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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the fiscal year ended July 31, 2003 Commission File Number 0-12927
NATIONAL HOME HEALTH CARE CORP.
(Exact name of Registrant as specified in its charter)
Delaware 22-2981141
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 WHITE PLAINS ROAD, SCARSDALE, NEW YORK 10583
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914-722-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
---
As of January 31, 2003, the aggregate market value of the Common Stock of the
Registrant, its only class of voting securities, held by non-affiliates of the
Registrant was approximately $28,700,830, calculated on the basis of the average
of the closing bid and asked prices of such stock on the National Association of
Securities Dealers Automated Quotation System on that date, as reported by the
National Association of Securities Dealers, Inc.
The number of shares outstanding of the Registrant's Common Stock on October 28,
2003 was 5,496,188.
Certain information to be included in the Registrant's definitive proxy
statement, to be filed not later than 120 days after the end of the fiscal year
covered by this report, for the Registrant's 2003 Annual Meeting of Stockholders
is incorporated by reference into Part III of this annual report on Form 10-K.
TABLE OF CONTENTS
Page
Cautionary Statement.........................................................iii
PART I
Item 1. Business..............................................................1
Item 2. Properties...........................................................15
Item 3. Legal Proceedings....................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................20
Item 6. Selected Financial Data..............................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........30
Item 8. Financial Statements and Supplementary Data..........................30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................30
Item 9A. Controls and Procedures..............................................30
PART III
Item 10. Directors and Executive Officers Of the Registrant...................31
Item 11. Executive Compensation...............................................31
Item 12. Security Ownership of Certain Beneficial Owners and Management.......31
Item 13. Certain Relationships and Related Transactions.......................31
Item 14. Principal Accountant Fees and Services...............................31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....31
Signatures....................................................................33
Exhibit Index.................................................................34
Exhibit 3.4 - Amendment to Article III, Section 3 of By-Laws.
Exhibit 10.14 - Audit Committee Charter adopted July 17, 2003
Exhibit 10.15 - Code of Ethics as of October 23, 2003
Exhibit 21.1 - Subsidiaries of the Registrant
Exhibit 23.1 - Consent of Independent Auditors
Exhibit 31.1 - CEO Section 302 Certification
Exhibit 31.2 - CFO Section 302 Certification
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Exhibit 32.1 - CEO Section 906 Certification
Exhibit 32.2 - CFO Section 906 Certification
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CAUTIONARY STATEMENT
Except for historical information contained in this report on Form 10-K, certain
matters set forth herein are forward-looking statements that are dependent on
certain risks and uncertainties, including such factors, among others, as market
acceptance, pricing and demand for the Company services, changing regulatory
environment, changing economic conditions, risks in connection with
acquisitions, ability to attract and retain qualified personnel, ability to
manage the Company's growth, and other risks detailed in the Company's other
filings with the Securities and Exchange Commission. In particular, in addition
to the specific regulatory matters described herein, the Company generally, as a
participant in the home health care industry, is subject to extensive federal,
state and local regulations. There can be no assurance that any of these
regulations will not change from existing standards, that additional standards
will not be imposed nor that the Company will not experience adverse effects as
a result of efforts to comply with applicable standards, which are extensive,
complex and often-changing.
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PART I
ITEM 1. BUSINESS.
GENERAL
National Home Health Care Corp. (the "Company") is a Delaware
corporation which was incorporated in 1983 and completed its initial public
offering that year. Formerly Family Treatment Centers of America, Inc. and then
National HMO Corp., in 1991 the Company changed its name to National Home Health
Care Corp. The Company is a provider of home health care and staffing services
in the Northeast region.
The Company has seven principal operating subsidiaries:
o Health Acquisition Corp., formerly Allen Health Care Services, Inc.
("Allen Health Care"), a New York corporation that conducts home health care
operations in New York.
o New England Home Care, Inc. ("New England"), a Connecticut
corporation that conducts home health care operations in Connecticut.
o Accredited Health Services, Inc. ("Accredited"), a New Jersey
corporation that conducts home health care operations in New Jersey.
o Connecticut Staffing Works Corp. ("Connecticut Staffing"), a
Connecticut corporation that conducts healthcare staffing operations in
Connecticut.
o Impressive Staffing Corp. ("Impressive Staffing"), a New York
corporation that conducts healthcare staffing operations in New York.
o New Jersey Staffing Works Corp. ("New Jersey Staffing"), a New Jersey
corporation that conducts healthcare staffing operations in New Jersey.
o Medical Resources Home Health Corp. ("Medical Resources"), a Delaware
corporation that conducts home health care operations in Massachusetts.
In January 1996, the outpatient medical service business of the
Company, formerly known as Brevard Medical Center, Inc. and First Health, Inc.,
was reorganized as SunStar Healthcare, Inc. ("SunStar"), a newly-formed,
wholly-owned subsidiary of the Company. In May 1996, SunStar completed its
initial public offering (thus reducing the Company's ownership percentage in
SunStar to approximately 37.6%) following a complete change in management and
the adoption of a business plan by new management for the establishment of a
health maintenance organization. As a result, SunStar was no longer consolidated
with the Company for accounting purposes and the Company accounted for its
investment in SunStar using the equity method of accounting. During the fiscal
year ended July 31, 1998, the Company's ownership percentage in SunStar was
reduced to 30.5% as a result of the issuance by SunStar of additional shares of
its common stock pursuant to a private placement. In February 2000, SunStar's
sole operating subsidiary effectively discontinued
operations. As of July 31, 2003, the Company's ownership percentage in SunStar
was 21.6% and the Company's value of its investment in SunStar was $0.
Health Acquisition Corp. d/b/a Allen Health Care Services. Allen Health
Care is a provider of personal home health aide services in New York State.
Services are provided by personal care aides, home health aides and homemakers
(collectively, "caregivers"). Allen Health Care is licensed by the Public Health
Council of the State of New York Department of Health. Allen Health Care
maintains its principal administrative office in Jamaica, New York and has
branch offices in Lindenhurst and Mount Vernon, New York. Case coordinating of
patients is performed at these three offices. In addition, the company has
satellite offices in Brooklyn, Hempstead and the Bronx, New York. The satellite
offices are primarily used for the recruitment and training of home health
aides. Services are provided in the following counties in the State of New York:
Nassau, Suffolk, Westchester, Queens, Kings, New York and the Bronx.
Home health care personnel are licensed or agency certified under a New
York State approved program and can be engaged on a full-time, part-time or
live-in basis. Since July 1996, Allen Health Care has required criminal
background investigations for all new personnel. In addition, urine drug testing
is part of the pre-employment screening process and thereafter is performed both
annually and randomly. In March 2002, Allen Health Care was re-surveyed by the
Joint Commission of Accreditation of Health Care Organizations ("JCAHO"), an
accrediting body for health care providers. JCAHO accreditation is associated
with providing quality services. This status is required by many of the
certified home health care agencies that Allen Health Care currently services.
The re-survey resulted in Allen Health Care extending its accredited status
through the year 2005.
Allen Health Care is reimbursed primarily by certified home health care
agencies ("CHHAs") and long-term health care provider programs that subcontract
their patients to Allen Health Care, as well as by private payors and the
Nassau, Suffolk and Westchester Counties Departments of Social Services Medicaid
Programs, for which Allen Health Care is a participating provider.
Allen Health Care provides home health aide services to its clients
twenty-four hours per day, seven days per week. Although Allen Health Care's
offices are open during normal business hours, personnel are available
twenty-four hours per day to respond to emergencies and to provide other service
requests. The registered nurses of Allen Health Care, in accordance with New
York State Department of Health regulations and contract requirements, visit
patients regularly and review records of service completed by the home health
aide and personnel care aides daily. These records are maintained by Allen
Health Care. In addition, a home care coordinator ensures that appropriate
coverage is maintained for all patients and acts as the liaison among family
members, aides and professional staff.
Allen Health Care has expanded in recent years through selected
acquisitions of complementary businesses or assets in its geographic region.
These acquisitions included the August 1998 acquisition of certain assets of
Bryan Employment Agency, Inc., d/b/a Bryan Home Care Services ("Bryan
HomeCare"), a New York licensed home health care agency that provided home
health aide services in Westchester County, New York. This acquisition expanded
the
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geographic presence of Allen Health Care and enabled it to become a
participating provider in the Westchester County Department of Social Services
Medicaid Program.
To a large extent, Allen Health Care's continued growth depends on,
among other things, its ability to recruit and maintain qualified personnel.
Allen Health Care's training programs for home health aides and personal care
aides have been approved by the New York State Department of Health. Allen
Health Care believes that it offers competitive salaries and fringe benefits and
has been able to keep its caregivers working on a steady basis.
New England Home Care, Inc. In August 1995, the Company acquired New
England. New England is a Medicare certified and licensed home health care
company in Connecticut. In November 2001, New England was re-surveyed by JCAHO,
resulting in New England extending its accredited status through 2004. New
England provides services throughout Connecticut. Services include skilled
nursing, physical therapy, occupational therapy, medical social services, home
health aide and homemaker services. In addition, New England provides specialty
services consisting of adult/geriatric, pediatric, post-acute rehabilitation,
behavioral medicine and maternal/child health. New England provides full-service
home health care twenty-four hours per day, seven days per week. Weekends,
holidays and after-hours are supported by an on-call system for each office
location with medical supervision by a registered nurse at all times. All home
health care personnel are licensed or agency certified under a Connecticut
state-approved program and can be engaged on a full-time, part-time or live-in
basis. Since 1995, New England has performed criminal background investigations
on all new personnel.
New England maintains its principal administrative office in Milford,
Connecticut. In addition, New England has administrative offices in Cromwell,
West Hartford and Waterbury and satellite offices in Norwalk, Hamden, Danbury,
Hartford, Norwich and Guilford, Connecticut. Case coordinating of patients is
performed at the Milford, Cromwell, West Hartford and Waterbury administrative
offices. The satellite offices are used as drop-off offices for paperwork,
recruitment, in services and orientation of personnel. Reimbursement for New
England's services is primarily provided by the State of Connecticut Department
of Social Services Medical Care Administration, the Federal Medicare Program,
managed care companies, private payors, hospices and other Medicare certified
home health agencies and long-term care providers that subcontract their
patients to New England.
New England has expanded its operations through increased penetration
of market share in Connecticut and selected acquisitions of complementary assets
in its geographic region. In November 1999, New England acquired certain assets
of Optimum Care Services of Connecticut, Inc., Optimum Home Health of
Connecticut, Inc. and Optimum Home Care of Connecticut, Inc. (collectively, the
"Optimum Entities"). The Optimum Entities included a Medicare certified and
licensed home health care company engaged in providing home health care services
in Connecticut. The assets were acquired from a court-appointed Chapter 7
trustee. The acquisition of these assets was coupled with a successful
penetration of the market share made available as a result of the liquidation of
the Optimum Entities.
In April 2000, New England acquired certain assets of the Connecticut
operations of U.S. HomeCare Corp. ("U.S. HomeCare-Connecticut"), a Medicare
certified and licensed home health care company engaged in providing home health
care services in Connecticut. The acquisition complemented the Company's
existing operations in Connecticut.
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In March 2003, New England acquired certain assets from Professional
Relief Nurses, Inc. ("PRN"), a Medicare certified and licensed home health care
company engaged in providing home health care services. PRN provided home health
care services in Hartford, Litchfield, New Haven and Middlesex Counties,
Connecticut.
The continued growth of New England depends on, among other things, its
ability to recruit and retain qualified personnel. New England's training
program for home health aides has been approved under a Connecticut
state-approved program. New England primarily recruits nurses through newspaper
advertisements. New England believes that it offers competitive salaries and
fringe benefits and has been able to keep its employees working on a steady
basis.
New England, as a participant in the Medicare and Medicaid programs, is
subject to survey and audits of operational, clinical and financial records with
respect to proper applications of general regulations governing operations and
billing of claims. These audits can result in retroactive adjustments for
payments received from these programs resulting in amounts due to governmental
agencies.
Connecticut Staffing Works Corp. Connecticut Staffing was organized in
October 1999 to operate certain of the assets acquired from the Optimum
Entities. Connecticut Staffing is a full-service health care staffing company.
It provides temporary staffing to hospitals, skilled nursing facilities, home
health organizations, schools and other institutions. Staffing personnel include
registered nurses, licensed practical nurses, certified nursing assistants, home
health aides, homemakers, opticians, medical secretaries and emergency medical
technicians. The company maintains its administrative office in Cromwell,
Connecticut. Staffing services are provided twenty-four hours per day, seven
days per week. Staffing coordinators are available in the office Monday to
Friday 6:00 a.m. to 7:00 p.m. Weekends, holidays and after hours are supported
by an on-call system which pages a staffing coordinator.
The company maintains a roster of quality professional personnel. The
continued success of Connecticut Staffing is dependent on, among other things,
its ability to maintain its steady roster of per diem workers for meeting the
staffing requirements of its clients. The company believes that it offers
competitive salaries and fringe benefits and has been able to keep its personnel
working on a steady basis.
Accredited Health Services, Inc. In October 1998, the Company acquired
Accredited. Accredited is a licensed home health care company that provides home
health aide services in Bergen, Hudson, Passaic, Essex, Morris, Union, Somerset
and Middlesex Counties, New Jersey. Accredited maintains its principal
administrative office in Hackensack, New Jersey and has a branch office in
Verona, New Jersey. Case coordinating of patients is performed in both the
Hackensack and Verona offices.
Accredited provides home health care services to its clients
twenty-four hours per day, seven days per week. Weekends, holidays and
after-hours are supported by an on-call system for each office. All home health
aides are licensed under a New Jersey state-approved program and can be engaged
on a full-time, part-time or live-in basis. In June 2003, Accredited was
re-surveyed by the Commission on Accreditation for Home Care (CAHC), one of the
accrediting bodies required for participation as a Medicaid provider in New
Jersey. This accreditation was extended for an
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additional year. Reimbursement for Accredited's services is primarily by the
state of New Jersey Medicaid Program, Medicare certified home health care
agencies that subcontract their patients to Accredited and private payors.
In August 2000, Accredited completed the acquisition of certain assets
of Health Force Owned, Ltd. and its affiliates. The acquisition complemented the
Company's existing operations in New Jersey.
In December 2002, Accredited completed the acquisition of certain
assets of Mary Baker's Health Care Services, Inc. ("Mary Baker"). Mary Baker
provided home health care services in Bergen and Passaic Counties, New Jersey.
Accredited's growth depends on, among other things, its ability to
recruit and retain qualified home health aides. The company believes that it
offers competitive salaries and fringe benefits and has been able to keep its
home health aides working on a steady basis.
