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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
For the fiscal year ended July 31, 1998 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of October 26, 1998, 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 $12,283,728, calculated on the basis of the average
closing bid and asked prices of such stock on the National Association of
Securities Dealers Automated Quotation System on that date, as reported by the
National Association of Securities Dealers, Inc.
The number of shares outstanding of the Registrant's Common Stock on October 26,
1998 was 5,197,167.
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
PART I
Item 1. Business
General
National Home Health Care Corp. (the "Company") is a Delaware
corporation which was incorporated on July 27, 1983 under the name of Family
Treatment Centers of America, Inc. Effective December 14, 1984, the Company
changed its name to National HMO Corp. and effective December 20, 1991, the
Company changed its name to National Home Health Care Corp. The Company
completed its initial public offering in December 1983. The Company is a
provider of home health care services throughout the New York City metropolitan
area, including Westchester County, and Long Island in New York and Fairfield
and New Haven Counties in Connecticut.
The Company has two operating subsidiaries:
* Health Acquisition Corp., formerly Allen Health Care Services, Inc.,
a New York corporation, of which Allen Health Care Services ("Allen Health
Care") is the sole operating division.
* New England Home Care, Inc., ( "New England") a Connecticut
corporation which conducts business in Connecticut.
In May 1998, the operations of Nurse Care, Inc. ("Nurse Care"),
previously a wholly-owned subsidiary of the Company, which provided home health
aide services in Connecticut were combined with the operations of New England.
In January 1996, the outpatient medical service business of the
Company, formerly known as Brevard Medical Center, Inc. and First Health, Inc.,
was reorganized as SunStar Healthcare, Inc. ("SunStar") a newly-formed, wholly
owned subsidiary of the Company. On May 21, 1996, the initial public offering of
common stock by SunStar was consummated, thus reducing the Company's ownership
percentage of SunStar to approximately 37.6%. As a result, SunStar is no longer
consolidated with the Company for accounting purposes and the Company accounts
for its investment in SunStar using the equity method of accounting. During the
fiscal year ended July 31, 1998, the Company's ownership percentage of SunStar
was reduced to 30.5% as a result of SunStar issuing additional shares of its
common stock pursuant to a private placement.
On September 25, 1998, the Company signed a definitive stock purchase
agreement with Accredited Health Services, Inc., ("Accredited"), a New Jersey
licensed home health care agency that provides home health aide services in
Bergen, Hudson, Passaic, Essex, Morris, Union, Somerset and Middlesex Counties
in New Jersey. Revenues of Accredited approximated $5,300,000 for the fiscal
year ended March 31, 1998. The closing of the transaction is subject to
regulatory and other approvals and conditions. The acquisition is expected to be
completed by October 31, 1998. The purchase price for 100% of Accredited's
outstanding stock is approximately $1,800,000 in cash,
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subject to post-closing adjustment. Upon closing, Accredited will be an
operating subsidiary of the Company.
Health Acquisition Corp.
d/b/a Allen Health Care Services
Allen Health Care is a provider of personal home health care services.
Services are provided by registered nurses, personal care aides, home health
aides and homemakers. The Company is licensed by the Public Health Council of
the State of New York Department of Health. Allen Health Care maintains its
principal administrative office in Jamaica, New York and has branch offices in
Farmingdale and Mount Vernon, New York. Case coordinating of patients is
performed at these three offices. In addition, the Company has satellite offices
in Manhattan, Islandia and Hempstead, New York. The satellite offices are
primarily used for the recruitment and training of home health aides. Services
are provided in the following counties in the State of New York: Nassau,
Suffolk, Westchester, Queens, Kings, New York and the Bronx.
All 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. Effective July 1, 1996, Allen Health Care instituted residential
criminal background investigations for all new personnel. In addition, urine
drug testing is part of the pre-employment screening process and is performed
annually and randomly thereafter. In May 1996, Allen Health Care was resurveyed
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 resurvey resulted in Allen Health Care extending its accredited status
through the year 1999.
Reimbursement for Allen Health Care's services is primarily by
certified home health care agencies, and long-term health care provider programs
that subcontract their patients to Allen Health Care, as well as from private
payors and the Nassau, Suffolk and Westchester Counties Department of Social
Services Medicaid Programs, for which Allen Health Care is a participating
provider.
Allen Health Care provides home health care services to its clients
twenty-four hours per day, seven days per week. Although the 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 the records of service which are completed by the
home health aide and personnel care aides daily. These records are maintained by
Allen Health Care. In addition, the home care coordinator ensures that
appropriate coverage is maintained for all patients and acts as the liaison
among family members, aides and professional staff.
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The stock of Allen Health Care was acquired by the Company in October
1986. Subsequent to the acquisition, the agency has grown its home care business
by securing additional contracts with certified home health agencies and
expanding its services and geographical presence through acquisitions.
In March 1997, Allen Health Care completed the acquisition of certain
assets of C.J. Home Care, Inc., d/b/a Garden City Home Care, a New York licensed
home health care agency that provides home health aide services in Nassau
County, New York. Annual revenues for Garden City Home Care approximated
$2,000,000 in 1996. In May 1997, Allen Health Care completed the acquisition of
certain assets of Home Health Aides, Inc. and H.H.A. Aides, Inc., two New York
licensed home health care agencies that provide home health aide services in
both Nassau and Suffolk County, New York. The two companies collectively had
revenues of approximately $3,400,000 in 1996. The latter acquisition gave the
Company an entree into the Shared Aide Program in Nassau County. The Shared Aide
Program is a relatively new program for Medicaid patients that brings together a
group of home health aides to care for patients in one geographic area, thus
increasing operating efficiencies and reducing costs.
In August 1998, Allen Health Care completed the acquisition of certain
assets of Bryan Employment Agency, Inc., d/b/a Bryan Home Care Services, a New
York State licensed home health care agency that provides home health aides
services in Westchester County, New York. The acquisition expanded the
geographic presence of the Company and enabled Allen Health Care to become a
participating provider in the Westchester County Department of Social Services
Medicaid Program. Annual revenues for Bryan Home Care approximated $5,700,000 in
calendar 1997.
To a larger extent, Allen Health Care's continued growth depends on its
ability to recruit and maintain qualified personnel. The Company believes that
it offers competitive salaries and fringe benefits and has been able to keep its
home health aides working on a steady basis.
New England Home Care, Inc.
On August 4, 1995, the Company consummated the acquisition of 100% of
the capital stock of Nurse Care, the parent company of New England for
$3,150,000 in cash. During the fiscal year ended July 31, 1996, Nurse Care
transferred all of the outstanding shares of New England to National Home Health
Care Corp., whereby New England as well as Nurse Care, became a direct,
wholly-owned subsidiary of the Company.
New England is a Medicare certified and licensed home health care
company in Connecticut. In December 1995, New England received JCAHO
accreditation through the year 1998. New England provides services throughout
Fairfield and New Haven Counties, in Connecticut. Services include skilled
nursing, physical therapy, occupational therapy, speech therapy, medical social
services and home health aide services. In addition, New England offers
specialty services consisting of mental health and wellness, perinatal/high risk
pregnancy, enterostomal therapy/wound care management and nutritional support.
New England provides full-service home health care twenty-
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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 and has branch offices in Norwalk, Hamden and Waterbury,
Connecticut. Case coordinating of patients is performed at these four offices.
In addition, New England has satellite offices in Danbury and Seymour,
Connecticut. Reimbursement for New England's services is primarily provided by
the Federal Medicare Program, the State of Connecticut Medicaid Program, private
payors, hospices, other certified home health agencies and long-term health care
providers that subcontract their patients to New England.
Insurance
The Company and its subsidiaries maintain professional malpractice
liability coverage on professionals employed in the rendering of health care
services providing coverage in an amount of up to $1,000,000 per occurrence and
up to $6,000,000 in the aggregate and coverage for the customary risks inherent
in the operation of business in general. Recent market conditions with respect
to liability insurances have caused wide fluctuations in the cost and
availability of coverage. The Company carries directors and officers liability
with a limit of $5,000,000. While the Company believes its insurance policies
are adequate in the amount and coverage for its current operations, 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 15, 1998, the Company had approximately 1,800 full and
part-time employees of whom 15 were employed in various management capacities
and four were employed in marketing capacities. None of the Company's employees
is represented by a labor organization. The Company believes its relationship
with its employees is satisfactory. The Company has standardized procedures for
recruiting, interviewing and reference checking prospective health care
personnel. All nurses and home health aides must be licensed or certified by the
appropriate authorities.
Competition
The home health care field is highly competitive. 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. Competition
also involves the quality of services provided and the pricing for its services.
As a result of changes in Medicare reimbursement and the competitive pressures
of managed care, the home health care industry is expected to
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experience consolidation over the next few years. The Company believes that
smaller, less financially secure home health agencies will find it ever more
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 recruits personnel principally through referral from existing personnel
and through newspaper advertisements.
