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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2004 Commission File Number 0-12927
NATIONAL HOME HEALTH CARE CORP.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2981141
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(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, during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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As of January 31, 2004, 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 $30,721,968 calculated on the basis of the average
of the closing price 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 of the Registrant's Common Stock outstanding on October 22,
2004 was 5,579,968.
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 2004 Annual Meeting of Stockholders
is incorporated by reference into Part III of this annual report on Form 10-K.
TABLE OF CONTENTS
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Page
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Cautionary Statement..............................................................................................1
PART I
Item 1. Business...........................................................................................1
Item 2. Properties........................................................................................14
Item 3. Legal Proceedings.................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............................................16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities..............................................................................17
Item 6. Selected Financial Data...........................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................27
Item 8. Financial Statements and Supplementary Data.......................................................27
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..............27
Item 9A. Controls and Procedures...........................................................................27
Item 9B. Other Information.................................................................................28
PART III
Item 10. Directors and Executive Officers of the Registrant................................................29
Item 11. Executive Compensation............................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...........................................................................................29
Item 13. Certain Relationships and Related Transactions....................................................29
Item 14. Principal Accountant Fees and Services............................................................29
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................29
Signatures ..................................................................................................31
Exhibit Index ..................................................................................................32
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PART I
Cautionary Statement
The Annual Report on Form 10-K contains certain forward-looking statements that
involve a number of risks and uncertainties. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "believe," "estimate," "project," "anticipate," "continue," or similar
terms, variations of those terms or the negative of those terms. Important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are set forth in this document.
These include but are not limited to risks and uncertainties relating to whether
the Company can identify, consummate and integrate on favorable terms
acquisitions or market penetrations; market acceptance; pricing and demand for
the Company's services; changing regulatory environment; changing economic
conditions; whether the Company can attract and retain qualified personnel;
ability to manage the Company's growth; and other risks detailed in this
document. Please refer to the "Risk Factors" Section in Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7.
Item 1. Business.
General
National Home Health Care Corp. (the "Company") is a Delaware
corporation which is a provider of home health care and staffing services in the
Northeast region.
Industry Overview
United States health care spending continues to outpace the rate of
inflation, and the population of older Americans continues to increase. The
Company believes that alternatives to costly hospital and nursing home stays
will continue to create demand for home health care. Medicare, Medicaid and
other managed care insurance companies continue to look for a setting whereby
the aged population can receive health care services most cost efficiently. Home
health care has evolved as the acceptable and most preferred alternative in this
continuum. Patient comfort and substantial cost savings can generally be
realized through treatment at home as an alternative to traditional
institutional settings. Continuing economic pressures within the home health
care industry and the changes to Medicare reimbursement have forced providers to
modify the manner in which they provide home health care services. Those
companies that successfully operate with efficient business models can provide
quality patient care and manage costs under the current reimbursement system.
The home health care industry has traditionally been highly fragmented,
comprised of not-for profit and for profit smaller local home health agencies
offering limited services. These smaller agencies do not generally have the
necessary capital to expand their operations or services and are often unable to
achieve the cost efficiencies to compete effectively. The implementation of the
Medicare Prospective Payment system and other legislation at the state levels
has created major industry consolidation.
Home Health Care Services
Home health care services include four broad categories: (1) home
health nursing services, (2) infusion therapy, (3) respiratory therapy, and (4)
home medical equipment. According to statistics from CMS' Office of the Actuary,
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total expenditures by payers on home health nursing services was approximately
$33.0 billion in 2001. Medicare is the largest single payer, accounting for
$11.0 billion in 2002, and this is projected to grow to $21.9 billion by 2012
according to the home health care spending projections by CMS' Office of the
Actuary.
The Company currently operates thirty offices consisting of one parent
corporate office, nineteen offices that coordinate home health care services and
ten satellite offices. The Company has two Medicare provider numbers and is a
Medicaid provider in each of the four states in which it operates. The Company
provides a wide variety of home health care services including:
o Registered nurses who provide clinical nursing assessments,
evaluations, clinical interventions, medication supervision
and/or administration.
o Licensed practical nurses who perform technical procedures,
administer medications and change surgical and medical
dressings.
o Physical and occupational therapists who work to strengthen
muscles, restore range of motion and help patients perform the
activities of daily living.
o Speech pathologists/therapists who work to restore
communication and oral skills.
o Medical social workers who help families address the problems
associated with acute and chronic illnesses.
o Home health aides who perform personal care such as bathing or
assistance in walking.
o Private duty services such as continuous hourly nursing care
and sitter services.
The Company has five 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 Medical Resources Home Health Corp. ("Medical Resources"), a
Delaware corporation that conducts home health care operations
in Massachusetts.
During the fiscal year ended July 31, 2004, the Company terminated its
healthcare staffing operations in both New York and New Jersey.
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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 State of New
York Department of Health. Allen Health Care maintains its principal
administrative office in Jamaica, New York and has a branch office in Mount
Vernon, New York. Case coordinating of patients is performed at these two
offices. In addition, Allen Health Care 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, 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 March 2005.
Allen Health Care is reimbursed primarily by certified home health care
agencies ("CHHAs") and long-term health care provider programs that subcontract
their home health aides from Allen Health Care, as well as by private payers and
the Nassau 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 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.
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New England Home Care, Inc. In August 1995, the Company acquired New
England. New England is a Medicare certified and state 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 November 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 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,
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 payers, hospices and other Medicare certified home health
agencies and long-term care providers that subcontract their home health aides
from 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.
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 in Hartford, Litchfield,
New Haven and Middlesex Counties, Connecticut.
In October 2004, New England acquired certain assets from On Duty
Metropolitan Connecticut, LLC, a Medicare certified and licensed home health
care company engaged in providing nursing and home health care services in New
Haven and Fairfield Counties, Connecticut.
The continued growth of New England depends on, among other things, its
ability to recruit and retain qualified personnel. 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.
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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. It maintains 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. From inception, Connecticut Staffing has
performed criminal background investigations on all new personnel.
Connecticut Staffing maintains a roster of quality professional
personnel. The continued success of Connecticut Staffing is dependent on, among
other things, its ability to maintain a steady roster of per diem workers to
meet the staffing requirements of its clients. Connecticut Staffing 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 also has a satellite office in Union
City, New Jersey that is used for recruitment, in services and orientation of
home health aides.
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. Accredited has been approved by the
New Jersey Board of Nursing for the training of home health aides in the State
of New Jersey. Effective November 2003, all home health aides of Accredited have
criminal background checks performed by the State of New Jersey.
In March 2004 , 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 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 home health aides from Accredited
and private payers.
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.
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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. Recruiting is conducted
primarily through advertising, direct contact with community groups and
employment programs, and programs designed to encourage new employee referrals
by existing employees. Accredited believes that it offers competitive salaries
and fringe benefits and has been able to keep its home health aides 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. 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. From inception, Medical Resources has performed criminal background
investigations on all new personnel.
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
North 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
from 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. Medical Resources 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 is located in Scarsdale, New York,
where all senior corporate administrative functions are performed. The Company's
operations are conducted by its five 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
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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.