Impressive Staffing Corp. Impressive Staffing is a full service health
care and clerical staffing company which commenced operations in February 2002.
It provides temporary staffing to hospitals, nursing facilities and radiological
facilities. Staffing personnel include registered nurses, licensed practical
nurses, x-ray technicians, MRI technicians, operating room technicians and
clerical personnel. The company maintains its administrative office in
Hempstead, New York. Staffing services are provided twenty-four hours per day,
seven days per week. Staffing coordinators are available in the office Monday to
Friday 8:30 a.m. to 5:00 p.m. Weekends, holidays and after hours are supported
by on-call coordinators.
The company maintains a roster of quality professional personnel. The
growth of Impressive Staffing is dependent on, among other things, its ability
to increase and maintain a steady roster of per diem workers for meeting the
staffing requirements of its clients. The company believes it offers competitive
salaries and fringe benefits and has been able to keep its personnel working on
a steady basis.
New Jersey Staffing Works Corp. New Jersey Staffing is licensed as a
health care service firm by the Division of Consumer Affairs of the Department
of Law and Public Safety of the State of New Jersey. New Jersey Staffing
commenced operations in September 2002 and offers a full complement of temporary
nursing and paraprofessional services to hospitals, nursing homes, clinics
assisted living facilities, correctional facilities and other institutions in
northern and central New Jersey. New Jersey Staffing personnel include
registered nurses, licensed practical nurses and certified nursing assistants.
The company maintains its administrative office in Hackensack, New Jersey.
Staffing services are provided twenty-four hours per day, seven days per week.
New Jersey Staffing coordinators are available in the office Monday to Friday
from 7:00 a.m. to 5:30 p.m. Weekends, holidays and after hours are supported by
an on-call system.
The company maintains a roster of quality professional personnel that
are interviewed, screened and monitored for proper credentials under guidelines
established by leading accredited health care organizations. The success of New
Jersey Staffing is dependent on, among other things, its ability to maintain a
steady roster of per diem workers for meeting the staffing requirements of its
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clients. The company believes that it offers competitive salaries and fringe
benefits and has been able to keep its personnel working on a steady basis.
Medical Resources Home Health Corp. In September 2002, the Company,
through a wholly-owned subsidiary, acquired certain assets of Medical Resources,
Inc. and related entities (collectively, the "Medical Resources Entities"). The
Medical Resources Entities provided home health care services in Massachusetts.
The Massachusetts State Home Care Program provides services to
approximately 33,000 frail, low income elders throughout the state. The funds
and services are managed through twenty-seven Aging Service Access Points
("ASAPs") that are not-for-profit organizations geographically dispersed
throughout the state. Services provided through this state program include
homemaking, personal care, chore, companion and shopping. Medical Resources has
contracts with certain of these ASAPs to provide homemaking and personal care
services as well as grocery shopping and delivery services. Services are
provided twenty-four hours per day, seven days per week. Weekends, holidays and
after-hours are supported by an on-call system for each office.
Medical Resources maintains its principal administrative office in
Newton, Massachusetts and has satellite offices in Boston, Lynn, Framingham,
North Andover, Leominster, Worcester, Chicopee, Bellingham, North Dartmouth and
Easton, Massachusetts. Case coordinating of patients is performed in Newton and
the satellite offices. The satellite offices are also used as drop-off offices
for paperwork, recruitment, in services, training and orientation of new
personnel.
In April 2003, Medical Resources received its Medicare certification
form the Department of Health and Human Services. In June 2003, Medical
Resources received its Medicaid provider number from the Commonwealth of
Massachusetts. As a result of receiving these certifications, Medical Resources
expanded its services to include nursing, physical therapy, occupational
therapy, speech therapy, medical social services and home health aide services
to Medicare and Medicaid recipients.
The growth of Medical Resources depends on, among other things, its
ability to recruit and retain staff as well as its ability to generate referrals
of Medicare and Medicaid patients. The Company believes that it offers
competitive salaries and fringe benefits and has been able to keep its personnel
working on a steady basis.
ORGANIZATION
The Company's corporate headquarters are located in Scarsdale, New
York, where all senior corporate administrative functions are performed. The
Company's operations are conducted by its seven operating subsidiaries. Although
the Company maintains separate subsidiaries in its various jurisdictions of
operations, it reviews its operations primarily on an integrated rather than
geographic or separate-subsidiary basis. Each subsidiary has a main
administrative office where all management functions are performed and overseen
by the subsidiary President. Each administrative office performs intake and case
coordinating of patients, corporate compliance, human resources, marketing and
all financial and accounting functions.
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INSURANCE
The Company and its subsidiaries maintain professional malpractice
liability coverage on professionals employed in the rendering of health care and
staffing services providing coverage per occurrence and in the aggregate and
coverage for the customary risks inherent in the operation of business in
general. The Company also carries directors and officers liability insurance.
While the Company believes its insurance policies are adequate, in the wake of
the terrorist events of September 11, 2001, the Company has experienced
substantial increases in the cost of its insurance coverage. As a result, there
can be no assurance that coverage will continue to be available in adequate
amounts or at a reasonable cost.
EMPLOYEES AND LABOR RELATIONS
As of October 29, 2003, the Company had approximately 3,350 full and
part-time employees, of whom approximately 25 were employed in various
management capacities and five (5) were employed in marketing capacities.
Although the Company currently has no union contracts with any of its employees,
a majority of the employees of Allen Health Care voted in favor of the American
Federation State, County and Municipal Employees ("AFSCME") District Council
1707 as their collective bargaining representative. Negotiations with that union
have been ongoing, although the terms of any collective bargaining agreement
have not been determined. The Company believes its relationship with its
employees is satisfactory. The Company has standardized procedures for
recruiting, interviewing and reference checking prospective health care
personnel. All nurses and home health aides must be licensed or certified by
appropriate authorities.
RISK FACTORS
This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company. Many of
these risks are discussed in other sections of this report.
If the Company is unable to attract qualified caregivers for its home health
care business at reasonable costs, it could increase the Company's operating
costs and negatively impact its business
The Company relies significantly on its ability to attract and retain
caregivers who possess the skills, experience and licenses necessary to meet the
requirements of the Company's customers. The Company competes for home health
care services personnel with other providers of home health care services. The
Company must continually evaluate and expand its network of caregivers to keep
pace with its customers' needs. Currently, there is a shortage of qualified
nurses and a diminishing pool of home health aides in the states in which the
Company conducts its business, competition for nursing personnel is increasing
and wages and benefit costs have risen. The Company may be unable to continue to
increase the number of caregivers that it recruits, adversely affecting the
potential for growth of the Company's business. The Company's ability to attract
and retain caregivers depends on several factors, including the Company's
ability to provide such caregivers with assignments that they view as attractive
and
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with competitive wages and benefits. There can be no assurance that the Company
will be successful in any of these areas. The cost of attracting caregivers and
providing them with attractive benefit packages may be higher than the Company
anticipates and, as a result, if it is unable to obtain increased reimbursement
rates, the Company's profitability could decline. Moreover, if the Company is
unable to attract and retain caregivers, the quality of its services to its
customers may decline and, as a result, it could lose certain customers.
In addition, a majority of the employees of Allen Health Care have
voted in favor of AFSCME District Council 1707 as their collective bargaining
representative. Negotiations with that union have been ongoing, although the
terms of any collective bargaining agreement have not been determined. There can
be no assurance that the terms of any collective bargaining agreement will not
materially increase labor-related costs or otherwise have a material adverse
affect on the Company, that further unionizing activity will not occur at other
subsidiaries of the Company nor that any such activity will not have a material
adverse effect on the Company.
The Company operates in a highly competitive market and its success depends on
its ability to remain competitive in obtaining and retaining referrals and
caregivers
The home health care business is highly competitive. Some of the
Company's competitors, unlike the Company, provide pharmaceutical products and
other home health care services that generate additional referrals. Some of the
Company's competitors also may have greater marketing and financial resources
than the Company. The Company believes that the primary competitive factors in
obtaining and retaining customers are the quality of services provided and the
pricing of such services, as well as identifying qualified caregivers for
specific job requirements and providing qualified employees in a timely manner.
The Company competes for caregivers based on the quantity, diversity and quality
of assignments, compensation packages and benefits. Competition for referrals
and caregivers may increase in the future and, as a result, the Company may not
be able to remain competitive. To the extent competitors gain or retain market
share by reducing prices or increasing marketing expenditures, the Company could
lose market share or otherwise experience a material adverse effect. In
addition, the development of alternative recruitment channels could lead the
Company's customers to bypass its services, which would also cause the Company's
revenues and margins to decline.
The Company's business depends upon its ability to secure new business from its
customers because the Company does not have long-term agreements or exclusive
contracts with them
The Company does not have long-term agreements or exclusive guaranteed
order contracts with its customers. The success of the Company's business is
dependent upon its ability to continually secure new business from its customers
and to service such new business with its caregivers. The Company's customers
are free to seek services from the Company's competitors and choose to use
caregivers that such competitors offer them. Therefore, the Company must
maintain positive relationships with its customers, otherwise the Company may be
unable to generate new business for its caregivers, which could have a material
adverse effect on the Company.
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Healthcare reform could negatively impact the Company's business opportunities,
revenues and margins
The U.S. government has undertaken efforts to control growing
healthcare costs through legislation, regulation and voluntary agreements with
medical care providers and drug companies. In the recent past, the U.S. Congress
has considered several comprehensive healthcare reform proposals. The proposals
were generally intended to expand healthcare coverage for the uninsured and
reduce the growth of total healthcare expenditures. While the U.S. Congress did
not adopt any comprehensive reform proposals, members of Congress may raise
similar proposals in the future. If any of these proposals are approved, the
Company's current customers may react by spending less on home health care
services. If this were to occur, the Company would have fewer business
opportunities, which could have a material adverse effect on its business.
Furthermore, third parties, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by the
Company's current customers to obtain full reimbursement from those third
parties could reduce the demand or the price paid for the Company's services.
If the Company is found to be in violation of Medicare and Medicaid
reimbursement regulations, it could become subject to retroactive adjustments
and recoupments
The Company, as a Medicare and Medicaid provider, is subject to
retroactive adjustments due to prior year audits, reviews and investigations,
government fraud and abuse initiatives and other similar actions. Federal
regulations also provide for withholding payments to recoup amounts payable
under the programs. While the Company believes it is in material compliance with
applicable Medicare and Medicaid reimbursement regulations, there can be no
assurance that the Company, pursuant to such audits, reviews and investigations,
among other things, will be found to be in compliance in all respects with such
reimbursement regulations. A determination that the Company is in violation of
any such reimbursement regulations could result in retroactive adjustments and
recoupments and have a material adverse effect on the Company. As a Medicaid
provider, the Company also is subject to routine, unscheduled audits, which may
have an adverse impact on the Company's results of operations.
The Company operates in a regulated industry and changes in regulations or
violations of regulations may result in increased costs or sanctions that could
reduce its revenues and profitability
The Company is subject to substantial and frequently changing federal,
state and local regulation. The Company must also comply with state licensing
along with federal and state eligibility standards for certification as a
Medicare and Medicaid provider. In addition, new laws and regulations are
adopted periodically to regulate new and existing services in the health care
industry. Changes in laws or regulations or new interpretations of existing laws
or regulations can have a dramatic effect on operating methods, costs and
reimbursement amounts provided by government and other third-party payors.
Federal laws governing the Company's activities include regulation of Medicare
reimbursement and certification and certain financial
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relationships with health care providers (collectively, the "fraud and abuse
laws"). Although the Company intends to comply with all applicable federal and
state fraud and abuse laws, these laws are not always clear and may be subject
to a range of potential interpretations. (For further discussion on such fraud
and abuse laws, see " - Medicare Fraud and Abuse"). There can be no assurance
that administrative or judicial clarification or interpretation of existing laws
or regulations, or legislative enactment of new laws or regulations, will not
have a material adverse effect on the Company. In addition, the Balanced Budget
Act of 1997, as amended (the "Balanced Budget Act"), introduced several
government initiatives causing changes to Medicare reimbursement, which changes
have resulted in the Company experiencing a decline in revenue from its Medicare
certified nursing agency. (For further discussion on the Balanced Budget Act,
see " - Medicare"). There can be no assurance that federal, state or local
governments will not change existing standards or impose additional standards.
Any failure to comply with existing or future standards could have a material
adverse effect on the Company.
Significant legal actions could subject the Company to substantial liabilities
Provision of home health care services entails an inherent risk of
liability. Certain participants in the home health care industry may be subject
to lawsuits which may involve large claims and significant defense costs. It is
expected that the Company periodically will be subject to such suits as a result
of the nature of its business. The Company currently maintains professional
liability insurance intended to cover such claims in amounts which management
believes are in accordance with industry standards. There can be no assurance
that the Company will be able to obtain liability insurance coverage in the
future on acceptable terms, if at all. There can be no assurance that claims in
excess of the Company's insurance coverage or claims not covered by the
Company's insurance coverage will not arise. A successful claim against the
Company in excess of the Company's insurance coverage could have a material
adverse effect on the Company. Claims against the Company, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
Company's ability to attract customers or to expand its business. In addition,
one of the Company's subsidiaries is self-insured for its workers compensation
and is at risk for claims up to certain levels.
The Company is dependent on reimbursement by third-party payors
For the twelve months ended July 31, 2003, 2002 and 2001, the
percentage of the Company's revenues derived from Medicare and Medicaid was 47%,
50% and 51%, respectively. The revenues and profitability of the Company are
affected by the continuing efforts of all third-party payors to contain or
reduce the costs of health care by lowering reimbursement rates, narrowing the
scope of covered services, increasing case management review of services and
negotiating reduced contract pricing. Any changes in reimbursement levels under
Medicare, Medicaid or other payor sources and any changes in applicable
government regulations could have a material adverse effect on the Company. See
Item 7 - "Certain Trends Expected to Impact Future Results of Operations".
Changes in the mix of the Company's patients among Medicare, Medicaid and other
payor sources may also affect the Company's revenues and profitability.
-10-
There is no assurance that the Company will be able to comply with new federal
health care initiatives, particularly concerning Medicare and Medicaid
The health care industry continues to undergo dramatic changes. New
federal health care initiatives, particularly concerning Medicare and Medicaid,
may be launched. There can be no assurance that sweeping federal health care
legislation will not be adopted in the future. It is also possible that proposed
federal legislation will include language that provides incentives to further
encourage Medicare recipients to shift to Medicare at-risk managed care
programs. Some states are adopting health care programs and initiatives as a
replacement for Medicaid. There can be no assurance that the adoption of such
legislation or interpretation of governmental health care programs or
initiatives will not have a material adverse effect on the Company.
