of Staff Builders in Hackensack, New Jersey. In
October 1999, the Company acquired the assets of a branch office of Staff
Builders in Manhattan. 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 in New York State, subject to entering
into 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.
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Professional Care Resources
The Company intends to expand its maternal/child care and 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.
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 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
has acquired new computer hardware and upgraded its software and other systems
to increase 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.
13
<PAGE>
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.
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 1999. 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, 1999.
In January 1999, the Company ogbtained a significant referral source from
The City of New York to provide services for Medicaid patients. The annualized
revenue was estimated at $11,000,000 over the one-year term.
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:
<TABLE>
<CAPTION>
Percentage of Net Revenues
-----------------------------
Referring Institution 1999 1998
- - ----------------------------------------- ------ -----
<S> <C> <C>
New York City Medicaid (1) 22.94%
New Jersey Medical Assistance Program 18.97% 21.4%
County Departments of Social Services (2) 9.26% 18.6%
Beth Abraham Health Services 6.25% 8.3%
Kingsbridge Medical Center 3.5 % 5.5%
<FN>
(1) This contract with the City of New York's Human Resources Administration
was first activated in 1999 and is for the provision of home health care
services to New York City's Medicaid patients.
(2) 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.
</TABLE>
Overall, the Company's ten largest referring institutions accounted for
approximately 71.1% of net revenues for 1999 and 67% of net revenues for 1998.
14
<PAGE>
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 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, 1999 the companies DSO
was 100 compared to 103 for the year ended December 31, 1998. The improvement
of 3 days in DSO is the net effect of combining the New Jersey DSO (which
consist primarily of Medicaid billing) of 55 days, the Home attendant program
(which consist primarily of Medicaid billing) DSO of 77 days and New York's DSO
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.
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 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.
15
<PAGE>
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 each of 1998 and 1999, payments from referring institutions
which receive direct payments from Medicare and Medicaid, together with direct
reimbursement to the Company from Medicaid, accounted for approximately 95% of
net revenues. For the same periods, five referring institutions with home
health care programs accounted for approximately 54% and 44%, respectively, of
net revenues for 1998 and 1999. Direct reimbursements from private insurers,
prepaid health plans, patients and other private sources accounted for
approximately 5% of net revenues for each of the calendar years
1998 and 1999.
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. 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 has filed all required annual cost reports for
each of its offices which provide services to Medicaid recipients. 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 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.
16
<PAGE>
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. In January
2000, the company renewed it's contract with OBQI for an additional year. 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 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.
17
<PAGE>
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 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.
18
<PAGE>
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 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
19
<PAGE>
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.
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., 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 Gentiva Health Services,
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
20
<PAGE>
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, work fairs/job fairs, 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.
Employees
On March 1, 2000, the Company had 1,311 employees, of whom 96 are salaried,
including 2 executive officers, 3 vice presidents of operations, 17 recruiters,
9 administrators/branch managers, 6 nurses, 25 accounting/clerical staff and 34
field staff supervisors. The remaining 1,215 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.
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 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 590,375 of its Class A Convertible
Preferred Stock, each share of which is convertible into one share of its common
stock.
21
<PAGE>
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 30, 2005. The rent is $5,850 per month and is
subject to annual increases 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 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.
<TABLE>
<CAPTION>
Lease Terms
----------------------
Approximate
Opening Square Expiration Annual
Location Date Footage Date Rental(l)
- - ------------------------------------- ----------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Kings County (2)
Branch Office
1667 Flatbush Avenue
Brooklyn, NY 11210 11/95 2,000 11/01/00 $ 42,291
Nassau County Branch Office
175 Fulton Avenue
Hempstead, NY 11550 9/93 1,600 10/31/03 $ 24,888
Westchester County Branch Office
6 Gramatan Avenue
Mt. Vernon, NY 10550 12/96 2,000 10/30/01 $ 28,566
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 $ 11,200
Queens Recruitment Office
91-31 Queens Blvd.
Elmhurst, NY 11373 11/97 500 10/31/00 $ 10,861
22
<PAGE>
Staten Island Recruitment Office
37 New Dorp Plaza
Staten Island, NY 10306 6/97 500 5/31/99 $ 11,075
White Plains Recruitment Office (3)
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 5/98 1,000 4/01/01 $ 17,000
Budd Lake Branch Office
389 Route 46
Budd Lake, NJ 07828 12/97 1,700 11/30/01 $ 16,000
Shrewsbury Branch Office
167 Avenue at the Commons, Suite 11B
Shrewsbury, NJ 07702 3/98 1,750 4/30/02 $ 18,133
Toms River Branch Office
617 Highway 37 West
Toms River, NJ 08753 2/98 2,400 5/01/01 $ 28,264
Edison Branch Office(3)
85 Route 27
Edison, NJ 08820 2/98 1,500 5/31/99 $ 13,680
Edison Branch Office(5)
629 Amboy Avenue
Edison, NJ 08837 8/99 1,450 7/31/01 $ 19,575
East Orange Branch Office
60 Evergreen Place
East Orange, NJ 07018 9/97 2,000 8/31/02 $ 18,000
Hackensack Recruitment Office(6)
144 Main Street Suite 211
Hackensack, NJ 07601 7/99 300 6/30/99 $ 10,923
<FN>
(1) All of 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
equal to 5% of the total prior year's monthly rent for the original term and all
renewal terms of the lease.
23
<PAGE>
(3) The Company did not renew this lease.
(4) The Company's West Orange location has been merged into the East Orange office.
(5) The Company relocated the Edison Office.
