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, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _______ to ________.
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
incorporation or organization) Identification No.)
1850 McDonald Avenue, Brooklyn, New York 11223
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 375-6700
Securities issued pursuant to Section 12(b) of the Act: None
Name of exchange on
Title of each class which registered
------------------- -------------------
Common Stock $.01 par value
Securities registered pursuant
To section 12(g) of the Act
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 "Exchange Act") during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of the registrant's common stock held by
non-affiliates computed by reference to the price at which the common stock was
last sold, or the average bid and asked price of such common stock, as of June
30, 2004, the last business day of the registrant's most recently completed
second fiscal quarter was approximately $52,175,000.
The number of shares outstanding of the registrant's common stock, as of
March 28, 2005: 32,839,138.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
2
FORWARD-LOOKING STATEMENTS
Certain information contained in this report is forward-looking in nature. All
statements in this report, including those made by New York Health Care, Inc.
and its subsidiaries ("we", "our", or the "Company"), other than statements of
historical fact, are forward-looking statements. Examples of forward-looking
statements include statements regarding the Company's future financial
condition, operating results, business and regulatory strategies, projected
costs, services, research and development, competitive positions and plans and
objectives of management for future operations. These forward-looking
statements are based on management's estimates, projections and assumptions as
of the date hereof and include the assumptions that underlie such statements.
Forward-looking statements may contain words such as "may," "will," "should,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "continue," or the negative of these terms or other comparable
terminology. Any expectations based on these forward-looking statements are
subject to risks and uncertainties and other important factors, including those
discussed below and in the following section entitled Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -"Risks
and Uncertainties." Other risks and uncertainties are disclosed in the Company's
prior SEC filings. These and many other factors could affect the Company's
future financial operating results, and could cause actual results to differ
materially from expectations based on forward-looking statements made in this
report or elsewhere by the Company or on its behalf. The Company assumes no
obligation to update 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, 2004.
RECENT DEVELOPMENTS:
In January 2004, the staff of Listing Investigations, a division of the Nasdaq
Stock Market, Inc., ("Nasdaq"), notified the Company, after requesting and
obtaining information and documents from the Company, that it had determined
that the Company no longer qualified for listing on the Nasdaq SmallCap Stock
Market primarily based on public interest concerns and the Company's failure to
timely hold its 2002 annual stockholders' meeting in compliance with the NASD
marketplace rules for securities quoted on the Nasdaq SmallCap Market. In
response, the Company requested a hearing before a Nasdaq Listing Qualifications
Panel to review the staff's determination. The hearing was held and on April 5,
2004, the Company announced that the Panel had determined that the Company's
common stock was delisted from Nasdaq, effective with the opening of business on
April 6, 2004. The Panel addressed concerns regarding events related to the
November 2003 indictment of the then President of the Company's subsidiary, the
BioBalance Corporation ("BioBalance"), who was also a director of the Company
and a then consultant to BioBalance, and the Company's failure to timely hold
its 2002 Annual Stockholder's meeting. Subsequently, the Company's common stock
began trading on the Over-the-Counter Market on the Pink Sheets.
On July 15, 2004, the Company executed a definitive agreement (the "Purchase
Agreement") for the sale of the assets of its home healthcare business to New
York Health Care, LLC (the "LLC") a company controlled by Messrs. Jerry Braun
("Braun") and Jacob Rosenberg ("Rosenberg"), who at the time were the Company's
chief executive officer and chief operating officer, for consideration of
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$2.7 million in cash, the assumption of all of the liabilities and obligations
with respect to the home healthcare business and the forgiveness of certain
future obligations that may be due to these individuals pursuant to employment
agreements each of them has with the Company. The sale was subject to the
satisfaction of a number of conditions including obtaining shareholder and
regulatory approvals. As noted below, certain of the assets that were to be sold
pursuant to the Purchase Agreement were sold by the Company to an unaffiliated
entity. The Company will consider its home health care division as discontinued
operations if the proposed sale of the entire home health care business is
consummated. We cannot assure you that the conditions to the sale of the home
healthcare business will be satisfied.
On February 24, 2005, the Company consummated a private offering (the
"Offering") which resulted in its issuing an aggregate of 7,899,362 shares (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), and warrants to purchase 3,949,681 shares of Common Stock (the
"Warrants") to persons who qualify as "accredited investors" within the meaning
of rule 501 of Regulation D promulgated under the Securities Act of 1933 (the
"Act"). The aggregate purchase price for the Shares and Warrants was $4,897,600.
Each Warrant is exercisable to purchase one share of the Company's Common Stock
at an exercise price of $0.78 per share during the five-year period commencing
on February 24, 2005. The Shares and Warrants were issued to the purchasers
without registration under the Act, in reliance upon the exemptions from
registration provided under Section 4(2) of the Act and Regulation D promulgated
thereunder. In connection with the Offering, the Company paid Placement Agent
commissions of $470,260 and an additional $146,616 to cover non-accountable and
certain other expenses of the Placement Agent. In addition, the Company issued
to the Placement Agent and its designees five-year warrants to purchase an
aggregate of 1,777,356 shares of the Company's Common Stock at $0.62 per share.
The net proceeds from the Offering are being used to support BioBalance's
operations including research and development, clinical trials and working
capital. In addition, a $1.7 million loan from the Company to BioBalance was
repaid from the proceeds of the Offering.
In connection with the consummation of the Offering, Braun and Rosenberg , at
the request of the Placement Agent resigned irrevocably as directors and
executive officers of the Company. In connection with Braun and Rosenberg's
agreement with the Placement Agent, in order to secure the obligations of the
Company and its subsidiary, NYHC Newco Paxxon, Inc. to (i) consummate the sale
of all the assets relating to the Company's home healthcare business (the "Asset
Sale") to the LLC, pursuant to the terms of the Purchase Agreement or (ii) to
comply with any future payment obligations the Company to Braun and Rosenberg
under their respective employment agreements with the Company, the Company
entered into an agreement (the "Security Agreement"), on February 24, 2005,
which granted Messrs. Braun and Rosenberg a security interest in the assets of
the Company's home healthcare business being conducted in the states of New York
and New Jersey and provided for the deposit of up to $3.55 million in a cash
collateral account (collectively, the "Collateral"). None of the assets of
BioBalance will be used as Collateral.
The Security Agreement provides that Messrs. Braun and Rosenberg will receive
all or a portion of the Collateral (and any additional amounts that they are
entitled to under their employment
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agreements and the Security Agreement) if prior to the consummation of the Asset
Sale: (i) the Company breaches the Purchase Agreement and the breach is not
cured within any applicable cure period or waived by Braun and Rosenberg, (ii)
there are changes in the composition of a majority of the Company's Board of
directors (other than the resignations of Messrs. Braun and Rosenberg or a
reduction in the number of Board members resulting from death, disability or
resignation of a member or the additions of directors that have been expressly
approved in writing by Braun and Rosenberg), (iii) an event occurs that would be
considered "good reason" for the resignation of Braun and Rosenberg under their
employment agreements with the Company or would be considered a "change of
control" under those employment agreements, or (iv) the Asset Sale has been
terminated or abandoned for any reason prior to December 31, 2005 (other than as
a result of a breach of the Purchase Agreement by, or a failure to act by the
LLC or Braun or Rosenberg).
At the close of business on February 24, 2005: (i) Mr. Braun resigned as a
director and as the Company's Chief Executive Officer and President and (ii) Mr.
Rosenberg resigned as a director and as the Company's Vice President, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Secretary. Mr. Braun continues to be employed by the Company as the President of
its home healthcare division and Mr. Rosenberg continues to be employed by the
Company as the Vice President of the Company's home healthcare division. Other
than their ceasing to be officers of the Company, and the resulting changes in
their duties and responsibilities, their respective employment agreements with
the Company remain in effect. In addition, Messrs. Braun and Rosenberg have
board observer rights with respect to the Company's board of directors until
such time as the Asset Sale is consummated. Pursuant to the terms of their
respective employment agreements, as a result of their resignations from the
Company's Board of Directors, on February 24, 2005, each of Braun and Rosenberg
received ten year stock options ("Options") to purchase 500,000 shares of the
Company's common stock at an exercise price of $0.85 per share, pursuant to the
Company's Performance Incentive Plan.
As of the close of business on February 24, 2005, Mr. Dennis O'Donnell became
the Company's Chief Executive Officer and Secretary. Mr. O'Donnell also retained
his position as the Chief Executive Officer and a director of BioBalance and as
a director of the Company. His annual salary was increased by $25,000 to
$225,000.
On March 23, 2005, the security interest that was granted pursuant to the
Security Agreement was terminated and Messrs. Braun and Rosenberg agreed that
the Company could enter into an agreement with a third party for the sale of the
New Jersey portion of the Company's home health care operations under specified
conditions without being in breach of the Purchase Agreement.
On April 11, 2005, the Company entered into an agreement to sell the New Jersey
portion of the Company's home health care operations (the "NJ Business") to
Accredited Health Services, Inc. ("Accredited Health") a subsidiary of National
Home Health Care Corp. ("National") for $3.0 million. In addition to Messrs.
Braun and Rosenberg, the LLC also consented to the sale of the NJ Business to
Accredited and agreed that such sale would not result in a breach of the
Purchase Agreement.
Pursuant to the terms of the definitive agreement funding of the purchase price
was received by the Company upon execution of the agreement, with the exception
of $150,000 (the "Escrow Funds"), which was placed in escrow to cover actual
losses, if any, incurred by Accredited for which the Company is required to
indemnify Accredited pursuant to the definitive agreement. If no claims by
Accredited for indemnification by the company are made, the Escrow Funds will be
released to the Company 90 days after the formal closing of the transaction
which will occur within 45 days of the signing of the definitive agreement,
subject only to an orderly transition of the business.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are engaged in two industry segments, the delivery of home healthcare
services (sometimes referred to as the "home healthcare business") and, since
our acquisition of BioBalance in a merger transaction in January 2003 (treated
for accounting purposes as a reverse acquisition of us by BioBalance), the
development and planned manufacturing and marketing of proprietary
biotherapeutic agents for the treatment of gastrointestinal ("GI") disorders.
BioBalance is our wholly-owned subsidiary. For accounting purposes, BioBalance
is considered to be the "accounting acquirer" in the transaction.
For more 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 office is located at 1850 McDonald Avenue, Brooklyn, New York 11223,
telephone 718-375-6700.
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 healthcare 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 healthcare business also
operates in Jersey City, Edison, Whiting, Toms River, East Orange and Paterson,
New Jersey under the name Helping Hands Healthcare. Our home healthcare
services are supplied principally pursuant to contracts with healthcare
institutions and governmental agencies, such as various county departments of
social services, the New York City Human Resources Administration, New Jersey
Medicaid and Beth Abraham Long-Term Home Health Services and Kingsbridge Medical
Center. We will cease our home health care operations in New Jersey upon
consummation of our sale of the NJ Business to Accredited Health, which is
scheduled to occur on or before May 28, 2005.
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
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to existing and new referral sources; as well as maintaining our regular
training and testing programs, and recruitment activities. See "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). BioBalance 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
We intend to actively pursue BioBalance's business plan of developing,
manufacturing and marketing its initial product PROBACTRIX(R) and other products
in its pipeline for treating gastrointestinal disorders while divesting our home
health care business. In furtherance of these goals, as noted above, in July
2004, the Company executed the Purchase Agreement for the sale of the assets of
its home health care business to the LLC for consideration of $2.7 million in
cash, the assumption of all of the liabilities and obligations with respect to
the home health care business and the forgiveness of certain future obligations
that may be due to Braun and Rosenberg pursuant to employment agreements each of
them has with the Company. The proposed sale was subject to the satisfaction of
a number of conditions including obtaining shareholder and regulatory approvals.
Since the execution of the Purchase Agreement National made an unsolicited offer
to the Company for the NJ Business which resulted in the Company entering into
an agreement on April 11, 2005 to sell the NJ Business to Accredited Health for
$3 million with a formal closing of this sale to occur within 45 days. Messrs.
Braun and Rosenberg and the LLC consented to the sale of the NJ Business to
Accredited Health. The Company has commenced negotiations with Messrs.Braun and
Rosenberg to sell them the remaining assets of the home health care business
which were used in connection with the operations of that business in various
locations in the State of New York (the "New York Assets"). There can be no
assurance that an agreement to sell the remaining portion of the Company's home
health care business to Messrs. Braun and Rosenberg will be entered into or, if
it is, that any transaction called for by such agreement will be consummated.
Any sale of the New York Assets to the LLC, Messrs. Braun or Rosenberg or
otherwise will be subject to the receipt of any applicable shareholder and
regulatory approvals for the sale of the New York Assets. Therefore, while
BioBalance does not expect to have access to the financial or operating
resources of the Company's home health care business, it has received a
substantial portion of the funds from the sale of the NJ Business to Accredited
and currently expects to seek additional funding in the future from the sale of
equity, debt or convertible securities of the Company.
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BIOBALANCE BUSINESS
OVERVIEW
Our BioBalance subsidiary is a development-stage company focused on the
development of novel treatments for various GI disorders that we believe are
poorly addressed by current therapies. These include pouchitis, irritable bowel
syndrome ("IBS"), Crohn's disease, ulcerative colitis, and diarrhea caused by
antibiotics, chemotherapy and travel. We believe that our initial potential
product, PROBACTRIX, a probiotic (a bacterial culture that supports a good and
healthy balance of microorganisms) can reduce symptoms of pouchitis, IBS and
other GI disorders. We have developed patented biotherapeutic agents for GI
disorders based on outstanding science and a pharmaceutical development approach
(e.g. randomized, double blind, placebo-controlled clinical trials).
Our current efforts consist of developing clinically validated products for
GI diseases and conditions where current therapies are inadequate or may have
significant side effects. Unlike conventional treatments, we believe that our
core technology restores the microbial balance in the GI tract by displacing
pathogenic bacteria and preventing their re-establishment. Clinical trials
conducted independently at the Cedars-Sinai Medical Center in California have
linked the overgrowth of pathogenic bacteria to IBS symptoms. Therefore, we
believe that our products may address an underlying root cause of many GI
disorders in addition to providing symptom relief with no demonstrated side
effects.
Our initial potential product is PROBACTRIX, a proprietary, live, single
strain (M17) of E.coli bacteria, which we plan to develop as a treatment for
pouchitis, IBS and a variety of other GI disorders. Prior clinical studies have
confirmed that this product can reduce the symptoms of IBS and other GI
disorders and, therefore, is able to improve the quality of life of patients
using the product to treat these disorders.
We are pursuing an accelerated regulatory approval for the use of PROBACTRIX in
the U.S. and Europe by filing an Investigational New Drug ("IND") application
with the U.S. Food and Drug Administration ("FDA") and with comparable
regulatory agencies in Europe and seeking "orphan drug" designation for the
prevention and/or treatment of pouchitis. Pouchitis is a non-specific
inflammation of the ileal reservoir, which can be a long-term problem for some
patients. This usually occurs during the first two years after bowel
reconstruction due to ulcerative colitis. Most pouchitis sufferers experience
symptoms including steadily increasing stool frequency that may be accompanied
by incontinence, bleeding, fever and/or a feeling of urgency. We believe that
current treatments (including antibiotics) are often ineffective in relieving
symptoms. "Orphan drug" refers to a product that treats a rare disease affecting
fewer than a specified number of persons (200,000 in the U.S.). Current federal
laws require that a drug be the subject of an approved marketing application
before it is transported or distributed across state lines. Because a sponsor of
a drug will probably want to ship the investigational drug to clinical
investigations in many states, it must seek an exemption from that legal
requirement. The IND is the means through which the sponsor technically obtains
this exemption from FDA. FDA approval of an IND permits the sponsor to conduct
clinical trials in the humans. We submitted the IND to the FDA at year-end 2004.
On February 2, 2005, we were notified by the FDA that the IND was on clinical
hold and that comments would be sent to us within 30 days. Comments on the IND
were received on March 4, 2005. BioBalance has reviewed the comments and is
currently working to resolve all of the issues raised by the FDA. We expect to
have a response prepared and sent back to the FDA during the second quarter of
2005. Although we believe that we can adequately address all of the issues
raised by the FDA, we can give no assurance that the FDA will agree with all of
our responses to the issues raised or give us clearance to proceed with the
clinical trials.
