SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X. QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
- - ACT OF 1934
For the quarterly period ended: JUNE 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12451
NEW YORK HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2636089
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1850 MCDONALD AVENUE, BROOKLYN, NY 11223
(Address of principal executive offices) (Zip Code)
(718) 375-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---
"Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 23,918,975
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2003 December 31, 2002
--------------- -------------------
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 8,101,339 $ 2,625,378
Restricted cash 200,000 100,000
Due from lending institution 85,651 -
Accounts receivable, net of allowance for uncollectible
amounts of $343,000 6,074,163 -
Subscriptions receivable - 290,000
Unbilled services 36,646 -
Prepaid expenses and other current assets 738,095 36,342
--------------- -------------------
Total current assets 15,235,894 3,051,720
Property and equipment, net 193,544 -
Goodwill, net 900,587 -
Other intangible assets, net 2,358,130 1,936,033
Deferred merger costs - 248,363
Other assets 75,619 23,333
--------------- -------------------
Total assets $ 18,763,774 $ 5,259,449
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,444,111 $ -
Current portion of lease obligations payable 7,742 -
Accounts payable and accrued expenses 7,281,476 349,182
Due to HRA 2,809,144 -
--------------- -------------------
Total current liabilities 11,542,473 349,182
--------------- -------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; Class A Preferred, 590,375 authorized,
issued and outstanding 5,904 -
Common stock, $.01 par value,100,000,000 shares
authorized; 23,943,821 shares issued and 23,918,975
outstanding as of June 30, 2003; 50,000,000 shares
authorized; 21,116,494 shares issued and outstanding
as of December 31, 2002 239,438 211,165
Additional paid-in capital 28,552,618 6,550,328
Deficit (21,545,176) (1,851,226)
Less: Treasury stock (24,846 common shares at cost) (31,483) -
--------------- -------------------
Total shareholders' equity 7,221,301 4,910,267
--------------- -------------------
Total liabilities and shareholders' equity $ 18,763,774 $ 5,259,449
=============== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-1
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended For The Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
2003 2002 2003 2002
------------- ---------------- ------------- -------------
Net patient service revenue $ 10,820,260 $ - $ 22,814,749 $ -
------------- ---------------- ------------- -------------
Expenses:
Professional care of patients 8,531,889 - 18,238,667 -
------------- ---------------- ------------- -------------
Product development 170,093 59,102 265,089 147,048
------------- ---------------- ------------- -------------
General and administrative
(excluding non cash compensation) 2,420,496 226,373 4,874,226 466,550
Non cash compensation 283,656 - 1,036,176 -
------------- ---------------- ------------- -------------
Total general and administrative expenses 2,704,152 226,373 5,910,402 466,550
------------- ---------------- ------------- -------------
Goodwill impairment - - 17,869,339 -
Bad debt expense 5,250 - 20,250 -
Depreciation and amortization 114,267 53,000 228,755 105,000
------------- ---------------- ------------- -------------
Total operating expenses 11,525,651 338,475 42,532,502 718,598
------------- ---------------- ------------- -------------
Loss from operations (705,391) (338,475) (19,717,753) (718,598)
Non-operating expenses:
Interest income 16,593 - 24,810 -
Interest expense (290) - (1,007) -
------------- ---------------- ------------- -------------
Net loss $ (689,088) $ (338,475) $(19,693,950) $ (718,598)
============= ================ ============= =============
Basic and diluted loss per share $ (0.03) $ (0.02) $ (0.82) $ (0.04)
------------- ---------------- ------------- -------------
Weighted and diluted average shares 23,918,975 20,171,345 23,903,492 20,071,465
============= ================ ============= =============
outstanding
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
Preferred Treasury
Common Stock Stock Additional Stock
--------------------------- ---------------------- Paid-In ---------------------------
Shares Amount Shares Amount Capital Shares Amount
------------ ------------- --------- ---------- ----------- ------------ -----------
Balance at January 1, 2003 21,116,494 $ 211,165 - - $ 6,550,328
Common stock issued for cash, net 327,327 3,273 1,025,535
Reverse acquisition on January 2,
2003 2,500,000 25,000 590,375 $ 5,904 19,940,579 24,846 $ (31,483)
Revaluation of options/warrants
as part of the reverse acquisition 721,100
Warrants earned for service 315,076
Net loss
------------ ------------- --------- ---------- ----------- ------------ -----------
Balance at June 30, 2003 23,943,821 $ 239,438 590,375 $ 5,904 $28,552,618 24,846 $ (31,483)
============ ============= ========= ========== =========== ============ ===========
Deficit Total
------------- ------------
Balance at January 1, 2003 $ (1,851,226) $ 4,910,267
Common stock issued for cash, net 1,028,808
Reverse acquisition on January 2,
2003 19,940,000
Revaluation of options/warrants
as part of the reverse acquisition 721,100
Warrants earned for service 315,076
Net loss (19,693,950) (19,693,950)
------------- ------------
Balance at June 30, 2003 $(21,545,176) $ 7,221,301
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended
June 30,
--------------------------
2003 2002
------------- -----------
Cash flows from operating activities:
Net loss $(19,693,950) $ (718,598)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Goodwill impairment 17,869,339 -
Noncash compensation 1,036,176 -
Depreciation and amortization 228,755 111,498
Bad debts expense 20,250 -
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable
and unbilled services (755,414) -
Increase in prepaid expenses and other current assets (517,130) (24,833)
Decrease in due from lending institution 67,174 -
Decrease (increase) in other assets 960 (38,000)
Increase in accrued payroll 246,336 -
Increase in accounts payable and accrued expenses 1,609,906 114,615
Increase in due to HRA 877,347 -
------------- -----------
Net cash provided by (used in)
operating activities 989,749 (555,318)
------------- -----------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary 3,407,442 -
Acquisition of property and equipment (33,774)
Acquisition of intangible assets (95,725) (11,378)
Increase in restricted cash (100,000) (100,000)
------------- -----------
Net cash provided by (used in)
investing activities 3,177,943 (111,378)
------------- -----------
Cash flows from financing activities:
Payments on lease obligation payable (10,539) -
Proceeds of issuance of common stock 1,028,808 1,419,168
Collection of subscription receivable 290,000 -
------------- -----------
Net cash provided by financing activities 1,308,269 1,419,168
------------- -----------
Net increase in cash and cash equivalents 5,475,961 752,472
Cash and cash equivalents at beginning of period 2,625,378 896,426
------------- -----------
Cash and cash equivalents at end of period $ 8,101,339 $1,648,898
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
Organization:
New York Health Care, Inc. ("New York Health Care") was initially organized
under the laws of the State of New York in 1983. New York Health Care provides
services of registered nurses and paraprofessionals to patients throughout New
York and New Jersey. The BioBalance Corporation, ("BioBalance") a Delaware
corporation, was formed in May 2001. BioBalance is a medical foods/specialty
pharma company devoted to the discovery, manufacturing and marketing of
biotherapeutic agents for therapy of gastrointestinal diseases. Although
BioBalance has commenced the tests and panel review necessary for its product to
be established as generally regarded as safe ("GRAS") and a medical food under
regulations of the Food and Drug Administration ("FDA"), there is no assurance
that the FDA will not contest the status. Further if BioBalance is successful in
establishing GRAS and medical food status, there can be no assurance that
BioBalance will be successful in marketing any such products. The consolidated
entity, collectively referred to as the "Company", includes BioBalance and New
York Health Care, Inc. and its wholly owned subsidiary NYHC Newco Paxxon Inc.
