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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to .
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COMMISSION FILE NO. 1-12451
NEW YORK HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
New York 11-2636089
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1850 McDonald Avenue, Brooklyn, New York 11223
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (718) 375-6700
Securities issued pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
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Common Stock $.01 par value Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 (the "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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. $52,174,860 (last sale as of 6/30/03).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date: 24,939,776 (as of March 19,
2004)
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. None.
2
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K of New York Health Care, Inc. and its
subsidiaries ("we" or the "Company") contains forward-looking statements. All
statements, other than statements of historical fact, may be forward-looking
statements. These include statements regarding the Company's future financial
results, operating results, business strategies, projected costs, health care
services, the therapeutic and commercial potential of technologies of the
Company's BioBalance subsidiary, competitive positions, and plans and objectives
of management for future operations. Forward-looking statements may be
identified by use of words such as "may," "will," "should," "could,"
"expect,""plan," "anticipate," "believe," "estimate," "predict," "intend" and
"continue," or the negative of these terms, and include the assumptions that
underlie such statements. The Company cautions investors that any
forward-looking statements it makes are not guarantees of future performance and
that actual results could differ materially from those expressed or implied in
these forward-looking statements as a result of various risks and uncertainties,
including those set forth in the section entitled "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations -Risks
and Uncertainties." All forward-looking statements in this report are based on
information available to the Company as of the date of this report and we assume
no obligation to update any such statements.
The following information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in this Annual
Report. All references to fiscal year apply to the Company's fiscal year which
ends on December 31.
RECENT DEVELOPMENTS
On November 19, 2003, the Company learned that Paul Stark, a director of the
Company and the President of BioBalance Corp., a subsidiary of the Company, and
Yitzchok Grossman, a consultant to The BioBalance Corp., a subsidiary of the
Company, had been indicted by the United States Attorney' for the Southern
District of New York. A press release received by Company relating to the
indictment did not describe the charges against Messrs. Stark or Grossman. On
November 20, at the Company's request, Mr. Stark resigned from all positions
with the Company and BioBalance. On November 24, the Company obtained a copy of
the indictment and, on November 25, the Company's board of directors authorized
an independent internal investigation regarding the indictment of Messrs. Stark
and Grossman.
The indictment alleges that from February through April 2003, Messrs. Stark and
Grossman conspired to manipulate the price and demand for the Company's common
stock by offering to pay a bribe, consisting of warrants to purchase 500,000
shares of the Company's common stock, to an undercover FBI agent posing as the
manager of a hedge fund, but does not allege any actual manipulation. The
indictment alleges that Messrs. Stark and Mr. Grossman caused the Company's
board of directors to approve issuance of the warrants by disguising the
warrants as compensation to an outside consultant to be engaged to perform
financial advisory services for BioBalance.
On November 25,the board also authorized suspension of the warrants referred to
in the indictment and a stock option to purchase 100,000 shares of common stock
granted to Mr. Stark and the termination of a consulting agreement between
BioBalance and Emerald Asset Management, Inc., a company owned and controlled by
Mr. Grossman, and appointed Dennis O'Donnell, BioBalance's Chief Operating
Officer, as President of BioBalance,
On November 26, 2003, Listing Investigations, a division of the The Nasdaq Stock
Market, Inc.("Nasdaq"), requested the Company to furnish documents and
information relating to the indictment of Mr. Stark. Thereafter, independent
legal counsel engaged by the Company to conduct the internal investigation
contacted Listing Investigations and provided documents and information
responsive to the request.
In January 2004, Nasdaq notified the Company that the Listing Investigations'
staff had determined that the Company no longer qualified for inclusion in the
Nasdaq Stock Market based on public interest concerns and the Company's failure
to timely hold its 2002 annual stockholders in compliance with the Nasdaq
Marketplace Rules. The Company responded to the notification by requesting a
hearing before a Nasdaq Listing Qualifications Panel to review the staff
determination. The hearing before the Nasdaq Listing Qualifications Panel was
held on February 19, 2004 and the Company is awaiting the Panel's decision. See
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operation- Risks and Uncertainties- Our Failure to Satisfy Nasdaq
Listing Standards Could Result in Reduced Liquidity and Lower Stock Price."
The Company's independent internal investigation found no evidence that any
current officer, director or employee of the Company or BioBalance knew of or
participated in any alleged attempt to manipulate the Company's common stock and
the investigation concluded that the Company responded properly to the
indictment based upon the information available to the Company at that time.
In January 2004, in response to the recommendations of the Company's independent
counsel, the board adopted a Code of Business Conduct and Ethics; a Code of
Ethics for Senior Financial Officers; Insider Trading Policies; Communications
and Whistle Blower Policies, a Corporate Governance/Nominating Committee Charter
and amended the charters of its standing audit and compensation committees. The
board also appointed four additional directors, including three new independent
directors, set the agenda for and scheduled the fiscal 2002 annual stockholders
meeting, and nominated a slate of seven directors, including a majority of
independent directors, for election by the stockholders at the annual meeting.
The Company held its 2002 annual stockholders meeting on February 13, 2004, at
which the stockholders elected the seven directors and ratified the appointment
of the Weiser LLP as the Company's auditors. The Company is currently treating
the warrants referenced in the indictment and the options granted to Mr. Stark
as being in effect in accordance with their terms.
PART I
ITEM 1. BUSINESS
GENERAL
We are engaged in two industry segments, the delivery of home health care
services (sometimes referred to as the "home health care business") and,
following our acquisition of The BioBalance Corp. in a merger transaction in
January 2003 (accounted for as a reverse acquisition of the Company by
BioBalance), the development and planned manufacturing and marketing of
proprietary biotherapeutic agents for the treatment of gastrointestinal
disorders that are poorly addressed by current therapies via accelerated
regulatory pathways. BioBalance is a wholly-owned subsidiary of the Company. See
Notes 1 and 2 of Notes to Consolidated Financial Statement included elsewhere in
this report.
For information as to the financial performance of our home health care and
BioBalance business segments, see Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 14 of Notes
to Consolidated Financial Statements included elsewhere in this report.
The Company is a New York corporation incorporated in 1983. Our principal
executive offices are located at 1850 McDonald Avenue, Brooklyn, New York 11223,
telephone (718) 375-6700.
3
HISTORY, DEVELOPMENT AND OVERVIEW OF THE COMPANY
The Company was initially organized to act as a licensed home health care
agency engaged primarily in supplying the services of paraprofessionals who
provide a broad range of health care support services to patients in their
homes.
Our home health care business operates in all five boroughs of New York
City and the counties of Nassau, Westchester, Rockland, Orange, Dutchess,
Ulster, Putnam and Sullivan, in the State of New York. Our home health care
business also operates in Jersey City, Edison, Whiting, Toms River, East Orange
and Paterson, New Jersey under the name Helping Hands Healthcare. Our home
health care services are supplied principally pursuant to contracts with health
care institutions and governmental agencies, such as various county Departments
of Social Services, the New York City Human Resources Administration, New Jersey
Medicaid, Beth Abraham Health Services in the Bronx and Westchester County,
Kingsbridge Medical Center, Aetna US Healthcare, and Gentiva Health Services.
Our primary objective, in our health care business, is to enhance our
position in the home health care market by increasing the promotion of our full
service and specialty health care capabilities to existing and new referral
sources; expand our markets and enter new markets by establishing additional
branch offices and acquiring other related health care businesses; and develop
complimentary home health care products and services, as well as maintaining our
regular training and testing programs, and recruitment activities. See Item 1.
Business - "Home Health Care Business."
BioBalance is a development stage specialty pharmaceutical company
incorporated in Delaware in May 2001. BioBalance is focused on the development
of patented biotherapeutic agents for gastrointestinal (GI) disorders with
significant unmet needs. BioBalance has pioneered the development of these
agents based on what BioBalance believes to be outstanding science and a
pharmaceutical development approach (e.g. randomized, double blind,
placebo-controlled clinical trials in FDA-approved centers). From inception to
completion of the reverse merger in January 2003, BioBalance has raised gross
proceeds of approximately $6.8 million from the private placement of securities
and has not, to date, generated any revenues, other than income from short-term
investment of such proceeds.
We believe that products developed from BioBalance's core technology will
restore the microbial balance in the GI tract by displacing pathogenic bacteria
and preventing their re-colonization. For example, recent clinical studies
independently conducted by Dr. Mark Pimentel at Cedars-Sinai Medical Center in
California have linked the overgrowth of pathogenic bacteria to Irritable Bowel
Syndrome (IBS) symptoms. The Company believes that these studies support the
rationale for the Company's potential products to address a potential root cause
of GI disease, while also providing symptom relief. As such, it could represent
a major shift in the treatment of many GI disorders.
CORPORATE STRATEGY
In completing the merger of the Company and BioBalance, management seeks to
capitalize on the operating performance of the Company's home health care
business and the growth potential of BioBalance's probiotics business, while
allowing each business to
4
operate as an autonomous business unit.
The Company's home health care business, operating as a self-supporting
business unit, will continue to seek selective growth opportunities and maintain
exclusive control over its existing financial and operating resources.
We intend to actively pursue BioBalance's business plan of developing,
manufacturing and marketing its initial product PROBACTRIX(TM) and other
products in its pipeline. While BioBalance will not have significant access to
the financial or operating resources of the home health care business, we
currently expect to seek additional funding for BioBalance from the sale of
equity, debt or convertible securities of the Company.
HOME HEALTH CARE BUSINESS
Industry Background
Rising Health Care Costs - According to the Office of the Actuary at the
Centers for Medicare & Medicaid Services, national health expenditures are
projected to reach approximately $2.8 trillion in 2011, growing at a mean annual
rate of 7.3% during the forecast period of 2001-2011. During this period, we
expect health spending to grow 2.5% per year faster than nominal gross domestic
product (GDP), so that by 2011 it will constitute approximately a 7.0% of GDP
compared to its 2000 level of 13.2%. This projection represents a 0.9%
percentage point increase in GDP share by 2010 compared with 2002 forecast.
(NationalHealth Care Expenditures Projections: 2001-2011,
- -------------------------------------------------------------
http://www.cms.hhs.gov/statistics/nhe/projections-2001/proj2001.pdf)
- --------------------------------------------------------------------
Aging Population - Although the growth of the U.S. population slowed
somewhat during the 1990's because of the relatively small number of babies born
during the Great Depression of the 1930's, it is expected that the older
population will burgeon between the years 2010 and 2030 when the post WWII "baby
boom" generation reaches age 65. By 2030, it is projected that there will be
approximately 70 million older persons, more than twice the number in 2000.
People 65 and older, who represented 12.4% of the population in the year 2000,
are expected to grow to approximately 20% of the population by 2030.
(Administration on Aging - A Profile of Older Americans: 2002 Future Growth,
- --------------------------------------------------------------------------------
http://www.aoa.gov/aoa/stats/profile/2002/2002profile.pdf)
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Cost Effectiveness of Home Health Care Service - Home care is a
cost-effective service, not only for individuals recuperating from a hospital
stay, but also for those who, because of a functional or cognitive disability,
find that they are unable to take care of themselves. More than 20,000
providers deliver home care services to some 7.6 million individuals who require
services because of acute illness, long-term health conditions, permanent
disability or terminal illness. Annual expenditures for home health care were
projected to have been $41.3 billion in 2001.
The table below lists some examples of cost-effective home care by
comparing the average Medicare charges on a per-day basis for hospital and
skilled nursing facility to the average Medicare charge for a home health visit.
(2001 National Association of Home Care Statistics,
- ---------------------------------------------------------
http://www.nahc.org/consumer/hcstats.html).
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5
Comparison of Hospital, SNF, and Home Health Medicare Charges, 1998-2000
- --------------------------------------------------------------------------------
1998 1999 2000(A)
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Hospital charges per day $ 2,370 $ 2,533 $ 2,753
Skilled nursing facility charges per day $ 498 $ 425 $ 421
Home Health charges per visit. $ 93 $ 93 $ 100
SOURCES: The hospital and SNF Medicare charge data are from the Annual
Statistical Supplement, 2000, to the Social Security Bulletin, Social Security
Administration (October 2001). Home care information for 1998 from HCFA, Office
of Information Services. Per visit charges for 1999 and 2000 are calculated
using producer price index data from the Bureau of Labor Statistics website
(www.bls.gov, September 2001).
NOTE (A): Hospital and skilled nursing facility charges per day are based on
preliminary data.
Patient Preference and Physician Acceptance - The Company believes that,
if possible in any given case, a patient will prefer to be treated at home
rather than in an institutional setting. Further, in the last decade, the
medical profession has shown greater acceptance of home health care in the
clinical management of patients. As evidence of this greater acceptance, the
American Medical Association Councils on Scientific Affairs and Medical
Education has recommended that training in the principles and practice of home
health care be incorporated into the undergraduate, graduate and continuing
education of physicians.
Incidences of AIDS and Cancer - During 2003, approximately 5 million people
became infected with the human immunodeficiency virus (HIV), which causes AIDS.
The year also saw 3 million deaths from HIV/AIDS, a higher global total, despite
antiretroviral therapy which reduced AIDS and AIDS-related deaths in more
affluent countries. Deaths among those already infected are expected to continue
to increase for some years even if prevention programs manage to cut the number
of new infections to zero. (AVERT.ORG, Worldwide HIV & AIDS Epidemic
---------------------------------
Statisticshttp). However, with the HIV-positive population still expanding the
- --------------
annual number of AIDS deaths is expected to increase for many years. At the end
of the December 2002, the Center for Disease Control and Prevention (CDC)
reported approximately 793,026 AIDS cases in the USA had been reported to the
Center for Disease Control and Prevention. Of these, 79% were men, 21% were
women and 1% were children less than 13 years of age. (United States HIV & AIDS
------------------------
Statistics Summary Aids Statistics, http://www.avert.org.statsum.htm).
- ------------------------------------------------------------------------
Cancer is the second leading cause of death in the U.S., exceeded only by
heart disease, with one of every four deaths occurring from cancer. Since 1990,
approximately 16 million new cancer cases have been diagnosed and approximately
1,284,900 new cancer cases are expected to be diagnosed in 2004, not including
carcinoma in situ (noninvasive cancer) of any site except urinary bladder, or
basal and squamous cell skin cancers. More than 1 million cases of basal and
squamous cancers were expected to be diagnosed in 2002 and approximately 555,500
Americans are expected to die of cancer, more than 1,500 people a day. (American
---------
Cancer Society, Surveillance Research 2002, www.cancer.org).
- -----------------------------------------------------------------
Services Offered
6
Overview - Through our staff of trained professionals, we provide a broad
range of home health and personal care support services in capacities ranging
from companions to live-ins, including assistance with personal hygiene,
dressing and feeding, meal preparation, light housekeeping and shopping and, to
a limited extent, physical therapy and standard skilled nursing services such as
the changing of dressings, injections, catheterizations and administration of
medications. Our personnel also train patients in their own care, monitor
patient compliance with treatment plans, make reports to the physicians and
process reimbursement claims to third-party payers.
Infusion Therapy - Among the specialty services offered, we provide
infusion therapy service to patients utilizing pharmaceuticals provided by
licensed suppliers. Management believes that the total market for home infusion
therapy is continuing to grow and that increasing the provision of infusion
therapy will build on our strength in providing nursing services, because such
therapies generally require administration by specialty nurses. We will also
seek to supply infusion therapy patients with the other home health care
services and therapies, which they often require and which are offered by us.
However, there can be no assurance that we will expand our infusion therapy
business or, if expanded, that we will conduct such a business on a profitable
basis.
Professional Care Resources - We also intend to expand our skilled nursing
programs in order to meet the needs which management believes are being created
by early discharge programs. The existing referral base of agencies, insurance
companies, social workers, case managers and physicians will be used to meet
what management perceives to be a need not being met by the current pool of home
health care agencies..
Professional Staff
Overview - Our services are provided principally by our staff of
professionals and paraprofessionals, who provide personal care to patients, and,
to a lesser extent, by our staff of skilled nurses, who provide various
therapies employing medical supplies and equipment and infusion therapy. Our
professional staff includes paraprofessionals and nurses fluent in Spanish,
Mandarin and Cantonese Chinese, Creole, Yiddish and Russian as well as personnel
knowledgeable in the requirements and practices of kosher homes. Personal care
and nursing services for a particular patient can extend from a few visits to
years of service and can involve intermittent or continuous care. Approximately
99% of our home health revenues in 2003 were attributable to services by our
paraprofessional staff.
Certified Paraprofessionals - Our certified paraprofessional staff provides
a combination of unskilled nursing and personal care services to patients, as
well as assistance with daily living, tasks such as hygiene and feeding.
Consistent with applicable regulations, all of paraprofessional aides are
certified and work under the supervision of a licensed professional nurse. Some
of our aides have been specially trained to work with patients with particular
needs, such as new mothers and their newborn infants, patients with particular
diseases such as Cancer, AIDS or Alzheimer's Disease and particular classes of
patients such as the developmentally disabled and terminally ill.
We are approved by New York State Department of Health for the training and
certification of Home Health Aides and Personal Care Aides. In addition, we are
approved by
7
the New Jersey Board of Nursing for the training of Certified Home Health Aides
in the State of New Jersey. Medicare provides reimbursement solely for Home
Health Aide Service, while Medicaid may be responsible for reimbursement for
both Home Health Aide and Personal Care Aide Services. In order to provide a
qualified and reliable staff, we continuously recruit, train, provide continuing
education for and offer benefits and other programs to encourage retention of
our staff. Recruiting is conducted primarily through advertising, direct contact
with community groups and employment programs, and the use of benefits programs
designed to encourage new employee referrals by existing employees.
All paraprofessional personnel must pass a written exam and a skills
competency test prior to employment, with all certificates having been validated
by the issuing agency. The Director of Nursing or designee in each of our branch
offices validates the professional competency of all new hires. Newly hired
employees are re-evaluated as to competency within six months of their
employment and all employees are re-evaluated on an on-going basis, at least
semi-annually. In addition, all paraprofessional personnel undergo an
orientation program that includes material regarding HIV, Hepatitis B,
standard/universal precautions, patient's rights and the Company's policies and
procedures.
Licensed Professional Nurses - We employ licensed professional nurses
(both registered nurses and licensed practical nurses) who provide special and
general professional nursing services (these nurses are employed on a per diem
basis). We also employ registered nurses who are responsible for training and
supervising our paraprofessional staff, as well as providing backup in the field
for the nursing staff that is providing care (these nurses are employed on a
salaried basis). General nursing care is provided by registered and licensed
practical nurses and includes periodic assessment of the appropriateness of home
care, the performance of therapy procedures, and patient and family instruction.
Patients receiving such care include stabilized postoperative patients
recovering at home, patients who, although acutely ill, do not need to be cared
for in an acute care facility and patients who are chronically or terminally
ill.
All nurses hired must have at least one year of current, verifiable
experience, including references and license verification. All nurses working in
specialty areas must have at least two years of experience.
While the provision of licensed professional nursing services accounted
for less than 1% of our net revenues in 2003, we have expanded our nursing
operations in our existing markets as well as new geographic locations
Organization and Operations
8
We operate 24 hours a day, seven days a week, to receive referrals and
coordinate services with physicians, case managers, patients and their families.
Services are provided through 11 principal and branch offices and 2 recruitment
and training offices. We seek to achieve economies of scale by having each
branch office serve a large patient population. Each office conducts its own
marketing efforts, negotiates contracts with referral sources, recruits and
trains professionals and paraprofessionals and coordinates patient care and care
givers. Each office is typically staffed with an administrator/branch manager,
director of nursing, nursing supervisor, home care coordinators, clerical staff
and nursing services staff.
Our principal office retains all functions necessary to ensure quality of
patient care and to maximize financial efficiency. Services performed at the
principal office include billing and collection, quality assurance, financial
and accounting functions, policy and procedure development, system design and
development, corporate development and marketing. We use financial reporting
systems through which we monitor data for each branch office, including patient
mix, volume, collections, revenues and staffing. Our systems also provide
monthly budget analysis, financial comparisons to prior periods and comparisons
among our branch offices.
Branch Offices
The home health care industry is, fundamentally, a local one in which both
the patients and the referral sources (such as hospitals, home health agencies,
social service agencies and physicians) are located in the local geographic area
in which the services are provided. We seek to serve local market needs through
a network of 12 branch offices, six in New York and six located in New Jersey,
managed by administrator/branch managers who are responsible for all aspects of
local office decision-making, including recruiting, training, staffing, and
marketing.
Our branch office network has been expanded through the years through a
combination of new office openings and acquisitions of existing operations.
Substantially all of the branch offices in New Jersey were acquired in a series
of acquisitions between 1997 and 2002. We intend to open additional branch
offices in New York, subject to entering agreements with municipal or county
social services agencies. In addition, we hope to expand further in New Jersey,
and into Pennsylvania and Connecticut in order to offer a wider geographic
coverage to the health maintenance organizations ("HMO's) and health care
insurance organizations with which we deal, and to add additional organizations.
Expansion is subject to the completion of market surveys in the various
locations to ascertain the extent to which existing home care medical needs are
not being met as well as competition and recruitment issues. We cannot assure
you that we will be able to implement our expansion plans or that any such
expansion will be profitable.
Management believes that the Company has successfully integrated all home
health care acquisitions, with minimum interruptions to the Company's daily
operations. This has been facilitated by the formation of a mergers and
acquisitions ("M&A") group, which includes our President/Chief Executive Officer
and our Chief Operating/Financial Officer. We have integrated our billing,
payroll and clinical services to all new locations to ensure they meet our high
quality standards. We believe that the experience acquired during this process
will allow us to continue a path of significant M&A activity in order to be one
of the leading home health agencies in the New York metropolitan area.
9
Work Flow
A case is initiated by one of our referral sources contacting a branch
office and advising it of the patient's general location, diagnosis, types of
services required, hours of service required and the time of day when the
services are to be rendered. The branch office then contacts the referral source
as promptly as possible with the identification of the staff person who will be
rendering the service, after which the referral source transmits to the branch
office a detailed copy of the plan for the patient's home care, which includes
the type of care to be rendered, the method by which it should be rendered, the
precise location and hours.
The supervisory staff at the branch office then reviews the care plan with
the staff member(s) who will be providing the care and then dispatches the staff
member(s) to begin rendering the care, usually the next day.
The clerical staff at the branch office enters all of the information
regarding the case into the local area computer network of the branch office,
which then generates the work schedule for the staff member(s), which provides a
detailed description of the services to be rendered, the hours and days during
which the care is to be provided. All of this information is simultaneously
received by our corporate headquarters by way of the wide area computer network
linking the principal office to each of the branch offices. This information is
then processed by the principal office computer system on a weekly basis to
generate the documentation of the services being provided. Such documentation is
then used to generate the billing for the service as well as process the payroll
for the staff member(s) providing the service.