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Our core intellectual property, including rights to two patented Bacillus
strains, B. subtilis and B. licheniformis, is protected by patents that have
been filed in the US and certain foreign countries. The patented formulation
used for PROBACTRIXconsists of a proprietary strain of non-pathogenic E.coli,
derived from an organism that was originally isolated from the intestinal
mircoflora of a healthy volunteer in a liquid formulation. The technology and
the processes comprise conditions that preserve M-17 E.coli in the biologically
active form. Patents have been filed by BioBalance for technology that could
extend the product's shelf life for two years or longer at room temperature.
In addition, we received approval of the registration of PROBACTRIX as a
registered trademark in the U.S. on March 1, 2005.
We have sub-contracted with a third-party for the manufacture of sufficient
quantities of PROBACTRIX in the U.S. to satisfy our clinical trial needs. We
have successfully transferred the manufacturing process of PROBACTRIX from
Israel to the University of Minnesota Biotech Center and, after confirming that
several batches met specifications, again have transferred the process to a
commercial pilot-scale production facility in Minnesota. We are working with a
third-party manufacturer (Benchmark Biolabs Inc.) to transfer production of
PROBACTRIX to their facility in Lincoln, Nebraska for manufacturing of
PROBACTRIX for the FDA-sanctioned clinical trials.
REGULATORY STRATEGY
Our regulatory strategy involves pursuing an accelerated approval for
PROBACTRIX in the U.S. and Europe by filing an IND application and seeking
orphan drug designation for the prevention and/or treatment of pouchitis. There
are currently no approved treatments for pouchitis. Additional clinical studies
can subsequently be conducted to determine whether there is support for broader
usage.
BioBalance originally planned to pursue marketing of PROBACTRIX as a
medical food for IBS, given limited resources and the significant time required
for prescription drug development. Industry studies indicate that it takes
approximately 7-13 years for the average prescription drug to progress from the
IND filing to market introduction. However, following discussions with
regulatory consultants and potential pharmaceutical licensees, it was determined
that a shorter pathway to drug development through filing an IND for an orphan
drug indication would be the most economically attractive course. This involved
addressing pouchitis, a narrowly focused indication with unmet therapeutic
needs, rather than IBS. Pouchitis also offered the potential for orphan drug
designation and expedited FDA approval. We believe, although there is no
assurance, that we can achieve FDA approval for PROBACTRIX as a prescription
drug to treat pouchitis in approximately 48 months after IND approval.
We plan to conduct double blind, placebo controlled studies if we obtain a
FDA endorsement of the clinical development plan via an approved IND for the
pouchitis indication. The first step would involve a safety/efficacy study in
the target population. This study would likely be followed with a
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pivotal Phase III trial in approximately 75-100 pouchitis patients. The product
could be approved for marketing in the U.S. by 2009 or earlier with fast track
designation although no assurance can be given as to any approval date.
Despite the longer time-to-market, we believe that the prescription drug
route is vastly more attractive than the medical food route for the following
reasons:
- prescription drugs are priced significantly higher than
non-prescription products;
- gross margins are typically 90% on prescription drugs versus 60%-70%
for non-prescription products;
- prescription drugs are reimbursable by health insurance plans, while
non-prescription products such as medical foods are generally
non-reimbursable; and
- there is a greater likelihood of establishing a marketing partnership
or licensing agreement with a major pharmaceutical company if
PROBACTRIX were marketed as a prescription drug rather than a medical
food.
A prescription drug can be assigned orphan drug status by the FDA and
European regulatory authorities if the indication addresses a target population
of less than 200,000 sufferers in the U.S. or less than 5 sufferers per 10,000
persons in Europe. There is a separate Office of Orphan Drug Product Development
at the FDA designed to help facilitate rapid approval of orphan drug
applications. Once approved, orphan drugs are given seven year exclusivity in
the U.S. and ten years of exclusivity in Europe. Additional benefits of
receiving orphan drug status in the U.S. include study design assistance, a 50%
reduction in the filing cost of the NDA/BLA and may also include partial funding
of clinical costs by the FDA. The NDA/BLA is the vehicle through which drug
sponsors formally propose that the FDA approve a new pharmaceutical for sale and
marketing in the U.S. The NDA/BLA requests permission from FDA to market a drug
in the U.S. In Europe, a drug product is filed with the European Medicines
Agency (EMEA) for marketing throughout the European Commission area. The EMEA
has a Committee for Orphan Medicinal Products (COMP) whereby drugs are
designated "orphan drug" status for the European Union.
Longer term, we are currently considering expanding the label indication of
PROBACTRIX to include a number of additional GI indications, including the
prevention or treatment of antibiotic-associated diarrhea (AAD). Recent medical
research indicates that antibiotics significantly alter intestinal microflora, a
key factor in causing diarrhea, for up to three months following treatment,
however, we currently have not yet formulated any plans with respect to the
expansion of the label indications of PROBACTRIX. We plan to explore
regulatory approval for a veterinary formulation of PROBACTRIX 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. McDonalds, the world's largest purchaser of animal
products, announced that its suppliers must phase out inappropriate use of
antibiotics on farm animals by the end of 2004. It is known that repeated use
of antibiotics can cause farm animals to become weak and retarded. We believe,
although there is no assurance, that PROBACTRIX has a particularly high safety
and efficacy profile in many different kinds of animals. We can not assure that
we will ever market Probactrix as an animal feed.
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PRODUCTS
PROBACTRIX
Our initial product, PROBACTRIX, is a non-pathogenic probiotic, which we
believe addresses the root cause of many GI disorders, including pouchitis, IBS,
IBD and diarrhea, by inhibiting the growth of pathogenic bacteria and preventing
their re-colonization. Clinical studies in over 14,000 patients have confirmed
that this product can reduce the symptoms of various GI disorders.
This product was approved as a biological agent for the treatment of a
broad range of GI disorders and diarrheas in Russia in May 1998, as a food
supplement for human use by the Ministry of Health of Israel in May 1998 and for
use as animal food by the Ministry of Agriculture of Israel in September 1998.
In August 2000, Tetra-Pharm, an Israeli pharmaceutical company, agreed to cease
manufacture and sale of the product in conjunction with its agreement to sell
all rights relating to the product to BioBalance. Since then, production of the
formula has been limited to supplying hospitals and universities where
BioBalance is conducting further research.
The basic active component in PROBACTRIX is a selective strain of
non-pathogenic E.coli bacteria, which is contained in a pleasant tasting liquid
suspension. This bacterium is a commonly represented species in the healthy
microflora of humans and animals. It has been used for the preparation of
Colibacterin, Bificon and other medicines and food supplements outside the U.S.
The research on PROBACTRIX originated in Russia from studies by Dr. Nellie
Kelner-Padalka, a pediatrician and our scientific founder. These studies 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 for some patients to ingest.
Dr. Kelner-Padalka later brought her studies to Israel where several
technologies were used to expand the shelf life and improve the smell and taste.
As part of the regulatory approval process of E. coli M-17 in Russia, a
scientific panel determined the product's mechanism of action included the
following:
- Rapid suppression of pathogenic microorganisms and their repulsion.
- Restoration of the normalization of the body's immune system due to
increased synthesis of immunoglobulin, interferon and activation of
macrophages.
- Stimulation of the enzyme complex (protease, amylase, lipase and
cellulase), which helps to improve digestion.
- Binding, neutralizing and withdrawing toxic substances (including
heavy metals) from the body.
- Improvement of the absorption of selected micronutrients including
B-complex vitamins and essential amino acids.
The patented formulation used for PROBACTRIX consists of a proprietary
strain of non-pathogenic E.coli, derived from an organism that was originally
isolated from the intestinal microflora
11
of healthy volunteers, which is preserved in a liquid extract formulation. The
technology and the processes comprise conditions that preserve M-17 E. coli in
the biologically active form. Additional patents have been filed by BioBalance
for technology that could extend the product's shelf life for two years or
longer at room temperature.
NEXGEN PRODUCT PLATFORM
We have acquired the rights to several strains of Bacillus that have
exhibited anti-inflammatory, anti-bacterial and anti-viral properties, which may
be effective in treating a variety of GI diseases. We refer to these strains of
Bacillius as our NexGen Product Platform. We believe Bacillus strains are
therapeutically effective against rotavirus and campylobacter pathogens, which
are the leading causes of infectious diarrhea. We believe this technology could
also be effective in treating ulcerative colitis. There was a predecessor
product (called Biosporin), based on the Bacillus strains acquired, which was
approved in Russia. Currently we have not yet formalized any plan with respect
to the development of our NexGen product platform and no assurance can be given
that we will ever commercially market any product related to this product
platform.
PRIOR CLINICAL STUDIES
The active ingredient in PROBACTRIX has undergone safety and efficacy
testing by more than 14,000 patients in controlled trials as well as case study
reports and has shown safety and efficacy in adults and children as young as six
months old. The product has been shown effective in a broad range of GI
diseases and conditions including IBS, IBD, pouchitis, Crohn's disease,
ulcerative colitis and diarrhea caused by antibiotics, chemotherapy and travel.
Two clinical studies recently conducted at Cedars-Sinai Medical Center
showed the link between IBS symptoms and pathogenic bacteria and support the
rationale for the use of PROBACTRIX as an effective treatment for IBS.
Clinical studies conducted in Israel indicate that PROBACTRIX is effective
at addressing various GI symptoms in both male and female patients with no
apparent side effects. Patients typically reported a marked reduction in
abdominal symptoms. Most recently, two pilot studies have been completed in
Israel with the current formulation. The first was an open label study
conducted on 63 patients with IBS, which were unresponsive to other therapies,
and 20 patients with Crohn's disease. After four to six weeks of therapy, 52%
of the IBS patients had an excellent response, 35% and 30% of the Crohn's
disease patients had an excellent and partial response, respectively, and no
adverse events were observed.
An open-label trial, examining the impact of PROBACTRIX on patients with
Crohn's disease, reported that three of the eight patients experienced a marked
reduction in abdominal symptoms, two dropped out, two experienced no improvement
and one experienced a worsening of symptoms.
A randomized, double blind pilot study conducted by Tiomny, et al. in 2003
reported that PROBACTRIX relieved major symptoms of IBS with no side effects.
This study involved 20 patients, who were experiencing severe symptoms of
diarrhea and constipation with a mean duration of eight years. Eight of the ten
patients in the placebo group withdrew from the study due to lack of response.
All ten patients in the treatment group completed the study. The treatment group
experienced significant improvement in IBS symptom relief with no apparent side
effects.
12
CURRENT STUDIES
We conducted a high-dose safety trial on PROBACTRIX to verify the excellent
safety results found in prior studies and to support Phase I status for the
prescription drug effort. Phase I studies focus on the safety of a drug or
biological agent, and are typically conducted in healthy adult volunteers at
relatively high doses. This study was completed in the third quarter of 2004.
In addition, we have recently begun a randomized, multi-center double blind,
placebo-controlled, clinical trial in approximately 200 IBS patients to study
the effectiveness of PROBACTRIX as a medical food. Sites for this study include
Cornell Medical Center in New York City, St. Michael's Hospital in Toronto,
Canada, Bikur Cholim Hospital in Jerusalem, Israel, and Sourasky Medical Center
in Tel Aviv, Israel.
VETERINARY APPLICATION
BioBalance or its predecessors has conducted numerous clinical studies in
farm animals to support the use of PROBACTRIX 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, could be
particularly successful. Veterinary experts believe that repeated applications
of antibiotics often leave animals weak and growth retarded. BioBalance believes
that PROBACTRIX 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 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. No assurance can be given that we will
ever market Probactrix as a veterinary feed additive.
MANUFACTURING
BioBalance has successfully transferred the manufacturing process of
PROBACTRIX from Israel to the University of Minnesota Biotech Center, enabling
sufficient quantities of PROBACTRIX 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, 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 a prescription drug
product. BioBalance has contracted with a third-party manufacturer and is
currently working to transfer the manufacturing technology to their
state-of-the-art facility.
INTELLECTUAL PROPERTY
BioBalance uses a combination of patents, trademarks and trade secrets to
protect its core technology, which is proprietary and protected by 34 filed
patents in the U.S. and certain foreign countries. In the U.S., BioBalance has
filed applications for 16 patents covering applications of its PROBACTRIX(R)
technology, of which 14 have been issued. The patent expiration dates range
from 2020 to 2023. 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. On
March 1,
13
2005, it received notification that PROBACTRIX has been approved as a registered
trademark in the U.S.
In August 2003, BioBalance acquired the GI rights to a line of
biotherapeutic agents (NexGen Platform). The purchase includes the rights to two
patented strains of Bacillus (B. subtilis and B. licheniformis) for $3,850,000
which included a one-time cash payment of $250,000 and one million shares of
Common Stock of the Company valued at $3,600,000. See "NexGen Product Platform"
above. BioBalance is also looking to obtain rights for other agents showing
promise in treating various GI diseases. At December 31, 2004 it was determined
that the investment in the NexGen Product Platform was impaired and as a result
of the impairment analysis a total of $1,740,326 was during the fourth quarter.
The impairment is due to a number of factors including the acceleration of the
Company's efforts to obtain regulatory approvals and take other action necessary
to market PROBACTRIX as a prescription product, overall limited funding
available to the Company to develop the NexGen Product Platform and available
management time. While BioBalance believes that the NexGen Platform is a viable
technology that can be commercialized, any steps the Company may take in the
future in furthermore of such commercialization will continue to be delayed
until the above mentioned factors are resolved.
BIOBALANCE EMPLOYEES
At March 31, 2005, BioBalance had two full time employees and outsourced
most of its clinical and 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.
HOME HEALTH CARE BUSINESS
OVERVIEW
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 and administration of
medications.
Our services are provided principally by our staff of professionals and
paraprofessionals (some are bilingual), who provide personal care to patients,
and, to a lesser extent, by our staff of skilled nurses. Approximately 99% of
our home health revenues in 2004 were attributable to services by our
paraprofessional staff.
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 the New Jersey Board of Nursing for the training of Certified Home
Health Aides in the State of New Jersey. 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.
14
On April 11, 2005 we entered into an agreement to sell our home healthcare
operations in the State of New Jersey to Accredited. Closing of this transaction
will occur on or prior to May 28, 2005. See - Recent Developments.
Organization and Operations
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. 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
collections, revenues and staffing. Our systems also provide monthly, financial
comparisons to prior periods and comparisons among our branch offices.
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 2004. 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. Approximately 98
such contracts were in effect and active as of December 31, 2004.
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 2004
- ------------------------------------------- --------------------------------
New York City Medicaid (HRA) 43.4%
New Jersey Medical Assistance Program 10.4%
Beth Abraham Long Term Home Health Program 6.4%
Overall, our 10 largest referring institutions accounted for approximately
80.8% of net revenues for 2004.
15
"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, 2004 the Company's DSO
were 74.
Reimbursement
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 2004, payments from
referring institutions that receive direct payments from Medicare and Medicaid,
together with direct reimbursement to us from Medicaid, accounted for
approximately 99% of net revenues. Direct reimbursements from private insurers,
prepaid health plans, patients and other private sources accounted for
approximately 1% of net revenue for 2004.
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.
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-based healthcare, which is
generally less costly to third party payers than hospital-based care, has
benefited from many of these cost containment measures.
We negotiate contracts 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.
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
16
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"). In November 2003, the New
York offices of the Company received full accreditation from the Joint
Commission for the next three years (expiring in November 2006). 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.
Sales and Marketing
Messrs. Braun and Rosenberg, officers of our health care division, 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
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.
17
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. Any such non-compliance or violation could have a material
adverse effect on our 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 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-Oxley 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.
18
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 Premiere Health Services, National Home Health Care Corp.,
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 do. We also compete with many other small temporary medical staffing
agencies.
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 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.
HOME HEALTH CARE EMPLOYEES
At March 31, 2005, our home health care business had 1,927 employees, of whom 94
are salaried, including two division officers, a controller, seven
administrators/branch managers, 18 nurses, 12 accounting staff, seven clerical
staff and 47 field staff supervisors. The remaining 1,833 employees are paid on
an hourly basis and consist of professional and paraprofessional staff.