D/B/A Helping Hands Health Care ("Helping Hands"). All significant intercompany
balances and transactions have been eliminated.
On January 2, 2003, BioBalance acquired New York Health Care in a transaction
accounted for as a reverse acquisition (See Note 2). The accompanying condensed
consolidated financial statements of the Company reflect the historical results
of the predecessor entity, BioBalance, prior to January 2, 2003 and the
consolidated results of operations of the Company subsequent to the acquisition
date of January 2, 2003.
The common stock and per share information in the condensed consolidated
financial statements and related notes have been retroactively adjusted to give
effect to the reverse acquisition on January 2, 2003.
In January 2003, the Company amended its certificate of incorporation to provide
for an increase in the Company's number of authorized common stock and preferred
stock. The authorized number of common stock increased from 50,000,000 shares
to a total of 100,000,000 shares. The authorized number of preferred stock
increased from 2,000,000 shares to a total of 5,000,000 shares.
F-5
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying interim consolidated financial statements have been prepared by
the Company without audit, in accordance with the instructions for Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and therefore do not include all information and notes normally provided
in the annual financial statements and should be read in conjunction with the
audited financial statements and the notes thereto of BioBalance and New York
Health Care for the year ended December 31, 2002. Included in the Form 8-K/A of
New York Health Care, Inc. as filed on March 17, 2003 with the SEC is
BioBalance's audited financial statements for the year ended December 31, 2002,
and in the Form 10-K of New York Health Care, Inc. as filed on March 17, 2003
with the SEC is New York Health Care's audited financial statements for the year
ended December 31, 2002.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (which consist of normal and recurring adjustments)
necessary for a fair presentation of the financial statements. The results of
operations for the six months ended June 30, 2003 are not necessarily indicative
of the results to be expected for the full year.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The Company has adopted the disclosure provisions of
SFAS No. 148.
F-6
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, elements of
financial statements. The Company is evaluating the effect of this new
pronouncement and will adopt FASB 150 within the prescribed time.
NOTE 2 - ACQUISITION OF NEW YORK HEALTH CARE, INC. AND PRIVATE PLACEMENT:
On January 2, 2003, BioBalance consummated a business combination with New York
Health Care. As a result of the merger, BioBalance shareholders exchanged all
of their BioBalance shares for 21,443,821 shares of common stock of New York
Health Care. New York Health Care effectuated a one share for one and one-half
shares reverse stock split simultaneously with the merger. Because the former
BioBalance stockholders own a majority of the common stock (89.7%) of the merged
company, BioBalance is considered to be the accounting acquirer in the
transaction. The acquisition of New York Health Care provides BioBalance with
access to the public equity markets through New York Health Care, which would
otherwise be unavailable in the current equity financing climate.
The purchase price of the acquisition was as follows:
Value of New York Health Care common stock $ 13,100,000
Value of New York Health Care preferred stock 1,890,000
F-7
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Value of New York Health Care options/warrants 4,950,000
BioBalance's transaction costs 390,000
---------------
Total purchase price $ 20,330,000
================
Common stock valued at approximately $13.1 million is based on the New York
Health Care's common stock outstanding at January 2, 2003, at an average closing
price for a six day period ended July 24, 2002 ($5.30) (measurement date) (after
giving effect to the one and one half reverse stock split).
The value of the preferred stock was calculated using the common stock price
less a 10% discount which reflects the limited marketability of the common stock
into which the preferred stock is convertible. The fair value of $4.9 million
of the New York Health Care options/warrants was determined using the
Black-Scholes valuation model. To determine the fair value of these options/
warrants, the following assumptions were used: expected volatility of 122%,
risk-free interest rates ranging from 1.62% to 4.55%, and expected life of
approximately 4.95 years.
F-8
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As part of the merger, outstanding BioBalance options/warrants (586,452 shares)
became exercisable for New York Heath Care stock. Compensation expense of
$721,100 was recorded on January 2, 2003 for the increase in the fair value of
the vested BioBalance options/warrants as a result of the merger. The unvested
options/warrants will be remeasured at the fair value on the date of vesting and
recorded as compensation expense.