Customers
One or more customers have each accounted for more than 10% of the
Company's revenues. For the fiscal years ended July 31, 1998, 1997 and 1996, VNS
Home Care, a non-profit Medicare home health care agency, accounted for 22%, 22%
and 24%, respectively, of the Company's net patient revenues; the State of New
York Department of Social Services personal care aide program for the counties
of Suffolk and Nassau accounted for 18%, 10% and 7%, respectively, of the
Company's net patient revenues; and the Federal Medicare program accounted for
approximately 13%, 22% and 21%, respectively, of the Company's net patient
revenues. The loss of any of the foregoing customers would have a material
adverse effect on the Company.
Government Regulations and Licensing
The health care industry is highly regulated. The Company's business is
subject to substantial and frequently changing regulations by Federal, state and
local authorities. The Company must comply with state licensing along with
Federal and state eligibility standards for certification as a Medicare and
Medicaid provider.
The ability of the Company to operate profitably will depend in part
upon the Company obtaining and maintaining all necessary licenses and other
approvals in compliance with applicable health care regulations.
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 the Department 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. Approximately 13%, 22% and 21% of net patient
revenue for the fiscal years ended July 31, 1998 , 1997 and 1996 were derived
under the Medicare program.
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The Balanced Budget Act of 1997, as amended (the "Act"), was signed
into law in August of 1997. The Act made significant changes in the
reimbursement system for Medicare home health services. The primary change that
affects the Company is a restructuring of the reimbursement system related to
Medicare certified home care agencies.
Under the Act, Medicare home care payment changes are scheduled in two
phases. The first phase, 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 will be reimbursed the lower 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 98% of
1994 costs adjusted for inflation. Under this new system, most Medicare
providers will now be reimbursed under an agency- specific per patient cost
limit. Prior to the implementation of IPS, Medicare reimbursed providers on
reasonable cost basis subject to program-imposed cost per visit limitations.
Under the second phase of the Act, IPS is to be replaced in October 2000 with a
prospective payment system in which Medicare will pay a fixed fee per diagnosis
to be established by the Secretary of the Department of Health and Human
Services.
In passing these new rules, Congress expressed the intent of reducing
Medicare home care expenditures by approximately $16.2 billion over five years.
These changes were enacted to slow the explosive growth of Medicare home health
care costs and curb fraud and abuse in the industry. As a result of these
changes, home health care providers will be forced to reduce their costs of
providing services and it is expected that utilization of home care services per
beneficiary will decline. Under certain conditions, Medicare beneficiaries who
had previously been entitled to services will no longer qualify under Medicare
reimbursement guidelines.
As a result of the changes to Medicare reimbursement imposed by the
Act, the Company expects a decline in revenues from its Medicare certified
nursing agency for the cost reporting period beginning July 1, 1998. The Company
has determined that IPS will reduce current reimbursement for the Medicare
services it provides. In addition, the Company's operations in New York are
dependent upon referrals, primarily from Medicare certified agencies, whose
future reimbursement may be adversely affected. Accordingly, there can be no
assurance that the Company's future referrals will not result in reduced
reimbursement rates or reduced volume in business.
Under the second phase of the Act, IPS is to be replaced with a
prospective payment system for home health care providers by October 1, 2000.
However, rules and regulations have not yet been developed by the Health Care
Financing Administration and there can be no assurance that such deadline will
be met. In the event that a prospective payment system is not implemented by
that date, the Act requires cost limits then in existence to be lowered by an
additional 15%. Such lower cost limits may have an adverse effect on the
Company, as well as on the entire industry. As the Company is unable to predict
how the prospective payment system will be ultimately designed and implemented,
it is unable to predict its impact on the Company.
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The Act also initially required that Medicare providers purchase surety
bonds in an amount equal to 15% of annual Medicare reimbursement. The Company
was required to have a surety bond in place no later than February 7, 1998. The
Company successfully complied with this requirement, at an immaterial cost.
Subsequent to the initial deadline, Medicare postponed this requirement until
February 1999.
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 promulgated
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 27%, 17% and 18% of net patient revenue for the fiscal
years ended July 31, 1998, 1997 and 1996, respectively, were derived under 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 and in Nassau, Suffolk and
Westchester Counties in New York. 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.
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Item 2. Properties.
The Company, directly or through certain subsidiaries, leases various
office facilities under lease agreements with various expiration dates through
the year 2004. The following sets forth the location, approximate square
footage, use of each office and expiration date of each lease:
Approximate Expiration Date
Location Square Feet Use of Lease
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Scarsdale, NY 2,679 Corporate headquarters October 31, 2003
Queens, NY 7,500 Administrative office January 31, 1999
Farmingdale, NY 3,519 Branch office May 31, 1999
Hempstead, NY 3,800 Satellite office September 30, 2004
Islandia, NY 2,100 Satellite office June 30, 2001
Manhattan, NY 1,265 Satellite office April 30, 1999
Mount Vernon, NY 1,900 Branch Office November 30, 2000
Milford, CT 10,350 Administrative office May 31, 1999
Norwalk, CT 2,772 Branch office May 31, 1999
Hamden, CT 2,605 Branch office July 31, 1999
Waterbury, CT 2,000 Branch office July 31, 2000
Seymour, CT 575 Satellite office Month to Month
Danbury, CT 1,200 Satellite office Month to Month
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 renew or find adequate replacement offices for
all leases which will expire in the current fiscal year.
Item 3. Legal Proceedings.
In the ordinary course of business, the Company is subject, from time
to time, to claims and legal actions. No material actions are currently pending
against the Company.
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, 1998.
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PART II
Item 5. Market for Company's Common Stock
and Related Stockholder Matters.
(A) Market Information
The Company's Common Stock is quoted on the NASDAQ National Market
under the symbol NHHC. The following table presents the quarterly high and low
bid quotations in the over-the-counter market, as reported by the National
Association of Securities Dealers for the two fiscal years ended July 31, 1997
and July 31, 1998. These quotations reflect the inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Market Prices
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High Low
Year ended July 31, 1997
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1st Quarter............................ $7.38 $5.88
2nd Quarter............................ 6.88 5.38
3rd Quarter............................ 6.25 5.00
4th Quarter............................ 6.38 5.00
Year ended July 31, 1998
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1st Quarter............................ $5.75 $4.50
2nd Quarter............................ 5.50 4.63
3rd Quarter............................ 4.88 3.88
4th Quarter............................ 5.00 4.03
(B) Holders
There were approximately 147 holders of record of Common Stock as of
October 26, 1998 excluding shares held by depository companies for certain
beneficial owners.
(C) Dividends
The Company has not declared or paid any cash dividends on its shares
of Common Stock during the last three fiscal years. It anticipates that for the
foreseeable future all earnings will be retained for use in its business, and,
accordingly, it does not intend to pay cash dividends. On October 21, 1996, the
Board of Directors of the Company declared a 6% stock dividend payable December
4, 1996 to stockholders of record on November 8, 1996. On October 10, 1997, the
Board of Directors of the Company declared a 3% stock dividend payable December
8, 1997 to stockholders of record on November 6, 1997. The Company did not
declare any cash or stock dividends during the fiscal year ended July 31, 1998.
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Item 6. Selected Financial Data.
The following table, which presents selected financial data for the
Company for each of the last five fiscal years, has been derived from the
Consolidated Financial Statements of the Company, which have been audited by
Richard A. Eisner & Company, LLP, independent auditors. The data set forth below
should be read in conjunction with the Consolidated Financial Statements in Item
8 of this Report. The results below include the operations of SunStar through
April 30, 1996. Subsequent thereto, the operations of SunStar are recorded on
the equity method and are reflected as loss from equity investee.
Fiscal Years Ended July 31,
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1998 1997 1996 1995 1994
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STATEMENT OF OPERATIONS
DATA:
Revenues............................. $34,313,000 $35,070,000 $38,830,000 $24,556,000 $20,116,000
Operating expenses................... 31,394,000 31,770,000 35,564,000 22,414,000 17,982,000
Income from operations............... 2,919,000 3,300,000 3,266,000 2,142,000 2,134,000
Other income (loss):
Gain resulting from
subsidiary's stock offering 331,000 --- 1,548,000 --- ---
Interest income............. 547,000 446,000 412,000 410,000 161,000
(Loss) from equity investee. (1,630,000) (612,000) (10,000) --- ---
Income from continuing operations
before taxes......................... 2,167,000 3,134,000 5,216,000 2,552,000 2,295,000
Provision for income taxes........... 964,000 1,278,000 1,859,000 1,126,000 1,077,000
Income from continuing operations.... 1,203,000 1,856,000 3,357,000 1,426,000 1,218,000
Discontinued operations.............. --- --- --- --- (3,472,000)
Net income (loss).................... 1,203,000 1,856,000 3,357,000 1,426,000 (2,254,000)
Diluted net income (loss) per share
of common stock:
Continuing operations....... $0.23 $0.35 $0.64 $0.27 $ 0.24
Discontinued operations --- --- --- --- $(0.67)
Net income (loss).. $0.23 $0.35 $0.64 $0.27 $(0.43)
BALANCE SHEET DATA:
Total assets......................... 25,503,000 25,224,000 24,421,000 18,865,000 17,926,000
Working capital...................... 19,134,000 16,853,000 16,288,000 15,292,000 13,484,000
Retained earnings.................... 7,045,000 5,842,000 4,789,000 3,307,000 1,881,000
Stockholders' equity................. 24,281,000 23,360,000 21,504,000 17,914,000 16,688,000
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
This discussion contains forward-looking statements that are subject to
a number of known and unknown risks that, in addition to general economic,
competitive and other business conditions, could cause actual results,
performance and achievements to differ materially from those described or
implied in the forward-looking statements.