There can be no assurance (i) that the Company will be able to successfully
complete the integration of its recent acquisitions and market penetrations, or
(ii) that the Company would be successful in claims, if any, for indemnification
from sellers in such transactions
In recent years, the Company's strategic focus was on the acquisition
of small to medium sized home health care agencies, or of certain of their
assets, in targeted markets. These acquisitions involve significant risks and
uncertainties, including difficulties integrating acquired personnel and other
corporate cultures into the Company's business, the potential loss of key
employees or customers of acquired companies, the assumption of liabilities and
exposure to unforeseen liabilities of acquired companies and the diversion of
management attention from existing operations. The Company may not be able to
fully integrate the operations of the acquired businesses with its own in an
efficient and cost-effective manner. The failure to effectively integrate any of
these businesses could have a material adverse effect on the Company. In
addition, the Company's growth over the last several years principally has been
the result of acquisitions and penetration of markets abandoned by competitors.
There can be no assurance that the Company will be able to identify suitable
acquisitions or available market share in the future nor that any such
opportunities, if identified, will be consummated on terms favorable to the
Company, if at all. In the absence of such successful transactions, there can be
no assurance that the Company will experience further growth, nor that such
transactions, if consummated, will result in further growth.
In addition, although the Company attempted in its acquisitions to
determine the nature and extent of any pre-existing liabilities, and has
obtained indemnification rights from the previous owners for acts or omissions
arising prior to the date of the acquisition, resolving issues of liability
between the parties could involve a significant amount of time, manpower and
expense on the part of the Company. If the Company or any of its subsidiaries
were to be unsuccessful in a claim for indemnity from a seller, the liability
imposed on the Company or its subsidiary could have a material adverse effect on
the Company.
Difficulties in maintaining the Company's management information and
communications systems may result in increased costs that may reduce the
Company's profitability
The Company's ability to deliver its home health care services to its
customers and manage its internal systems depends to a large extent upon the
performance of the Company's
-11-
management information and communications systems. If these systems do not
adequately support the Company's operations, or if the Company is required to
incur significant additional costs to maintain or expand these systems, its
business and financial results could be materially adversely affected.
The loss of key senior management personnel could adversely affect the Company's
ability to remain competitive
The Company believes that the success of its business strategy and its
ability to operate profitably depends on the continued employment of its senior
management team. If any member of the Company's senior management team became
unable or unwilling to continue in his present positions, the Company's business
and financial results could be materially adversely affected.
Difficulties and risks resulting from continuing growth
The Company has grown significantly over the last three years. This
growth, which has resulted primarily from acquisitions and which management
intends to continue to pursue, poses a number of difficulties and risks for the
Company. As the Company has grown and may continue to grow (as to which there
can be no assurance) in both revenue and geographical scope, such growth
stretches the various resources of the Company, including management,
information systems, regulatory compliance, logistics and other controls. There
can be no assurance that such resources will keep pace with such growth. If the
Company does not maintain such pace, then its prospects would be materially
adversely affected.
COMPETITION
The home health care field is highly competitive in each state in which
the Company operates. The Company is competing with numerous other licensed as
well as certified home health care agencies in each of the markets it serves. In
addition, the Company competes with companies that, in addition to providing
home health aide and skilled nursing services, also, unlike the Company, provide
pharmaceutical products and other home health care services that generate
additional referrals. The Company believes it is one of the largest competitors
in the state of Connecticut. However, the Company believes that numerous
competitors in the other principal markets served by the Company (i.e., the
states of Massachusetts, New York and New Jersey) have substantially greater
personnel, financial and other resources than the Company. Competition also
involves the quality of services provided and the pricing for such services. As
a result of changes in Medicare reimbursement and the competitive pressures of
managed care, the home health care industry continues to experience
consolidation. In addition, the Company believes that smaller, less financially
secure home health agencies will continue to find it difficult to compete for
market share and comply with regulatory compliance standards.
The Company's ability to attract a staff of highly trained personnel is
a material element of its business. There currently is intense competition for
qualified personnel and there can be no assurance that the Company will be
successful in maintaining or in securing additional qualified personnel. The
Company's competition for personnel comes from other industries as well. If and
to
-12-
the extent that reimbursement rates and other factors constrain wages and other
benefits to caregivers, other industries offering more attractive compensation
and other benefits also may attract eligible home health care personnel. The
Company recruits personnel principally through newspaper advertisements and
through referrals from existing personnel.
CUSTOMERS
The Company provides its services to four types of payor sources. These
sources include federal and state funded public assistance programs (Medicare
and Medicaid), other third party payors (subcontracts), insurance companies and
private payors.
A substantial portion of the Company's revenue is derived from
subcontracts that the Company has with Medicare certified home health care
agencies and long-term health care provider programs that subcontract their
patients to the Company. From time to time, some of these agencies have
requested bids from the home care agencies to which they subcontract. If the
Company is not successful in maintaining these contracts as they came up for
bid, it could have a materially adverse effect on the Company's results of
operations.
For the fiscal years ended July 31, 2003, 2002 and 2001, the State of
New York Department of Social Services personal care aide program for the
counties of Nassau, Suffolk and Westchester accounted for 5%, 7% and 10%,
respectively, of the Company's net patient revenue; and the State of Connecticut
Department of Social Services Medical Care Administration program accounted for
29%, 32% and 32%, respectively, of the Company's net patient revenue. The loss
of or a significant adverse change in the business terms with either of the
foregoing customers would have a material adverse effect on the Company.
GOVERNMENT REGULATIONS AND LICENSING
The health care industry is highly regulated. The Company's business is
subject to substantial and frequently changing regulations by federal, state and
local authorities. The Company must comply with state licensing along with
federal and state eligibility standards for certification as a Medicare and
Medicaid provider. The ability of the Company to operate profitably will depend
in part upon the Company obtaining and maintaining all necessary licenses and
other approvals in compliance with applicable health care regulations.
The Health Insurance Portability and Accountability Act. The Health
Insurance Portability and Accountability Act ("HIPAA") was enacted by the
Federal government on August 12, 1996, and requires organizations to adhere to
certain standards to protect data integrity, confidentiality and availability.
HIPAA mandates, among other things, that the Department of Health and Human
Services (the "DHHS") adopt standards for the exchange of electronic health
information in an effort to encourage overall administrative simplification and
enhance the effectiveness and efficiency of the health care industry. The DHHS
has also issued rules with respect to certain health care transactions and
relating to the privacy of health information, and requiring the Company to
impose those rules on any business associate to whom we disclose protected
information.
-13-
Although HIPAA was intended ultimately to reduce administrative
expenses and burdens faced within the health care industry, the Company believes
that the law has initially brought about significant and, in some cases, costly
changes. Sanctions for failing to comply with the HIPAA provisions related to
health information practices include criminal and civil penalties. At this time,
management believes that the Company is compliant with the requirements
established to date pursuant to HIPAA. However, management has not at this time
fully estimated the cost of compliance, nor can it estimate the cost of
compliance with future standards that may yet be by DHHS pursuant to HIPAA.
Although the new and proposed health information standards are likely to have a
significant effect on the manner in which the Company handles health data and
communicates with payors, based on current knowledge, the Company believes that
the cost of our compliance will not have a material adverse effect on its
business, financial condition or results of operations.
Medicare. Title XVIII of the Social Security Act authorizes Part A of
the Medicare program, the health insurance program that pays for home health
care services for covered persons (typically, those aged 65 and older and
long-term disabled). Home health care providers may participate in the Medicare
program subject to certain conditions of participation and upon acceptance of a
provider agreement by the Secretary of Health and Human Services. Only
enumerated services, upon satisfaction of certain coverage criteria, are
eligible for reimbursement as a Medicare provider. The Company is currently
Medicare certified in Connecticut and Massachusetts. Approximately 5%, 3% and 2%
of revenue for the fiscal years ended July 31, 2003, 2002 and 2001,
respectively, were derived from the Medicare program.
Medicare Fraud and Abuse. Provisions of the Social Security Act under
Medicare and Medicaid generally prohibit soliciting, receiving, offering or
paying, directly or indirectly, any form of remuneration in return for the
referral of Medicare or state health care program patients or patient care
opportunities, or in return for the purchase, lease or order of any facility
item or service that is covered by Medicare or state health care program. The
federal government has published regulations that provide exceptions, or "safe
harbors", for business transactions that will be deemed not to violate the
anti-kickback statute. Violations of the statute may result in civil and
criminal penalties and exclusion from participation in the Medicare and Medicaid
programs. The Company believes that its current operations are not in violation
of the anti-kickback statute.
Medicaid. Approximately 42%, 47% and 48% of revenue for the fiscal
years ended July 31, 2003, 2002 and 2001, respectively, were derived from state
sponsored Medicaid programs. Reimbursement for home health care services
rendered to eligible Medicaid recipients is made in an amount determined in
accordance with procedures and standards established by state law under federal
guidelines. States differ as to reimbursement policies and rates. The Company is
a licensed Medicaid provider in Connecticut, New Jersey, Massachusetts and in
Nassau, Suffolk and Westchester Counties, New York. Future Medicaid
reimbursement rates may be reduced in response to state economic and budgetary
constraints, as well as in response to changes in the Medicare program.
Proposed New Jersey Legislation. Legislation proposed in the state of
New Jersey would establish four regional councils that would maintain registries
of home health care workers and
-14-
would regulate various aspects of the home health care industry. Among other
provisions, the legislation would:
o Require all home health care aides (such as the individuals
employed by the Company in rendering home health care services)
to register with the regional councils.
o Require private employers such as the Company, to pay the initial
enrollment fee for their home health care aides.
o Require the regional councils to provide consumers with a
referral service of home health care aides.
o Permit the regional councils to employ health aides (including
relatives of the consumers) to provide home health care services.
o Permit the regional councils, in order to support their
operations, to assess and collect fees from private home health
care agencies such as the Company.
o Establish a minimum wage of $10.00 per hour for home health care
aides, including home health care aides employed the Company.
This wage level is higher than average wage paid by the Company
in New Jersey.
o Prohibit private employers such as the Company from incurring
administrative costs higher than 25% of the annual Medicaid or
state-funded revenue received for home health care aide services.
The Company believes that this proposed legislation, if enacted in its
present form, would result in the loss of 100% of the Company's Medicaid
business in New Jersey, which represents approximately 77% of the total net
patient revenue derived by the Company from its New Jersey operations, and may
result in the Company terminating its operations in that state altogether.
During fiscal 2003, the Company derived approximately 7% of its total net
patient revenue from operations in New Jersey that would be subject to possible
termination if this proposed legislation becomes law. As of this date the
proposed legislation is being considered by the applicable committees of the New
Jersey legislature.
ITEM 2. PROPERTIES.
The Company, directly or through certain subsidiaries, leases various
office facilities under lease agreements with various expiration dates through
fiscal 2006. The following sets forth the location, approximate square footage
and use of each office, and the expiration date of each lease:
-15-
Approximate Expiration Date
Location Square Feet Use of Lease
- -------- ----------- --- --------
Scarsdale, NY 2,679 Corporate headquarters October 31, 2008
Queens, NY 12,300 Administrative office July 31, 2005
Lindenhurst, NY 1,250 Branch office July 31, 2004
Mount Vernon, NY 2,500 Branch office November 30, 2003
Hempstead, NY 3,800 Satellite office September 30, 2004
Brooklyn, NY 800 Satellite office October 31, 2003
Bronx, NY 648 Satellite office August 31, 2004
Milford, CT 15,036 Administrative office March 31, 2006
Cromwell, CT 14,419 Administrative office September 30, 2005
Norwalk, CT 1,400 Satellite office March 31, 2004
Hamden, CT 1,875 Satellite office July 31, 2004
Waterbury, CT 2,700 Administrative office Month to Month
Danbury, CT 780 Satellite office Month to Month
Norwich, CT 1,200 Satellite office Month to Month
Hartford, CT 989 Satellite office August 31, 2003
Waterbury, CT 1,200 Satellite office October 31, 2003
West Hartford, CT 4,455 Administrative office October 31, 2005
Guilford, CT 200 Satellite office December 31, 2003
Hackensack, NJ 4,281 Administrative office September 30, 2005
Hackensack, NJ 852 Satellite office September 30, 2005
Verona, NJ 1,765 Branch office December 14, 2005
Newton, MA 2,496 Administrative office April 30, 2005
Bellingham, MA 260 Satellite office Month to Month
North Andover, MA 220 Satellite office July 31, 2004
Framingham, MA 525 Satellite office Month to Month
Boston, MA 795 Satellite office January 31, 2004
Lynn, MA 412 Satellite office Month to Month
North Dartmouth, MA 964 Satellite office Month to Month
Chicopee, MA 1,340 Satellite office November 30, 2003
North Easton, MA 550 Satellite office August 31, 2004
Leominster, MA 1,000 Satellite office Month to Month
Worcester, MA 1,365 Satellite office August 31, 2003
The Company believes that its office facilities are adequate for the
conduct of its existing operations. The Company regularly evaluates the
suitability and the overall adequacy of its various offices. The Company
believes that it will be able to either (i) renew any leases that will expire
during the current fiscal year or (ii) find adequate leases in lieu of any
leases that have expired or will expire during the current fiscal year.
-16-
ITEM 3. LEGAL PROCEEDINGS.
The Company, certain of its officers and directors (who previously were
outside directors of SunStar) (the "director defendants") and other parties were
named as defendants in In Re SunStar Healthcare Securities Litigation (United
States District Court for Middle District of Florida), a consolidated class
action brought on behalf of a purported class of shareholders of SunStar who
purchased stock of SunStar between June 15, 1998 and December 14, 1999. In
February 2001, the Court dismissed the Consolidated Amended Complaint and
granted plaintiffs leave to amend. The plaintiffs' Second Consolidated Amended
Complaint (the "Complaint") purported to assert claims under sections 10(b) (and
Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of
1934, as amended, based upon alleged acts or omissions of the defendants that
allegedly resulted in misrepresentations or omissions of material information
concerning the financial condition of SunStar (and its subsidiary SunStar Health
Plan, Inc., a Florida HMO presently in receivership ("Plan")). The Complaint
also alleged that the Company (which allegedly held 30.5% of SunStar's common
stock during SunStar's fiscal year ended July 31, 1998 and reduced its holdings
to approximately 25% in 1999) and the director defendants exercised control over
SunStar and therefore are liable as "controlling persons" of SunStar. In October
2001, the Court granted the defendants' motion to dismiss the Complaint with
prejudice. Plaintiff's did not appeal from this decision against them.