As part of their employment agreements, if the two officers/directors from New
York Health Care are terminated from the Board of Directors prior to the
expiration of their employment agreements, they will enter into consulting
agreements with the Company for a period of not less than five years commencing
with the date of termination. As compensation, the Company will issue an option
to each officer/director to acquire 500,000 shares of the Company common stock
at the fair market value on date of termination. These options are contingent
upon future services and will be recorded under EITF 96-18. In addition, the
agreements required a payment to them if a change in control of New York Health
Care occurred. This amounted to $1,940,526 and was recorded as a liability in
accounts payable and accrued expenses in the net assets of New York Health Care
on January 2, 2003.
Under the purchase method of accounting, the total estimated purchase price as
detailed above was allocated to New York Health Care's net tangible and
intangible assets based on their fair values as of January 2, 2003. At January
2, 2003, New York Health Care's tangible assets and liabilities at fair value
were as follows:
Cash $ 3,549,000
Due from lending institution 153,000
Accounts receivable 5,280,000
Unbilled services 96,000
Prepaid expenses and other current assets 185,000
Property and equipment 225,000
Other assets 53,000
Accrued payroll (1,198,000)
Current portion of lease obligation (18,000)
Accounts payable and accrued expenses (5,323,000)
Due to HRA (1,932,000)
---------------
$ 1,070,000
===============
F-9
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Based on the independent valuation prepared using estimates and assumptions
provided by management, the total purchase price of $20,330,000 has been
allocated as follows:
Purchase price allocation:
Net tangible assets of New York Health Care $ 1,070,000
Goodwill 18,770,000
Customer base 390,000
Patient list 100,000
---------------
$ 20,330,000
===============
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition on the historical operating results for the three and
six months ended June 30, 2003 and 2002 as if the acquisition had occurred at
the beginning of the respective period.
For The Three For The
Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------- ------------
Net revenue $10,820,260 $9,820,612 $ 22,814,749 $19,057,740
Net loss for the period $ (689,088) $ (247,011) $(19,693,950) $ (544,481)
Net loss per share $ (0.03) $ (0.01) $ (0.82) $ (0.03)
Included in the six months ended June 30, 2003 net loss is a goodwill impairment
charge of $17,869,339.
Private Placement:
On January 2, 2003, BioBalance completed a private placement of 327,327 shares
of its common stock. The shares were offered to accredited investors at a price
of $3.27 per share for aggregate gross proceeds of $1,072,000 and net proceeds
of $1,028,808.
F-10
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - LOSS PER SHARE:
Basic loss per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities including the
presumed conversion of the preferred stock from the date of its issuance. Due
to a loss for the six months ended June 30, 2003 and 2002, options, warrants and
preferred stock outstanding of 3,419,368 and 493,066 at June 30, 2003 and 2002,
respectively, were not included in the computation of diluted earnings per
share, because to do so would be antidilutive.
NOTE 4 - RESTRICTED CASH:
At June 30, 2003, the Company had $200,000 of restricted cash held in escrow in
connection with the Company's proposed purchase of certain technology.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS:
As a result of the merger, the Company had recognized goodwill on the
transaction. The goodwill is associated with the home care business and on the
date of the merger the Company determined that the goodwill was impaired. The
indicator leading to an impairment was the fact that, based on the current home
health care market, the home health care business could not be sold in the open
market for its recorded purchase price. The Company hired a valuation expert
who valued the Company using the capitalized earnings/cash flow methodology and
the market multiple approach. Based on these methodologies, it was determined
that an impairment had been incurred. The goodwill impairment amounted to
$17,869,339.
The changes in the carrying amount of goodwill by reportable segment for the six
months ended June 30, 2003 were as follows:
Goodwill
--------------------------------------------------------------------
Balance Acquisition Impairment Balance
January 1, 2003 January 2, 2003 January 2, 2003 June 30, 2003
---------------- ---------------- ---------------- --------------
New York Health Care $ - $ 18,769,926 $ 17,869,339 $ 900,587
BioBalance $ - $ - $ - $ -
The impairment charges are noncash in nature and do not affect the Company's liquidity.
F-11
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The major classifications of intangible assets and their respective estimated useful
lives are as follows:
June 30, 2003
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,036,500 $ 390,276 $ 1,646,224 10
Patents/trademarks 296,858 25,952 270,906 10
Patient list 100,000 10,000 90,000 5
Customer base 390,000 39,000 351,000 5
--------------- ------------- -------------
$ 2,823,358 $ 465,228 $ 2,358,130
=============== ============= =============
December 31, 2002
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,036,500 $ 288,450 $ 1,748,050 10
Patents/trademarks 201,133 13,150 187,983 10
--------------- ------------- -------------
$ 2,237,633 $ 301,600 $ 1,936,033
=============== ============= =============
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, 2003 December 31, 2002
-------------- ------------------
Accounts payable $ 401,763 $ 349,182
Accrued expenses 860,172 -
Accrued employee benefits 4,329,015 -
Due to executive officers 1,690,526 -
-------------- ------------------
$ 7,281,476 $ 349,182
============== ==================
F-12
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - LINE OF CREDIT:
The Company has a $4,000,000 line of credit with Heller Financial that expires
November 29, 2004. The availability of the line of credit is based on a formula
of eligible accounts receivable. At June 30, 2003, approximately $4,000,000 was
available to the Company. Certain assets of the Company collateralize the line
of credit. The agreement contains various restrictive covenants, which among
other things, require that the Company maintain a minimum net worth. Borrowings
under the agreement bear interest at prime plus 1 1/2% (5.50% at June 30, 2003).
At June 30, 2003, there was an amount due from Heller Financial of $85,651.
This is due to a lockbox being used by the Company; all collections are
deposited with Heller Financial and then transferred to the bank.
NOTE 8 - SHAREHOLDERS' EQUITY:
In January 2003, the Company issued 327,327 shares of common stock for gross
proceeds of $1,072,000.