Insurance
The Company and its subsidiaries maintain casualty coverages for all of
its operations, including professional and general liability, workers'
compensation, automobile, property, fiduciary liability and directors and
officers insurance. The Company reviews its insurance coverages throughout the
year to insure that adequate coverages are in place. In New York State, the
Company self insures up to specified limits certain risks related to workers'
compensation. 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 25, 2004, the Company had approximately 3,350 full and
part-time employees. The Company currently employs the following classifications
of personnel: administrative employees which consist of a senior management team
(CEO and CFO) of the parent company and a COO, CFO and vice-presidents at each
subsidiary company; office administrative staff, nursing directors and clinical
managers; sales and marketing executives; licensed and certified professional
staff (RNs, LPNs, therapists); and non-licensed care givers (home health and
personal care aides). 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.
Effective May 1, 2004, Allen Health Care and District Council 1707,
American Federation of State, County and Municipal Employees (AFSCME), concluded
negotiations on an initial three-year labor contract. The labor contract
provides "covered" home health aides with some new benefits, consisting of an
immediate wage increase, eligibility for paid time off, increase in minimum
hourly base rates, holiday premium pay and representation by the Union in
procedures and personnel matters. The Company has no other union contracts with
any of its employees. The Company believes its relationship with its employees
is satisfactory.
In a recent court case (Coke v. Long Island Care At Home, Ltd), the
United States Court of Appeals for the Second Circuit invalidated the
interpretation by the United States Department of Labor of certain overtime
exemptions under the Fair Labor Standards Act regarding companionship services.
As a result, it appears that federal overtime pay requirements would apply to
all of the Company's personnel that provide home health care services. Unless
the aforementioned decision is overturned on appeal, the Company's labor costs
would increase, but the Company does not believe that such increase would have a
material adverse affect on its operating results.
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 also discussed in other sections of this report.
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Risk Related to the Company's Ability to Attract Qualified Caregivers.
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 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, effective May 1, 2004, Allen Health Care and District
Council 1707, American Federation of State, County and Municipal Employees
(AFSCME), concluded negotiations on an initial three-year labor contract. There
can be no assurance that the terms of this 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 or that any such activity will not have a material
adverse effect on the Company.
Risks Related to Competition.
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. Competition for referrals 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. 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 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.
Risks Related to Medicare and Medicaid 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
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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.
Risks Related to Federal and State Regulations.
The Company is subject to substantial and frequently changing federal,
state and local regulations. 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 payers.
Federal laws governing the Company's activities include regulation of Medicare
reimbursement and certification and certain financial 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
"Government Regulation and Licensing - 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. These 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 "Government Regulation and Licensing -
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.
In October 2003, New England received a subpoena from the United States
Attorney's Office in New Haven, Connecticut. The subpoena sought production of
documents in connection with an investigation into possible violations of
certain federal health care laws. The Company believes that the investigation,
which the Company understands is being conducted in parallel with an
investigation by state of Connecticut authorities, seeks evidence of potentially
fraudulent claims that may have been submitted by psychiatric nurses employed by
New England. 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. New England has produced documents
in response to the subpoena and intends to continue to cooperate with the
investigation.
In the event that the government investigation uncovers a fraudulent
scheme and New England is convicted of participating in such a scheme, the
penalties could include (1) fines and restitution in excess of $1,000,000, (2)
organizational probation that could include requirements such as court-monitored
supervision and termination of responsible employees, officers and/or directors
and (3) suspension or debarment from federally funded programs. Ancillary
consequences could include: (1) criminal prosecution of responsible employees,
officers and directors, (2) civil enforcement and penalties and (3) default
under loan and insurance covenants.
-9-
On or about October 8, 2004, New England was notified by the Division
of Health Systems Regulation for the Connecticut Department of Public Health
("DPH") of New England's alleged lack of compliance with a Condition of
Participation and nine standards for continued Certification for Participation
in the Title XVIII Medicare Program ("Summary Statement of Deficiencies"). On
October 12, 2004, New England received notice from DPH of alleged violations of
Connecticut state regulations based on substantially the same grounds as the
Summary Statement of Deficiencies. DPH notified New England that consideration
for continued Medicare certification would be based on New England's submission
of a Plan of Correction addressing the cited deficiencies and DPH's acceptance
of that Plan of Correction by November 12, 2004. Although New England disputes
certain of the deficiencies cited by DPH, New England intends to comply fully
with DPH's direction and has submitted a Plan of Correction and expects that its
Plan of Correction will be acceptable. In the event that New England's Plan of
Correction is deemed unacceptable, New England would no longer be certified as
an approved provider of services reimbursed under the Medicare program and would
be prohibited from participating in that program as well as the Medicaid
program. Revenues derived from New England's participation in the Medicare and
Medicaid programs for the fiscal year ended July 31, 2004 were 32% of the
Company's total revenues for such period.
Risks Related to the Company's Exposure to Professional 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.
Risks Related to Third Party Payers.
For the twelve months ended July 31, 2004, 2003 and 2002, the
percentage of the Company's revenues derived from Medicare and Medicaid was 48%,
47%, and 50%, respectively. The revenues and profitability of the Company are
affected by the continuing efforts of all third-party payers 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 payer 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
payer sources may also affect the Company's revenues and profitability.
-10-
Risks Related to the Company's Acquisition Strategy.
In recent years, the Company's strategic focus has been 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 has principally
resulted from 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.
The Company has grown significantly over the past few 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.
Risks Related to the Company's Dependence on Senior Management.
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 their present positions, the Company's
business and financial results could 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
-11-
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. The
Company's largest competitors include Gentiva Health Services, Inc., Premier
Health Services, Patient Care, Inc., New York Health Care, Inc. and Personal
Touch Home Care, Inc. 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 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 payer sources. These
sources include federal and state funded public assistance programs (Medicare
and Medicaid), other third party payers (subcontracts), insurance companies and
private payers.
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 come up for
bid, it could have a materially adverse effect on the Company's results of
operations.
For the fiscal years ended July 31, 2004, 2003 and 2002, the State of
Connecticut Department of Social Services Medical Care Administration program
accounted for 27%, 29% and 32%, respectively, of the Company's net patient
revenue; the New Jersey Department of Human Services Division of Medical
Assistance and Health Services program accounted for 9%, 7% and 8% respectively,
of the Company's net patient revenue; and the State of New York Department of
Social Services personal care aide program for the counties of Nassau, Suffolk
and Westchester accounted for 5%, 5% and 7% respectively, of the Company's net
patient revenue. During fiscal year ended July 31, 2004, the Company exited the
Suffolk County Department of Social Services personal care aide program. This
program accounted for less than 1% of Company's net patient revenue over the
past two fiscal years. The loss of or a significant adverse change in the
business terms with any of the foregoing customers would have a material adverse
effect on the Company.
-12-
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.
Organizations were required to be in compliance with certain HIPAA provisions
relating to security and privacy beginning April 14, 2003. Organizations are
subject to significant fines and penalties if found not to be compliant with the
provisions outlined in the regulations. Regulations issued pursuant to HIPAA
impose ongoing obligations relative to training, monitoring and enforcement, and
management has implemented processes and procedures to ensure continued
compliance with these regulations.