The Company is subject to significant external factors that could
significantly impact its business, including changes in Medicare and Medicaid
reimbursement, government fraud and abuse initiatives and other such factors
that are beyond the control of the Company. These factors, as well as future
changes in reimbursement could cause future results to differ materially from
historical results.
The Balanced Budget Act of 1997, as amended (the "Act"), was signed
into law on August 5, 1997. Under the Act, for cost reports beginning on or
after October 1, 1997, Medicare-reimbursed home health agencies will be
reimbursed under an interim payment system ("IPS") for a two-year period prior
to the implementation of a prospective system. Under IPS, home health care
providers will be reimbursed the lower 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 98% of 1994 costs
adjusted for inflation. Prior to the implementation of IPS, Medicare reimbursed
providers on a reasonable cost basis subject to program-imposed cost per visit
limitations. The Act calls for payments to Medicare providers for cost reporting
periods beginning on or after October 1, 2000 to be made in accordance with a
prospective payment system to be established by the Secretary of the Department
of Health and Human Services. Without a prospective payment system by October
2000, a 15% further cut in Medicare home health payments will take effect.
The new IPS cost limits will apply to the Company's Connecticut based
medicare certified nursing agency for the cost reporting period beginning July
1, 1998. The Company has determined that these new limits will reduce current
reimbursement for the Medicare services it provides. Accordingly, in May 1998,
the Company combined its operations in Connecticut by merging its Medicare
certified subsidiary with its licensed agency subsidiary to increase operational
efficiencies. In addition, the Company will closely monitor utilization of
Medicare services in an effort not to exceed per patient cost limits.
The implementation of IPS is expected to result in a decrease in
revenues from the Company's Medicare certified agency, beginning in fiscal 1999.
In addition, the Company's operations in New York are dependent upon referrals,
primarily from Medicare certified agencies, whose future
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reimbursement may be adversely affected. Accordingly, there can be no assurance
that the Company's future referrals will not result in reduced reimbursement
rates or reduced volume of business.
On March 25, 1997, Health Acquisition Corp.("HAC"), a wholly-owned
subsidiary of the Company, acquired certain assets of C.J. Home Care, Inc. and
on May 29, 1997, HAC acquired certain assets of Home Health Aides, Inc. and
H.H.A. Aides, Inc. These acquisitions were from New York State licensed home
health care companies that provided home health care services in both Nassau &
Suffolk Counties, New York. The acquisitions have been accounted for utilizing
purchase accounting principles.
On May 21, 1996, the initial public offering of common stock by SunStar
was consummated. SunStar, then a wholly-owned subsidiary of the Company had
comprised the Company's Florida outpatient medical center operations. The
Company currently owns 890,000 shares, or approximately 30.5%, of SunStar. The
operations of SunStar prior to the offering are reflected in the Company's
financial statements as continuing operations. In the preparation of its
financial information, the Company has relied upon the financial statements of
SunStar.
Results of Operations
Fiscal year ended July 31,
1998 1997 1996
---- ---- ----
Net patient revenue 100.0% 100.0% 100.0%
------ ------- ------
Cost of revenue 64.5 65.3 63.9
General and administrative 25.9 24.6 26.9
Amortization of intangibles 1.1 0.7 0.8
------ ------- -------
Total operating expenses 91.5 90.6 91.6
------ ------ ------
Income from operations 8.5 9.4 8.4
Gain resulting from subsidiary's stock offering 1.0 --- 4.0
Interest income 1.6 1.2 1.0
(Loss) from equity investee (4.8) (1.7) ---
--------- ------- -------
Income before income taxes 6.3 8.9 13.4
Provision for income taxes 2.8 3.6 4.8
-------- ------ ------
Net income 3.5% 5.3% 8.6%
--------- ------- -------
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Year Ended July 31, 1998 Compared to Year Ended July 31, 1997
For the fiscal year ended July 31, 1998 ("fiscal 1998"), net patient
revenues decreased ($757,000) or (2%) to $34,313,000 from $35,070,000 for the
fiscal year ended July 31, 1997 ("fiscal 1997"). During fiscal 1998, net patient
revenue from HAC increased $2,037,000, or 10% to $22,599,000 from $20,562,000.
This increase is attributable to the acquisitions made by HAC that were
completed in March and May of 1997. During fiscal 1998, net patient revenue from
New England Home Care, Inc. ("New England") and Nurse Care, Inc. ("Nurse Care"),
respectively, the Medicare certified and licensed home health care subsidiaries
in Connecticut, decreased ($2,794,000), or (19%) to $11,714,000 from
$14,508,000. This decrease is attributable to a decline of ($3,256,000) in
Medicare revenue, offset by an increase in non-Medicare revenue of $462,000. The
decline in Medicare revenue is the result of a decline of (45%) in Medicare
visits from the corresponding period of 1997. Medicare visits decreased as the
Company began early preparation for the change in Medicare reimbursement to IPS
cost limits.
Gross profit margin remained at 35% in both fiscal 1998 and 1997.
General and administrative expenses increased $266,000, or 3% to
$8,886,000 in fiscal 1998 from $8,620,000 in fiscal 1997. As a percentage of
revenue, general and administrative expenses increased to 26% in fiscal 1998
from 25% in fiscal 1997. This increase is attributable to the decline in net
patient revenues that was not offset by a corresponding decline in general and
administrative expenses.
Amortization of intangibles increased $128,000, or 52% to $373,000 in
fiscal 1998 from $245,000 in fiscal 1997. This increase is attributable to the
acquisitions made by HAC in fiscal 1997.
As a result of the foregoing, income from operations decreased
($381,000), or (12%) to $2,919,000 in fiscal 1998 from $3,300,000 in fiscal
1997.
Interest income increased $101,000, or 23% to $547,000 in fiscal 1998
from $446,000 in fiscal 1997. This increase is attributable to the increase in
cash and cash equivalents over the most recent fiscal year.
As a result of a private placement of common stock by SunStar, the
Company adjusted the carrying value of its investment in SunStar to reflect the
Company's percentage ownership share (30.5%) in the increase in SunStar's
equity, which resulted in a gain of $331,000. In addition, the Company recorded
a loss from equity investee of ($1,630,000) in fiscal 1998 as compared to a loss
of ($612,000) in fiscal 1997, representing the Company's share of the net loss
recorded by SunStar for the same periods.
-14-
The Company's effective tax rate increased to 44% in fiscal 1998 as
compared to 41% in fiscal 1997. This increase is attributable to a lesser income
tax benefit on the loss from equity investee. Excluding the loss from equity
investee and gain resulting from subsidiary's stock offering, the effective tax
rate remained at 38% in both fiscal 1998 and 1997.
Net income decreased ($653,000) to $1,203,000, or $.23 per diluted share
in fiscal 1998 from $1,856,000, or $.35 per diluted share in fiscal 1997. The
decrease is primarily attributable to the increased loss from the equity
investment in SunStar.
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
For the fiscal year ended July 31, 1997, net patient revenues decreased
($3,760,000), or (10%) to $35,070,000 from $38,830,000 for the fiscal year ended
July 31, 1996 ("fiscal 1996"). This decrease is primarily attributable to the
absence of revenues from outpatient revenues from outpatient medical services
during fiscal 1997 as compared with the presence of such revenues of $3,693,000
during 1996. Revenues from home health care services decreased ($67,000), or
(.2%) from $35,173,000 in fiscal 1996. Revenues from HAC decreased ($100,000),
or (.5%) to $20,562,000 in fiscal 1997 from $20,662,000 in fiscal 1996, This
decrease is the result of increased competition and price pressures from the
certified home health agencies with which it contracts. Revenues from New
England and Nurse Care increased $33,000, or .2% to $14,508,000 in fiscal 1997
from $14,475,000 in fiscal 1996.
Gross profit margin percentage in fiscal 1997 was 35% as compared to
36% for fiscal 1996. Excluding outpatient medical center operations, the gross
profit margin was 35% in fiscal 1996.
General and administrative expenses decreased from 27% of revenues in
fiscal 1996 to 25% of revenues in fiscal 1997. The decrease is primarily
attributable to improved efficiencies implemented in the operations of New
England and Nurse Care.
Amortization of intangibles decreased from $294,000 in fiscal 1996 to
$245,000 in fiscal 1997 as a result of certain intangible assets from prior
acquisitions being fully amortized.
As a result of the foregoing, income from operations increased $34,000,
or 1% to $3,300,000 in fiscal 1997 from $3,266,000 in fiscal 1996.
Interest income increased to $446,000 for fiscal 1997 from $412,000 in
fiscal 1996. This increase of $34,000, or 8% is the result of the Company's
increased cash flow over fiscal 1996.