On January 2, 2003, the Company recapitalized 2,475,154 shares of common stock
and 590,375 shares of preferred stock in connection with the reverse
acquisition.
The Company has authorized 590,375 shares of Class A preferred stock. The
holders of the preferred stock are entitled to a dividend equal to 9% of the
purchase price for shares of the preferred stock before any dividend is paid on
common stock. Dividends may be declared quarterly at the discretion of the
Board of Directors and are not cumulative. The holders of preferred stock
receive no preference on liquidation and such shares may be converted into
two-thirds of one share of common stock at any time. The Class A preferred
stockholders are entitled to vote on matters that affect them.
NOTE 9 - STOCK OPTION/WARRANTS:
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. No stock-based compensation cost is included in net loss,
as all options granted during periods presented had an exercise price equal to
the market value of the stock on the date of grant. In accordance with SFAS
No.148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
the following table presents the effect on net loss and net loss per share had
compensation cost for the Company's stock plans been determined consistent with
SFAS No.123 The fair value of each option grant is estimated on the date of
grant by use of the Black-Scholes option pricing model:
F-13
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three For The
Months Ended Six Months Ended
June 30 June 30,
---------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ------------- ----------
Net loss, as reported $(689,088) $(338,475) $(19,693,950) $(718,598)
Less stock-based compensation expense
determined under fair value method for
all stock options, net of related income
tax benefit (12,075) - (1,400,875) -
---------- ---------- ------------- ----------
Pro forma net loss $(701,163) $(338,475) $(21,094,825) $(718,598)
========== ========== ============= ==========
Basic and diluted loss per share, as reported $ (0.03) $ (0.02) $ (0.82) $ (0.04)
Basic and diluted loss per share, pro forma $ (0.03) $ (0.02) $ (0.88) $ (0.04)
On January 15, 2003, the Company granted a consultant a warrant to purchase up
to 100,000 shares of Common Stock at an exercise price of $4.15 per share (which
was not less than the fair value on date of grant). The warrant expires in one
year. On February 3, 2003, the Company granted a consultant a warrant to
purchase up to 35,000 shares of Common Stock at an exercise price of $3.40 per
share (which was not less than the fair value on the date of grant). The
warrant expires in one year. On April 14, 2003, the Company granted a consulting
firm a warrant to purchase up to 500,000 shares of common stock at an exercise
price of $2.50 per share (which was less than the fair value on the date of
grant). The warrant expires in one year. These warrants vest monthly and are
expensed at the fair value on the date of vesting. For the three and six months
ended June 30, 2003, $283,656 and $315,076 respectively, was expensed as
compensation for these warrants.
On March 7, 2003, the Company granted 500,000 stock options, pursuant to its
Performance Incentive Plan, to key employees at an exercise price of $3.14 per
share (which was not less than the fair value on the date of grant). On June 26,
2003, the Company granted 200,000 stock options, pursuant to its Performance
Incentive Plan, to a key employee at an exercise price of $2.48 per share (which
was not less than the fair value on the date of the grant). The stock options
expire in ten years.
On March 7, 2003, the Company granted each of three of its board members a
warrant to purchase up to 20,000 shares of common stock at an exercise price of
$3.14 per share (which was not less than the fair value on date of grant). The
warrants expire in ten years. On June 16, 2003, the Company granted a board
member a warrant to purchase up to 7,500 shares of common stock at an exercise
price $2.87 per share (which was not less than the fair value on the date of
grant). The warrants expire in three years. Since the warrants and options were
given to employees with an exercise price equal to fair value on the date of
grant, no compensation expense was recorded. At June 30, 2003, the Company has
4,712,500 shares of Common Stock reserved for issuance for these options and for
options and warrants granted previously.
F-14
F-15
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
In January 2003, the Company renewed a consulting agreement with an individual,
who is to provide consulting services to develop clinical trials infrastructure
for the BioBalance product line. The agreements provide for aggregate annual
compensation of $120,000.
In February 2003, the Company entered into consulting agreements with two
individuals to serve as Director of Medical and Regulatory Affairs and Director
of Research and Development. The agreements provide for aggregate annual
compensation of $250,000 and provide for specified bonuses when the Company
meets certain goals.
In April 2003, the Company entered into a consulting agreement with a firm to
assist the Company in developing, studying and evaluating a financing plan,
strategic and financial alternatives and merger and acquisition proposals. The
agreement provides for the firm to be compensated in the amount of 4% of the
total gross consideration or value attributed to a business combination at the
closing of a completed transaction. In addition, the consulting firm received a
warrant to purchase up to 500,000 shares of the Company's common stock at an
exercise price of $2.50 per share (which was less than the fair value on the
date of grant).
LEGAL PROCEEDINGS.
Melissa Stephens, et al. v. New York Health Care, Inc.
- ------------------------------------------------------
The plaintiff, an employee of New York Health Care, initiated this lawsuit
in April 2003 in the United States District Court for the Southern District of
New York, alleging that she is entitled under the federal Fair Labor Standards
Act ("FLSA") to overtime premium wages of one and one-half times her regular
rate of pay for hours worked in excess of forty per week. The plaintiff is
claiming $75,000.00 in damages, including liquidated damages, plus interest and
attorneys fees. Additionally, under the "collective action" provisions of the
FLSA, the plaintiff may join other employees in this lawsuit who are "similarly
situated" to plaintiff, i.e., are personal care aides who have worked in excess
of forty hours per week without receiving compensation of at least one and
one-half times their regular rates of pay.
The company has filed an answer to the complaint stating that the
plaintiff, a personal care aide, is exempt from the FLSA's minimum wage and
overtime requirements under the "companionship exemption" of that law, and that
she has been paid all of the wages, including required overtime compensation, to
which she is entitled under New York State law.