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%, 5% and 3%
of revenue for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively, were derived from the Medicare program (see "Risk Factors -Risks
Related to Federal and State Regulations" above for a discussion regarding the
Company's participation in the Connecticut 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 43%, 42% and 47% of revenue for the fiscal
years ended July 31, 2004, 2003 and 2002, 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
-13-
Nassau 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 (see "Risk Factors -Risks
Related to Federal and State Regulations" above for a discussion regarding the
Company's participation in the Connecticut Medicaid program).
New Jersey Legislation. During fiscal year ended July 31, 2003,
legislation was proposed in the state of New Jersey that would have established
four regional councils to maintain registries of home health care workers and to
regulate various aspects of the home health care industry.
During the fiscal year ended July 31, 2004, this proposed legislation
was defeated.
Item 2. Properties.
The Company, directly or through certain subsidiaries, leases various
office facilities under lease agreements with various expiration dates through
fiscal 2009. The following sets forth the location, approximate square footage
and use of each office, and the expiration date of each lease:
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
Mount Vernon, NY 2,500 Branch office November 30, 2005
Hempstead, NY 1,528 Satellite office November 30, 2007
Brooklyn, NY 800 Satellite office Month-to-Month
Bronx, NY 648 Satellite office August 31, 2005
Milford, CT 18,441 Administrative office March 31, 2006
Cromwell, CT 15,219 Administrative office September 30, 2005
Norwalk, CT 1,400 Satellite office Month-to-Month
Hamden, CT 1,875 Satellite office Month-to-Month
Danbury, CT 780 Satellite office Month to Month
Norwich, CT 1,200 Satellite office Month to Month
Waterbury, CT 3,986 Branch office May 31, 2007
West Hartford, CT 4,455 Branch office October 31, 2005
Guilford, CT 200 Satellite office Month-to-Month
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
Union City, NJ 300 Satellite office Month to Month
Newton, MA 3,838 Administrative office August 31, 2007
Bellingham, MA 260 Satellite office Month to Month
North Andover, MA 220 Satellite office July 31, 2005
Framingham, MA 525 Satellite office Month to Month
Boston, MA 795 Satellite office January 31, 2005
Lynn, MA 412 Satellite office August 31, 2004*
North Dartmouth, MA 964 Satellite office Month to Month
Chicopee, MA 1,340 Satellite office November 30, 2004
-14-
Approximate Expiration Date
Location Square Feet Use of Lease
- -------- ----------- --- ---------------
North Easton, MA 550 Satellite office August 31, 2004*
Leominster, MA 1,000 Satellite office August 31, 2004*
Worcester, MA 1,510 Branch office October 31, 2006
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.
*The Company is in the process of renewing such leases for a one year
term and upon substantially the same terms and conditions.
Item 3. Legal Proceedings.
The Company and certain of its officers and directors (the "director
defendants") were named as defendants in a consolidated class action brought on
behalf of certain shareholders of SunStar Healthcare, Inc. ("SunStar"). The
lawsuit asserted alleged acts or omissions, which allegedly resulted in
misrepresentations or omissions of material information concerning the financial
condition of SunStar. In addition, the lawsuit alleged that the Company and the
director defendants exercised control over SunStar. In February 2001, the Court
dismissed the complaint and granted the plaintiffs leave to amend. In October
2001, the Court granted the defendants' motion to dismiss the amended complaint
with prejudice. Plaintiffs did not appeal this decision.
In a related action, the director defendants were named in a case
brought by the Department of Insurance of the State of Florida as receiver for
SunStar. The allegations in this action were similar to those alleged in the
class action lawsuit, which was subsequently dismissed. Although the Company was
not named in this action, the Company agreed to indemnify the director
defendants to the fullest extent permitted under its by-laws. 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 to resolve this action. The settlement payments
were made in March 2004. The Company indemnified the director defendants for
their share of the settlement payments. Because the amount paid had been
previously reserved, the payments had no impact on the Company's July 31, 2004
consolidated statement of earnings.
In October 2003, New England received a subpoena from the United States
Attorney's Office in New Haven, Connecticut. The subpoena sought production of
documents in connection with an investigation into possible violations of
certain federal health care laws. The Company believes that the investigation,
which the Company understands is being conducted in parallel with an
investigation by state of Connecticut authorities, seeks evidence of potentially
fraudulent claims that may have been submitted by psychiatric nurses employed by
New England. 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. New England has produced documents
in response to the subpoena and intends to continue to cooperate with the
investigation.
-15-
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, 2004.
-16-
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
(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, 2003
and 2004. 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, 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
Year ended July 31, 2004
- ------------------------
1st Quarter.............................................................. $10.40 $6.67
2nd Quarter.............................................................. 11.09 8.29
3rd Quarter.............................................................. 12.28 9.51
4th Quarter.............................................................. 11.75 9.11
(b) Holders
There were approximately 161 holders of record of the Company's Common
Stock as of October 22, 2004, excluding certain beneficial holders that own
their shares in street name, but including each firm which holds shares on
behalf of such beneficial owners.
(c) Dividends
The Company has not declared or paid cash dividends for the last two
fiscal years. The Board of Directors of the Company did declare a cash dividend
of $0.075 per share of Common Stock in the fiscal quarter ending October 31,
2004. The Company anticipates that this amount will be paid as a quarterly
dividend going forward, subject to the Board's discretion, based on the
Company's cash requirements.
-17-
(d) Securities Authorized for Issuance Under Equity
Compensation Plans.
====================================================================================================================
Number of Securities
Remaining Available for
Number of Securities to be Weighted-Average Exercise Future issuance Under
Issued Upon Exercise of Price of Outstanding Equity Compensation Plans
Outstanding Options, Options, Warrants and (Excluding Securities
Plan Category Warrants and Rights Rights Reflected in Column (a))
- --------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 378,439 $8.51 332,011
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans N/A N/A N/A
not approved by security
holders
- --------------------------------------------------------------------------------------------------------------------
Total 378,439 $8.51 332,011
====================================================================================================================
(e) Issuer Purchases of Equity Securities
Total Number of Maximum Number (or
Shares Purchased as Approximate Dollar Value)
Total Number of Average Price Part of Publicly of Shares that may yet be
Period Shares Paid Per Share Announced Plans purchased under the Plans
------ ------ -------------- ------------------- -------------------------
May 1, 2004 - May 31, 2004 1,213 $9.32 1,213 $2,988,694.84
June 1, 2004 - June 30, 2004 700 $9.82 700 $2,981,820.84
July 1, 2004 - July 31, 2004 14,399 $9.69 14,399 $2,842,294.53
--------------------------------------------------------------------------------------
Total 16,312 $9.67 16,312 $2,842,294.53
Effective April 24, 2004, the Company's Board of Directors extended its program
to repurchase shares for an additional year. Purchases up to $3,000,000 per year
will be made from time to time in open market transactions, subject to general
market and other conditions.
-18-
Item 6. Selected Financial Data.