In a related action, the director defendants, along with thirteen
others, are named as defendants in Department of Insurance of the State of
Florida v. Warren D. Stowell et al. (Circuit Court, Seminole County, Florida)
(the "Seminole County Action") in which the plaintiff as the receiver of Plan
brings claims purporting to arise out of some of the facts forming the basis of
the class action described in the paragraph above and other alleged matters
relating to the insolvency of Plan. An amended complaint relating to the
Seminole County Action was filed on November 17, 2000, and on February 12, 2001
the director defendants filed motions to dismiss the Seminole County Action. On
May 7, 2001, the Court granted the director defendants' motion to dismiss and
granted the plaintiff leave to serve a further amended complaint. On July 24,
2001, the plaintiff served an amended complaint. On September 24, 2001 the
director defendants filed a motion to dismiss the amended complaint. In
September 2002, the director defendants (and certain other defendants) entered
into a settlement agreement with the plaintiff in the Seminole County Action to
resolve that action. The settlement agreement, which is subject to court
approval, was approved by the trial court in October 2002. A third party has
appealed from the order of the trial court which approved the foregoing
settlement agreement.
The Company intends to indemnify the director defendants to the fullest
extent permitted under its by-laws and applicable law in connection with the
actions described herein, subject to independent Board members' review and
action with respect to the final details of the proposed settlement and final
eligibility and entitlement for such indemnification.
In October 2003, the Company's Connecticut Home Care subsidiary
received a subpoena from the United States Attorney's Office in New Haven,
Connecticut. The subpoena seeks production of documents in connection with an
investigation into possible violations of certain federal health care laws. The
records sought by the subpoena relate to the subsidiary's psychiatric nurses.
-17-
The Company has not been advised been advised of the nature or scope of
the investigation. However, the Company believes that the investigation seeks
evidence of potentially fraudulent claims that may have been submitted by
psychiatric nurses employed by the Connecticut Home Care subsidiary. The Company
cannot now predict the course or outcome of the investigation or whether
additional information will be sought. The Company believes that the
investigation extends to certain other competitors in the Connecticut market for
psychiatric nursing. The Connecticut Home Care subsidiary intends to cooperate
with the investigation.
-18-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended July 31, 2003.
-19-
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock is quoted on the NASDAQ National Market
under the symbol NHHC. The following table presents the quarterly high and low
bid quotations in the over-the-counter market, as reported by the National
Association of Securities Dealers for the two fiscal years ended July 31, 2002
and 2003. These quotations reflect the inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Market Prices
--------------------------------------
High Low
---- ---
Year ended July 31, 2002
- ------------------------
1st Quarter.............................................................. $19.85 $8.90
2nd Quarter.............................................................. 17.72 10.74
3rd Quarter.............................................................. 15.00 10.27
4th Quarter.............................................................. 16.65 9.34
Year ended July 31, 2003
- ------------------------
1st Quarter.............................................................. $10.93 $8.25
2nd Quarter.............................................................. 10.90 7.82
3rd Quarter.............................................................. 10.34 6.35
4th Quarter.............................................................. 7.83 6.50
(b) Holders
There were approximately 101 holders of record of the Company's Common
Stock as of October 29, 2003, excluding shares held by depository companies for
certain beneficial owners.
(c) Dividends
The Company has not declared or paid any cash dividends on its Common
Stock during the last three fiscal years. It anticipates that for the
foreseeable future all earnings will be retained for use in its business and,
accordingly, it does not intend to pay cash dividends. On March 13, 2001, the
Board of Directors of the Company declared a 5% stock dividend payable on March
23, 2001 to stockholders of record on March 16, 2001. On April 25, 2002, the
Board of Directors of the Company declared a 5% stock dividend payable on May
17, 2002 to stockholders of record on May 10, 2002.
-20-
ITEM 6. SELECTED FINANCIAL DATA.
Fiscal Years Ended July 31,
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue........................... $97,235,000 $82,172,000 $74,492,000 $55,574,000 $38,518,000
Operating expenses................ 87,694,000 73,792,000 67,804,000 51,247,000 36,090,000
Income from operations............ 9,541,000 8,380,000 6,688,000 4,327,000 2,428,000
Other income (loss):
Interest income............. 143,000 227,000 216,000 220,000 385,000
Gain from sale of
stock of equity investee... --- --- --- 1,602,000 ---
(Loss) from equity investee...... --- --- --- --- (674,000)
Income before income taxes........ 9,684,000 8,607,000 6,904,000 6,149,000 2,139,000
Provision for income taxes........ 3,901,000 3,336,000 2,704,000 2,058,000 1,001,000
Net income........................ 5,783,000 5,271,000 4,200,000 4,091,000 1,138,000
Primary net income per share of
common stock...................... $1.04 $0.96 $0.77 $0.74 $0.20
Diluted net income per share of
common stock...................... $1.01 $0.91 $0.75 $0.74 $0.20
At July 31,
-------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets.................... $48,473,000 $43,512,000 $37,250,000 $30,856,000 $26,092,000
Working capital................. 29,551,000 28,232,000 22,138,000 19,312,000 17,708,000
Retained earnings............... 21,622,000 15,839,000 14,784,000 12,274,000 8,183,000
Stockholders' equity............ 43,866,000 38,679,000 32,584,000 28,486,000 25,013,000
-21-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes appearing elsewhere herein.
The Company is subject to external factors that could significantly
impact its business, including potential reductions in reimbursement rates by
Medicare, Medicaid and other third party payors for the Company's services,
retroactive adjustments due to prior year audits, reviews and investigations,
government fraud and abuse initiatives and other such factors that are beyond
the control of the Company. These factors could cause future results to differ
materially from historical results.
THE IMPACT OF THE BALANCED BUDGET ACT
The Balanced Budget Act was signed into law in August 1997. The Act
made significant changes in the reimbursement system for Medicare home health
care services. The primary change affecting the Company was a restructuring of
the reimbursement system related to Medicare certified home health care
agencies. Prior to the Act, Medicare reimbursed providers on a reasonable cost
basis subject to program-imposed cost per visit limitations.
Under the Act, changes in Medicare home care reimbursement were
scheduled in two phases. A temporary or interim payment system ("IPS") took
effect for cost reports beginning on or after October 1, 1997. Under IPS, home
health care providers were reimbursed the lowest of (i) their actual costs, (ii)
cost limits based on 105% of median costs of freestanding home health agencies,
or (iii) an agency-specific per patient cost limit, based on 1994 costs adjusted
for inflation. Under IPS, most Medicare providers were reimbursed under an
agency-specific per patient cost limit. Effective October 1, 2001, under the
prospective payment system, Medicare now reimburses providers a predetermined
base payment. The payment is adjusted for the health condition and care needs of
the beneficiary and is also adjusted for the geographic differences in wages
across the country. Medicare provides home health agencies with payments for
60-day "episodes of care".
The final phase of the Act implemented a 15% cut in Medicare
reimbursement rates effective October 1, 2002. In each of the last three fiscal
years, less than five percent of the Company's net patient revenue was derived
directly from Medicare, and accordingly the change to the prospective payment
system has not, to date, had a material adverse impact on the Company. However,
there can be no assurance that the Medicare prospective payment system will not
adversely impact the Company's reimbursement rates in the future or otherwise
have a material adverse effect on the Company. The Company's operations in New
York and New
-22-
Jersey are dependent upon referrals, primarily from Medicare certified home
health care agencies, whose reimbursement has been adversely affected by the
prospective payment system. Under the prospective payment system, there can be
no assurance that the Company's future referrals will not result in reduced
reimbursement rates or reduced volume of business.
RECENT ACQUISITIONS
The following acquisitions were made either directly by the Company or
through one of the Company's wholly owned subsidiaries. With the exception of
the Medical Resources and Accredited acquisitions described below, each of these
acquisitions complemented an existing business of the Company in the respective
geographical area. Each of the acquisitions described below was accounted for
utilizing purchase accounting principles. At the time of each of the
acquisitions described below, the revenues of each respective acquired business
constituted less than ten percent of the consolidated revenues of the Company.
On March 17, 2003, the Company acquired through New England certain
assets from Professional Relief Nurses, Inc. ("PRN"), a licensed and Medicare
certified home health care company in the state of Connecticut that provides
nursing and home health aide services in Hartford, Litchfield, New Haven and
Middlesex Counties, Connecticut.
On December 14, 2002, the Company acquired through Accredited certain
assets from Mary Baker's Health Care Services, Inc. ("Mary Baker"), a licensed
home health care company in the state of New Jersey that provides home health
aide services in Bergen and Passaic Counties, New Jersey.
On September 3, 2002, the Company, through a newly-formed subsidiary
Medical Resources acquired certain assets of Medical Resources Inc. and related
entities ("Medical Resources"). Medical Resources provides home health aide
services throughout Massachusetts.
On August 25, 2000, the Company acquired through Accredited certain
assets of Health Force. Health Force's operations included the provision of home
health aide and skilled nursing services in northern and central New Jersey.
On April 14, 2000, the Company acquired through New England certain
assets of the Connecticut operations of U.S. HomeCare-Connecticut, a licensed
and Medicare certified home health care company in the state of Connecticut.
On November 1, 1999, the Company acquired, through wholly owned
subsidiaries in Connecticut, certain assets of the Optimum Entities. The assets
were acquired from a court-appointed Chapter 7 Trustee. The final purchase price
was determined through an auction process conducted at the United States
Bankruptcy Court for the District of Massachusetts. The Company is operating the
acquired assets under New England and a recently formed subsidiary, Connecticut
Staffing. The Optimum Entities had been engaged in the business of providing
home health care and staffing related services in Connecticut.
-23-
On October 30, 1998, the Company acquired all the outstanding common
shares of Accredited. Accredited is a licensed home health care company that
provides home health care services in Bergen, Hudson, Passaic, Essex, Morris,
Union, Somerset and Middlesex Counties, New Jersey.
CRITICAL ACCOUNTING POLICIES
The Company believes that the most critical accounting policies used in
the preparation of its consolidated financial statements are those policies
relating to recognizing net patient revenue, determining the value of accounts
receivable, and assessing the value of goodwill and other long-lived assets.
Net Patient Revenue. The Company recognizes net patient revenue
generally on the date services are provided to patients. Net patient revenue is
recorded at amounts the Company expects to receive under reimbursement
arrangements with third-party payors, including private insurers, private
payors, subcontractors, Medicaid and Medicare. Because the Company's business
depends upon third-party payors whose reimbursement rates and payment policies
are complex and subject to possible change from time to time, the Company must
make estimates with respect to certain amounts it records as the net realizable
value of net patent revenue and accounts receivable. Because of the potential
for changes in these third-party reimbursement rates and payment policies, and
as a result of the complexity of certain of these policies, the estimated
amounts originally recorded as net patient revenue and accounts receivable may
be subject to revision as additional information becomes known.
Accounts Receivable. Accounts receivable are reduced by an allowance
for possible losses that provides a reserve with respect to those accounts for
which net patient revenue was recognized but with respect to which management
subsequently determines that payment is not expected to be received. The Company
analyzes the balances of accounts receivable to ensure that the recorded amounts
properly reflect the amounts expected to be collected. This analysis involves
the application of varying percentages to each accounts receivable category
based on the age of the receivable. The result of this aging analysis provides
the initial estimate of the amount of uncollectible accounts receivable. The
amount ultimately recorded as the reserve is determined after management also
analyzes the collectibility of specific large or problematic accounts on an
individual basis, as well as the overall business climate and other factors. The
Company's estimate of the percentage of uncollectible accounts may change from
time to time and any such change could have a material impact on the Company's
financial condition and results of operations.
Goodwill and Other Long-Lived Assets. Goodwill arising from the
acquisitions of businesses is recorded as the excess of the purchase price over
the estimated fair value of the net assets of the businesses acquired. Statement
of Financial Accounting Standards No. 142 ("Goodwill and Other Intangible
Assets") provides that goodwill is to be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. Consistent with this
standard, the Company reviews goodwill, as well as other intangible assets and
long-term assets, for impairment annually or more frequently as warranted, and
if circumstances indicate that the recorded value of any such other asset is
impaired, such asset is written down to its proper value.
-24-
The Company currently does not believe any impairment of its goodwill or any
such other asset existed at July 31, 2003. Nevertheless, future conditions or
events could adversely affect the recorded value of goodwill or such other
assets. If any item of goodwill or such other asset is determined to be
impaired, an impairment loss would be recognized equal to the amount by which
the recorded value exceeds the estimated fair market value.
RESULTS OF OPERATIONS
- ---------------------
(% of net patient revenue) FISCAL YEAR ENDED JULY 31,
--------------------------
2003 2002 2001
---- ---- ----
Net patient revenue 100.0% 100.0% 100.0%
Cost of revenue 65.0 63.6 65.2
General and administrative 24.2 25.1 23.7
Allowance for possible losses --- .1 .8
Amortization of intangibles 1.0 1.0 1.3
---------- ----------- ----------
Total operating expenses 90.2 89.8 91.0
Income from operations 9.8 10.2 9.0
Interest income .1 .3 .3
------------ ------------ -----------
Income before income taxes 9.9 10.5 9.3
Provision for income taxes 4.0 4.1 3.7
----------- -------- ---------
Net income 5.9% 6.4% 5.6%
=========== ======== =========
CERTAIN TRENDS EXPECTED TO IMPACT FUTURE RESULTS OF OPERATIONS
Medicaid reimbursement, like other third-party reimbursement, is
subject to rate changes from time to time that may affect the Company. Effective
May 1, 2003, the Connecticut Department of Social Services significantly reduced
the Medicaid reimbursement rate for certain nursing visits. The rate for a
medication administration visit, defined as administration of oral,
intramuscular and/or subcutaneous medication by health care agency/professional,
was reduced from $85 to $52 per visit. The Company believes that the decrease is
consistent with the continuing efforts by all third-party payors to contain or
reduce costs. The rate change went into effect beginning with the start of the
Company's fourth quarter of fiscal 2003. Without giving effect to any other
changes in regulated reimbursement rates or changes in the volume or mix of
services provided by the Company, management estimates that at the Company's
level of operations on May 1, 2003, this Connecticut rate change will reduce the
Company's future annual revenue and net income by approximately $6,000,000 and
$1,560,000, respectively.
As a Medicaid provider, the Company is subject to routine, unscheduled
audits. These audits may result in the application of a statistically-derived
adjustment factor to the Company's
-25-
revenues, which may have an adverse impact on the Company's results of
operations. Although the audits to date have not resulted in any material
adjustments, such audits were conducted at a time when the Company had
significantly lower Medicaid revenues. There can be no assurance that future
Medicaid audits will not have a material adverse impact on the Company.