The Company recorded a loss from equity investee of ($612,000) in
fiscal 1997 as compared to a loss of ($10,000) in fiscal 1996, representing the
Company's share of the net loss reported by SunStar for the same periods. In
addition, in fiscal 1996, the Company recorded a net gain on the SunStar initial
public offering in the amount of $1,024,000.
-15-
The Company's effective tax rate increased to 41% in fiscal 1997 as
compared to 36% in fiscal 1996. This increase is attributable to the Company
utilizing available state net operating loss deductions in fiscal 1996.
Net income decreased ($1,501,000), or (45%) to $1,856,000, or $.35 per
diluted share in fiscal 1997 as compared to $3,357,000, or $.64 per diluted
share in fiscal 1996. The decrease is primarily attributable to the gain
resulting from subsidiary's stock offering in fiscal 1996.
Financial Condition, Liquidity and Capital Resources
At July 31, 1998, the Company had working capital of $19,134,000 as
compared to working capital of $16,853,000 at July 31, 1997. Cash and cash
equivalents at July 31, 1998 were $10,992,000 as compared to $9,324,000 at July
31, 1997.
On August 10, 1998, the Company acquired certain assets of Bryan
Employment Agency, Inc., a New York State licensed home health agency based in
Westchester County, New York for approximately $1,935,000 in cash and on
September 25, 1998, the Company signed a definitive stock purchase agreement
with Accredited Health Services, Inc., a New Jersey licensed home health care
agency based in Bergen County, New Jersey. The approximate purchase price for
Accredited Health Services, Inc. is $1,800,000 in cash, subject to post-closing
adjustment. The acquisition is expected to be completed by October 31, 1998.
Net cash provided by operating activities was $2,016,000 in fiscal 1998
as compared with $2,398,000 in fiscal 1997. This decrease of ($382,000), or
(16%) is primarily attributable to an increase in accounts receivable of
$448,000, an increase in prepaid expenses and other assets of $75,000, an
increase in income taxes receivable of $370,000 and a decrease in accounts
payable and accrued expenses of $334,000, offset by the decrease in estimated
third-party payor settlements of ($897,000) as compared to fiscal 1997. After
giving effect to the above mentioned acquisitions subsequent to year end, the
Company expects to continue to generate sufficient cash flow from operations to
meet its working capital requirements.
Investing activities in fiscal 1998 used cash of ($66,000) as compared
to cash used of ($2,003,000) in fiscal 1997. The cash used in investing
activities consisted of the purchase of furniture and equipment in both periods
and the purchase of assets of businesses in fiscal 1997.
The purchase of treasury shares of ($331,000) pursuant to the Company's
stock repurchase plan offset by the proceeds from the exercise of stock options
of $49,000, resulted in the cash used in financing activities of ($282,000) in
fiscal 1998. The proceeds from the exercise of stock options offset by the
purchase of treasury shares provided no cash from financing activities in fiscal
1997.
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 on a basis of 90 to 120 days with respect to
contracted business and 30 to 45 days with respect to certain
-16-
governmental payors, such as Medicare and Medicaid programs. For both fiscal
years 1998 and 1997, accounts receivable turnover was 91 days.
The Company has available a $2,000,000 secured line of credit with its
bank. In addition, a subsidiary of the Company has a secured advised line of
credit. The maximum amount that can be borrowed under the secured advised line
of credit may not exceed the lesser of eligible accounts receivable or
$2,000,000. Both credit facilities bear interest at the alternate base
commercial lending rate of the bank and expire January 31, 1999. At July 31,
1998, there was no outstanding balance under either line of credit.
The Company intends to meet both its short and long term liquidity
needs with its current cash balances, cash flow and available lines of credit.
The Company believes that its current cash balances and available credit will
also allow it to continue to make acquisitions in the home health care industry
without external financing.
In August 1998, the Board of Directors extended for one year its
program to repurchase its Common Stock. Purchases in the aggregate amount of up
to $1,000,000 in purchase price during the one-year extension would be made from
time to time in the open market and through privately- negotiated transactions,
subject to general market and other conditions. The buyback program will be
financed out of existing cash or cash equivalents.
Other than as set forth herein, the Company has no material commitments
for capital expenditures as of July 31, 1998.
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 the
fiscal year ended July 31, 1998. 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.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs which were
written using two digits rather than four to define the applicable year. Certain
purchased systems used by the Company, and for which the Company does not
control the programming code, use two digits for the year. The current system
used by HAC is relatively old and has been slated for replacement with a new
system that better meets the information needs as it expands and deals with the
current operating environment. The Company anticipates that this conversion will
be completed to provide compliance with the requirements to handle the year 2000
issue with no significant operational concerns. The
-17-
current system utilized by New England is a relatively new operating system. The
Company has been advised by the system vendor that all required changes
necessary to be compliant with the year 2000 issue have been substantially
completed and will be implemented prior to the year 2000. Management currently
believes that the financial resources necessary to accomplish year 2000
compliance will not be material to the Company's financial condition, liquidity
or results of operations. However, there is no guarantee that the Company's
expected results will be achieved. In addition, actual results could differ
materially from those expected results.
The Company depends on receipt of payment for services from its payor
sources most of which utilize computer software to process those payments. The
Company's primary payors include Medicare and Medicaid programs, insurance
companies, other certified home health agencies and long-term health care
provider programs. The Company is currently unable to predict what effect, if
any, the year 2000 issue may have on the computer systems of those payors or, in
turn, on the Company.
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-25.
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.
Not applicable.
-18-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
The information required by each of the items of Part III 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 1998 Annual
Meeting of Stockholders to be held on December 8, 1998, and is incorporated
herein by reference. The Company intends to files such Proxy Statement with the
Securities and Exchange Commission not later than 120 days subsequent to July
31, 1998.
-19-
PART IV
Item 14. 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.
(1) Financial Statements (see index to the consolidated
financial statements).
(2) Financial Statement Schedules (see index to the
consolidated financial statements).
-20-
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Index to Financial Statements and Schedules
Filed with the Annual Report of the Company on Form 10-K
Page
----
Part II Item 8
Independent Auditors' Report F-2
Consolidated Financial Statements
Balance sheets as of July 31, 1998 and 1997 F-3
Statements of operations for the years ended July 31, 1998, 1997 and 1996 F-4
Statements of changes in stockholders' equity for the years ended July 31, 1998,
1997 and 1996 F-5
Statements of cash flows for the years ended July 31, 1998, 1997 and 1996 F-6
Notes to financial statements F-7
Part IV Item 14
Independent Auditors' Report on Schedule F-24
Supplementary Information
Schedule II Valuation and Qualifying Accounts F-25
Schedules Omitted
Other schedules have been omitted as the conditions requiring their
filing are not present or the information required therein has been
included in the notes to consolidated financial statements.