19
None of our Home Health Care or BioBalance 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 2010, at a monthly rental of approximately $7,000 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 June
2005 through April 2010 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. We expect that the six leases with respect to our New Jersey
offices will be assigned to and assumed by Accredited Health in connection with
the closing of the sale of the NJ Business to Accredited.
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.
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
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock traded on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") SmallCap Market until April 6, 2004.
Since that time, our common
20
stock has been trading over-the-counter on the Pink Sheets. Our common stock was
also listed on the Boston Stock Exchange ("BSE") until March 5, 2005, when our
voluntary delisting application was granted, although no trades of our common
stock had been executed on the BSE for at least two years prior to our making
the voluntary application to delist from the BSE. The following table sets
forth, for the quarters indicated, the high and low sales prices for our common
stock on the NASDAQ SmallCap Market or the Pink Sheets as applicable.
Fiscal 2004 High Low
- -------------- ---- ----
First Quarter 3.95 2.99
Second Quarter 1.22 0.60
Third Quarter 0.82 0.50
Fourth Quarter 0.67 0.46
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
HOLDERS
At March 8, 2005, we had approximately 145 holders of record and 1,385
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 11 of this report, "Executive
Compensation - Savings and Equity Compensation Plans."
21
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
2004 2003 2002 DECEMBER 2001
------------ ------------- ------------ ---------------------
Total revenues $48,854,358 $ 45,060,449 $ - $ -
Net loss (6,071,685) (22,052,170) (1,399,057) (452,169)
Basic loss per share (0.24) (0.91) (0.07) (0.03)
Diluted loss per share (0.24) (0.91) (0.07) (0.03)
Current assets 11,941,842 14,543,209 3,051,720 906,926
Total assets 16,503,195 21,628,968 5,259,449 2,918,836
Current liabilities 13,918,937 12,607,203 349,182 117,070
Long-term liabilities, net of
current portion - - - -
Shareholders' equity 2,584,258 9,021,765 4,910,267 2,801,766
Book value per share .10 .36 .23 .16
Dividends per share - - - -
Shares used in computing
loss per common share:
Basic 24,939,776 24,283,907 20,562,131 17,574,891
Diluted 24,939,776 24,283,907 20,562,131 17,574,891
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEARS ENDED
DECEMBER 31, 2003 AND 2002
Overview
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 for the years ended December 31, 2004 and
December 31, 2003 is that of the Company while the data for December 31, 2002 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.
The Company operates in two industry segments; the home health care
business, which business has a 20-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.
See Recent Developments for a description of the Company's agreement to sell the
NJ Business to Accredited.
22
RESULTS OF OPERATIONS
Revenues in 2004 increased to $48,854,000 from $45,060,000 in 2003. The
increase in revenue is due to an increase in sales volume to some of our
existing home health care clients. There was no reported revenue for the year
2002.
Cost of professional care of patients in 2004 increased to $39,214,000 from
$36,107,000 in 2003. The increase in cost is due to the increase in sales. There
were no reported costs for the year 2002.
Selling, general and administrative expenses ("SG&A") in 2004 increased to
$12,056,000 from $11,249,000 in 2003 and $830,000 in 2002, an increase of 7% and
1,255% for the years 2003 and 2002 respectively. The increase in expenses for
the year 2004 compared to 2003 is the result of administrative personnel
increases and other costs associated with the increased revenue. In addition,
the Company incurred significant legal, accounting and insurance cost in 2004
relating to the indictment of one of its former directors. The year 2002 only
includes the expenses related to the BioBalance segment.
As a result of the merger in 2003, 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.
The net loss of $6,072,000 for the year 2004 includes income of $351,000
from the operation of the home care segment and a loss of $6,423,000 from the
BioBalance segment which to date has not generated any revenue. The net loss
from the BioBalance segment also includes an expense of $1,740,326, for the
impairment writedown of the NexGen Platform technology that was purchased in
2003. BioBalance intends to pursue the NexGen Platform technology in the future
as funds and management time allow although there can be no assurance that any
commercially usable product will be derived from the NexGen Platform.
For the year 2003, the Company suffered a net loss of $22,052,000. This
includes the non-cash impairment charge of $17,869,000, a net loss from the
BioBalance segment of $4,657,000, which 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 income of
approximately $474,000 from the operation of its home care segment. The net loss
of $1,399,000 for the year 2002 was due principally to product development for
PROBACTRIX by BioBalance. BioBalance had no revenues in 2002.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 requires certain variable interest entities to be
23
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 at risk for the entity to support its
activities. In December 2003, the FASB revised certain elements of FIN 46 ("FIN
46-R"). The FASB also modified the effective date of FIN 46. This interpretation
applies immediately to variable interest entities created after January 31, 2003
and variable interest entities in which the Company obtains an interest after
January 31, 2003. For variable interest entities in which a company obtained an
interest before February 1, 2003, the interpretation applies to the periods
ending after March 15, 2004. The adoption of FIN 46 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," or SFAS No. 123R. SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, requires that compensation cost relating to
share-based payment transactions be recognized in the financial statements,
based on the fair value of the equity or liability instruments issued. SFAS No.
123R is effective as of the beginning of the first interim period that begins
after December 31, 2005 and applies to all awards granted, modified, repurchased
or cancelled after the effective date. We do not expect the adoption of this
standard to have a significant impact on our consolidated results of operations
or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets-an amendment of APB Opinion No. 29," or SFAS No. 153. SFAS No. 153
eliminates the exception for non-monetary exchanges of similar productive assets
of APB Opinion No. 29 and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for non-monetary asset exchanges occurring in the fiscal periods
beginning after June 15, 2005. We do not expect the adoption of this standard
to have a significant impact on our consolidated results of operations or
financial position.
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 with G.E. Capital Health Care Financial
Services 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
2005, may be 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 formula based upon a calculation relating to recent collection
histories of certain classes of qualified accounts
24
receivable. Currently, application of the liquidity factors percentage formula
results in 97% of qualified accounts receivable being part of the borrowing
base. Accordingly, at December 31, 2004 the amount available for borrowing under
this facility was $4,000,000. The agreement contains various restrictive
covenants, which amongst other things, require that the Company maintain 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 relating to the revolving credit
facility to allow it to lend money to its BioBalance subsidiary if there is no
loan outstanding under the revolving credit facility. At December 31, 2004, New
York Health Care had loaned BioBalance $1,500,000 and at February 25, 2005 the
loan amount was approximately $1,700,000, which was repaid in full with a
portion of the proceeds of the Offering. The loan agreement has also been
amended to allow the Company to invest money in BioBalance.
In addition, on April 11, 2005, the Company's loan agreement was modified
to permit the sale of the NJ Business to Accredited Health and to remove the
lender's lien with respect to the assets of the NJ Business. As a result of this
modification, no loans under the agreement will be made until the net worth has
been amended to the lender's satisfaction.
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, 6.75% 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.
Contractual Obligations and Commitments
Information in the following table provides a summary of our contractual
obligations and commercial commitments as of December 31, 2004.
25
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* $ 1,166,000 $ 423,000 $ 458,000 $ 253,000 $ 32,000
Purchase Obligations -0- -- -- -- --
Other Long-Term Liabilities Reflected
on the Registrant's Balance Sheet
GAAP --------------- ----------------- ------------ ------------ ------------------
Total $ 1,166,000 $ 423,000 $ 458,000 $ 253,000 $ 32,000
=============== ================= ============ ============ ==================
* 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.
Because we anticipate that the leases used in connection with the NJ
Business will be assigned to and assumed by Accredited Health in connection
with the closing of the sale of the NJ Business to Accredited Health, the
total operating lease obligations are expected to decrease by $207,000.
Net cash used in operating activities for the year 2004 was $5,073,333, as
compared to net cash provided of $233,269 and net cash used of $958,773 for the
years 2003 and 2002, respectively. The change in net cash used in operating
activities from 2004 to 2003 is due mainly to an increase in accounts receivable
and unbilled services, a decrease in accrued payroll, a decrease in amounts due
to related parties and a net loss for the period, offset by an increase in
accounts payable and accrued expenses and an increase in the amounts due to HRA.
The net cash provided by operating activities for 2003 as compared to net cash
used in operating activities for 2002 is mainly the result of comparing two
business segments in 2003 to only one segment in 2002.
Net cash used in investing activities for the year 2004 totaled $77,805 ,
as compared to net cash provided of $3,175, 321 and net cash used of $510,419
for the years 2003 and 2002 respectively. The increase in 2003 was due mainly
to cash acquired from the acquisition of the BioBalance subsidiary.
There was no net cash provided by financing activities for the year ended
December 31, 2004. Net cash provided by financing activities for the year ended
December 31, 2003 totaled approximately $1,304,000, as compared to $3,198,000
for the year ended December 31, 2002. The decrease was due mainly to a decrease
in the sales and issuance of common stock.
As of December 31, 2004, approximately $8,656,000 (approximately 52.4% ) of
the Company's total assets consisted of accounts receivable from customers as
compared to approximately $6,577,000 or 30.4% as of December 31, 2003. As of
December 31, 2002 BioBalance had no accounts receivable.
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 years ended December 31, 2004 and 2003, the
Company's DSO's were 74 and 62, respectively. For the year ended December 31,
2002, BioBalance had no revenue and accounts receivable.
26
BIOBALANCE SEGMENT
As of December 31, 2004, BioBalance had a cash overdraft in the amount of
$12,736. On February 24, 2005 the Company consummated the Offering and received
gross proceeds of approximately $4,900,000. The net funds for the offering were
to be used exclusively by BioBalance primarily for the development of its
proposed products, to repay to the Company a loan in the amount of $1,717,969
and pay accrued expenses and accounts payable in the amount of $782,995. The
remaining proceeds will be used for BioBalance operations in 2005. BioBalance
estimates that its capital requirements for the remainder of 2005 will be
approximately $4,000,000, which it plans to fund with existing cash from the
offering and the proceeds from the sale of the NJ Business and via the sale of
equity, debt or convertible securities of the Company. We believe that our
current capital will sustain BioBalance's operations for twelve months.
BioBalance has incurred product development costs excluding non-cash
compensation of $1,426,423 for the twelve months ended December 31, 2004. The
majority of these costs were for manufacturing clinical supplies, conducting
clinical studies to assess the safety and efficacy of PROBACTRIX and the costs
for preparing and filing the Investigational New Drug ("IND") application for
PROBACTRIX. During this period, BioBalance completed an extended safety study
in healthy human volunteers at ten times the normal dose in 35 subjects for a
six month period. The data from this study has been submitted for publication
in a peer-reviewed medical journal. BioBalance began an Irritable Bowel Syndrome
("IBS") medical food clinical trial at Ichilov Medical Center in Tel Aviv in
November 2003. An additional site (St. Michael's Hospital in Toronto) became
operational in the first quarter this year, but enrollment was significantly
delayed due to personnel issues. Additional sites in New York and Jerusalem were
added in the third quarter to compensate for the slow enrollment. Total
enrollment of 200 patients is anticipated for this trial, which will continue
into 2005.
BioBalance is pursing accelerated regulatory approval of PROBACTRIX as a
prescription drug for the prevention and/or treatment of pouchitis and has filed
an Investigational New Drug ("IND") application with the U.S. Food and Drug
Administration ("FDA"). Pouchitis is a non-specific inflammation of the "pouch"
or ileal reservoir, which usually occurs during the first two years after bowel
reconstruction due to ulcerative colitis. Symptoms of pouchitis include steadily
increasing stool frequency that may be accompanied by incontinence, bleeding,
fever and/or a feeling of urgency. There are currently no approved treatments
for pouchitis. BioBalance also will seek orphan drug designation for this
indication. "Orphan drug" refers to a product that treats a rare disease
affecting less than a specified number of persons (200,000 in the U.S.). The
orphan drug regulatory strategy provides a significantly shorter approval
process and less costly clinical studies. Additional clinical studies can
subsequently be conducted to determine whether there is support for broader
usage. BioBalance submitted the IND to FDA at year-end 2004. On February 2,
2005, we were notified by the FDA that the IND was on clinical hold and that
comments would be sent to us within 30 days. Comments on the IND were received
on March 4, 2005. BioBalance has reviewed the comments and is currently working
to provide a response to all of the issues raised by FDA. We expect to have a
response prepared and sent back to the FDA during second quarter of 2005. We
feel that all of the issues raised by the FDA can be properly addressed, but we
can give no assurance that the FDA will agree with all of our responses to the
issues raised or give us clearance to move forward with the clinical trials.
27
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, 2004, the Company had total outstanding commitments on
non-cancelable operating leases for office space of approximately $1,166,000 of
which $207,000 represents the New Jersey offices. Remaining terms on the
Company's existing operating leases range from June 2005 through March 2010.
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
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 other than goodwill,
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.
THE COMPANY OPERATES IN A CHANGING ENVIRONMENT THAT INVOLVES NUMEROUS KNOWN
AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD MATERIALLY ADVERSELY AFFECT ITS
OPERATIONS. THE FOLLOWING HIGHLIGHTS SOME OF THE FACTORS THAT HAVE AFFECTED,
AND/OR IN THE FUTURE COULD AFFECT, ITS OPERATIONS.
RISKS RELATING TO THE BIOBALANCE BUSINESS
28
BIOBALANCE IS A DEVELOPMENT STAGE COMPANY, HAS GENERATED NO REVENUES TO
DATE AND HAS A LIMITED OPERATING HISTORY UPON WHICH IT MAY BE EVALUATED.
BioBalance was incorporated in May 2001, has generated no revenues from
operations, and has no meaningful assets, other than its intellectual property
rights and available cash generated from the Offering and the sale of the NJ
Business. BioBalance faces all of the risks inherent in a new business and those
risks specifically inherent in the business of developing, testing, obtaining
regulatory approvals for, manufacturing, commercializing and selling a new
ethical drug or a new medical food product, 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 WOULD RESULT IN IMPAIRED GROWTH AND
INABILITY TO OPERATE.
BioBalance will be required to expend substantial amounts of working
capital in order to develop, test, obtain the requisite regulatory approvals,
manufacture and market its proposed product and establish the necessary
relationships to implement its business plan. BioBalance had negative cash on
hand at December 31, 2004. Since then, both a portion of the net proceeds from
the Offering, and a portion of the proceeds of the Company's sale of the NJ
Business to Accredited Health are being used to fund BioBalance's current
operations. We expect these funds will be sufficient to sustain its operations
for the next twelve months. If BioBalance fails to obtain additional financing,
BioBalance's clinical and regulatory programs would need to be scaled back or
cancelled. BioBalance has no firm agreements or arrangements with respect to any
such financing and we cannot assure you that any needed funds will be available
to BioBalance on acceptable terms or at all. The inability to obtain sufficient
funding of BioBalance's operations in the immediate future could cause
BioBalance to curtail or cease it operations.
THE SALE OF OUR NEW YORK HOME HEALTH CARE BUSINESS IS NOT ASSURED.
We are currently negotiating to sell our remaining home healthcare
operations which are located in New York in whole or in part, to the entity
controlled by Messrs. Braun and Rosenberg. Even if we reach an agreement with
Messrs. Braun and Rosenberg with respect to such sale, the sale is expected to
be subject to a number of conditions, including, but not limited to, shareholder
and regulatory approval. Even if shareholder approval and regulatory approval of
the proposed sale are obtained, there can be no assurance that litigation will
not be commenced by a shareholder or other third party seeking to prevent the
sale of the remaining home healthcare business to the entity controlled by
Messrs. Braun and Rosenberg from being consummated. Until the time, if ever,
that our New York home healthcare business is sold, we expect to continue to
29
operate the remaining home healthcare business under Braun and Rosenberg, or an
entity controlled by them.
IF WE DIVEST OUR HOME HEALTH CARE BUSINESS, WE WILL BE A PURELY DEVELOPMENT
STAGE COMPANY, HAVING GENERATED NO REVENUES TO DATE AND HAVING MINIMAL OPERATING
HISTORY UPON WHICH WE MAY BE EVALUATED.
