Filed pursuant to Rule 424(b)(3)
Registration No. 333-85054
NEW YORK HEALTH CARE, INC.
1850 McDonald Avenue
Brooklyn, NY 11223
(718)375-6700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of New York Health Care, Inc.:
The Annual Meeting of Shareholders of New York Health Care, Inc. will be
held at the offices of New York Health Care, 1850 McDonald Avenue, Brooklyn, New
York 11223 on December 10, 2002 at 10:00 A.M. local time, for the purpose of
considering and voting upon the approval and adoption of the following:
1. Approval and adoption of the Stock For Stock Exchange Agreement with The
Bio Balance Corp.;
2. Approval of an amendment to the New York Health Care Certificate of
Incorporation increasing the authorized shares of New York Health Care
common stock from 50,000,000 shares to 100,000,000 shares;
3. Approval of an amendment to the New York Health Care Certificate of
Incorporation. increasing the authorized shares of New York Health Care
preferred stock from 2,000,000 shares to 5,000,000 shares;
4. Approval of an amendment to the New York Health Care Certificate of
Incorporation providing for a 1-for-1.5 share reverse split of all of the
issued and outstanding shares of New York Health Care's common stock to
occur on the day before the closing of the Bio Balance merger;
5. Election of Jerry Braun, Jacob Rosenberg, H. Gene Berger, Charles J.
Pendola, Paul Stark and David C. Katz as the Board of Directors of New York
Health Care until the next Annual Meeting or until their successors are
elected and qualify. Messrs. Braun, Rosenberg, Berger and Pendola have been
members of the New York Health Care Board of Directors for a number of
years. Mr. Stark and Mr. Katz are the nominees who have been proposed by
Bio Balance as provided for in the Exchange Agreement and whose election
will only be effective if the transaction is completed;
6. Approval of an amendment to the New York Health Care stock option plan
authorizing an additional 3,230,000 shares of New York Health Care common
stock for issuance as stock options;
7. Ratification of the change of control parachute payment provisions
contained in the senior executive officers employment agreements approved
by New York Health Care Compensation Committee; and
8. To transact such other business as may properly come before the meeting or
any other adjournment or adjournments thereof.
Shareholder approval of proposals 1 - 7 are a requirement of the Exchange
Agreement.
Only holders of record of New York Health Care at the close of business on
November 4, 2002 are entitled to notice of and to vote at the Annual Meeting and
any adjournment or adjournments thereof.
Brooklyn, NY By Order of the Board of Directors
November 1, 2002
/s/ Jacob Rosenberg
-----------------------------------
Jacob Rosenberg, Secretary
PROSPECTUS/PROXY STATEMENT
NEW YORK HEALTH CARE, INC.
23,143,334 Shares of Common Stock and
483,066 Common Stock Purchase Warrants
This Prospectus/Proxy Statement relates to the solicitation of proxies by
the board of directors of New York Health Care, Inc. for use at the annual
meeting of holders of New York Health Care common stock to be held at 10:00
a.m., eastern time, on Tuesday, December 10, 2002, at the offices of New York
Health Care, 1850 McDonald Avenue, Brooklyn, NY 11233, and at any adjournments
and postponements of the annual meeting. At the annual meeting New York Health
Care shareholders will consider and vote upon a proposal to approve the
Acquisition of The Bio Balance Corp. by means of a merger of a wholly-owned
Subsidiary of New York Health Care with Bio Balance and the issuance of the
maximum number of shares of common stock and warrants issuable pursuant to the
terms of the Exchange Agreement. Additionally, New York Health Care shareholders
will consider and vote upon proposals to amend the Certificate of Incorporation
of New York Health to effect a 1-for-1.5 reverse stock split, increase the
authorized shares of common stock, and increase the authorized shares of
preferred stock, to increase the shares reserved under the New York Health Care
stock option plan, to ratify certain change in control provisions in the
employment agreements of two senior officers of New York Health Care and to
elect six directors, all in accordance with the terms of the Exchange Agreement.
This Prospectus/Proxy Statement is also a prospectus of New York Health
Care relating to the shares of common stock and warrants issuable by New York
Health Care to the shareholders and warrant holders of Bio Balance pursuant to
the Exchange Agreement.
You should carefully consider the risk factors beginning on page 18 of this
Prospectus/Proxy Statement before participating in the exchange offer.
-------------------------
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus/Proxy Statement. Any
representation to the contrary is a criminal offense.
The date of this Prospectus/Proxy Statement is November 1, 2002
New York Health Care's Common stock has been listed for trading on the
Nasdaq SmallCap Market and the Boston Stock Exchange. By reason of the
acquisition described in this prospectus, application has been made by New York
Health Care for continued listing on Nasdaq and the Boston Exchange. New York
Health Care does not intend to apply to Nasdaq or to the Boston Exchange for the
listing of the warrants for trading. There is no public market for the warrants
and New York Health Care does not intend to make any effort for there to be a
public market for the warrants and it is unlikely that such a market will
develop or, if it does develop, will be sustained.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/PROXY STATEMENT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
2
Table of Contents
Page
Questions and Answers About the Transaction 6
General Questions and Answers 6
New York Health Care Shareholder Questions
and Answers 9
Bio Balance Shareholders Questions and Answers 11
Prospectus/Proxy Statement Summary 13
Risk Factors 18
General Risks Relating to the Transaction 18
New York Health Care Business Risks 21
Bio Balance Risks 25
Forward Looking Statements 32
Market Price Information 34
The Annual Meeting of New York Health Care Shareholders 35
General Information 35
Date, Time and Place 35
Purpose of the Annual Meeting 35
Record Date for the Annual Meeting 36
Vote Required 36
Quorum, Abstentions and Broker Non-Votes 37
Revocability of Proxies 38
Voting and Solicitation 38
Proposal 1: Merger of the Bio Balance Corp. 38
General 39
Background of Transaction 39
Reasons for the Transaction 43
Determination of the Post-Transaction Ownership Ratios 48
Vote Required 49
The Board of Directors of New York Health Care Recommends
that the Shareholders Vote for Proposal 1 49
Proposal 2: Amendment of the Certificate of Incorporation to
Increase the Number of Shares of New York Health Care's
Authorized Common stock to 100,000,000 50
Vote Required 50
Effect of the Increase in Authorized Shares of Common and
Preferred Stock 50
The New York Health Care Board of Directors Recommends that the
Shareholders Vote for Proposal 2 51
Proposal 3: Amendment of the Certificate of Incorporation to
Increase the Number of Shares of New York Health
Care's Authorized Preferred
Stock to 5,000,000 51
Vote Required 51
Effect of the Increase in Authorized Shares of Common and
Preferred Stock 51
The New York Health Care Board of Directors Recommends that the
Shareholders Vote for Proposal 3 51
3
Proposal 4: Amendment of the Certificate of Incorporation to
Effect A 1-for-1.5 Reverse Stock Split 52
Effect of the Reverse Stock Split 52
Vote Required 53
The New York Health Care Board of Directors Recommends that the
Shareholders Vote for Proposal 4 53
Proposal 5: Election of Directors 54
Proposal 6: Approval of Amendment to Stock Option Plan 64
General 64
Federal Income Tax Consequences of the Option Plan 66
Accounting Treatment 67
Option Grants 67
Equity Compensation Plan Information 68
Shareholder Approval 68
Vote Required 68
Proposal 7: Ratification of the Change of Control Parachute Payment
Provisions Contained in the Senior Executive Officers Employment
Agreement's Approved by New York Health Care Compensation Committee
in November, 1999 69
Vote Required 70
Shareholder Proposals 71
Other Matters 71
Interests of New York Health Care Directors
and Executive Officers in the Transaction 71
Completion and Effectiveness of the Transaction 72
Exchange of Bio Balance Stock and Warrant Certificates