Referral Sources
We obtain patients primarily through contracts, referrals from hospitals,
community-based health care institutions and social service agencies, case
management and insurance companies. Referrals from these sources accounted for
substantially all of our net revenues in 2003. We generally conduct business
with most of our institutional referral sources under one-year contracts that
fix the rates and terms of all referrals but do not require that any referrals
be made. Under these contracts, the referral sources refer patients to us and we
bill the referral sources for services provided to patients. These contracts
also generally designate the kinds of services to be provided by our employees,
liability insurance requirements, billing and record keeping responsibilities,
complaint procedures, compliance with applicable laws, and rates for employee
hours or days depending on the services to be provided. Approximately 260 such
contracts were in effect as of December 31, 2003.
One or more referring institutions have accounted for more than 5% of our
net revenues during our last fiscal year, as set forth in the following table:
Referring Institution Percentage of Net Revenues 2003
- --------------------------------------------- -------------------------------
New York City Medicaid (HRA) 50.45%
New Jersey Medical Assistance Program 9.87%
New York State Department of Social Services 5.81%
Overall, our 10 largest referring institutions accounted for approximately
86.8% of net
10
revenues for 2003.
Billing and Collection
We screen each new case to determine whether adequate reimbursement will
be available and we believe that we have developed substantial expertise in
processing claims. We make a concerted effort to provide complete and accurate
claims data to the relevant payer sources in order to accelerate the
collectibility of accounts receivable.
"Days Sales Outstanding" ("DSO") is a measure of the average number of
days required for the Company to collect accounts receivable, calculated from
the date services are billed. For the year ended December 31, 2003 the Company's
DSO were 62.
We license the Dataline Home Care System, a computerized payroll system
designed to produce invoices for services rendered as a by-product of employee
compensation. Automated schedules and staffing requirements are maintained in
our offices, with the ability to enter all relevant patient and employee
demographic information. The payroll is processed weekly at our corporate
headquarters. Our corporate headquarters is responsible for the processing of
data, ensuring the availability of all required billing documentation and its
accuracy, and the issuance and distributing of payments. Once payroll processing
is completed, our computer system generates the resulting invoices
automatically. The necessary documentation is attached to all invoices that are
mailed to clients.
Our management reviews reports for all phases of the billing process and
prepares reconciliations for the purpose of ensuring accuracy and maintenance of
controls. When errors are found, new processes are developed, as appropriate, to
ensure and improve the quality and accuracy of the billing process and
responsiveness to clients' needs and requirements.
Accounts receivable reports are produced weekly and are analyzed and
reviewed by our staff and management to locate negative trends or emerging
problems that would require immediate attention. All unpaid invoices are
reviewed and telephone contacts established for invoices over 90 days old. Our
experience with collection of accounts receivable has been favorable, with
uncollectible accounts within the allowances provided.
Private patients are required to pay the one-week fee for their service in
advance, as a deposit for services to be provided. For patients with insurance
covering home health services, we accept assignment of the insurance and submit
claims if the carrier first verifies coverage and eligibility. Payments from
private patients are required to be made weekly, as invoices are submitted and,
if unpaid over three weeks, result in follow-up telephone calls to ensure prompt
payment. Requests for terms from private patients are generally honored and
payment arrangements structured based on the patient's financial resources and
ability to pay. Unresponsive accounts are referred to outside collection
agencies.
Reimbursement
11
We are reimbursed for services, primarily by referring institutions, such
as health care institutions and social service agencies, which in turn receive
their reimbursement from Medicaid, Medicare and, to a much lesser extent,
through direct payments by insurance companies and private payers. New York
State and New Jersey Medicaid programs constitute our largest reimbursement
sources, when including both direct Medicaid reimbursement and indirect Medicaid
payments through many of our referring institutions. For 2003 payments from
referring institutions that receive direct payments from Medicare and Medicaid,
together with direct reimbursement to us from Medicaid, accounted for
approximately 98% of net revenues. Direct reimbursements from private insurers,
prepaid health plans, patients and other private sources accounted for
approximately 2% of net revenue for 2003.
The New York State Department of Health, in conjunction with local
Departments of Social Services, sets annual reimbursement rates for patients
covered by Medicaid. These rates are generally established on a county-by-county
basis, using a complex reimbursement formula applied to cost reports filed by
providers. Generally, the first report filed (called a "budgeted" rate) uses
projections to develop the current year's reimbursement rate, subject to
retroactive recapture of any monies paid by local Departments of Social Services
for budgeted expenses that are greater than the actual expenses incurred. We
have filed all required annual cost reports for each of our offices provide
services to Medicaid recipients. To date, our expenses have equaled or exceeded
the budgeted amounts.
Third party payers, including Medicaid, Medicare and private insurers,
have taken extensive steps to contain or reduce the costs of health care. These
steps include reduced reimbursement rates, increased utilization review of
services and negotiated prospective or discounted pricing and adoption of a
competitive bid approach to service contracts. Home health care, which is
generally less costly to third party payers than hospital-based care, has
benefited from many of these cost containment measures.
The New York State Department of Health issues Certificates of Need for
Certified Home Health Agencies ("CHHA's"), which provide post-acute home care
services for people who have just been discharged from a hospital but are not
yet fully recovered, and Long-Term Home Health Care Programs ("LTHHCP's"), also
known as the "Nursing Home Without Walls," which programs are intended to
provide elderly people with an alternative for long-term nursing home care, at
less than the cost of nursing home care. We negotiate contracts with CHHA's and
LTHHCP's on the basis of services to be provided, in connection with contracts
either currently in effect with us or with other agencies. Prevailing market
conditions are such that, despite escalating operating expenses, reduced
contract rates are regularly negotiated as a result of internal budget
restraints and reductions mandated by managed care contracts between our clients
and HMO's and other third party administrators. While we anticipate that this
trend is likely to continue for the foreseeable future, we do not expect the
impact on the Company to be significant, since we believe our rates are
competitive. Accordingly, we expect to be subject to only minor rate reductions.
However, as expenditures in the home health care market continue to grow,
initiatives aimed at reducing the costs of health care delivery at non-hospital
sites are increasing. A significant change in coverage or a reduction in payment
rates by third party payers, particularly by New York State Medicaid, would have
a material adverse effect upon our home health care business.
12
Performance Improvement
We believe that our reputation for quality patient care has been and will
continue to be a significant factor in our success. To this end, we have
established a performance improvement management program, including a
performance improvement program to ensure that our service standards are
implemented and that the objectives of those standards are met.
We believe that we have developed and implemented service standards that
comply with or exceed the service standards required by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). The Company has received
full accreditation from the Joint Commission for 2003. We have not sought JCAHO
accreditation for our New Jersey offices because such accreditation is not
required by any of the contracts in that state. An adverse determination by
JCAHO regarding our home health care operations or any branch office could
adversely affect our reputation and competitive position.
Our performance improvement program includes the following:
Professional Advisory Committee - We maintain a Professional Advisory
Committee for each of our branch offices, which consists of a physician, nursing
professionals and representatives of branch management. The Professional
Advisory Committee identifies problems and suggests ways to improve patient care
based on internal quality compliance audits and clinical and personnel record
reviews.
Internal Quality Compliance Review Process - Periodic internal reviews are
conducted by our management to ensure compliance with the documentation and
operating procedures required by state law, JCAHO standards and internal
standards. Written reports are forwarded to the director of nursing and
administrators/branch managers of each of our branch offices. We believe that
the internal review process is an effective management tool. For the director of
nursing and administrators/ branch managers.
Case Conferences - Staff professionals regularly hold case conferences to
review problem and high risk cases, the physician's treatment and services
provided for such cases in order to ensure appropriate, safe patient care and to
evaluate patient progress and plans for future care.
Clinical Record Review - Clinical record review is the periodic evaluation
of the documentation in patient clinical records. In this review process, we
evaluate the performance of the nursing services staff to ensure that
professional and patient care policies are followed in providing appropriate
care and that the needs of patients are being met. Clinical record review
findings are documented and reviewed by the applicable Professional Advisory
Committee for recommendations.
Sales and Marketing
Our executive officers, Messrs. Jerry Braun and Jacob Rosenberg, are
principally responsible for the marketing of our services. Each
administrator/branch manager is also responsible for sales activities in the
branch office's local market area. We attempt to cultivate strong, long-term
relationships with referral sources through high quality service and education
13
of local health care personnel about the appropriate role of home health care in
the clinical management of patients.
Government Regulation
The federal government and the States of New York and New Jersey, where we
operate, regulate various aspects of our business. Changes in the law or new
interpretations of existing laws can have a material adverse effect on
permissible activities of the Company, the relative costs associated with doing
business and the amount of reimbursement by government and other third-party
payers.
We are licensed by New York State as a home care services agency. New York
State law requires approval by the New York State Public Health Council
("Council") of any change in "the controlling person" of an operator of a
licensed home care services agency ("LHCSA"). Control of an entity is presumed
to exist if any person owns, controls or holds the power to vote 10% or more of
the voting securities of the LHCSA. A person seeking approval as a controlling
person of a LHCSA, or of an entity that is the operator of a LHCSA, must file an
application for Council approval prior to becoming a controlling person.
We are subject to federal and state laws prohibiting payments for patient
referrals and regulating reimbursement procedures and practices under Medicare,
Medicaid and state programs. The federal Medicare and Medicaid legislation
contains anti-kickback provisions, which prohibit any remuneration in return for
the referral of Medicare and Medicaid patients. Courts have, to date,
interpreted these anti-kickbacks laws to apply to a broad range of financial
relationships. Violations of these provisions may result in civil and criminal
penalties, including fines of up to $15,000 for each separate service billed to
Medicare in violation of the anti-kickback provisions, exclusion from
participation in the Medicare and state health programs such as Medicaid and
imprisonment for up to five years.
Our healthcare operations potentially subject us to the Medicare and
Medicaid anti-kickback provisions of the Social Security Act. These provisions
are broadly worded and often vague, and the future interpretation of these
provisions and their applicability to our operations cannot be fully predicted
with certainty. We cannot assure you that we will be able to arrange our
acquisitions or business relationships so as to comply with these laws or that
our present or future operations will not be accused of violating, or be
determined to have violated, such provisions. Any such non-compliance or
violation could have a material adverse effect on home health care business.
Various federal and state laws regulate the relationship among providers
of healthcare services, including employment or service contracts, and
investment relationships. These laws include the broadly worded fraud and abuse
provisions of the Social Security Act that are applicable to the Medicare and
Medicaid programs, which prohibit various transactions involving Medicare or
Medicaid covered patients or services. Among other things, these provisions
restrict referrals for certain designated health services by physicians to
entities with which the physician or the physician's immediate family member has
a "financial relationship" and the receipt of remuneration by anyone in return
for, or to induce, the referral of a patient for treatment or purchasing or
leasing equipment or services that are paid for, in whole or in part, by
Medicare or Medicaid. Violations of these provisions may result in civil or
criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare and Medicaid
14
programs. The future interpretation of these provisions and their applicability
to our operations cannot be fully predicted with certainty.
New York and New Jersey also have statutes and regulations prohibiting
payments for patient referrals and other types of financial arrangements with
health care providers that, while similar in many respects to the federal
legislation, vary from state to state, are often vague and have infrequently
been interpreted by courts or regulatory agencies. Sanctions for violation of
these state restrictions may include loss of licensure and civil and criminal
penalties.
We believe that our operations, in general, comply in all material
respects with applicable federal and state anti-kickback laws, and that we will
be able to arrange our future business relationships so as to comply with the
fraud and abuse provisions.
Management believes that the trend of federal and state legislation is to
subject the home health care and nursing services industry to greater regulation
and enforcement activity, particularly in connection with third-party
reimbursement and arrangements designed to induce or encourage the referral of
patients to a particular provider of medical services. We attempt to be
responsive to such regulatory climate. However, we are unable to accurately
predict the effect, if any, of such increased regulatory or enforcement
activities on our future results of operations.
In addition, we are subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws, and environmental laws (which relate, among other things, to
the disposal, transportation and handling of hazardous and infectious wastes)
and federal and state securities laws, including the Sarbanes-Oxely Act of 2002
and the rules and regulations thereunder (relating to corporate governance and
the quality of disclosure by public companies). To date, none of these laws and
regulations has had a material adverse effect on our home health care business
or the competitive position of such business or required any material
expenditures by us. We cannot assure that we will not be adversely effected by
such laws and regulations in the future.
We cannot accurately predict what additional legislation, if any, may be
enacted in the future relating to our business or the health care industry,
including third-party reimbursement, or what effect any such legislation may
have on us.
We have never been denied any home health care license we have sought to
obtain. We believe that our home health care operations are in material
compliance with all applicable state and federal regulations and licensing
requirements.
Competition
The home health care market is highly fragmented and significant
competitors are often localized in particular geographical markets. Our largest
competitors include Gentiva Health Services, Premier Health Services, National
Home Health Care, Patient Care, Inc., and Personal Touch Home Care Services,
Inc. The home health care business is marked by low entry costs so that given
the increasing level of demand for nursing services, significant additional
competition can be expected to develop in the future. Some of the companies
with which we presently compete in home health care have substantially greater
financial and human resources than we
15
do. We also compete with many other small temporary medical staffing agencies.
The home infusion therapy market is highly competitive and we expect that
the competition will intensify. As we seek to expand our provision of infusion
therapy services, we will compete with a large number of companies and programs
in the areas in which our facilities are located. Many of these are local
operations servicing a single area; however, there are a number of large
national and regional companies, including Gentiva Health Services and Coram
Health Care Corp, that provide such services. In addition, certain hospitals,
clinics and physicians, who traditionally may have been referral sources for us,
have entered or may enter the market with their own programs.
We believe that the principal competitive factors in our industry are
quality of care, including responsiveness of services and quality of
professional personnel; breadth of therapies and nursing services offered;
successful referrals from referring Government agencies, hospitals and health
maintenance organizations; general reputation with physicians, other referral
sources and potential patients; and price. We believe that our competitive
strengths have been the quality, responsiveness, flexibility and breadth of
services and staff we offer, and to some extent our competitive pricing, as well
as our reputation with physicians, referral sources and patients.
The United States health care industry generally faces a shortage of
qualified personnel. Accordingly, we experience intense competition from other
companies in recruiting health care personnel for our home health care
operations. Our success to date has depended, to a significant degree, on our
ability to recruit and retain qualified health care personnel. Most of the
registered and licensed nurses and health care paraprofessionals who we employ
are also registered with, and may accept placements from time to time through,
our competitors. We believe we are able to compete successfully for nursing and
paraprofessional personnel by aggressive recruitment through newspaper
advertisements, work fairs/job fairs, flexible work schedules and competitive
compensation arrangements. We cannot assure you, however, that we will be able
to continue to attract and retain sufficient qualified personnel. The inability
to either attract or retain such qualified personnel would have a material
adverse effect on our business.
BIOBALANCE BUSINESS
OVERVIEW. Our BioBalance subsidiary is focused on the development of
novel treatments and dietary products for various gastrointestinal (GI)
disorders that are poorly addressed by current therapies. These include
irritable bowel syndrome (IBS), inflammatory bowel disease and diarrhea caused
by antibiotics, chemotherapy or AIDS.
BioBalance's product pipeline is comprised of potential products intended
to address GI diseases and conditions where current therapies are inadequate or
may have significant side effects. Unlike conventional treatments, BioBalance
believes that development of its core technology will result in products that
restore the microbial balance in the GI tract by attacking pathogenic bacteria
and preventing their re-colonization. Clinical trials conducted independently at
Cedars-Sinai Medical Center in California have linked the overgrowth of
pathogenic bacteria to IBS symptoms. As such, BioBalance's potential products
may address an underlying root cause of many GI disorders in addition to
providing symptom relief with no side effects.
LEAD PRODUCT. BioBalance's initial potential product, PROBACTRIX(TM), is
formulated
16
from a proprietary strain of non-pathogenic ("healthy") E.coli M17 in a patented
liquid formulation that delivers live bacteria with excellent adherence to the
intestinal mucosa. The product has been approved as a pharmaceutical in Russia
and as a food supplement in Israel. Numerous clinical studies have confirmed
that it can reduce the symptoms of various GI disorders and improve the
patient's quality of life.
BioBalance is currently pursuing two accelerated regulatory pathways for
PROBACTRIX(TM). The first approach is to introduce PROBACTRIX(TM) as a
non-prescription medical food for the dietary management of IBS symptoms. The
medical food track would allow the company to make disease type claims for
products used under a physician's supervision while providing non-prescription
retail convenience to patients. BioBalance is currently also pursuing
prescription development of a formulation of PROBACTRIX(TM) as a prescription
drug. BioBalance plans to determine the most expedient pathway for prescription
drug approval after discussing the clinical requirements with the U.S. Food and
Drug Administration (FDA) in the first half of 2004.
A critical milestone in marketing a medical food product is to attain
Generally Recognized as Safe (or "GRAS") status. An independent panel of
scientific experts and additional members with relevant expertise (including a
board certified gastroenterologist) reviewed the extensive safety and clinical
history of PROBACTRIX(TM) and determined that PROBACTRIX(TM) meets or exceeds
the requirements for GRAS status. BioBalance announced the completion of the
GRAS process on January 5, 2004. While BioBalance believes that the current
regulatory statutes allow it to begin marketing PROBACTRIX(TM) immediately, it
is conducting a multi-center clinical trial for the IBS indication in 2004 to
develop statistically sufficient data to support marketing of its product as a
medical food to the medical community. BioBalance intends to conduct similar
trials for each additional indication it decides to pursue, including the
prescription drug indication.
POTENTIAL SHIFT IN TREATING GI DISORDERS. PROBACTRIX(TM) works with the body's
immune system to eliminate the overgrowth of unhealthy bacteria in the GI tract,
addressing what scientists now believe could represent a potential root cause of
IBS. BioBalance believes that two clinical studies recently conducted
independently at Cedars-Sinai Medical Center support the rationale for
PROBACTRIX(TM) in addressing IBS symptoms in this manner. The Cedars-Sinai team
identified the link between the overgrowth of unhealthy bacteria in the GI tract
to IBS symptoms. The studies also indicated that antibiotics can be used for
treatment, but resistance poses a serious public health risk. In addition,
antibiotics indiscriminately kill both pathogenic and healthy bacteria in the GI
tract contributing to other health problems such as overgrowth of
non-susceptible organisms and the development of bacterial resistance to the
antibiotic. BioBalance believes that PROBACTRIX(TM) does not cause resistance
and works in a safe manner with no systemic absorption.
ATTITUDINAL SHIFT WITHIN FDA. A number of recent FDA actions appear to be
supportive of the overall business strategy for BioBalance. The FDA recently
declined to issue more restrictive regulations governing the use of medical food
products. Secondly, the FDA continues to focus on reducing antibiotic usage to
curb the growth of bacteria resistant, a pressing worldwide health problem.
Finally, the FDA unveiled new steps in June 2003 to overhaul the entire drug
application process for shortening the time for new drug approvals.
THERAPEUTIC FOCUS. BioBalance currently intends to offer PROBACTRIX(TM) to
the huge
17
but underserved IBS market. IBS, a chronic, life-altering disorder, affects
approximately 40 million Americans and can have a significant impact on daily
functioning and overall well being. There is no known cure for IBS. For reasons
unknown, women account for two-thirds of IBS sufferers. Primary symptoms include
abdominal pain, gas and pressure usually accompanied by diarrhea, constipation
or both. Approximately one-third of suffers are defined as diarrhea-predominant,
one-third are constipation-predominant and the balance alternate between
constipation and diarrhea. Studies indicate that only 10-20% of IBS sufferers
seek medical attention.
The current addressable market for IBS products is estimated at $3 billion
by RedChip Research (a leading research firm). IBS is a large, underserved
market with sufferers desperate for symptom relief, as evidenced by the rapid
uptake of GlaxoSmithKline's Lotronex for diarrhea-predominant IBS and Novartis'
Zelnorm for constipation-dominant IBS. Both prescription products are only
indicated for short-term, symptomatic relief and limited to use by women only.
The over the counter (OTC) market for products that treat IBS symptoms
(primarily laxatives, anti-diarrheals and antispasmodics) is reported by
Information Resources Inc. (a leading research firm) at $2 billion annually.
BioBalance also plans to expand the label indication of PROBACTRIX(TM) to
include the prevention or treatment of antibiotic-associated diarrhea (AAD).
Approximately 150 million prescriptions are written for antibiotics annually in
the U.S., with a large portion prescribed for children. The most common adverse
effect of antibiotics is diarrhea. Recent medical research documents that
antibiotics significantly alter the intestinal microflora for up to three months
following treatment. All antibiotics can trigger AAD, and in particular those
with broad-spectrum activity. Studies indicate that 20-30% of all patients
treated with antibiotics develop some degree of AAD.
REGULATORY STRATEGY. BioBalance is currently pursuing both prescription
drug and non-prescription medical food pathways for its lead product,
PROBACTRIX(TM). BioBalance plans to discuss the clinical requirements and
potential indication for prescription drug development with the FDA.
BioBalance currently intends to explore partnering with a larger
pharmaceutical company to maximize the sales potential of PROBACTRIX(TM). Our
ultimate regulatory pathway for PROBACTRIX(TM) may include a prescription drug
pathway, a medical food pathway or both, depending on the partner selected and
the partner's regulatory preference. While the medical food track allows
BioBalance a speedier path to market compared to a prescription drug, the
prescription drug route is vastly more attractive to investors due to higher
margins and the likelihood of patient reimbursement by insurance companies.
BioBalance is also exploring regulatory approval for a veterinary
formulation of PROBACTRIX(TM) as an animal feed additive to replace antibiotics.
The issue of using antibiotics as an animal feed additive has generated
significant attention as governments and consumer groups have called for the
reduction or elimination of unnecessary antibiotic use in farm animals.
CLINICAL SUMMARY. PROBACTRIX(TM) has undergone extensive safety and
efficacy testing in Russia and Israel. BioBalance believes that the product has
shown exceptional results during use by thousands of adults and children as
young as 6 months old. It has been effective in a broad range of GI diseases and
conditions, including IBS, diarrhea due to bacterial infection, antibiotics, or
18
chemotherapy, Crohn's disease, ulcerative colitis and AIDS-related diarrhea with
no reported side effects. In addition, a high-dose safety trial in healthy
volunteers was completed in January 2004 to further support the excellent safety
profile of the product.
BioBalance has also recently initiated a randomized, multi-center double
blind, placebo-controlled clinical trial in 210 IBS patients to support
potential medical food marketing. Sites for this study include St. Michael's
Hospital in Toronto, Canada and Sourasky Medical Center in Tel Aviv, Israel. The
third site, a major New York medical institution, is expected to begin in April
2004. The study is anticipated to be completed by fourth quarter of 2004.
MARKETING STRATEGY. BioBalance currently plans to explore partnering with
an established pharmaceutical company to maximize the full potential of
PROBACTRIX(TM). The ideal partner would have ethical and consumer healthcare
divisions to support both prescription and medical food marketing.