Fiscal Years Ended July 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue........................... $94,592,000 $97,235,000 $82,172,000 $74,492,000 $55,574,000
Operating expenses................ 86,975,000 87,694,000 73,792,000 67,804,000 51,247,000
Income from operations............ 7,617,000 9,541,000 8,380,000 6,688,000 4,327,000
Other income :
Interest income............. 143,000 143,000 227,000 216,000 220,000
Gain from sale of
stock of equity investee... --- --- --- --- 1,602,000
Income before income taxes........ 7,760,000 9,684,000 8,607,000 6,904,000 6,149,000
Provision for income taxes........ 3,040,000 3,901,000 3,336,000 2,704,000 2,058,000
Net income........................ 4,720,000 5,783,000 5,271,000 4,200,000 4,091,000
Primary net income per share of
common stock...................... $.85 $1.04 $0.96 $0.77 $0.74
Diluted net income per share of
common stock...................... $.83 $1.01 $0.91 $0.75 $0.74
At July 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets......................... $53,486,000 $48,473,000 $43,512,000 $37,250,000 $30,856,000
Working capital...................... 35,169,000 29,551,000 28,232,000 22,138,000 19,312,000
Retained earnings.................... 26,342,000 21,622,000 15,839,000 14,784,000 12,274,000
Stockholders' equity................. 49,039,000 43,866,000 38,679,000 32,584,000 28,486,000
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 payers 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.
-19-
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 revenues, which may have an adverse impact on
the Company's result 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.
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 actually 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 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 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
geographical area in which the entity whose assets were acquired provided
services. Each of the acquisitions described below was accounted for utilizing
purchase accounting principles. At the time of its acquisition, the revenues of
each acquired business constituted less than ten percent of the consolidated
revenues of the Company.
-20-
On October 6, 2004, the Company acquired through New England certain
assets of On Duty Metropolitan Connecticut, LLC, a Medicare certified and
licensed home health care company engaged in providing nursing and home health
care services in New Haven and Fairfield Counties, Connecticut.
On March 17, 2003, the Company acquired through New England certain
assets of Professional Relief Nurses, Inc. ("PRN"), a licensed and Medicare
certified home health care company in the state of Connecticut that provided
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 of Mary Baker's Health Care Services, Inc. ("Mary Baker"), a licensed
home health care company in the state of New Jersey that provided home health
aide services in Bergen and Passaic Counties, New Jersey.
On September 3, 2002, the Company, through a then newly-formed
subsidiary Medical Resources, acquired certain assets of Medical Resources Inc.
and related entities ("Medical Resources"). Medical Resources provided 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, 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 then 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.
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 payers, including private insurers, private
payers, subcontractors, Medicaid and Medicare. Because the Company's business
depends upon third-party payers 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
-21-
value of net patient 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 and the collectibility 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. The Company currently
does not believe any impairment of its goodwill or any such other asset existed
at July 31, 2004. 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,
--------------------------
2004 2003 2002
---- ---- ----
Net patient revenue 100.0% 100.0% 100.0%
Cost of revenue 65.4 65.0 63.6
General and administrative 24.8 24.2 25.1
Allowance for possible losses 1.2 -- .1
Amortization of intangibles .5 1.0 1.0
--------- ----------- -----------
Total operating expenses 91.9 90.2 89.8
Income from operations 8.1 9.8 10.2
Interest income .1 .1 .3
------------ ------------ ------------
Income before income taxes 8.2 9.9 10.5
Provision for income taxes 3.2 4.0 4.1
----------- -------- --------
Net income 5.0% 5.9% 6.4%
=========== ======== ========
-22-
Certain Trends Expected to Impact Future Results of Operations
Effective May 1, 2004, the Connecticut Department of Social Services
increased the Medicaid rate for certain nursing visits. The rate for a
medication administration visit, defined as administration of oral,
intramuscular and/or subcutaneous medication by a health care
agency/professional, was increased from $52 to $56.50 for initial visits and
from $26 to $28.25 for subsequent visits. The increase in these rates was made
retroactive to July 1, 2003, resulting in an increase in net patient revenue of
approximately $916,000 for the period from July 1, 2003 through April 30, 2004,
all of which was recorded in the results of operations for the fiscal year ended
July 31, 2004. The rate change will impact periods following May 1, 2004, and at
current levels of operations, the Company estimates that the rate change will
result in an increase in net patient revenue of approximately $1,050,000
annually. In May 2003, the rates for these nursing visits had been significantly
reduced from $85 to $52 per visit. The Connecticut Department of Social Services
analyzed the impact of this rate cut and as a result, effective May 1, 2004,
increased the rates retroactive to July 1, 2003.
Health Acquisition Corp., d/b/a Allen Health Care Services, the
Company's New York licensed home health care subsidiary, and District Council
1707, American Federation of State, County and Municipal Employees (AFSCME),
concluded negotiations on an initial three-year labor contract that became
effective May 1, 2004. This labor contract provides "covered" home health aides
with some new benefits, consisting of an immediate wage increase, eligibility
for paid time off, an increase in minimum hourly base rates, holiday premium pay
and representation by the Union in procedures and personnel matters. The Company
does not believe that the labor contract will have a material adverse effect on
the Company's future results of operations or financial condition.
Year Ended July 31, 2004 Compared to Year Ended July 31, 2003
Net Patient Revenue. For the fiscal year ended July 31, 2004 ("fiscal
2004"), net patient revenue decreased $2,643,000, or 2.7%, to $94,592,000 from
$97,235,000 for the fiscal year ended July 31, 2003 ("fiscal 2003"). This
decrease was primarily attributable to (i) a decrease of $1,879,000 in net
patient revenue as a result of the reduced Medicaid reimbursement rates for
certain nursing visits in Connecticut that was effective May 1, 2003, (ii) a
decrease of $3,428,000 as a result of fewer hours being subcontracted to the
Company from other Medicare certified agencies in New York and (iii) a decrease
of $1,246,000 in staffing revenue primarily as a result of the Company
terminating its staffing operations in New York in December 2003 and in New
Jersey in July 2004. The decline in net patient revenue was offset by an
increase in net patient revenue of $3,910,000 from the Company's expansion in
New Jersey and the Company attaining Medicare and Medicaid certification in
Massachusetts.
Gross Profit. Gross profit margin decreased to 34.6% for fiscal 2004
from 35% for fiscal 2003. This decrease was primarily attributable to the
reduced Medicaid reimbursement rates for certain nursing visits in Connecticut
and, to a lesser extent, increases in direct payments to caregivers and
increased workers' compensation rates.
General and Administrative. General and administrative expenses
decreased $44,000, or .2%, to $23,503,000 in fiscal 2004 from $23,547,000 in
fiscal 2003. This decrease is primarily attributable to the reductions in
administrative personnel associated with both the downsizing of the Company's
staffing operations and as a result of the Connecticut reimbursement rate
reduction in certain Medicaid nursing rates. As a percentage of net patient
revenue, general and administrative expenses increased to 24.8% in fiscal 2004
from 24.2% in fiscal 2003.
-23-
Allowance for Possible Losses. The Company recorded an allowance for
possible losses of $1,112,000 in fiscal 2004 as compared to $300,000 in fiscal
2003. The increase in the allowance for possible losses is attributable the
Company establishing allowances for accounts receivable balances from certain
Medicare certified home health care agencies and other health care institutions.
As many of these agencies and institutions have been experiencing financial
difficulties and have not made payments in accordance with contract terms, the
Company has reserved for possible future losses. The Company is closely
monitoring these accounts receivable balances.