To date, the only revenues that have been generated by the Company have
been produced by the home health care business. BioBalance has generated no
revenues from operations or meaningful assets, other than its intellectual
property rights. We have recently sold the NJ Business and if we sell our
remaining home health care business which is located in New York, our only
remaining operating business will be BioBalance, which 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. We cannot assure you that
BioBalance will be able to generate revenues or profits from operation of its
business.
THE LOSS OF KEY EXECUTIVES OR CONSULTANTS OR THE FAILURE TO HIRE QUALIFIED
EMPLOYEES WOULD DAMAGE OUR BUSINESS.
Because of the highly technical nature of our BioBalance business, we
depend greatly on attracting and retaining experienced management and highly
qualified and trained scientific personnel. Our future success will depend on
the continued services of our key scientific and management personnel with whom
we have entered into various agreements. The management team for BioBalance was
only assembled, during 2003 with the addition of Dennis O'Donnell as
BioBalance's President and Chief Executive Officer, Dr. Robert Hoerr as Director
of Medical and Regulatory Affairs and Dr. Eileen Bostwick as Director of
Research and Development. We have also retained the services of Dr. Nellie
Kelner-Padalka, the original inventor of PROBACTRIX, and have entered into a
written agreement with Dr. Khursheed Jeejeebhoy and are finalizing an agreement
with Dr. Harold Jacob, both of whom serve on our Medical Advisory Board. We
compete intensely for these professionals with other companies in our industry.
If we 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 our capacity to grow our business and develop our
products through the clinical trial process. We do not presently maintain key
person insurance for any of BioBalance's key personnel. Moreover, as a result
of the resignations of Messrs. Braun and Rosenberg, Mr. O'Donnell is our only
executive officer. Although Mr. O'Donnell has previously served as an officer
of subsidiaries or divisions of public companies, he has no direct experience as
a chief executive of a public company.
WE COULD BE REQUIRED TO PAY FUNDS TO SATISFY INDEMNITY AND OTHER POSSIBLE
CLAIMS BY FORMER EMPLOYEES AND CONSULTANTS.
In November 2003, a former director of the Company who was an officer of
BioBalance resigned and a consulting agreement with a consultant to BioBalance
was suspended, and
30
subsequently terminated, as a result of matters related to certain claims made
against the former director and the consultant by the U.S. Attorney's office
relating to an alleged attempt by these two individuals to manipulate the
Company's common stock. The Company is obligated, under certain circumstances,
to indemnify the former director against liability and to pay for his costs of
defending himself from certain legal actions that arose from his activities as a
director or officer of the Company. To date, the Company's insurance carrier has
advanced funds on behalf of the Company to the former director to cover the
expenses of his defense to the government action. Unless it is legally
determined that the former director is not entitled to indemnification, the
Company will be required to reimburse the insurance carrier for $250,000 of the
amount it advanced on behalf of the former director. The Company has accrued the
$250,000 on its financial statements as of December 31, 2004. In addition, the
terminated consulting agreement that BioBalance had entered into in 2001 with
the consultant and a company affiliated with the consultant provided for the
payment to the consultant of annual consulting fees of $250,000 per year through
at least January 2008 and the issuance of 200,000 warrants to the consulting
company, subject to earlier termination of the consulting agreement under
certain circumstances, including for cause, as defined in the agreement, or
without cause. Although BioBalance has notified the consultant of the
termination of the consulting agreement for cause, should the consultant bring
an action to challenge the termination and a court determines that the agreement
was actually terminated without cause, then BioBalance could be obligated under
the agreement to pay to the consulting company a severance payment equal to
three times the sum of its annual base consulting fee and any cash bonus paid to
it in the three-year period preceding the date of termination and to provide the
consultant with certain health and other benefits for a period of five-years.
The Company has accrued $353,910 as of December 31, 2004, in its consolidated
financial statements. There can be no assurance as to the actual amount of money
that the Company will be required to pay on behalf of its former director in
connection with the indemnification provisions. Moreover, the Company believes
that it will be able to defend its position in a possible claim by the
consultant that it is owed money under the consulting agreement, although there
can be no assurance as to the amount of monies, if any, that BioBalance may have
to pay under the consulting agreement or that the consultant will not bring an
action against BioBalance or the Company for an alleged breach of the consulting
agreement.
BIOBALANCE'S PRODUCTS ARE IN DEVELOPMENT AND MAY NOT SATISFY REGULATORY
REQUIREMENTS OR BECOME COMMERCIALLY VIABLE.
The products that we are currently developing will require additional
development, testing, and investment in order to market it as a prescription
drug. We cannot be sure that our product research and development efforts will
be successful, that candidates will enter clinical studies as anticipated, that
we will satisfy Good Laboratory Procedures ("GLP"), medical food or prescription
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. We have conducted anecdotal and pre-clinical trials
and have recently commenced an IBS medical food clinical trial for our initial
product and have established GRAS (Generally Recognized As Safe) status 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
31
clinical testing. We 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 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. The commercial formulation has yet to be developed for PROBACTRIX.
We may encounter difficulties in manufacturing, process development and
formulation activities that could result in delays in clinical trials,
regulatory submissions, regulatory approvals and commercialization of our
product, or cause negative financial and competitive consequences. We cannot
assure you that PROBACTRIX or any other product will be successfully developed,
be developed on a timely basis or prove to be more effective than competing
products based on existing or newly developed technologies. The inability to
successfully complete development, or a determination by us, for financial or
other reasons, not to undertake to complete development of PROBACTRIX or any
other product, particularly in instances in which we have made significant
capital expenditures, could have a material adverse effect on us.
POTENTIAL FAILURE OF PLANNED CLINICAL TRIALS TO PRODUCE STATISTICALLY
SIGNIFICANT DATA COULD IMPAIR OUR ABILITY TO SUCCESSFULLY MARKET OUR PRODUCTS.
Even if we are successful in satisfying medical food status, there still is
substantial risk that the studies that we are 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 unless supported by statistically
significant data before recommending it to patients. This could severely limit
our ability to successfully market our product.
WE ARE DEPENDENT ON NEW PRODUCTS AND CONTINUED INNOVATION.
The pharmaceutical industry in general, including the market for IBS and
pouchitis 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. We believe our ability to grow and succeed
is partially dependent upon our ability to introduce new and innovative products
into such markets. We cannot assure you that we will be successful in our plans
to introduce additional products to the market or expand our current label
indications.
INTELLECTUAL PROPERTY RIGHTS MAY NOT PROTECT OUR BUSINESS.
We have adopted a comprehensive patent policy on current and future
products. We use a combination of patents, trademarks and trade secrets to
protect our proprietary position on PROBACTRIX. We cannot assure you that our
pending or future patent and trademark
32
registration applications will result in issued patents and registered
trademarks, or that, if issued, our applications will be upheld if challenged.
Further, even if granted, we cannot assure you that these patents and trademarks
will provide us with any protection from competitors or, that if they do provide
any meaningful level of protection, that we will have the financial resources
necessary to enforce our patent and trademark rights. In addition, we cannot
assure you that others will not independently develop technologies similar to
those covered by our pending patents and trade secrets, or design around the
pending patents. If others are able to design around our patents, our results of
operations could be materially adversely affected. Further, we will have very
limited, if any, protection of our proprietary rights in those jurisdictions
where we have not affected any filings or where we fail to obtain protection
through our filings. We cannot assure you that third parties will not assert
intellectual property infringement claims against us in the future with respect
to current or future products. We are responsible for defending against charges
of infringement of third party intellectual property rights by our actions and
products and such assertion may require us to refrain from the sale of our
products, enter into royalty arrangements or undertake costly litigation.
Further, challenges may be instituted by third parties as to the validity,
enforceability and infringement of our patents. Our adherence to industry
standards with respect to our product may limit our opportunities to provide
proprietary features which may be protected. In addition, the laws of various
countries in which our product may be sold may not protect our product and
intellectual property rights to the same extent as the laws of the United
States.
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 OUR ABILITY TO PRODUCE AND MARKET OUR
PRODUCTS.
There is no consistent policy regarding the breadth of claims allowed in
specialty pharmaceutical and biotechnology patents. In addition, patents may
have been granted, or may be granted, to others covering products or processes
we need for developing our products. If our products or processes infringe upon
the patents, or otherwise impermissibly utilize the intellectual property of
others, we might be unable to develop, manufacture, or sell our products. In
such event, we may be required to obtain licenses from third parties. We cannot
be sure that we will be able to obtain such licenses on acceptable terms, or at
all.
FAILURE TO ASSEMBLE OR CONTRACT WITH AN ADEQUATE SALES & MARKETING
ORGANIZATION OR PARTNER WITH A LARGER PHARMACEUTICAL COMPANY COULD RESULT IN A
LACK OF FUTURE REVENUES.
To market any of our products directly, we would have to develop a
substantial marketing and sales force. Alternatively, we may, for certain
products, attempt to obtain the assistance of larger pharmaceutical companies
with established distributions systems and direct sales forces. We do not know
if we will be able to enter into agreements with other companies to assist in
the marketing and sales of our products.
33
WE OWN NO MANUFACTURING FACILITIES AND WILL BE DEPENDENT ON THIRD PARTIES
TO MAKE OUR PRODUCT.
We own no manufacturing facilities or equipment, and employ no
manufacturing personnel. We expect to use third parties to manufacture certain
of our products on a contract basis. We may not be able to obtain
contract-manufacturing services on reasonable terms or at all. If we are not
able to contract manufacturing services, we will not be able to make our
products.
WE MAY BE REQUIRED TO COMPLY WITH GOOD MANUFACTURING PRACTICES.
The manufacture of our proposed products will likely be subject to current
Good Manufacturing Practices ("GMP") prescribed by the FDA in the United States.
We cannot give assurance that we or any entity manufacturing products on our
behalf will be able to comply with GMP or satisfy certain regulatory inspections
in connection with the manufacture of our proposed products. Failure or delay by
any manufacturer of our products to comply with GMP or similar regulations or
satisfy regulatory inspections would have a material adverse effect on us.
POTENTIAL SIDE EFFECTS OF OUR PRODUCT COULD IMPAIR OUR ABILITY TO
SUCCESSFULLY MARKET OUR PRODUCTS.
Although no side effects of our products 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 our products being withdrawn from the market or liability claims being
asserted against us.
OUR PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, PATIENTS OR THIRD PARTY
PAYERS.
Patients, doctors and third-party payers must accept our products as
medically useful and cost-effective for us to be successful. Doctors and
patients are very important constituents because they directly make all medical
decisions. Third party payers are also very important because they pay for a
major portion of all medical care expenses. Third party payers consist of health
maintenance organizations ("HMOs"), health insurers, managed care providers,
Medicare and Medicaid, and their equivalent organizations in jurisdictions
outside the U.S. In order to achieve our sales targets in the jurisdictions in
which we intend to sell our products, we must educate patients, doctors and
third-party payers on the benefits of our products. We cannot assure you that
patients, doctors or third-party payers will accept our products, even if
approved for marketing, on a timely basis.
GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT PAY FOR OUR PRODUCTS.
The success of our products 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 payers and other
34
organizations. We cannot determine in advance the reimbursement status of newly
approved therapeutic products. Even if a product is approved for marketing, we
cannot be sure that adequate reimbursement will be available. Also, future
legislation or regulation, or related announcements or developments, concerning
the healthcare industry or third party or governmental coverage and
reimbursement may adversely affect our business. In particular, legislation or
regulation limiting consumers' reimbursement rights could have a material
adverse effect on our revenues.
WE 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, we may not realize the expected
benefits of our 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 our technology obsolete or noncompetitive. We
cannot be certain that we will be able to access the same technologies at an
acceptable price, or at all.
WE COULD BE FACED WITH 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. We face 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 us 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 us. 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 us. Additionally, we are highly dependent upon consumers' perception
of the safety and quality of our 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 us, 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 OUR INABILITY TO GENERATE SUFFICIENT
REVENUES TO OPERATE PROFITABLY.
The pharmaceutical industry is highly competitive. Numerous companies, many
of which are significantly larger than us, which have greater financial,
personnel, distribution and other resources than us and may be better able to
withstand volatile market conditions, will compete with us in the development,
manufacture and marketing of probiotics for the treatment
35
of IBS or other GI disorders. 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 us in this industry, since they
have already spent millions of dollars to develop treatments for IBS or other GI
disorders. Increased competition could have a material adverse effect on us, 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 ours.
RISKS RELATING TO THE HOME HEALTH CARE BUSINESS
RECENT RULING REGARDING COMPANIONSHIP SERVICES EXEMPTION MAY IMPACT OUR ABILITY
TO PROVIDE HEALTH CARE SERVICES
On July 22, 2004, the federal Second Circuit Court of Appeals issued a ruling
concerning the Fair Labor Standards Act on the validity of the "companionship
services" exemption from minimum wage and overtime payment requirements to
paraprofessional field staff in New York State Home care providers have long
relied on this exemption to provide compensation to home care aides and personal
care workers with the expectation that there is no obligation for overtime pay.
In September 2004, a request for a rehearing was submitted en banc for the full
court. On January 13, 2005, the Court rejected the request for a rehearing on
the issue. At this point, preparations are being made to submit papers to
request a review of the issue before the U.S. Supreme Court. Simultaneously, a
request for a stay of mandate from the Court is pending resolution at the
Supreme Court level.
The implication of these changes for paying the overtime expense for the home
care industry and the State will be challenges to ensuring patient continuity of
care, if agencies can no longer afford to authorize overtime during an outgoing
workforce shortage, and the inability of workers to secure the number of hours
of work they desire, all of these factors may cause a higher cost per hour
serviced thereby adversely affecting profit, ability.
WE ARE INDIRECTLY DEPENDENT UPON REIMBURSEMENT BY THIRD-PARTY PAYERS;
HEALTH CARE REFORM COULD REDUCE REVENUES.
More than 40% 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- party payers," 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 payers 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 payers 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
36
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 payers, 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
entail 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 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 affect 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 the amount of reimbursement by government and private
third-party payers. 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 effect 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
37
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 in 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
Premiere Health Services, National Home Health Care Corp., 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. We
believe 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 80.8% of gross revenues during the
year ended December 31, 2004. One referral source, New York City Medicaid, was
responsible for approximately 43.4% of our gross revenues for the year ended
December 31, 2004. The loss of, or a significant reduction in, referrals by
these sources, as well as certain other key sources, 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 segment to a large extent
depends upon the continued services of Jerry Braun, President and Chief
Executive Officer of the Home Health
38
Care division, and Jacob Rosenberg, Vice President, Chief Operating officer and
Chief Financial Officer of the Home Health Care division. 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 employees
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 qualified personnel is often
intense and we may not be able to retain or hire the necessary personnel.
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 there is a limited market for our Common Stock. Over the last
12 months, the price of our Common Stock has ranged from a high of $4.50 to a
low of $0.46. The price of our Common Stock is likely to continue to be affected
by various factors, including but not limited to the results of our development
efforts of PROBACTRIX and other products, variations in quarterly results of
operations, announcements of new contracts or services or acquisitions by us or
our 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.
OUR DELISTING FROM NASDAQ DUE TO OUR FAILURE TO SATISFY NASDAQ LISTING
STANDARDS AND OUR STOCK BEING SUBJECT TO THE "PENNY STOCK" RULES HAS RESULTED IN
REDUCED LIQUIDITY AND LOWER STOCK PRICE.
Our Common Stock, which was delisted from the Nasdaq SmallCap market in
April 2004 as a result of Nasdaq's public interest concerns regarding events
relating to the indictments by the U.S. Attorney's Office of a former Director
of the Company who was an officer of BioBalance and a consultant to BioBalance
for allegedly attempting to manipulate our Common Stock, and our failure to
timely hold one of our annual shareholder meetings, is now listed for trading in
the OTC "pink sheets," which provides significantly less liquidity than a
securities exchange (such as the American or New York Stock Exchange) or an
automated quotation system (such as the Nasdaq National or SmallCap Market). As
a result, the liquidity of our Common Stock has been impaired, not only in the
number of shares which can 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.