YEAR ENDED JULY 31, 2003 COMPARED TO YEAR ENDED JULY 31, 2002
Net Patient Revenue. For the fiscal year ended July 31, 2003 ("fiscal
2003"), net patient revenue increased $15,063,000, or 18.3%, to $97,235,000 from
$82,172,000 for the fiscal year ended July 31, 2002 ("fiscal 2002"). Of this
increase, $7,739,000 was attributable to additional revenue generated by the
business acquired in September 2002 from Medical Resources; $5,323,000 was
attributable to additional revenue resulting from continued successful market
penetration of existing markets and the Company's other acquisitions; and
$2,001,000 was attributable to the expansion of the Company's operations to
include the staffing of nurses and other personnel to hospitals, nursing homes
and other health care facilities in New York and New Jersey.
Gross Profit. Gross profit margin decreased to 35% for fiscal 2003 from
36.4% for fiscal 2002. This decrease was primarily attributable to lower gross
profit margins on the new staffing operations, the Connecticut reimbursement
rate reduction effective May 1, 2003, and certain increases in direct payments
to care givers. During fiscal 2003, the Company did not benefit by any increases
in its Medicaid reimbursement rates until July 2003 (the last month of the
fiscal year), when Medicaid reimbursement rates in Connecticut increased 3.3%
for comprehensive skilled nursing visits and 7% for home health aide visits;
these July 2003 rate increases were unrelated to the type of nursing visits for
which significant rate reductions were implemented in May 2003, as described
previously in this management's discussion and analysis under the caption
"Certain Trends Expected to Impact Future Results of Operations."
General and Administrative. General and administrative expenses
increased $2,880,000, or 13.9%, to $23,547,000 in fiscal 2003 from $20,667,000
in fiscal 2002. Of this increase, $2,071,000 was attributable to additional
administrative personnel and occupancy costs related to the business acquired
from Medical Resources; and the balance of $809,000 was attributable to the
opening of an additional full-service administrative office in West Hartford,
Connecticut and increases in the Company's insurance costs over fiscal 2002. As
a percentage of net patient revenue, general and administrative expenses
decreased to 24.2% in fiscal 2003 from 25.1% in fiscal 2002. This decrease was
primarily attributable to the fact that net patient revenue increased by a
greater percentage than the increase in general administrative expenses.
Amortization. Amortization of intangibles increased $45,000, or 8.2%,
to $591,000 in fiscal 2003 from $546,000 in fiscal 2002. This increase resulted
from additional amortization attributable to the business acquisition from
Medical Resources, offset by reduced amortization of intangibles from previous
acquisitions that have now been fully amortized.
Allowance for Possible Losses. The Company recorded an allowance for
possible losses of $300,000 in fiscal 2003 as compared to $295,000 in fiscal
2002.
-26-
Income from Operations. As a result of the foregoing, income from
operations increased $1,161,000, or 13.9%, to $9,541,000 in fiscal 2003 from
$8,380,000 in fiscal 2002.
Interest Income. Interest income decreased $84,000, or 37%, to $143,000
in fiscal 2003 from $227,000 in fiscal 2002. This decrease was attributable to
the lower cash balances of the Company, as a result of the current year
acquisitions, as well as the continued decline in interest rates.
Income Taxes. The Company's effective tax rate increased to 40.3% in
fiscal 2003 as compared to 38.8% in fiscal 2002. This increase was attributable
to higher state income tax rates and a decrease in work opportunity tax credits
in the current fiscal year.
Net Income. Net income increased $512,000, or 9.7%, to $5,783,000, or
$1.01 per diluted share, in fiscal 2003 from $5,271,000, or $.91 per diluted
share, in fiscal 2002. This increase and the increase in net patient revenue
over the fiscal year, as well as over recent fiscal years, was attributable
principally to the Company's expansion of its operations through penetrations of
markets vacated by competitors and the successful integration of the Company's
acquisitions over the recent fiscal years. Such increases would not be expected
to continue at the same rate, if at all, in the absence of future such
acquisitions, as to which there can be no assurance. As discussed elsewhere in
this management discussion and analysis, the Company will also be adversely
affected by recent decreases in rates of reimbursement.
YEAR ENDED JULY 31, 2002 COMPARED TO YEAR ENDED JULY 31, 2001
Net Patient Revenue. For fiscal 2002, net patient revenue increased
$7,680,000, or 10.3%, to $82,172,000 from $74,492,000 for the fiscal year ended
July 31, 2001 ("fiscal 2001"). This increase was attributable to the expansion
of operations in Connecticut, in which net patient revenue increased $5,235,000,
and in New York, where net patient revenue increased $1,472,000, partially
attributable to Impressive Staffing Corp. ("Impressive"), a newly formed
subsidiary of Health Acquisition Corp. that is engaged in the staffing and
related personnel to hospitals, nursing homes and facilities. Impressive
commenced operations in February 2002 and had net patient revenue of $497,000
for fiscal 2002. In addition, net patient revenue increased $973,000 in New
Jersey over fiscal 2001.
Gross Profit. Gross profit margin increased to 36.4% for fiscal 2002
from 34.8% for fiscal 2001. This increase was primarily attributable to
increases in Medicaid reimbursement rates in both Connecticut and New Jersey in
the month of July 2001. The Company experienced no such increase in
reimbursement rates in New York, New Jersey or Connecticut during fiscal 2002.
General and Administrative. General and administrative expenses
increased $3,039,000, or 17.2%, to $20,667,000 in fiscal 2002 from $17,628,000
in fiscal 2001. This increase was attributable to additional administrative
personnel, an increase in all insurance costs, professional fees and occupancy
related costs incurred in connection with the expansion of operations in all
service areas. The Company also incurred additional general and administrative
costs in connection with the startup during fiscal 2002 of Impressive and New
Jersey Staffing Works
-27-
Corp. ("New Jersey Staffing"), a newly formed subsidiary of the Company in New
Jersey that is engaged in the staffing and related personnel to hospitals,
nursing homes and other health care facilities. New Jersey Staffing commenced
operations in September 2002. As a percentage of net patient revenue, general
and administrative expenses increased to 25.1% in fiscal 2002 from 23.7% in
fiscal 2001. The increase in general and administrative expenses over the
periods includes the increase of $992,000 of such expenses over the respective
fourth quarters of such periods, which resulted from certain non-recurring
expenses during the recent fourth quarter, including as discussed above.
Amortization. Amortization of intangibles decreased $410,000, or 42.9%,
to $546,000 in fiscal 2002 from $956,000 in fiscal 2001. This decrease is
attributable to the Company adopting SFAS Nos. 141 and 142 in fiscal 2002,
pursuant to which the Company no longer amortizes goodwill, but instead tests
goodwill for impairment at least annually.
Allowance for Possible Losses. The Company recorded an allowance for
possible losses of $295,000 in fiscal 2002 as compared to $670,000 in fiscal
2001. The Company had reserved against its accounts receivable in the previous
year as a result of the Company entering into contracts with many new payor
sources over the two prior years.
Income from Operations. As a result of the foregoing, income from
operations increased $1,692,000, or 25.3%, to $8,380,000 in fiscal 2002 from
$6,688,000 in fiscal 2001.
Interest Income. Interest income increased slightly to $227,000 in
fiscal 2002 from $216,000 in fiscal 2001. The increase was attributable to the
higher cash balances in fiscal 2002, offset by the continued decline in interest
rates.
Income Taxes. The Company's effective tax rate decreased slightly to
38.8% in fiscal 2002 as compared to 39.2% in fiscal 2001. This decrease was
attributable to a decline in state corporate income tax rates.
Net Income. Net income increased $1,071,000, or 25.5%, to $5,271,000,
or $.91 per diluted share, in fiscal 2002 from $4,200,000, or $.75 per diluted
share, in fiscal 2001. This increase and the increase in net patient revenue
over the fiscal year, as well as over other recent fiscal years, was
attributable principally to the Company's expansion of its operations through
penetrations of markets vacated by competitors and the successful integration of
the Company's acquisitions over the past three years. Such increases would not
be expected to continue at the same rate, if at all, in the absence of future
such acquisitions or market penetrations, as to which there can be no assurance.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Current assets increased $1,093,000 to $34,158,000 and current
liabilities decreased $226,000 to $4,607,000 at July 31, 2003. These changes
resulted in an increase in working capital of $1,319,000 to $29,551,000 at July
31, 2003 from $28,232,000 at July 31, 2002. Cash and cash equivalents decreased
$1,089,000 to $14,252,000 at July 31, 2003 from $15,341,000 at
-28-
July 31, 2002. The decrease in cash was attributable to the use of approximately
$4,706,000 of cash for the acquisitions of businesses from Medical Resources,
Mary Baker and PRN.
Net cash provided by operating activities was $4,519,000 in fiscal 2003
as compared with $6,498,000 in fiscal 2002. The decrease in cash provided by
operating activities of $1,979,000, or 30.5%, is attributable to an increase in
operating assets, primarily accounts receivable, of $1,664,000 and a decrease in
operating liabilities of $553,000, offset by an increase in operating cash flow
of $238,000 over fiscal 2002.
Investing activities in fiscal 2003 used cash of $5,012,000 as compared
to cash used of $586,000 in fiscal 2002. The cash used in investing activities
in fiscal 2003 consisted of the purchase of businesses and equipment. The cash
used in investing activities in fiscal 2002 consisted of the purchase of
equipment, the purchase of businesses and other investing activities.
Financing activities in fiscal 2003 used cash of $596,000 as compared
to cash provided of $347,000 in fiscal 2002. The cash used in financing
activities in fiscal 2003 consisted of the purchase of treasury stock, offset by
the proceeds from the exercise of stock options. The cash provided by financing
activities in fiscal 2002 consisted of the proceeds from the exercise of stock
options, offset by the purchase of treasury stock.
As a result of the May 1, 2003 reduction of certain Medicaid nursing
rates in Connecticut, the Company expects an annual decline in operating cash
flow of approximately $1,560,000, absent other changes in the Company's
operations or other changes in reimbursement rates.
The nature of the Company's business requires weekly payments to health
care personnel at the time services are rendered. The Company typically receives
payment for these services in 90 to 120 days with respect to contracted and
insurance business and 8 to 45 days with respect to certain governmental payors,
such as Medicare and Medicaid programs. Accounts receivable turnover was 68 days
in fiscal 2003, down from 75 days in fiscal 2002.
The Company has renewed its $7,500,000 committed revolving line of
credit facility (the "credit facility") with its bank. The credit facility
provides for the Company to borrow up to the lesser of $7,500,000 or 80% of
eligible accounts receivable that are aged less than 120 days at the bank's
prime rate or LIBOR plus 2.5%. The credit facility expires in October 2005 and
requires the Company to meet certain financial covenants and ratios. The Company
is required to pay .25% commitment fee on unused amounts, payable quarterly in
arrears. At July 31, 2003 there was no outstanding balance under the credit
facility.
In April 2003, the Board of Directors increased its program to
repurchase its Common Stock from $1,000,000 to $3,000,00 for an additional year.
Purchases would be made from time to time in the open market and through
privately negotiated transactions, subject to general market and other
conditions. The buyback program will be financed out of existing cash or cash
equivalents.
-29-
The Company intends to incur capital expenditures of approximately
$500,000 during the next fiscal year in connection with the proposed
implementation of new computer software systems and hardware. The new hardware
would be designed to, among other things, update certain data input capability
regarding services rendered at certain locations. The Company believes that the
software will provide efficiencies in data organization, retrieval and analysis,
both for continuing operations and in connection with certain audits. The
Company intends to fund these expenditures and otherwise meet its short term and
long term liquidity needs with its current cash balances, cash flow from
operations and its credit facility.
In the opinion of management, there will be no material impact on the
financial statements of the Company from any recently issued accounting
standards.
INFLATION AND SEASONALITY
The rate of inflation had no material effect on operations for fiscal
2003. The effects of inflation on personnel costs in the future could have an
adverse effect on operations, as the Company may not be able to increase its
charges for services rendered. The Company's business is not seasonal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by this item is set forth in the
Consolidated Financial Statements on pages F-1 through F-32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports that
the Company is required to file under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including the principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management necessarily
has applied its judgment in assessing the costs and benefits of such controls
and procedures, which, by their nature, can provide only reasonable assurance
regarding management's control objectives. Management
-30-
believes that there are reasonable assurances that our controls and procedures
will achieve management's control objectives.
The Company has carried out an evaluation, under the supervision and
with the participation of its management, including the President and Chief
Executive Officer and the Vice President of Finance and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 as of July 31,
2003. Based upon the foregoing, the President and Chief Executive Officer and
the Vice President of Finance and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (and its consolidated
subsidiaries) required to be included in its Exchange Act reports.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
The evaluation referred to above did not identify any changes in the
Company's internal controls over financial reporting that occurred during the
quarter ended July 31, 2003 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART III
The information required by each of the items of Part III (Items 10,
11, 12, 13 and 14) is omitted from this Report. Pursuant to the General
Instruction G(3) to Form 10-K, the information is included in the Company's
Proxy Statement for its 2003 Annual Meeting of Stockholders to be held on or
about December 5, 2003, and is incorporated herein by reference. The Company
intends to file such Proxy Statement with the SEC not later than 120 days
subsequent to July 31, 2003.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following represents a listing of all financial statements,
financial statement schedules and exhibits filed as part of this Report:
-31-
Pages F-1 through F-32: Financial Statements and
Supplemental Material (see index to the consolidated
financial statements).
Exhibit 3.4: Amendment to Article III, Section 3 of By-Laws.
Exhibit 10.14: Audit Committee Charter adopted July 17, 2003.
Exhibit 10.15: Code of Ethics as of October 23, 2003.
Exhibit 21.1: List of Subsidiaries.
Exhibit 23.1: Consent of BDO Seidman, LLP.
Exhibit 31.1: Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2: Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1: Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2: Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
-32-
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL MATERIAL
YEARS ENDED JULY 31, 2003, 2002 AND 2001
F-1
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 4
Statements of earnings 5
Statements of changes in stockholders' equity 6
Statements of cash flows 7
Summary of accounting policies 8-17
Notes to consolidated financial statements 18-29
SUPPLEMENTAL MATERIAL:
Report of independent Certified Public Accountants on
supplemental material 30
Schedule II valuation and qualifying accounts 31
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
National Home Health Care Corp.