Amortization of Intangibles. Amortization of intangibles decreased
$81,000, or 13.7%, to $510,000 in fiscal 2004 from $591,000 in fiscal 2003. This
decrease is attributable to previous acquisitions that have now been fully
amortized.
Income from Operations. As a result of the foregoing, income from
operations decreased $1,924,000, or 20.2%, to $7,617,000 in fiscal 2004 from
$9,541,000 in fiscal 2003.
Interest Income. Interest income remained flat at $143,000 for fiscal
2004 as compared to fiscal 2003. Although the Company has generated higher cash
balances over the fiscal years, the decline in interest rates has reduced the
Company's ability to maximize interest income.
Income Taxes. The Company's effective tax rate decreased to 39.2% in
fiscal 2004 as compared to 40.3% in fiscal 2003. This decrease was attributable
to an over accrual of taxes in fiscal 2003.
Net Income. Net income decreased $1,063,000, or 18.4%, to $4,720,000,
or $.83 per diluted share, in fiscal 2004 from $5,783,000, or $1.01 per diluted
share, in fiscal 2003.
Year Ended July 31, 2003 Compared to Year Ended July 31, 2002
Net Patient Revenue. For 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 34.6% for fiscal 2004
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.
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,
-24-
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.
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.
Amortization of Intangibles. 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.
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 acquisitions,
as to which there can be no assurance.
Financial Condition, Liquidity and Capital Resources
Current assets increased $5,458,000 to $39,616,000 and current
liabilities decreased $160,000 to $4,447,000 at July 31, 2004. These changes
resulted in an increase in working capital of $5,618,000 to $35,169,000 at July
31, 2004 from $29,551,000 at July 31, 2003. Cash and cash equivalents increased
$5,933,000 to $20,185,000 at July 31, 2004 from $14,252,000 at July 31, 2003.
The increase in cash and working capital was primarily attributable to the net
cash provided by operating activities.
Net cash provided by operating activities was $5,961,000 in fiscal 2004
as compared with $4,519,000 in fiscal 2003. The increase in cash provided by
operating activities of $1,442,000, or 32.0%, is attributable to a decrease in
operating assets, primarily accounts receivable, of $2,459,000, offset by a
decrease in operating cash flow of $849,000 and a decrease in operating
liabilities of $168,000 over fiscal 2003.
Investing activities in fiscal 2004 used cash of $383,000 as compared
to $5,012,000 in fiscal 2003. The cash used in investing activities in fiscal
2004 consisted of the purchase of equipment, offset by the proceeds from sale of
investments. The cash used in investing activities in fiscal 2003 consisted of
the purchase of equipment and the purchase of businesses.
-25-
Financing activities in fiscal 2004 provided cash of $355,000 as
compared to cash used of $596,000 in fiscal 2003. The cash provided by financing
activities in fiscal 2004 consisted of the proceeds from the exercise of stock
options, offset by the purchase of treasury stock. 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 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 payers,
such as Medicare and Medicaid programs. Accounts receivable turnover was 74 days
in fiscal 2004, as compared to 68 days in fiscal 2003.
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, 2004, there was no outstanding balance under the credit
facility.
In June 2004, the Board of Directors extended the Company's program to
repurchase its Common Stock for an additional year. Purchases of up to
$3,000,000 will 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.
The Company intends to incur capital expenditures of approximately
$1,000,000 during the fiscal year ending July 31, 2005 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, acquisitions and
cash dividends declared by the Board of Directors and otherwise meet its short
term and long term liquidity needs from 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
2004. 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.
-26-
Contractual Obligations
The Company rents various office facilities through 2008 under terms of
several lease agreements that include escalation clauses. At July 31, 2004,
minimum annual rental commitments under noncancellable operating leases are as
follows:
- ------------------------------------------------------------------------------------------------------------------
Payments due by period
----------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
- ------------------------------------------------------------------------------------------------------------------
Operating Leases $1,722,000 $1,051,000 $656,000 $15,000 - - - - -
- ------------------------------------------------------------------------------------------------------------------
Total $1,722,000 $1,051,000 $656,000 $15,000 - - - - -
- ------------------------------------------------------------------------------------------------------------------
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-29.
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 Exchange Act of 1934 (the
"Exchange Act Reports") 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 believes that there are reasonable assurances that our controls and
procedures will achieve management's control objectives.
Prior to the filing date of this report, the Company 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, 2004. Based upon that evaluation, 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.
-27-
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, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Item 9B. Other Information.
On October 29, 2004, the Company's Board of Directors adopted an
amendment to the Company's By-Laws. The amendment added a provision to the
By-Laws explicitly providing that the directors shall be elected by a plurality
of the votes of the shares present in person or represented by proxy at a
meeting for such purpose and entitled to vote on the election of directors.
-28-
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 2004 Annual Meeting of Stockholders to be held on or
about December 6, 2004, 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, 2004.
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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:
Pages F-1 through F-29: Financial Statements and Supplemental Material (see
index to the consolidated financial statements).
Exhibit
Number Document
------ --------
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* Amended By-laws.
-29-
Exhibit
Number Document
------ --------
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# 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.
10.3# 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").
10.4# 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.
10.5# 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.
10.6 Credit Agreement dated October 24, 2001 by and among the
Registrant and certain of its subsidiaries and HSBC Bank USA,
providing a $7.5 million revolving credit facility. Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 2001.
10.7* Amendment No. 1, dated October 24, 2003, to Credit Agreement with
HSBC Bank USA.
21.1* List of Subsidiaries.
23.1* Consent of Independent Registered Public Accounting Firm.
31.1* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer.
31.2* Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer.
32.1* Section 1350 Certification of Principal Executive Officer.
32.2* Section 1350 Certification of Principal Financial Officer.
- ----------
# Management contract or compensatory plan or arrangement.
* Filed herewith
-30-
National Home Health Care Corp.
and Subsidiaries
================================================================================
Consolidated Financial Statements
and Supplemental Material
Years Ended July 31, 2004, 2003 and 2002
F-1
National Home Health Care Corp.
and Subsidiaries
Contents
================================================================================
Report of Independent Registered Public Accounting Firm F-3
Consolidated financial statements:
Balance sheets F-4
Statements of earnings F-5
Statements of changes in stockholders' equity F-6
Statements of cash flows F-7
Summary of accounting policies F-8-14
Notes to consolidated financial statements F-15-27
Supplemental material:
Report of Independent Registered Public Accounting
Firm on supplemental material F-28
Schedule II valuation and qualifying accounts F-29
F-2
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003 and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows for the years ended July 31, 2004, 2003 and 2002. 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 the Standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended July 31, 2004, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
Valhalla, New York
October 20, 2004
F-3
National Home Health Care Corp.