There is currently a very limited volume of trading in our Common Stock and on
many days there is no trading activity at all in our Common Stock. Moreover,
because of the limited volume of trading, our Common Stock is more likely to
fluctuate due to broad market fluctuations, general market conditions,
fluctuations in our operating results, future securities offering by us, changes
in the
39
market's perception of our business, announcements made by us or our competitors
and general industry conditions. Our Common Stock may not be accepted for a
listing on an automated quotation system or securities exchange.
In addition, our Common Stock is 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. The
regulations relating to penny stocks could limit the ability of broker dealers
to sell our Common Stock and, thus, the ability of shareholders to sell their
shares in the market.
FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
We have previously issued a substantial number of shares of Common Stock,
which are eligible for resale under Rule 144 of the Securities Act, and which
may become freely tradable. We have registered or agreed to register a
substantial number of shares of Common Stock that are issuable upon the exercise
of options and warrants or that were previously issued in private transactions.
If holders of options or warrants choose to exercise their purchase rights and
sell shares of Common Stock in the public market, or if holders of currently
restricted shares choose to sell such shares in the public market under Rule 144
or otherwise, the prevailing market price for the Common Stock may decline.
Future public sales of shares of Common Stock may adversely affect the market
price of our Common Stock or our future ability to raise capital by offering
equity securities.
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 issue up to
5,000,000 shares of preferred stock, 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 our company or the removal of our management more
difficult, discourage hostile bids for control of our company 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.
WE HAVE NEVER PAID ANY DIVIDENDS ON OUR COMMON STOCK.
40
We have never paid any dividends on our Common Stock and do not anticipate
paying cash dividends in the foreseeable future. We currently intend to retain
all earnings. The declaration and payment of future dividends, if any, will be
at the sole discretion of our board of directors and will depend upon our
profitability, financial condition, cash requirements, future prospects, the
rights of any other classes of preferred stock, and other factors deemed
relevant by the board of directors.
SHARES OF OUR COMMON STOCK ISSUED IN CONNECTION WITH OUR ACQUISITION OF
BIOBALANCE MAY HAVE BEEN ISSUED WITHOUT COMPLYING WITH CERTAIN STATE SECURITIES
LAWS.
During October 2003, it was determined that certain of the shares of common
stock that we issued to holders of BioBalance stock in connection with our
January 2003 acquisition of BioBalance may not have been exempt from the
registration or qualification requirements of the state securities laws of
certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act of 1933, as amended.
Although we are unable to quantify the actual number of shares involved that are
still owned by the original recipients of our shares in the acquisition, the per
share purchase price paid by the BioBalance holders for the shares they
exchanged in the acquisition ranged from $.03 to $3.00 per share and we
currently believe that the purchase price paid by such persons who might have
certain statutory rescission rights does not exceed approximately $345,000,
exclusive of any penalties or interest, although no assurance can be given that
any such claims will not exceed this amount. We cannot determine the effect, if
any, on our operations or financial condition that may occur from the failure to
register or qualify these shares under applicable state securities laws. If it
is determined that we offered securities without properly registering or
qualifying them under state laws, or securing exemption from registration,
regulators could impose on us monetary fines or other sanctions as provided
under these laws. We are unable to estimate the amount of monetary fines, if
any, or the nature or scope of any sanctions at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent Registered Public Accounting Firms' report thereon of Weiser LLP,
for the year ended December 31, 2004, 2003 and from Holtz Rubenstein Reminick
LLP for the year ending December 31, 2002, appears herein. See Index to
Financial Statements appearing on page 77.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
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.
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.
ITEM 9B. OTHER INFORMATION:
Not applicable.
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
- ------------------- --- ----------------------------------------
Dennis M. O'Donnell 49 Director, Chief Executive Officer, Chief
Financial Officer and Secretary of the
Company and President & CEO
of The BioBalance Corporation
Fred E. Nussbaum 57 Director
Mordecai H. Dicker 44 Director
Mark Gray 46 Director
42
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 and on February 24, 2005, he
became the Company's Chief Executive Officer and Secretary. 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.
Fred E. Nussbaum has been a director of the Company since January 2004. Mr.
Nussbaum became Chairman of the Board of the Company in February 2005. 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, 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/or until their successors have been duly elected and qualified, or until
death, resignation or removal. Executive
43
officers are elected by the Board of Directors on an annual basis and serve at
the discretion of the Board. There is no family relationship between any of the
Company's directors or its executive officers.
AUDIT COMMITTEE
The Board of Director has a standing Audit Committee. The members of the
Audit Committee are Mordecai Dicker, Mark Gray and Fred E. Nussbaum. Fred E.
Nussbaum serves 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 expert, is "independent," as
that term is defined in the applicable SEC rules and would also be independent
under NASD Marketplace 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 2004.
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 2004, 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 to the Company's Chief Executive Officer and Chief Financial and
Principal Accounting Officer. A copy of this Code was filed with the Securities
and Exchange Commission as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31, 2002,
2003 and 2004, 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, whose total
salary and bonuses for the fiscal year 2004, in all capacities in which served,
was $100,000 or more (collectively, the "Named Executive Officers"):
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NAME AND
PRINCIPAL OTHER SECURITIES
POSITION ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
YEAR ($) ($) ($) ($)
-----------------------------------------------------------------------------
Jerry Braun (6) 2004 $ 341,026 $ 276,325 $ 49,823(1) 200,000 Shares $ 634,789(3)
President and Chief 2003 $ 333,872 $ 35,000 $ 44,085(1) 200,000 Shares $ 412,500(3)
Executive Officer 2002 $ 325,200 $ 405,000 $ 48,395(1) $ 0
- ---------------------------------------------------------------------------------------------------------
Jacob Rosenberg (6)
Chief Operating Officer 2004 $ 288,560 $ 271,340 $ 47,862(2) 200,000 Shares $ 535,737(3)
and Chief Financial 2003 $ 257,557 $ 30,000 $ 46,447(2) 200,000 Shares $ 337,500(3)
Officer 2002 $ 242,815 $ 401,000 $ 50,582(2) $ 0
- ---------------------------------------------------------------------------------------------------------
Dennis O'Donnell (5)
President and Chief 2004 $ 200,000 $ 0 $ 20,321(4) 150,000 Shares $ 0
Operating Officer of 2003 $ 126,923 $ 0 $ 12,198(4) 200,000 Shares $ 0
BioBalance 2002 $ 0 $ 0 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------
44
(1) Includes $35,518, $31,081 and $25,720 of medical insurance premiums paid on
behalf of such individual for the fiscal years 2004, 2003 and 2002,
respectively, $4,305, $3,004 and $12,675 for automobile and
automobile-related costs, including insurance, incurred on behalf of such
individual, respectively, for the fiscal years 2004,2003 and 2002 and
$10,000 in expense allowance for the fiscal years ended 2004, 2003 and
2002.
(2) Includes $35,518, $31,081 and $25,720 of medical insurance premiums paid on
behalf of such individual for the fiscal years 2004,2003 and 2002,
respectively, $2,344,$5,366 and $14,862 for automobile and
automobile-related costs, including insurance, incurred on behalf of such
individual, respectively, for each of the fiscal years 2004,2003 and 2002
and $10,000 in expense allowance for the fiscal years ended 2004, 2003 and
2002.
(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 $20,321 and $12,198 for medical insurance premiums paid on behalf
of such individual for the fiscal years 2004 and 2003, respectively.
(5) Dennis O'Donnell became President of BioBalance on November 26, 2003. On
February 24, 2005, he became the Company's Chief Executive Officer and
Secretary.
(6) Messrs. Braun and Rosenberg resigned as executive officers and directors of
the Company on February 24, 2005.
OPTION/SAR GRANTS IN 2004
The following table provides certain information with respect to stock options
granted to the Named Executive Officers in 2004.
45
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Grant Date
Options/SARs Employees in Exercise Price Expiration Present
Name Granted Fiscal Year (1) Per Share ($/sh) Date Value (2)
- -------------------------------------------------------------------------------------------
Jerry Braun 200,000 36.36% 2.13 01/28/14 $ 248,940
Jacob Rosenberg 200,000 36.36% 2.13 01/28/14 $ 248,940
Dennis O'Donnell 100,000 18.18% .50 09/13/14 $ 32,000
50,000 9.09% 2.13 01/28/14 $ 62,235
(1) Based on the total number of options granted to employees of the Company in
2004, 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.
STOCK OPTION EXERCISES AND YEAR END VALUES
The following table sets forth, for the Named Executive Officers, the number of
shares covered by stock options as of December 31, 2004, 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, 2004. No options were exercised by the Named
Officers in 2004.
Number of
Securities Value of
Underlying Unexercised
Unexercised In- the-Money
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ---------------------------------------------------------------------- ----------------
Jerry Braun 862,496/0 Shs $ 0
Jacob Rosenberg 799,996/0 Shs $ 0
Dennis O'Donnell 216,667/133,333 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.
46
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 OF THE NAMED EXECUTIVE OFFICERS; 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.
Messrs. Braun and Rosenberg served as executive officers of the Company until
February 24, 2005, and continue to serve as officers of the Company's home
health care division.
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 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. Braun's
current annual base compensation under the amended agreement is approximately
$375,000. Mr. Braun resigned as an executive officer and director of the
Company on February 24, 2005. Mr. Braun will continue to be employed by the
Company as the President of its Home Health Care division. Other than his
ceasing to be an executive officer and director, his employment agreement
remains in effect.
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 was approximately
$186,000. Mr. Rosenberg's current annual base compensation under the agreement
is approximately $300,000. Mr. Rosenberg resigned as an executive officer and
director of the Company on February 24, 2005. Mr. Rosenberg will continue to be
employed by the Company as the Vice President of its Home Health Care division.
Other than his ceasing to be an executive officer and director, his employment
agreement remains in effect.
These employment agreements also provide additional benefits if a "change of
control" of the Company occurs. A "change of control" is deemed 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 stockholders, 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
47
- - 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 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. A change of control took place on
January 2, 2003 when the Company merged with BioBalance and the Company recorded
a liability of $1,940,526. The change of control provision is still contained
in their employment agreements and may, under certain circumstances, be
triggered again upon the occurrence of another change of control event.
Messrs. Braun and Rosenberg also participate, together with all other
salaried employees of the Company's home healthcare business, in a bonus plan
pursuant to which 10% of the annual pre-tax net income of the Company's home
healthcare business income is contributed to a bonus pool which is distributable
to these employees in amounts determined by the Company's Compensation
Committee.
Mr. O'Donnell is party to a three-year employment agreement pursuant to
which he will serve as BioBalance's Chief Executive Officer until May 3, 2006.
Mr. O'Donnell will also agree to serve, if requested, as one of the Company's
officers and to be nominated or appointed as a member of the Company's Board of
Directors. Under the agreement, Mr. O'Donnell's base annual salary was $200,000,
which increased to $225,000 upon the completion of the Offering. In addition,
Mr. O'Donnell received a ten-year option to purchase 200,000 shares of the
Company's common stock under the Company's existing stock option plan at an
exercise price of $2.48. An additional option to purchase 50,000 shares of the
Company's common stock at its then fair market value will be granted each year
during the term of the agreement. Mr. O'Donnell is entitled to bonus payments
upon the satisfaction of specified financial performance criteria, certain
lump-sum payments upon the occurrence of certain change of control events, and
insurance and other benefits. In September 2004, Mr. O'Donnell received 50,000
ten-year
48
options under his employment agreement and an additional 50,000 ten-year options
as a bonus, with an exercise price of $0.50. In 2004, Mr. O'Donnell was awarded
a bonus of $66,667 in accordance with the term in his contract. This amount was
accrued on the books at December 31, 2004.
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 home health
care division 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.
EQUITY COMPENSATION PLANS
The following table summarizes with respect to options and warrants under the
Company's equity compensation plans at December 31, 2004:
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 2,058,333 2.03 2,611,167
plans approved by
security holders(1)
Equity compensation 794,786 2.56
plans not approved
by security
holders(2)
Total 2,853,119
(1) Represents shares of the Company's common stock issuable pursuant to the
Company's Performance Incentive Plan, as amended (the "Option Plan"). Does
not include the 500,000 options granted to each of Messrs. Braun and
Rosenberg on February 24, 2005. 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. Under the
terms of the amended Option Plan, as amended, up to 4,712,500 shares of
49
common stock may be granted at December 31, 2004. The Option Plan is
administered by the standing compensation committee (the "Committee") of
the board of 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, 80,834 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, 330,000 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 321,452 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.
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 28, 2005, by (i) each person, known
to the Company, who beneficially owns more than 5% of the Common Stock,(ii) each
Named Executive Officer, (iii) each of the Company's directors and (iv) all
officers and directors as a group:
50
Shares Percentage
Name and Address of Beneficially of Stock
Beneficial Owner (1) Owned(l) Outstanding(l)
- ------------------------------------- ------------- --------------
Dennis O'Donnell (4) 427,368 1.29%
Fred E. Nussbaum (5) *
Mark Gray (6) *
Mordecai Dicker (7) *
Jerry Braun (2) 2,139,454 6.51%
Jacob Rosenberg (3) 1,694,761 5.22%
Pinchas Stefansky (8) 2,024,000 6.16%
Hershey Holdings
Leon House
Secretary's Lane
P.O. Box 450, Gibraltar
Douglas Andrew Ryan (9) 1,800,000 5.48%
Birizma Associates
c/o Tallhurst Ltd.
P.O. Box 795, Gibraltar
Bernard Korolnick (10) 1,729,208 5.26%
KPT Partners
c/o Alton Management
Splelhof 14A, Postach 536
8750 Glarus, Switzerland
Rivvi Rose (11) 1,950,000 5.93%
Nekavim Investors
1/1 Library Run
P.O. Box 317, Gibraltar
All executive officers and directors 427,368 1.29%
as a group (4)
_____________________________
* Less than one percent (1%).
51
(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 unless otherwise indicated, the address of
each shareholder is c/o the Company.
(2) Includes a total of 1,362,496 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 (i) 1,299,996 shares issuable upon the exercise of
stock options granted to Mr. Rosenberg, (ii) 73,797 Shares issuable upon
the conversion of his shares of Class A Convertible Preferred Stock (iii)
120,968 shares and 60,484 warrants of common stock owned by his wife.
(4) Includes a total of 350,000 shares issuable upon the exercise of stock
options granted to Mr. O'Donnell and also 8,064 shares issuable upon the
exercise of warrants.
(8) All shares are owned of record by Hershey Holdings, of which Mr. Stefansky
holds sole voting and investment power.
(9) All shares are owned of record by Birizma Associates, of which Mr. Ryan
holds sole voting and investment power.
(10) All shares are owned of record by KPT Partners, of which Mr. Korolnick
holds sole voting and investment power.
(11) All shares are owned of record by Nekavim Investors, of which Ms. Rose
holds sole voting and investment power.
52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 15, 2004, the Company executed the Purchase Agreement providing for the
sale of the assets of its home healthcare business to the LLC, a company
controlled by Messrs. Braun and Rosenberg, who at the time were the Company's
chief executive officer and chief operating officer, for consideration of $2.7
million in cash, the assumption of all of the liabilities and obligations with
respect to the home healthcare business and the forgiveness of certain future
obligations that may be due to these individuals pursuant to employment
agreements each of them has with the Company. On April 11, 2005, with the
consent of Messrs. Braun, Rosenberg and the LLC, the Company entered into an
agreement to sell the NJ Business to Accredited Health, a subsidiary of National
for $3.0 million. There are ongoing discussions regarding the sale of the
remaining portion of the assets of the Company's home healthcare business to the
LLC.
On February 24, 2005, the Company consummated the Offering. In connection with
the consummation of the Offering, Braun and Rosenberg, who were at the time
executive officers of the Company, at the request of the Placement Agent for the
Offering, resigned irrevocably as directors and executive officers of the
Company. In connection with Braun and Rosenberg's agreement with the Placement
Agent, in order to secure the obligations of the Company and its subsidiary to
(i) consummate the sale of all the assets relating to the Company's home
healthcare business (the "Asset Sale") to the LLC, pursuant to the terms of the
Purchase Agreement or (ii) to comply with any future payment obligations the
Company to Braun and Rosenberg under their respective employment agreements with
the Company, the Company entered into the Security Agreement, on February 24,
2005, which granted Messrs. Braun and Rosenberg a security interest in the
assets of the Company's home healthcare business being conducted in the states
of New York and New Jersey and provided for the deposit of up to $3.55 million
in cash collateral (the "Collateral"). None of the assets of BioBalance will be
used as Collateral to secure the Company's obligations to Braun and Rosenberg.