For prescription or medical food marketing, the partner is likely to
utilize an ethical promotional strategy consisting of professional sales
representatives to educate healthcare professionals (e.g. physicians,
pharmacists and managed care groups) and direct-to-consumer (DTC) advertising
targeted primarily to women, a key demographic for IBS as well as the family's
primary gatekeeper for health-related products. The professional and consumer
efforts are likely to be supported by an internationally recognized panel of GI
thought leaders.
Should BioBalance be unable to find an appropriate marketing partner, it
would need to consider the use of a contract sales organization for physician
detailing. This could also include negotiation with GI firms that have an
underutilized medical sales force. BioBalance would also likely utilize third
party retail broker organizations to assist in the retail placement and
merchandising of its products in pharmacies within drug, food and mass
merchandiser channels.
Initial Product. PROBACTRIX(TM) is a non-pathogenic E. coli-based probiotic
microorganism. PROBACTRIX(TM) contains a live, single strain (M-17) of E. coli
in a liquid suspension. This bacterium is a commonly represented species in
healthy gastrointestinal microflora of man and animals. BioBalance believes the
PROBACTRIX(TM) formulation is useful in the restoration of normal GI function
and may be utilized to maintain or reinstate normal gastrointestinal microflora.
It may also aid in the dietary management of numerous gastrointestinal
infections or disorders. The following list highlights several diseases,
infections, and disorders for which BioBalance believes PROBACTRIX(TM) may be
effective:
- Irritable Bowel Syndrome
- Antibiotic-associated diarrhea
- Diarrhea resulting from radiotherapy or chemotherapy
- Other infectious diarrhea caused by Salmonella, Shigella, C. difficile,
pathogenic E. coli, Campylobacter, Clostridium, and other bacteria and
infectious agents
- Inflammatory Bowel Disease (Crohn's Disease & ulcerative colitis)
- Traveler's diarrhea
The patented formulation used for PROBACTRIX(TM) consists of a proprietary
strain of non-pathogenic E. coli, derived from an organism that was originally
isolated from the intestinal microflora of healthy volunteers, preserved in a
proprietary vegetable extract formulation. The
19
technology and the processes comprise conditions that preserve M-17 E. coli in
the biologically active form with a shelf life of one year at room temperature.
Additional patents have been filed by BioBalance for technology that could
extend the product's shelf life to more than two years.
BioBalance believes that PROBACTRIX(TM) may have critical competitive
advantages relative to other probiotics and to antibiotics. PROBACTRIX(TM) is
potentially much more efficacious than Lactobacillus and other probiotics since
it is delivered in a unique, metabolically active liquid preparation that
contains large amounts of live bacteria with parameters to promote fimbriation.
These live bacteria begin to act immediately and multiply much faster than other
probiotics with excellent adhere to the intestinal mucosa. This produces an
environment of stable, normalizing bacteria unique to PROBACTRIX(TM) and results
in very powerful biological activity. In contrast, other probiotics are
primarily delivered in dry preparations and though they may contain live
bacteria upon packaging; require a period of time for recovery of biological
activity. Since diarrhea results in the accelerated passage of intestinal
content, only a small portion of dried bacteria is then retained to multiply and
become biologically active. Significantly, other probiotics are only active for
up to 8 hours with no colonization. This results in a far less pronounced and
sustainable biological effect, as compared with PROBACTRIX(TM). With
PROBACTRIX(TM), temporary colonization does occur in many patients, which is a
major factor in lining the lumen of the GI tract with friendly bacteria.
Importantly, this colonization by friendly bacteria inhibits the overgrowth of
abnormal microbial flora that could lead to potentially harmful clinical
disorders. Unlike antibiotics, BioBalance is not aware of any side effects
occurring as a result of the use of PROBACTRIX(TM) and does not believe that it
promotes antibiotic resistance.
Research on the unique liquid formulation of PROBACTRIX(TM) originated in
Russia from studies by Dr. Nellie Kelner-Padalka, a pediatrician and a key
medical advisor to BioBalance. Clinical studies conducted in Russia found liquid
food supplements containing E. coli M-17 to be effective in treating intestinal
infections of various origins. However, shelf life was short and the product had
a strong odor that made it difficult to ingest for some patients. Dr.
Kelner-Padalka later brought her studies to Israel where several technologies
were advanced that stabilized and prepared the product for commercialization.
Since the original product formulation in Russia, the smell and taste have been
improved and the shelf life at room temperature has been expanded to one year.
Clinical studies of liquid food supplements with E. coli M-17 were
performed in the former Soviet Union beginning in the late 1990's. In those
studies, and in studies conducted in Israel, these biologically active food
supplements were found efficient in the treatment of intestine infections of
various etiologies and showed no harmful side effects.
The PROBACTRIX(TM) formula was approved for use as an animal food by the
Ministry of Agriculture of Israel in September 1998. In August 2000, Tetra Pharm
(1997) Ltd., an Israeli biotechnology company, began supplying the formula to
pharmacies in Israel and continued manufacture and sale of the product until
July 2001 when Tetra Pharm agreed to cease manufacture and sale of the product
in conjunction with its agreement to sell all rights relating to the product to
BioBalance. The product was approved in Russia in November 1998 as an OTC
pharmaceutical for the treatment of a broad range of diarrheas and GI disorders.
The formula has been extensively tested and used in many species of animals
as well as on a number of human volunteers with known gastrointestinal
disorders. It has also been used for
20
the preparation of colibacterin, Bificon and other medicines and food
supplements outside the United States.
Product Pipeline BioBalance seeks to obtain rights for other agents showing
promise in treating various GI diseases. For example, BioBalance recently
acquired the GI right to several strains of Bacillus that have been shown to
exhibit natural anti-inflammatory, anti-bacterial and anti-viral properties,
which could prove extremely effective in treating GI diseases such as ulcerative
colitis. BioBalance believes that the acquired technology has significant
potential for the treatment of acute enteric infections from both bacteria and
viruses. Specifically, BioBalance believes that the Bacillus strains are
therapeutically effective against rotavirus and Campylobacter pathogens, which
are the leading causes of infectious diarrhea in the United States. See
"Intellectual Property" below.
Moreover, like BioBalance's other biotherapeutic agent, PROBACTRIX(TM),
there is extensive clinical and laboratory data on the Bacillus strains
acquired. Also, like PROBACTRIX(TM) , the potential new product has a
predecessor product, Biosporin, that was approved as a prescription drug in
Russia (the product was subsequently marketed in Russia and Ukraine). BioBalance
believes that the acquisition broadens and diversifies its product portfolio and
enhances its position as a potential leading player in the GI marketplace.
CLINICAL HISTORY
RUSSIAN STUDIES. Studies conducted in Russia of the original formulation of
the PROBACTRIX(TM) were in the format of "open label" controlled studies. The
odor of the product at the time the Russian studies were conducted limited the
manufacture of an appropriate placebo, and the product itself was deemed
unpleasant by participants in the studies. However, in preparation for its
potential marketing within the United States, the composition of PROBACTRIX(TM)
has recently been significantly improved to mask off flavors, permitting the
production of a product that has been well-tolerated by users, as well as a
suitable placebo for placebo-controlled studies.
ISRAELI STUDIES. A number of clinical studies have confirmed that
PROBACTRIX(TM) addresses various GI symptoms in both male and female patients
with known no side effects. Patients typically report a marked reduction in
abdominal symptoms and improvement in overall well being. More recently, two
pilot studies have been completed in Israel with the present formulation. The
first consisted of an open-label study in 63 patients with IBS unresponsive to
other therapy and 20 patients with Crohn's disease. After four to six weeks of
therapy, 52% of the IBS patients had an excellent response with a marked
improvement in quality of life. Of the Crohn's disease patients, 35% had an
excellent response and 30% had a partial response. No adverse events were noted
by the lead investigators (Adler, S. and Jacob, H., 2002).
A second open-label trial examined the impact of PROBACTRIX(TM) on six
patients with Crohn's disease. Three of the patients had a significant clinical
response with marked reduction in abdominal symptoms and improvement in well
being; two of the patients did not improve, and one patient reported a
progression of symptoms. (Adler, S. et al., 2003). No adverse events were noted.
A randomized, double blind pilot study conducted in 2003 found that
PROBACTRIX(TM) relieved major symptoms of IBS with no side effects. This study
involved 20 patients experiencing severe symptoms of diarrhea and constipation
with a mean duration of eight years. Eight of the 10 patients in the placebo
group dropped out due to lack of response. All 10 patients in the treatment
group completed the study and experienced significant improvement in IBS symptom
relief. No side effects were reported.
BioBalance has also been investigating the use of PROBACTRIX(TM) in
patients who are suffering from inflammation in the proximal area of the small
intestine. This newly diagnosed condition, that was recognized by scientific
collaborators, may potentially occur in many patients with IBS. BioBalance has
filed a patent application covering the use of PROBACTRIX(TM) in both preventing
and treating this particular type of GI inflammation.
CURRENT STUDIES. BioBalance has initiated a multi-center double blind,
placebo controlled clinical trial among male and female IBS sufferers. The trial
includes 210 patients and is anticipated to be completed by the fourth quarter
of 2004. In addition, an extended term, high-dose safety trial in healthy
volunteers is being fielded to corroborate the safety results found in prior
studies. The safety trial is anticipated to be completed by mid 2004.
21
VETERINARY APPLICATION. BioBalance or its predecessors has conducted numerous
clinical studies in farm animals to support the use of PROBACTRIX(TM) as a
veterinary feed additive to replace antibiotics. BioBalance believes that enough
safety and efficacy data may already be accumulated to present an attractive
case for licensing to appropriate corporate partners. BioBalance believes that a
new and potentially safer anti-diarrheal veterinary product, such as
PROBACTRIX(TM), could be particularly successful. Veterinary experts believe
that repeated applications of antibiotics often leave animals weak and growth
retarded. BioBalance believes that PROBACTRIX(TM) has a particularly high safety
and efficacy profile in many different kinds of animals. There are numerous
probiotic products in the veterinary market but lack of well-designed scientific
studies. Significantly, PROBACTRIX(TM) has been studied for its use in
preventing bacterial diarrhea in piglets and as a replacement for gentamycin and
Advocin, which are most often used to treat diarrhea in these animals.
MANUFACTURING
BioBalance has successfully transferred the manufacturing process of
PROBACTRIX(TM) from Israel to the University of Minnesota Biotech Center,
enabling sufficient quantities of PROBACTRIX(TM) to be produced in the U.S. for
clinical trials under contract manufacture. BioBalance has not yet selected
contract manufacturers for production of commercial quantities of
PROBACTRIX(TM), but may rely on a marketing partner to oversee the product's
manufacture. The process for growing E. coli and formulating the bacteria into a
probiotic agent is not complicated but requires specialized fermentation
facilities maintained and operated under FDA laboratory and manufacturing
requirements for food or drug good manufacturing procedures ("GMP's") if this
pathway is pursued.
INTELLECTUAL PROPERTY
BioBalance uses a combination of patents, trademarks and trade secrets to
protect its core technology, which is proprietary and protected by 26 patents in
the U.S. and key overseas markets. In the U.S., BioBalance has filed
applications for 16 patents covering applications of its core technology, of
which 14 have been issued. It has also filed patent applications covering
application of its core technology in Japan, European, Korea, Canada, Australia,
Mexico, Brazil, Poland, Russia and New Zealand. BioBalance is also aggressively
pursuing additional patent applications relating to its core technology. It has
also applied to register PROBACTRIX(TM) as a trademark in both the U.S. and
Israel. BioBalance is also looking to obtain rights for other agents showing
promise in treating various GI diseases.
In August 2003, BioBalance acquired the GI rights to a line of
biotherapeutic agents from NexGen Bacterium Inc. The purchase includes the
rights to two patented strains of Bacillus (B. subtilis and B. licheniformis)
for $3,600,000 which included a one-time cash payment of $250,000 and one
million shares of restricted stock of the Company valued at $3,350,000.
The acquired strains of Bacillus have been shown to exhibit natural
anti-inflammatory, anti-bacterial and anti-viral properties, which could prove
extremely effective in treating GI diseases such as ulcerative colitis.
BioBalance believes that the acquired technology has significant potential for
the treatment of acute enteric infections from both bacteria and viruses.
Specifically, BioBalance believes that the Bacillus strains are therapeutically
effective against
22
rotavirus and Campylobacter pathogens, which are the leading causes of
infectious diarrhea in the United States.
Moreover, like BioBalance's other biotherapeutic agent, PROBACTRIX(TM),
there is extensive clinical and laboratory data on the Bacillus strains
acquired. Also, like PROBACTRIX(TM), the product has a predecessor product,
Biosporin, that was approved as a prescription drug in Russia (the product was
subsequently marketed in Russia and Ukraine). BioBalance believes that the
acquisition broadens and diversifies the Company's product portfolio. It also
enhances the Company's position as a potential leading player in the GI
marketplace.
EMPLOYEES
At February 1, 2004, our home health care business had 2,061 employees, of
whom 91 are salaried, including two executive officers, a controller, 10
administrators/branch managers, 19 nurses, 12 accounting staff, six clerical
staff and 44 field staff supervisors. The remaining 1,970 employees are paid on
an hourly basis and consist of professional and paraprofessional staff.
At March 1, 2004, BioBalance had two full time employees and outsourced
most of its clinical regulatory needs through consultants. While BioBalance has
no definitive plans with respect to the size of its workforce or persons who
will fill specific positions, BioBalance plans to evaluate its needs relative to
research and development, product manufacturing and marketing and finance and
administration in light of then current alliances and partnerships and will seek
to hire personnel based on that evaluation.
None of our employees are compensated on an independent contractor basis
or represented by a labor union. We believe that our employee relations are
good.
ITEM 2. DESCRIPTION OF PROPERTIES.
All of our executive and branch offices are located in facilities leased
from unaffiliated persons.
Our corporate headquarters is located in a building containing
approximately 6,000 square feet located in Brooklyn, New York under a lease
expiring in 2005, at a monthly rental of approximately $6,800 subject to annual
increases and rent escalations based on increases in real estate taxes. Our home
health care business is administered from our corporate headquarters and 12
branch and recruitment offices located in New York (six offices) and New Jersey
(six offices) under month to month tenancies and term leases expiring from April
2004 through February 2007 at annual rentals ranging from approximately $14,000
to $55,000 and additional rent based upon increases in real estate taxes and
other cost escalations.
BioBalance's executive office is located in the Borough of Manhattan , City
of New York under a lease expiring in May 2006 at a monthly rental of
approximately $6,200.
23
ITEM 3. LEGAL PROCEEDINGS.
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on our results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our 2002 annual meeting of stockholders was held on February 13, 2004. At
the meeting, the stockholders present in person and by proxy approved all of the
proposals presented to the meeting.
The following persons were elected directors of the Company until the next
annual meeting and/or until their successors are elected and qualify:
VOTES
NAMES FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------
Jerry Braun 14,640,206 2,829,422 4,478,526
- ----------------------------------------------------------------------
Jacob Rosenberg 14,640,206 2,829,422 4,478,526
- ----------------------------------------------------------------------
Dennis O'Donnell 16,315,216 2,829,422 2,803,516
- ----------------------------------------------------------------------
H. Gene Berger 16,315,216 2,829,422 2,803,516
- ----------------------------------------------------------------------
Fred E. Nussbaum 16,315,216 2,829,422 2,803,516
- ----------------------------------------------------------------------
Mark Gray 16,315,216 2,829,422 2,803,516
- ----------------------------------------------------------------------
Mordecai H. Dicker 16,315,216 2,829,422 2,803,516
- ----------------------------------------------------------------------
The proposal submitted to the stockholders at the annual meeting seeking
ratification of the selection of Weiser LLP by the audit committee of the board
of directors as our independent auditors for the fiscal year ending December 31,
2003 was approved and adopted by the following vote:
Common Stock - For - the resolution - 18,206,442; Against - 127,705; Abstain -
1,803,982
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") SmallCap Market and is traded on
the Boston Stock Exchange. The following table sets forth the range of the last
price on NASDAQ for our
24
Common Stock for the periods indicated. Quotations do not necessarily present
actual transactions and do not reflect related mark-ups, mark-downs or
commissions:
Fiscal 2003 High Low
- ------------ ---- ---
First Quarter 4.50 2.59
Second Quarter 3.20 2.13
Third Quarter 4.39 2.07
Fourth Quarter 4.19 1.96
Fiscal 2002 High Low
- ------------ ---- ---
First Quarter 3.95 2.99
Second Quarter 3.90 3.25
Third Quarter 3.65 3.28
Fourth Quarter 3.68 3.17
HOLDERS
At March 19, 2004, we had 148 holders of record and 2,004 beneficial
holders of our Common Stock.
DIVIDENDS
The Company has not paid any cash dividends since its inception and
presently anticipates that all earnings, if any, will be retained for
development of the Company's business and that no dividends on the shares of
Common Stock will be declared in the foreseeable future. Any future dividends
will be subject to the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, the operating and financial
condition of the Company, its capital requirements, general business conditions
and other pertinent facts. Therefore, there can be no assurance that any
dividends on the Common Stock will be paid in the future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information on securities authorized for issuance under the
Company's equity compensation plans, see Part III, Item 12 of this report,
"Security Ownership of Certain Beneficial Owners and Management."
25
ITEM 6: SELECTED FINANCIAL DATA
NEW YORK HEALTH CARE HISTORICAL FINANCIAL INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
Period May 21, 2001
(Inception) Through
2003 2002 DECEMBER 2001
--------------- ------------------ -----------------
Total revenues $ 45,060,449 $ - $ -
Net income (loss) (22,052,170) (1,399,057) (452,169)
Basic earnings (loss) per share (0.91) (0.07) (0.03)
Diluted earnings (loss) per share (0.91) (0.07) (0.03)
Current assets 14,543,209 3,051,720 906,926
Total assets 21,628,968 5,259,449 2,918,836
Current liabilities 12,607,203 349,182 117,070
Long-term liabilities, net of
current portion - - -
Shareholders' equity 9,021,765 4,910,267 2,801,766
Book value per share .36 .23 .16
Dividends per share - - -
Shares used in computing earnings
(loss) per common share:
Basic 24,283,907 20,562,131 17,574,891
Diluted 24,283,907 20,562,131 17,574,891
ITEM 7: MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEARS ENDED
DECEMBER 31, 2002 AND 2001
On January 2, 2003, the Company and BioBalance completed a business
combination (a "reverse merger"), accounted for as "reverse acquisition," in
which BioBalance became a wholly-owned subsidiary of the Company and the
stockholders of BioBalance exchanged all of the outstanding shares of the common
stock of BioBalance for approximately 90% of the outstanding shares of the
Company's common stock. For accounting purposes, BioBalance is considered to be
the "accounting acquirer" in the transaction. As a result, the historical
financial information in this report is that of BioBalance, not of the Company.
Prior reports of the Company 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 the Company and BioBalance for the year
ended December 31, 2003 are being compared to the operations solely of
BioBalance for the years ended December 31, 2001 and 2002 without regard to the
Company's operations for that period.
The Company operates in two industry segments; the home health care
business, which business has a 15-year operating history, and the specialty
pharmaceutical business of BioBalance, which commenced in 2001 and is still in
its development stage. All numerical amounts and percentages in the following
discussion are approximate.
26
RESULTS OF OPERATIONS
Revenues in 2003 increased to $45,060,000 from no reported revenue for the
years 2002 and 2001.
Cost of professional care of patients in 2003 increased to $36,107,000
from no reported costs for the years 2002 and 2001.
Selling, general and administrative expenses ("SG&A") in 2003 increased to
$11,249,000 from $830,000 in 2002 and $261,000 in 2001, an increase of 1,255%
and 218% for the years 2002 and 2001 respectively. The increase in expenses for
these periods is the result of combining the selling, general and administrative
expenses (SG&A) of two industry segments, as compared to the SG&A of only one
industry segment.
The loss of $22,052,000 for the year 2003 includes a charge of $17,869,000
for the impairment of goodwill, which resulted from the valuation of assets in
conjunction with the merger transaction in January 2003.
As a result of the merger, the Company recognized goodwill associated with
the Company's home health care business. The Company has determined, based upon
the opinion of a valuation expert engaged to determine the Company's fair market
value as of the date of the merger, that goodwill was impaired to the extent of
$17,869,000. The Company determined that in the current market for home health
care businesses, the value of the Company's home health care business would not
generate the amount of goodwill recorded in connection with the merger, assuming
the business had been sold in the open market, based on current sources of
revenue and limited profit margin of the business and potential regulatory
threats to the business, which threats, if realized, could adversely affect the
economic structure of its business. The valuation expert used the capitalized
cash flow and the guidelines companies methodologies in valuing the Company. The
impairment charge of $17,869,000 is non-cash in nature and does not affect the
Company's liquidity.
For the year 2003, the Company suffered a net loss of $22,052,000 as
compared to net losses of $1,399,000 and $452,000 for the years 2002 and 2001,
respectively. The net loss of $22,052,000 for the year 2003 includes the
non-cash impairment charge of $17,869,000, and also includes a non-cash expense
in the amount of $1,591,000, resulting from an increase in the fair value of
outstanding stock options and warrants as a result of the merger, and the
issuance of warrants to consultants. The losses for the years 2002 and 2001 are,
in part, due principally to the development of the product of BioBalance to
generate any revenue for these periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, "Guarantor 's Accounting and Disclosure Requirement
for Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. This
Interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. This
Interpretation has not had a material impact on our financial condition or
results of operation
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities", which clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." Interpretation 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity to support its activities. In December 2003, the FASB concluded to revise
certain elements of FIN 46. The FASB also modified the effective date of FIN 46.
FIN 46 is to be applied for registrants who file under Regulation S-X in periods
ending after March 15, 2004. The Company is currently assessing the application
of FIN 49 on its financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150") SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of liabilities and equity. SFAS No. 150 requires that an issuer
classify an instrument that is within its scope as a liability (or as an asset
in certain circumstances). SFAS 150 is effective for financial instruments
entered into after or modified after May 31, 2003 and otherwise is effective at
the beginning of the first interim period after June 15, 2003, except for
mandatory redeemable financial instruments of nonpublic entities. The adoption
of SFAS No. 150 has not had, and is not expected to have, a material impact on
the Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The sources of liquidity and capital resources for the home health care segment
are internally generated funds, cash on hand and amounts available under a
$4,000,000 revolving credit facility relating exclusively to the home health
care segment. Currently there is no outstanding indebtedness under this
facility.