and Subsidiaries
Consolidated Balance Sheets
======================================================================================================================
July 31, 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash, (including cash equivalents of $15,964,000 and
$10,645,000, respectively) (Note 7) $20,185,000 $14,252,000
Investments 19,000 22,000
Accounts receivable, less allowance for possible losses of
$1,122,000 and $622,000, respectively (Note 7) 18,084,000 18,705,000
Prepaid expenses and other
801,000 804,000
Deferred income taxes (Note 6) 527,000 375,000
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 39,616,000 34,158,000
- ----------------------------------------------------------------------------------------------------------------------
Furniture, equipment and leasehold improvements, net (Note 1) 1,083,000 1,030,000
Goodwill (Note 2) 10,628,000 10,628,000
Other intangible assets, net (Note 3) 1,589,000 2,099,000
Deposits and other assets 570,000 395,000
Deferred income taxes (Note 6) - 163,000
- ----------------------------------------------------------------------------------------------------------------------
$53,486,000 $48,473,000
======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses (Note 4) $ 3,322,000 $ 3,257,000
Estimated third-party payer settlements 696,000 756,000
Deferred revenue 402,000 460,000
Income taxes payable 27,000 134,000
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,447,000 4,607,000
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 9 and 10)
Stockholders' equity (Note 8):
Common stock, $.001 par value, shares authorized - 20,000,000;
issued shares - 7,041,388 and 6,903,819, respectively 7,000 7,000
Additional paid-in capital 26,174,000 25,556,000
Retained earnings 26,342,000 21,622,000
- ----------------------------------------------------------------------------------------------------------------------
52,523,000 47,185,000
Less treasury stock (1,424,883 and 1,407,571 shares) -
at cost (Note 11) (3,484,000) (3,319,000)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 49,039,000 43,866,000
- ----------------------------------------------------------------------------------------------------------------------
$53,486,000 $48,473,000
======================================================================================================================
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, 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Net patient revenue (Note 7) $94,592,000 $97,235,000 $82,172,000
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenue 61,850,000 63,256,000 52,284,000
General and administrative 23,503,000 23,547,000 20,667,000
Allowance for possible losses 1,112,000 300,000 295,000
Amortization of intangibles 510,000 591,000 546,000
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 86,975,000 87,694,000 73,792,000
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 7,617,000 9,541,000 8,380,000
Other income:
Interest 143,000 143,000 227,000
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,760,000 9,684,000 8,607,000
Provision for income taxes (Note 6) 3,040,000 3,901,000 3,336,000
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,720,000 $ 5,783,000 $ 5,271,000
=======================================================================================================================
Net income per common share:
Basic $ .85 $ 1.04 $ .96
Diluted $ .83 $ 1.01 $ .91
Weighted average number of shares outstanding:
Basic 5,541,730 5,545,953 5,516,689
Diluted 5,700,770 5,738,267 5,791,911
=======================================================================================================================
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 Additional Treasury Stock
-------------------- Paid-in Retained --------------------------
Shares Amount Capital Earnings Shares Amount
------ ------ ---------- -------- ------ ------
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 dividend declared April 25, 2002 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)
Net income - - - 4,720,000 - -
Exercise of stock options 137,569 - 520,000 - - -
Tax benefit of stock option exercise - - 98,000 - - -
Acquisition of treasury shares - - - - 17,312 (165,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2004 7,041,388 $ 7,000 $ 26,174,000 $ 26,342,000 1,424,883 $ (3,484,000)
==================================================================================================================================
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, 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,720,000 $ 5,783,000 $ 5,271,000
- -----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 847,000 884,000 813,000
Allowance for possible losses, net of write-offs 500,000 69,000 174,000
(Gain) on sale of investments (4,000) - -
Deferred income taxes 11,000 272,000 -
Unrealized loss on investments - 13,000 49,000
Tax benefit realized from the exercise of stock options 98,000 - 476,000
Changes in assets and liabilities:
Accounts receivable 121,000 (2,392,000) (573,000)
Prepaid expenses and other (172,000) (118,000) 354,000
Income taxes payable (107,000) 368,000 (259,000)
Accounts payable and accrued expenses 65,000 (324,000) 313,000
Estimated third-party payer settlements (60,000) (156,000) (178,000)
Deferred revenue (58,000) 120,000 58,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,961,000 4,519,000 6,498,000
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase property, plant and equipment (390,000) (306,000) (185,000)
Proceeds from sale of investments 7,000 - -
Purchase of assets of businesses - (4,706,000) (335,000)
Others - - (66,000)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (383,000) (5,012,000) (586,000)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (165,000) (600,000) (207,000)
Proceeds from exercise of stock options 520,000 4,000 554,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 355,000 (596,000) 347,000
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,933,000 (1,089,000) 6,259,000
Cash and cash equivalents, beginning of period 14,252,000 15,341,000 9,082,000
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $20,185,000 $14,252,000 $15,341,000
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 21,000 $ 20,000 $ 13,000
Income taxes $ 3,037,000 $ 3,261,000 $ 3,119,000
=======================================================================================================================
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
northeastern part of the United States.
Principles of The consolidated financial statements include the
Consolidation 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 Net patient revenues are recorded at estimated net
and Allowance realizable amounts from patients, third-party payers
for Possible Losses 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 Approximately 48%, 47% and 50% of net patient revenue
and Allowance for for the fiscal years ended July 31, 2004, 2003 and
Possible Losses 2002, respectively, were derived under federal and
(continued) state third-party reimbursement programs.
Cash and Cash For the purposes of the statements of cash flows, the
Equivalents 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 are
and Leasehold stated at cost. Depreciation is being provided on the
Improvements 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 ceased
effective August 1, 2001.
Net Income Per Basic net income per share is computed by dividing
Common 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.
The reconciliation for the years ended July 31, 2004,
2003 and 2002 is as follows:
Years ended July 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Shares Shares Shares
- --------------------------------------------------------------------------------
Average number of shares outstanding 5,541,730 5,545,953 5,516,689
Effect of dilutive securities - common
stock options 159,040 192,314 275,222
- --------------------------------------------------------------------------------
Diluted shares outstanding 5,700,770 5,738,267 5,791,911
================================================================================
The number of options that were anti-dilutive and
excluded from the computation for the year ended July
31, 2004 was 168,000 and for the years ended July 31,
2003 and 2002 was 183,750.
Fair Value of The carrying amount reported in the consolidated
Financial 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.
F-10
National Home Health Care Corp.
and Subsidiaries
Summary of Accounting Policies
================================================================================
Estimated Third-Party The amount represents overpayments from certain
Payer Settlement third-party payers. The Company anticipates that the
third-party payer 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 payer settlements and valuation reserves
for accounts receivable.
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.
F-11
National Home Health Care Corp.
and Subsidiaries
Summary of Accounting Policies
================================================================================
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 As of July 31, 2004, the Company has a stock-based
Compensation employee compensation plan, which is described in Note
9. As allowed by SFAS No. 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.
All stock options have been granted to employees and
non-employees at exercise prices equal to or in excess
of the market value on the date of the grant.
The Company has elected to account for stock based
compensation following the intrinsic value method under
APB Opinion No. 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 expense was recognized.
F-12
National Home Health Care Corp.
and Subsidiaries
Summary of Accounting Policies
================================================================================
Stock Based SFAS No. 123 requires the Company to provide pro forma
Compensation information regarding net income and net income per
(continued) 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, 2004 2003 2002
- --------------------------------------------------------------------------------
Assumptions
Dividend yield - - 0.00%
Volatility - - 66.00%
Risk free interest rate - - 5.04%
Expected lives - - 10 years
================================================================================
Under the accounting provisions of FASB Statement No.