(6) The Company's Hackensack location moved from suite 211 to suite 212.
</TABLE>
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
At a special shareholders' meeting held on December 30, 1999, the Company's
shareholders approved a proposal giving the Board of Director the authority to
implement a 1-for-2 reverse stock split at any time until December 31, 2000.
The Company's Board of Directors made that proposal so that it would have the
ability to implement the reverse stock split if it believed that a decrease in
the number of outstanding shares of Common Stock might improve the trading
market for the Common Stock if required to maintain on the Nasdaq SmallCap
Market, which requires a minimum price of $1.00 per share. For a period of more
than 30 consecutive days prior to that shareholder' meeting, the Company's
Common Stock had a reported closing price on the Nasdaq SmalCap Market of less
than $1.00 per share, with the result that it became eligible for de-listing.
As of the date of this report, the reverse stock split authorized by
shareholders on December 30, 1999 has not been implemented by the Board of
Directors because the reported closing price of the Company's common stock has
since increased to a level which is in compliance with the listing requirement
of the Nasdaq SmallCap Market.
At the same meeting, the Company's shareholders also approved the proposal
authorizing an amendment to the Company's Certificate of Incorporation to permit
shareholder action to be taken by a vote on written consent signed by the
holders of a sufficient number of outstanding shares to constitute not less than
the minimum number of votes which would be necessary to authorize or take such
action at a shareholders' meeting at which all shares entitled to vote were
present and voted. The Board of Directors made that proposal to enable the
Company and its shareholders to take action more promptly and less expensively
than would be possible without adopting such an amendment.
24
<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, markdowns or commissions:
<TABLE>
<CAPTION>
Fiscal 1999 High Low
- - -------------- ----- ----
<S> <C> <C>
First Quarter 1.312 .771
Second Quarter 3.125 .906
Third Quarter 1.188 .625
Fourth Quarter 1.75 .406
</TABLE>
At March 21, 2000 the Company had 104 holders of record and more than 482
beneficial holders of its shares of Common Stock.On March 27 , 2000, the
last sale price of the shares of Common Stock as reported by NASDAQ was $1.50
per share.
Item 6. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations:
- - -----------------------
Fiscal year ended December 31, 1999 compared
with fiscal year ended December 31, 1998.
Revenues for the year ended December 31, 1999 increased 18% to
approximately $23,772,000 from approximately $20,224,000 for the year ended
December 31, 1998. Most of the increase is attributable to increased hours
of service provided under the new contract with the City of New York.
Cost of professional care of patients for the year ended December 31, 1999
increased to approximately $17,165,000 from approximately $13,795,000 for the
year ended December 31, 1998. The increase resulted from hiring additional home
health care personnel to service the increased business in New York. The cost of
professional care of patients as a percentage of revenues increased 4% to
approximately 72.2% for the year ended December 31, 1999 from approximately
68.2% for prior year ended December 31, 1998. The increase was primarily caused
by the lower gross margin on the HRA contract.
25
<PAGE>
Selling, general and administrative expenses for the year ended December
31, 1999 increased to approximately $6,190,000 from approximately $5,237,000 for
the year ended December 31, 1998. The increase resulted primarily from the cost
associated with the increased revenue. Selling, general and administrative
expenses as a percentage of revenue remained at 26%.
Interest expense for the year ended December 31, 1999 was approximately
$323,000 as compared to approximately $321,000 for the year ended December 31,
1998.
The credit for federal, state and local taxes for the year ended December
31, 1999 of $180,000 is the result of the loss for the year as compared to a
provision for taxes of approximately $256,000 for the year ended December 31,
1998.
In view of the foregoing, and in addition to the initial start-up costs
incurred during the first nine months that it took for New York Health Care to
receive it's full compliment of the cases allotted to it by HRA, caused a net
loss for the year ended December 31, 1999 amounting to approximately $235,000 as
compared to approximately $341,000 of net income for the year ended December 31,
1998.
Liquidity and Capital Resources
The Company's liquidity and capital resources are generated through
internally generated funds, cash on hand and amounts available under its line of
credit. The Company's line of credit expired during 1999 and the bank has
continued to fund the line of credit on a month to month basis pending the
Company's obtaining replacement financing. There can be no guarantee that the
bank will continue to fund the line of credit. The Company is in the process of
obtaining replacement financing. In addition, the Company failed to make an
October 1 1999 payment on a note payable to a related party, and paid the July
1, 1999 payment in October 1999. In order to accelerate cash flow, in August
1999 the Company entered into an agreement with a third party to sell certain
receivables.
The Company purchased three Staff Builders offices and computer equipment
for approximately $174,000 in 1999. The Company paid current maturities of
long-term debt and capital leases of approximately $504,000, purchased Common
Stock for the treasury of approximately $39,000 and paid dividends of $13,500 to
preferred stock holders in 1999. The Company borrowed an additional $250,000
under its line of credit to fund the start-up costs for the New York Home
Attendant Agency that began serving patients on January 6, 1999.
26
<PAGE>
As of December 31, 1999, approximately $6,364,857 (approximately 62%) of
the Company's total assets consisted of accounts receivable from clients who are
reimbursed by third-party payors, as compared to $5,869,000 (approximately 59%)
as of December 31, 1998, an increase of 3%. Such payors generally require
substantial documentation in order to process claims. The increase 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 revenue due to the new
contract with the City of New York.
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, ,1999 the Company's
DSO was 100 compared to 103 for the year ended December 31, 1998. The
improvement of 3 days in DSO is the net effect of combining the New Jersey DSO
(which consist primarily of Medicaid billing) of 55 days with The Home Attendant
program DSO (which consist primarily of Medicaid billing) of 77 days and
New York's DSO of 135 days.