Loans under this revolving credit loan facility, which expires in November
2004, may be
27
used only for working capital of the Company's home health care business and
other costs arising in the ordinary course of that business. The Company's
obligations to pay the principal of, and interest on, loans advanced under this
facility are secured by substantially all the assets of the Company's home
health care business, and not by any assets of BioBalance. Borrowings under the
facility are permitted to the extent of a borrowing base of up to 85% of
"qualified accounts receivable" of the Company's home health care business and
there are no events of default under the relevant loan documents subject to the
lender's right to reduce the borrowing base by applying a liquidity factor
percentages based upon a calculation relating to recent collection histories of
certain classes of qualified accounts receivable. Currently, application of the
liquidity factors that formula results in 97% of qualified accounts receivable
being part of the borrowing base. At December 31, 2003 the amount available for
borrowing under this facility, based on the borrowing base on the formula was
$4,000,000. The agreement contains various restrictive convenants, which among
other things, require that the Company have a minimum tangible net worth greater
than $500,000. The Company utilizes the line of credit from time to time, and at
the present time there is no balance outstanding.
The Company has amended its loan agreement to allow it to lend money to its
subsidiary BioBalance if there is no loan outstanding loan under this agreement.
It has also been amended to allow the Company to invest money in the subsidiary
BioBalance.
The principal amount of loans borrowed under this facility bear interest
at a variable annual rate equal to the prime rate charged from time to time by
CitiBank, N.A. plus 1.5% (currently, 4% per annum) and the loan agreement
creating this facility provides for monthly payments of interest on the
outstanding loan balance on the basis of the actual number of days elapsed over
a year of 360 days.
Payments due, by period
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
-------- ----------------- ---------- ---------- -----------------
Long-Term Debt -0- -- -- -- --
Capital Lease Obligations -0- -- - - -- --
Operating Lease Obligations* $829,000 $ 386,000 $ 439,000 $ 4,000 --
Purchase Obligations -0- -- -- -- --
Other Long-Term Liabilities Reflected
on the Registrant's Balance Sheet
GAAP --0- -- -- -- --
======== ================= ========== ========== =================
Total $829,000 $ 386,000 $ 439,000 $ 4,000 -0-
* These leases generally contain provisions allowing rental obligations to be accelerated upon
default in the payment of rent or the performance of other lease obligations. These leases generally
contain provisions for additional rent based upon increases in real estate taxes and other cost
escalations.
Net cash used by operating activities for the year 2003 was $374,000, as
compared to deficits of $959,000 and $194,000 for the years 2002 and 2001,
respectively. The change in net cash used by operating activities from 2003 to
2002 is due mainly to comparing the two segments which showed an increase in
accounts payable, an increase in due to HRA, an increase in due to related
parties, an increase in non-cash compensation, offset by a net loss for the
period, as compared to only one segment which only showed a net loss for the
period. The change in cash used by operating activities from 2002 as compared to
2001 is due mainly to an increase in the net loss for the period.
Net cash provided by investing activities for the year 2003 totaled
$3,034,000, as compared to deficits of $510,000 and $597,000 for the years 2002
and 2001, respectively. The increase in 2003 is due mainly to cash acquired from
the acquisition of the BioBalance subsidiary.
Net cash provided by financing activities for the year December 31, 2003
totaled approximately $1,304,000, as compared to $3,198,000 and $1,688,000 for
the years ended December 31, 2002 and 2001 respectively. The decrease is due
mainly from a decrease in the issuance of common stock.
As of December 31, 2003, approximately $6,577,000 (approximately 30.4%) of
the Company's total assets consisted of accounts receivable from clients. As of
December 31, 2002 and 2001, BioBalance had no accounts receivable.
28
Days Sales Outstanding ("DSO") is a measure of the average number of days
required for the Company to collect its account receivable, calculated from the
date services are billed. For the year ended December 31, 2003 the Company's DSO
were 62. For the years ended December 31, 2002 and 2001, BioBalance had no
accounts receivable.
BioBalance Segment
Since its inception in 2001, BioBalance has received aggregate gross
proceeds of $6,889,000 from sales of its common stock in a series of private
placements. As of December 31, 2003, BioBalance had cash on hand of
approximately $1,100,000, all of which was available to fund operations.
BioBalance estimates that its capital requirements for 2004 will be
approximately $4,700,000, which it plans to fund via sale of equity, debt or
convertible securities of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any transactions with unconsolidated
entities whereby the Company has financial guarantees, subordinated retained
interests, derivative instruments or other contingent arrangements that expose
the Company to material continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to the Company.
Lease Commitments
As of December 31, 2003, the Company had total outstanding commitments on
noncancelable operating leases for office space of approximately $829,000.
Remaining terms on the Company's existing operating leases range from April 2004
through February 2007.
POTENTIAL REGULATORY CHANGES
Home Health Care Regulation
There have been reports concerning budget negotiations regarding potential
changes in the way the federal and state 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, some 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. See Item 1, "Business-Home Health Care Business-Reimbursement and
Governmental Regulation," for information on state regulatory activities.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that we make estimates and judgments
that affect the amounts reported of assets, liabilities, revenues and expenses
and the related disclosure of contingent assets and liabilities. Note 1 of Notes
to Consolidated Financial Statements describes the significant accounting
policies used in the preparation of the consolidated financial statements. We
base our estimates on historical experience and on various other assumptions we
believe to be applicable and reasonable under the current circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
In addition, we are periodically faced with uncertainties, the outcomes of
which are not within our control and will not be known for prolonged periods of
time. Some of these uncertainties are discussed below under "Risks and
Uncertainties."
We believe the following to be critical accounting policies that affect the
most significant estimates and judgments used in the preparation of our
consolidated financial statements:
REVENUE RECOGNITION
The Company recognizes patient service revenue on the date services are
rendered. Unbilled services represent amounts due for services rendered that had
not been billed at the end of each period because authorization had not been
received from referral source.
ACCOUNTS RECEIVABLE
Accounts receivable of our home health care business consist of trade
receivables recorded at original invoice amounts, less an estimated allowance
for uncollectible accounts. We generally extend trade credit on a short-term
basis. Accordingly, our trade receivables do not bear interest, although we may
apply a finance charge to receivables that are past due. We periodically
evaluate accounts receivables for collectibility, based on past credit history
of customers and the current financial condition of those customers. Changes in
the estimated collectibility of accounts receivables are recorded in the results
of operations for the fiscal period in which the estimate is revised. Accounts
receivables we judge to be uncollectible are offset against the allowance for
uncollectible accounts. Generally, we do not require account debtors to secure
the payment of accounts payable.
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to fiscal 2002, the Company amortized good will and intangible assets
using the straight-line method over periods of up to 10 years. Statement of
Financial Accounting Standards No.142 requires that good will and intangible
assets having indefinite lives not be amortized, but instead be tested for
impairment at least annually. Intangible assets determined to have definite
lives are amortized over their remaining useful lives.
LONG-LIVED ASSETS
We evaluate long-lived assets, such as intangible assets, equipment and
leasehold improvements, for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
estimated undiscounted cash flows from the use of these assets, When an
impairment exists, the related assets are written down to fair value.
RISKS RELATING TO THE BIOBALANCE BUSINESS
BIOBALANCE IS A DEVELOPMENT STAGE COMPANY, HAS GENERATED NO REVENUES TO DATE AND
HAS MINIMAL OPERATING HISTORY UPON WHICH IT MAY BE EVALUATED
BioBalance was incorporated in May 2001, and has generated no revenues from
operations or meaningful assets, other than its intellectual property rights.
BioBalance faces all of the risks inherent in a new business and those risks
specifically inherent in the business of developing, manufacturing, introducing
and selling a new drug or new product to the market with all of the unforeseen
costs, expenses, problems, and difficulties to which such ventures are subject.
In July 2001 BioBalance acquired the intellectual property rights with respect
to certain probiotic agents from Israeli companies engaged in the research,
development, marketing or sales of probiotic bacteria and other technology. We
cannot assure that BioBalance will be able to generate revenues or profits from
operation of its business or that BioBalance will be able to generate or sustain
profitability in the future.
FAILURE TO SECURE ADDITIONAL FINANCING COULD RESULT IN IMPAIRED GROWTH AND
INABILITY TO OPERATE PROFITABLY
BioBalance will be required to expend substantial amounts of working capital in
order to develop its proposed product and establish the necessary relationships
to implement its business plan. BioBalance believes that the proceeds from
private placements, together with available funds,
29
will be sufficient to meet the currently anticipated working capital and capital
expenditure requirements for at least the next 18-24 months. If BioBalance fails
to obtain adequate financing, BioBalance's expansion plans would need to be
scaled back. BioBalance has no agreements or arrangements with respect to any
such financing and there can be no assurance that any needed funds will be
available to BioBalance on acceptable terms or at all.
THE LOSS OF KEY EXECUTIVES OR CONSULTANTS OR THE FAILURE TO HIRE QUALIFIED
EMPLOYEES WOULD DAMAGE BIOBALANCE'S BUSINESS
Because of the highly technical nature of its business, BioBalance depends
greatly on attracting and retaining experienced management and highly qualified
and trained scientific personnel. BioBalance's future success will depend on
the continued services of its key scientific and management personnel with whom
it has entered into various agreements. BioBalance's management team has only
recently been assembled, with the retention during 2003 of Dennis O'Donnell as
President and Chief Operating Officer, Dr. Robert Hoerr as Director of Medical
and Regulatory Affairs and Dr. Eileen Bostwick as Director of Research and
Development. BioBalance has also retained the services of Dr. Nellie Kellner,
the original inventor of PROBRACTRIX, and has entered into agreements with Dr.
Harold Jacobs and Dr.Kursheed Jeejeebhoy, each of whom serves on BioBalance's
Medical Advisory Board. BioBalance competes intensely for these professionals
with other companies in its industry. If BioBalance cannot retain or hire and
effectively integrate a sufficient number of qualified scientists and
experienced professionals, such inability would have a material adverse effect
on its capacity to grow its business and develop its products through the
clinical trial process. BioBalance does not presently maintain key person
insurance for any of its key personnel.
BIOBALANCE'S PRODUCTS ARE IN DEVELOPMENT AND MAY NOT SATISFY REGULATORY
REQUIREMENTS OR BECOME COMMERCIALLY VIABLE
The product that BioBalance is currently developing will require additional
development, testing, and investment in order to market it as an ethical drug.
BioBalance cannot be sure that its product research and development efforts will
be successful, that candidates will enter clinical studies as anticipated, that
BioBalance will satisfy medical food or ethical drug requirements or that any
required regulatory approvals will be expeditiously applied for or obtained, or
that any products, if introduced, will be commercially successful. BioBalance
has conducted anecdotal and pre-clinical trials and has recently commenced a
clinical trial for its initial product and has established GRAS (Generally
Recognized As Safe) (investigational new drug) approvals to date. The results of
these pre-clinical and anecdotal trials on products under development are not
necessarily predictive of results that will be obtained from large scale
clinical testing. BioBalance cannot be sure that clinical trials of the products
under development will demonstrate the safety and efficacy of such products or
will result in a marketable product. In addition, the administration alone or in
combination with drugs of any product developed by BioBalance may produce
undesirable side effects in humans. The failure to demonstrate adequately the
safety and efficacy of a medical food or therapeutic drug product under
development could delay or prevent regulatory approval, where required, and
delay or prevent commercial sale of the product, any of which could have a
material adverse effect on BioBalance. In addition, the FDA may contest the GRAS
status of the ingredients in PROBACTRIX(TM), or contest the status of
PROBACTRIX(TM) as a medical food. Commercial formulation has yet to be developed
for PROBACTRIX(TM). BioBalance may encounter difficulties in manufacturing
process development and formulation activities that
30
could result in delays in clinical trials, regulatory submissions, regulatory
approvals, and commercialization of its product, or cause negative financial and
competitive consequences.
THE VALIDITY OF PATENTS COVERING PHARMACEUTICAL AND BIOTECHNOLOGICAL INVENTIONS
AND THE SCOPE OF CLAIMS MADE UNDER SUCH PATENTS IS UNCERTAIN; FAILURE TO SECURE
NECESSARY PATENTS COULD IMPAIR BIOBALANCE'S ABILITY TO PRODUCE AND MARKET ITS
PRODUCTS
There is no consistent policy regarding the breadth of claims allowed in
specialty pharma/medical foods patents. In addition, patents may have been
granted, or may be granted, to others covering products or processes BioBalance
needs for developing its product. If BioBalance's product or processes infringe
upon the patents, or otherwise impermissibly utilize the intellectual property
of others, BioBalance might be unable to develop, manufacture, or sell
its product. In such event, BioBalance may be required to obtain licenses from
third parties. BioBalance cannot be sure that it will be able to obtain such
licenses on acceptable terms, or at all.
FAILURE TO ASSEMBLE OR CONTRACT WITH AN ADEQUATE SALES ORGANIZATION COULD RESULT
IN A LACK OF FUTURE REVENUES
To market any of its products directly, BioBalance would have to develop a
substantial marketing and sales force. Alternatively, BioBalance may, for
certain products, attempt to obtain the assistance of companies with established
distributions systems and direct sales forces. BioBalance does not know if it
will be able to establish sales and distribution capabilities or if it will be
able to enter into licensing or other agreements with established companies to
sell its product.
BIOBALANCE OWNS NO MANUFACTURING FACILITIES AND WILL BE DEPENDENT ON THIRD
PARTIES TO MAKE ITS PRODUCT
BioBalance owns no manufacturing facilities or equipment, and employs no
manufacturing personnel. BioBalance expects to use third parties to manufacture
certain of its products on a contract basis. BioBalance may not be able to
obtain contract-manufacturing services on reasonable terms or at all. If
BioBalance is not able to contract manufacturing services, it will not be able
to make its products.
IF WE OR ANY OF OUR POTENTIAL PARTNERS FAIL TO OBTAIN REGULATORY APPROVAL FOR
OUR PRODUCTS, WE WILL NOT BE ABLE TO SELL THEM
If we determine to pursue the IND regulatory pathway for our products, we and
any pharmaceutical companies with who we may partner must conduct
time-consuming, extensive and costly clinical trials to show the safety and
efficacy of each of our drug candidates, before a drug candidate can be approved
for sale. We must conduct these trials in compliance with FDA regulations and
with comparable regulations in other countries. If the FDA or another regulatory
agency believes that we or our partners have not sufficiently demonstrated the
safety or efficacy of our drug candidates, it will not approve them or will
require additional studies, which can be time consuming and expensive and which
will delay commercialization of a drug candidate. We and any partners may not be
able to obtain necessary regulatory approvals on a timely basis, if at all, for
any of our drug candidates. Failure to receive these approvals or delays in such
receipt could prevent or delay commercial introduction of a product and, as a
result, could negatively impact our ability to generate revenue from product
sales. In addition, following approval of a drug candidate, we and our partners
must comply with comprehensive government regulations regarding how we
manufacture, market and distribute products. If we fail to comply with these
regulations, regulators could force us to withdraw a drug candidate from the
market or impose other penalties or requirements that could have a similar
negative impact.
We cannot guarantee that any of our drug candidates will be safe and effective,
will be approved for commercialization or that our partners or we can
successfully commercialize these drug candidates.
If the results of clinical testing indicate that any of our drugs under
development are not suitable for commercial use, or if additional testing is
required to demonstrate such suitability, we may need to abandon one or more of
our drug development programs.
BIOBALANCE'S PRODUCT MAY BE DENIED MEDICAL FOOD STATUS
BioBalance's regulatory strategy with its initial product is to establish its
initial product as a medical food. The advantage of this is that it is a
relatively rapid and relatively inexpensive way to reach the market. A "medical
food" is defined as a food which is formulated to be consumed or administered
under the supervision of a physician and which is intended for the specific
dietary management of a disease or condition for which instinctive nutritional
requirements, based on recognized scientific principles, are established by
medical evaluation. Perhaps most importantly, FDA's policies on medical food
products have long been in a state of flux and are not the subject of final
regulations. In the future, it is possible that FDA policies in this area could
be adopted that would prevent or severely limit BioBalance's ability to market
the PROBACTRIX(TM) product as a medical food. Overall, we cannot assure that
BioBalance will
31
satisfy the regulatory requirements applicable to medical foods. Such a failure
would result in BioBalance having to market the product as a dietary supplement
under the Dietary Supplement Health Education Act (DSHEA) or as a drug which
would have to enter the new drug regulatory pathway at either Phase I, or Phase
II, which could result in the need to raise large sums of money. In addition,
such a determination would result in a significant delay in introduction of the
product to the market.
POTENTIAL FAILURE OF PLANNED CLINICAL TRIALS TO PRODUCE STATISTICALLY
SIGNIFICANT DATA COULD IMPAIR BIOBALANCE'S ABILITY TO SUCCESSFULLY MARKET ITS
PRODUCT
Even if BioBalance is successful in establishing medical food status, there
still is substantial risk that the extensive clinical trials that BioBalance is
planning will not yield sufficient statistically significant data to make strong
marketing claims. This could adversely affect marketing efforts to the medical
community, which is traditionally resistant to new treatments even if approved
by the FDA unless also supported by statistically significant data before
recommending it to patients. This could severely limit BioBalance's ability to
successfully market its product.
POTENTIAL SIDE EFFECTS OF BIOBALANCE'S PRODUCT COULD IMPAIR BIOBALANCE'S ABILITY
TO SUCCESSFULLY MARKET ITS PRODUCT
Although no side effects of BioBalance's product have been reported, it is
possible that any time during clinical trials or patient usage, side effects may
be encountered. If they are common enough or significant enough, this could
result in BioBalance's product being withdrawn from the market.
BIOBALANCE'S PRODUCT MAY NOT BE ACCEPTED BY PHYSICIANS, INSURERS, OR PATIENTS
Patients, doctors, and insurers must accept BioBalance's product as medically
useful and cost-effective for BioBalance to be successful. Market acceptance
will require substantial education about the benefits of the product. We cannot
assure that patients, doctors or insurers will accept BioBalance's product, even
if approved for marketing, on a timely basis. If patients, the medical
community, and insurers do not accept BioBalance's product or acceptance takes
longer than anticipated, profits would be reduced.
GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT PAY FOR BIOBALANCE'S PRODUCT
The success of BioBalance's product in the United States and other significant
markets will depend, in part, upon the extent to which a consumer will be able
to obtain reimbursement for the cost of such product from governmental
authorities, third-party payors and other organizations. BioBalance cannot
determine in advance the reimbursement status of newly approved therapeutic
products. Even if a product is approved for marketing, BioBalance cannot be
sure that adequate reimbursement will be available. Also, future legislation or
regulation, or related announcements or developments, concerning the health care
industry or third party or governmental coverage and reimbursement may adversely
affect BioBalance's business. In particular, legislation or regulation limiting
consumers' reimbursement rights could have a material adverse effect on
BioBalance's revenues.
32
BIOBALANCE MAY LOSE ANY TECHNOLOGICAL ADVANTAGE BECAUSE PHARMACEUTICAL RESEARCH
TECHNOLOGIES CHANGE RAPIDLY
The pharmaceutical research field is characterized by rapid technological
progress and intense competition. As a result, BioBalance may not realize the
expected benefits of its business strategy. Businesses, academic institutions,
governmental agencies, and other public and private research organizations are
conducting research to develop technologies that may compete with those of
BioBalance. It is possible that competitors could acquire or develop
technologies that would render BioBalance's technology obsolete or
noncompetitive. BioBalance cannot be certain that it will be able to access the
same technologies at an acceptable price, or at all.
POSSIBLE PRODUCT LIABILITY LOSSES AND ADVERSE PRODUCT PUBLICITY
BioBalance, like any other wholesaler, retailer or distributor of products that
are designed to be ingested, faces an inherent risk of exposure to product
liability claims and negative publicity in the event that the use of its product
results in injury. BioBalance faces the risk that materials used in the
manufacture of the final product may be contaminated with substances that may
cause sickness or injury to persons who have used the products, or that sickness
or injury to persons may occur if the product distributed by BioBalance is
ingested in dosages which exceed the dosage recommended on the product label.
In the event that insurance coverage or contractual indemnification is not
adequate, product liability claims could have a material adverse effect on
BioBalance. The successful assertion or settlement of any uninsured claim, a
significant number of insured claims, or a claim exceeding any future insurance
coverage, could have a material adverse effect on BioBalance. Additionally,
BioBalance is highly dependent upon consumers' perception of the safety and
quality of its product as well as similar products distributed by other
companies. Thus, the mere publication of reports and negative publicity
asserting that such products may be harmful could have a material adverse effect
on BioBalance, regardless of whether such reports are scientifically supported,
regardless of whether the harmful effects would be present at the dosages
recommended for such products, and regardless of whether such adverse effects
resulted from failure to consume the product as directed.
INTENSE COMPETITION MAY RESULT IN AN INABILITY TO GENERATE SUFFICIENT REVENUES
TO OPERATE PROFITABLY
The pharmaceutical industry is highly competitive. Numerous companies, many of
which are significantly larger than BioBalance, which have greater financial,
personnel, distribution and other resources than BioBalance and may be better
able to withstand volatile market conditions, will compete with BioBalance in
the development, manufacture and marketing of probiotics for the treatment of
IBS. There can be no assurance that national or international companies will not
seek to enter, or increase their presence in the industry. In addition, large
nationally known companies (such as Novartis and GlaxoSmithKline) are in
competition with BioBalance in this industry, since they have already spent
millions of dollars to develop treatments for IBS. Increased competition could
have a material adverse effect on BioBalance, as our competitors may have far
greater financial and other resources available to them and possess extensive
manufacturing, distribution and marketing capabilities far greater than those of
BioBalance.
33
BIOBALANCE IS DEPENDENT ON NEW PRODUCTS AND CONTINUED INNOVATION
The pharmaceutical industry in general, including the market for IBS treatments,
is characterized by rapid innovation and advances. These advances result in
frequent product introductions and short product life cycles, requiring a high
level of expenditures for research and development and the timely introduction
of new products. BioBalance believes its ability to grow and succeed is
partially dependent upon its ability to introduce new and innovative products
into such markets. BioBalance currently has plans to introduce additional
products in its existing markets such as treatments for travelers' diarrhea and
Crohn's disease. We cannot assure that BioBalance will be successful in its
plans to introduce additional products to the market.
INTELLECTUAL PROPERTY RIGHTS MAY NOT PROTECT THE BIOBALANCE BUSINESS.
BioBalance has adopted an aggressive patent policy on current and future
products. It uses a combination of patents, trademarks and trade secrets to
protect its proprietary position on PROBACTRIX(TM).