F-1
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of SunStar Healthcare,
Inc. at July 31, 1997 and for the year then ended, a corporation in which the
Company had a 37.6% interest at such date. Those statements were audited by
other auditors whose report has been furnished to us; insofar as our opinion on
the 1997 consolidated financial statements relates to data included for SunStar
Healthcare, Inc., it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and, for 1997, the report of other
auditors, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of National Home Health
Care Corp. and subsidiaries as of July 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the three-year period ended July 31, 1998, in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
October 7, 1998
F-2
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31,
--------------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash (including cash equivalents of $7,576,000 and $8,344,000) $ 10,992,000 $ 9,324,000
Investments - available for sale 488,000 508,000
Accounts receivable (less allowance for doubtful accounts of $295,000
and $327,000) 8,269,000 8,176,000
Income taxes receivable 123,000
Prepaid expenses and other assets 195,000 163,000
Deferred taxes 289,000 230,000
------- -------
Total current assets 20,356,000 18,401,000
Furniture, equipment and leasehold improvements, net 395,000 378,000
Excess of cost over fair value of net assets of businesses acquired 3,179,000 3,350,000
Other intangible assets 745,000 947,000
Deposits and other assets 154,000 138,000
Investment in unconsolidated investee 674,000 2,010,000
------- ---------
$ 25,503,000 $ 25,224,000
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,013,000 $ 1,331,000
Income taxes payable 22,000
Estimated third-party payor settlements 209,000 195,000
------- -------
Total current liabilities 1,222,000 1,548,000
Deferred tax liability - noncurrent 316,000
--------- -------
Total liabilities 1,222,000 1,864,000
--------- ---------
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; authorized 20,000,000 shares,
issued 6,228,746 and 6,208,646 shares 6,000 6,000
Additional paid-in capital 18,525,000 18,476,000
Retained earnings 7,045,000 5,842,000
--------- ---------
25,576,000 24,324,000
Less treasury stock (1,028,879 and 957,500 shares) - at cost 1,295,000 964,000
--------- ----------
Total stockholders' equity 24,281,000 23,360,000
---------- ----------
$ 25,503,000 $ 25,224,000
========== ==========
See notes to financial statements
F-3
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended July 31,
---------------------------------------
1998 1997 1996
---- ---- ----
Net patient revenue $ 34,313,000 $ 35,070,000 $ 38,830,000
---------- ---------- ----------
Operating expenses:
Cost of revenue 22,135,000 22,905,000 24,798,000
General and administrative 8,886,000 8,620,000 10,472,000
Amortization of intangibles 373,000 245,000 294,000
------- ------- -------
Total operating expenses 31,394,000 31,770,000 35,564,000
---------- ---------- ----------
Income from operations 2,919,000 3,300,000 3,266,000
Other income:
Gain resulting from subsidiary's stock offering 331,000 1,548,000
Interest income 547,000 446,000 412,000
Loss from equity investee (1,630,000) (612,000) (10,000)
---------- -------- -------
Income before income taxes 2,167,000 3,134,000 5,216,000
Provision for income taxes 964,000 1,278,000 1,859,000
------- --------- ---------
Net income $ 1,203,000 $ 1,856,000 $ 3,357,000
========= ========= =========
Net income per common share:
Basic $.23 $.35 $.65
==== ==== ====
Diluted $.23 $.35 $.64
==== ==== ====
Weighted average number of shares outstanding:
Basic 5,231,248 5,250,242 5,186,985
========= ========= =========
Diluted 5,307,158 5,358,722 5,284,799
========= ========= =========
See notes to financial statements
F-4
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Additional Treasury Stock
Number of Paid-In Retained Number of
Shares Amount Capital Earnings Shares Cost
---------- ------ ---------- -------- -------- ----
Balance at July 31, 1995 5,673,075 $ 6,000 $ 15,552,000 $ 3,307,000 955,000 $ (951,000)
Net income 3,357,000
Stock dividend declared on October 21, 1996 288,414 1,875,000 (1,875,000)
Exercise of common stock options 88,832 233,000
--------- -------- ---------- ---------- ------- -------
Balance at July 31, 1996 6,050,321 6,000 17,660,000 4,789,000 955,000 (951,000)
Net income 1,856,000
Acquisition of treasury shares, $5.32 per share 2,500 (13,000)
Stock dividend declared on October 10, 1997 153,025 803,000 (803,000)
Exercise of common stock options 5,300 13,000
--------- -------- ---------- ---------- -------- --------
Balance at July 31, 1997 6,208,646 6,000 18,476,000 5,842,000 957,500 (964,000)
Net income 1,203,000
Acquisition of treasury shares, $4.65 per share 71,379 (331,000)
Exercise of common stock options 20,100 49,000
--------- ------- ---------- --------- --------- ----------
Balance at July 31, 1998 6,228,746 $ 6,000 $ 18,525,000 $ 7,045,000 1,028,879 $(1,295,000)
========= ====== ========== ========= ========= ==========
See notes to financial statements
F-5
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended July 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 1,203,000 $ 1,856,000 $ 3,357,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 479,000 355,000 454,000
Provision for doubtful accounts 32,000 123,000
Deferred tax (375,000) (133,000) 410,000
Gain on subsidiary's stock offering (331,000) (1,548,000)
Loss from equity investee 1,630,000 612,000 10,000
Changes in:
Accounts receivable (125,000) 323,000 (544,000)
Prepaid expenses and other assets (48,000) 27,000 (65,000)
Accounts payable, accrued expenses and other
liabilities (318,000) 16,000 (337,000)
Income taxes receivable/payable (145,000) 225,000 207,000
Estimated third-party payor settlements 14,000 (883,000) (1,001,000)
------ -------- ----------
Net cash provided by operating activities 2,016,000 2,398,000 1,066,000
--------- --------- ---------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (123,000) (134,000) (172,000)
Proceeds of investments 20,000 20,000 285,000
Purchase of assets of businesses (1,889,000)
Purchase of Nurse Care, Inc., net of cash acquired (2,595,000)
Proceeds from sale of subsidiary stock 37,000
------ ---------- ---------
Net cash used in investing activities (66,000) (2,003,000) (2,482,000)
------- ---------- ----------
Cash flows from financing activities:
Decrease in notes receivable 1,039,000
Purchase of treasury shares (331,000) (13,000)
Proceeds from exercise of stock options 49,000 13,000 233,000
Cash of subsidiary at date of stock offering (164,000)
--------- -------- ---------
Net cash (used in) provided by financing activities (282,000) 0 1,108,000
-------- -------- ----------
Net increase (decrease) in cash and cash equivalents 1,668,000 395,000 (308,000)
Cash and cash equivalents - beginning of year 9,324,000 8,929,000 9,237,000
--------- --------- ---------
Cash and cash equivalents - end of year $ 10,992,000 $ 9,324,000 $ 8,929,000
========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,000 $ 11,000 $ 14,000
Income taxes $ 1,512,000 $ 1,584,000 $ 1,677,000
Supplemental disclosure of noncash investing and financing activities - see
Notes 6 and 7.
See notes to financial statements
F-6
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
National Home Health Care Corp. and subsidiaries (the "Company") is a provider
of home health care services, including nursing care, personal care and other
specialized therapies. Until May 1996, the Company was also engaged as a
provider of outpatient medical services (see Note 6).
Principles of consolidation:
The consolidated financial statements include the accounts of National Home
Health Care Corp. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. During the fourth quarter of fiscal 1996,
the Company's interest in its previously wholly owned subsidiary, which
provided outpatient medical services, was reduced to 37.6%, and was further
reduced to 30.5% at July 31, 1998. Accordingly, the Company began accounting
for this entity using the equity method during the fourth quarter of fiscal
1996.
Revenue recognition:
Net patient revenue is recorded at the estimated net realizable amount from
third-party payors and patients.
Under Medicare and Medicaid cost reimbursement programs, the Company is
reimbursed for services rendered to covered patients. Revenues derived from
these programs are based in part on cost reimbursement principles and are
subject to examination and retroactive adjustment. Management continuously
evaluates the outcome of these reimbursement examinations and provides
allowances for any potential adjustments. In the opinion of management,
retroactive adjustments, if any, would not be material to the financial
position or results of operations of the Company.
Approximately 40%, 39% and 39% of net patient revenue for the fiscal years
ended July 31, 1998, 1997 and 1996, respectively, were derived under federal
and state third-party reimbursement programs.
Cash equivalents:
For the purposes of the statements of cash flows, the Company considers all
highly liquid investment instruments purchased with a maturity of three months
or less to be cash equivalents.
F-7
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Furniture, equipment and leasehold improvements:
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation is being provided on the straight-line method over the estimated
useful lives of the assets (generally five to ten years). Amortization of
leasehold improvements is being provided on the straight-line method over the
various lease terms or estimated useful lives, if shorter.
Excess of cost over fair value of net assets of business acquired:
The excess of cost over the fair value of net assets acquired (goodwill) is
being amortized principally over a period of 20 years on a straight-line
basis. Goodwill is evaluated periodically and adjusted if necessary, if events
and circumstances indicate that a permanent decline in value below the current
unamortized historical cost has occurred.
Net income per share:
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share",
which establishes new standards for computing and presenting earnings per
share and simplifies previously issued accounting standards related to
earnings per share. SFAS 128 has replaced the concept of "primary" with
"basic" and the concept of "fully-diluted" with "diluted".
The basic calculation is determined by dividing net income attributable to
common shares outstanding (the basic numerator) by the weighted average number
of common shares outstanding (the basic denominator) during the period.
The diluted calculation is determined by adjusting the basic numerator for any
changes in income or loss that would result from the assumed exercise of
potentially issued common shares. Additionally, the basic denominator is
increased to include the additional number of common shares that would be
outstanding if the potentially issued common shares had been issued, if
dilutive. Potentially issued common shares, consisting of options, are not
included in this calculation where the effect of the inclusion would be
antidilutive. The treasury stock method is used to reflect the dilutive effect
of outstanding options and warrants.
F-8
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
SFAS 128 requires restatement of prior periods. The application of SFAS 128
for the fiscal year ended July 31, 1997, had no impact and the effect for the
fiscal year ended July 31, 1996 resulted in a reduction of $.01 per diluted
share.
SFAS 128 also requires dual presentation of basic and diluted earnings per
share on the face of the consolidated statement of operations for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic earnings per share computation to the numerator
and denominator of the diluted EPS computation. The reconciliations for the
years ended July 31, 1998, 1997 and 1996 are as follows:
Year Ended July 31,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- --------------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
Basic EPS
Net income $ 1,203,000 5,231,248 $ 1,856,000 5,250,242 $ 3,357,000 5,186,985
Effect of dilutive securities -
common stock options 75,910 108,480 97,814
--------- --------- --------- --------- ---------- ---------
Diluted EPS $ 1,203,000 5,307,158 $ 1,856,000 5,358,722 $ 3,357,000 5,284,799
========= ========= ========= ========= ========== =========
Investments:
The Company's investments are accounted for in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" which requires that, except for debt securities
classified as "held-to-maturity securities", investments in debt and equity
securities be reported at fair value.