At the close of business on February 24, 2005: (i) Mr. Braun resigned as a
director and as the Company's Chief Executive Officer and President and (ii) Mr.
Rosenberg resigned as a director and as the Company's Vice President, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Secretary. Mr. Braun continues to be employed by the Company as the President of
its home healthcare division and Mr. Rosenberg continues to be employed by the
Company as the Vice President of the Company's home healthcare division. Other
than their ceasing to be officers and directors of the Company, and the
resulting changes in their duties and responsibilities, their respective
employment agreements with the Company remain in effect. In addition, Messrs.
Braun and Rosenberg have board observer rights with respect to the Company's
board of directors until such time as the Asset Sale is consummated. Pursuant to
the terms of their respective employment agreements, as a result of their
resignations from the Company's Board of Directors, on February 24, 2005, each
of Braun and Rosenberg received the Options to purchase 500,000 shares of the
Company's Common Stock at an exercise price of $0.85 per share, pursuant to the
Company's Performance Incentive Plan.
On March 23, 2005, the security interest that was granted pursuant to the
Security Agreement was terminated and Messrs. Braun and Rosenberg agreed that
the Company could enter into an agreement with a third party for the sale of the
New Jersey portion of the Company's home health care operations under specified
conditions without being in breach of the Purchase Agreement. The LLC has also
consented to the sale. The Company entered into an agreement to sell the NJ
Business to Accredited Health on April 11, 2005. See - Recent Developments for
a more detailed explanation of the above transactions.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered
by Weiser LLP and Holtz Rubensrein Reminick LLP for the audit of the Company's
annual financial statements for the years ended December 31, 2004, 2003 and
2002:
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------ ------------ ------------
Audit Fees(1) $ 442,757 $ 165,000 $ 97,000
Audit-Related Fees(2) 105,139 95,000 36,000
Tax Service Fees(3) 58,377 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 2004, 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.
53
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
Schedule II - Valuation and Qualifying Accounts for each of the years ended
December 31, 2004, 2003 and 2002.
(3) Exhibits:
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
54
NEW YORK HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003 AND 2002
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW YORK HEALTH CARE, INC.:
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
for the years ended December 31, 2004 and 2003 F-1
Report of Independent Registered Public Accounting Firm
for the year ended December 31, 2002 F-2
Consolidated Balance Sheets at December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-31
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-32
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
----------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
New York Health Care, Inc.
We have audited the accompanying consolidated balance sheets of New York Health
Care, Inc. and Subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
York Health Care, Inc. and Subsidiaries as of December 31, 2004 and 2003, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
We have also audited the financial statement Schedule II for the years ended
December 31, 2004 and 2003. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
Weiser LLP
April 11, 2005
New York, NY
F-1
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
----------------------------
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
New York Health Care, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows, and financial statement Schedule II
(Valuation and Qualifying Accounts) of New York Health Care, Inc. (formerly The
Bio Balance Corporation) for the year ended December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United Stares). 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, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of New York Health
Care, Inc., (formerly The Bio Balance Corporation) for the year ended December
31, 2002 in conformity with U.S. generally accepted accounting principles. 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.
/s/ HoltzRubenstein Reminick LLP
Holtz Rubenstein Reminick LLP
Melville, New York
March 4, 2003
F-2
NEW YORK HEALTH CARE , INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
2004 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 2,186,756 $ 7,337,896
Due from lending institution 566,523 208,721
Accounts receivable, net of allowance for uncollectible
amounts of $460,000 and $397,000, respectively 8,656,311 6,577,283
Unbilled services 65,627 100,114
Prepaid expenses and other current assets 466,625 319,195
------------- -------------
Total current assets 11,941,842 14,543,209
Property and equipment, net 87,006 145,898
Goodwill, net 900,587 900,587
Other intangible assets, net 3,496,295 5,971,622
Other assets 77,465 67,652
------------- -------------
Total assets $ 16,503,195 $ 21,628,968
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,328,127 $ 1,786,044
Accounts payable and accrued expenses 7,326,115 5,849,732
Due to HRA 5,264,695 3,756,507
Due to related parties - 1,190,526
Income taxes payable - 24,394
------------- -------------
Total current liabilities 13,918,937 12,607,203
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; Class A Preferred, 590,375 shares
authorized, issued and outstanding 5,904 5,904
Common stock, $.01 par value, 100,000,000 shares
authorized; 24,943,821 shares issued and
24,939,776 outstanding. 249,438 249,438
Additional paid-in capital 32,313,470 32,679,292
Accumulated deficit (29,975,081) (23,903,396)
Less: Treasury stock (4,045 common shares at cost) (9,473) (9,473)
------------- -------------
Total shareholders' equity 2,584,258 9,021,765
------------- -------------
Total liabilities and shareholders' equity $ 16,503,195 $ 21,628,968
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
Net patient service revenue $ 48,854,358 $ 45,060,449 $ -
-------------- -------------- --------------
Expenses:
Professional care of patients 39,214,216 36,106,721 -
-------------- -------------- --------------
General and administrative
(excluding noncash compensation) 12,052,255 9,941,923 810,427
Noncash compensation 4,127 1,307,119 19,414
-------------- -------------- --------------
Total general and administrative expenses 12,056,382 11,249,042 829,841
-------------- -------------- --------------
Product development
(excluding noncash compensation) 1,426,423 956,262 354,616
Noncash compensation (369,949) 284,340 -
-------------- -------------- --------------
Total product development 1,056,474 1,240,602 354,616
-------------- -------------- --------------
Goodwill impairment - 17,869,339 -
Impairment of intangible assets 1,740,326 - -
Bad debts expense 90,400 50,250 -
Depreciation and amortization 871,710 606,747 214,600
-------------- -------------- --------------
Total operating expenses 55,029,508 67,122,701 1,399,057
-------------- -------------- --------------
Loss from operations (6,175,150) (22,062,252) (1,399,057)
Non-operating income (expenses):
Interest income 69,877 51,255 -
Interest expense (29,538) (2,173) -
-------------- -------------- --------------
Non-operating income (expenses), net 40,339 49,082 -
-------------- -------------- --------------
Loss before (benefit) provision for income taxes (6,134,811) (22,013,170) (1,399,057)
(Benefit) provision for income taxes:
Current (63,126) 39,000 -
-------------- -------------- --------------
Net loss $ (6,071,685) $ (22,052,170) $ (1,399,057)
============== ============== ==============
Basic and diluted loss per share $ (0.24) $ (0.91) $ (0.07)
-------------- -------------- --------------
Weighted and diluted average shares outstanding 24,939,776 24,283,907 20,562,131
============== ============== ==============
The accompanying notes are an 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, 2004, 2003 AND 2002
Common Stock Preferred Stock Additional Treasury Stock Total
-------------------- ---------------- Paid-In ------------------- Accumulated Shareholders'
Shares Amount Shares Amount Capital Shares Amount Deficit Equity
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
Balance at
January 1, 2002 19,700,667 $197,007 - $ 0 $ 3,056,928 - $ - $ (452,169) $ 2,801,766
Common stock
issued for cash 1,415,827 14,158 - - 3,473,986 - - - 3,488,144
Amortization of
unearned compensation - - - - 19,414 - - - 19,414
Net loss - - - - - - - (1,399,057) (1,399,057)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2002 21,116,494 211,165 - - 6,550,328 - - (1,851,226) 4,910,267
Common stock issued
for cash, net 327,327 3,273 - - 1,010,535 - - - 1,013,808
Reverse acquisition on
January 2, 2003 2,500,000 25,000 590,375 5,904 19,940,579 24,846 (31,483) - 19,940,000
Revaluation of options
/warrants as part of
reverse acquisition - - - - 721,100 - - - 721,100
Common stock
Issued for purchase
of intangible assets
on August 20, 2003 1,000,000 10,000 - - 3,590,000 - - - 3,600,000
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 - 17,201
Issuance of treasury
stock (during Oct 2003)
pursuant to the exercise
of options at an average
exercise price of $1.50 - - - - 360 (800) 840 - 1,200
Warrants earned
for service - - - - 870,359 - - - 870,359
Net Loss - - - - - - - (22,052,170) (22,052,170)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2003 24,943,821 249,438 590,375 5,904 32,679,292 4,045 (9,473) (23,903,396) 9,021,765
Warrants earned
for service - - - - 15,743 - - - 15,743
Reduction of
compensation expense
due to revaluation
of options/warrants - - - - (381,565) - - - (381,565)
Net loss - - - - - - - (6,071,685) (6,071,685)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2004 24,943,821 $249,438 590,375 $ 5,904 $32,313,470 4,045 $ (9,473) $(29,975,081) $ 2,584,258
========== ======== ======= ======= ============ ======== ========= ============= =============
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
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (6,071,685) $ (22,052,170) $ (1,399,057)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Impairment of intangible assets 1,740,326
Goodwill impairment - 17,869,339 -
Noncash compensation (365,822) 1,591,459 19,414
Depreciation and amortization 871,710 606,747 214,600
Bad debts expense 90,400 50,250 -
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable and unbilled services (2,134,953) (1,352,003) -
Increase in prepaid expenses and other current assets (147,430) (98,231) (25,842)
Increase in due from lending institution (357,802) (55,896) -
(Increase)decrease in other assets (9,813) 8,927 -
(Decrease)increase in accrued payroll (457,917) 588,269 120,000
Increase in accounts payable and accrued expenses 1,476,383 1,977,474 112,112
Increase in due to HRA 1,508,188 1,824,710 -
Decrease in due to related parties (1,190,526) (750,000) -
--------------
(Decrease)increase in income tax payable (24,394) 24,394 -
-------------- -------------- --------------
Net cash (used in) provided by
operating activities (5,073,335) 233,269 (958,773)
-------------- -------------- --------------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary - 3,548,658 -
Acquisition of property and equipment (8,495) (50,724) -
Acquisition of intangible assets (69,310) (422,613) (148,723)
Increase in other assets - - (13,333)
Decrease (increase) in restricted cash - 100,000 (100,000)
Increase in deferred merger cost - - (248,363)
-------------- -------------- --------------
Net cash (used in) provided by investing activities (77,805) 3,175,321 (510,419)
-------------- -------------- --------------
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
Decrease (increase) in subscription receivable - 290,000 (290,000)
-------------- -------------- --------------
Net cash provided by financing activities - 1,303,928 3,198,144
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (5,151,140) 4,712,518 1,728,952
Cash and cash equivalents at beginning of year 7,337,896 2,625,378 896,426
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 2,186,756 $ 7,337,896 $ 2,625,378
============== ============== ==============
The accompanying notes are an 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 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 is pursuing accelerated prescription drug development of its lead
product, PROBACTRIX(TM) by filing an investigational new drug ("IND")
application for the prevention and/or treatment of pouchitis. 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.
COMPANY DEVELOPMENTS:
In November 2003, the Company learned that an individual then serving as a
director of the Company and president of BioBalance (Mr. Stark) and another
individual then serving as a consultant (Mr. Grossman) to BioBalance were the
subjects of a federal indictment alleging that they 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
and causing the Company's board of directors to approve the issuance of the
warrants by disguising the warrants as compensation to an outside consultant to
be engaged to perform financial advisory services for BioBalance. At the
Company's request, the then director of the Company and president of BioBalance
resigned from all positions with the Company and the Company's Board of
Directors authorized an independent internal investigation regarding the subject
matter of the indictment.
In November 2003, 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.
The law firm retained by the Company to conduct the independent internal
investigation found no evidence that any current officer, director or employee
of the Company knew of, or participated in, any alleged attempt to manipulate
the Company's common stock and, concluded that the Company responded properly
to the indictment based on the information at the time available to the Company.
F-7
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2004, the staff of Listing Investigations, a division of Nasdaq
Stock Market, Inc., ("Nasdaq"), notified the Company, after requesting and
obtaining information and documents from the Company, that they had determined
that the Company no longer qualified for inclusion in the Nasdaq Stock Market
primarily based on public interest concerns and the Company's failure to timely
hold its 2002 annual stockholders' meeting in compliance with the Nasdaq
marketplace rules. In response, the Company requested a hearing before a Nasdaq
Listing Qualifications Panel to review the staff determination. The hearing was
held and on April 5, 2004, the Company announced that the Panel had determined
that the Company's common stock was delisted from Nasdaq, effective with the
opening of business on April 6, 2004. The Panel addressed concerns regarding
events related to the indictment and the Company's failure to timely hold its
2002 Annual Stockholder's meeting. Subsequently, the Company's common stock
began trading in the Over-the-Counter Market on the Pink Sheets.
On May 13, 2004, the Company executed a non-binding letter of intent with
executive officers of the Company who have since resigned (see below), for the
acquisition of its home healthcare business, subject to satisfaction of a number
of conditions, including execution of a definitive acquisition agreement,
obtaining various corporate and regulatory approvals, including stockholder
approval, obtaining an acceptable fairness opinion and receipt by the Company of
at least $4 million to finance its remaining operations. On July 15, 2004, the
Company executed a definitive agreement (the "Purchase Agreement") for the sale
of the assets of its home healthcare business to a company controlled by its
chief executive officer and chief operating officer for consideration of $2.7
million in cash, the assumption of all of the liabilities and obligations with
respect to the home healthcare business and the forgiveness of certain future
obligations that may be due to them pursuant to Employment Agreements each of
them has with the Company. The sale is subject to the satisfaction of a number
of conditions including obtaining shareholder and regulatory approvals; such
conditions had not been satisfied as of April 11, 2005. As noted below, on April
11, 2005 the company entered into a definitive sales agreement to sell certain
of the assets to an unaffiliated entity.
The Company will consider its home health care division as a discontinued
operations of the entire home health care business upon shareholder approval of
the proposed sale.
We cannot assure you that the conditions to the sale of the entire home
healthcare business will be satisfied.
On or about September 23, 2004 the Company commenced an offering for sale (the
"Offering") of a minimum aggregate offering of $4,000,000 and a maximum
aggregate offering of $6,000,000, of shares of its unregistered common stock,
$0.01 par value ("Common Stock") and associated warrants to persons who qualify
as "accredited investors" as defined in the rules under the Securities Act of
1933, as amended, (the "Securities Act") pursuant to the terms of a Confidential
Private Placement Memorandum. The purchase price per share of Common Stock sold
in the Offering will be equal to 95% of the volume weighted average price of the
Common Stock for the 10 trading days prior to the initial closing of the
Offering, but not less than $0.60 nor more than $1.00 per share.
For every two shares of Common Stock purchased in the Offering, investors will
receive a five-year redeemable warrant to purchase shares of Common Stock (the
"Warrants"). Each Warrant is exercisable for one share of Common Stock at an
exercise price equal to 125% of the price per share of Common Stock sold in the
Offering.
On February 24, 2005, the Company consummated the Offering which resulted in its
issuing an aggregate of 7,899,362 shares (the "Shares") of the Company's common
stock, par value $0.01 per share (the "Common Stock"), and warrants to purchase
3,949,681 shares of Common Stock (the "Warrants") to persons who qualify as
"accredited investors" within the meaning of rule 501 of Regulation D
promulgated under the Securities Act. The aggregate purchase price for the
Shares and Warrants was $4,897,600. Each Warrant is exercisable to purchase one
share of the Company's Common Stock at an exercise price of $0.78 per share
during the five-year period commencing on February 24, 2005. The Shares and
Warrants were issued to the purchasers without registration under the Act, in
reliance upon the exemptions from registration provided under Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. In connection with
the Offering, the Company paid the Placement Agent commissions of $470,260 and
an additional $146,616 to cover non-accountable and certain other expenses of
the Placement Agent. In addition, the Company issued to the Placement Agent and
its designees five-year warrants to purchase an aggregate of 1,777,356 shares of
the Company's common stock at $0.62 per share.