for New York Health Care Stock and Warrant
Certificates 72
Material United States Federal Income Tax Consequences
of the Transaction 73
Accounting Treatment of the Transaction 74
Restrictions on Market Sales of Shares by Affiliates of Bio
Balance and Others 74
Appraisal Rights 74
Appraisal Rights Procedures 75
Listing on the NASDAQ Market of the New York Health
Care Common stock to be Issued in the Transaction 77
The Exchange Agreement 77
Selected Historical Financial Information 79
New York Health Care Historical Financial Information 80
Bio Balance Historical Financial Information 81
Unaudited Pro Forma Condensed Consolidated Financial Statements 82
Bio Balance Business 92
General 92
Recent Purchase of Technology 93
Irritable Bowel Syndrome 94
Probiotics 97
Bio Balance's Technology and Product 104
The Need for FDA Approval of Bio Balance's Product 105
4
Bio Balance Business Strategies 110
Bio Balance Marketing and Sales 111
Bio Balance Manufacturing 113
Clinical Testing 113
Future Plans 114
Competition 114
Bio Balance Intellectual Property Rights 114
Employees 115
Facilities 115
Legal Proceedings 115
Bio Balance Management's Discussion and Analysis of Financial
Conditions and Results of Operations 116
Bio Balance Management 120
Bio Balance Director Compensation 121
Bio Balance Medical Advisory Board 121
Technical Advisory Board 122
Bio Balance Limitation on Liability; Indemnification of Directors 123
Bio Balance Related Transactions 124
Description of Bio Balance Securities 125
Shares Eligible for Future Sale 126
Transfer Agent and Warrant Agent 126
Security Ownership of Certain Beneficial Owners and
Management of New York Health Care
and Bio Balance 127
New York Health Care 127
Bio Balance 128
New York Health Care After the Bio Balance Acquisition 129
Legal Matters 131
Experts 131
Where You Can Find More Information 131
Bio Balance Financial Statements 133
Annex A Exchange Agreement
Annex B Amendment No. 1 to Exchange Agreement
Annex C Amendment No. 2 to Exchange Agreement
Annex D Amendment No. 3 to Exchange Agreement
Annex E Amendment No. 4 to Exchange Agreement
Annex F Section 262 of the Delaware General Corporation Law
5
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
GENERAL QUESTIONS AND ANSWERS
Q: What are New York Health Care and Bio Balance proposing?
A: New York Health Care and Bio Balance are proposing to engage in a business
combination transaction in which a New York Health Care wholly-owned
subsidiary will merge with and into Bio Balance, and Bio Balance will thereby
become a wholly-owned subsidiary of New York Health Care. The combination
will be carried out pursuant to the Stock for Stock Exchange Agreement dated
October 11, 2001, as amended February 13, 2002, July 10, 2002, August 13,
2002 and October 25, 2002.
Q: Why have New York Health Care and Bio Balance agreed to this transaction?
(See page 43)
A: New York Health Care and Bio Balance are proposing this transaction, after
discussions and negotiations over a number of months, because their
managements each believe that a combination of the two companies will be
beneficial to their combined businesses and to each of their respective
shareholder groups.
New York Health Care is a licensed home health care agency supplying
paraprofessional services providing a broad range of health support services
to patients in their homes since February 1983. Historically, home health
care has been a business with moderate profit margins, and over the last few
years profitability has been affected by declining reimbursement formulas
implemented by insurance companies and government subsidy programs. Increased
profits require a substantial increase in sales, which in turn requires a
substantial increase in New York Health Care's paraprofessional staff.
However, competition for qualified staff in the New York Metropolitan area is
intense.
The management of New York Health Care believes that the acquisition of Bio
Balance offers the potential for the shareholders of New York Health Care to
realize greater value, assuming that Bio Balance can successfully implement
its business plan at an acceptable cost and risk (as to which there can be no
assurance), than if New York Health Care were to continue to operate on a
stand-alone basis.
Bio Balance is a development stage business which was incorporated in 2001
whose business is the discovery, manufacturing and marketing of probiotic
agents and ethical drugs for therapy of GI diseases. Probiotics is the
utilization of live microbial agents to benefit an animal or human host by
improving intestinal microbial balance through the stimulation of the growth
of healthy bacteria. Bio Balance acquired the technology, intellectual
property and pending patent applications with respect to its developing
probiotic business at the end of July 2001. It intends to focus the initial
development of its business on digestive disorders such as Irritable Bowel
Syndrome.
6
The Bio Balance contract to acquire the technology requires that Bio
Balance enter into a business combination transaction with a company whose
shares were listed for trading on the Nasdaq, or accomplish an initial
public offering of its own securities, not later than January 2, 2003 (Bio
Balance's management believes that prevailing market conditions precluded
the likelihood of an initial public offering of its securities in the near
future).
The management of Bio Balance concluded that New York Health Care had a
good health care business with good management in a moderate margin
environment with a limited opportunity for substantial growth in equity
value. Moreover, New York Health Care's Common stock has been listed for
trading on the Nasdaq SmallCap Market and on the Boston Exchange since it
made its public offering in 1996.
The transaction provides Bio Balance with the ability to satisfy the
conditions required under its technology acquisition agreements to maintain
ownership of the probiotic technology rights it purchased in July 2001. It
provides for each of New York Health Care and Bio Balance to operate their
businesses independently while providing the Bio Balance business with
access to the public equity markets through New York Health Care which Bio
Balance's management believes would otherwise be unavailable in the current
equity financing climate. The transaction provides Bio Balance's
shareholders with a large majority, as much as approximately 90% (assuming
that Bio Balance has sold 3,000,000 shares in its private placement, and
before the exercise or conversion of currently outstanding Bio Balance and
New York Health Care stock options, warrants and preferred stock) and no
less than 86% (assuming the exercise or conversion of all currently
outstanding stock options, warrants and preferred stock), of the issued and
outstanding shares of New York Health Care common stock while providing New
York Health Care shareholders with the opportunity for equity growth in the
value of their holdings if Bio Balance successfully implements its
biotechnology business
Q: What will holders of Bio Balance common stock and warrants receive in this
transaction? (See page 38)
A: The holders of Bio Balance securities will receive one (1) share of New
York Health Care common stock for each share of issued and outstanding Bio
Balance common stock. The holders of Bio Balance warrants will receive one
(1) New York Health Care warrant for every Bio Balance warrant they hold,
with terms which are identical to those of their Bio Balance warrant. The
exchange of Bio Balance shares for New York Health Care shares should not
be a taxable event for U.S. Federal income tax purposes. However, the
exchange of Bio Balance warrants for New York Health Care warrants may be
taxable to Bio Balance warrant holders to the extent that the exercise
price of a Bio Balance warrant exceeds the market price of New York Health
Care shares on the day of exercise.
7
Q: What will holders of New York Health Care securities receive in this
transaction? (See page 38)
A: The holders of New York Health Care shares of common stock will not receive
any securities of Bio Balance. Bio Balance will be merged with New York
Health Care's wholly-owned subsidiary, NYHC Acquisition, Inc. When and if
the New York Health Care warrants acquired by the Bio Balance warrant
holders are exercised, New York Health Care will receive the consideration
provided for in those warrants.