F-9
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Investment securities available for sale at July 31, 1998 and 1997 are
summarized as follows:
Amortized Cost (1)
--------------------------
1998 1997
---- ----
Floating rate debentures issued by New York State, maturing
in one to five years $ 160,000 $ 160,000
Floating rate debentures issued by New York State, maturing
in five to ten years 150,000 160,000
Floating rate debentures issued by New York State, maturing
after ten years 160,000 170,000
Other 18,000 18,000
------ ------
$ 488,000 $ 508,000
======= =======
- -----------------
(1) Amortized cost approximates market value. Accordingly, there is no
unrealized holding gain or loss.
Fair value of financial instruments:
The carrying amount reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and accrued liabilities approximates
fair value because of the immediate or short-term maturity of the financial
instruments.
Accounting for stock options:
The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation", in fiscal 1997 and continues
to account for employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 ("APB Opinion 25"), "Accounting for Stock
Issued to Employees" using intrinsic values with appropriate disclosures in
conformity with the fair values based method of SFAS 123.
Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130
F-10
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recently issued accounting pronouncements: (continued)
defines the concept of "comprehensive income" and establishes the standards
for reporting comprehensive income. Comprehensive income is defined to include
net income, as currently recorded, as well as unrealized gains and losses on
available-for-sale securities, foreign currency translation adjustments and
certain other items not included in the statement of operations. SFAS 130 also
sets forth requirements on how comprehensive income should be presented as
part of an issuer's financial statements. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. The Company is currently assessing
how it will disclose comprehensive income in its financial statements. The
adoption of SFAS 130 will not affect the Company's earnings, liquidity or
capital resources.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131") "Disclosure About Segments of an Enterprise and Related
Information", which defines the criteria by which an issuer is to determine
the number and nature of its "operating segments" and sets forth the financial
information that is required to be disclosed about such operating segments.
SFAS 131 is effective for fiscal years beginning after December 15, 1997. The
Company is currently assessing the manner in which it will disclose the
required information.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities", requiring the recognition of all derivatives as either assets or
liabilities on the balance sheet and measurement of the derivatives at fair
value. SFAS 133 is effective for fiscal years beginning after June 15, 1999.
The Company is currently assessing the effect, if any, of this pronouncement.
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 goodwill, depreciable assets, third-party payor
settlements and valuation reserves for accounts receivable and deferred tax
assets.
F-11
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 development trends and may be subsequently revised based on developments
relating to such claims.
Stock dividend:
On October 21, 1996, the Company's Board of Directors declared a 6% stock
dividend payable on December 4, 1996 for shareholders of record as of November
8, 1996. A total of 288,414 shares of common stock were issued in connection
with the dividend.
On October 10, 1997, the Company's Board of Directors declared a 3% stock
dividend payable on December 8, 1997 for shareholders of record as of November
6, 1997. A total of 153,025 shares of common stock were issued in connection
with the dividend.
NOTE 2 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost and are
summarized as follows:
July 31,
---------------------
1998 1997
---- ----
Furniture and equipment $ 849,000 $ 753,000
Leasehold improvements 186,000 159,000
------- -------
1,035,000 912,000
Less accumulated depreciation and amortization 640,000 534,000
------- -------
Balance $ 395,000 $ 378,000
======= =======
The net book value of furniture and equipment held under capital leases was $0
at July 31, 1998 and 1997. Depreciation expense includes depreciation on
assets held under capital leases.
F-12
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 3 - EXCESS OF COST OVER FAIR VALUE
Changes in the excess of cost over fair value of net assets of businesses
acquired during the two years ended July 31, 1998 are as follows:
Year Ended July 31,
---------------------
1998 1997
---- ----
Balance - beginning of year $ 3,350,000 $ 2,557,000
Consideration for acquisition 929,000
Reduction from subsidiary stock offering (Note 6)
Amortization (171,000) (136,000)
--------- --------
Balance - end of year $ 3,179,000 $ 3,350,000
========= =========
NOTE 4 - OTHER INTANGIBLE ASSETS
Other intangible assets are as follows:
July 31,
---------------------
1998 1997
---- ----
Covenants not to compete $ 775,000 $ 775,000
Personnel files 678,000 678,000
Patient files 352,000 352,000
------- -------
1,805,000 1,805,000
Less accumulated amortization 1,060,000 858,000
--------- -------
$ 745,000 $ 947,000
======= =======
Other intangible assets are being amortized using the straight-line method
over a period of three to ten years.
F-13
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are as follows:
July 31,
------------------
1998 1997
---- ----
Trade accounts payable $ 541,000 $ 621,000
Accrued employee compensation and benefits 416,000 643,000
Other 56,000 67,000
------ ------
$ 1,013,000 $ 1,331,000
========= =========
NOTE 6 - SUBSIDIARY STOCK OFFERING
In January 1996, the outpatient medical service business of the Company was
reorganized as SunStar Healthcare, Inc. ("SunStar"), a newly-formed, wholly
owned subsidiary of the Company. The Company reduced its ownership percentage
of SunStar to 37.6% through a public offering of 1,495,000 shares at a price
of $5.00 per share, aggregating approximately $6,083,000, net of expenses.
Subsequent to the offering, the Company is accounting for its investment in
SunStar using the equity method of accounting. In connection with SunStar's
public stock offering, the Company recorded a gain before tax of $1,548,000
representing the net increase in book value of the Company's investment in
SunStar at that date. Deferred income taxes of $524,000 have been provided on
the gain.
In fiscal 1998, the Company's ownership percentage of SunStar was reduced to
30.5% as a result of SunStar issuing additional shares of its common stock
pursuant to a private placement in which it received $1,318,000, net of
expenses. In connection therewith, the Company recorded a gain before tax of
$302,000 representing the net increase in book value of the Company's
investment. Also in fiscal 1998, the Company sold 10,000 shares of SunStar for
$37,000 and recorded a gain of $29,000.
F-14
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 6 - SUBSIDIARY STOCK OFFERING
(Continued)
Summarized financial data of SunStar for the years ended July 31 are as
follows:
1998 1997 1996
---------- ------------ -----------
Total current assets $ 8,150,000 $ 5,105,000 $ 6,403,000
Total assets 8,650,000 6,371,000 7,499,000
Total current liabilities 6,319,000 881,000 505,000
Total liabilities 6,402,000 989,000 522,000
Total shareholders' equity 2,248,000 5,382,000 6,977,000
Total revenues 9,079,000 4,729,000 5,080,000
Net loss (4,567,000) (1,631,000) (222,000)
Market value of the Company's investment 4,228,000* 4,500,000 * 4,233,000 *
- ----------------------
* The market value of the Company's investment is based on quoted market
prices and does not necessarily represent the amount that may be realized
upon disposition of the investment.
NOTE 7 - ACQUISITIONS
On March 25, 1997, the Company acquired certain assets of C.J. Home Care,
Inc., d/b/a Garden City Home Care, for approximately $677,000, including
acquisition costs of $27,000. The assets purchased consisted of personnel
files of $100,000, patient files of $50,000, furniture and equipment of
$10,000, covenants not to compete of $200,000 and goodwill of $317,000.
On May 29, 1997, the Company acquired certain assets of Home Health Aides,
Inc. and H.H.A. Aides, Inc., for approximately $1,212,000, including
acquisition costs of $77,000. The assets purchased consisted of personnel
files of $100,000, patient files of $300,000, furniture and equipment of
$25,000, covenant not to compete of $175,000 and goodwill of $612,000.
The above acquisitions have been accounted for utilizing purchase accounting
principles. Accordingly, the results of these operations have been included in
the accompanying consolidated financial statements since the dates of
acquisition.
Had the operations of the above acquisitions been acquired on August 1, 1995,
there would have been no material effect on the consolidated operations of the
Company for the years ended July 31, 1997 and July 31, 1996.
F-15
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 7 - ACQUISITIONS
(Continued)
On August 4, 1995, the Company acquired all of the outstanding common shares
of Nurse Care, Inc., the parent company of New England Home Care, Inc. ("New
England"). New England is a licensed and Medicare certified home health care
agency providing services in Fairfield and New Haven counties in the State of
Connecticut. The purchase price of $3,150,000 was generated from internal
funds. The acquisition was accounted for as a purchase and the excess of the
purchase price over the fair value of the assets acquired, $2,049,000, was
allocated to goodwill. Had the operations been acquired on August 1, 1995,
there would have been no material effect on the consolidated operations of the
Company for the fiscal year ended July 31, 1996.
NOTE 8 - INCOME TAXES
The provision for income taxes is summarized as follows:
Year Ended July 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $ 920,000 $ 1,156,000 $ 1,340,000
State and local 419,000 255,000 109,000
-------- --------- ---------
1,339,000 1,411,000 1,449,000
Deferred (375,000) (133,000) 410,000
-------- --------- ---------
$ 964,000 $ 1,278,000 $ 1,859,000
======== ========= =========
F-16
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 8 - INCOME TAXES
(Continued)
Deferred income taxes reflect the tax impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. The principal items
making up the deferred income tax expense (benefit) are as follows:
Year Ended July 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Loss from equity investee $ (316,000) $ (208,000)
State tax net operating loss carryforwards (59,000) 75,000 $ (114,000)
Tax on gain from sale of subsidiary stock 524,000
-------- -------- -------
$ (375,000) $ (133,000) $ 410,000
======== ======== =======
The deferred tax assets and liabilities are as follows:
July 31,
----------------------------------------------------------
1998 1997
-------------------------- -------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Accrued liability and reserves $ 248,000 $ 191,000
State net operating loss carryforwards 41,000 39,000
Investment in unconsolidated investee $ 0 $ 316,000
------- -- ------- -------
289,000 0 230,000 316,000
Valuation allowance 0 0
------- -- ------- -------
$ 289,000 $ 0 $ 230,000 $ 316,000
======= === ======= =======
One subsidiary of the Company has incurred losses which can be used to offset
state taxable income through 2012. At July 31, 1998, the total net operating
loss carryforward as applicable to Connecticut amounted to approximately
$580,000.