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.
27
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Position
- - --------------------------- --- -----------------------------------------------
<S> <C> <C>
Jerry Braun 43 President, Chief Executive Officer and Director
Jacob Rosenberg 42 Vice President, Chief Operating Officer, Chief
Financial and Accounting Officer, Seceratary and Director
*David Grossman 31 Chief Financial Officer and Chief
Accounting Officer
Hirsch Chitrik 71 Director
Sid Borenstein 46 Director
H. Gene Berger 59 Director
Charles J. Pendola 54 Director
<FN>
*David Grossman resigned from the Company in August 1999.
</TABLE>
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. Jacob Rosenberg is currently acting as the Chief Financial and
Accounting Officer for the Company.
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.
28
<PAGE>
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 did not meet during the fiscal year
ended December 31, 1999 and took action in lieu of meetings by executing
unanimous written consents.
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 November 10, 1999, the Company entered into new employment agreements
with Jerry Braun and Jacob Rosenberg, each of which is for a term beginning
December 27, 1999 and ending December 26, 2004.
Mr. Braun's agreement provides that he will serve as President and Chief
Executive Officer in consideration of (i) initial annual base compensation of
$232,925; (ii) reimbursement of authorized business expenses incurred in
connection with the conduct of the Company's business; (iii) participation in
the Company's Bonus Plan, 401 (k) Plan and Option Plan; (iv) an automobile
reimbursement allowance of $750 per month toward automobile leasing costs and
payment of reimbursement of automobile insurance and maintenance costs; (v) an
allowance of $5,000 per year towards the cost of life insurance, like insurance
and disability insurance; (vi) four weeks paid vacation; vacation and eighteen
sick or personal leave days; and (vii) an annual increase in salary of 10% for
each year.
29
<PAGE>
Mr. Rosenberg's agreement has the same general terms and conditions as Mr.
Braun's, except that he will serve as Vice President, Secretary and Chief
Operating Officer, and the annual base compensation $186,340.
These new executive employment agreements also provide additional benefits
in the event there is a "change of control" of the Company, which is generally
defined as a merger or consolidation of the Company with another corporation, or
the sale of all or substantially all of its assets, or the acquisition of either
a majority of the Company's assets or its voting equity stock, or the power to
designate a majority of the Company's Board of Directors by persons other than
the present shareholders of the Company. In the event of such a "change of
control," the executives' unexercised stock options will become immediately
vested and exercisable in full, they will each receive a lump-sum payment equal
to 2.99 times the average of their annual base salary and bonus for the previous
five years and the Company will pay the cost to either maintain the lease or
transfer the ownership of the automobile for which the Company has paid the
leasing costs for the executive. The Company has also agreed that, to the
extent any payments received by an executive from the Company subjects the
executive to an excise tax under Section 499 of the Internal Revenue Code, the
Company will make an additional payment to the executive so that net after-tax
compensation is not reduced by the excise tax. All "change of control"
compensation is limited, to the extent it may qualify as a "parachute payment"
under Section 280G of the Internal Revenue Code, to the maximum amount that may
be paid to that executive without any part of that compensation being deemed to
be an "excess parachute payment." That maximum amount is generally determined by
multiplying the average of the executive's annual base salary and bonus for the
previous five years by a factor of three.
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.
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
30
<PAGE>
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. On July 28,1999 the Option Plan was further
amended to provide an additional 350,000 shares of common stock for issuance
under the Option Plan after January 1, 2000. The total number of shares which
may be issued under the plan increased from 682,500 to 1,032,500 shares. The
amendment also provided that each stock option granted under the plan, including
unexercised options outstanding on the date of the amendment, may exercisable in
either one, two or three equal annual installments. To date, options have been
granted under the plan for a total of 626,500 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 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.
31
<PAGE>
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.
32
<PAGE>
<TABLE>
<CAPTION>
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 Expiration
Name Granted Fiscal Year Base Price Date
- - --------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Jerry Braun 50,000 Shares 25% $ .6875/Share May 11, 2004
50,000 Shares 25% $ .625/Share May 11, 2008
Jacob Rosenberg 50,000 Shares 25% $ .6875/Share May 11, 2004
50,000 Shares 25% $ .625/Share May 11, 2008
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
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
- - --------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Jerry Braun 93,750/0 Shares $ -
55,000/0 Shares $ -
55,000/0 Shares $ 6,875
35,000/0 Shares $ 25,137
35,000/0 Shares $ 28,420
50,000/0 Shares $ 53,125
50,000/0 Shares $ 56,250
Jacob Rosenberg 55,000/0 Shares $ -
55,000/0 Shares $ 6,875
35,000/0 Shares $ 25,137
35,000/0 Shares $ 28,420
50,000/0 Shares $ 53,125
50,000/0 Shares $ 56,250
</TABLE>
33
<PAGE>
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 1999. On November 12, 1999, 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 $.625 per share at any time comencing May
12, 2000 up until November 12, 2004.
The Company does not have any other existing stock option or other deferred
compensation plans, but may adopt such plans in the future.