F-8
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The proceeds from this offering will be used to support BioBalance operations
including R&D, clinical trials and working capital. In addition, a $1.7 million
loan from New York Health Care to BioBalance was repaid from the proceeds of
the Offering.
In connection with the consummation of the Offering, Messrs. Jerry Braun
("Braun") and Jacob Rosenberg ("Rosenberg") then executive officers of the
Company agreed with the request of the Placement Agent to resign irrevocably as
directors and executive officers of the Company. Therefore, in order to secure
the obligations of the Company and its subsidiary, NYHC Newco Paxxon, Inc.
agreed to (i) consummate the sale of all the assets relating to the Company's
home healthcare business (the "Asset Sale") to New York Health Care, LLC, an
entity controlled by Braun and Rosenberg pursuant to the terms of the "Purchase
Agreement or (ii) comply with any future payment obligations of the Company to
Braun and Rosenberg under their respective employment agreements with the
Company, the Company entered into an agreement (the "Agreement") on February 24,
2005, which supercedes an escrow agreement dated August 3, 2004 that was
canceled, and which granted Messrs. Braun and Rosenberg a security interest in
the assets of the Company's home healthcare business being conducted in the
states of New York and New Jersey and provides for the deposit of up to $3.55
million in a cash collateral account (collectively, the "Collateral"). None of
the assets of BioBalance will be used as Collateral to secure the Company's
obligations to Braun and Rosenberg under their respective employment agreements
or the Agreement.
The Agreement provided that Messrs. Braun and Rosenberg will be entitled to
receive all or a portion of the Collateral (and any additional amounts that they
are entitled to under their employment agreements and the Agreement) if prior to
the consummation of the Asset Sale: (i) the Company breaches the Purchase
Agreement and the breach is not cured within any applicable cure period or
waived by Messrs Braun and Rosenberg, (ii) there are changes in the composition
of a majority of the Company's Board of directors (other than the resignations
of Messrs Braun and Rosenberg or a reduction in the number of Board members
resulting from death, disability or resignation of a member or the additions of
directors that have been expressly approved in writing by Messrs Braun and
Rosenberg) (iii) an event occurs that would be considered "good reason" for the
resignation of Messrs. Braun and Rosenberg under their employment agreements
with the Company or would be considered a "change of control" under those
employment agreements or (iv) the Asset Sale has been terminated or abandoned
for any reason prior to December 31, 2005 (other than as a result of a breach of
the Purchase Agreement by, or a failure to act by, New York Health Care LLC or
Braun or Rosenberg).
F-9
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of their respective employment agreements, as a result of
their resignations from the Company's Board of Directors as of the close of
business on February 24, 2005, on that date, each of Braun and Rosenberg
received ten year stock options to purchase 500,000 shares of the Company's
common stock at an exercise price of $0.85 per share, pursuant to the Company's
Performance Incentive Plan.
At the close of business on February 24, 2005:(i) Mr. Braun resigned as a
director and as the Company's Chief Executive Officer and President and (ii) Mr.
Rosenberg resigned as a director and as the Company's Vice President, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Secretary. Mr. Braun will continue to be employed by the Company as the
President of its home healthcare division and Mr. Rosenberg will continue to be
employed by the Company as the Vice President of the Company's home healthcare
division. Other than their ceasing to be officers of the Company and the
resulting changes in their duties and responsibilities, their respective
employment agreements with the Company remain in effect. In addition, Messrs.
Braun and Rosenberg will have board observer rights with respect to the
Company's board of directors until such time as the Asset Sale is consummated.
As of the close of business on February 24, 2005, Mr. O'Donnell became the
Company's Chief Executive Officer and Secretary. Mr. O'Donnell also retains his
position as the Chief Executive Officer and a director of BioBalance and as a
director of the Company. His salary was increased by $25,000 to $225,000.
On March 24, 2005 Mr. Braun and Mr. Rosenberg agreed with New York Healthcare,
Inc and its subsidiary, NYHC Newco Paxxon, Inc., to terminate the security
interest in the Company's home healthcare business that had been granted to
Messrs. Braun and Rosenberg pursuant to the Agreement. Messrs Braun and
Rosenberg have also consented, under certain conditions, that the Company may
sell all or a portion of the Company's home health care operations in the State
of New Jersey (the "New Jersey Operations") to one or more third parties and to
the use by the Company of the proceeds of any such sale to finance the
operations of its BioBalance Corporation subsidiary.
On April 11, 2005, the Company entered into a definitive agreement with
Accredited Health Services, Inc. ("Accredited"), a wholly owned subsidiary of
National Home Health Care Corp, pursuant to which Accredited will acquire
certain assets of the Company's New Jersey home healthcare business (the "NJ
Business") for $3 million. Revenues for the New Jersey business were
approximately $6.6 million in 2004. Pursuant to the terms of the definitive
agreement funding of the purchase price was received by the Company upon
execution of the agreement, with the exception of $150,000 (the "Escrow Funds"),
which was placed in escrow to cover actual losses, if any, incurred by
Accredited for which the Company is required to indemnify Accredited pursuant to
the definitive agreement. If no claims by Accredited for indemnification by the
company are made, the Escrow Funds will be released to the Company 90 days after
the formal closing of the transaction which will occur within 45 days of the
signing of the definitive agreement, subject only to an orderly transition of
the business.
Below is selected financial data for the New Jersey home healthcare business
(unaudited):
December 31,
----------------------
2004 2003
---------- ----------
Current assets $ 516,277 $ 541,485
Total assets 542,093 584,304
Total current liabilities $ 284,970 $ 323,289
Year Ended Year Ended
December 31, December 31,
2004 2003
------------- -------------
Net patient service revenue $ 6,567,915 $ 6,490,823
Professional care of patients 4,433,245 4,254,593
RISK FACTOR ASSOCIATED WITH FAIR LABOR STANDARDS ACT:
On July 22, 2004, the federal Second Circuit Court of Appeals issued a ruling
concerning the Fair Labor Standards Act on the validity of the "companionship
services" exemption from minimum wage and overtime payment requirements to
paraprofessional field staff in New York State.
F-10
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Home care providers have long relied on this exemption to provide compensation
to home care aides and personal care workers with the expectation that there is
no obligation for overtime pay.
In September 2004, a request for a rehearing was submitted en banc for the full
court. On January 13, 2005, the Court rejected the request for a rehearing on
the issue.
At this point, preparations are being made to submit papers to request a review
of the issue before the U.S. Supreme Court. Simultaneously, a request for a
stay of mandate from the Court pending a resolution at the Supreme Court level.
The implications of these changes for paying the overtime expense for the home
care industry and the State will be challenges to ensuring patient continuity of
care, if agencies can no longer afford to authorize overtime during workforce
shortage, and the inability of workers to secure the number of hours of work
they desire.
ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that could 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 consists 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 written 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.
F-11
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Machinery and equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease
GOODWILL AND OTHER INTANGIBLE ASSETS:
Statement of Financial Accounting Standards (SFAS No. 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.
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 other than goodwill, 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. No stock-based compensation cost is included in net loss,
as all options granted to employees 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".
The fair value of each option grant is estimated on the date of grant by use of
the Black-Scholes option pricing model:
F-12
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- ---------------- --------------
Net loss, as reported $ (6,071,685) $ (22,052,170) $ (1,399,057)
Less stock-based compensation expense
determined under fair value method for
all employee stock options, net of tax
effect (711,723) ( 1,620,705) -
-------------- ---------------- --------------
Pro forma net loss $ (6,783,408) $ (23,672,875) $ (1,399,057)
============== ================ ==============
Basic and diluted loss per share, as reported $ (0.24) $ (0.91) $ (0.07)
Basic and diluted loss per share, pro forma $ (0.27) $ (0.97) $ (0.07)
The options' assumptions used to estimate these values are as follows:
2004 2003
----------- -----------
Risk free interest rate 1.59%-2.81% 1.10%-3.23%
Expected volatility of common stock 88%-103% 67%-102%
Dividend yield 0% 0%
Expected option term 3yrs. 1-5yrs.
The weighted average fair value of options was $1.12 and $2.29 for options
granted during the years ended December 31, 2004 and 2003, respectively.
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, 2004, 2003 and 2002 potential common
stock attributable to options, warrants and convertible preferred stock
outstanding of 3,246,701 for 2004, 3,649,234 for 2003 and 538,066 for 2002, were
not included in the computation of diluted earnings per share, because to do so
would be antidilutive.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Financial Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 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 at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 ("FIN 46-R"). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to the periods ending after March 15, 2004. The
adoption of FIN 46 did not have an impact on the Company's consolidated
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," or SFAS No. 123R. SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, requires that compensation cost relating to
share-based payment transactions be recognized in
F-13
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the financial statements, based on the fair value of the equity or liability
instruments issued. SFAS No. 123R is effective as of the beginning of the first
interim or annual reporting period that begins after December 31, 2005 and
applies to all awards granted, modified, repurchased or cancelled after the
effective date. We do not expect the adoption of this standard to have a
significant impact on our consolidated results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an amendment of APB Opinion No. 29," or SFAS No. 153. SFAS No. 153
eliminates the exception for nonmonetary exchanges of similar productive assets
of APB Opinion No. 29 and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in the fiscal periods
beginning after June 15, 2005. We do not expect the adoption of this standard
to have a significant impact on our consolidated results of operations or
financial position.
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.
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.
F-14
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and $15,743 for the year ended December 31, 2004.
As part of their amended employment agreements, if the two officers/directors
from New York Health Care are terminated or resign from the Board of Directors
prior to the expiration of their employment agreements, the Company is required
to issue an options to each officer/director to acquire 500,000 shares of the
Company common stock at the fair market value on the date of termination. The
Company issued these options to Messrs. Bruan and Rosenberg on February 24,
2005. As Messrs Bruan and Rosenberg will continue as officers of the health care
divison the options were issued in accordance with the Company's Performance
Incentive Plan. 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, and during the year ended December 31,
2004, the remaining $1,190,526 was paid.
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):
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
===========
F-15
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment, at cost consists of the following at December 31:
2004 2003
-------- --------
Machinery and equipment $141,661 $133,161
Furniture and fixtures 87,536 87,536
Leasehold improvements 54,033 54,033
-------- --------
283,230 274,730
Less accumulated depreciation
and amortization 196,224 128,832
-------- --------
$ 87,006 $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 then 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 for the year ended December 31, 2003.
F-16
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill by reportable segment for the
years ended December 31, 2004 and 2003 were as follows:
New York Bio-
Health Care Balance
------------- -----------
Balance as of
January 1, 2003 $ - $ -
Acquisition
January 2, 2003 18,769,926 -
Impairment
January 2, 2003 (17,869,339) -
------------- -----------
Balance as of
December 31, 2003 900,587 -
Impairment for the
year ended December 31, 2004 - -
------------- -----------
Balance as of
December 31, 2004 $ 900,587 $ -
============= ===========
The impairment charges are noncash in nature and do not affect the Company's
liquidity.
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
December 31, 2004
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,706,337 $ 896,840 $ 1,809,497 10
Patents/trademarks 1,112,905 278,357 834,548 10
Non-compete agreement 770,000 211,750 558,250 5
Patient list 100,000 40,000 60,000 5
Customer base 390,000 156,000 234,000 5
--------------- ------------- -------------
$ 5,079,242 $ 1,582,947 $ 3,496,295
=============== ============= =============
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
=============== ============= =============
F-17
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December 31, 2004 and
2003, the Company has also incurred fees approximating $69,000 and $173,000,
respectively, 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.
At December 31, 2004 it was determined that the investment in the NexGen
Platform was impaired and as a result of the impairment analysis a total of
$1,740,326 was expensed during the 4th quarter. The impairment was determined by
an independent valuation firm using a discounted cash flow model. The impairment
is due to a number of factors including the acceleration of PROBACTRIX as a
prescription product, overall limited funding available and available management
time. While BioBalance believes that the NexGen Platform is a viable technology
that can be commercialized, it will continue to be delayed until the above
mentioned factors are resolved.
As of December 31, 2004, approximately $3.2 million of intangible assets net of
accumulated amortization relate to BioBalance. BioBalance is a research and
development company and has had significant losses since inception. 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.
Amortization expense amounted to $804,318, $477,029 and $214,600 for the years
ended December 31, 2004, 2003 and 2002, respectively.
AMORTIZATION EXPENSE:
For The Years
Ended
December 31,
-----------
2005 $ 607,143
2006 607,143
2007 607,143
2008 451,149
2009 355,149
Thereafter 868,568
----------
$3,496,295
==========
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
2004 2003
---------- ----------
Accounts payable $ 622,730 $ 500,186
Accrued expenses 2,150,896 967,851
Accrued employee benefits 4,552,489 4,381,695
---------- ----------
$7,326,115 $5,849,732
========== ==========
F-18
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LINE OF CREDIT:
New York Health Care has a $4,000,000 line of credit with G.E. Capital Health
Care Financial Services that expires November 29, 2005. The availability of
the line of credit is based on a formula of eligible accounts receivable. At
December 31, 2004, 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% (6.75%) at December 31, 2004.
At December 31, 2004, there was an amount due from G.E. Capital Health Care
Financial Services of $566,523. 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 New York Health
Care to invest money in BioBalance. At December 31, 2004, New York Health Care
loaned BioBalance $1,500,000.
On January 19, 2005, the loan agreement was amended to allow the resignations of
Messrs. Jerry Braun and Jacob Rosenberg as officers and directors of the
Company, conditioned upon Messrs. Braun and Rosenberg remaining managers of the
Home Health Care division.
In addition, on April 11, 2005, the Company's loan agreement was modified to
permit the sale of the NJ Business to Accredited Health and to remove the
lender's lien with respect to the assets of the New Jersey Operation. As a
result of this modification, no loans under the agreement may be requested or
occur until the net worth agreement has been amended to the lender's
satisfaction.
NOTE 7 - INCOME TAXES:
Deferred tax attributes resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at December 31, 2004 and 2003
follows (rounded to the nearest thousand):
2004 2003
------------ ------------
Current assets:
Allowance for doubtful accounts $ 194,000 $ 166,000
Prepaid expenses (154,000) -
------------ ------------
40,000 166,000
Valuation allowance (40,000) (166,000)
------------ ------------
Net current deferred tax asset $ - $ -
============ ============
Noncurrent assets:
Net operating loss carryforwards $ 3,588,000 $ 695,000
Depreciation 44,000 28,000
Amortization of goodwill 765,000 857,000
Amortization of intangibles 255,000 113,000
------------ ------------
4,652,000 1,693,000
Valuation allowance (4,652,000) (1,693,000)
------------ ------------
Net noncurrent deferred tax asset $ - $ -
============ ============
F-19
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004, the Company had net operating loss carryforwards of
approximately $8,400,000, which expire between 2021 through 2024.
The (benefit) provision for income taxes, consist of the following:
2004 2003 2002
------------ ------------ ---------
Current tax (benefit) expense $ (63,126) $ 39,000 $ -
Deferred tax expense
(not including amount listed below) 2,800,000 1,007,000 -
Net change in valuation allowance (2,800,000) (1,007,000) -
------------ ------------ ---------
$ (63,126) $ 39,000 $ -
============ ============ =========
The (benefit) provision for income taxes is comprised of the following:
2004 2003 2002
--------- ------- -----
Current:
Federal $ - $ - $ -
State (63,126) 39,000 -
--------- ------- -----
$(63,126) $39,000 -
========= ======= =====
The statutory Federal income tax rate and the effective rate is reconciled as
follows:
2004 2003 2002
----- ----- -----
Statutory Federal income tax rate 34% 34% 34%
State taxes, net of Federal tax benefit 12 12 10
Valuation allowance (45) (45) (44)
Over/under accrual (1) (1) -
----- ----- -----
- - -
===== ===== =====
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of December 31, 2004 and 2003, 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
On January 29, 2002, the Company issued 391,656 shares of common stock in a
private placement.
F-20
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 following tables summarize options and warrants issued during the years
ended December 31, 2004, 2003 and 2002 to consultants and employees (including
non-employee Board of Directors):
Warrants:
These warrants were issued to or earned by consultants
Grants for 2004 None
- ------------------
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
F-21
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
*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, 2004, $15,743 was expensed as compensation expense
for these warrants. 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 2002 was $72,450. Fair
value is estimated based on the Black-Scholes option pricing model with the
following assumptions. For grants in 2002, the expected volatility used was 0%
and risk-free interest rate of 3.0% and expected lives equal to the lives of the
warrants.