Q: How will the transaction affect New York Health Care shareholders? (See
Pages 38, 43 and 52)
A: One of the conditions of the transaction is a 1-for-1.5 reverse split of
New York Health Care common stock. As a result of that reverse split, each
New York Health Care shareholder will receive 100 shares of New York Health
Care common stock for every 150 shares they held prior to the closing. All
New York Health Care shareholders will be effected equally by this reverse
stock split. New York Health Care's management believes that the Bio
Balance merger provides the shareholders with a substantially greater
opportunity for equity growth than would be otherwise available in New York
Health Care's traditional home health care business. The prospect of
successful equity growth, however, depends upon the ability of Bio Balance
to successfully prosecute its business, in particular the satisfaction by
its initial product, PROBACTRIX(TM), of United States Food and Drug
Administration rules governing medical foods.
Q: Will the Bio Balance shareholders be able to trade the shares of New York
Health Care common stock which they receive in the transaction? (See page
74)
A: Yes. The New York Health Care common stock is tradable under the symbol
"NYHC" on the Nasdaq SmallCap Market and "NYH" on the Boston Stock
Exchange, where the New York Health Care common stock is presently listed
for trading. New York Health Care has been advised by Nasdaq that it will
continue to have a listing on its SmallCap Market if New York Health Care,
upon the conclusion of the transaction, meets the initial listing
requirements for new listings on the Nasdaq SmallCap Market. It is a
condition to the completion of the transaction that New York Health Care
meet the initial listing requirements of the Nasdaq SmallCap Market so as
to enable continuation of its SmallCap Market listing. Persons who are
deemed to be affiliates of Bio Balance prior to the completion of the
transaction, however, may not sell their shares of New York Health Care
common stock acquired in connection with the merger except pursuant to a
resale prospectus in an effective registration statement covering the
resale of those shares, an exemption under Rule 145 of the Securities Act
or another applicable exemption under the Securities Act. This
Prospectus/Proxy Statement is not a resale prospectus. Moreover, there are
contractual restrictions on transfer of New York Health Care shares which
are set forth in the Exchange Agreement and affect a number of Bio Balance
shareholders.
8
Q: When do New York Health Care and Bio Balance expect to complete the
transaction?
A: New York Health Care and Bio Balance expect to complete the transaction
when all of the conditions to completion contained in the Exchange
Agreement have been satisfied or waived. We are working towards satisfying
these conditions and completing the transaction as promptly as possible. We
currently plan to complete the transaction effective January 1, 2003.
Because the transaction is subject to various regulatory matters and other
conditions, some of which are beyond the control of New York Health Care
and Bio Balance, the exact timing cannot be predicted.
Q: What happens if the transaction is not completed?
A: If the transaction is not completed, New York Health Care and Bio Balance
will each continue as independent companies, there will be no merger, no
exchange of shares or warrants and no reverse split of New York Health Care
shares.
NEW YORK HEALTH CARE SHAREHOLDER QUESTIONS AND ANSWERS
Q: On what am I being asked to vote? (See page 35)
A: New York Health Care's shareholders are being asked to vote on seven
resolutions which have been agreed-to between New York Health Care and Bio
Balance and are required to be approved by shareholders as part of the
transaction:
1. Approval and adoption of the Exchange Agreement;
2. Approval of an amendment to the New York Health Care Certificate of
Incorporation. increasing the authorized shares of New York Health
Care common stock from 50,000,000 shares to 100,000,000 shares;
3. Approval of an amendment to the New York Health Care Certificate of
Incorporation. increasing the authorized shares of New York Health
Care preferred stock from 2,000,000 shares to 5,000,000 shares;
4. Approval of an amendment to the New York Health Care Certificate of
Incorporation providing for a 1-for-1.5 share reverse split of all of
the issued and outstanding shares of New York Health Care's common
stock to occur on the day before the closing of the Bio Balance
merger;
5. Election of Jerry Braun, Jacob Rosenberg, H. Gene Berger, Charles J.
Pendola, Paul Stark and David C. Katz as the Board of Directors of New
York Health Care until the next Annual Meeting or until their
successors are elected and qualify. Messrs. Braun, Rosenberg, Berger
and Pendola have been members of the New York Health Care Board of
Directors for a number of years. Mr. Stark and Mr. Katz are the
nominees who have been proposed by Bio Balance as provided for in the
Exchange Agreement and whose election will only be effective if the
transaction is completed;
9
6. Approval of an amendment to the New York Health Care stock option plan
authorizing an additional 3,230,000 shares of New York Health Care
common stock for issuance as stock options; and
7. Ratification of the change of control parachute payment provisions
contained in the senior executive officers employment agreements
approved by New York Health Care Compensation Committee.
Q: What vote is required to approve the closing of the Exchange Agreement?
(See page 49)
A: A majority of the outstanding shares of New York Health Care common stock
must be voted by the New York Health Care shareholders at the New York
Health Care shareholder meeting at which a quorum is present to approve the
Bio Balance merger and the exchange of shares and warrants. Each share of
New York Health Care common stock is entitled to one vote on all matters to
come before the meeting. It is very important that as many shareholders as
possible are represented in person or by proxy at the annual meeting. Only
shareholders who hold shares of the New York Health Care common stock at
the close of business on November 4, 2002 will be entitled to vote at the
annual meeting. New York Health Care agreed in the Exchange Agreement that
Officers and Directors would provide proxies representing at least 50.1% of
the capital stock permitted to vote on the merger transaction.
Q: Are there risks I should consider in deciding whether to vote for the Bio
Balance merger? (See page 18)
A: Yes. A number of risk factors that you should consider in connection with
the transaction are described in the section of this document entitled
"Risk Factors."
Q: How do I vote on the proposed Bio Balance merger? (See page 36)
A: First, please review the information contained in this document, including
its annexes and the New York Health Care Annual Report for 2001 on Form
10-KSB/A which accompanies this document. These materials contain important
information about New York Health Care and Bio Balance. They also contain
important information about what the Boards of Directors of New York Health
Care and Bio Balance considered in evaluating the transaction. Next,
complete and sign the enclosed proxy card and then mail it in the enclosed
return envelope as soon possible so that your shares can be voted at the
annual meeting of New York Health Care shareholders in which the Bio
Balance merger will be presented and voted upon. You may attend this annual
meeting in person and vote there.
Q: What happens if I don't indicate how to vote my proxy? (See page 37)
A: If you sign and send in your proxy, but do not include instructions on how
to vote your properly signed proxy card, your shares will be voted FOR the
approval of all of the resolutions set forth in the proxy.
10
Q: What if I don't return a proxy card? (See page 37)
A: Not returning your proxy card will have the effect of reducing the number
of votes cast at the annual meeting, thereby reducing the number of votes
needed to approve the Bio Balance merger and other resolutions. It may also
contribute to a failure to obtain a quorum at the annual meeting. Under New
York Health Care's bylaws, a majority of the total issued and outstanding
shares entitled to vote, present in person or represented by proxy,
constitutes a quorum at the annual meeting.
Q: Can I change my vote after I have mailed my signed proxy card? (See page
38)
A: Yes. You can change your vote at any time before your proxy is voted at the
New York Health Care annual meeting of shareholders by sending a written
notice to the Secretary of New York Health Care stating that you would like
to revoke your proxy, by completing and submitting a later-dated proxy card
or by both attending the annual meeting and voting in person.
Q: If my broker holds my shares in "street name," will my broker vote my
shares for me? (See page 37)
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instructions, your
shares may be considered present at the annual meeting for purposes of
determining a quorum, but will not be considered to have been voted in
favor of approval of any resolution. If you have instructed a broker to
vote your shares and wish to change your vote, you must follow directions
received from your broker to change those instructions.
Q: Am I entitled to dissent or appraisal rights?
A: No. Holders of New York Health Care common stock do not have dissent or
appraisal rights in connection with the transaction.
BIO BALANCE SHAREHOLDER QUESTIONS AND ANSWERS
Q: Should I send in my share or warrant certificates now?