No decision has been made by the Court as to whether the case will be
certified as a collective action. The case is presently in the discovery phase
and no trial date has been set. The Company believes it has a valid legal
defense and expects to prevail.
NOTE 11 - INCOME TAXES:
The temporary differences that give rise to deferred tax assets are impairment
of intangible assets for book purposes over tax purposes, the direct write-off
method for receivables, using accelerated methods of amortization and
depreciation for property and equipment for tax purposes, and using statutory
lives for intangibles for tax purposes. Also included in the deferred tax asset
is a net operating loss carryforward. At June 30, 2003 and December 31, 2002,
the Company has computed a deferred tax asset in the amount of approximately
$1,487,000 and $852,000, respectively. A full valuation allowance has been
recorded against the net deferred tax assets because it is more likely than not
that such assets will not be reduced in the foreseeable future. The valuation
allowance increased by $258,500 and $635,000 during the three and six months
ended June 30, 2003, respectively.
NOTE 12 - SUPPLEMENTAL CASH FLOW DISCLOSURES:
For The Six Months Ended
----------------------------
June 30, June 30,
2003 2002
------------- -------------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 1,007 $ -
F-16
Income taxes $ 40,053 $ 2,500
F-17
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SEGMENT REPORTING:
The Company has two reportable business segments: New York Health Care, a home
health care agency that provides a broad range of health care support services
to patients in their homes, and BioBalance, a segment that is developing a
biotherapeutic agent for the treatment of gastrointestinal disorders. BioBalance
has not generated any revenue as of June 30, 2003.
New York Bio Total
Health Care Balance Consolidated
------------- ------------ --------------
SIX MONTHS ENDED JUNE 30, 2003
Revenue:
Net patient service revenue $ 22,814,749 $ - $ 22,814,749
Sales - - -
------------- ------------ --------------
Total revenue $ 22,814,749 $ - $ 22,814,749
============= ============ ==============
Loss before income taxes $(17,577,007) $(2,116,943) $ (19,693,950)
Assets $ 14,047,064 $ 4,716,710 $ 18,763,774
THREE MONTHS ENDED JUNE 30, 2003
Revenue:
Net patient service revenue $ 10,820,260 $ - $ 10,820,260
Sales - - -
------------- ------------ --------------
Total revenue $ 10,820,260 $ $ 10,820,260
============= ============ ==============
Income (loss) before taxes $ 149,415 $ (838,503) $ (689,088)
Prior to its acquisition of New York Health Care on January 2, 2003, BioBalance
only had one segment, which did not generate any revenue.
Bio Total
Balance Consolidated
-------------- --------------
SIX MONTHS ENDED JUNE 30, 2002
Revenue:
Sales $ - $ -
-------------- --------------
Total revenue $ - $ -
============== ==============
Loss before income taxes $ (718,598) $ (718,598)
============== ==============
Assets $ 3,740,519 $ 3,740,519
============== ==============
F-18
Bio Total
Balance Consolidated
-------------- --------------
THREE MONTHS ENDED JUNE 30, 2002
Revenue:
Net patient service revenue $ - $ -
Sales - -
-------------- --------------
Total revenue $ - $ -
============== ==============
Loss before income taxes $ (338,475) $ (338,475)
F-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Information provided by New York Health Care in this report may contain,
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). In particular, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources" contains information
concerning the ability of the company to service its obligations and other
financial commitments as they come due. The forward looking statements are
qualified in their entirety by these cautionary statements, which are being made
pursuant to the provisions of the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act.
The company cautions investors that any forward-looking statements it makes
are not guarantees of future performance and that actual results may differ
materially from those in the forward-looking statements as a result of various
factors, including, but not limited to, the following:
(a) In recent years, an increasing number of legislative proposals have
been introduced or proposed by Congress and some state legislatures, which
would effect major changes in the healthcare system. However, the company
cannot predict the form of healthcare reform legislation, which may be proposed
or adopted by either the Congress or state legislatures. Accordingly, the
company is unable to assess the effect of any such legislation on its business.
There can be no assurance that any such legislation will not have a material
adverse impact on the future growth, revenues and net income of the company.
(b) The company derives substantial portions of its revenues from
third-party payers including, both directly and indirectly, government
reimbursement programs such as Medicare and Medicaid and some portions of its
revenues from non-governmental sources, such as commercial insurance companies,
health maintenance organizations and other charge-based contracted payment
sources. Both government and non-government payers have undertaken
cost-containment measures designed to limit payments to healthcare providers.
There can be no assurance that payments under governmental and non-governmental
payer programs will be sufficient to cover the costs allocable to eligible
patients. The company cannot predict whether or what proposals or
cost-containment measures will be adopted or, if adopted and implemented, what
effect, if any, such proposals might have on the operations of the company.
(c) The company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing facilities,
construction of new facilities, purchase or lease of existing facilities,
addition of new services, certain capital expenditures, cost-containment and
reimbursement for services rendered. The failure to obtain or renew required
regulatory approvals or licenses, the delicensing of facilities owned, leased or
operated by the company or the disqualification of the company from
participation in certain federal and state reimbursement programs could have a
material adverse effect upon the operations of the company.
2
(d) There can be no assurance that the company will be able to continue
its substantial historical growth or be able to fully implement its business
strategies or that management will be able to successfully integrate the
operations of its various acquisitions.
(e) Bio Balance's business plans are subject to a variety of matters,
including but not limited to (i) trends effecting the treatment of Irritable
Bowel Syndrome, (ii) United States Food and Drug Administration regulations,
(iii) the possibility of rapid advances in treatment, (iv) the impact of
competition from substantially larger companies, (v) the possible introduction
of new products, (vi) Bio Balance's need for alliances with potential
manufacturers and marketing organizations, and (vii) other matters.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30,
2002.