We cannot assure that BioBalance's pending or future patent and trademark
registration applications will result in issued patents and registered
trademarks, or that, if issued, BioBalance's applications will be upheld if
challenged. Further, even if granted, we cannot assure that these patents and
trademarks will provide BioBalance with any protection from competitors, or,
that if they do provide any meaningful level of protection, that BioBalance will
have the financial resources necessary to enforce its patent and trademark
rights. In addition, we cannot assure that others will not independently develop
technologies similar to those covered by BioBalance's pending patents and trade
secrets, or design around the pending patents. If others are able to design
around BioBalance's patents, its results of operations could be materially
adversely affected. Further, BioBalance will have very limited, if any,
protection of its proprietary rights in those jurisdictions where it has not
effected any filings or where it fails to obtain protection through its filings.
We cannot assure that third parties will not assert intellectual property
infringement claims against BioBalance in the future with respect to current or
future products. BioBalance is responsible for defending against charges of
infringement of third party intellectual property rights by BioBalance's actions
and products and such assertion may require BioBalance to refrain from the sale
of its product, enter into royalty arrangements or undertake costly litigation.
Further, challenges may be instituted by third parties as to the validity,
enforceability and infringement of BioBalance's patents.
BioBalance's adherence to industry standards with respect to its product may
limit its opportunities to provide proprietary features which may be protected.
In addition, the laws of various countries in which BioBalance's product may be
sold may not protect BioBalance's product and intellectual property rights to
the same extent as the laws of the United States. As a consequence, BioBalance
requires all of its personnel to execute confidentiality agreements and
assignment of intellectual property agreements in its
favor.
34
THE BUSINESS COMBINATION EFFECTED BY US AND BIOBALANCE MAY NOT ACHIEVE THE
ANTICIPATED BENEFITS, IN WHICH CASE THE BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS OF THE COMBINED COMPANY COULD BE ADVERSELY EFFECTED
We must overcome significant issues in order to realize any benefits or
synergies from the merger transaction, including the timely, efficient and
successful execution of a number of post-transaction events. Key events include:
- Managing the disparate operations of two companies doing business in
very different sectors of the health care market;
- Retaining, recruiting, and assimilating key personnel for each
company;
- Obtaining financing needed to fund BioBalance's product development,
regulatory compliance, manufacturing and marketing activities; and
- Maintaining good working relationships between the management's of the
Company and BioBalance, as well as uniform standards, controls,
procedures and policies.
The execution of these tasks will involve considerable risks and may not be
successful. These risks include:
- The potential disruption of the combined companies' ongoing business
and distraction of their respective management's;
- Unanticipated expenses related to product development, regulatory
compliance, manufacturing and marketing;
- The impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
- Potential unknown liabilities associated with the probiotic business.
We may not succeed in addressing these risks or any other problems encountered
in connection with the transaction. We cannot assure that we will realize any of
the anticipated benefits of the transaction. If we are unable to adequately
address any of the risks relating to integration of the companies, we may be
required to substantially alter, or possibly divest, the operations of either
our home health care business or probiotic business.
Risk Relating to Home Health Care Business
OUR INDIRECT DEPENDENCY UPON REIMBURSEMENT BY THIRD-PARTY PAYORS; HEALTH CARE
REFORM COULD REDUCE REVENUEs
More than 30% of our revenues of are paid by Certified Home Health Agencies and
Long-Term Home Health Care Programs, as well as other clients who receive their
payments from "third-
35
party payors," such as private insurance companies, self-insured employers and
HMOs. Our revenues and profitability, like those of other home health care
companies, are affected by the continuing efforts of third-party payors to
contain or reduce the costs of health care by lowering reimbursement or payment
rates, increasing case management review of services and negotiating reduced
contract pricing. Because home care is generally less costly than hospital-based
care, home nursing and home care providers have benefited from cost containment
initiatives aimed at reducing the costs of medical care. However, as
expenditures in the home health care market continue to grow, cost containment
initiatives aimed at reducing the costs of delivering services at non-hospital
sites are likely to increase. A significant reduction in coverage or payment
rates of public or private third-party payors would reduce New York Health
Care's revenues and profit margins. While we are not aware of any substantive
changes in the Medicare or Medicaid reimbursement systems for home health care
which are about to be implemented, revised budget plans of New York State or the
federal government could result in limitation or reduction in the reimbursement
of home care costs and in the imposition of limitations on the provision of
services which will be reimbursed. Moreover, third party payors, particularly
private insurance companies, may negotiate fee discounts and reimbursement caps
for services we provide.
SLOW PAYMENTS AND POSSIBLE BAD DEBTS MAY CAUSE WORKING CAPITAL SHORTAGES AND
OPERATING LOSSES.
We generally collect payments from our contractors within one to three months
after services are rendered, but pay our obligations on a current basis. This
timing delay may cause working capital shortages from time to time. We have a
secured revolving credit facility, which may be available to cover these
periodic shortages. Borrowings or other methods of financing may not be
available when needed or, if available, may not be on terms acceptable to us.
Although we have established a bad debt reserve for uncollectible accounts, any
significant increase in bad debts would damage our profitability.
PROFESSIONAL LIABILITY INSURANCE MAY BECOME INADEQUATE, UNAVAILABLE OR TOO
COSTLY
The administration of home care and the provision of nursing services entails
certain liability risks. We maintain professional liability insurance coverage
with limits of $1,000,000 per claim and $3,000,000 annual aggregate, with an
umbrella policy providing an additional $5,000,000 of coverage. Although we
believe that the insurance we maintain is sufficient for its present operations,
professional liability insurance is increasingly expensive and sometimes
difficult to obtain. A successful claim against us in excess of, or not covered
by, our insurance could adversely affect our business and financial condition.
Claims against us, regardless of their merit or eventual outcome, could also
adversely effect our reputation and home health care business.
CHANGES IN FEDERAL AND STATE REGULATION COULD INCREASE COSTS AND REDUCE REVENUES
Our home health care business is subject to substantial regulation at the state
level and also under the federal Medicare and Medicaid laws. In particular, we
are subject to state laws regulating home care, nursing services, health
planning and professional ethics, as well as state and federal laws regarding
fraud and abuse in government funded health programs. Changes in the law or new
interpretations for existing laws can increase the relative costs of doing
business and reduce
36
the amount of reimbursement by government and private third-party payors.
Although we have not experienced any difficulties to date complying with
applicable laws, rules or regulations, our failure to obtain, renew or maintain
any required regulatory approvals or licenses could have a material adverse on
us and could prevent us from offering our existing services to patients or from
further expansion.
Pending legislation in both the States of New York and New Jersey could
substantially impact the conduct of our home health care business and
potentially adversely affect the cost of operations and available reimbursement.
Under the pending legislation in New Jersey, home health care aides would be
required to register with various State-funded home care councils; the home care
councils would have the ability to employ home health care aides and provide
referrals to consumers seeking the services of home health care aides; the State
could assess and collect fees from home health care agencies to pay the costs of
operating the home care councils, and the State could fix minimum wages for home
health care aides, as well as place caps on permissible administrative expenses.
Under the pending legislation in New York, certain reporting requirements, as
well as caps on permissible administrative expenses, would be imposed. If the
pending legislation becomes law its current form, costs of operations of our
home health care business in both New York and New Jersey are likely to
increase, and we would not be able to conduct our home health care business in
New Jersey on a profitable basis.
INTENSE COMPETITION COULD RESULT IN LOSS OF CLIENTS, LOSS OF PERSONNEL, REDUCED
REVENUES AND INABILITY TO OPERATE PROFITABLY
The home health care industry is marked by low entry costs and is highly
fragmented and competitive. We compete for personnel with hospitals and nursing
homes, and we also compete for both personnel and business with other companies
that provide home health care services, most of which are large established
companies with significantly greater resources, access to capital and greater
name recognition than we have. Our principal business competitors include
Gentiva Health Services, Premiere Health Services, National Home Health Care,
Patient Care, Inc., and Personal Touch Home Care Services, Inc. We also compete
with many other small temporary medical staffing agencies. Competition for
qualified paraprofessional personnel in the New York Metropolitan area is
intense. New York Health Care believes that, given the increasing level of
demand for nursing services, significant additional competition can be expected
to develop in the future.
DEPENDENCE ON MAJOR CUSTOMERS AND REFERRAL SOURCES MAY RESULT IN SUBSTANTIAL
DECLINES IN REVENUES IF CUSTOMERS ARE LOST.
The development and growth of our home care and nursing businesses depends to a
significant extent on our ability to establish close working relationships with
hospitals, clinics, nursing homes, physician groups, HMO's, governmental health
care agencies and other health care providers. Many of our contractual
arrangements with customers are renewable annually. Existing relationships may
not be successfully maintained and additional relationships may not be
successfully developed and maintained in existing and future markets. Our 10
largest customers accounted for approximately 86.8% of gross revenues during the
year ended December 31, 2003. One referral source, New York City Medicaid, was
responsible for approximately 50.45% of our gross revenues for the year ended
December 31, 2003. The loss of, or a significant reduction in, referrals by
these sources, as well as certain other key sources,
37
would have a material adverse effect on results of operations of our home health
care business.
LOSS OF KEY PERSONNEL MAY RESULT IN IMPAIRMENT OF THE ABILITY TO DELIVER
SERVICES OR MANAGE OPERATIONS
Our success in the home health care business to a large extent depends upon the
continued services of Jerry Braun, our President / Chief Executive Officer, and
Jacob Rosenberg, our Vice President, Chief Operating / Chief Financial Officer.
The BioBalance merger resulted in a change in control, which reduced the
percentage of voting shares held by Messrs. Braun and Rosenberg and triggered
provisions in their respective employment agreements which provide significant
monetary and other benefits to them. Although the Company has entered into
employment agreements with Messrs. Braun and Rosenberg which expire in 2009, and
the Company is the sole beneficiary of a $5,000,000 life insurance policy
covering Mr. Braun and a $3,000,000 life insurance policy covering Mr.
Rosenberg, the loss of the services of either of these executive officers for
any reason, including, but not limited, to a violation of their employment
agreements, would damage us. The success of our home health business will also
depend, in part, upon our ability in the future to attract and retain additional
qualified licensed health care, operating, marketing and financial personnel.
Competition in the home health care industry for such qualified personnel is
often intense and we may not be able to retain or hire the necessary personnel.
OUR INABILITY TO IDENTIFY SUITABLE LOCATIONS OR PERSONNEL OR TO SECURE FINANCING
MAY IMPAIR FUTURE GROWTH
Our ability to expand our home health care business depends on a number of
factors, including the availability of desirable locations and qualified
personnel, the availability of acquisition candidates and our ability to finance
such expansion. Our establishment of additional branch offices and any future
acquisitions by us may involve the use of cash, debt or equity securities, or a
combination thereof. We may be required to obtain additional financing to
achieve such objectives. That financing may not be available, or, if available,
may be on unacceptable terms. We are not experienced in operating health care
businesses unrelated to its current businesses and we may be unable to
successfully operate any such unrelated health care business.
RISKS RELATING TO OUR COMMON STOCK
POSSIBLE VOLATILITY OF COMMON STOCK MAY RESULT IN LOSSES TO SHAREHOLDERS
The trading price of our common stock has been subject to significant
fluctuations and, since the Merger in January 2003, has ranged from a high of
$4.50 to a low of $1.96 for the year of 2003. The price of our common stock is
likely to continue to be affected by various factors, including but not limited
to the financial results of the BioBalance merger, and the results of our
development efforts of PROBACTRIX(TM) and other products, variations in
quarterly results of operations, announcements of new contracts or services or
acquisitions by the Company or its competitors, governmental regulatory action,
general trends in the industry and other factors, such as extreme price and
volume fluctuations which have been experienced by the securities markets from
time to time in recent years.
38
OUR FAILURE TO SATISFY NASDAQ LISTING STANDARDS COULD RESULT IN REDUCED
LIQUIDITY AND LOWER STOCK PRICE
Our common stock is listed for trading on the NASDAQ SmallCap Market and the
Boston Stock Exchange. In order to qualify for continued listing on the NASDAQ
SmallCap Market, we, among other things, must have $2,500,000 of shareholders
equity and a minimum bid price of $1.00 per share and comply with certain
non-quantitative criteria established by Nasdaq. If we are unable to satisfy the
requirements for quotation on NASDAQ, it is anticipated that our common stock
would be quoted in the over-the-counter market National Quotation Bureau ("NQB")
"pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, the
liquidity of the common stock could be impaired, not only in the number of
shares which could be bought and sold, but also through delays in the timing of
transactions, reduction in security analysts' and news media's coverage and
lower prices for our common stock than might otherwise be attained. In addition,
if the common stock is delisted from NASDAQ it might be subject to the
low-priced security or so-called "penny stock" rules that impose additional
sales practice requirements on broker-dealers who sell such securities. For any
transaction involving a penny stock the rules require, among other things, the
delivery, prior to the transaction, of a disclosure schedule required by the SEC
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks held in the
customer's account.
In the event our common stock were subsequently to be classified as a penny
stock, the market liquidity for the common stock could be severely affected. In
such an event, the regulations relating to penny stocks could limit the ability
of broker dealers to sell the common stock and, thus, the ability of
shareholders to sell their shares in the market.
ISSUANCE OF PREFERRED STOCK COULD REDUCE THE VALUE OF COMMON STOCK AND COULD
HAVE ANTI-TAKEOVER EFFECTS
We are authorized by our certificate of incorporation to up to 5,000,000 shares
of preferred stock value, on terms which may be fixed by our board of directors
without further shareholder action. There are now 590,375 shares of Series A
convertible preferred stock currently issued and outstanding which can be
converted, on a 1-for-2/3rds basis, into shares of common stock. The terms of
any new series of preferred stock, which may include priority claims to assets
and dividends and special voting rights, could adversely affect the rights of
holders of the common stock. The issuance of an additional series of preferred
stock, depending upon the rights and preferences of such series, could make the
possible takeover of the Company or the removal of management of New York Health
Care more difficult, discourage hostile bids for control of New York Health Care
in which shareholders may receive premiums for their shares of common stock, or
otherwise dilute the rights of holders of common stock and the market price of
the common stock.
ITEM 7A: QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent accountants report thereon of Weiser LLP, for the year ended 2003
and from Holtz Rubenstein for period ending December 31, 2001 and year ended
December 31, 2002 appears herein. See Index to Financial Statements appearing on
page 77.
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, with the participation of the
Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"),
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report in reaching a reasonable
level of assurance that the information required to be disclosed by the Company
in the reports that it files with the Securities and Exchange Commission is
recorded, processed, summarized and reported within the time period specified in
the Securities and Exchange Commission's rules and forms. Based upon that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
As required by Exchange Act Rule 13a-15(d), the Company's management, including
the Chief Executive Officer and Chief Financial Officer, also conducted an
evaluation of the Company's internal control over financial reporting to
determine whether any changes occurred during the fourth fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation
the Company refined the use of BioBalance's accounting software system to more
accurately reflect the allocation of expenses to individual accounts. Moreover,
as a result of the evaluation and after taking into account the indictment of
a former member of management of, the Company's wholly-owned subsidiary
BioBalance during the fourth fiscal quarter of 2003, authorization for payment
of BioBalance invoices was transferred to specified officers of the Company.
There were no other changes during the fourth fiscal quarter of 2003.
Please note that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
Name Age Position
- ----- --- --------
Jerry Braun 46 President, Chief Executive Officer and a Director
Jacob Rosenberg 45 Vice President, Chief Operating Officer,
Chief Financial and Accounting Officer,
Secretary and a Director
Dennis O'Donnell 48 Director and President and Chief Operating
Officer of The BioBalance Corp.
H. Gene Berger 63 Director
Fred E. Nussbaum 56 Director
40
Mordecai H. Dicker 43 Director
Mark Gray 45 Director
Jerry Braun has been the President and Chief Executive Officer and a
director of the Company since its inception in 1983 and was Chief Operating
Officer of the Company from 1983 to 1995.
Jacob Rosenberg, has been Secretary and a director of the Company since
its inception in 1983, Vice President and Chief Operating Officer of the Company
since 1995 and Chief Financial Officer of the Company since January 2000.
Dennis O'Donnell has been a director of the Company since January 2004,
Chief Operating Officer of the Company's BioBalance subsidiary since May 2003
and President of BioBalance since November 2003. Mr. O'Donnell has more than 20
years of general management, marketing and business development experience in
the pharmaceutical, consumer healthcare and nutritional industries, principally
with Wyeth (formerly American Home Products) from 1983 to 2002, including as
manager of the Wyeth's Respiratory and GI/Topicals Divisions from 1994 to 1996;
Senior Vice President of Global Business Development & Strategic Planning for
Wyeth's OTC Drug Division from 1996 to 1998 (where he identified drugs, devices
and medical foods for potential acquisition); and Executive Vice President and
General Manager of Wyeth's Solgar division, a manufacturer of premium dietary
supplements, probiotics and specialty nutritional products. From February 2002
to April 2003, he was a consultant to the pharmaceutical and consumer healthcare
industries. Mr. O'Donnell is a registered pharmacist, with a B.S. in Pharmacy
from St. John's University and an MBA in Marketing & Finance from New York
University's Stern School of Business.
H. Gene Berger has been a director of the Company since 1998. Since 1981,
Mr. Berger has been the president of Jay Isle Associates, a consulting firm to
the health care industry. During the period 1969 to 1981, Mr. Berger was
employed by Pfizer, Inc. Pharmaceutical Division, in various senior level
management positions. From 1991 to 1997, Mr. Berger was employed by Transworld
Health Care, Inc., a public company, which is a regional provider of alternate
site health care services and products, in a number of capacities including as
Executive Vice President, President, Chief Operating Officer and Chief Executive
Officer. Additionally, Mr. Berger has been CEO and President of six other
companies in the health care industry.
Fred E. Nussbaum has been a director of the Company since January 2004.
Mr. Nussbaum is licensed as a certified public accountant in New York and has,
for more than the past five years, provided accounting and auditing services to
individuals, partnerships, corporations and not-for-profit and charitable
organizations. From 1997 to 1999 Mr. Nussbaum was the Chief Financial Officer of
DEB-EL Foods Corporation, a large producer of eggs and egg-based products in the
Northeast. Mr. Nussbaum is a member of the American Institute of Certified
Public Accountants as well as the New York State Society of Certified Public
Accountants. He has a BBA from the Bernard M. Baruch College of the City
University of New York.
Mordecai H. Dicker has been a director of the Company since January 2004.
From 1998 to 1999, Mr. Dicker was the Company's Program Director, responsible
for payroll, billing,
41
accounts receivable and cash receipts. From 2000 to 2003, Mr. Dicker was
Administrator of the Sayreville Senior Living Center, Inc., a 230-bed long-term
care facility. Since 2003, he has been the Administrator of the Franklin Care
Center, a 180-bed long-term care facility.
Mark Gray has been a director of the Company since January 2004. From 1985
to 2000, Mr. Gray was an independent computer consultant serving insurance,
banking, technology and consumer goods corporations in the development and
management of various computer systems and software. From 2000 to 2003, Mr. Gray
was the Director of Clinical Services for CATECG Medical Services, PC, a
provider of mobile diagnostic cardiology and neurology services to hospitals and
other medical care facilities in the New York metropolitan area. Since 2003, he
has been Executive Vice President of ESF Marks, LLC, a computer software
company. Mr. Gray has a B.A. in Medical Computer Science from Brooklyn College
of the City University of New York.
Directors hold office until the next annual meeting of the stockholders and
until their successors have been duly elected and qualified, or until death,
resignation or removal. Executive officers are elected by the Board of Directors
on an annual basis and serve at the discretion of the Board. All of the
Company's executive officers devote approximately 90% of their time to the
business affairs of the Company. There is no family relationship between any of
the Company's directors or executive officers.
AUDIT COMMITTEE
The Board of Director has a standing Audit Committee. The members of the
Audit Committee are H. Gene Berger, Mordecai Dicker and Fred E. Nussbaum. Fred
E. Nussbaum will serve as Chairman of the Audit Committee and as the audit
committee financial expert. The Board has determined that each member of the
Audit Committee, including the Company's audit committee financial expert , is
"independent," as that term is defined in the applicable NASDAQ listing
standards and SEC rules.
SECTION 16(A) COMPLIANCE REPORTING
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and holders of more than 10% of the Company's common stock to
file reports with the SEC about their ownership of common stock and other
securities of the Company. These persons are required by SEC rules to furnish
the Company with copies of all Section 16(a) forms they file. The Company is
required to identify anyone who filed a required report late during 2003.
Based solely on our review of forms we received and written
representations from reporting persons stating that they were not required to
file these forms, the Company believes, that during 2003, all Section 16(a)
filing requirements were satisfied on a timely basis.
CODE OF ETHICS
The Company has adopted a Code of Ethics for Senior Financial Officers
which applies
42
to the Company's Chief Executive Officer and Chief Financial and Principal
Accounting Officer. A copy of this Code is filed with this report as Exhibit
14.1.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31, 2001,
2002 and 2003, the cash compensation paid by the Company, as well as certain
other compensation paid with respect to those fiscal years, to the Company's
Chief Executive Officer and to each of the three other most highly compensated
executive officers of the Company and its BioBalance subsidiary, and to Paul
Stark, who served as President of BioBalance until November 2003, and whose
total salary and bonuses for the fiscal year 2003, in all capacities in which
served, was $100,000 or more (collectively, the "Named Officers"):
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------ ----------------------
NAME AND
PRINCIPAL AWARDS SECURITIES PAYOUTS
POSITION OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION
($) ($) ($) ($) AWARDS($) (#) ($)
----------------------------------------------------------------------------------------
Jerry Braun (1)
President and Chief
Executive Officer 2003 $ 333,872 $ 35,000 $44,085 (1) 200,000 Shares $412,500 (3)
- -------------------------------------------------------------------------------------------------------------------
Jacob Rosenberg (2)
Chief Operating Officer
and Chief Financial 2003 $ 257,557 $ 30,000 $46,447 (2) 200,000 Shares $337,500 (3)
Officer
- -------------------------------------------------------------------------------------------------------------------
Dennis O'Donnell (4)(5)
President and Chief 2002 $ 0 $ 0 $ 0 $ 0
Operating Officer of 2003 $ 126,923 $ 0 $12,198 (4) 200,000 Shares $ 0
BioBalance
- -------------------------------------------------------------------------------------------------------------------
Paul Stark (6)(7)
President of 2002 $ 100,000 $ 0 $16,267 (6) $ 0
BioBalance 2003 $ 101,450 $ 0 $18,536 (6) 100,000 Shares $ 0
- -------------------------------------------------------------------------------------------------------------------
(1) Includes $31,081 of medical insurance premiums paid on behalf of such
individual, $3,004 for automobile and automobile-related costs, including
insurance, incurred on behalf of such individual and $10,000 in expense
allowance for the year ended 2003.
(2) Includes $31,081 of medical insurance premiums paid on behalf of such
individual, $5,366 for automobile and automobile-related costs, including
insurance, incurred on behalf of such individual and $10,000 in expense
allowance for the year ended 2003.