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 27, 2000 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:
<TABLE>
<CAPTION>
Shares Percentage
Name and Address of Beneficially of Stock
Beneficial Owner Owned(l) Outstanding(l)
- - -------- ------------ --------------
<S> <C> <C>
Jerry Braun(2) 1,415,639 33.20%
929 East 28th Street
Brooklyn, NY 11210
Jacob Rosenberg(3) 810,096 19.96%
932 East 29th Street
Brooklyn, NY 11210
34
<PAGE>
Samson Soroka(4) 551,606 14.59%
1228 East 22nd Street
Brooklyn, NY 11210
Hirsch Chitrik(5) 616,075 16.27%
1401 President Street
Brooklyn, NY 11213
Sid Borenstein(6) 136,697 3.69%
1246 East 10th Street
Brooklyn, NY 11230
H. Gene Berger (7) 20,000 .54%
11 Fenimore Drive
Scotch Plains, NJ 07076
Charles J. Pendola(8) 10,000 .27%
18 Guild Court
Plainview, NY 11803-3932
All officers and directors
as a group (7 persons)(1)(2)
(3)(4)(5)(6)(7)(8) 3,560,113 72.03%
<FN>
(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 373,750 shares of Common Stock issuable upon
the exercise of stock options granted to Mr. Braun and 221,391 shares issuable
upon the conversion of shares of Class A Convertible Preferred Stock.
(3) Includes a total of 280,000 shares of Common Stock issuable upon the
exercise of stock options granted to Mr. Rosenberg and 110,695 shares
issuable upon the conversion of his shares of Class A Convertible Preferred
Stock.
(4) Includes 110,695 shares of Common Stock issuable upon the conversion of
Mr. Soroka's shares of Class A Convertible Preferred Stock.
(5) Includes 118,075 shares of Common Stock issuable upon the conversion of
Mr. Chitrik's shares of Class A Convertible Preferred Stock.
35
<PAGE>
(6) Includes 29,519 shares of Common Stock issuable upon the conversion of
Mr. Borenstein's shares of Class A Convertible Preferred Stock.
(7) Includes 20,000 shares of Common Stock issuable upon the exercise of
Common Stock Purchase Warrants granted to Mr. Berger.
(8) Includes 10,000 shares of Common Stock issuable upon the exercise of a
common stock purchase warrant granted to Mr. Pendola.
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
36
<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 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 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 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.
37
<PAGE>
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 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.
On July 29, 1999, the Registrant's Board of Directors authorized an
increase in the authorized shares of the Registrant's Class A Convertible
Preferred Stock (the "Class A Preferred") from 480,000 shares to 590,375 shares.
Immediately following that authorization, the Company entered an agreement with
Heart to Heart Health Care Services, Inc. ("Heart to Heart"), which is the
holder of the Registrant's promissory note (the "Note") in the current face
amount of $550,000 currently bearing interest at the rate of 9% per annum, for
the conversion of $100,000 of the principal amount of that Note into 110,375
shares of the Registrant's Class A Convertible Preferred Stock at a conversion
price of $.906 per share, each share of which is convertible at any time into
shares of the Registrant's $.01 par value common stock. Heart to Heart is owned
by Jerry Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrick and Sid
Borenstein (the "Affiliated Shareholders"). Messers. Braun, Rosenberg, Chitrik
and Borenstien are officers or directors of the Registrant and, together with
Mr. Soroka, are all principal shareholders. The conversion transaction is on
substantially the same terms as that Registrant and Heart to Heart agreed-to on
August 6, 1998 in which $600,000 of the Note was converted into 480,000 shares
of the Class A Preferred. The Registrant had obtained an independent opinion
that the consideration received by the Company in that transaction was, under
the circumstances, fair from a financial point of view to the Registrant, not
including the Affiliated Shareholders.
On November 12, 1999, the Company entered into new employment agreements
with Jerry Braun and Jacob Rosenberg. See "Manaement - Employment Agreements."
On November 12, 1999, the Company issued warrants pursanut 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 $.625 per
share at any time commencing May 12, 2000 up until November 11, 2004.
On November 12, 1999, the Company issued stock options pursuant to the
Option Jplan to each of Jerry Braun and Jacob Rosenberg. They were each granted
an Incentive Stock Option to purchase up to an aggregate of 50,000 shares of the
Company's Common Stock at an exercise price of $.6875 per share at any time up
until May 11, 2004, and a Non-Qualified Stock Option to purchase up to an
aggregate of 50,000 shares of the Company's Common Stock at an exercise price
of $.625 per share at any time up until May 11, 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
38
<PAGE>
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.
39
<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.
Consolidated Balance Sheet at December 31, 1999.
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998.
Notes to consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
NONE
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- - ------- ----------------------
<S> <C>
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.*
40
<PAGE>
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.*
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 2, 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.*
41
<PAGE>
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.*
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.*
42
<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.*
43
<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.*
44
<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.*****
10.42 Agreement between the Company and Heart to Heart Health Care Services, Inc.
dated July 29, 1999.
10.43 Employment Agreement by and between the Company and Jerry Braun dated
November 12, 1999.
10.44 Employment Agreement by and between the company and Jacob Rosenberg dated
November 12, 1999.
11 Computation of Earnings Per Common Share of the
Company.
<FN>
* 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
48-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.
45
<PAGE>
****** Incorporated by reference to Exhibits filed as part of the Company's Form
10-QSB Report for the quarter ended June 30, 1999.
******* Incorporated by reference to Exhibits filed as part of the Company's
Form 10-QSB Report for the quarter ended September 30, 1999.