Scarsdale, New York
We have audited the accompanying consolidated balance sheets of National Home
Health Care Corp. and Subsidiaries as of July 31, 2003 and 2002 and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows for the years ended July 31, 2003, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Home Health
Care Corp. and Subsidiaries at July 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended July 31, 2003, 2002 and
2001 in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
Valhalla, New York
October 3, 2003
F-3
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash, (including cash equivalents of $10,645,000 and $13,481,000,
respectively) (Note 8) $14,252,000 $15,341,000
Investments 22,000 35,000
Accounts receivable, less allowance for possible losses of $622,000
and $691,000, respectively (Notes 8 and 10) 18,705,000 16,382,000
Prepaid expenses and other 804,000 778,000
Income taxes receivable - 234,000
Deferred income taxes (Note 7) 375,000 295,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 34,158,000 33,065,000
- --------------------------------------------------------------------------------------------------------------------
Furniture, equipment and leasehold improvements, net (Note 1) 1,030,000 857,000
Goodwill (Note 2) 10,628,000 7,366,000
Other intangible assets, net (Note 3) 2,099,000 1,406,000
Deferred income taxes (Note 7) 163,000 515,000
Deposits and other assets 395,000 303,000
- --------------------------------------------------------------------------------------------------------------------
$48,473,000 $43,512,000
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 4) $ 3,257,000 $ 3,581,000
Estimated third-party payor settlements 756,000 912,000
Deferred revenue 460,000 340,000
Income taxes payable 134,000 -
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,607,000 4,833,000
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (NOTE 9):
Common stock, $.001 par value, shares authorized - 20,000,000;
issued shares- 6,903,819 and 6,902,819, respectively 7,000 7,000
Additional paid-in capital 25,556,000 25,552,000
Retained earnings 21,622,000 15,839,000
- --------------------------------------------------------------------------------------------------------------------
47,185,000 41,398,000
Less treasury stock (1,407,571 and 1,329,979 shares)- at cost (Note
12) 3,319,000 2,719,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 43,866,000 38,679,000
- --------------------------------------------------------------------------------------------------------------------
$48,473,000 $43,512,000
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended July 31, 2003 2002 2001
---- ---- ----
----------------------------------------------------------------------------------------------------------------------
NET PATIENT REVENUE (NOTE 8) $97,235,000 $82,172,000 $74,492,000
----------- ----------- -----------
----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of revenue 63,256,000 52,284,000 48,550,000
---------- ---------- ----------
General and administrative 23,547,000 20,667,000 17,628,000
---------- ---------- ----------
Amortization of intangibles 591,000 546,000 956,000
------- ------- -------
Allowance for possible losses 300,000 295,000 670,000
------- ------- -------
----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 87,694,000 73,792,000 67,804,000
---------- ---------- ----------
----------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 9,541,000 8,380,000 6,688,000
--------- --------- ---------
OTHER INCOME:
Interest 143,000 227,000 216,000
------- ------- -------
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 9,684,000 8,607,000 6,904,000
--------- --------- ---------
PROVISION FOR INCOME TAXES (NOTE 7) 3,901,000 3,336,000 2,704,000
--------- --------- ---------
----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,783,000 $ 5,271,000 $ 4,200,000
------------ ------------ ------------
======================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 1.04 $ .96 $ .77
------------ ------------ ------------
Diluted $ 1.01 $ .91 $ .75
------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 5,545,953 5,516,689 5,444,035
---------- --------- ---------
Diluted 5,738,267 5,791,911 5,615,414
---------- --------- ---------
======================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
------------------------- ------------------------------
Additional Retained
Shares Amount Paid-in Capital Earnings Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2000 6,228,746 $6,000 $18,525,000 $12,274,000 1,276,778 $(2,319,000)
Net income - - - 4,200,000 - -
Stock dividend declared March 16, 2002 245,983 - 1,690,000 (1,690,000) - -
Exercise of stock options 16,500 - 69,000 - - -
Tax benefit of stock option exercise - - 22,000 - - -
Acquisition of treasury shares - - - - 33,901 (193,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2001 6,491,229 6,000 20,306,000 14,784,000 1,310,679 (2,512,000)
Net income - - - 5,271,000 - -
Stock divided declared April 17, 2003 264,211 1,000 4,216,000 (4,216,000) - -
Exercise of stock options 147,379 - 554,000 - - -
Tax benefit of stock option exercise - - 476,000 - - -
Acquisition of treasury shares - - - - 19,300 (207,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2002 6,902,819 7,000 25,552,000 15,839,000 1,329,979 (2,719,000)
Net income - - - 5,783,000 - -
Exercise of stock options 1,000 4,000 - - -
Acquisition of treasury shares - - - - 77,592 (600,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 2003 6,903,819 $7,000 $25,556,000 $21,622,000 1,407,571 $(3,319,000)
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,783,000 $ 5,271,000 $ 4,200,000
----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 884,000 813,000 1,194,000
Allowance for possible losses, net of write-offs 69,000 174,000 192,000
Deferred income taxes 272,000 - (306,000)
Unrealized loss on investments 13,000 49,000 -
Loss on sale of assets - - 31,000
Tax benefit realized from the exercise of stock options - 476,000 22,000
Changes in assets and liabilities:
Accounts receivable (2,392,000) (573,000) (328,000)
Prepaid expenses and other (118,000) 354,000 (634,000)
Income taxes receivable 368,000 (259,000) (141,000)
Accounts payable and accrued expenses (324,000) 313,000 1,065,000
Estimated third-party payor settlements (156,000) (178,000) 958,000
Deferred revenue 120,000 58,000 282,000
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,519,000 6,498,000 6,535,000
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold improvements (306,000) (185,000) (470,000)
Purchase of assets of businesses (4,706,000) (335,000) (1,737,000)
Others - (66,000) 22,000
----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,012,000) (586,000) (2,185,000)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (600,000) (207,000) (193,000)
Proceeds from exercise of stock options 4,000 554,000 69,000
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (596,000) 347,000 (124,000)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,089,000) 6,259,000 4,226,000
Cash and cash equivalents, beginning of year 15,341,000 9,082,000 4,856,000
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $14,252,000 $15,341,000 $ 9,082,000
======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 20,000 $ 13,000 $ 1,000
Income taxes $ 3,261,000 $ 3,119,000 $ 3,129,000
======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS National Home Health Care Corp. and Subsidiaries
(the "Company") is a provider of home health care
services, including nursing care, personal care,
supplemental staffing and other specialized health
services in the North Eastern part of the United
States.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of National Home Health Care Corp. and
its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been
eliminated in the consolidated financial
statements.
REVENUE RECOGNITION AND Net patient revenues are recorded at estimated net
ALLOWANCE FOR POSSIBLE realizable amounts from patients, third-party
LOSSES payors and others for services rendered and
includes estimated retroactive revenue adjustments
relating to future audits, reviews and
investigations. Estimated adjustments are recorded
as reviews are completed. An allowance for
possible losses is recorded based upon
management's evaluation of current industry
conditions, historical collection experience and
other relevant factors which, in the opinion of
management, require recognition in estimating the
allowance.
Under Medicaid, Medicare and other reimbursement
programs, the Company is reimbursed for services
rendered to covered program patients as determined
by reimbursement formulas and regulations. To
date, the Company has not had any material
adjustments to previously recorded amounts. Laws
and regulations governing these programs are
complex and subject to interpretation. As a
result, it is possible that recorded estimates
will change.
The Company is reimbursed by Medicare based on
episodes of care. An episode of care is defined as
a length of care up to sixty days with multiple
continuous episodes allowed. Deferred revenue
represents the unearned cash received from an
episode of care.
F-8
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
REVENUE RECOGNITION AND Approximately 47%, 50% and 51% of net patient
ALLOWANCE FOR POSSIBLE revenue for the fiscal years ended July 31, 2003,
LOSSES (CONTINUED) 2002 and 2001, respectively, were derived under
federal and state third-party reimbursement
programs.
CASH AND CASH EQUIVALENTS For the purposes of the statements of cash flows,
the Company considers all highly liquid investment
instruments purchased with a maturity of three
months or less to be cash equivalents.
FURNITURE, EQUIPMENT Furniture, equipment and leasehold improvements
AND LEASEHOLD are stated at cost. Depreciation is being provided
IMPROVEMENTS on the straight-line method over the estimated
useful lives of the assets (generally five to ten
years). Amortization of leasehold improvements is
being provided on the straight-line method over
the various lease terms or estimated useful lives,
if shorter.
GOODWILL In August 2001, the Company adopted SFAS No. 141,
"Business Combinations" and No. 142, "Goodwill and
Intangible Assets." SFAS No. 141 requires the use
of the purchase method of accounting and prohibits
the use of the pooling-of-interests method of
accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires
that the Company recognize acquired intangible
assets apart from goodwill if the acquired
intangible assets meet certain criteria. It also
requires, upon adoption of SFAS No. 142, that the
Company reclassify, if necessary, the carrying
amounts of intangible assets and goodwill based on
the criteria of SFAS No. 141.
SFAS No. 142 requires, among other things, that
companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company
identify reporting units for the purpose of
assessing potential future impairments of
goodwill, reassess the useful lives of other
existing recognized intangible assets and cease
amortization of intangible assets with an
indefinite useful life. No adjustments for
impairment losses were required.
F-9
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
GOODWILL (CONTINUED) The Company's previous business combinations were
accounted for by using the purchase method and, as
of August 2001, the net carrying amount of
goodwill from prior purchase transactions was
approximately $7.2 million. Annual amortization of
this amount, which ceased effective August 1, 2001
amounted to approximately $0.4 million in the year
ended July 31, 2001.
The effect of adoption of SFAS No. 142 on the 2001
consolidated results of operations were as
follows:
2001
---------------------------------------------------------------------------------
Reported net income $4,200,000
Add back: Amortization of goodwill, net of taxes 325,000
---------------------------------------------------------------------------------
Net income, as adjusted $4,525,000
=================================================================================
Basic earnings per share:
Reported net income $.77
Amortization of goodwill, net of taxes .06
---------------------------------------------------------------------------------
Basic earnings per share, as adjusted $.83
=================================================================================
Diluted earnings per share:
Reported net income $.75
Add back: Amortization of goodwill, net .06
of taxes
---------------------------------------------------------------------------------
Diluted earnings, per share, as adjusted $.81
=================================================================================
NET INCOME PER COMMON Basic net income per share is computed by dividing
SHARE income available to common shareholders by the
weighted-average number of common shares
outstanding. Diluted earnings per share reflect,
in periods in which they have a dilutive effect,
the impact of common shares issuable upon exercise
of stock options.
F-10
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NET INCOME PER COMMON The reconciliation for the years ended July 31,
SHARE (CONTINUED) 2003, 2002 and 2001 are as follows:
Years ended July 31, 2003 2002 2001
-----------------------------------------------------------------------------------
SHARES Shares Shares
-----------------------------------------------------------------------------------
Average number of shares outstanding 5,545,953 5,516,689 5,444,035
Effect of dilutive securities - common
stock options 192,314 275,222 171,379
-----------------------------------------------------------------------------------
Diluted shares outstanding 5,738,267 5,791,911 5,615,414
====================================================================================
The number of options that were anti-dilutive and
excluded from the computation for the years ended
July 31, 2003 and 2002 were 183,750 and 0 for July
31, 2001.
FAIR VALUE OF FINANCIAL The carrying amount reported in the consolidated
INSTRUMENTS balance sheets for cash, accounts receivable,
accounts payable and accrued expenses approximate
fair value because of the immediate or short-term
maturity of the financial instruments.
ESTIMATED THIRD-PARTY The amount represents overpayments from certain
PAYOR SETTLEMENT third-party payors. The Company anticipates that
the third-party payor will recoup these funds in
subsequent periods.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities 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.
Such estimates relate primarily to third-party
payor settlements and valuation reserves for
accounts receivable.
F-11
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
WORKERS' COMPENSATION The Company self-insures up to specified limits
certain risks related to workers' compensation
liability. The estimated costs of existing and
expected future claims under the insurance program
are accrued based upon historical loss trends and
may be subsequently revised based on developments
relating to such claims.
INCOME TAXES The Company accounts for income taxes under an
asset and liability approach that requires the
recognition of deferred tax assets and liabilities
for the expected future tax consequences of events
that have been recognized in the Company's
financial statements or tax returns. The effect on
deferred tax assets and liabilities of changes in
tax rates will be recognized as income or expense
in the period that includes the enactment date.
The Company files a consolidated Federal income
tax return with its subsidiaries.
LONG-LIVED ASSETS Long-lived assets, such as intangible assets,
furniture, equipment and leasehold improvements,
are evaluated for impairment when events or
changes in circumstances indicate that the
carrying amount of the assets may not be
recoverable through estimated undiscounted future
cash flows from the use of these assets. When any
such impairment exists, the related assets will be
written down to fair value.
STOCK BASED COMPENSATION As of July 31, 2003, the Company has a stock-based
employee compensation plan, which is described in
Note 9. As allowed by SFAS 148, the Company, has
elected not to use one of the alternative methods
of transition available for a voluntary change to
the fair value based method of accounting for
stock-based employee compensation.
F-12
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
STOCK BASED COMPENSATION All stock options have been granted to employees
(CONTINUED) and non-employees at exercise prices equal to or
in excess of the market value on the date of the
grant.
The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees," and related
Interpretations in accounting for its stock option
plan by recording as compensation expense the
excess of the fair market value of the underlying
common stock over the exercise price per share as
of the date of grant. Because the exercise price
of the Company's employee stock options equals the
market price of the underlying stock on the date
of grant, no compensation was recognized.
SFAS No. 123 requires the Company to provide pro
forma information regarding net income and net
income per share as if compensation cost for the
Company's stock option plan had been determined in
accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing
model with the following weighted average
assumptions used for grants since 1992:
Years ended July 31, 2003 2002 2001
---------------------------------------------------------------------------------
ASSUMPTIONS
Dividend Yield - 0.00% -
Volatility - 66.00% -
Risk free interest rate - 5.04% -
Expected lives - 10 years -
=================================================================================
F-13
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
STOCK BASED COMPENSATION Under the accounting provisions of FASB Statement
(CONTINUED) 123, the Company's net income and net income per
share would have been adjusted to the pro forma
amounts indicated below:
Years ended July 31, 2003 2002 2001
---------------------------------------------------------------------------------
PRO FORMA RESULTS
Net income:
As reported $5,783,000 $5,271,000 $4,200,000
Pro forma (a) 5,050,000 (a)
Income per common share-basic:
As reported 1.04 0.96 0.77
Pro forma (a) 0.92 (a)
Income per common share-diluted:
As reported 1.01 0.91 0.75
Pro forma (a) 0.87 (a)
=================================================================================
(a) No pro forma since options were not granted.