(3) Change in control payment. This change in control took place with the
merging of the Company and BioBalance on January 2, 2003.
(4) Includes $12,198 of medical insurance premiums paid on behalf of such
individual for the fiscal year 2003.
(5) Dennis O'Donnell became President of BioBalance on November 26, 2003.
(6) Includes $18,536 and $16,267 of medical insurance premiums paid on behalf
of such individuals for the fiscal years 2003 and 2002.
43
(7) Paul Stark resigned as President of BioBalance on November 20, 2003.
OPTION/SAR GRANTS IN 2003
The following table provides certain information with respect to stock options
granted to the Named Officers.
Individual Grants
- ----------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Price Expiration Grant Date
Name Granted Fiscal Year (1) Per Share ($/sh) Date Present Value(2)
- ---------------- ------------- --------------- ------------------- ----------- ----------------
Jerry Braun 200,000 23.6 % 3.14 03/07/13 $496,000
40,000 4.72 3.77 09/26/13 $ 68,800
Jacob Rosenberg 200,000 23.6 3.14 03/07/13 $496,000
40,000 4.72 3.77 09/26/13 $ 68,800
Dennis O'Donnell 200,000 23.5 2.48 06/02/13 $ 82,230
Paul Stark(3) 100,000 11.8 3.14 03/07/13 $248,000
- ----------------------------------------------------------------------------------------
(1) Based on a total of options granted to employees of the Company in 2003,
including the Named Officers.
(2) Estimated fair value of each option grant on the date of grant was
determined by use of the Black-Scholes option pricing model.
(3) The right to exercise this option has terminated pursuant to the terms of
the Company's Incentive Performance Plan.
44
STOCK OPTION EXERCISES AND YEAR END VALUES
The following table sets forth, for the Named Officers, the number of shares
covered by stock options as of December 31, 2003, and the value of
"in-the-money" stock options, which represents the positive spread between the
exercise price of a stock option and the market price of the shares subject to
such option on December 31, 2003. No options were exercised by the Named
Officers in 2003.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Fiscal Year-End Fiscal Year-End
Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ---------------- ------------- -------------- ------------------ -------------------------
Jerry Braun 62,500/0 Shs $ 0
36,666/0 Shs 7,700
23,333/0 Shs 29,400
33,333/0 Shs 59,333
33,333/0 Shs 56,333
66,666/0 Shs 133,999
66,666/0 Shs 128,665
66,666/0 Shs 124,665
66,666/0 Shs 118,665
200,000/0 Shs 0
40,000/0 Shs 0
Jacob Rosenberg 36,666/0 Shs 7,700
23,333/0 Shs 29,400
33,333/0 Shs 59,333
33,333/0 Shs 56,333
66,666/0 Shs 133,999
66,666/0 Shs 128,665
66,666/0 Shs 124,665
66,666/0 Shs 118,665
200,000/0 Shs 0
40,000/0 Shs 0
Dennis O'Donnell 33,333/166,667 Shs 9,333/46,666
Paul Stark 100,000/0 Shs 0
COMPENSATION OF DIRECTORS
Directors who are employees of the Company or its BioBalance subsidiary do
not receive any additional compensation for their services as directors. Each
non-employee director of the Company is paid a fee of $2,000 per month, plus
$1,000 for each Board meeting attended and $500 for attendance at each meeting
of a committee of the Board of Directors of which such director is a member.
The Company also reimburses each director for all expenses of attending such
meetings.
No additional compensation of any nature is paid to employee directors.
The Company also issues common stock purchase warrants to non-employee
directors from time to time in recognition of their services.
EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL ARRANGEMENTS
The Company entered into amended employment agreements with Messrs. Jerry
Braun and Jacob Rosenberg for employment terms that expire on December 26, 2009.
Mr. Braun's amended agreement provides for his service as President and
Chief Executive Officer in consideration of (i) initial annual base compensation
of $233,000 and annual salary increases of 10%; (ii) reimbursement of business
expenses; (iii) participation in the
45
Company's bonus, 401(k) and stock option plans; (iv) $750 per month automobile
leasing cost allowance and reimbursement of automobile insurance and maintenance
costs; (v) $10,000 per year allowance for the cost of insurance and other items
(which has been in effect since January 2002); and (vi) 48 days of compensated
absences per year.
Mr. Rosenberg's employment agreement has the same general terms and
conditions as Mr. Braun's, except that he serves as Vice President, Secretary
and Chief Operating Officer, and his initial annual base compensation is
approximately $186,000.
Each employment agreements provide that if the executive's service as a
member of the Board of Directors of the Company terminates for any reason, other
than death, the executive and the Company will enter into a consulting
agreement, commencing on the date of termination, whereby the executive will
agree to provide consulting services to the Company on an as-needed basis for a
period of not less than five years. As compensation for those services, the
executive will be granted an option for 10 years to acquire 500,000 shares of
the Company's common stock at a price per share equal to the closing price of
the Company's common stock on the date of termination. This consulting agreement
also provides that the Company will register the shares of common stock
underlying the option for sale in public markets no later than 90 days after
termination.
These employment agreements also provide additional benefits if a "change
of control" of the Company occurs. A "change of control" is deem to have
occurred if:
- the Company enters into an agreement for its merger or consolidation
with another corporation or for the sale of all or substantially all of it's
assets, followed by termination of the executive's employment within 12 months;
- persons, other than the Company's then current shareholders, acquire
(1) a majority in book value of the Company's assets, (2) a majority of its
common stock, (3) the power to designate a majority of the Company's Board of
Directors, or (4) otherwise acquire the ability to control the Company's
management ; or
- any other event (or series of events) occurs which, in the opinion of
the Company's board of directors, will, or is likely to, if carried out, result
in a change of control of the Company.
In the event of a change of control,
- the unexercised stock options of each executive will immediately vest
and be exercisable in full;
- the Company will pay each executive a lump-sum payment equal to 2.99
times the average of their annual base salary and bonus for the previous five
years and the cost of either maintaining the lease or transferring ownership of
the automobile for which the Company had been paying the leasing costs for the
executive, and
- to the extent any payments received by an executive from the Company
subjects the
46
executive to an excise tax under Section 499 of the Internal Revenue Code, the
Company will make an additional payment to the executive so that the executive's
net after-tax compensation is not reduced by the excise tax.
All "change of control" compensation is limited by each employment agreement, to
the extent the compensation may qualify as a "parachute payment" under Section
280G of the Internal Revenue Code, to the maximum amount that may be paid to
that executive without any part of that compensation being deemed to be an
"excess parachute payment." That maximum amount is generally determined by
multiplying the average of the executive's annual base salary and bonus for the
previous five years by a factor of three. This change of control took place on
January 2, 2003 when the Company merged with BioBalance.
Messrs. Braun and Rosenberg also participate, together with all other
salaried employees of the Company's home health care business, in a bonus plan
pursuant to which 10% of the annual pre-tax net income of the Company's home
health care business income is contributed to a bonus pool which is
distributable to these employees in amounts determined by the Company's
Compensation Committee.
Savings and Equity Compensation Plans
401(k) Plan
The Company maintains an Internal Revenue Code Section 401(k) salary
deferral savings plan (the "Plan") for all of its eligible New York employees
who have been employed for at least one year and are at least 21 years old
(effective July 1, 1996, field staff employees at the Company's Orange County
branch office in Newburgh, New York ceased being eligible to participate in the
Plan). Subject to certain limitations, the Plan allows participants to
voluntarily contribute up to 15% of their pay on a pre-tax basis. Under the
Plan, the Company may make matching contributions on behalf of the pre-tax
contributions made by participants.
47
Equity Compensation Plans
The following table summarizes with respect to options and warrants under
the Company's equity compensation plans at December 31, 2003:
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
- -------------------- -------------------- ----------------- --------------------------
Equity compensation 1,515,000 1.93 3,144,500
plans approved by
security holders(1)
Equity compensation 1.665,651 2.57
plans not approved
by security
holders(2)
Total 3,180,651
(1) Represents shares of the Company's common stock issuable pursuant to the
Company's Performance Incentive Plan, amended (the "Option Plan").
The Company's board of directors and stockholders approved and adopted the
Option Plan in March 1996. The Company's stockholders approved amendments to
the Option Plan (previously adopted by the board of directors) in 1998, 1999,
2000 and 2002. The Option Plan is administered by the standing compensation
committee (the "Committee") of the board of
48
directors (the "Committee"), which is authorized to grant incentive stock
options and non-qualified stock options to selected employees of the Company and
to determine the participants, the number of options to be granted and other
terms and provisions of each option. Options become exercisable in whole or in
part from time to time as determined by the Committee, but in no event may a
stock option be exercisable prior to the expiration of six months from the date
of grant, unless the grantee dies or becomes disabled prior to the end of the
period. Stock options have a maximum term of 10 years from the date of grant,
except that the maximum term of an incentive stock options granted to an
employee who, at the date of grant, is a holder of more than 10% of the
outstanding common stock (a "10% holder") may not exceed five years from the
date of the grant. The exercise price of an incentive stock option or
nonqualified option granted under the Option Plan may not be less than 100% of
the fair market value per share of the common stock at the date of grant, except
that the exercise price of an incentive stock options granted to a 10% holder
may not be less than 110% of the fair market value. The exercise price of
options must be paid in full on the date of exercise and is payable in cash or
in shares of Common Stock having a fair market value on the exercise date.
(2) Includes 62,500 shares of common stock issuable upon exercise of a
non-plan option granted to an executive officer of the Company in 1996 at
an exercise price of $4.50 per share which expires in 2006, 67,500 shares
of common stock issuable upon exercise of warrants granted to non-employee
directors at exercise prices not less than 100% of the fair market value
per share of the common stock at the respective dates of grant and
generally expiring three to 10 years from the date of grant, 949,200
shares of common stock issuable upon exercise of warrants issued to
consultants in consideration for services performed or to be for the
Company or BioBalance at exercise prices not less than 100% of the fair
market value per share of the common stock at the respective dates of
grant; and 586,452 shares of common stock issuable upon exercise of
non-plan options and warrants issued by the Company in exchange for
non-plan options and warrants issued by BioBalance in connection with the
Company's acquisition of BioBalance. Some of these warrants vest
immediately and some warrants vest monthly.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding shares of the
Common Stock beneficially owned as of March 14, 2003 by (i) each person, known
to the Company, who beneficially owns more than 5% of the Common Stock, (ii)
each of the Company's directors and (iii) all officers and directors as a group:
Shares Percentage
Name and Address of Beneficially of Stock
Beneficial Owner Owned(l) Outstanding(l)
- ---------------------------- ------------- ---------------
Jerry Braun (2) 1,303,759 5.06%
929 East 28th Street
Brooklyn, NY 11210
Jacob Rosenberg (3) 867,130 3.38%
932 East 29th Street
Brooklyn, NY 11210
49
Dennis O'Donnell (4) 279,175 *
66 South Stone Hedge Drive
Basking Ridge, NJ 07920
H. Gene Berger (5) 47,500 *
11 Fenimore Drive
Scotch Plains, NJ 07076
Fred E. Nussbaum *
960 East 27 Street
Brooklyn, NY 11210
Mark Gray *
872 East 27 Street
Brooklyn, NY 11210
Mordecai Dicker *
2923 Bailey Court
Far Rockaway, NY 11691
Pinchas Stefansky (6) 2,024,000 8.11%
Hershey Holdings
Leon House
Secretary's Lane
P.O. Box 450, Gibraltar
Douglas Andrew Ryan (7) 1,800,000 7.21%
Birizma Associates
c/o Tallhurst Ltd.
P.O. Box 795, Gibraltar
Bernard Korolnick (8) 1,729,208 6.93%
KPT Partners
c/o Alton Management
Splelhof 14A, Postach 536
8750 Glarus, Switzerland
Rivvi Rose (9) 1,950,000 7.81%
Nekavim Investors
1/1 Library Run
P.O. Box 317, Gibraltar
All officers and directors
as a group (7 persons)(1)(2)
(3)(4)(5) 2,625,289 10.53%
- ----------------
* Less than one percent (1%).
50
(1) The shares of Common Stock owned by each person or by the group, and the
shares included in the total number of shares of Common Stock outstanding,
have been adjusted in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, to reflect the ownership of shares
issuable upon exercise of outstanding options, warrants or other common
stock equivalents which are exercisable within 60 days. As provided in
such Rule, such shares issuable to any holder are deemed outstanding for
the purpose of calculating such holder's beneficial ownership but not any
other holder's beneficial ownership.
(2) Includes a total of 655,833 shares issuable upon the exercise of stock
options granted to Mr. Braun and 147,594 Shares issuable upon the
conversion of shares of Class A Convertible Preferred Stock.
(3) Includes a total of 593,333 shares issuable upon the exercise of stock
options granted to Mr. Rosenberg and 73,797 Shares issuable upon the
conversion of his shares of Class A Convertible Preferred Stock.
(4) Includes a total of 200,000 shares issuable upon the exercise of stock
options granted to Mr. O'Donnell.
(5) Includes 47,500 shares issuable upon the exercise of common stock purchase
warrants granted to Mr. Berger.
(6) All shares are owned of record by Hershey Holdings, of which Mr. Stefansky
holds sole voting and investment power.
(7) All shares are owned of record by Birizma Associates, of which Mr. Ryan
holds sole voting and investment power.
(8) All shares are owned of record by KPT Partners, of which Mr. Korolnick
holds sole voting and investment power.
(9) All shares are owned of record by Nekavim Investors, of which Ms. Rose
holds sole voting and investment power.
51
Transfer Agent
Continental Stock Transfer & Trust Company, New York, New York, is the
transfer agent for the shares of Common Stock.
52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by
Weiser LLP for the audit of the Company's annual financial statements for the
years ended December 31, 2003 and
53
December 31, 2002 and fees billed for other services rendered by Weiser LLP
during those periods:
FISCAL 2003 FISCAL 2002
------------ ------------
Audit Fees(1) $ 165,000 $ 97,000
Audit-Related Fees(2) 95,000 36,000
Tax Service Fees(3) 35,000 6,000
All Other Fees(4)
- ----------------
(1) Audit Fees consist of fees billed for professional services rendered for
the audit of the Company's consolidated annual financial statements and
review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided by Weiser LLP in
connection with statutory and regulatory filings or engagements.
(2) Audit-Related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company's consolidated financial statements and are not
reported under "Audit Fees."
(3) Tax Fees consist of fees billed for professional services rendered for tax
compliance, tax advisory and tax planning. These services include
assistance regarding federal, state and local tax compliance and tax
planning.
(4) No other fees for professional services rendered to the Company during the
fiscal 2003 and 2002 were billed by Weiser LLP, other than the services
reported above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor. The Audit Committee has not yet adopted a
formal pre-approval policy for audit and non-audit services. The Audit Committee
pre-approves all audit, audit-related, tax and other services provided by Weiser
LLP prior to the engagement of Weiser LLP to provide to these services. The
Chairman of the Audit Committee has been delegated authority by the Audit
Committee to pre-approve the engagement of Weiser LLP when the entire Audit
Committee is unable to do so. The Chairman must report all such pre-approvals to
the entire Audit Committee at the next committee meeting.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: See Index to Financial Statements
on page 54 of this report for financial statements and supplementary
data filed as part of this report.
(2) Financial Statement Schedules
54
Schedule II - Valuation and Qualifying Accounts for each of the years ended
December 31, 2003, 2002 and 2001.
(3) Exhibits:
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
(b) Reports on Form 8-K.
On November 20, 2003, the Company filed a report on Form 8-K dated
November 20, 2003 that furnished, under Items 7 and 12, the press release
announcing the Company's financial results for the fiscal quarter ended
September 30, 2003, the Company's consolidated condensed balance sheets as at
December 31, 2002 and September 30, 2003 and the Company's consolidated
condensed statements of operations for the three months and the nine months
ended September 30, 2002 and 2003.
On November 21, 2003, the Company filed a report on Form 8-K dated
November 20, 2003 that disclosed, under Item 6, the resignation of Paul Stark as
a director of the Company, and furnished under Item 7, the press release
announcing that resignation.
On December 11, 2003, the Company filed a report on Form 8-K dated
November 26, 2003 that furnished, under Items 5 and 7, a press release
disclosing the appointment of Dennis O'Donnell as president of the Company's
BioBalance subsidiary; the indictment of Paul Stark, a former officer of
BioBalance and a former director of the Company, and Yitzchok Grossman, a former
consultant to BioBalance, for allegedly conspiring to manipulate the price and
demand for the Company's common stock; and the Company's initiation of an
independent internal investigation.
55
NEW YORK HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
56
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NEW YORK HEALTH CARE, INC.:
Consolidated Financial Statements:
Independent Auditors' Report for year ended December 31, 2003 F-1
Independent Auditors' Report for year and period ended
December 31, 2002 and 2001 F-2
Consolidated Balance Sheets at December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for years ended
December 31, 2003 and 2002 and for the period
May 21, 2001 (Inception) through December 31, 2001 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and for the period
May 21, 2001 (Inception) through December 31, 2001 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and for the period
May 21, 2001 (Inception) through December 31, 2001 F-6
Notes to Consolidated Financial Statements F-7 F-30
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-31
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
New York Health Care, Inc.
We have audited the accompanying consolidated balance sheet of New York Health
Care, Inc. and Subsidiaries (the "Company") as of December 31, 2003, and the
related consolidated statements of operations, equity and cash flows, and
consolidated financial statement Schedule II (Valuation and Qualifying Accounts)
for the year then ended. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of New York Health
Care, Inc. and Subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America. In addition, 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 required to
be included therein.
See Note 2 "Recent Developments" for information concerning actions by
regulatory authorities.
Weiser LLP
Certified Public Accountants
New York, NY
March 8, 2004, except for Note 2 "Recent Developments"
and the third paragraph of Note 6, which are as of
March 29, 2004
F-1
Independent Auditors' Report
----------------------------
Board of Directors and Stockholders
New York Health Care, Inc.
We have audited the accompanying balance sheet of New York Health Care, Inc.
(formerly The BioBalance Corporation) as of December 31, 2002, and the related
statements of operations, stockholders' equity and cash flows, and financial
statement Schedule II (Valuation and Qualifying Accounts) for the year ended
December 31, 2002 and the period May 21, 2001 (inception) through December 31,
2001. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New York Health Care, Inc.
(formerly The BioBalance Corporation) as of December 31, 2002, and the results
of its operations and its cash flows for the year ended December 31, 2002 and
the period May 21, 2001 (inception) through December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, 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 required to be
included therein.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
March 4, 2003
F-2
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
2003 2002
------------- ------------
Current assets:
Cash and cash equivalents $ 7,337,896 $ 2,625,378
Restricted cash - 100,000
Due from lending institution 208,721 -
Accounts receivable, net of allowance for uncollectible 6,577,283 -
amounts of $397,000
Subscriptions receivable - 290,000
Unbilled services 100,114 -
Prepaid expenses and other current assets 319,195 36,342
------------- ------------
Total current assets 14,543,209 3,051,720
Property and equipment, net 145,898 -
Goodwill, net 900,587 -
Other intangible assets, net 5,971,622 1,936,033
Deferred merger costs - 248,363
Other assets 67,652 23,333
------------- ------------
Total assets $ 21,628,968 $ 5,259,449
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,786,044 $ 120,000
Accounts payable and accrued expenses 5,849,732 229,182
Due to HRA 3,756,507 -
Due to related parties 1,190,526 -
Income taxes payable 24,394 -
------------- ------------
Total current liabilities 12,607,203 349,182
------------- ------------
Commitment 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; 24,943,821 shares issued and 24,939,776
outstanding as of December 31, 2003; 50,000,000 shares
authorized; 21,116,494 shares issued and outstanding
as of December 31, 2002 249,438 211,165
Additional paid-in capital 32,679,292 6,550,328
Accumulated Deficit (23,903,396) (1,851,226)
Less: Treasury stock (4,045 common shares at cost) (9,473) -
------------- ------------
Total shareholders' equity 9,021,765 4,910,267
------------- ------------
Total liabilities and shareholders' equity $ 21,628,968 $ 5,259,449
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
THE ABOVE STATEMENTS GIVE RETROACTIVE EFFECT TO CHANGE IN PAR VALUE FROM $.0001
TO $.01, DUE TO REVERSE MERGER.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Period
May 21, 2001
(Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
2003 2002 2001
-------------- -------------- --------------
Net patient service revenue $ 45,060,449 $ - $ -
-------------- -------------- --------------
Expenses:
Professional care of patients 36,106,721 - -
-------------- -------------- --------------
Organization costs - - 32,500
-------------- -------------- --------------
General and administrative
(excluding noncash compensation) 9,941,923 810,427 197,046
Noncash compensation 1,307,119 19,414 64,332
-------------- -------------- --------------
Total general and
administrative expenses 11,249,042 829,841 261,378
-------------- -------------- --------------
Product development (excluding
Noncash compensation) 956,262 354,616 71,291
Noncash compensation 284,340 - -
-------------- -------------- --------------
Total product development 1,240,602 - -
-------------- -------------- --------------
Goodwill impairment 17,869,339 - -
Bad debts expense 50,250 - -
Depreciation and amortization 606,747 214,600 87,000
-------------- -------------- --------------
Total operating expenses 67,122,701 1,399,057 452,169
-------------- -------------- --------------
Loss from operations (22,062,252) (1,399,057) (452,169)
-------------- -------------- --------------
Non-operating income (expenses)
Interest income 51,255 - -
Interest expense (2,173) - -
-------------- -------------- --------------
Non-operating income (expenses), net 49,082 - -
-------------- -------------- --------------
Loss before provision for
income taxes (22,013,170) (1,399,057) (452,169)
-------------- -------------- --------------
Provision for income taxes:
Current 39,000 - -
Deferred - - -
-------------- -------------- --------------
Net loss $ (22,052,170) $ (1,399,057) $ (452,169)
============== ============== ==============
Basic and diluted loss per share $ (0.91) $ (0.07) $ (0.03)
-------------- -------------- --------------
Weighted and diluted average
shares outstanding 24,283,907 20,562,131 17,574,891
============== ============== ==============
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Common Stock Preferred Stock Additional Treasury Stock
--------------------- ---------------- ------------ -------------------
Paid-in
Shares Amount Shares Amount Capital Shares Amount
---------- --------- ------- ------- ------------ -------- ---------
Balance at May 21, 2001 - $ - - $ - $ - - $ -
Common stock issued to founders
and investors for cash 18,120,667 181,207 - - 1,506,896 - -
Common stock issued for services 590,000 5,900 - - 70,600 - -
Common stock issued for
asset acquisition 990,000 9,900 - - 1,475,100 - -
Amortization of unearned compensation - - - - 4,332 - -
Net loss - - - - - - -
---------- --------- ------- ------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 2001 19,700,667 197,007 - - 3,056,928 - -
Common stock issued for cash 1,415,827 14,158 - - 3,473,986 - -
Amortization of unearned compensation - - - - 19,414 - -
Net loss - - - - - - -
---------- --------- ------- ------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 2002 21,116,494 211,165 - - 6,550,328 - -
Common stock issued for cash, net 327,327 3,273 - - 1,010,535 - -
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 reverse acquisition - - - - 721,100 - -
Common stock issued for the purchase of
intangible assets on August 20, 2003 1,000,000 10,000 - - 3,590,000 - -
Issuance of treasury stock (during Sept. 2003)
pursuant to the exercise of options at an
average exercise price of $.86 - - - - (3,969) (20,001) 21,170
Issuance of treasury stock (during Oct. 2003)
pursuant to the exercise of options at an
average price of $1.50 - - - - 360 (800) 840
Warrants earned for service - - - - 870,359 - -
Net loss - - - - - - -
---------- --------- ------- ------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 2003 24,943,821 $ 249,438 590,375 $ 5,904 $32,679,292 4,045 $ (9,473)
========== ========= ======= ======= ============ ======== =========
Total
Accumulated Shareholders'
Deficit Equity
------------- -------------
Balance at May 21, 2001 $ - $ -
Common stock issued to founders
and investors for cash - 1,688,103
Common stock issued for services - 76,500
Common stock issued for
asset acquisition - 1,485,000
Amortization of unearned compensation - 4,332
Net loss (452,169) (452,169)
------------- -------------
BALANCE AT DECEMBER 31, 2001 (452,169) 2,801,766
Common stock issued for cash - 3,488,144
Amortization of unearned compensation - 19,414
Net loss (1,399,057) (1,399,057)
------------- -------------
BALANCE AT DECEMBER 31, 2002 (1,851,226) 4,910,267
Common stock issued for cash, net - 1,013,808
Reverse acquisition on January 2, 2003 - 19,940,000
Revaluation of options/warrants
as part of reverse acquisition - 721,100
Common stock issued for the purchase of
intangibles assets on August 20, 2003 - 3,600,000
Issuance of treasury stock (during Sept. 2003)
pursuant to the exercise of options at an
average exercise price of $.86 - 17,201
Issuance of treasury stock (during Oct. 2003)
pursuant to the exercise of options at an
average price of $1.50 - 1,200
Warrants earned for service - 870,359
Net loss (22,052,170) (22,052,170)
------------- -------------
BALANCE AT DECEMBER 31, 2003 $(23,903,396) $ 9,021,765
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
THE ABOVE STATEMENTS GIVE RETROACTIVE EFFECT TO CHANGE IN PAR VALUE FROM $.0001
TO $.01, DUE TO REVERSE MERGER.