</TABLE>
New York Health Care, 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 did not file any reports on Form 8-K during the year ended
December 31, 1999.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 29, 2000
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 been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Jerry Braun President, Chief Executive March 29, 2000
- - ---------------------- Officer and Director
Jerry Braun
/s/ Jacob Rosenberg Vice President, Chief Operating March 29, 2000
- - ---------------------- Officer, Chief Financial and
Jacob Rosenberg Accounting Officer, Secretary,
Director
/s/ Hirsch Chitrik Director March 29, 2000
- - ----------------------
Hirsch Chitrik
/s/ Sid Borenstein Director March 29, 2000
- - ----------------------
Sid Borenstein
/s/ H. Gene Berger Director March 29, 2000
- - ----------------------
H. Gene Berger
/s/ Charles J. Pendola Director March 29, 2000
- - ----------------------
Charles J. Pendola
47
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
NEW YORK HEALTH CARE, INC.:
Independent Auditors' Report F-1
Consolidated Balance Sheet at December 31, 1999 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1999 F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999 F-5
Notes to Consolidated Financial Statements F-6 - F-22
<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, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1999. 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, 1999, and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1999 in conformity with
generally accepted accounting principles.
Reference is made to Note 1 for information relating to the Company's plans for
replacing its line of credit.
/s/ M.R. Weiser & Co. LLP
Certified Public Accountants
New York, NY
March 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
A S S E T S
<S> <C>
Current assets:
Cash and cash equivalents $ 97,114
Accounts receivable, net of allowance for uncollectible
amounts of $341,000 6,039,049
Unbilled services 325,808
Prepaid expenses 113,802
Prepaid income taxes and income tax receivable 154,906
Deferred tax assets 130,000
------------
Total current assets 6,860,679
Property and equipment, net 481,917
Intangibles, net 2,937,830
Deposits 52,726
------------
Total assets $10,333,152
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 970,175
Line of credit 2,850,000
Current maturities of long term debt 333,610
Current portion of lease obligations payable 41,212
Accounts payable 584,129
Other current liabilities 321,544
------------
Total current liabilities 5,100,670
------------
Deferred tax liability 33,000
Lease obligations payable, less current portion 78,659
Long-term debt, less current maturities 83,404
------------
195,063
------------
Commitments, contingencies and other comments
Shareholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized;
590,375 issued 5,904
Common stock, $.01 par value, 12,500,000 shares authorized;
3,750,000 shares issued; 3,668,730 outstanding 37,500
Additional paid-in capital 4,758,414
Retained earnings 325,897
------------
5,127,715
Less: Treasury stock (81,270 common shares at cost) (90,296)
------------
Total shareholders' equity 5,037,419
------------
Total liabilities and shareholders' equity $10,333,152
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
<TABLE>
<CAPTION>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net patient service revenue $20,223,674 $23,772,346
------------ ------------
Expenses:
Professional care of patients 13,794,969 17,164,782
General and administrative 5,236,740 6,188,011
Bad debts expense 150,000 236,000
Depreciation and amortization 197,826 263,392
------------ ------------
Total operating expenses 19,379,535 23,852,185
------------ ------------
Income (loss) from operations 844,139 (79,839)
------------ ------------
Nonoperating income (expenses):
Interest income 56,720
Other income 17,273
Interest expense (320,980) (323,100)
------------ ------------
Nonoperating expenses, net (246,987) (323,100)
------------ ------------
Income (loss) before provision (credit) for income taxes 597,152 (402,939)
------------ ------------
Provision (credit) for income taxes:
Current 234,000 (89,000)
Deferred 22,000 (91,000)
------------ ------------
256,000 (180,000)
------------ ------------
Net income (loss) 341,152 (222,939)
Dividends paid on preferred stock - 13,500
------------ ------------
Net income (loss) applicable to common stock $ 341,152 $ (236,439)
============ ============
Basic and diluted earnings (loss) per share $ 0.09 $ (0.06)
============ ============
Weighted average shares outstanding 3,739,864 3,684,685
============ ============
Diluted weighted average shares outstanding 3,933,179 3,684,685
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
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> <C> <C> <C> <C>
Balance at January 1, 1998 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
Treasury stock purchased
during January through
June ($1.06 average
per share) 19,800 (21,079) (21,079)
Treasury stock purchased
during July through
September ($0.97
average per share) 9,500 (9,203) (9,203)
Treasury stock purchased
on October 26, 1999
($.91 per share) 10,000 (9,090) (9,090)
Dividends paid on preferred
stock ($.03 per share) (13,500) (13,500)
Issuance of preferred stock
on July 29, 1999 in
exchange for promissory
note ($.91 per share) 110,375 1,104 98,896 100,000
Net loss (222,939) (222,939)
--------- ------- ------- ------ ----------- -------- --------- ----------- -----------
Balance at December 31, 1999 3,750,000 $37,500 590,375 $5,904 $4,758,414 81,270 $(90,296) $ 325,897 $5,037,419
========= ======= ======= ====== =========== ======== ========= =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended
December 31,
------------------------
1998 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 341,152 $(222,939)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 197,826 263,392
Bad debts expense 150,000 236,000
Deferred tax provision (credit) 22,000 (74,000)
Deferred revenue (36,000)
Changes in operating assets and liabilities:
Increase in accounts receivable and unbilled services (1,370,283) (584,574)
(Increase) decrease in due from affiliates (6,475) 6,475
(Increase) decrease in prepaid expenses (15,953) 27,145
Increase in prepaid income taxes and income tax receivable (154,906)
Increase in deposits (19,053) (6,874)
Decrease in accounts receivable due after one year 180,604
Increase in accrued payroll 207,483 405,218
Decrease in accounts payable (214,391) 525,989
Increase in other current liabilities 321,544
Decrease in income taxes payable (67,818) (35,215)
------------ ----------
Net cash (used in) provided by operating activities (309,364) 385,711
------------ ----------
Cash flows from investing activities:
Acquisition of fixed assets (154,507) (123,224)
Payments for purchase of intangible assets in connection
with acquisitions (571,602) (50,700)
------------ ----------
Net cash used in investing activities (726,109) (173,924)
------------ ----------
Cash flows from financing activities:
Borrowings under notes payable 1,450,000 250,000
Repayment of long-term debt (342,298) (504,476)
Net charges from issuance of common stock 16,250
Preferred stock dividends paid (13,500)
Purchase of treasury stock (67,663) (39,372)
------------ ----------
Net cash provided by (used in) financing activities 1,056,289 (307,348)
------------ ----------
Net increase (decrease) in cash and cash equivalents 20,816 (95,561)
Cash and cash equivalents at beginning of year 171,859 192,675
------------ ----------
Cash and cash equivalents at end of year $ 192,675 $ 97,114
============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<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.