No valuation allowance has been recorded as the Company believes that it is
more likely than not that the benefit of the deferred tax assets will be
realized.
F-17
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 8 - INCOME TAXES
(Continued)
The reconciliation of the statutory tax rate to the effective tax rate for the
three years ended July 31, 1998 is as follows:
1998 1997 1996
---- ---- ----
Statutory rate 34% 34% 34%
State and local taxes (net of federal tax effect) 12 5 1
Federal tax credit (6) (2)
Permanent differences 8 4 1
Other (4)
-- -- --
Effective rate 44% 41% 36%
== == ==
NOTE 9 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Most of the Company's business is with customers who are in the health care
industry and with governmental agencies.
The Company provides temporary health care personnel to in-home patients in
the New York City metropolitan area and State of Connecticut. Credit losses
relating to customers historically have been minimal and within management's
expectations.
At July 31, 1998, the Company maintained approximately 53% of its cash and
cash equivalents with one financial institution.
Under certain federal and state third-party reimbursement programs, the
Company received net patient revenues approximating $13,666,000, $13,610,000
and $15,211,000 for the years ended July 31, 1998, 1997 and 1996,
respectively. The Company also received net patient revenues of approximately
$7,488,000, $7,624,000 and $9,275,000 for the years ended July 31, 1998, 1997
and 1996, respectively, from a private company. At July 31, 1998, the Company
had an aggregate outstanding receivable from the federal and state
reimbursement programs of $2,151,000 and an outstanding receivable of
$1,896,000 from the private company.
F-18
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 10 - STOCK OPTION PLAN
In 1992, the stockholders approved the 1992 Stock Option Plan (the "1992
Plan") designed to provide an incentive to key employees (including directors
and officers who are key employees) and to Directors who are not employees of
the Company. The 1992 Plan authorizes the granting of both incentive and
nonqualified stock options to purchase up to 500,000 shares of the Company's
common stock.
The 1992 Plan is administered by the Compensation Committee which has the
authority to determine when options are granted, the term during which an
option may be exercised (provided no option has a term exceeding ten years),
the exercise price and the exercise period. The exercise price shall generally
not be less than the fair market value on the date of grant. No option may be
granted under the 1992 Plan after August 16, 2002.
At July 31, 1998, 419,476 shares of the Company's common stock have been
reserved for future issuance pursuant to the 1992 Plan.
A summary of the status of the Company's stock options as of July 31, 1998,
1997 and 1996 and changes during the years ending on those dates is presented
below:
1998 1997 1996
---------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- ------ -------- ------ -------- ------ ---------
Outstanding at beginning of
year 204,042 (2) $2.77 (2) 203,982 (1) $2.85 (1) 295,502 $2.77
Granted 60,000 4.81 12,000 6.25
Exercised (20,100) 2.47 (5,300) 2.47 (88,832) 2.63
Forfeited (2,184) 5.70 (26,234) 2.91
------- ------- -------
Outstanding at end of year 241,758 3.29 198,682 2.86 192,436 3.03
======= ======= =======
Options exercisable at year-end 241,758 3.29 198,682 2.86 192,436 3.03
======= ======= =======
Weighted-average fair value of
options granted during the year 1.97 2.53
- --------
(1) Adjusted for 6% stock dividend declared in October 1996.
(2) Adjusted for 3% stock dividend declared in October 1997.
F-19
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 10 - STOCK OPTION PLAN
(Continued)
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model utilizing the following assumptions as of
July 31, 1998: risk-free interest rate of 5.75%, expected option life of 10
years, expected stock price volatility of 42% and expected dividend yield of
3%.
The Company applies APB Opinion 25 and related interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option grants. The effect of applying SFAS No. 123 on 1996 and 1998 pro
forma net income is not necessarily representative of the effects on reported
net income for future years due to, among other things, (1) the vesting period
of stock options and (2) the fair value of additional stock options in future
years. Had the Company elected to recognize compensation cost based on the
fair value of the options at the date of grant as prescribed by SFAS 123, net
income for the year ended July 31, 1998 would have been $1,085,000 or $.21 and
$.20 per basic and diluted shares, respectively. There would have been no
material effect on the Company's net income or net income per common share for
the year ended July 31, 1996.
The following table summarizes information about stock options outstanding at
July 31, 1998:
Options Outstanding and Exercisable
Weighted-
Shares Average Weighted-
Outstanding Remaining Average
Range at Contractual Exercise
Exercise Prices July 31, 1998 Life Price
--------------- ------------- ----------- --------
$2.39 - $2.63 159,920 1 year $2.58
$3.76 10,918 4 years 3.76
$5.70 10,920 8 years 5.70
$4.81 60,000 9 years 4.81
-------
241,758
=======
F-20
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[a] Effective April 1, 1997 the Company amended and restated the Company's
Employee Savings and Stock Investment Plan organized under Section 401(k)
of the Internal Revenue Code. Under the new plan, employees may
contribute up to 15% of their salary into the plan, limited to the
maximum amount allowable under federal tax regulations. The Company will
match 100% of employees' contributions, provided, that in no event shall
the matching contributions on behalf of any employee exceed 2.5% of each
employee's 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 each
of the years ended July 31, 1998, 1997 and 1996 were $105,000, $135,000
and $122,000, respectively.
[b] The Company has employment agreements with four officers which expire
through October 2002. The aggregate commitment for future salary,
excluding bonuses, under the agreements is $2,633,000. One agreement also
provides for increases based on increases in the consumer price index and
additional annual compensation of up to $150,000 based on 5% of pre-tax
income, as defined, in excess of $3,000,000. Another agreement provides
for additional compensation based on 3% of income from operations, as
defined, in excess of $3,000,000.
[c] The Company rents various office facilities through 2000 under the terms
of several lease agreements which include escalation clauses.
At July 31, 1998, minimum annual rental commitments under noncancellable
operating leases are as follows:
Year Ending
July 31,
1999 $ 406,000
2000 161,000
2001 119,000
2002 54,000
2003 54,000
Thereafter 5,000
-----
$ 799,000
=======
F-21
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[c] (Continued)
Rent expense for the years ended July 31, 1998, 1997 and 1996 was
approximately $527,000, $435,000 and $655,000, respectively.
One lease is with a company controlled by the Company's Chief Executive
Officer. Rent expense under such lease approximates $129,000 per year.
[d] The Company has a line of credit with its bank totalling $2,000,000.
Advances against the line are to be collateralized by the assets of the
Company. In addition, a subsidiary of the Company has a secured line of
credit. The maximum amount that can be borrowed under the secured line of
credit shall not exceed the lesser of eligible accounts receivable or
$2,000,000. Both credit facilities bear interest at the alternate base
commercial lending rate of the bank and expire January 30, 1999. At July
31, 1998, there were no outstanding balances under either line of credit.
NOTE 12 - SEGMENT INFORMATION
The Company's operations are in home health care services and, through May
1996, outpatient medical services. Home health care services are performed in
the New York metropolitan area and in the State of Connecticut. Outpatient
medical services were performed in Brevard and Volusia County, Florida.
Subsequent to the Company's sale of its majority ownership in SunStar
Healthcare, Inc., during the fourth quarter of fiscal 1996, such operations
are not consolidated and, accordingly, are not included in the following
segment information.
F-22
NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIES
Notes to Financial Statements
July 31, 1998 and 1997
NOTE 12 - SEGMENT INFORMATION
(Continued)
Subsequent to 1996, the Company's operations consist only of home health
services. Revenue, operating expenses and income from operations pertaining to
the Company's segments for 1996 is as follows:
Year Ended
July 31,
1996
----------
Net patient revenue:
Home health care services $ 35,137,000
Outpatient medical services 3,693,000
----------
38,830,000
----------
Operating expenses:
Home health care services 31,968,000
Outpatient medical services 3,596,000
----------
35,564,000
----------
Income from operations:
Home health care services 3,241,000
Outpatient medical services 25,000
----------
$ 3,266,000
==========
NOTE 13 - SUBSEQUENT EVENT
On August 10, 1998, the Company acquired certain assets of Bryan Employment
Agency, Inc., d/b/a Bryan Home Care Services for approximately $1,943,000,
including acquisition costs of $8,000. The assets purchased consisted of
personnel files of $285,000, patient files of $285,000, furniture and
equipment of $30,000, covenants not to compete of $200,000 and goodwill of
$1,143,000. Had the operations been acquired on August 1, 1997, there would
have been no material effect on the consolidated operations for the year ended
July 31, 1998.