F-5
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period
May 21, 2001
(Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
2003 2002 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (22,052,170) $ (1,399,057) $ (452,169)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Goodwill impairment 17,869,339 - -
Noncash compensation 1,591,459 19,414 64,332
Depreciation and amortization 606,747 214,600 87,000
Bad debts expense 50,250 - -
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable and unbilled
Services (1,352,003) - -
Increase in prepaid expenses and other current
Assets (98,231) (25,842) (10,500)
Increase in due from lending institution (55,896) - -
Decrease in other assets 8,927 - -
Increase in accrued payroll 588,269 120,000 -
Increase in accounts payable and accrued expenses 1,977,474 112,112 117,070
Increase in due to HRA 1,824,710 - -
Decrease in due to related parties (750,000) - -
Increase in income tax payable 24,394 - -
-------------- -------------- --------------
Net cash provided by (used in)
operating activities 233,269 (958,773) (194,267)
-------------- -------------- --------------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary 3,548,658 - -
Acquisition of property and equipment (50,724) - -
Acquisition of intangible assets (422,613) (148,723) (587,410)
Increase in other assets - (13,333) (10,000)
Decrease (increase) in restricted cash 100,000 (100,000) -
Increase in deferred merger cost - (248,363) -
-------------- -------------- --------------
Net cash provided by (used in) investing activities 3,175,321 (510,419) (597,410)
-------------- -------------- --------------
Cash flows from financing activities:
Exercise of options 18,401 - -
Payments on lease obligation payable (18,281) - -
Proceeds of issuance of common stock 1,013,808 3,488,144 1,688,103
Decrease (increase) in subscription receivable 290,000 (290,000) -
-------------- -------------- --------------
Net cash provided by financing activities 1,303,928 3,198,144 1,688,103
-------------- -------------- --------------
Net increase in cash and cash equivalents 4,712,518 1,728,952 896,426
Cash and cash equivalents at beginning of period 2,625,378 896,426 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 7,337,896 $ 2,625,378 $ 896,426
============== ============== ==============
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION:
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 specialty pharmaceutical
company focused on the development of proprietary biotherapeutic agents for
various gastrointestinal diseases that are poorly addressed by current
therapies. BioBalance has completed 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").
However, there is no assurance that the FDA will not contest the status.
BioBalance is also exploring a formulation of its product as a prescription
drug. 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 Healthcare
("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
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 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.
RECENT DEVELOPMENTS
On November 19, 2003, the Company learned that Paul Stark, a director of the
Company and the president of Bio Balance, and Yitzchok Grossman, a consultant to
The BioBalance Corp., a subsidiary of the Company, had been indicted by the
United States Attorney' for the Southern District of New York. A press release
received by Company relating to the indictment did not describe the charges
against Messrs. Stark or Grossman. On November 20, at the Company's request, Mr.
Stark resigned from all positions with the Company and BioBalance. On November
24, the Company obtained a copy of the indictment and, on November 25, the
Company's board of directors authorized an independent internal investigation
regarding the indictment of Messrs. Stark and Grossman.
F-7
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The indictment alleges that from February through April 2003, Messrs. Stark and
Grossman conspired to manipulate the price and demand for the Company's common
stock by offering to pay a bribe, consisting of warrants to purchase 500,000
shares of the Company's common stock, to an undercover FBI agent posing as the
manager of a hedge fund, but does not allege any actual manipulation. The
indictment alleges that Messrs. Stark and Mr. Grossman caused the Company's
board of directors to approve issuance of the warrants by disguising the
warrants as compensation to an outside consultant to be engaged to perform
financial advisory services for BioBalance.
On November 25,the board also authorized suspension of the warrants referred to
in the indictment and a stock option to purchase 100,000 shares of common stock
granted to Mr. Stark and the termination of a consulting agreement between
BioBalance and Emerald Asset Management, Inc., a company owned and controlled by
Mr. Grossman, and appointed Dennis O'Donnell, BioBalance's Chief Operating
Officer, as President of BioBalance.
On November 26, 2003, Listing Investigations, a division of the The Nasdaq Stock
Market, Inc.("Nasdaq"), requested the Company to furnish documents and
information relating to the indictment of Mr. Stark. Thereafter, independent
legal counsel engaged by the Company to conduct the internal investigation
contacted Listing Investigations and provided documents and information
responsive to the request.
In January 2004, Nasdaq notified the Company that the Listing Investigations'
staff had determined that the Company no longer qualified for inclusion in the
Nasdaq Stock Market based on public interest concerns and the Company's failure
to timely hold its 2002 annual stockholders in compliance with the Nasdaq
Marketplace Rules. The Company responded to the notification by requesting a
hearing before a Nasdaq Listing Qualifications Panel to review the staff
determination. The hearing before the Nasdaq Listing Qualifications Panel was
held on February 19, 2004 and, as of March 29, 2004 the Company is awaiting the
Panel's decision. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation- Risks and Uncertainties- Our
Failure to Satisfy Nasdaq Listing Standards Could Result in Reduced Liquidity
and Lower Stock Price."
The Company's independent internal investigation found no evidence that any
current officer, director or employee of the Company or BioBalance knew of or
participated in any alleged attempt to manipulate the Company's common stock and
the investigation concluded that the Company responded properly to the
indictment based upon the information available to the Company at that time.
In January 2004, in response to the recommendations of the Company's independent
counsel, the board adopted a Code of Business Conduct and Ethics; a Code of
Ethics for Senior Financial Officers; Insider Trading Policies; Communications
and Whistle Blower Policies, a Corporate Governance/Nominating Committee Charter
and amended the charters of its standing audit and compensation committees. The
board also appointed four additional directors, including three new independent
directors, set the agenda for the Shareholder meeting, and scheduled the fiscal
2002 annual stockholders meeting, and nominated a slate of seven directors,
including a majority of independent directors, for election at the meeting, and
nominated a slate of seven directors, including a majority of independent
directors for election by the stockholders at the annual meeting. The Company
held its 2002 annual stockholders meeting on February 13, 2004, at which the
stockholders elected the seven directors and ratified the appointment of the
Weiser LLP as the Company's auditors.
The Company is currently treating the warrants referenced to in the indictment
as being in effect in accordance with their terms.
F-8
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
ACCOUNTS RECEIVABLE:
Accounts receivable consist of trade receivables recorded at original invoice
amount, less an estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis; thus trade receivables do not bear
interest, although a finance charge may be applied to receivables that are past
due. Trade receivables are periodically evaluated for collectibility based on
past credit history with customers and their current financial condition.
Changes in the estimated collectibility of trade receivables are recorded in the
results of operations for the period in which the estimate is revised. Trade
receivables that are deemed uncollectible are offset against the allowance for
uncollectible accounts. The Company generally does not require collateral for
trade receivables.
REVENUE RECOGNITION:
The Company recognizes patient service revenue on the date services are
rendered. Unbilled services represent amounts due for services rendered that had
not been billed at the end of each period because authorization had not been
received from the referral source.
PROPERTY AND EQUIPMENT:
Property and equipment is carried at cost and is depreciated under the
straight-line method over the following estimated useful lives of the assets.
Leasehold improvements are amortized over the estimated useful lives of the
improvements or the life of the lease, whichever is shorter.
Machinery and equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease
GOODWILL AND OTHER INTANGIBLE ASSETS:
Prior to January 1, 2002, the Company amortized goodwill and intangible assets
using the straight-line method over periods of up to 10 years. Statement of
Financial Accounting Standards (SFAS 142) "Goodwill and other Intangible Assets"
requires that goodwill and intangible assets having indefinite lives not be
amortized, but instead be tested for impairment at least annually. Intangible
assets determined to have definite lives are amortized over their remaining
useful lives.
F-9
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES:
The Company used the asset and liability method to calculate deferred tax assets
and liabilities. Deferred taxes are recognized based on the differences between
financial reporting and income tax bases of assets and liabilities using enacted
income tax rates. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Long-Lived Assets:
Long-lived assets, such as intangible assets, furniture, equipment and leasehold
improvements, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
STOCK BASED COMPENSATION:
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. See Note 10 for pro forma information on the impact of the
fair-value method of accounting for stock options. The Company uses the fair
value method of accounting for warrants granted to consultants for services.
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
losses during the years ended December 31, 2003, 2002, and 2001 potential common
stock attributable to options, warrants and convertible preferred stock
outstanding of 3,649,234 for 2003, 538,066 for 2002 and 453,900 for 2001, were
not included in the computation of diluted earnings per share, because to do so
would be antidilutive.
F-10
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting guidance and
disclosure requirements for certain guarantees. The Interpretation requires an
entity to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. This Interpretation did
not have a material impact on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities", which clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." Interpretation 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity to support its activities. In December 2003, the FASB concluded to revise
certain elements of FIN 46. The FASB also modified the effective date of FIN 46.
FIN 46 is to be applied for registrants who file under Regulation S-X in periods
ending after March 15, 2004. The Company is currently assessing the application
of FIN 46 on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Standard requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is 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, except for mandatory
redeemable financial instruments of nonpublic entities. The adoption of SFAS No.
150 has not had and is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
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 and one-half for one 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 to
BioBalance.
F-11
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price of the acquisition was as follows (rounded to the nearest
thousand):
Value of New York Health Care common stock $13,100,000
Value of New York Health Care preferred stock 1,890,000
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 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 for one 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.
As part of the merger, outstanding BioBalance options/warrants (586,452 shares)
became exercisable for New York Health Care's common 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, which was $33,928 for the year
ended December 31, 2003.
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 the date of termination. These options are
contingent upon future services and will be recorded under Emerging Issues Task
Force (EITF) 96-18. Accounting for Equity Instruments that are issued to other
than employees for acquiring or in conjunction with selling goods or services.
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 due to related parties in the net assets of New York Health Care on
January 2, 2003. As of December 31, 2003, this amounted to $1,190,526. During
The year ended December 31, 2003 payments of $750,000 were made related to this
obligation.
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 (rounded to the nearest thousand):
F-12
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (3,382,000)
Due to related parties (1,941,000)
Due to HRA (1,932,000)
-----------
$1,070,000
==========
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 unaudited supplemental pro forma information is presented to
illustrate the effects of the acquisition on the historical operating results
for the year ended December 31, 2002, as if the acquisition had occurred at the
beginning of that period. Since the acquisition occurred on January 2, 2003,
there is no difference in the pro forma information for the year ended December
31, 2003.
Year Ended
December 31,
2002
------------
Net revenue $38,880,477
Net loss for the period $(1,020,689)
Net loss per share $ (0.05)
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 approximately $3.27 per share for aggregate gross proceeds of $1,072,000 and
net proceeds of $1,013,808.
F-13
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment at cost consists of the following at December 31:
2003 2002
-------- -------
Machinery and equipment $133,161 $ -
Furniture and fixtures 87,536 -
Leasehold improvements 54,033 -
-------- -------
274,730 -
Less accumulated depreciation and amortization 128,832 -
-------- -------
$145,898 $ -
======== =======
NOTE 4 - 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
year ended December 31, 2003, were as follows:
Balance Acquisition Impairment Balance
January 1, 2003 January 2, 2003 January 2, 2003 December 31, 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-14
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The major classifications of intangible assets and their respective estimated useful
lives are as follows:
December 31, 2003
--------------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
------------------- ------------- ------------- -----------
Intellectual property $ 3,576,500 $ 539,189 $ 3,037,311 10
Patents/trademarks 1,913,751 83,690 1,830,061 10
Non-compete agreement 770,000 57,750 712,250 5
Patient list 100,000 20,000 80,000 5
Customer base 390,000 78,000 312,000 5
------------------- ------------- -------------
$ 6,750,251 $ 778,629 $ 5,971,622
=================== ============= =============
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
=================== ============= =============
On July 31, 2001, the Company acquired technology, including patents, relating
to certain probiotic agents. Aggregate consideration paid totaled $2,036,500,
including 990,000 shares of the Company's common stock (valued at $1,485,000),
$510,000 cash to fund the payment of claims against the Sellers, and associated
acquisition costs of $41,500. The Company has also incurred fees approximating
$201,000 through December 31, 2002, principally in connection with patent and
trademark applications for the technology.
On August 20, 2003, the Company purchased from NexGen Bacterium Inc. ("NexGen")
certain proprietary technology and intellectual property assets that did not
constitute a business. The purchase price for the assets is comprised of a
$250,000 payment and the issuance of 1,000,000 shares of the Company's $.01
par-value common stock. The stock was valued at $3,600,000 based on a closing
price of $3.60 per share on August 20, 2003. The asset acquisition agreement
includes noncompete provisions restricting NexGen from competing with the
Company for a period of five years. Management has allocated the purchase price
as follows: intellectual property: $1,540,000, patents: $1,540,000, and
noncompete agreement: $770,000. For the year ended December 31, 2003, the
Company has also incurred fees approximating $173,000, principally in connection
with patent and trademark applications for the technology. These assets are
being amortized over their estimated useful lives of 10 years for intellectual
property and patents and 5 years for the noncompete agreement.
Approximately $4.9 million of such amount, relates to intangibles of BioBalance.
BioBalance is a development stage Company. The Company cannot assure that
BioBalance will be able to generate revenues or profits from operations of its
business or that BioBalance could be able to generate or sustain profitability
in the future.
F-15
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense amounted to $477,029, $214,600 and $87,000 for the years
and period ended December 31, 2003, 2002 and 2001, respectively.
Estimated Amortization Expense:
For The Years
Ended
December 31,
------------
2004 $ 801,025
2005 801,025
2006 801,025
2007 801,025
2008 645,275
Thereafter 2,122,247
----------
$5,971,622
==========
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
2003 2002
----------- --------
Accounts payable $ 500,186 $229,182
Accrued expenses 967,851 -
Accrued employee benefits 4,381,695 -
----------- --------
$5,849,732 $229,182
========== ========
NOTE 6 - LINE OF CREDIT:
The Company has a $4,000,000 line of credit with G.E. Capital Health Care
Financial Services that expires November 29, 2004. The availability of the line
of credit is based on a formula of eligible accounts receivable. At December 31,
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 tangible net worth. Borrowings under the agreement bear
interest at prime plus 1 1/2% (5.50%) at December 31, 2003.
At December 31, 2003, there was an amount due from G.E. Capital Health Care
Financial Services of $208,721. This is due to a lockbox being used by the
Company; all collections are deposited with G.E. Capital Health Care Financial
Services and then transferred to the bank.
On March 29, 2004, the loan agreement was amended to allow New York Health Care
to lend money to its subsidiary BioBalance if there is no outstanding loan under
this agreement. The agreement has also been amended to allow the Company to
invest money in the subsidiary BioBalance.
F-16
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES:
Deferred tax attributes resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at December 31, 2003 and 2002
follows (rounded to the nearest thousand):
2003 2002
------------ ----------
Current assets:
Allowance for doubtful accounts $ 166,000 $ -
Valuation allowance (166,000) -
------------ ----------
Net current deferred tax asset $ - $ -
============ ==========
Noncurrent assets:
Net operating loss carryforwards $ 695,000 $ 685,000
Depreciation 28,000 -
Amortization of goodwill 857,000 -
Amortization of intangibles 113,000 167,000
------------ ----------
1,693,000 852,000
Valuation allowance (1,693,000) (852,000)
------------ ----------
Net noncurrent deferred tax asset $ - $ -
============ ==========
As of December 31, 2003, the Company had net operating loss carryforwards of
approximately $695,000, which expire at various dates through 2023.
F-17
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes consist of the following:
2003 2002 2001
------------ --------- ----------
Current tax expense $ 39,000 $ - $ -
Deferred tax expense
(not including amount listed below) 1,007,000 - -
Net change in valuation allowance (1,007,000) - -
------------ --------- ----------
$ 39,000 $ - $ -
============ ========= ==========
The provision for income taxes is comprised of the following:
2003 2002 2001
------------ --------- ----------
Current:
Federal $ - $ - $ -
State 39,000 - -
------------ --------- ----------
39,000 - -
------------ --------- ----------
Deferred:
Federal - - -
State - - -
------------ --------- ----------
- - -
------------ --------- ----------
$ 39,000 $ - $ -
============ ========= ==========
The statutory Federal income tax rate and the effective rate is reconciled as
follows:
2003 2002 2001
------------ --------- ----------
Statutory Federal income tax rate 34% 34% 34%
State taxes, net of Federal tax benefit 12 10 10
Valuation allowance (45) (44) (44)
Over/under accrual (1) - -
------------ --------- ----------
- - -
============ ========= ==========
F-18
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of December 31, 2003 and 2002, the carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, accrued expenses and
accrued payroll, due to HRA, and due to related parties approximates fair value
due to their short-term nature.
NOTE 9 - SHAREHOLDERS' EQUITY:
COMMON STOCK
In May 2001, the Company issued 8,896,709 shares of common stock to its founders
for cash proceeds of $890.
In June 2001, the Company issued 8,456,625 shares of common stock in a private
placement for gross cash proceeds of approximately $253,400. In addition,
550,000 shares of common stock (valued at $16,500) were issued for services
provided.
On July 31, 2001, the Company issued 990,000 shares of its common stock (valued
at $1,485,000) as consideration for the acquisition of technology.
In July and August 2001, the Company issued 400,000 shares of its common stock
in a private placement for gross cash proceeds of $600,000. An additional
40,000 shares (valued at $60,000) were issued to a consultant for services.
In November and December 2001, the Company issued 367,333 shares of its common
stock in private placements for gross cash proceeds of $1,102,000.
On January 29, 2002, the Company issued 391,656 shares of common stock in a
private placement.
In the period April 2002 through June 2002, the Company issued 153,000 shares of
its common stock in private placement for gross proceeds of $459,000.
In the period July 1, 2002 through September 30, 2002, the Company issued 49,000
shares of common stock in private placement for gross proceeds of $147,000.
In the period October 1, 2002 through December 31, 2002, the Company issued
822,171 shares of common stock in private placements for gross proceeds of
$2,080,033. $290,000 of the gross proceeds were received in January 2003.
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.
On August 20, 2003, the Company issued 1,000,000 shares of common stock in
connection with the purchase of intangible assets.
F-19
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK
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.
TREASURY STOCK
The Company issued treasury stock for the exercise of options that occurred in
September and October 2003. The Company assigned a cost to the treasury stock
based on the first-in, first-out method.
NOTE 10 - 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, "Accounting for Stock-Based Compensation".
F-20
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant by use of
the Black-Scholes option pricing model:
Period
May 21, 2001
(Inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2003 2002 2001
------------- ------------- ------------
Net loss, as reported $(22,052,170) $ (1,399,057) $ (452,169)
Less stock-based compensation expense
determined under fair value method for
all employee stock options (1,620,705) - -
------------- ------------- ------------
Pro forma net loss $(23,672,875) $ (1,399,057) $ (452,169)
============= ============= ============
Basic and diluted loss per share, as reported $ (0.91) $ (0.07) $ (0.03)
Basic and diluted loss per share, pro forma $ (0.97) $ (0.07) $ (0.03)
Fair value is estimated based on the Black-Scholes option-pricing model with the
following assumptions for grants in 2003; expected volatility used was a range
of 67%-102%, risk-free interest rates 1.10%-3.23% and expected lives of
approximately 1 to 5 years.
The following tables summarize options and warrants issued during the year ended
December 31, 2003, 2002 and 2001 to consultants and employees (including
non-employee Board of Directors):
Warrants:
These warrants were issued to or earned by consultants
Grant Date Number of warrants Exercise Price Expiration term
- ----------------------- ------------------ ------------------- ---------------
January 1, 2003 7,205 $ 3.47 5 yrs
January 1, 2003 25,528 $ 3.22 5 yrs
January 1, 2003 15,653 $ 3.37 5 yrs
January 15, 2003 100,000 $ 4.15 1 yr
February 3, 2003 35,000 $ 3.40 1 yr
April 14, 2003 500,000 $ 2.50 1 yr
July 15, 2003 135,000 $ 2.70 1 yr
September 15, 2003 100,000 $ 3.69 5 yrs
* December 17, 2003 75,000 $ 2.51 2 yrs
Grant Date Number of warrants Exercise Price Expiration term
- ----------------------- ------------------ ------------------- ---------------
January 30, 2002 39,166 $ 3.00 5 yrs
November 4, 2002 25,000 $ 1.50 2 yrs
November 7, 2002 20,000 $ 1.50 2 yrs
Grant Date Number of warrants Exercise Price Expiration term
- ----------------------- ------------------ ------------------- ---------------
June 1, 2001 200,000 $ 1.00 10 yrs
August 31, 2001 210,000 $ 1.50 3 yrs
October 21, 2001 10,000 $ 1.50 2 yrs
November 30, 2001 33,900 $ 3.00 5 yrs
* These are performance based warrants which were earned on December 17, 2003.