On January 2, 2003, New York Health Care, Inc. and The Bio Balance Corp., a
development stage company, in what amounted to a "reverse acquisition"
consummated a business merger wherein Bio Balance became a wholly-owned
subsidiary of New York Health Care and the stockholders of Bio Balance exchanged
all of the issued and outstanding shares of Bio Balance for approximately 90% of
the issued and outstanding shares of New York Health Care. For accounting
purposes, Bio Balance is therefore considered to be the "accounting acquirer" in
the transaction. As a result, the historical financial information in this
report is that of Bio Balance, not New York Health Care. (New York Health Care's
prior reports as filed with the SEC remain available on the SEC website at
http://www.sec.gov). It is important to keep this in mind because the operations
on a consolidated basis of New York Health Care and Bio Balance for the second
quarter of 2003 are being compared to the operations of Bio Balance only for the
second quarter of 2002 without regard to those of New York Health Care for that
period.
New York Health Care operates its business in two segments; the home health
care business, which has been in operation for more than fifteen years, and the
specialty pharmaceutical business of Bio Balance, which was begun in 2001 and is
still in its development stage.
RESULTS OF OPERATIONS
Revenues for the six months ended June 30, 2003 increased to approximately
$22,815,000 from no reported revenue for the six months ended June 30, 2002.
Revenues for the three months ended June 30 2003 increased to approximately
$10,820,000 from no reported revenue for the three months ended June 30, 2002.
Cost of professional care of patients for the six months ended June 30,
2003 increased to approximately $18,239,000 from no reported costs for the six
months ended June 30, 2002. Cost of professional care of patients for the three
months ended June 30, 2003 increased to approximately $8,532,000 from no
reported costs for the three months ended June 30, 2002.
Selling, general and administrative expenses ("SG&A") for the six months
ended June 30, 2003 increased 1,165.5% to approximately $5,910,000 from
approximately $467,000 for the six months ended June 30, 2002. Selling, general
and administrative expenses ("SG&A") for the three months ended June 30, 2003
increased 1,096.5% to approximately $2,704,000 from approximately $226,000 for
the three months ended June 30, 2002. The increase in expenses for these periods
is the result of combining the SG&A of two segments as compared to SG&A of only
one segment.
3
The loss of $19,694,000 for the six months ended June 30, 2003 includes a
charge of $17,869,000 for the impairment of goodwill a charge that is non-cash
in nature. This was the result of the valuation of assets in conjunction with
the merger in January 2003.
The impairment charge of $17,869,000 is non-cash in nature and does not
affect the Company's liquidity.
For the six months ended June 30, 2003 the Company suffered a net loss of
$19,694,000 as compared to a net loss of $719,000 for the six months ended June
30, 2002. The net loss of approximately $19,694,000 for the six months ended
June 30, 2003 includes the impairment non-cash charge of $17,869,000, and also
includes a non-cash expense in the amount of $1,037,000 resulting from an
increase in the fair value of the options as a result of the merger and the
issuance of stock options to consultants. Without these two non-cash items, the
net loss would be $788,000. This amount includes net income of $292,000 from the
operations of the home health care segment offset by operating losses, net of
non-cash compensation, of $1,080,000 from the Bio Balance segment.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002.
RESULTS OF OPERATIONS
For the three months ended June 30, 2003 the company suffered a net loss of
$689,000, as compared to a net loss of $338,000 for the three months ended June
30, 2002. The net loss of approximately $689,000 includes a non-cash expense in
the amount of $284,000 resulting from the issuance of stock option to
consultants. Without this non-cash, item, the net loss would be $405,000. This
amount includes net income of $149,000 from the operations of the home care
segment offset by operating losses, net of non-cash compensation of $554,000
from the Bio Balance segment.
LIQUIDITY AND CAPITAL RESOURCES
Cash at June 30, 2003 increased by approximately $5,576,000, as compared to
December 31, 2002. The increase is the result of combining cash from two
segments, as compared to cash of only one segment.
Home Health Care Segment
The home health care segment has a $4,000,000 line of credit with a lending
institution that renewed November 28, 2002. The availability of the line of
credit is based on a formula, which is 85% of eligible accounts receivable. As
of June 30, 2003 the amount available to borrow based on the formula was
$4,000,000. The only restrictive covenant is that the home health care segment
has a net worth greater then $500,000.
For the six months ended June 30, 2003, net cash provided by operating
activities was approximately $990,000, as compared to cash used of approximately
$555,000 during the six months ended June 30, 2002, an increase of $1,545,000.
The $990,000 provided by operations for the six months ended June 30, 2003 was
principally due to an increase in accounts payable and accrued expenses, an
increase in due to HRA, increase in non-cash amortization of stock
4
options, and an increase in goodwill impairment, offset by an increase in
accounts receivable and unbilled services, an increase in prepaid expenses and
other assets and a net loss for the period.
Net cash provided by investing activities for the six months ended June 30,
2003 totaled approximately $3,178,000, due mainly to cash acquired from the
purchase of the Bio Balance subsidiary.
Net cash provided by financing activities for the six months ended June 30,
2003 totaled approximately $1,308,000, resulting from proceeds of the issuance
of common stock by Bio Balance immediately prior to the acquisition and
collection of subscription receivable.
As of June 30, 2003, approximately $6,111,000 (approximately 32.6%) of the
company's total assets consisted of accounts receivable from clients who are
reimbursed by third-party payers. As of June 30, 2002 Bio Balance had no
accounts receivable.
Days Sales Outstanding ("DSO") is a measure of the average number of days
taken by the company to collect its account receivable, calculated from the date
services are billed. For the six months ended June 30, 2003, the Company's DSO
was 58. For the three months ended June 30, 2003, The Company's DSO was 59. As
of June 30, 2002 Bio Balance had no accounts receivable.
Bio Balance Segment
Since its inception in 2001, Bio Balance received aggregate gross proceeds
of $6,889,000 in a series of private placements from the sale of common stock.