Financing:
The Corporation's line of credit expired during 1999 and the bank has
continued to fund the line of credit on a month-to-month basis pending the
Corporation's obtaining replacement financing. There can be no guarantee
that the bank will continue to fund the line of credit. The Corporation is
in the process of obtaining replacement financing.
Acquisitions:
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.
F-6
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 26, 1998, the Corporation purchased the customer lists and other
intangible assets of Heart to Heart Health Care Service, Inc. 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.
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.
On February 22, 1999, the Corporation purchased customer list and other
intangible assets from Staff Builders Service, Inc. (Shrewbury Office) for
$65,000. The purchase price has been allocated to furniture and fixtures
for $25,000 and the remaining $40,000 to customer lists and other
intangibles.
On June 11, 1999, the Corporation purchased customer lists and other
intangible assets from Staff Builders Services, Inc. (Hackensack Office)
for $25,700. The purchase price has been allocated to furniture and
fixtures for $20,000 and the remaining $5,700 to customer list and other
intangibles.
On October 23, 1999, the Corporation purchased customer lists and other
intangible assets from Staff Builders Services, Inc. (Manhattan Office) for
$30,000. The purchase price has been allocated to furniture and fixtures
for $25,000 and the remaining $5,000 to customer lists and other
intangibles.
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.
F-7
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION:
The Corporation recognizes net patient service revenue on the date services
are rendered. Unbilled services represent amounts due for services rendered
which were not billed at the end of each period.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is not a rule or interpretation of the SEC,
however, it represents interpretations and practices followed by the
Division of Corporation Finance and the Office of the Chief Accountant in
administering the disclosure requirements of the Federal securities laws.
The Company does not believe that the interpretations outlined in SAB 101
will have an impact on the Company's revenue recognition policies.
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 Life of lease
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.
F-8
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and other stock based
compensation arrangements. As permitted by SFAS 123, the Corporation
applies Accounting Principles Board Opinion No. 25 and related
interpretations for expense recognition.
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) 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 (loss) 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. For 1998, 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. Due
to a loss in 1999, the options, warrants, and Convertible Preferred Stock
are not included in the computation of diluted loss per share because the
effect would be to reduce the loss 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.
F-9
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER 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.
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 became effective in 1999,
requires that certain costs of developing or obtaining software for
internal use be capitalized. This statement does not have a material effect
on the Company's financial position, results of operations or cash flows.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities" which delayed the effective date of
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities" for one year. SFAS 133
provides guidance for the recognition and measurement of derivatives and
hedging activities. It requires an entity to record, at fair value, all
derivatives as either assets or liabilities in the balance sheet, and it
establishes specific accounting rules for certain types of hedges. SFAS 133
is now effective for fiscal years beginning after June 15, 2000 and will be
adopted by the Corporation when required. The Corporation does not expect
SFAS 133 to have a material effect on the Corporation's financial position,
results of operations or cash flows for the year ended December 31, 1999.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1999:
Machinery and equipment $362,781
Furniture and fixtures 207,533
Leasehold improvements 120,652
--------
690,966
Less accumulated depreciation and amortization 209,049
--------
$481,917
========
F-10
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the amounts shown above include assets of
approximately $160,750 under capitalized leases and accumulated
depreciation of approximately $32,150, relating thereto.
3. INTANGIBLES:
Intangibles consist of the following at December 31, 1999:
Lives
--------
Goodwill $3,008,834 25 years
Contract value 112,700 10 years
Customer lists 72,000 10 years
----------
3,193,534
Less accumulated amortization 255,704
----------
$2,937,830
==========
4. LINE OF CREDIT:
The Corporation has a $6,000,000 line of credit with a bank. The
availability of the line of credit is based on a formula of eligible
accounts receivable. All property and assets of the Corporation
collateralize the line and the Corporation has also guaranteed the line of
credit. At December 31, 1999 $2,850,000 was outstanding. Borrowings under
the agreement bear interest at prime plus 1/2% (9.0%) at December 31,1999).
The line of credit expired during 1999, and the bank has continued to fund
the line of credit on a month-to-month basis pending the Corporation's
obtaining replacement financing.
5. OTHER CURRENT LIABILITIES:
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.
Per the agreement with HRA, if the Corporation incurs direct costs of home
attendant services under the maximum allowable per the contract, the
Corporation must repay the difference to HRA. During 1999, the Corporation
incurred less direct costs than the maximum allowable and has recorded a
liability to HRA (included as Other Current Liabilities in the accompanying
balance sheet) for the difference in the amount of $321,544.