A: No. You will be sent written instructions for exchanging your Bio Balance
common stock or Bio Balance warrants for New York Health Care common stock
and New York Health Care warrants.
11
Q: Am I entitled to dissent or appraisal rights? (See page 74)
A: Under Delaware law, Bio Balance common stockholders may have the right to
an appraisal of the value of their shares of common stock in connection
with the merger. You may vote for or against the merger and, if you vote
against the merger, you may assert appraisal rights. Under the terms of the
Exchange Agreement, if holders of more than 10% of the Bio Balance shares
assert appraisal rights, New York Health Care may choose not to complete
the transaction and no shares or warrants will be exchanged.
At the closing of the exchange Bio Balance will merge with NYHC
Acquisition, a newly formed, wholly-owned subsidiary of New York Health
Care organized under Delaware law. All Bio Balance shareholders who vote
against the merger and comply with applicable procedures will have the
opportunity to dissent from the transaction and exercise appraisal rights
in the Delaware Chancery Court for a determination of the "fair value" of
their Bio Balance shares and payment of that "fair value" by Bio Balance.
See "Appraisal Rights."
Q: Are there risks I should consider in deciding whether to vote for the
New York Health Care merger? (See page 18)
A. Yes. A number of risk factors that you should consider in connection with
the transaction are described in the section of this document entitled
"Risk Factors."
12
PROSPECTUS/PROXY STATEMENT SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus/Proxy Statement.
PARTIES TO THE TRANSACTION
New York Health Care
New York Health Care, Inc. is 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. New York
Health Care was initially organized under the laws of the State of New York, in
February 1983.
New York Health Care operates 24 hours a day, seven days a week to receive
referrals and coordinate services with physicians, case managers, patients and
their families in all five boroughs of New York City and the counties of Nassau,
Westchester, Rockland, Orange, Duchess, Ulster, Putnam and Sullivan, in the
State of New York. New York Health Care, as a result of acquisitions as
described elsewhere in this Prospectus/Proxy Statement, also operates in Jersey
City, Edison, Bradley Beach, Toms River, East Orange and Hackensack, New Jersey
under the name Helping Hands Healthcare, (the business name of NYHC Newco
Paxxon, Inc., a wholly owned subsidiary of New York Health Care). New York
Health Care's services are supplied principally pursuant to contracts with
health care institutions and agencies such as various county Departments of
Social Services, NYC HRA, New Jersey Medicaid, Beth Abraham Health Services in
the Bronx and Westchester County, Kingsbridge Medical Center, Aetna US
Healthcare, and Gentiva Health Services.
New York Health Care's primary objective is to enhance its position in the
home health care market by increasing the promotion of its full service and
specialty health care capabilities to existing and new referral sources; expand
its markets and enter new markets by establishing additional branch offices and
acquiring other related health care businesses; expand its provision of skilled
nursing services and the care of women during pregnancy and their newborn
children; and develop complimentary home health care products and services, as
well as maintaining its regular training and testing programs, and recruitment
activities.
NYHC Acquisition is a wholly-owned subsidiary organized under Delaware law
on April 30, 2002 for the sole purpose of merging with Bio Balance in the
transaction.
New York Health Care's offices are located at 1850 McDonald Avenue,
Brooklyn, NY 11223. Its telephone number is (718) 375-6700.
13
Bio Balance
The Bio Balance Corp. is a development stage company, which owns
"probiotic" technology and intellectual property and has engaged in the
research, development and limited marketing in Israel of a product for the
treatment of gastrointestinal diseases and disorders in animals and humans,
including Irritable bowel syndrome ("IBS") and chronic diarrhea.
"Probiotics" are living microorganisms or microbial mixtures, which are
administered to benefit the animal or human host by improving its microbial
balance by stimulating the growth of healthy bacteria. Bio Balance has patent
applications filed in Israel and the United States on its core technologies.
Bio Balance's first product, PROBACTRIX(TM) has undergone toxicity and
animal studies in established laboratories in Israel and the former Soviet Union
and has received approval from the State of Israel, Ministry of Agriculture,
Division of Animal Feed Quality Assurance for veterinarian use and from the
State of Israel, Ministry of Health for use as a human food supplement.
PROBACTRIX(TM) was available in Israeli pharmacies from August 2000 until July
2001 when Bio Balance entered into an agreement to acquire all rights with
respect to the product. PROBACTRIX(TM) consists of a proprietary strain of
non-pathogenic (i.e. non-toxic) M-17 Escherichia Coli ("E.coli") bacteria
preserved in a proprietary vegetable extract formulation. Various clinical
studies in the former Soviet Union and in Israel, as well as published
scientific articles support the beneficial effects of non-pathogenic E.coli.
Bio Balance intends to comply with applicable requirements for the
introduction of its first product, PROBACTRIX(TM), to the United States market
as a medical food. Medical foods are not subject to the FDA regulatory criteria
and market clearance standards applicable to "drugs". Instead, medical foods are
a subcategory of foods for special dietary use that are subject to FDA rules
governing foods and food ingredients. A product to be marketed as a medical food
must (1) satisfy the statutory definition of a medical food, and (2) the
ingredients in the medical food must be either approved food additives or
"generally recognized as safe" (GRAS).
A "medical food" means an enterally administered food which is formulated
to be consumed or administered under the supervision of a physician and which is
intended for the specific dietary management of a disease or condition for which
distinctive nutritional requirements, based on recognized scientific principles,
are established by medical evaluation. In order to establish medical food
status, Bio Balance will convene an expert panel to review the safety and
efficacy data relating to PROBRATRIX(TM) and provide an expert opinion as to
whether these criteria are met. Although there is no formal FDA approval process
for medical foods, Bio Balance may meet with FDA to inform the agency as to the
medical food status of PROBRACTRIX(TM).
In order to meet the requirements of GRAS status for the functional
ingredient in PROBACTRIX ( T M), Bio Balance is conducting a GRAS self-
determination, and may voluntarily file a notification of such determination
with the FDA. Bio Balance commenced the GRAS determination process in the spring
of 2002 and presently expects completion of that in 2003. The GRAS process
involves compiling the existing data on the PROBACTRIX(TM) ingredient,
developing additional data as necessary, and ensuring publication of such data
to satisfy the "general recognition" requirement of GRAS. Thereafter, Bio
Balance will obtain the concurrence of an expert panel that the ingredient meets
the requirements of GRAS. Although FDA approval is not required for GRAS
substances, Bio Balance may submit a voluntary notification of GRAS status to
the agency, in which case the FDA has 90 days to raise questions or objections
to the GRAS self-determination. Although it is possible that GRAS status could
be sustained based upon current efficacy data, Bio Balance intends to conduct at
least two clinical trials to obtain further data to support marketing efforts
before commencing marketing of PROBACTRIX(TM) in the United States.
14
As a secondary product offering, Bio Balance also plans on introducing a
version of its product as a pharmaceutical drug and thereafter market the
product in the United States. FDA approval of the product as a pharmaceutical
drug is a time consuming and costly process requiring extensive clinical studies
to prove the safety and efficacy of a product. Clinical studies and clearance of
a pharmaceutical drug can cost $50 million or more and require 2 to 5 years to
complete. Because of its ability to market PROBACTRIX(TM) as a medical food, and
because of the time and cost associated with introduction of PROBACTRIX(TM) as a
pharmaceutical drug, Bio Balance has not as yet commenced the FDA approval
process and has no current time table to begin that process. Bio Balance does
not expect to commence the FDA approval process unless and until it can secure
adequate financing to support that effort.