For accounting purposes they are deemed to be outstanding. The Company
recognized a noncash compensation charge of $102,203 during the year ended
December 31, 2003.
Some of these warrants granted in 2003 vest immediately, some warrants vest
monthly. These warrants are expensed at the fair value on the date of vesting.
For accounting purposes, unvested warrants are not considered outstanding. For
the year ended December 31, 2003, $870,359 was expensed as compensation for
these warrants, which includes compensation expense for the BioBalance warrants
of $33,928 for the year ended December 31, 2003 and 75,000 performance based
warrants earned in December 2003 of $102,203.
The fair value of options granted to consultants during 2001 and 2002 was
$26,000 and $72,450 respectively. Fair value is estimated based on the
Black-Scholes option pricing model with the following assumptions. For grants in
2001 and 2002 the expected volatility used was 0% and risk-free interest rates
of 3.0% and expected lives equal to the lives of the warrants.
F-21
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NASDAQ implemented a rule on July 1, 2003 that requires a company to obtain
shareholder approval prior to the issuance of warrants to consultants or
non-employee Board of Directors and that it designate a certain amount of the
Company's shares in connection with any issuances to consultants and
non-employee Board of Directors.
The Company committed to issue warrants to certain consultants subsequent to
July 1, 2003. Therefore, these commitments of warrants will be re-valued at each
balance sheet date with the appropriate adjustment made to compensation expense.
Once shareholder approval is obtained, no further adjustment to compensation
expense will be recorded.
On January 29, 2004 the Company granted options to purchase an aggregate of
450,000 shares of common stock at the then fair market value to three officers
of the Company.
Options/Warrants:
These options and warrants were issued to employees and non-employee Board of
Directors in accordance with the Company's Performance Incentive Plan.
Grant Date Number of Options Exercise Price Expiration Term
- ----------------------- ----------------- --------------- ---------------
March 7, 2003 500,000 $ 3.14 10 yrs
March 7, 2003 60,000 $ 3.14 10 yrs
June 16, 2003 7,500 $ 2.87 3 yrs
June 26, 2003 200,000 $ 2.48 10 yrs
September 26, 2003 80,000 $ 3.77 10 yrs
Since the warrants and options were given to employees and non-employee Board of
Directors at not less than fair value on the date of grant, no compensation
expense was recorded.
On November 26, 2003, the Company suspended the 100,000 options granted on March
7, 2003 to Paul Stark, the former President of BioBalance. The options are
considered outstanding but can not be exercised until the Company gives notice
that they may be exercised. The options have been recorded under the intrinsic
value method and are included in the Black-Scholes calculation above.
At December 31, 2003, the Company has 4,834,592 shares of common stock reserved
for issuance of these options/warrants and for options/warrants granted
previously.
PERFORMANCE INCENTIVE PLAN:
On March 26, 1996, the Company's Board of Directors adopted the Performance
Incentive Plan, (the "Option Plan"). Under the terms of the amended Option Plan,
as amended, up to 4,712,500 shares of common stock may be granted at December
31, 2003. The Option Plan will be administered by the Compensation Committee
which was appointed by the Board of Directors. The Committee will determine
which key employee, officer or director on the regular payroll of the Company,
shall receive stock options. Granted options are exercisable commencing six
months after the date of grant, and expire up to ten years after the date of
grant. The exercise price of any incentive stock option or nonqualified option
granted under the Option Plan may not be less than 100% of the fair market value
of the shares of common stock of the Company at the time of the grant.
F-22
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in stock options, and warrants, including those outside the Performance
Incentive Plan, for each of the three years ended December 31, is summarized as
follows:
Shares Under Weighted Average
Options/Warrants Exercise Price
----------------- ----------------
Options and warrants granted 453,900 $ 1.39
-----------------
Balance at December 31, 2001 453,900 1.39
Options and warrants granted 84,166 2.20
Options cancelled - -
----------------- ----------------
Balance at December 31, 2002 538,066 1.52
New York Health Care's options
and warrants, due to merger 1,024,167 1.84
Options and warrants granted *1,840,886 3.40
Options exercised (20,801) .88
Options cancelled/expired (126,667) 2.25
----------------- ----------------
Balance at December 31, 2003 3,255,651 2.27
=================
Eligible for exercise at
December 31, 2003 3,065,134 2.26
=================
* Includes the performance based warrants discussed above.
F-23
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about options and warrants outstanding and
exercisable at December 31, 2003.
Options/Warrants Outstanding Options/Warrants Exercisable
----------------------------- ----------------------------
Weighted
Weighted Average
Options/ Average Weighted Options/ Options/
Range of Warrants Remaining Average Warrants Warrants
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercisable
- --------------- ----------- ---------------------- -------------- ----------- -----------
$4.50 62,500 3.25 Years 4.50 62,500 4.50
$4.15 100,000 0.04 Years 4.15 100,000 4.15
$3.77 80,000 9.53 Years 3.77 80,000 3.77
$3.69 100,000 4.70 Years 3.69 100,000 3.69
$3.40 35,000 0.08 Years 3.40 32,000 3.40
$3.22 - $3.47 48,386 4.00 Years 3.31 48,386 3.31
$3.14 560,000 8.28 Years 3.14 560,000 3.14
$3.00 39,166 2.42 Years 3.00 39,166 3.00
$3.00 33,900 2.92 Years 3.00 33,900 3.00
$2.87 7,500 2.50 Years 2.87 7,500 2.87
$2.70 135,000 1.53 Years 2.70 123,750 2.70
$2.51 75,000 1.96 Years 2.51 75,000 2.51
$2.50 500,000 0.54 Years 2.50 500,000 2.50
$2.48 200,000 9.42 Years 2.48 33,333 2.48
$2.45 75,333 4.50 Years 2.45 75,333 2.45
$1.50 25,000 0.83 Years 1.50 15,400 1.50
$1.50 20,000 0.83 Years 1.50 20,000 1.50
$1.50 210,000 0.75 Years 1.50 210,000 1.50
$1.50 9,200 0.25 Years 1.50 9,200 1.50
$1.41 51,333 5.00 Years 1.41 51,333 1.41
$1.00 200,000 7.50 Years 1.00 200,000 1.00
$.95 - $1.04 140,000 3.43 Years 0.98 140,000 0.98
$.89-$.98 275,000 5.42 Years 0.93 275,000 0.93
$.75-$.83 273,333 4.38 Years 0.79 273,333 0.79
----------- -----------
3,255,651 4.44 Years 2.27 3,065,134 2.26
=========== ===========
F-24
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
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 for its BioBalance subsidiary. The agreements
provide for aggregate annual compensation of $250,000 and provide for specific
bonuses when the Company meets certain goals. In December 2003, the Company met
these goals and the bonuses were expensed. These agreements were subsequently
renewed under the same terms, through December 31, 2004.
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. This
transaction is one of the matters addressed in the allegations referred to in
Note 1, under Recent Developments.
In February 2004, the Company entered into an agreement with St. Michael's
Hospital in Toronto, Canada to conduct clinical trials on PROBACTRIX as a
medical food for the dietary management of IBS symptoms. The committed cost for
this study is $292,000.
LEASE COMMITMENTS:
The Company leases office space under noncancellable operating leases in New
York and New Jersey that expire between April 2004 and February 2007.
At December 31, 2003, future minimum lease payments due under operating leases
approximate:
2004 $386,000
2005 258,000
2006 181,000
2007 4,000
--------
Total minimum future payments $829,000
========
Rental expense charged to operations was approximately $432,000, $60,000 and
$10,000, for the years and period ended December 31, 2003, 2002 and 2001,
respectively.
F-25
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYMENT AGREEMENTS:
On November 10, 1999, the Company entered into employment agreements with two
officers, with terms beginning December 27, 1999 and expiring in 2004. The
agreements called for initial aggregate annual compensation of approximately
$420,000 with an annual increase of 10% and provided for certain additional
benefits. This employment agreement was amended on January 2, 2003 pursuant to
the Stock for Stock Exchange Agreement between the Company and The BioBalance
Corporation (Note 2). Under the amended employment agreement, the two officers'
employment was extended until December 31, 2009. The amendment also calls for
assurance that the two officers continue their election as Directors for the
full term of their employment contracts. If the officers are terminated as
Directors, the Company shall enter into consulting agreements with the officers,
effective the date of termination. In such case, consulting services will be
provided on an as needed basis for a period of not less than five years and, as
compensation for consulting services, each officer will be granted an option to
acquire 500,000 shares of the Company's common stock for a term of no less than
ten years at a price per share equal to the closing price of the stock on the
date of such termination.
On March 15, 2004, the Compensation Committee approved a bonus of $500,000 to be
paid to the two officers for the year ended December 31, 2003; such amount was
accrued as of December 31, 2003.
401(K) PLAN:
The Home Health Care segment maintains an Internal Revenue Code Section 401(k)
salary deferred savings plan (the "Plan") for eligible employees who have been
employed for at least one year and are at least 21 years old. Subject to certain
limitations, the Plan allows participants to voluntarily contribute up to 15% of
their pay on a pretax basis. The Company currently contributes 50% of each
dollar contributed to the Plan by participants up to a maximum of 3% of the
participant's salary. The Plan also provides for certain discretionary
contributions by the Company as determined by the Board of Directors. The
Company's contributions offset by unvested, forfeited matching funds amounted to
$54,000 for the year ended December 31, 2003. The Bio Balance segment did not
have a 401(k) plan for the years and period ended December 31, 2002 and 2001.
F-26
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BONUS PLAN:
The Home Care segment of the Company has established a bonus plan pursuant to
which 10% of the Company's pre-tax net income is contributed to a bonus pool
which is available for distribution to all employees as decided by the Company's
Compensation Committee. A bonus of $58,000 was accrued as of December 31, 2003.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of temporary cash investments which from time-to-time exceed
the Federal depository insurance coverage and commercial accounts receivable.
The Company has cash investment policies that restrict placement of these
investments to financial institutions evaluated as highly creditworthy. Cash
and cash equivalents held in one bank exceed federally insured limits by
approximately $7,236,000, at December 31, 2003 and $2,675,000 at December 31,
2002. The Company does not require collateral on commercial accounts receivable
as the customer base generally consists of large, well-established institutions.
MAJOR CUSTOMERS:
Two major customers accounted for approximately 60% of net patient service
revenue for the year ended December 31, 2003. In addition, three customers
represented approximately 44% of accounts receivable at December 31, 2003.
BioBalance had no accounts receivable for the year ended 2002.
BUSINESS RISKS:
The Company's primary business, offering home health care services, is heavily
regulated at both the federal and state levels. While the Company is unable to
predict what regulatory changes may occur or the impact on the Company of any
particular change, the Company's operations and financial results could be
negatively affected.
Further, the Company operates in a highly competitive industry, which may limit
the Company's ability to price its services at levels that the Company believes
appropriate. These competitive factors may adversely affect the Company'
financial results.
CAUTIONARY STATEMENT
BioBalance operates in a competitive environment that involves a number of
risks, some of which are beyond its control. Although we believe the
expectations for BioBalance are based on reasonable assumptions, we can give no
assurance that our expectations will be attained. Factors that could cause
actual events or results to differ materially from expected results involve both
known and unknown risks. Key factors include, among others: our need to secure
additional financing and at acceptable terms; the high cost and uncertainty of
clinical trials and other development activities involving pharmaceutical
products; the dependence on third parties to manufacture its products; the
unpredictability of the duration and results of regulatory approval for our
products; our dependence on our lead biotherapeutic agent, PROBACTRIX and the
uncertainty of its market acceptance; the possible impairment of, or inability
to enforce, intellectual property rights and the subsequent costs of defending
these rights; and the loss of key executives or consultants.
F-27
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - THIRD-PARTY RATE ADJUSTMENTS AND REVENUE AND
CERTAIN CONTRACTS:
Approximately 5% of net patient service revenue was derived under New York State
Medicaid reimbursement programs during the year ended December 31, 2003. These
revenues are based, in part, on cost reimbursement principles and are subject to
audit and retroactive adjustment. Differences between current rates and
subsequent revisions are reflected in the year the revisions are determined.
There was no revenue generated by BioBalance for the years ended 2002 and 2001.
The Company has an agreement with the City of New York acting through the
Department of Social Services of The Human Resources Administration ("HRA") to
provide personal care services to certain qualified individuals as determined by
HRA. The agreement with HRA sets a fixed direct labor cost in the reimbursement
rate. Should the Company incur direct costs of home attendant services below
this fixed rate, the Company must repay the difference to HRA, subject to final
audit by the City of New York. As of December 31, 2003, the amount included in
due to HRA relating to direct labor costs amounted to $828,555. In addition,
the City's reimbursement methodology for general and administrative expenses is
based on a fixed amount per client based on the number of cases. The Company
is reimbursed at an hourly rate. Any amount over this fixed rate must be repaid
to HRA. As of December 31, 2003, this amount was $2,927,952 subject to final
audit by the City of New York. The aggregate amount due to HRA was $3,756,507
at December 31, 2003. As of December 31, 2003, HRA had completed their audit
for the fiscal year ended June 30, 2000 and was in the process of auditing the
fiscal year ended June 30, 2001.
The New York State Department of Health ("DOH") approved additional funding to
home health care agencies in a form of a rate increase. The additional funding
is to be used exclusively for the recruitment and retention of home health care
employees. Any unspent money relating to recruitment and retention is recorded
as an accrued liability until such time as it is spent. As of December 31, 2003,
the Company accrued approximately $1,318,000 related to recruitment and
retention funds not yet expended and is included in accrued employee benefits.
F-28
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13- SUPPLEMENTAL CASH FLOW DISCLOSURES:
Period
May 21, 2001
(Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
2003 2002 2001
-------------- ------------- -------------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 2,173 $ - $ -
============== ============= =============
Income taxes $ 58,465 $ 6,800 $ -
============== ============= =============
Supplemental schedule of noncash
investing and financing activities:
The Company purchased intangibles
which were partially acquired through
the issuance of 1,000,000 shares of
common stock. (See note 4)
$ 3,600,000 $ - $ -
============== ============= =============
NOTE 14 - 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 December 31, 2003.
New York Bio Total
Health Care Balance Consolidated
------------- ------------ --------------
YEAR ENDED DECEMBER 31, 2003
Revenue:
Net patient service revenue $ 45,060,449 $ - $ 45,060,449
Sales - - -
------------- ------------ --------------
Total revenue $ 45,060,449 $ - $ 45,060,449
============= ============ ==============
Loss before provision for income taxes $(17,370,598) $(4,642,572) $ (22,013,170)
============= ============ ==============
Depreciation and amortization $ 225,563 $ 381,184 $ 606,747
============= ============ ==============
Interest income $ 35,720 $ 15,535 $ 51,255
============= ============ ==============
Interest expense $ 2,173 $ - $ 2,173
============= ============ ==============
Income tax expense $ 24,500 $ 14,500 $ 39,000
============= ============ ==============
Noncash Compensation $ - $ 1,591,459 $ 1,591,459
============= ============ ==============
Assets $ 14,801,531 $ 6,827,437 $ 21,628,968
============= ============ ==============
Expenditures for long lived assets $ 12,245 $ 4,061,092 $ 4,073,337
============= ============ ==============
Prior to its acquisition of New York Health Care on January 2, 2003, BioBalance
had only one segment, which did not generate any revenue.
F-29
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Cost of
Net Patient Professional
Service Care of Net Basic and
2003 Revenue Patients Loss Diluted EPS
- ----------- ------------ ----------- ------------- ----------
First quarter $11,994,489 $9,706,778 $(19,004,862) $(0.79)
Second quarter 10,820,260 8,531,889 (689,088) (0.03)
Third quarter 11,044,365 8,821,090 (1,099,192) (0.05)
Fourth quarter 11,201,335 9,046,964 (1,259,028) (0.04)
2002
- -----------
First quarter $ - $ - $ (380,123) $(0.02)
Second quarter - - (338,475) (0.02)
Third quarter - - (254,926) (0.01)
Fourth quarter - - (425,533) (0.01)
F-30
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ----------------------------------------- ----------- ---------- --------------
Additions
-------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions End of Period
- ----------------------------------------- ----------- ----------- ------------ ---------- --------------
Year ended December 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ 50,000 *$694,000 $ (347,000) $ 397,000
Deferred tax asset valuation
allowance $ 852,000 $ 841,000 - $ 1,693,000
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ - - $ - $ -
Deferred tax asset valuation
allowance $ 208,000 $ 644,000 - $ - $ 852,000
For period ended May 21, 2002 (inception)
through December 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ - $ - $ - $ -
Deferred tax asset valuation
allowance $ - $ 255,000 - $ - $ 208,000
*Cash collected in excess of the estimated fair value of accounts receivable of New York Health Care acquired
in the reverse merger, offset by an additional equal amount of $347,000.
F-31
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description of Exhibit
- -------- ----------------------
2.1 Stock for Stock Exchange Agreement between the Company and BioBalance
dated October 11, 2001, as amended by Amendment No. 1 dated February
13, 2002, Amendment No. 2 dated July 10, 2002, Amendment No. 3 dated
August 13, 2002 and Amendment No. 4 dated October 25, 2002
(incorporated herein by reference to Exhibits No. 2.1-2.4, inclusive,
to the Company's registration statement on FormS-4, SEC file no.
333-85054).
3.1 Certificate of Incorporation of the Company. (1)
3.2 Restated Certificate of Incorporation of the Company. (1)
3.3 Certificate of Correction of Restated Certificate of Incorporation of
the Company. (1)
3.4 Amendment to the Certificate of Incorporation filed October 17, 1996.
(1)
3.5 By-laws of the Company. (1)
3.6 Amendment to the Certificate of Incorporation of the Company filed
December 4, 1996. (1)
3.7 Certificate of Designations, Rights and Preferences of New York Health
Care, Inc. Class A Convertible Preferred Stock. (2)
4.1 Form of certificate evidencing shares of Common Stock. (1)
10.8 State of New York Department of Health Office of Health Systems
Management Home Care Service Agency License for the Company doing
business in Rockland, Westchester and Bronx Counties dated May 8,
1995. (1)
10.9 State of New York Department of Health Office of Health Systems
Management Home Care Service Agency License for the Company doing
business in Dutchess, Orange, Putnam, Sullivan and Ulster Counties
dated May 8, 1995. (1)
10.10 State of New York Department of Health Office of Health Systems
Management Home Care Service Agency License for the Company doing
business in Nassau, Suffolk and Queens Counties dated May 8, 1995. (1)
10.11 State of New York Department of Health Office of Health Systems
Management Home Care Service Agency License for the Company doing
business in Orange and Rockland Counties dated July 1, 1995. (1)
10.15 Personal Care Aide Agreement by and between the Company and Nassau
County Department of Social Services dated October 18, 1995. (1)
10.17 State of New York Department of Health Office of Health Systems
Management Home Care Service Agency License for the Company doing
business in Bronx, Kings, New York, Queens and Richmond Counties dated
December 29, 1995. (1)
10.19 Homemaker and Personal Care Agreements by and between the Company and
the County of Rockland Department of Social Services dated January 1,
1996. (1)
10.43 ++ Employment Agreement by and between the Company and Jerry Braun dated
November 12, 1999. (3)
10.44 ++ Employment Agreement by and between the Company and Jacob Rosenberg
dated November 12, 1999. (3)
10.45 Loan and Security Agreement among New York Health Care, Inc., NYHC
Newco Paxxon, Inc. and Heller Healthcare Finance, Inc. dated November
28, 2000. (incorporated by reference to Exhibits to the Company's Form
8-K Report filed on December 8, 2000)
10.46 Revolving Credit Note dated November 28, 2000 made by the Company and
NYHC Newco Paxxon, Inc. to the order of Heller Healthcare Finance,
Inc. ((incorporated by reference to Exhibits to the Company's Form 8-K
Report filed on December 8, 2000)
10.49 Amendment No. 1 to Loan and Security Agreement and Consent and Waiver
with Heller Healthcare Finance, Inc. dated November 27, 2002
(incorporated by reference to Exhibit to the Company's Form 8-K
Current Report filed on December 4, 2002)
10.50 ++ Amended Performance Incentive Plan (Stock Option Plan) of the
Company. (4)
10.51 ++ Amendment to Employment Agreement between the Company and Jerry
Braun dated January 28, 2003. (4)
10.52 ++ Amendment to Employment Agreement between the Company and Jacob
Rosenberg dated January 28, 2003. (4)
14.1* Code of Ethics for Senior Financial Officers.
23.1* Consent of Weiser LLP Independent Public Accountants.
23.2* Consent of Holtz Rubenstein & Co., LLP.
57
31.1* Certification of Chief Executive Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer Pursuant 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2* Certification of Chief Financial Officer Pursuant 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
- ----------------
* Filed herewith.
++ Compensation plan.
(1) Incorporated by reference to Exhibits filed as part of the Company's
Registration Statement on Form SB-2 under S.E.C. File No. 333-08152, which
was declared effective on December 20, 1996.
(2) Incorporated by reference to Exhibits filed as part of the Company's Form
10-QSB report for the quarter ended June 30, 1998.
(3) Incorporated by reference to Exhibits filed as part of the Company's Form
10-QSB Report for the quarter ended September 30, 1999.
(4) Incorporated by reference to Exhibits filed part as of Company's Form 10-K
Annual Report for the year ended December 31, 2002.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 31, 2004
NEW YORK HEALTH CARE, INC.
By: /s/ Jerry Braun
-------------------------------------
Jerry Braun
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Jerry Braun President, Chief Executive March 31, 2004
- ----------------------- Officer and Director
Jerry Braun
/s/ Jacob Rosenberg Vice President, Chief Operating March 31, 2004
- ----------------------- Officer, Chief Financial and Accounting
Jacob Rosenberg Officer and Director
/s/ Dennis O'Donnell Director March 31, 2004
- -----------------------
Dennis O'Donnell
/s/ H. Gene Berger Director March 31, 2004
- -----------------------
H. Gene Berger
/s/ Fred E. Nussbaum Director March 31, 2004
- -----------------------
Fred E. Nussbaum
/s/ Mark Gray Director March 31, 2004
- -----------------------
Mark Gray
/s/ Mordecai H. Dicker Director March 31, 2004
- -----------------------
Mordecai H. Dicker
59