F-11
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT AND CAPITALIZED LEASES:
Long-term debt consists of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
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 $ 43,288
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 54,003
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 22,580
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, 1999) 241,667
Note payable, to a related party, in 5 quarterly installments
commencing June 1998 of $47,917, and 6 quarterly installments of
$35,069 starting October, 1999 through January 2001 including
principal only, bearing interest at prime rate plus 1% per annum
(9.5% at December 31, 1999). During 1999, principal quarterly
installments were reduced due to a reduction of the principal
amount outstanding as a result of conversion of $100,000 of the
Company's Class A stock (See Note 14) 175,347
------------
536,885
Less current maturities 374,822
------------
$ 162,063
============
</TABLE>
F-12
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are maturities of long-term debt (excluding capitalized
leases, see Note 12):
For the Years
Ended
December 31,
-------------
2000 $334,000
2001 83,000
7. INCOME TAXES:
The components of deferred tax assets and liabilities as of December 31,
1999 are as follows:
Deferred tax assets:
Accounts receivable reserve $130,000
=========
Deferred tax liabilities:
Property and equipment $ 27,000
Intangibles (60,000)
---------
$(33,000)
=========
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:
1998 1999
-------- ----------
Current:
Federal $180,000 $ (69,000)
State 54,000 (20,000)
-------- ----------
234,000 (89,000)
-------- ----------
Deferred:
Federal 13,200 (54,600)
State 8,800 (36,400)
-------- ----------
22,000 (91,000)
-------- ----------
$256,000 $(180,000)
======== ==========
F-13
<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:
1998 1999
----- -----
Statutory Federal income tax rate 34% 34%
State taxes, net of Federal tax benefit 9 10
----- -----
43% 44%
===== =====
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999, the carrying amount of accounts receivable,
unbilled services, accounts payable and accrued expenses, and accrued
payroll approximates fair value due to the short-term maturities of these
instruments.
9. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE:
Approximately 19% and 9% of net patient service revenue was derived under
New York State third-party reimbursement programs during the years ended
December 31, 1998 and 1999, respectively. These revenues are based, in
part, on cost reimbursement principles and are subject to audit and
retroactive adjustment by the respective third-party fiscal intermediaries.
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 operations
in the year revisions are calculated.
10. SALE OF ACCOUNTS RECEIVABLE:
The Corporation has an agreement with a finance company to sell certain
accounts receivable. As part of the agreement, the Corporation may from
time-to-time offer to sell a certain accounts receivable to the finance
company, which the finance company may at such time elect to purchase, but
is not obligated to purchase the accounts receivable offered. The purchase
price to be paid by the finance company shall be the face amount of the
accounts receivable discounted at the discount rate established from
time-to-time by the finance company.
During 1999, the Corporation sold approximately $150,000 of such accounts
receivable to the finance company.
F-14
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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. On July 29,
1999, the Corporation further amended the Option Plan to provide for an
additional 350,000 shares of the Corporation's $.01 par value common stock
for issuance under the plan after January 1, 2000 so that the total number
of shares which may be issued under the plan is increased from 682,500 to
1,032,500 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.
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 exercise prices ranging from $ 1.7875 to $.938. The
options expire in 5-10 years. The exercise price of these options was not
less than the fair market price of the Common Stock as of the date of
grant.
On November 12, 1999, the Corporation granted 200,000 stock options,
pursuant to the Option Plan, to key employees at exercise prices ranging
from $.6787 to $.625 per share. The options expire in 5-10 years. The
exercise price of these options was not less than 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.
F-15
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in stock options, and warrants 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
Options granted 220,000 .65
Options cancelled (25,500) 1.22
------------ ----------------
Balance at December 31, 1999 720,750 $ 1.37
============ ================
Eligible for exercise at December 31, 1999 306,417 $ 1.96
============ ================
</TABLE>
The following table summarizes information about options outstanding and
exercisable at December 31, 1999.
<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-$1.79 231,000 6.62 years $ 1.70 154,000 $ 1.70
$ .94-$1.03 176,000 7.01 years .97 58,667 .97
$3.00 93,750 7.25 years 3.00 93,750 3.00
$ .63-$ .69 220,000 7.27 years .65
----------- -----------
720,750 7.00 years $ 1.37 306,417 $ 1.96
=========== ================ ============== =========== ===========
</TABLE>
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 and 1999 was
$372,500 and $112,000, respectively. Fair value is estimated based on the
Black-Scholes option-pricing model with the following assumptions for
grants in 1998 and 1999: expected volatility of 55% and 90%; risk-free
interest rates ranging from 4.81% through 5.56% in 1998 and 4.77% in 1999
and expected lives of approximately 8 years for the years ended 1998 and
1999. 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 and its net loss would
have been increased by $112,000 ($.03 per share) in 1999.
F-16
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 pretax basis. The Corporation currently contributes
50% of each dollar contributed to the Plan by participants up to a maximum
of 6% of the participants salary. The Plan also provides for certain
discretionary contributions by the Corporation as determined by the Board
of Directors. The Corporation's contributions amounted to $41,000 and
$63,000 for the years ended December 31, 1998 and 1999, respectively.
12. 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 September 2000 and October
2003.
At December 31, 1999, future minimum lease payments due under operating and
capital leases approximate:
<TABLE>
<CAPTION>
Rental Expense
Operating Capital
Leases Leases
---------------- --------
<S> <C> <C>
2000 $ 295,000 $ 51,000
2001 194,000 49,000
2002 113,000 20,000
2003 90,000 19,000
2004 70,000
Thereafter 18,000
---------------- --------
Total minimum future payments $ 780,000 139,000
================
Less amounts representing interest (19,000)
--------
Present value of net minimum lease payments $ 120,000
========
</TABLE>
F-17
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense charged to operations was approximately $302,000 and
$343,000 for the years ended December 31, 1998 and 1999, respectively.