Bio Balance was incorporated on May 21, 2001 in the State of Delaware under
the name "The Zig Zag Corp." and changed its name to The Bio Balance Corp. in
September 2001. From its inception, Bio Balance has been a development stage
company and has not generated any revenues. From inception to August 15, 2002,
Bio Balance has raised gross proceeds of approximately $3,734,000 from the
private placement of 9,816,614 shares of its common stock to investors other
than the founders.
In July 2001, Bio Balance acquired all patents, patent applications,
know-how and intellectual property rights relating to certain probiotic agents
from Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd., each of
which are unaffiliated third parties engaged in the research, development,
marketing and sales of probiotic bacteria and other technology for cash
consideration of $510,000 and an aggregate of 990,000 Bio Balance shares. Under
the terms of the agreement pursuant to which Bio Balance acquired the
intellectual property rights, Danron Ltd., Uprising Investment Ltd., and Kimmey
Trading Ltd. have an option to repurchase the intellectual property rights by
returning the 990,000 Bio Balance shares and repaying the $510,000 if Bio
Balance has not completed an initial public offering or combination with a
publicly traded company within a specified time period (January 2, 2003, as
extended). Further, the agreement provides that, in the event the aggregate
value of the shares received by Danron Ltd., Uprising Investment Ltd., and
Kimmey Trading Ltd. in a stock-for-stock exchange is less than $1,980,000, or
$2.00 per share, the number of shares to be received by those shareholders shall
be increased such that the total value of such shares at closing is not less
than $1,980,000 and the interest of the remaining shareholders of Bio Balance
shall be reduced proportionately.
The Bio Balance Corp.'s offices are located at 16 East 34 Street, New York,
NY 10016. Its telephone number is (212) 679-7778.
15
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma condensed consolidated financial
data was prepared using the purchase method of accounting. The unaudited pro
forma condensed consolidated financial data for the year ended December 31, 2001
and as of and for the six month period ended June 30, 2002 gives effect to the
acquisition as if such transaction occurred for balance sheet purposes on June
30, 2002 and for the statement of operations purposes on May 21, 2001 with
respect to Bio Balance and January 1, 2001 with respect to New York Health Care.
The selected unaudited pro forma condensed consolidated financial data of
New York Health Care and Bio Balance have been obtained from and should be read
with, the unaudited pro forma condensed consolidated financial information and
related notes included, and made reference to in this joint proxy
statement/prospectus.
The selected unaudited pro forma condensed consolidated financial data is
based on estimates and assumptions which are preliminary. This data is presented
for informational purposes only and is not intended to represent or be
indicative of the consolidated results of operations or financial condition that
would have been reported had the merger been completed as of the date presented,
and should not be taken as representative of future consolidated results of
operations or financial condition of New York Health Care.
NEW YORK HEALTH CARE, INC. AND THE BIO BALANCE CORPORATION SELECTED UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (1)
AS OF AND FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- -------------
Assuming $5 Assuming $6 Assuming $5 Assuming $6
Million Raised Million Raised Million Raised Million Raised
In Private In Private In Private In Private
Placement Placement Placement Placement
--------------- -------------- -------------- --------------
Total revenues $ 34,320,710 $ 34,320,710 $ 19,057,740 $ 19,057,740
Net loss (312,118) (312,118) (650,899) (650,899)
Basic loss per share (.02) (.01) (.03) (.03)
Diluted loss per share (.02) (.01) (.03) (.03)
Current assets 11,866,021 12,820,070
Total assets 33,419,930 34,373,979
Current liabilities 7,274,610 7,274,610
Long-term liabilities, net of
current portion 8,789 8,789
Shareholders' equity 26,136,531 27,090,580
Book value per share 1.27 1.14
Average common shares
Basic 20,565,291 23,787,513 20,578,659 23,800,881
Diluted 20,565,291 23,787,513 20,578,659 23,800,881
(1) The information for New York Health Care gives effect to the one for one
and one half reverse stock split contemplated in the merger.
16
COMPARATIVE PER SHARE DATA
The following table sets forth unaudited data concerning the net income
(loss), dividends and book value per share for New York Health Care and Bio
Balance on a historical basis and on a pro forma basis after giving effect to
the merger:
New York Health Care Common Stock: Year ended Six Months ended
December 31, 2001 June 30, 2002
------------------ ----------------------------------------------
Assuming Assuming
$5 million $6 million
raised in raised in
private private
Historical placement placement
------------- ------------ ------------
Net income (loss) per share:
Historical, restated for stock split (1).. $ 0.14 $ 0.07
Pro forma consolidated.................... (0.02) $ (0.03) $ (0.03)
Book value per share at end of period:
Historical, restated for stock split (1).. 1.71 1.78
Pro forma consolidated.................................. 1.27 1.14
Bio Balance Common Stock: Period from May 21, 2001 Six Months ended
(Inception) to December 31, 2001 June 30, 2002
------------------------------- -----------------
Net income (loss) per share:
Historical............................ $ (0.03) $ (0.04)
Book value per share at end of period:
Historical............................ 0.14 0.17
Shares used in computing the net income (loss) per share data have been
derived from each company's historical weighted average shares outstanding for
the historical data and adjusted to give effect to the ratio of the shares
issuable to each company's stockholders as of the merger for the pro forma
consolidated data. Book value data was derived from each company's historical
book value at the end of the period and applied to the ratio of the shares
issuable to each company's stockholders at the merger date for the historical
data and adjusted to reflect the effect of the merger and the completion of the
private placement offering by Bio Balance for the pro forma consolidated data.
(1) The information for New York Health Care gives effect to the one for one and
one half reverse stock split contemplated in the merger.
17
RISK FACTORS
GENERAL RISKS RELATING TO THE TRANSACTION
New York Health Care and Bio Balance May Not Achieve any Benefits from the
Transaction, in Which Case the Transaction Could Have a Material Adverse Effect
on the Combined Company's Business, Financial Condition and Operating Results.
If the benefits of the transaction do not exceed the costs associated with it,
including any dilution to New York Health Care shareholders resulting from the
issuance of shares of New York Health Care common stock to Bio Balance
shareholders in connection with the transaction, New York Health Care's
financial results, including earnings per share, could be adversely effected.
New York Health Care will need to overcome significant issues in order to
realize any benefits or synergies from the transaction, including the timely,
efficient and successful execution of a number of post-transaction events. Key
events include:
* Managing the disparate operations of two companies who are doing business
in very different sectors of the health care market;
* Retaining, recruiting, and assimilating key personnel for each company;
* Obtaining additional financing that may be needed to fund Bio Balance's
regulatory compliance, product development, manufacturing and marketing
activities; and
* Maintaining good working relationships between the two different
managements of New York Health Care and Bio Balance, as well as uniform
standards, controls, procedures and policies.
The execution of these post-transaction events will involve considerable
risks and may not be successful. These risks include:
* The potential disruption of the combined companies' ongoing business and
distraction of their respective managements;
* Unanticipated expenses related to regulatory compliance, product
development, manufacturing and marketing;
* The impairment of relationships with employees and customers as a result of
any integration of new management personnel; and
* Potential unknown liabilities associated with the Bio Balance business.
The combined companies may not succeed in addressing these risks or any
other problems encountered in connection with the transaction. There can be no
assurance that New York Health Care or Bio Balance will realize any of the
anticipated benefits of the transaction. If New York Health Care and Bio Balance
are unable to adequately address any of the risks relating to integration of the
companies, the combined companies may be required to substantially alter, or
possibly divest, the operations of either New York Health Care or Bio Balance.