On September 25, 1998, the Company signed a definitive stock purchase
agreement with Accredited Health Services, Inc. (Accredited), a New Jersey
licensed home health care agency based in Bergen County, New Jersey. The
purchase price for 100% of Accredited's outstanding common stock is
approximately $1,800,000 in cash, subject to post-closing adjustment.
F-23
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors and Stockholders
National Home Health Care Corp.
New York, New York
The audits referred to in our report dated October 7, 1998 on the consolidated
financial statements of National Home Health Care Corp. and subsidiaries,
which appears in Part II, also included Schedule II for each of the years in
the three-year period ended July 31, 1998. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein, in compliance with the applicable accounting regulations of the
Securities and Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
October 7, 1998
F-24
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Additions
---------------------------------------------------------------------------------
(1) (2)
Balance Charged to Charged to
at Beginning Costs and Other Accounts - Deductions - Balance at
of Period Expenses Describe Describe End of Period
------------- ---------- --------------- ------------- --------------
Description:
Year ended July 31, 1998:
Allowance deducted from asset account
Allowance for uncollectible accounts $ 327,000 $ 32,000 (A) $ (64,000) $ 295,000
======= ====== ======= =======
Year ended July 31, 1997:
Allowance deducted from asset account
Allowance for uncollectible accounts $ 414,000 (A) $ (87,000) $ 327,000
======= ======= ======= =======
Year ended July 31, 1996:
Allowance deducted from asset account
Allowance for uncollectible accounts (B) $ 439,000 $ 123,000 (A) $ (148,000) $ 414,000
======= ======= ======== =======
- ------------------
(A) Represents actual write-offs.
(B) Includes $340,000 acquired in acquisition of Nurse Care, Inc.
See notes to financial statements
F-25
(3) Exhibits
Exhibit Document
Number
3.1 Certificate of Incorporation. Incorporated by reference
to the Registrant's Registration Statement on Form S-1
(No. 2-86643) filed September 20, 1983 (the "1983 Form
S-1").
3.2 Certificate of Amendment to Certificate of
Incorporation. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1992 (the "1992 Form 10-K").
3.3 By-laws. Incorporated by reference to the 1983 Form
S-1.
10.1 1992 Stock Option Plan. Incorporated by reference to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1993 (the "1993 Form 10-K").
10.2 Incentive Stock Option Plan. Incorporated by reference
to the 1993 Form 10-K.
10.3 Agreement dated January 1, 1994 between Allen Health
Care Services and VNS Home Care. Incorporated by
reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1994 (the "1994
Form 10-K").
10.4 Employment Agreement dated as of November 1, 1997
between the Registrant and Steven Fialkow. Incorporated
by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 1998
(the "January 31, 1998 Form 10-Q").
10.5 Employment Agreement dated as of November 1, 1997
between the Registrant and Frederick H. Fialkow.
Incorporated by reference to the January 31, 1998 Form
10-Q.
10.6 Employment Agreement dated as of November 1, 1997
between the Registrant and Robert P. Heller.
Incorporated by reference to the January 31, 1998 Form
10-Q.
10.7 Employment Agreement dated as of November 1, 1997
between the Registrant and Richard Garofalo.
Incorporated by reference to the January 31, 1998 Form
10-Q.
-21-
Exhibit Document
10.8 Agreement between Division of Social Services of
Suffolk County and Health Acquisition Corp.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1991.
10.9 Agreement between Nassau County Department of Social
Services and Allen Health Care Services. Incorporated
by reference to the 1992 Form 10-K.
10.10 Agreement dated January 1, 1994 between Catholic
Medical Center of Brooklyn and Queens, Inc.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1994.
10.11 Letter dated June 1, 1992 from Public Health Council of
the State of New York Department of Health to Health
Acquisition Corp. d/b/a Allen Health Care Services.
Incorporated by reference to the 1992 Form 10-K.
10.12 Letter from Joint Commission on Accreditation of
Healthcare Organizations awarding accreditation to
Allen Health Care, dated September 20, 1993.
Incorporated by reference to the 1993 Form 10-K.
10.13 The Registrant's Employee Savings and Stock Investment
Plan under Section 401(k) of the Internal Revenue Code.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1997 (the "1997 Form 10-K").
10.14 Letter Agreement dated February 20, 1998 providing a
Secured Advised Line of Credit from the Bank of New
York to National Home Health Care Corp. Incorporated by
reference to the January 31, 1998 Form 10-Q.
10.15 Letter Agreement dated February 20, 1998 providing a
Secured Advised Line of Credit from the Bank of New
York to New England Home Care, Inc. Incorporated by
reference to the January 31, 1998 Form 10-Q.
21.1 List of Subsidiaries. Incorporated by reference to the
1997 Form 10-K.
23.1 * Consent of Richard A. Eisner & Company, LLP
-22-
Exhibit Document
27.1 * Financial Data Schedule
- ---------------
* Filed herewith
(b) Reports on Form 8-K. None have been filed during the last fiscal
quarter.
-23-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL HOME HEALTH CARE CORP.
/s/ Robert P. Heller
---------------------------------------
By: Robert P. Heller
Vice President of Finance
and Chief Financial Officer
Dated: October 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
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 Chairman of the Board of Directors
------------------------ and Chief Executive Officer
Frederick H. Fialkow
/s/ Steven Fialkow President, Chief Operating Officer,
------------------------ Secretary and Director
Steven Fialkow
/s/ Robert P. Heller Vice President of Finance and Chief
------------------------ Financial Officer (Principal
Robert P. Heller Financial and Accounting Officer)
/s/ Ira Greifer, M.D. Director
------------------------
Ira Greifer, M.D.
/s/ Bernard Levine, M.D. Director
------------------------
Bernard Levine, M.D.
/s/ Robert Pordy, M.D. Director
------------------------
Robert Pordy, M.D.
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 FOR THE
FISCAL YEAR ENDED JULY 31, 1998
NATIONAL HOME HEALTH CARE CORP.
EXHIBIT INDEX
Exhibit Description
Number
3.1 Certificate of Incorporation. Incorporated by reference
to the Registrant's Registration Statement on Form S-1
(No. 2-86643) filed September 20, 1983 (the "1983 Form
S-1").
3.2 Certificate of Amendment to Certificate of
Incorporation. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1992 (the "1992 Form 10-K").
3.3 By-laws. Incorporated by reference to the 1983 Form
S-1.
10.1 1992 Stock Option Plan. Incorporated by reference to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1993 (the "1993 Form 10-K").
10.2 Incentive Stock Option Plan. Incorporated by reference
to the 1993 Form 10-K.
10.3 Agreement dated January 1, 1994 between Allen Health
Care Services and VNS Home Care. Incorporated by
reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1994 (the "1994
Form 10-K").
10.4 Employment Agreement dated as of November 1, 1997
between the Registrant and Steven Fialkow. Incorporated
by reference to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 1998
(the "January 31, 1998 Form 10-Q").
10.5 Employment Agreement dated as of November 1, 1997
between the Registrant and Frederick H. Fialkow.
Incorporated by reference to the January 31, 1998 Form
10-Q.
10.6 Employment Agreement dated as of November 1, 1997
between the Registrant and Robert P. Heller.
Incorporated by reference to the January 31, 1998 Form
10-Q.
10.7 Employment Agreement dated as of November 1, 1997
between the Registrant and Richard Garofalo.
Incorporated by reference to the January 31, 1998 Form
10-Q.
10.8 Agreement between Division of Social Services of
Suffolk County and Health Acquisition Corp.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1991.
10.9 Agreement between Nassau County Department of Social
Services and Allen Health Care Services. Incorporated
by reference to the 1992 Form 10-K.
10.10 Agreement dated January 1, 1994 between Catholic
Medical Center of Brooklyn and Queens, Inc.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1994.
10.11 Letter dated June 1, 1992 from Public Health Council of
the State of New York Department of Health to Health
Acquisition Corp. d/b/a Allen Health Care Services.
Incorporated by reference to the 1992 Form 10-K.
10.12 Letter from Joint Commission on Accreditation of
Healthcare Organizations awarding accreditation to
Allen Health Care, dated September 20, 1993.
Incorporated by reference to the 1993 Form 10-K.
10.13 The Registrant's Employee Savings and Stock Investment
Plan under Section 401(k) of the Internal Revenue Code.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1997 (the "1997 Form 10-K").
10.14 Letter Agreement dated February 20, 1998 providing a
Secured Advised Line of Credit from the Bank of New
York to National Home Health Care Corp. Incorporated by
reference to the January 31, 1998 Form 10-Q.
10.15 Letter Agreement dated February 20, 1998 providing a
Secured Advised Line of Credit from the Bank of New
York to New England Home Care, Inc. Incorporated by
reference to the January 31, 1998 Form 10-Q.
21.1 List of Subsidiaries. Incorporated by reference to the
1997 Form 10-K.
23.1 * Consent of Richard A. Eisner & Company, LLP
27.1 * Financial Data Schedule
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* Filed herewith