Rental income under the sublease agreement in the amount of $28,000 for the
year ended December 31, 1998 has been offset against rental expense. There
was no sublease agreement for the year ended December 31, 1999.
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 2004. The agreements call for aggregate annual
compensation of approximately $420,000 with an annual increase of 10% 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 by the
Corporation's Compensation Committee. The Corporation accrued approximately
$65,000 for its contributions to the bonus pool for 1998. There was no
bonus accrual for 1999 due to a net loss for the year.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist 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 $171,000 at December 31,
1999. The Corporation does not require collateral on commercial accounts
receivable as the customer base generally consists of large,
well-established institutions.
MAJOR CUSTOMERS:
Two major customers accounted for approximately 30% and 42% of net patient
service revenue for the years ended December 31, 1998 and 1999,
respectively. In addition, the Corporation has another customer whose
accounts receivable balance represents approximately 14% of accounts
receivable at December 31, 1999.
F-18
<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.
13. RELATED PARTY TRANSACTION:
The Corporation had an agreement with an affiliated company to provide
administrative services relating to payroll, benefits management and data
processing through December 31, 1998. The fee for these services was
approximately $12,000 for the year ended December 31, 1998.
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, 1998 and 1999 amounted to approximately $40,000 and $42,000,
respectively.
14. 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. On July 29, 1999, the Board of Directors authorized an
increase in the number of shares of Class A Convertible Preferred Stock
from 480,000 to 590,375. 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 may
be declared quarterly at the discretion of the Board of Directors
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.
F-19
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 6, 1998, Heart to Heart Care Services, Inc. ("Heart to Heart"),
which was the holder of the Corporation's promissory note in the face
amount of $1,150,000, and bearing interest at the rate of prime plus 1%
(9%), converted $600,000 of the principal amount of that promissory note
into 480,000 shares of Class A Stock. The Class A Stock may be converted at
a conversion price of $1.25 per share, into shares of the Corporation's
$.01 par value Common Stock at any time. 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 therefore obtained an independent opinion
that the terms and conditions of the transaction were, under the
circumstances, fair to the Corporation.
On March 31, 1999, the Corporation declared a dividend (amounting to
$13,500), to holders of preferred stock, which was paid in April 1999.
On July 29, 1999, Heart to Heart, which was still then owed approximately
$360,000 under the terms of the promissory note, converted $100,000 of
principal amount into 110,375 shares of the Corporation's Class A stock at
a conversion price of $.91 per share, each share of which is convertible at
any time into shares of the Corporation's $.01 par value Common Stock. The
remaining balance under the promissory note is payable, with interest at
prime plus 1% (9.5% at December 31, 1999), in quarterly installments until
January 2001.
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.
F-20
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 12, 1999, the Corporation granted two of its board members a
warrant for each to purchase up to 10,000 shares of Common Stock at $.625
per share during a period commencing May 12, 2000 and concluding November
12, 2004.
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.
During 1999, the Corporation purchased 39,300 shares of Common Stock for
the treasury at a cost of $39,372. Treasury stock is shown at cost.
RESERVES:
The Corporation has reserved an aggregate of 1,157,500 shares of Common
Stock for the exercise of options under the Option Plan referred to in Note
11 and warrants.
ONE-FOR-TWO REVERSE STOCK SPLIT:
On December 30, 1999, the Corporation approved an amendment to the
Certificate of Incorporation for the purpose of effecting a one-for-two
reverse stock split of the issued and outstanding shares of the Corporation
$.01 par value common stock to be adopted at the discretion of the
Corporation's Board of Directors at any time prior to December 31, 2000.
Simultaneously with the effective date of this amendment, the number of
unissued and issued and outstanding $.01 par value Common shares shall
automatically and without any action on the part of the holder be
reclassified as and changed into one half (1/2) of a Common share. This
amendment was not effective as of the issuance of this report.
F-21
<PAGE>
NEW YORK HEALTH CARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share are computed as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Basic and diluted earnings (loss) per share:
Earnings (loss):
Net income applicable to common stock $ 341,152 $ (236,439)
========== ===========
Shares:
Weighted average number of common shares
outstanding - basic 3,739,864 3,684,685
Effect of dilutive convertible preferred stock 193,315
---------- -----------
Diluted weighted average shares outstanding 3,933,179 3,684,685
========== ===========
Basic earnings (loss) per share $ .09 $ (.06)
========== ===========
Diluted earnings (loss) per share $ .09 $ (.06)
========== ===========
</TABLE>
16. SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------
1998 1999
---------- --------
<S> <C> <C>
Cash paid during the year for:
Interest $ 295,338 $329,583
========== ========
Income taxes $ 300,685 $184,195
========== ========
Supplemental schedule of noncash investing and
financing activities:
The Corporation purchased customer lists, furniture
and other intangibles which were partially
acquired through the issuance of promissory
notes $1,730,000 $ -0-
========== ========
The Corporation issued preferred stock
in exchange for a promissory note $ 600,000 $100,000
========== ========
The Corporation entered into capital lease obligations
for certain equipment $ 160,750
==========
</TABLE>
F-22
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 97114
<SECURITIES> 0
<RECEIVABLES> 6364857
<ALLOWANCES> (341000)
<INVENTORY> 0
<CURRENT-ASSETS> 6860679
<PP&E> 690966
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0
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