New York Health Care Shareholders Will Be Left With as Little as 10% of
the Company. New York Health Care shareholders own 100% of a company that is
currently generating revenues in an established business. They are being asked
to approve a transaction in which they will give up as much as approximately 90%
(assuming that Bio Balance has sold 3,000,000 shares in its private placement,
and before the exercise or conversion of currently outstanding Bio Balance and
New York Health Care stock options, warrants and preferred stock) and no less
than approximately 86% (assuming the exercise or conversion of all currently
outstanding stock options, warrants and preferred stock) in return for merging
with a company which currently has prospects for only one development stage
product, the success of which depends upon many variables.
18
The Market Price of New York Health Care Common Stock May Decline as a
Result of the Transaction. The market price of New York Health Care common stock
may decline as a result of the transaction for a number of reasons, including
but not limited to the following:
* Adverse market reaction to the increase of issued and outstanding shares of
New York Health Care common stock; or
* Bio Balance does not accomplish regulatory compliance enabling it to market
its product as rapidly as its management anticipates; or
* The effect of the transaction on New York Health Care's combined financial
results is not consistent with expectations.
A Failure to Complete the Transaction Could Negatively Impact New York
Health Care's Stock Price, Future Business and Operations. If the transaction is
not completed, New York Health Care may be subject to a number of material
risks, including the following:
* The price of New York Health Care common stock may decline to the extent
that the relevant current market price reflects a market assumption that
the transaction will be completed; and
* Certain costs related to the transaction, such as legal, accounting, and
other fees, must be paid even if the transaction is not completed.
In addition, if the transaction is terminated and the respective Boards of
Directors of New York Health Care and Bio Balance determine to seek another
business combination, there can be no assurance that either will be able to find
a partner willing to pay an equivalent or more attractive price than the price
being paid by New York Health Care, pursuant to the Exchange Agreement.
19
There Are Significant Costs Associated with the Transaction. The combined
estimated fees, costs, and expenses of New York Health Care and Bio Balance in
connection with the transaction, including, without limitation, filing fees,
legal and accounting fees, printing and mailing costs, are anticipated to be
approximately $500,000. New York Health Care believes that it may incur
substantial charges to operations, which are not currently reasonably estimable,
in the quarter in which the transaction is completed or the following quarters
to reflect costs associated with the transaction and integration of the two
companies. There may also be additional costs associated with the transaction in
the future.
Exchange Agreement Stock Option Provisions and Change in Control Provisions
Benefiting Senior Executives of New York Health Care May Result in Conflicts of
Interest. The Exchange Agreement provides for the issuance of stock options to
acquire 500,000 shares during a term of ten years to each of Jerry Braun and
Jacob Rosenberg, the Chief Executive Officer and Chief Operating and Financial
Officer, respectively, of New York Health Care, as compensation for services
rendered under five year consulting agreements which go into effect in event of
termination of their services as directors during the term of their employment
contracts. The employment contracts currently expire on December 31, 2009.
Moreover, the Bio Balance merger will constitute a "change in control."
Shareholders should be aware that Jerry Braun and Jacob Rosenberg have a
potential conflict of interest because both the stock option provisions on the
Exchange Agreement and the change in control parachute payment provisions in
their employment contracts provide them with substantial financial benefits
which are different from and in addition to the interests of other New York
Health Care shareholders. When the employment contracts were approved by the
Compensation Committee of the Board of Directors in November 1999, New York
Health Care did not receive any independent opinion of the fairness of the
change in control benefit transaction to New York Health Care's shareholders as
a whole. Assuming current salary and bonus information remains in effect, the
approximate value of the cash payments due under the employment agreements to
each of Jerry Braun and Jacob Rosenberg, not including any payment that may be
made with respect to any excise tax, would be approximately: Jerry Braun,
$747,000; and Jacob Rosenberg, $606,000 (these numbers are estimates which will
be computed as of the date of closing). Except for the change of control payment
and potential stock option grant, the current officers and directors of New York
Health Care will not receive any benefit from the merger, other than those
generally accruing to shareholders of New York Health Care. See "Interests of
New York Health Care Directors and Executive Officers in the Transaction."
The Merger May be Cancelled if Bio Balance Does Not Raise Additional
Financing. The Exchange Agreement requires that Bio Balance complete a private
placement of shares of its common stock at a price of not less than $2.00 per
share in which it raises not less than $6,000,000. If Bio Balance is unable to
raise at least $5,000,000 in the private placement by the closing date as
required by the Exchange Agreement, New York Health Care may cancel the merger
transaction. As of October 25, 2002, Bio Balance must raise an additional
$1,992,033 by selling not more than an additional 1,016,851 shares of its common
stock.
20
NEW YORK HEALTH CARE BUSINESS RISKS
New York Health Care's Indirect Dependency Upon Reimbursement by
Third-party Payors; Health Care Reform Could Reduce Revenues. More than 90% of
the revenues of New York Health Care 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 payors," such as private insurance companies,
self-insured employers, HMOs and governmental payors under the Medicare and
Medicaid programs. The levels of revenues and profitability of New York Health
Care, like those of other home health care companies, are affected by the
continuing efforts of third-party payors to contain or reduce the costs of
health care by lowering reimbursement or payment rates, increasing case
management review of services and negotiating reduced contract pricing. Because
home care is generally less costly to third-party payors than hospital-based
care, home nursing and home care providers have benefitted from cost containment
initiatives aimed at reducing the costs of medical care. However, as
expenditures in the home health care market continue to grow, cost containment
initiatives aimed at reducing the costs of delivering services at non-hospital
sites are likely to increase. A significant reduction in coverage or payment
rates of public or private third-party payors would reduce New York Health
Care's revenues and profit margins. While New York Health Care is not aware of
any substantive changes in the Medicare or Medicaid reimbursement systems for
home health care which are about to be implemented, revised budget plans of New
York State or the Federal Government could result in limitation or reduction in
the reimbursement of home care costs and in the imposition of limitations on the
provision of services which will be reimbursed. Moreover, third party payors,
particularly private insurance companies, may negotiate fee discounts and
reimbursement caps for services which New York Health Care will provide.
Slow Payments and Possible Bad Debts May Cause Working Capital Shortages
and Operating Losses. New York Health Care generally collects payments from its
contractors within one to three months after services are rendered, but pays its
obligations on a current basis. This timing delay may cause working capital
shortages from time to time. New York Health Care has a secured line of credit
which is 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 New York Health Care. Although New York Health Care
has established a bad debt reserve for uncollectible accounts, any significant
increase in bad debts would damage profitability.
Professional Liability Insurance May Become Inadequate, Unavailable or Too
Costly. The administration of home care and the provision of nursing services
entails certain liability risks. New York Health Care maintains 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 New York Health Care believes the insurance it maintains is
sufficient for its present operations, professional liability insurance is
increasingly expensive and sometimes difficult to obtain. A successful claim
against New York Health Care in excess of, or not covered by, New York Health
Care's insurance could damage New York Health Care's business and financial
condition. Claims against New York Health Care, regardless of their merit or
eventual outcome, could also damage New York Health Care's reputation and
business.
21
Changes in State and Federal Regulation Could Increase Costs and Reduce
Revenues. New York Health Care's operations are subject to substantial
regulation at the state level and also under the federal Medicare and Medicaid
laws. In particular, New York Health Care is subject to state laws governing
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 payors. If any person should
become the owner or holder, or acquire control of or the right to vote ten (10%)
percent or more of the issued and outstanding Common stock of New York Health
Care, that person could not exercise control of New York Health Care until an
application for approval of such ownership, control or holding has been
submitted to and approved by the New York State Public Health Council. In the
event such an application is not approved, such owner or holder may be required
to reduce their ownership or holding to less than 10% of New York Health Care's
issued and outstanding Common stock. Although New York Health Care has not
experienced any difficulties to date complying with applicable laws, rules or
regulations, the failure of New York Health Care to obtain, renew or maintain
any required regulatory approvals or licenses would seriously damage New York
Health Care and could prevent it from offering its existing services to patients
or from further expansion.