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, 2004 2003 2002
- --------------------------------------------------------------------------------
Pro forma results
Net income:
As reported $4,720,000 $5,783,000 $5,271,000
Pro forma (a) (a) 5,050,000
Income per common share-basic:
As reported .85 1.04 0.96
Pro forma (a) (a) 0.92
Income per common share-diluted:
As reported .83 1.01 0.91
Pro forma (a) (a) 0.87
================================================================================
(a) No pro forma since options were not granted.
F-13
National Home Health Care Corp.
and Subsidiaries
Summary of Accounting Policies
================================================================================
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
Notes to Consolidated Financial Statements
================================================================================
1. Furniture, Furniture, equipment and leasehold improvements are
Equipment stated at cost and are and summarized as follows:
and Leasehold
Improvements
July 31, 2004 2003
- --------------------------------------------------------------------------------
Furniture and equipment $ 2,715,000 $ 2,369,000
Leasehold improvements 470,000 426,000
- --------------------------------------------------------------------------------
3,185,000 2,795,000
Less accumulated depreciation and
amortization 2,102,000 1,765,000
- --------------------------------------------------------------------------------
$ 1,083,000 $1,030,000
================================================================================
Depreciation expense in 2004, 2003 and 2002 was
$337,000, $292,000 and $267,000, respectively.
2. Goodwill Changes in goodwill are as follows:
July 31, 2004 2003
- --------------------------------------------------------------------------------
Balance, beginning of year $10,628,000 $ 7,366,000
Additions - 3,262,000
- --------------------------------------------------------------------------------
Balance, end of year $10,628,000 $10,628,000
================================================================================
F-15
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Other Intangible Other tangible assets are as follows:
Assets
July 31, 2004 2003
- --------------------------------------------------------------------------------
Gross carrying amount:
Covenants not to compete $1,375,000 $1,375,000
Patient and other files 2,796,000 2,796,000
Contracts 1,234,000 1,234,000
- --------------------------------------------------------------------------------
5,405,000 5,405,000
- --------------------------------------------------------------------------------
Accumulated amortization:
Covenants not to compete 1,248,000 1,168,000
Patient and other files 2,331,000 2,026,000
Contracts 237,000 112,000
- --------------------------------------------------------------------------------
3,816,000 3,306,000
- --------------------------------------------------------------------------------
Balance, end of year $1,589,000 $2,099,000
================================================================================
The aggregate amortization expense for the years ended
July 31, 2004, 2003 and 2002 was $510,000, $592,000 and
$546,000, respectively.
Estimated amortization expense is as follows:
Years ending July 31,
- --------------------------------------------------------------------------------
2005 $ 488,000
2006 242,000
2007 199,000
2008 155,000
2009 123,000
- --------------------------------------------------------------------------------
$1,207,000
================================================================================
F-16
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Other Intangible The remaining weighted-average amortization period is
Assets (continued) as follows:
Year ended July 31, 2004
- --------------------------------------------------------------------------------
Covenants not to compete 2.20 years
Patient and other files 2.55 years
Contracts 8.91 years
- --------------------------------------------------------------------------------
2.33 years
================================================================================
Other intangible assets are being amortized using the
straight-line method over a period of three to ten
years.
4. Accounts Payable Accounts payable and accrued expenses are as follows:
and Accrued
Expenses
July 31, 2004 2003
- --------------------------------------------------------------------------------
Trade accounts payable $ 174,000 $ 299,000
Accrued employee compensation and
benefits 2,644,000 2,432,000
Other 504,000 526,000
- --------------------------------------------------------------------------------
$3,322,000 $3,257,000
================================================================================
F-17
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Acquisitions 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-18
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Income Taxes The provision for income taxes is summarized as
follows:
Years ended July 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Current:
Federal $2,205,000 $2,805,000 $2,500,000
State 824,000 824,000 836,000
- --------------------------------------------------------------------------------
3,029,000 3,629,000 3,336,000
Deferred 11,000 272,000 -
- --------------------------------------------------------------------------------
$3,040,000 $3,901,000 $3,336,000
================================================================================
The deferred tax asset consists of the following:
July 31, 2004 2003
- --------------------------------------------------------------------------------
Current:
Accrued liabilities and reserves $527,000 $375,000
Long term:
Amortization of intangible assets - 163,000
- --------------------------------------------------------------------------------
$527,000 $538,000
================================================================================
The reconciliation of the statutory tax rate to the
effective tax rate is as follows:
Years ending July 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Statutory rate 34% 34% 34%
State and local taxes
(net of federal tax effect) 7 6 6
Federal tax credit (1) (1) (1)
Other (1) 1 -
- --------------------------------------------------------------------------------
Effective rate 39% 40% 39%
================================================================================
F-19
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
7. Concentrations of The Company's business is with customers who are in the
Credit Risk and healthcare industry or with governmental agencies.
Major Customers
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, 2004, the Company maintained approximately
35% 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 $45,159,000,
$45,565,000 and $41,253,000 for the years ended July
31, 2004, 2003 and 2002, respectively. At July 31, 2004
and 2003, the Company had aggregate outstanding
receivables from federal and state agencies of
$4,852,000 and $4,048,000, respectively.
8. 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, 2003 and July 31, 2004, 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-20
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Stock Options In 1999, the Company adopted a second Employee Stock
(continued) Option 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, 2004, 392,311 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
plans as of July 31, 2004, 2003 and 2002 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, 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 - 7.43
Options exercised (1,000) 2009 3.84
- --------------------------------------------------------------------------------
Options outstanding at July 31, 2003 531,758 2004-2011 7.23
Options exercised (137,569) 2004-2009 3.77
Options forfeited (15,750) 2011 13.58
- --------------------------------------------------------------------------------
Options outstanding at July 31, 2004 378,439 2004-2011 $ 8.51
================================================================================
Weighted
average Weighted Weighted
Remaining average average
Range of Number Contractual exercise Number exercise
Exercise Price Outstanding Price price excercisable price
- --------------------------------------------------------------------------------
$ 3.66 11,024 4.25 years $ 3.66 11,024 $ 3.66
$ 3.84 - 4.22 155,315 4.91 years $ 4.04 155,315 $ 4.04
$ 4.34 44,100 2.42 years $ 4.34 44,100 $ 4.34
$13.58 - 14.94 168,000 4.83 years $ 14.05 168,000 $ 14.05
================================================================================
F-21
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Stock Options The stock options plans 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, 2004, 2003 and 2002 is shown
below:
Options Exercisable 2004 2003 2002
- -------------------------------------- ------------- ------------- -------------
Options exercisable at year-end 378,439 531,758 532,758
Weighted average exercise price $ 8.51 $ 7.23 $ 7.43
Weighted average fair value of
options granted during the year - - 9.61
Weighted average remaining
contractual life 5.07 years 6.07 years 7.07 years
- -------------------------------------- ------------- ------------- -------------
9. 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, 2004, 2003 and 2002 were $676,000,
$653,000, and $617,000, respectively.
F-22
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Commitments, Employment Agreements
Contingencies and
Other Matters The Company has employment agreements with four
(continued) executives, which expire through October 31, 2006. The
aggregate commitment for future salary, excluding
bonuses, is $1,840,000. 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. In
addition, these two agreements provide for annual
reviews and adjustments of the respective base
salaries.