As of June 30, 2003, Bio Balance had cash on hand of approximately $2,494,000,
all of which was available to fund operations. Bio Balance estimates that its
capital requirements for the remainder of 2003 will be approximately $1,750,000.
This budget assumes that Bio Balance will continue along the Medical Food
Approval track with the FDA.
POTENTIAL REGULATORY CHANGES
Home Health Care Regulation
There have been reports concerning federal budget negotiations regarding
potential changes in the way the Government will reimburse home health care
companies in the future, including the possibility of capitation. While the
company is not currently a Medicare-Certified Home Health Agency subject to
these changes, most of the company's referral sources are and they may be
negatively impacted by this legislation which was adopted to control home health
care costs. While it is still premature to discern what impact, if any, the
potential changes may have on the company's operations; there can be no
assurance that future legislation will not result in reduced reimbursement rates
from referral sources. Please see Part II, Item 5 for additional information on
state regulatory activities.
BioBalance
Regulatory Strategy
BioBalance intends to comply with applicable requirements for the
introduction of its first product, PROBACTRIX(TM), to the United States market
as a medical food for the treatment of IBS and symptoms. To be marketed as a
medical food: 1) the ingredients must be either approved food additives or
"generally recognized as safe" (GRAS); and 2) the product must satisfy the
statutory definition of a medical food.
5
Under the current regulatory process, companies wishing to introduce new
food ingredients must make a determination (using outside panel of experts) that
the ingredients in the product are generally recognized as safe (GRAS) before
introducing the product to market. GRAS status is self determined by the company
introducing the product without the need for any pre-marketing clearance from
the FDA, although a process of voluntary notification to the agency is
available, in which case FDA has 90 days to raise questions or objections to the
GRAS self-determination.
BioBalance began the process of establishing GRAS status last year. Patton
Boggs was retained to develop and implement a process to establish GRAS and to
conduct clinical studies to obtain statistically significant data to support the
safety of the product. Under that process, (1) an exhaustive review and write-up
of scientific literature relating to the safety of the product needs to be
performed, (2) laboratory testing needs to be conducted to verify that the
product in question is the same as reflected in the scientific literature
reviewed, and (3) a panel of experts must review the literature and laboratory
results and render an opinion that the product satisfies GRAS status.
As a second requirement for obtaining medical food status, the Company
needs to demonstrate that PROBACTRIX(TM) fulfills the statutory definition of a
medical food. Medical foods are intended to address the distinctive nutritional
requirements of patients with particular diseases under medical supervision.
Unlike dietary supplements, medical food labels may contain disease claims and
require clinical proof of efficacy for each indication.
A panel composed of the GRAS experts and additional members with relevant
clinical and regulatory expertise must also review PROBACTRIX(TM) for medical
food status, and provide an opinion as to whether the product meets the medical
food definition.
As of the date of this report, (1) the literature review had been
completed, (2) laboratory testing to verify the character of BioBalance's
product had been completed at two universities and at a well known and
established testing center for bacteriological strains, and (3) the first peer
reviewed article relating to PROBACTRIX(TM) has been published, and efforts are
ongoing to publish additional articles covering BioBalance's complete dossier.
In February 2003, BioBalance hired Dr. Robert Hoerr, MD, Ph.D., and Dr. Eileen
Bostwick, Ph.D., as Director of Medical and Regulatory Affairs, and Director of
Research and Development, respectively, to complete the GRAS and medical food
determination process. In May of 2003, the Company retained the services of
Sidley Austin to accelerate the development of PROBACTRIX(TM) as a medical food
and also explore additional regulatory pathways for its core technology as
prescription or OTC drugs. BioBalance anticipates that completion of the GRAS
certification process will occur by first quarter of 2004 or earlier.
Although BioBalance intends to comply with the procedures and regulations
to establish and market its product as a medical food, there can be no assurance
that GRAS status will be achieved, or that the FDA will not contest the GRAS
status of the ingredient(s) in PROBACTRIX(TM) or the medical food status of our
product. Such action by the FDA could delay for an extended period, or
indefinitely, the introduction of our product to the market pending resolution
of the product's status or, in the alternative, compliance with the regulatory
process applicable to ethical drugs.
In July 2003, the Company announced that in addition to its plan of
introducing PROBACTRIX(TM) as a medical food in the United States, and as a
result of a successful trial which was conducted overseas, it plans on pursuing
an Over the Counter Drug (OTC) for anti-biotic associated diarrhea and also
plans to file an Investigational New Drug application (IND) for the approval of
a form of PROBACTRIX (TM) as an ethical drug for radiation and chemotherapy
induced diarrhea.
6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15 under the Act, as of the end of the period
covered by this report, the company carried out an evaluation of the
effectiveness of the design and operation of the company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the company's Chief Executive Officer ("CEO"), and
Principal Financial and Accounting Officer ("CFO"). Based upon that evaluation,
the company's management, including the CEO and CFO, concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the company required to be included in
the Company's periodic SEC filings.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
company reports filed under the Act is accumulated and communicated to
management to allow timely decisions regarding required disclosures.
7
Changes in Internal Controls.
There have been no changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Melissa Stephens, et al. v. New York Health Care, Inc.
- ------------------------------------------------------
The plaintiff, an employee of New York Health Care, initiated this lawsuit
in April 2003 in the United States District Court for the Southern District of
New York, alleging that she is entitled under the federal Fair Labor Standards
Act ("FLSA") to overtime premium wages of one and one-half times her regular
rate of pay for hours worked in excess of forty per week. The plaintiff is
claiming $75,000.00 in damages, including liquidated damages, plus interest and
attorneys fees. Additionally, under the "collective action" provisions of the
FLSA, the plaintiff may join other employees in this lawsuit who are "similarly
situated" to plaintiff, i.e., are personal care aides who have worked in excess
of forty hours per week without receiving compensation of at least one and
one-half times their regular rates of pay.