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.
New York Health Care competes for personnel with hospitals and nursing homes,
and competes for both personnel and business with other companies that provide
home health care services, most of which are larger and more established
companies with significantly greater resources and access to capital and greater
name recognition than New York Health Care. New York Health Care's largest
business competitors include Gentiva Health Services, Premiere Health Services,
National Home Health Care, Patient Care, Inc., and Personal Touch Home Care
Services, Inc. New York Health Care also competes with many other small
temporary medical staffing agencies. Competition for qualified paraprofessional
personnel in the New York Metropolitan area is intense. New York Health Care
believes that, given the increasing level of demand for nursing services,
significant additional competition can be expected to develop in the future.
Dependence on Major Customers and Referral Sources May Result in
Substantial declines in Revenues if Customers Are Lost. The development and
growth of New York Health Care's home care and nursing businesses depends to a
significant extent on its 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 New York Health Care's
contractual arrangements with its customers are renewable annually. Existing
relationships might not be successfully maintained and additional relationships
might not be successfully developed and maintained in existing and future
markets. New York Health Care's ten largest customers accounted for
approximately 88% and 82% of gross revenues during the years ended December 31,
2001 and 2000, respectively. One referral source, New York City Medicaid was
responsible for approximately 45% and 38% of New York Health Care's gross
revenues for the years ended December 31, 2001 and 2000, respectively. The loss
of or a significant reduction in referrals by these sources, as well as certain
other key sources, would hurt New York Health Care's results of operations.
22
Loss of Key Personnel May Result in Impairment of the Ability to Deliver
Services or Manage Operations. New York Health Care's success in the home health
care business will, to a large extent, depend upon the continued services of
Jerry Braun, New York Health Care's President and Chief Executive Officer, and
Jacob Rosenberg, New York Health Care's Vice President and Chief Operating
Officer. The Bio Balance merger will result in a change in control which reduces
the percentage of voting shares held by Messrs. Braun and Rosenberg. Although
upon the closing of the transaction New York Health Care will have employment
agreements with Messrs. Braun and Rosenberg expiring in 2009, and it is the sole
beneficiary of a $2,000,000 life insurance policy covering Mr. Braun and a
$1,000,000 life insurance policy covering Mr. Rosenberg, the loss of the
services of either executive officer for any reason, including but not limited
to a violation of their employment agreements, would damage New York Health
Care. The success of New York Health Care will also depend, in part, upon its
ability in the future to attract and retain additional qualified licensed health
care, operating, marketing and financial personnel. Competition in the home
health care industry for such qualified personnel is often intense and we may
not be able to retain or hire the necessary personnel.
Inability to Identify Suitable Locations or Personnel or to Secure
Financing May Impair Future Growth. New York Health Care's ability to expand its
home health care operations depends on a number of factors, including the
availability of desirable locations and qualified personnel, the availability of
acquisition candidates and the ability of New York Health Care to finance such
expansion. The establishment of additional branch offices and any future
acquisitions by New York Health Care may involve the use of cash, debt or equity
securities, or a combination thereof. New York Health Care may be required to
obtain additional financing to achieve such objectives. That financing may not
be available, or, if available, may be on unacceptable terms. New York Health
Care is not experienced in operating health care businesses unrelated to its
current businesses and may be unable to successfully operate any such unrelated
health care business.
Possible Volatility of Common Stock May Result in Losses to Shareholders.
The trading price of the common stock has been subject to significant
fluctuations and has ranged from as high as $5.35 to as low as $.25 over the
past two years. The price of New York Health Care's securities is likely to
continue to be effected by various factors, including but not limited to the
financial results of the Bio Balance merger, variations in quarterly results of
operations, announcements of new contracts or services or acquisitions by New
York Health Care or its competitors, governmental regulatory action, general
trends in the industry and other factors, such as extreme price and volume
fluctuations which have been experienced by the securities markets from time to
time in recent years.
Failure to Satisfy Nasdaq Listing Standards Could Result in Reduced
Liquidity and Lower Stock Price. Prior to the offering, New York Health Care's
common stock has been listed for trading on the Nasdaq SmallCap Market and the
Boston Stock Exchange. In order to continue its Nasdaq listing after the closing
of the Bio Balance merger, New York Health Care will have to qualify under the
Nasdaq new listing requirements for its SmallCap Market, which require, among
other things, at least $5,000,000 of shareholders equity and a minimum bid price
of $4.00 per share. New York Health Care anticipates that its common stock will
continue to be eligible for listing on Nasdaq and the Boston Exchange. In order
to qualify for continued listing on the Nasdaq SmallCap Market, New York Health
Care, among other things, must have $2,500,000 of shareholders equity and a
minimum bid price of $1.00 per share. If New York Health Care is unable to
satisfy the requirements for quotation on Nasdaq, it is anticipated that the
common stock would be quoted in the over-the-counter market National Quotation
Bureau ("NQB") "pink sheets" or on the NASD OTC Electronic Bulletin Board. As a
result, the liquidity of the common stock could be impaired, not only in the
number of shares which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts' and news media's
coverage of New York Health Care and lower prices for New York Health Care's
common stock than might otherwise be attained. In addition, if the common stock
is delisted from Nasdaq it might be subject to the low-priced security or
so-called "penny stock" rules that impose additional sales practice requirements
on broker-dealers who sell such securities. For any transaction involving a
penny stock the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements must be sent disclosing recent
price information for the penny stocks held in the customer's account.
23
In the event New York Health Care's common stock subsequently become
characterized as a penny stock, the market liquidity for the common stock could
be severely affected. In such an event, the regulations relating to penny stocks
could limit the ability of broker-dealers to sell the common stock and, thus,
the ability of shareholders to sell their shares in the market.
The Large Amount of Shares Eligible for Future Sale Could Reduce the Price.
The sale of substantial amounts of common stock in the public market following
the transaction could adversely affect the market price of the common stock.
Upon the completion of the transaction, a total of 18,387,949 (post-split)
shares will be subject to restrictions on sale in accordance with the terms of
the Exchange Agreement. A total of 17,396,625 shares of New York Health Care's
common stock issued to Bio Balance shareholders will be restricted from sale for
various periods of time ranging from as early as 120 days after the date of this
Prospectus/Proxy Statement and as late as August 10, 2003. A total of 991,324
(post-split) shares of New York Health Care common stock held of record and
beneficially by its President and Vice-President, who are the NYHC restricted
shareholders, will be restricted from sale for a period of 120 days after the
date of this Prospectus/Proxy Statement, after which they will be able to sell
not more than 10% of their shares per month for as long as they are directors of
New York Health Care. These restrictions on the NYHC restricted shareholders,
however, does permit transfers to family trusts and registered charities
provided the transferees abide by the restrictions, although they will be
permitted to sell not more than 1,000 shares of common stock each trading day
during a period ending 120 days after the date of this Prospectus/Proxy
Statement, after which the restriction will expire. In addition, New York Health
Care may release the restriction on the shares held by the NYHC restricted
shareholders provided it also releases restrictions on the shares issued to Bio
Balance shareholders in a ratio of one share held by the NYHC restricted
shareholders for two shares held by the Bio Balance shareholders. See "Shares
Eligible For Sale."
24
The Issuance of Preferred Stock Could Reduce the Value of Common Stock and
Could Have Anti-Takeover Effects. Amendment of New York Health Care's
Certificate of Incorporation as part of the merger transaction will authorize
the issuance of a maximum of 5,000,000 shares of preferred stock, $.01 par
value, on terms which may be fixed by New York Health Care's 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-1 basis, into shares of common stock (393,583 after a
1-for-1.5 reverse stock split). Although it is possible that these existing
shares may be converted into common stock prior to the closing of the Bio
Balance merger, there can be no assurance that they will, in fact, be converted.