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 members of the Board of Directors. The Company committed to issue
warrants to certain consultants subsequent to July 1, 2003. Therefore, these
commitments of warrants are 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.
For the year ended December 31, 2004, the re-valued warrants generated a
reduction in compensation of $381,565. For the year ended December 31, 2003,
the re-valued warrants generated a compensation expense of $19,511.
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 Option Plan, as
amended, up to 4,712,500 shares of common stock may be granted at December 31,
2004. The Option Plan is administered by the Compensation Committee which was
appointed by the Board of Directors. The Committee determines 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
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
- ------------------ ----------------- --------------- ---------------
January 29, 2004 450,000 $ 2.13 10 yrs
September 14, 2004 100,000 $ 0.50 10 yrs
Grant Date Number of Options Exercise Price Expiration Term
- ------------------ ----------------- --------------- ---------------
March 7, 2003 560,000 $ 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 options were given to employees 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, 2004, the Company has 4,834,592 shares of common stock reserved
for issuance of these options/warrants and for options/warrants granted
previously.
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
----------------- -----------------
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
Options and warrants granted 550,000 1.83
Options exercised - -
Options canceled/expired (952,532) 2.31
----------------- -----------------
Balance at December 31, 2004 2,853,119 2.17
=================
Eligible for exercise at December 31, 2004 2,753,119 2.23
=================
*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, 2004.
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 1.24 years $ 4.50 62,500 $ 4.50
$ 3.77 80,000 8.54 years 3.77 80,000 3.77
$ 3.69 100,000 3.71 years 3.69 100,000 3.69
$ 3.22-3.47 48,386 3.00 years 3.31 48,386 3.31
$ 3.14 560,000 8.19 years 3.14 560,000 3.14
$ 3.00 33,900 1.92 years 3.00 33,900 3.00
$ 3.00 39,166 2.08 years 3.00 39,166 3.00
$ 2.87 7,500 1.46 years 2.87 7,500 2.87
$ 2.70 135,000 0.54 years 2.70 135,000 2.70
$ 2.55 75,333 3.42 years 2.55 75,333 2.55
$ 2.51 75,000 0.96 years 2.51 75,000 2.51
$ 2.48 200,000 8.49 years 2.48 200,000 2.48
$ 2.13 450,000 9.08 years 2.13 450,000 2.13
$ 1.50 51,333 3.98 years 1.50 51,333 1.50
$ 1.50 20,000 0.85 years 1.50 20,000 1.50
$ 1.00 200,000 6.42 years 1.00 200,000 1.00
$ 0.98 66,667 4.86 years 0.98 66,667 0.98
$ 0.89-0.98 275,000 3.43 years 0.93 275,000 0.93
$ 0.75-0.83 273,334 2.96 years 0.79 273,334 0.79
$ 0.50 100,000 9.70 years 0.50 - 0.00
----------- ------------
2,853,119 5.87 years 2.17 2,753,119 2.23
=========== ============
F-24
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
In November 2003, a director, who was also an officer of BioBalance resigned,
and a consulting agreement with a consultant to BioBalance was suspended, and
subsequently terminated, as a result of matters related to certain claims made
against the former director and consultant by the U.S. Attorney's office. The
matters related to an alleged attempt by these two individuals to manipulate the
Company's common stock. The Company is obligated, under certain circumstances,
to indemnify the former director against liability and to pay for his costs of
defending himself from certain legal actions that arose from his activities as a
director or officer of the Company. To date, the Company's insurance carrier has
advanced funds on behalf of the Company to the former director to cover the
expenses of his defense to the government action. Unless it is legally
determined that the former director is not entitled to indemnification, the
Company would be required to reimburse the insurance carrier for $250,000 of the
amount it advanced on behalf of the former director. As of December 31, 2004,
the Company has accrued the $250,000 on its financial statements. In addition,
the terminated consulting agreement that BioBalance had entered into in 2001
with the consultant and a company affiliated with the consultant provided for
the payment to the consultant of annual consulting fees of $250,000 per year
through at least January 2008 and the issuance of 200,000 warrants to the
consulting company, subject to earlier termination of the consulting agreement
under certain circumstances, including for cause, as defined in the agreement,
or without cause. Although BioBalance has notified the consultant in writing on
September 23, 2004, of the termination of the consulting agreement for cause,
should the consultant bring an action to challenge the termination and a
court determines that the agreement was actually terminated without cause,
then BioBalance could be obligated under the agreement to pay to the
consulting company a severance payment equal to three times the sum of its
annual base consulting fee ($750,000) any cash bonus paid to it in the
three-year period preceding the date of termination and to provide the
consultant with certain health and other benefits for a period of five-years.
The Company has accrued approximately $359,000 in its consolidated financial
statements as of December 31, 2004 relating to this consulting agreement which
includes $125,000 in the third quarter of 2004 to cover additional payments
provided for in the consulting agreement which reflects the maximum the Company
may be required to pay. Moreover, the Company believes that it will be able to
defend its position in a possible claim by the consultant that it is owed money
under the consulting agreement, although there can be no assurance as to the
amount of monies, if
F-25
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any, that BioBalance may have to pay under the consulting agreement or that the
consultant will not bring an action against BioBalance or the Company for an
alleged breach of the consulting agreement.
During October 2004, it was determined that certain of the shares of Common
Stock that the Company issued to holders of BioBalance stock in connection with
the Company's January 2003 acquisition of BioBalance may not have been exempt
from the registration or qualification requirements of the state securities laws
of certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act of 1933, as amended.
Although the Company is unable to quantify the actual number of shares involved
that are still owned by the original recipients of the Company's Common Stock
received in the BioBalance acquisition, the per share purchase price paid by the
BioBalance holders for the BioBalance shares they exchanged in the acquisition
ranged from $.03 to $3.00 per share and the Company currently believes that the
purchase price paid by such persons who might have certain statutory rescission
rights does not exceed approximately $345,000, exclusive of any penalties or
interest, although no assurance can be given that any such claims will not
exceed this amount. The Company cannot determine the effect, if any, on its
operations or financial condition that may occur from the failure to register or
qualify these shares under applicable state securities laws. If it is determined
that the Company offered Common Stock in connection with the BioBalance
acquisition without properly registering or qualifying the shares under state
laws, or securing exemption from registration, regulators could impose on the
Company monetary fines or other sanctions as provided under these laws. The
Company is unable to estimate the amount of monetary fines, if any, or the
nature or scope of any sanctions at this time and is continuing its
investigation of this matter.
LEASE COMMITMENTS
The Company leases office space under noncancellable operating leases in New
York and New Jersey that expire between June 2005 and March 2010.
At December 31, 2004, future minimum lease payments due under operating leases
approximate:
2005 $ 423,000
2006 315,000
2007 143,000
2008 126,000
2009 127,000
2010 32,000
----------
Total minimum future payments $1,166,000 (1)
==========
Rental expense charged to operations was approximately $461,000, $432,000 and
$60,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
(1) At December 31, 2004, the New Jersey operations future minimum lease
payments due under operating leases approximates: 2005 $112,000, 2006 - $71,000,
2007 - $21,000, and 2008 - $3,000.
EMPLOYMENT AGREEMENTS:
In June 2004, the Company entered into an employment agreement with Dennis
O'Donnell the president of BioBalance that expires on May 5, 2006 at an annual
compensation of $200,000. The board approved an increase of $25,000 upon the
closing of the Offering that took place on February 24, 2005.
F-26
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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. The employment agreements were further amended to
eliminate the requirerment for consulting agreements. Messrs Braun and Rosenberg
on February 24, 2005, agreed to a further amendment that their resignations as
Executive Officers and Directors would be irrevocable. On February 24, 2005,
Messrs Bruan and Rosenberg resigned as Executive Officers and Directors of the
Company and each received, in accordance with their amended employment
agreements, 500,000 10 year options to purchase the Company's common stock at an
exercise price of $0.85 per share.
On January 13, 2005 and March 15, 2004, the Compensation Committee approved
bonuses of $500,000 to be paid to the two officers for the years ended December
31, 2004 and 2003, respectively; such amounts were accrued as of December 31,
2004 and 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
$40,000 and $54,000 for the years ended December 31, 2004 and 2003,
respectively. The Bio Balance segment did not have a 401(k) plan for the year
ended December 31, 2002.
BONUS PLAN:
The Home Health 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 $44,000 and $58,000 was
accrued as of December 31, 2004 and 2003, respectively.
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
F-27
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2,765,000 at December 31,
2004. 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 54% and 60% of net patient
service revenue for the years ended December 31, 2004 and 2003, respectively.
In addition, three customers represented approximately 49% and 44% of accounts
receivable at December 31, 2004 and 2003, respectively.
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(TM) 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.
NOTE 12 - THIRD-PARTY RATE ADJUSTMENTS AND REVENUE AND CERTAIN CONTRACTS:
Approximately 4% and 5% of net patient service revenue was derived under New
York State Medicaid reimbursement programs during the years ended December 31,
2004 and 2003, respectively. 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 that the revisions are determined. There was no revenue generated by
BioBalance for the years ended 2004, 2003 and 2002.
F-28
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 and 2003, the amount
included in due to HRA relating to direct labor costs amounted to $844,950 and
$828,555, respectively. 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, 2004 and
2003, this amount was $4,419,745 and $2,927,952, respectively, subject to final
audit by the City of New York. The aggregate amount due to HRA was $5,264,695
and $3,756,507 at December 31, 2004 and 2003, respectively. As of December 31,
2004, HRA had completed their audit for the fiscal year ended June 30, 2001.
In January 2003, 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, 2004 and 2003, the Company accrued approximately
$1,716,000 and $1,318,000, respectively, related to recruitment and retention
funds not yet expended and are included in accrued employee benefits.
NOTE 13- SUPPLEMENTAL CASH FLOW DISCLOSURES:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
------------- ------------- -------------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 29,538 $ 2,173 $ -
============= ============= =============
Income taxes $ 49,608 $ 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 $ -
============= ============= =============
F-29
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, 2004.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Elimination of
New York Bio- Intersegment Total
Health Care Balance Activity Consolidated
------------- ------------ ---------------- --------------
Year ended December 31, 2004
Revenue:
Net patient service revenue $ 48,854,358 $ - $ - $ 48,854,358
Sales - - - -
------------- ------------ ---------------- --------------
Total revenue $ 48,854,358 $ - $ - $ 48,854,358
============= ============ ================ ==============
Income (loss) before (benefit) provision
for income taxes $ 290,204 $(6,425,015) $ - $ (6,134,811)
============= ============ ================ ==============
Depreciation and amortization $ 159,119 $ 712,591 $ - $ 871,710
============= ============ ================ ==============
Interest income $ 90,307 $ 2,343 $ (22,773) $ 69,877
============= ============ ================ ==============
Interest expense $ 29,538 $ 22,773 $ (22,773) $ 29,538
============= ============ ================ ==============
Income tax (benefit) expense $ (63,126) $ - $ - $ (63,126)
============= ============ ================ ==============
Noncash compensation $ - $ (365,822) $ - $ (365,822)
============= ============ ================ ==============
Assets $ 14,646,001 $ 3,379,967 $ ( 1,522,773) $ 16,503,195
============= ============ ================ ==============
Expenditures for long lived assets $ - $ 77,817 $ - $ 77,817
============= ============ ================ ==============
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 (benefit) 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 (benefit) 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 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-30
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Cost of
Net Patient Professional
Service Care of Net Basic and
2004 Revenue Patients Loss Diluted EPS
- -------------- ------------ ------------- ------------ -------------
First quarter $ 11,506,458 $ 9,187,896 $(1,227,584) $ (0.05)
Second quarter 12,171,007 9,807,932 (1,162,071) (0.05)
Third quarter 12,397,208 9,961,241 (1,013,904) (0.04)
Fourth quarter 12,779,685 10,257,147 (2,668,126)(1) (0.11)
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
(1) In the fourth quarter, it was determined that the NexGen intangible assets
were impaired by $1,740,326 as a result of an impairment analysis performed. See
note 4.
F-31
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, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 397,000 $ 90,400 $ - $ (27,400) $ 460,000
Deferred tax asset valuation
allowance $ 1,859,000 $ 2,800,000 $ - $ - $ 4,659,000
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 $ 1,007,000 $ - $ - $ 1,859,000
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ - $ - $ - $ -
Deferred tax asset valuation
Allowance $ 208,000 $ 644,000 $ - $ - $ 852,000
*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-32
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 S-
4, SEC file no. 333-85054).
2.2 Purchase and Sale agreement dated as of July 15, 2004 by and among the Company,
NYHC Newco Paxxon Inc. and New York Health Care, LLC. (7)
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)
3.8 Certificate of Amendment to the Certificate of Incorporation of New York Health
Care, Inc. filed on September 10, 2004 (incorporated by reference to the applicable Exhibit filed
with the Company's 8-K filed on September 15, 2004)
3.9 Amended By-Laws of the Company*
4.1 Form of certificate evidencing shares of Common Stock. (1)
10.1 Engagement Letter Agreement between the Company and Sterling Financial
Investment Group, Inc. dated May 6, 2004. (5)
10.2 Employment Agreement for Dennis O'Donnell (6)
10.3 Option agreement dated September 14, 2004 between the Company and Dennis
O'Donnell (7)
10.4 Form of Option Agreement under the Company's Performance Incentive (Stock
Option) Plan (7)
10.5 Placement Agreement dated November 19, 2004 between the Company and Sterling Financial Investment
(incorporated by reference to the applicable Exhibit filed with the Company's Form 8-K filed on
November 23, 2004)
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)
55
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)
10.12 Personal Care Aide Agreement by and between the Company and Nassau County
Department of Social Services dated October 18, 1995. (1)
10.13 State of New York Department of Health Offices 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)
10.14 Homemaker and Personal Care Agreements by and between the Company and the
County of Rockland Department of Social Services dated January 1, 1996. (1)
10.15++ Employment Agreement by and between the Company and Jerry Braun dated
November 12, 1999. (3)
10.16++ Employment Agreement by and between the Company and Jacob Rosenberg dated
November 12, 1999. (3)
10.17 Loan 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
December 8, 2000)
10.18 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)
10.19 Amendment No. 2 to Loan and Security Agreement among GE HFS Holding, Inc.,
the Company and Newco Paxxon, Inc. dated March 29, 2004 (5)
10.20 Amendment No. 3 to Loan and Security Agreement among GE HFS Holdings, Inc.,
the Company and Newco Paxxon, Inc. dated March 29, 2004 (incorporated by
reference to the Form 8-K filed by the Company on December 12, 2004)
10.51++ Amended Performance Incentive Plan (Stock Option Plan) of the Company. (4)
10.52++ Amendment to Employment Agreement between the Company and Jerry Braun
dated January 28, 2003. (4)
10.53++ Amendment to Employment Agreement between the Company and Jacob Rosenberg
dated January 28, 2003. (4)
14.1 Code of Ethics for Senior Financial Officers (8).
23.1* Consent of Weiser LLP
23.2* Consent of Holtz Rubenstein Reminick LLP.
31.1* Certification of Chief Executive Officer 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 to 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 to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
56
* 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 Form10-QSB
report for the quarter ended June 30, 1998.
(3) Incorporated by reference to Exhibits filed as part of the Company's Form10-QSB
Report for the quarter ended September 30, 1999.
(4) Incorporated by reference to Exhibits filed as part of Company's Form 10-K
Annual Report for the year ended December 31, 2002.
(5) Incorporated by reference to Exhibits filed as part of the Company's Form 10-Q for
the quarter ended March 31, 2004
(6) Incorporated by reference to Exhibits filed as part of the Company's Form 10-Q for
the quarter ended June 30, 2004
(7) Incorporated by reference to Exhibits filed as part of the Company's Form 10-Q for
the quarter ended September 30, 2004
(8) Incorporated by reference to Exhibits filed as part of the Company's Form 10-K for
The year ended December 31, 2004.
57