SEGMENTS The Company's management considers its business to
be a single segment - Home Healthcare Services.
Home Healthcare Services net patient revenue is
provided by health care personnel, and the
Company's customers are similar for all sources of
net patient revenue. Management evaluates its
operating results on an integrated basis.
RECLASSIFICATIONS Certain reclassifications have been made in prior
years' financial statements to conform to
classifications used in the current year.
F-14
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
RECENT ACCOUNTING In January 2003, the Financial Accounting
PRONOUNCEMENTS Standards Board ("FASB") issued Interpretation No.
46, Consolidation of Variable Interest Entities.
The objective of this interpretation is to provide
guidance on how to identify a variable interest
entity (VIE) and determine when the assets,
liability, and non-controlling interests and
results of operations and a VIE need to be
included in a Company's consolidated financial
statements. A company that holds variable interest
in an entity will need to consolidate the entity
if the Company interest in the VIE is such that
the Company will absorb a majority of the VIE's
expected losses and/or receive a majority of the
entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional
disclosures by primary beneficiaries and other
significant variable interest holders. The
provisions of this interpretation became effective
upon issuance. The adoption of this interpretation
did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the FASB issued FIN 45,
"Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This
interpretation expands the disclosures to be made
by a guarantor in its financial statements about
its obligations under certain guarantees and
requires the guarantors to recognize the liability
for the fair value of an obligations assumed under
a guarantee. FIN 45 clarifies the requirements of
SFAS No. 5, "Accounting for Contingencies"
relating to guarantees. In general, FIN 45 applies
to contracts or indemnification agreements that
contingently require the guarantor to make
payments to the guaranteed party based on changes
in an underlying that is related to an asset,
liability, or equity security of the guaranteed
party. Certain guarantee contracts are excluded
from both the disclosure and recognition
requirements of this interpretation, including,
among others, guarantees relating to employee
compensation, residual value guarantees under
capital lease arrangements, commercial letters of
credit, loan commitments, subordinated interests
in a special purpose entity, and guarantees of a
company's own future performance.
F-15
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
RECENT ACCOUNTING Other guarantees are subject to the disclosure
PRONOUNCEMENTS (CONTINUED) requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee
accounted for as a derivative instrument under
SFAS No. 133, a parent's guarantee of debt owed to
a third party by its subsidiary or vice-versa, and
a guarantee which is based on performance not
price. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002,
and require disclosure of the nature of the
guarantee, the maximum potential amount of future
payments that the guarantor could be required to
make under the guarantee, and the current amount
of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified
after December 31, 2002. The adoption of this
interpretation did not have a material effect on
the Company's consolidated financial statements.
In May 2003, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics
of Liabilities and Equity ("SFAS 150") which is
effective for the interim period beginning after
June 15, 2003. SFAS 150 establishes standards for
the Company's classification of liabilities in the
financial statements that have characteristics of
both liabilities and equity. The adoption of SFAS
150 will not have a material effect on the
Company's financial statements.
F-16
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
RECENT ACCOUNTING In December 2002, the FASB issued SFAS No. 148,
PRONOUNCEMENTS (CONTINUED) "Accounting for Stock-Based Compensation-
Transition and Disclosure". This statement amends
SFAS No. 123, "Accounting for Stock-Based
Compensation" and provides alternate methods of
transition for an entity's voluntary change to the
fair value method of accounting for stock-based
employee compensation". This statement also amends
the disclosure requirement of SFAS No. 123 to
require more prominent disclosure and specifies
the form, content and location of those
disclosures in both annual and interim financial
statements regarding the method of accounting used
for stock-based employee compensation and its
effect on reported results. This statement is
effective for fiscal years ending after December
15, 2002. The Company continues to account for
employee stock-based compensation under APB 25,
and did not make a voluntary change to the fair
value based method of accounting for stock-based
employee compensation under SFAS No. 123
accordingly, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for
costs associated with an exit or disposal activity
and requires such costs to be recognized when the
liability is incurred. Previous guidance in EITF
No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to
Exit an Activity (Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"), require that a
liability for an exit cost be recognized at a date
of a company's commitment to an exit plan. The
provisions of SFAS 146 are effective for an exit
or disposal activities that are initiated by a
company after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the
Company's financial position or results of
operations.
F-17
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. FURNITURE, Furniture, equipment and leasehold improvements
EQUIPMENT AND are stated at cost and are summarized as follows:
LEASEHOLD
IMPROVEMENTS
July 31, 2003 2002
---------------------------------------------------------------------------------
Furniture and equipment $2,369,000 $ 1,924,000
Leasehold improvements 426,000 406,000
---------------------------------------------------------------------------------
2,795,000 2,330,000
Less accumulated depreciation and
amortization 1,765,000 1,473,000
---------------------------------------------------------------------------------
$1,030,000 $ 857,000
---------------------------------------------------------------------------------
Depreciation expense in 2003, 2002 and 2001 was
$292,000, $267,000 and $238,000, respectively.
2. GOODWILL Changes in goodwill are as follows:
July 31, 2003 2002
---------------------------------------------------------------------------------
Balance, beginning of year $ 7,366,000 $ 7,166,000
Additions 3,262,000 200,000
---------------------------------------------------------------------------------
Balance, end of year $10,628,000 $7,366,000
================================================================================
F-18
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. OTHER Other intangible assets are as follows:
INTANGIBLE
ASSETS
July 31, 2003 2002
--------------------------------------------------------------------------------
GROSS CARRYING AMOUNT:
Covenants not to compete $ 1,375,000 $ 1,325,000
Patient and other files 2,796,000 2,796,000
Contracts 1,234,000 -
--------------------------------------------------------------------------------
5,405,000 4,121,000
--------------------------------------------------------------------------------
ACCUMULATED AMORTIZATION:
Covenants not to compete 1,168,000 1,049,000
Patient and other files 2,026,000 1,666,000
Contracts 112,000 -
--------------------------------------------------------------------------------
3,306,000 2,715,000
--------------------------------------------------------------------------------
Balance, end of year $ 2,099,000 $1,406,000
--------------------------------------------------------------------------------
The aggregate amortization expense for the years
ended July 31, 2003, 2002 and 2001 was $591,000,
$546,000 and $540,000, respectively.
Estimated amortization expense is as follows:
Years ended July 31,
--------------------------------------------------------------------------------
2004 $ 510,000
2005 488,000
2006 242,000
2007 199,000
2008 155,000
--------------------------------------------------------------------------------
$1,594,000
================================================================================
F-19
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. OTHER The remaining weighted-average amortization period
INTANGIBLE is as follows:
ASSETS
(CONTINUED)
Year ended July 31, 2003
--------------------------------------------------------------------------------
Covenants not to compete 2.16 years
Patient and other files 2.19 years
Contracts 9.91 years
--------------------------------------------------------------------------------
3.04 years
================================================================================
Other intangible assets are being
amortized using the straight-line method
over a period of three to ten years.
4. ACCOUNTS Accounts payable and accrued expenses are as
PAYABLE AND follows:
ACCRUED EXPENSES
July 31, 2003 2002
--------------------------------------------------------------------------------
Trade accounts payable $ 299,000 $ 730,000
Accrued employee compensation and
benefits 2,432,000 2,461,000
Other 526,000 390,000
--------------------------------------------------------------------------------
$3,257,000 $3,581,000
================================================================================
5. INVESTMENT IN During fiscal 1996, following an initial public
SUNSTAR offering and change in management, the Company
HEALTHCARE, INC. held a 37.6% investment in SunStar Healthcare,
Inc. ("SunStar"), which was accounted for under
the equity method of accounting.
During the fiscal year ended July 31, 2000, the
Company sold 259,510 shares of SunStar for
$1,602,000, resulting in a gain of $1,602,000.
In February 2000, SunStar's sole operating
subsidiary effectively discontinued operations. At
July 31, 2003, the Company's ownership percentage
of SunStar was 21.6% and the Company's value of
its investment in SunStar was $0. The Company and
certain of its officers and directors have been
named in a class action brought on behalf of
certain shareholders of SunStar (See Note 10d).
F-20
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. ACQUISITIONS On August 25, 2000, the Company acquired certain
assets of Health Force Owned, Ltd. and its
affiliates for $1,822,000 in cash, including
acquisition costs of $42,000. The assets purchased
consisted of patient and other files of $800,000,
employee files of $400,000, covenant not to
compete of $300,000 and goodwill of $722,000.
On September 3, 2002, the Company acquired certain
assets of Medical Resources, Inc. and related
entities for $2,623,000 in cash, including
acquisition costs of $73,000. The assets purchased
consisted of contracts of $1,235,000, furniture
and equipment of $50,000 and goodwill of
$1,338,000.
On December 14, 2002, the Company acquired certain
assets of Mary Baker's Health Care Services, Inc.
for $434,000 in cash, including acquisition costs
of $14,000. The assets purchased consisted of
furniture and equipment of $20,000 and goodwill of
$414,000.
On March 17, 2003, the Company acquired certain
assets of Professional Relief Nurses, Inc. for
$1,248,000 in cash, including acquisition costs of
$98,000. The assets purchased consisted of
furniture and equipment of $89,000 and goodwill of
$1,159,000.
The above acquisitions have been recorded using
the purchase method of accounting. Accordingly,
the results of these operations have been included
in the accompanying consolidated financial
statements since the dates of acquisition.
The effects of the above acquisitions on the
consolidated results of operations were not
significant.
F-21
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INCOME TAXES The provision for income taxes is summarized as
follows:
Years ended July 31, 2003 2002 2001
--------------------------------------------------------------------------------
Current:
Federal $2,805,000 $2,500,000 $2,275,000
State 824,000 836,000 735,000
--------------------------------------------------------------------------------
3,629,000 3,336,000 3,010,000
Deferred 272,000 - (306,000)
--------------------------------------------------------------------------------
$3,901,000 $3,336,000 $2,704,000
================================================================================
The deferred tax asset consists of the following:
July 31, 2003 2002
--------------------------------------------------------------------------------
Current:
Accrued liabilities and reserves $375,000 $295,000
Long term:
Amortization of intangible assets 163,000 515,000
--------------------------------------------------------------------------------
$538,000 $810,000
================================================================================
The reconciliation of the statutory tax rate to
the effective tax rate is as follows:
Years ended July 31, 2003 2002 2001
--------------------------------------------------------------------------------
Statutory rate 34% 34% 34%
State and local taxes
(net of federal tax effect) 6 6 6
Federal tax credit (1) (1) (2)
Permanent differences - - 1
Other 1 - -
--------------------------------------------------------------------------------
Effective rate 40% 39% 39%
================================================================================
F-22
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. CONCENTRATIONS OF The Company's business is with customers who are
CREDIT RISK AND in the healthcare industry or with governmental
MAJOR CUSTOMERS agencies.
The Company provides temporary health care
personnel to in-home patients and facilities in
the New York City metropolitan area, Connecticut,
New Jersey and Massachusetts. Credit losses
relating to customers historically have been
minimal and within management's expectations.
At July 31, 2003, the Company maintained
approximately 28% of its cash and cash equivalents
with one financial institution.
Under certain federal and state third-party
reimbursement programs, the Company received net
patient revenue of approximately $45,565,000,
$41,253,000 and $37,788,000 for the years ended
July 31, 2003, 2002 and 2001, respectively. At
July 31, 2003 and 2002, the Company had aggregate
outstanding receivables from federal and state
agencies of $4,048,000 and $4,621,000,
respectively.
9. STOCK OPTIONS In 1992, the Company adopted an Employee Stock
Option Plan (the "Plan") designed to provide
incentives to key employees (including directors
and officers who are key employees) and to
non-employee directors of the Company. The Plan
authorizes the granting of both incentive and
non-qualified stock options to purchase up to
500,000 shares of the Company's common stock. As
of August 1, 2002 and July 31, 2003, 318,139
shares, of the Company's common stock have been
reserved for future issuance upon the exercise of
options designated at either (i) options intended
to constitute incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as
amended, or (ii) nonqualified options. The Plan
expired in July of 2002. Options granted under the
Plan expire not more than ten years from the date
of grant and vest immediately.
F-23
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. STOCK OPTIONS In 1999, the Company adopted a second Employee
(CONTINUED) Stock Plan (the "1999 Plan"). The 1999 Plan was
adopted in anticipation of expiration of the Plan.
The 1999 Plan was also designed to provide
incentives to key employees (including directors
and officers who are key employees) and to
non-employee directors of the Company. The Plan
authorizes the granting of both incentive and
non-qualified stock options to purchase up to
551,250 shares of the Company's common stock. As
of July 31, 2003, 529,880 shares of the Company's
common stock have been reserved for future
issuance. The provisions of the 1999 Plan are
consistent with the Plan. Unless sooner
terminated, the 1999 Plan will expire in October
2009. Options granted under the 1999 Plan expire
not more than ten years from the date of grant and
vest immediately.
A summary of the status of the Company's stock
option plan as of July 31, 2003, 2002 and 2001 and
changes for the years ending on those dates is
presented below:
Weighted
average
Number of Expiration exercise
shares date price
---------------------------------------------------------------------------------
Options outstanding at July 31, 2000 525,291 2004-2009 $ 3.86
Options exercised (17,325) - 3.96
---------------------------------------------------------------------------------
Options outstanding at July 31, 2001 507,966 2004-2009 3.85
Options exercised (153,445) - 3.61
Options forfeited (5,513) - 3.65
Options granted 183,750 2004-2011 13.31
---------------------------------------------------------------------------------
Options outstanding at July 31, 2002 532,758 - 13.97
Options exercised (1,000) 2009 3.84
---------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT JULY 31, 2003 531,758 2004-2011 $13.97
-------------------------------------- ------------- ------------- --------------
Range of Number Weighted Weighted Number Weighted
average
Remaining average average
Contractual exercise exercise
Exercise Price Outstanding Price price excercisable price
---------------------------------------------------------------------------------
$ 3.60 85,751 0.75 years $ 3.60 85,751 $ 3.60
$ 3.66 11,024 5.25 years $ 3.66 11,024 $ 3.66
$ 3.84 - 4.22 185,083 5.91 years $ 4.06 185,083 $ 4.06
$ 4.34 66,150 3.42 years $ 4.34 66,150 $ 4.34
$13.58 - 14.94 183,750 5.83 years $14.01 183,750 $14.01
=================================================================================
F-24
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. STOCK OPTIONS The plan options are exercisable at various
(CONTINUED) prices, none of which were in excess of 110% of
the fair market value of the Company's common
stock at the date of grant.