Leases
The Company rents various office facilities through
2008 under the terms of several lease agreements that
include escalation clauses.
At July 31, 2004, minimum annual rental commitments
under noncancellable operating leases are as follows:
Years ending July 31,
-------------------------------------------------------
2005 $1,051,000
2006 409,000
2007 174,000
2008 73,000
2009 15,000
-------------------------------------------------------
$1,722,000
=======================================================
Rent expense for the years ended July 31, 2004, 2003
and 2002 was approximately $1,187,000, $1,110,000, and
$853,000, 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 $213,000 per year.
F-23
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Commitments, Litigation
Contingencies and
Other Matters The Company and certain of its officers and directors
(continued) (the "director defendants") were named as defendants in
a consolidated class action brought on behalf of
certain shareholders of SunStar Healthcare, Inc.
("SunStar"). The lawsuit asserted alleged acts or
omissions, which allegedly resulted in
misrepresentations or omissions of material information
concerning the financial condition of SunStar. In
addition, the lawsuit alleged that the Company and the
director defendants exercised control over SunStar. In
February 2001, the Court dismissed the complaint and
granted the plaintiffs leave to amend. In October 2001,
the Court granted the defendants' motion to dismiss the
amended complaint with prejudice. Plaintiffs did not
appeal this decision.
In a related action, the director defendants were named
in a case brought by the Department of Insurance of the
State of Florida as receiver for SunStar. The
allegations in this action were similar to those
alleged in the class action lawsuit, which was
subsequently dismissed. Although the Company was not
named in this action, the Company agreed to indemnify
the director defendants to the fullest extent permitted
under its by-laws. 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 to resolve this
action. The settlement payments were made in March
2004. The Company indemnified the director defendants
for their share of the settlement payments. Because the
amount paid had been previously reserved, the payments
had no impact on the Company's July 31, 2004
consolidated statements of earnings.
F-24
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Commitments, Litigation (continued)
Contingencies and
Other Matters In October 2003, the Company's Connecticut Home Care
(continued) 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.
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 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,
2005 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, 2004
and 2003 there was no outstanding balance under the
credit facility.
10. Stock Dividend 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 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
effect of the stock dividend.
11. 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-25
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Summarized Presented below is a summary of the unaudited
Quarterly Data consolidated quarterly financial information for the
(unaudited) years ended July 31, 2004 and 2003 (in thousands,
except per share data):
2004
- --------------------------------------------------------------------------------
Quarter First Second Third Fourth
- --------------------------------------------------------------------------------
Net patient revenue $24,414 $22,869 $23,739(a) $23,570(a)
- --------------------------------------------------------------------------------
Cost of revenue 16,419 15,105 15,163 15,163
General and administrative
expenses 5,887 5,786 5,895 5,935
Amortization of intangibles 127 128 128 127
Allowance for possible
losses 105 55 680(b) 272
- --------------------------------------------------------------------------------
Total operating expenses 22,538 21,074 21,866 21,497
- --------------------------------------------------------------------------------
Income from operations 1,876 1,795 1,873 2,073
Interest income 25 31 43 44
- --------------------------------------------------------------------------------
Income before income taxes 1,901 1,826 1,916 2,117
Provision for income taxes 746 693 703 898
- --------------------------------------------------------------------------------
Net income $ 1,155 $ 1,133 $ 1,213 $ 1,219
================================================================================
Net income per common
share:
Basic $ .21 .21 .22 .22
Diluted $ .20 .20 .21 .21
================================================================================
(a) includes $790,000 and $126,000 retroactive rate adjustment in the third
and fourth quarters, respectively.
(b) includes $600,000 of additional provision for possible losses. 2003
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
================================================================================
F-26
National Home Health Care Corp.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Subsequent On October 6, 2004, the Company, through a wholly owned
Events subsidiary acquired certain assets of On Duty
Metropolitan Connecticut, LLC ("On Duty"). On Duty
provides home health care services in Connecticut. The
purchase price of $1,079,000, including acquisition
costs of $104,000 was financed using internal funds.
The acquisition was accounted for as a purchase.
On October 12, 2004, the Company's Board of Directors
declared a cash dividend of $.075 per share on its
common stock, payable on November 5, 2004 to holders of
record of its outstanding common stock on October 22,
2004.
F-27
Supplemental Material
================================================================================
Report of Independent Registered Public Accounting Firm
on Supplemental Material
The audits referred to in our report dated October 20, 2004 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, 2004, 2003 and 2002. 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.
BDO Seidman, LLP
Valhalla, New York
October 20, 2004
F-28
National Home Health Care Corp.
and Subsidiaries
Schedule II Valuation and Qualifying Accounts
====================================================================================================================================
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Charged
Balance, Charged to to other Balance,
beginning costs and accounts Deductions end of
Description of period expenses describe describe period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 2004:
Allowance deducted from asset account
Allowance for possible losses $622,000 $1,112,000 $ - $612,000(a) $1,122,000
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 2003:
Allowance deducted from asset account
Allowance for possible losses $691,000 $ 300,000 $ - $369,000(a) $ 622,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 2002:
Allowance deducted from asset account
Allowance for possible losses $865,000 $ 295,000 $ - $469,000(a) $ 691,000
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Represents actual write-offs. See accompanying independent accountants' report on supplemental material.
F-29
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.
By: /s/ Robert P. Heller
-------------------------------
Robert P. Heller
Vice President of Finance
and Chief Financial Officer
Dated: October 29, 2004
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, 2004 Chairman of the Board of Directors
- ---------------------------------
Frederick H. Fialkow
/s/ Steven Fialkow October 29, 2004 President, Chief Executive Officer,
- --------------------------------- Secretary and Director (principal
Steven Fialkow executive officer)
/s/ Robert P. Heller October 29, 2004 Vice President of Finance, Chief
- --------------------------------- Financial Officer and Treasurer (principal
Robert P. Heller financial and accounting officer)
/s/ Ira Greifer, M.D. October 29, 2004 Director
- ---------------------------------
Ira Greifer, M.D.
/s/ Bernard Levine, M.D. October 29, 2004 Director
- ---------------------------------
Bernard Levine, M.D.
/s/ Robert Pordy, M.D. October 29, 2004 Director
- ---------------------------------
Robert Pordy, M.D.
/s/ Harold Shulman October 29, 2004 Director
- ---------------------------------
Harold Shulman
-31-
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, 2004
NATIONAL HOME HEALTH CARE CORP.
-32-
Exhibit
Number Document
------ --------
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* Amended 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 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.
10.3 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").
10.4 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.
10.5 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.
10.6 Credit Agreement dated October 24, 2001 by and among the
Registrant and certain of its subsidiaries and HSBC Bank USA,
providing a $7.5 million revolving credit facility. Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 2001.
10.7* Amendment No. 1, dated October 24, 2003, to Credit Agreement with
HSBC Bank USA.
21.1* List of Subsidiaries.
23.1* Consent of Independent Registered Public Accounting Firm.
31.1* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer.
-33-
Exhibit
Number Document
------ --------
31.2* Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer.
32.1* Section 1350 Certification of Principal Executive Officer.
32.2* Section 1350 Certification of Principal Financial Officer.
- ----------
* Filed herewith
-34-