The company has filed an answer to the complaint stating that the
plaintiff, a personal care aide, is exempt from the FLSA's minimum wage and
overtime requirements under the "companionship exemption" of that law, and that
she has been paid all of the wages, including required overtime compensation, to
which she is entitled under New York State law.
No decision has been made by the Court as to whether the case will be
certified as a collective action. The case is presently in the discovery phase
and no trial date has been set. The company believes it has a valid legal
defense and expects to prevail.
ITEM 5. OTHER INFORMATION.
GOVERNMENT REGULATION
- ---------------------
Various aspects of our home health care business are regulated by the
federal government, and the States of New York and New Jersey, where we
currently operate. Changes in the law or new interpretations of existing laws
can have a material affect on our home health care business, the relative costs
associated with it and the amount of reimbursement by government and other
third-party payers.
8
The legislatures of the States of New York and New Jersey are in the
process of adopting new legislation which could have a material adverse affect
on our home health care business. While the legislation in New York, which has
been passed by the Assembly and Senate but not yet signed by the Governor, may
increase our cost of doing business, the legislation under consideration in New
Jersey has the potential of closing private home health care agencies in New
Jersey whose business consists primarily of Medicaid and State-funded services.
New Jersey
The legislation being considered by the New Jersey Assembly and Senate
(Assembly bill A3778; Senate bill S2662) would establish four Quality Home Care
Councils in various regions throughout the state.
All home health care aides (who are the persons principally employed by
home health care businesses, such as ours, in rendering home health care
services), would be required to register with the various State-funded Home Care
Councils. Moreover, each Home Care Council would be State-funded and could
employ the registered health aides, including relatives of the consumers, to
provide home health and personal care services.
The Home Care Council would provide a referral service to enable consumers
to find personnel for the provision of home care services from the list of aides
maintained by each Home Care Council. Each Home Care Council would also
determine the duties and compensation of these aides. The pending legislation
also permits the Home Care Councils to cover their costs of establishing and
maintaining the referral registry by assessing and collecting fees from private
home health care agencies, such as our company, and various other persons
seeking to access the referral registry.
All persons in New Jersey who are qualified and available to provide
Medicaid-funded or other State-funded home health care or personal care aide
services would be compelled to enroll in the referral registry of the respective
Home Care Councils as a condition of their authorization to provide such
services.
The pending New Jersey legislation would also establish a minimum wage of
not less than ten dollars per hour for the employment of home health and
personal care aides, whether employed by the state or private agencies and
businesses, such as the company. The minimum wage level in the proposed
legislation is higher than average wage levels paid by the company in New
Jersey.
Private agencies employing home health and personal care aides in New
Jersey would also be required to pay to the Home Care Council in its region an
initial enrollment fee for each aide who provides Medicaid-funded or other
State-funded home health or personal care aide services.
9
The legislation would require private agencies supplying Medicaid-funded or
State-funded home health and personal care aide services to limit spending for
administrative costs to not more than 25% of the total annual revenue received
from Medicaid-funded or other State-funded home health or personal care aide
services. Private agencies would also have to file annual cost reports for the
Department of Human Services or Department of Health and Senior Services based
upon the categories of administrative expenses limited by the legislation.
For the year ended December 31, 2002, the company's wholly-owned subsidiary
operating in New Jersey, Helping Hands Healthcare, received 69% of its revenues
from Medicaid-funded and other State-funded services in New Jersey, which
represents 12% of the Company's home health care division revenues. Thus far
during 2003, Helping Hands Healthcare has received approximately 66% of its
revenues from these sources in New Jersey, representing approximately 10% of the
Company's home health care division revenues.
The Company's management believes that if the presently pending New Jersey
legislation described becomes a law, it would likely result in the costs of
private home health care business in New Jersey increasing to such an extent
that it would be unprofitable to continue home health care operations in that
state.
New York
The New York State Assembly and Senate have passed an act to amend the
Public Health Law in relation to home heath care services, agency reimbursement
and reporting requirements (Assembly Bill A3612; Senate Bill S2949). As of the
date of this report, the governor of New York has not yet signed this
legislation into law.
The new law would require that any private agency providing home health
care services must file a report including a complete description of its
operations; and the type, frequency and reimbursement for services provided
including, but not limited to, reimbursement from federal and state governmental
agencies. Moreover, the Commissioner of Health would be required to adopt rules
and regulations for licensed home care services agencies which would establish a
cap on administrative and general costs equal to the approximately 25% cap on
such costs presently required of Certified Home Health Agencies.
The Company is already subject to the approximately 25% limit on
administrative and general costs equal to a Certified Home Health Agency and is
similarly required to file the type of reports which would also be required by
the new legislation. However, one of the company's branch offices, which does
not have a Medicaid contract and is therefore not subject to such restrictions,
would be required by the new law to file the reports and observe the
approximately 25% administrative and general costs limitation, even though it
does not receive any direct reimbursement from any government programs.
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If the New York State legislation is signed into law by the Governor, the
company's management believes that it will result in increased costs to the
company which it may not be able to recover through increased charges.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by item 601 of Regulation S-K.
Exhibit
Number Description of Exhibit
------ ----------------------
31 Rule 13(a)-14(a)/15(d)-14(a) Certifications.
32 Section 1350 Certification.
(b) Reports on Form 8-K
On May 23, 2003, New York Health Care filed a report on Form 8-K
which discussed, under Item 9, a company press release regarding its
consolidated financial results for the first quarter ended March 31, 2003, which
included a "non-GAAP" financial measure.
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.
August 14, 2003
NEW YORK HEALTH CARE, INC.
By: /s/ Jacob Rosenberg
--------------------------------------
Jacob Rosenberg, Vice President, Chief
Operating Officer, Chief Financial and
Accounting Officer, Secretary
11