Data summarizing year-end options exercisable and
weighted average fair value of options granted
during the years ended July 31, 2003, 2002 and
2001 is shown below:
Options Exercisable 2003 2002 2001
---------------------------------------------------------------------------------
Options exercisable at year end 531,758 532,758 507,966
Weighted average exercise price $ 13.97 $ 13.97 $ 3.85
Weighted average fair value of
options granted during the year - 9.61 -
Weighted average remaining
contractual life 6.07 YEARS 7.07 years 6.98 years
==================================================================================
10. COMMITMENTS, EMPLOYEE SAVINGS AND STOCK INVESTMENT PLAN
CONTINGENCIES AND
OTHER MATTERS Effective January 1, 1999, the Company amended and
restated its Employee Savings and Stock Investment
Plan organized under Section 401(k) of the
Internal Revenue Code. Under the amended plan,
employees may contribute up to 15% of their
salary, limited to the maximum amount allowable
under federal tax regulations. The Company will
match 100% of the first 3% of employees'
contributions and 50% of the next 2% of employees'
contributions, provided that the matching
contributions on behalf of any employee does not
exceed 4% of employees' compensation. The Company
may also make additional contributions at its
discretion. An employee may invest in Company
stock and several mutual funds. The Company's
matching contributions for the years ended July
31, 2003, 2002 and 2001 were $653,000, $617,000,
and $495,000, respectively.
F-25
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS, EMPLOYMENT AGREEMENTS
CONTINGENCIES AND
MATTERS (CONTINUED) The Company has employment agreements with five
officers, which expire through October 31, 2006.
The aggregate commitment for future salary,
excluding bonuses, is $3,631,000. One agreement
also provides for increases based on increases in
the consumer price index and additional annual
compensation based on 4% of pre-tax income, as
defined, in excess of $3,000,000. Two other
agreements provide for additional compensation
based on 4% and 1% of income from operations, as
defined, in excess of $3,300,000.
Leases
The Company rents various office facilities
through 2008 under the terms of several lease
agreements that include escalation clauses.
At July 31, 2003, minimum annual rental
commitments under noncancellable operating leases
are as follows:
Years ended July 31,
-------------------------------------------------------------------------
2004 $1,008,000
2005 875,000
2006 252,000
2007 60,000
2008 60,000
Thereafter 15,000
-------------------------------------------------------------------------
$2,270,000
=========================================================================
Rent expense for the years ended July 31, 2003,
2002 and 2001 was approximately $1,110,000,
$853,000, and $858,000, respectively.
One lease agreement is with a company controlled
by the Company's Chairman of the Board. Net rent
expense under such lease agreement approximates
$216,000 per year.
F-26
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS, LITIGATION
CONTINGENCIES AND
MATTERS (CONTINUED) The Company and certain of its officers and
directors have been named as defendants in a
consolidated class action brought on behalf of
certain shareholders of SunStar Healthcare, Inc.
("SunStar"). The lawsuit asserts alleged acts or
omissions, which resulted in misrepresentations or
omissions of material information concerning the
financial condition of SunStar. In February 2001,
the Court dismissed the complaint and granted the
plaintiffs leave to amend. In addition, the
lawsuit alleges that the Company and certain
directors exercised control over SunStar. In
October 2001, the Court granted the defendants'
motion to dismiss the complaint with prejudice.
Plaintiff's did not appeal this decision.
In a related action, the director defendants are
named in a case brought by the Department of
Insurance of the State of Florida. The allegations
in this action are similar to those alleged in the
class action lawsuit, which was subsequently
dismissed. Although the Company is not named in
this action, the Company intends to indemnify the
director defendants to the fullest extent
permitted under its by-laws. On May 7, 2002, the
Court granted the director defendants' motion to
dismiss and granted the plaintiff leave to serve a
further amended complaint. On July 24, 2001, the
plaintiff served an amended complaint. On
September 24, 2001 the director defendants filed a
motion to dismiss the amended complaint. In
September 2002, the director defendants (and
certain other defendants) entered into a
settlement agreement with the plaintiff to resolve
this action. The settlement agreement, which is
subject to court approval, was approved by the
trial court in October 2002. The settlement
agreement did not have any impact on the July 31,
2003 consolidated statement of earnings. A third
party has appealed from the order of the trial
court which approved the foregoing settlement
agreement.
F-27
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS, In October 2003, the Company's Connecticut Home
CONTINGENCIES AND Care subsidiary received a subpoena from the
MATTERS (CONTINUED) United States Attorney's Office in New Haven,
Connecticut. The subpoena seeks production of
documents in connection with an investigation into
possible violations of certain federal health care
laws. The records sought by the subpoena relate to
the subsidiary's psychiatric nurses.
Credit Facility
The Company has a $7,500,000 committed revolving
line of credit facility (the "credit facility")
with its bank. The credit facility allows for the
Company to borrow up to the lesser of $7,500,000
or 80% of eligible accounts receivable at the
bank's prime rate or LIBOR plus 2.5%. The credit
facility expires on October 23, 2003 and requires
the Company to meet certain financial covenants
and ratios. The Company is required to pay a .25%
commitment fee on unused amounts. At July 31, 2003
and 2002 there was no outstanding balance under
the credit facility.
11. STOCK DIVIDENDS The Board announced on April 25, 2002 the
declaration of a 5% stock dividend payable May 17,
2002 to shareholders of record on May 10, 2002.
The Board also announced on March 13, 2001 the
declaration of a 5% stock dividend payable on
March 23, 2001 to shareholders of record on March
16, 2001. The basic and diluted weighted average
number of shares outstanding and net income per
share information for all prior reporting periods
have been restated to reflect the effects of the
stock dividends.
12. TREASURY STOCK In April 2003, the Board of Directors increased
its annual program to repurchase its Common Stock
from $1,000,000 to $3,000,000. Purchases would be
made from time-to-time in the open market and
through privately negotiated transactions, subject
to general market and other conditions.
F-28
NATIONAL HOME HEALTH CARE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. SUMMARIZED Presented below is a summary of the unaudited
QUARTERLY DATA consolidated quarterly financial information for
(UNAUDITED) the years ended July 31, 2003 and 2002 (in
thousands, except per share data):
2003
--------------------------------------------------------------------------------
Quarter First Second Third Fourth
--------------------------------------------------------------------------------
Net patient revenue $22,939 $24,643 $25,120 $24,533
--------------------------------------------------------------------------------
Cost of revenue 14,740 15,956 16,374 16,186
General and administrative
expenses 5,603 5,982 6,020 5,942
Amortization of intangibles 140 151 150 150
Allowance for possible losses 50 50 75 125
--------------------------------------------------------------------------------
Total operating expenses 20,533 22,139 22,619 22,403
--------------------------------------------------------------------------------
Income from operations 2,406 2,504 2,501 2,130
Interest income 55 35 31 22
--------------------------------------------------------------------------------
Income before income taxes 2,461 2,539 2,532 2,152
Provision for income taxes 987 1,065 1,038 811
--------------------------------------------------------------------------------
Net income $ 1,474 $ 1,474 $ 1,494 $ 1,341
--------------------------------------------------------------------------------
Net income per common share:
Basic $ .26 .26 $ .27 $ .24
Diluted $ .26 .26 $ .26 $ .24
--------------------------------------------------------------------------------
2002
--------------------------------------------------------------------------------
Quarter First Second Third Fourth
--------------------------------------------------------------------------------
Net patient revenue $20,274 $20,466 $20,620 $20,812
--------------------------------------------------------------------------------
Cost of revenue 12,926 12,972 13,081 13,305
General and administrative
expenses 4,824 5,012 5,186 5,645
Amortization of intangibles 137 136 136 137
Allowance for possible losses 115 65 65 50
--------------------------------------------------------------------------------
Total operating expenses 18,002 18,185 18,468 19,137
--------------------------------------------------------------------------------
Income from operations 2,272 2,281 2,152 1,675
Interest income 78 44 48 57
--------------------------------------------------------------------------------
Income before income taxes 2,350 2,325 2,200 1,732
Provision for income taxes 936 904 839 657
--------------------------------------------------------------------------------
Net income $ 1,414 $ 1,421 $ 1,361 $ 1,075
--------------------------------------------------------------------------------
Net income per common share:
Basic $ .26 $ .26 $ .25 $ .19
Diluted $ .25 $ .24 $ .24 $ .18
--------------------------------------------------------------------------------
F-29
SUPPLEMENTAL MATERIAL
F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL MATERIAL
The audits referred to in our report dated October 3, 2003 relating to the
consolidated financial statements of National Home Health Care Corp. and
Subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying Schedule
II for the years ended July 31, 2003, 2002 and 2001. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
- ---------------------------------
BDO Seidman, LLP
Valhalla, New York
October 3, 2003
F-31
Column A Column B Column C
- -------------------------------------------------------------------------------------------------------------
Additions
------------------------------------------
Description Balance, beginning Charged to costs and Charged to other
of period expenses accounts describe
- -------------------------------------------------------------------------------------------------------------
Year ended July 31, 2003:
Allowance deducted from asset account
Allowance for possible losses $691,000 $300,000 $ -
- -------------------------------------------------------------------------------------------------------------
Year ended July 31, 2002:
Allowance deducted from asset account
Allowance for possible losses $865,000 $295,000 $ -
- -------------------------------------------------------------------------------------------------------------
Year ended July 31, 2001:
Allowance deducted from asset account
Allowance for possible losses $673,000 $670,000 $ -
- -------------------------------------------------------------------------------------------------------------
Column D Column E
--------------------------------------------------
Deductions describe Balance, end of period
- ----------------------------------------------------------------------------------------------
Year ended July 31, 2003:
Allowance deducted from asset account
Allowance for possible losses $369,000(a) $622,000
- ----------------------------------------------------------------------------------------------
Year ended July 31, 2002:
Allowance deducted from asset account
Allowance for possible losses $469,000(a) $691,000
- ----------------------------------------------------------------------------------------------
Year ended July 31, 2001:
Allowance deducted from asset account
Allowance for possible losses $478,000(a) $865,000
- ----------------------------------------------------------------------------------------------
(a) Represents actual write-offs.
See accompanying independent accountants' report on supplemental material.
F-32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL HOME HEALTH CARE CORP.
/s/ Robert P. Heller
------------------------------------
By: Robert P. Heller
Vice President of Finance
and Chief Financial Officer
Dated: October 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the above date by the following persons
on behalf of the Registrant and in the capacities indicated.
/s/ Frederick H. Fialkow October 29, 2003 Chairman of the Board of
- --------------------------- Directors
Frederick H. Fialkow
/s/ Steven Fialkow October 29, 2003 President, Chief Executive
- --------------------------- Officer, Secretary and
Steven Fialkow Director (principal
executive officer)
/s/ Robert P. Heller October 29, 2003 Vice President of Finance,
- --------------------------- Chief Financial Officer and
Robert P. Heller Treasurer (principal
financial and accounting
officer)
/s/ Ira Greifer October 29, 2003 Director
- ---------------------------
Ira Greifer, M.D.
/s/ Bernard Levine October 29, 2003 Director
- ---------------------------
Bernard Levine, M.D.
/s/ Robert Pordy October 29, 2003 Director
- ---------------------------
Robert Pordy, M.D.
/s/ Harold Shulman October 29, 2003 Director
- ---------------------------
Harold Shulman
-33-
Commission File No. 0-12927
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, FOR THE
FISCAL YEAR ENDED JULY 31, 2003
NATIONAL HOME HEALTH CARE CORP.
34
EXHIBIT DOCUMENT
NUMBER --------
- ------
3.1 Certificate of Incorporation. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (No. 2-86643)
filed September 20, 1983 (the "1983 Form S-1").
3.2 Certificate of Amendment to Certificate of Incorporation.
Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1992.
3.3 By-laws. Incorporated by reference to the 1983 Form S-1.
3.4* Amendment to Article III, Section 3 of By-Laws.
10.1 1992 Stock Option Plan. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1993 (the "1993 Form 10-K").
10.2 Incentive Stock Option Plan. Incorporated by reference to the
1993 Form 10-K.
10.3 1999 Stock Option Plan. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 2000.
10.4 Third Amendment, dated as of August 1, 2001, to Amended and
Restated Employment Agreement between the Registrant and
Frederick H. Fialkow. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 2001 (the "2001 Form 10-K").
10.5 Amended and Restated Employment Agreement dated as of November 1,
2001 between the Registrant and Frederick H. Fialkow.
Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 2002 (the
"January 31, 2002 Form 10-Q").
10.6 Fourth Amendment, dated as of August 1, 2001, to Employment
Agreement between the Registrant and Steven Fialkow. Incorporated
by reference to the 2001 Form 10-K.
10.7 Employment Agreement dated as of November 1, 2001 between the
Registrant and Steven Fialkow. Incorporated by reference to the
January 31, 2002 Form 10-Q.
10.8 Employment Agreement dated as of November 1, 2001 between the
Registrant and Robert P. Heller. Incorporated by reference to the
January 31, 2002 Form 10-Q.
EXHIBIT DOCUMENT
NUMBER --------
- ------
10.9 Employment Agreement dated as of November 1, 2001 between the
Registrant and Richard Garofalo. Incorporated by reference to the
January 31, 2002 Form 10-Q.
10.10 Amended and Restated Asset Purchase Agreement dated October 15,
1999 among Charles L. Glerum as Trustee for Optimum Care Services
of Connecticut, Inc., Optimum Home Health of Connecticut, Inc.,
Optimum Home Care of Connecticut, Inc., New England Home Care,
Inc., Connecticut Staffing Works Corp. and the Registrant.
Incorporated by reference to the Registrant's Current Report on
Form 8-K dated November 11, 1999.
10.11 The Registrant's Employee Savings and Stock Investment Plan under
Section 401(k) of the Internal Revenue Code, effective as of
January 1, 1999. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1999.
10.12 Letter Agreement dated February 20, 2000 providing a Secured
Advised Line of Credit from the Bank of New York to National Home
Health Care Corp. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2000 (the "January 31, 2000 Form 10-Q").
10.13 Letter Agreement dated February 20, 2000 providing a Secured
Advised Line of Credit from the Bank of New York to New England
Home Care, Inc. Incorporated by reference to the January 31, 2000
Form 10-Q.
10.14* Audit Committee Charter adopted July 17, 2003.
10.15* Code of Ethics as of October 23, 2003.
21.1* List of Subsidiaries.
23.1* Consent of BDO Seidman, LLP.
31.1* Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
EXHIBIT DOCUMENT
NUMBER --------
- ------
32.1* Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
* Filed herewith