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 New York Health Care or the removal of
management of New York Health Care more difficult, discourage hostile bids for
control of New York Health Care in which shareholders may receive premiums for
their shares of common stock, or otherwise dilute the rights of holders of
common stock and the market price of the common stock. See "Description of
Securities - Preferred Stock."
Absence of Dividends. New York Health Care does not anticipate paying any
cash dividends on the common stock in the foreseeable future. See "Dividend
Policy."
BIO BALANCE RISKS
Bio Balance is Newly Formed, has Generated No Revenues to Date and has No
Operating History Upon Which it May be Evaluated. Bio Balance was incorporated
on May 21, 2001, and has generated no revenues from operations or meaningful
assets. Bio Balance faces all of the risks inherent in a new business and those
risks specifically inherent in the business of manufacturing, introducing and
selling a new drug or new product to the market with all of the unforeseen
costs, expenses, problems, and difficulties to which such ventures are subject.
In July 2001 Bio Balance acquired the intellectual property rights with respect
to certain probiotic agents from Danron Ltd., Uprising Investment Ltd., and
Kimmey Trading Ltd., each of which was engaged in research, development,
marketing or sales of probiotic bacteria and other technology. There can be no
assurance that Bio Balance will be able to generate revenues or profits from
operation of its business or that Bio Balance will be able to generate or
sustain profitability in the future.
Failure to Secure Additional Financing Could Result in Impaired Growth and
Inability to Operate Profitably. Bio Balance will be required to expend
substantial amounts of working capital in order to develop its proposed product
and establish the necessary relationships to implement its business plan. See
"Business." Bio Balance believes that the proceeds from its private placements,
together with available funds will be sufficient to meet the currently
anticipated working capital and capital expenditure requirements for at least
the next 24 months. If Bio Balance fails to obtain additional financing, Bio
Balance's expansion plans would need to be scaled back. Bio Balance has no
agreements or arrangements with respect to any such financing and there can be
no assurance that any needed funds will be available to Bio Balance on
acceptable terms or at all.
25
Certain Parties Have the Right to Buyback Substantially All of Bio
Balance's Assets, Which Would Prevent Bio Balance From Conducting its Business.
Pursuant to the Asset Purchase Agreement, entered into between Bio Balance and
Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd., in which Bio
Balance acquired the key intellectual property rights Bio Balance uses in its
business, Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. are
entitled to buy back such assets unless Bio Balance has (i) entered into a
binding agreement with respect to a "transaction" to initiate a public offering
of Bio Balance Shares, a merger with a publicly traded entity, or an acquisition
of Bio Balance Shares (including the Exchange Agreement) within one hundred
eighty (180) days from the date of the closing, and (ii) completes such
transaction within a specified time period (originally by August 13, 2002). In
order to exercise the buyback right, all 990,000 shares of Bio Balance common
stock issued pursuant to the Asset Purchase Agreement must be returned along
with the cash portion of the purchase price of the assets in the amount of
$510,000. Upon such buyback, Bio Balance will be forbidden for a period of three
years from the date of exercise of the buyback right to engage directly or
indirectly in the development, manufacture and marketing of any product using
the E.coli bacteria.
On July 26, 2002, Danron Ltd. and Kimmey Trading Ltd. each executed an
amendment to the Asset Purchase Agreement, and on August 28, 2002 Uprising
Investment Ltd. executed the amendment, deferring commencement of the buyback
right until November 13, 2002. In October 2002, Danron Ltd., Kimmey Trading
Ltd. And Uprising Investment Ltd. Executed a further amendment to the Asset
Purchase Agreement deferring commencement of the buyback period until January 2,
2003. Although the Bio Balance Exchange Agreement with New York Health Care will
qualify as a "transaction" described above, the transaction is subject to
various conditions prior to closing the exchange. In the event the exchange is
not consummated by January 2, 2003, Danron Ltd., Uprising Investment Ltd., and
Kimmey Trading Ltd. will have the right to buy back the assets. In the event the
buyback is exercised by Danron Ltd., Uprising Investment Ltd., and Kimmey
Trading Ltd., Bio Balance will be forced to shut down its operations. See
"Business."
The Persons Who Sold Bio Balance its Assets and Technology Have Price
Protection Which Could Result in Dilution to the Remaining Bio Balance
Shareholders. Pursuant to the terms of the Asset Purchase Agreement, in the
event of a transaction providing for a stock-for-stock exchange, Danron Ltd.,
Uprising Investment Ltd., and Kimmey Trading Ltd. shall in exchange for the
shares of common stock of Bio Balance receive a like number of shares of the
common stock of the surviving or acquiring entity. If the valuation of 990,000
shares issued to Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd.
for purposes of such transaction is less than $1,980,000 ($2.00 per share),
Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. shall be entitled
to receive, rounded down to the nearest whole number of shares, an additional
number of shares calculated as (A) (i) $1,980,000 divided by (ii) the per share
valuation of the common stock in the transaction, minus (B) the aggregate number
of shares issued or issuable to Danron Ltd., Uprising Investment Ltd., and
Kimmey Trading Ltd. under the Exchange Agreement. If the New York Health Care
shares are valued at less than $2.00 each upon consummation of the transaction,
each shareholder of Bio Balance other than Danron Ltd., Uprising Investment
Ltd., and Kimmey Trading Ltd. will have the amount of New York Health Care
Shares they would otherwise receive in the transaction proportionately reduced.
26
The Loss of Key Consultants or the Failure to Hire Qualified Employees
Would Damage the Bio Balance Business. Because of the highly technical nature of
business, Bio Balance depends greatly on attracting and retaining experienced
management and highly qualified and trained scientific personnel. Bio Balance's
future success will depend on the continued services of its key scientific and
management personnel with whom it has entered into consulting agreements. Bio
Balance has entered into consulting agreements with Medical Instrument
Development, Inc. to provide the services of Dr. Harold Jacob and with Dr.
Sergei Braun, Dr. Emanuel Hanski and Dr. Kursheed Jeejeebhoy, each of whom
serves on Bio Balance's Medical Advisory Board and/or Technical Advisory Board.
Bio Balance competes intensely for these persons with other companies in its
industry. If Bio Balance cannot retain or hire and effectively integrate a
sufficient number of qualified scientists and experienced professionals, it
would substantially negatively impact its business and its ability to grow its
business and develop its products through the clinical trial process. Bio
Balance is currently looking for a chief executive officer. There can be no
assurance that Bio Balance will be able to procure the services of an experience
and skilled chief executive officer. Bio Balance does not presently maintain key
person insurance for any of its key personnel.
Bio Balance's Products are in Development and May Not Satisfy Regulatory
Requirements or Become Commercially Viable. The product that Bio Balance is
researching will require extensive additional development, testing, and
investment in order to establish it as a generally recognized as safe medical
food prior to commercialization. We cannot be sure that our product research and
development efforts will be successful, that candidates will enter pre-clinical
or clinical studies as anticipated, that we will satisfy GRAS or medical food
requirements or, if needed, file for regulatory approval, or that any required
regulatory approvals will be obtained, or that any products, if introduced, will
be commercially successful. Bio Balance has conducted anecdotal and pre-clinical
trials only and has neither established GRAS or medical food status nor applied
for nor received any FDA drug approvals to date. The results of these
pre-clinical and anecdotal trials on products under development are not
necessarily predictive of results that will be obtained from large scale
clinical testing. Bio Balance 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 Bio Balance may
produce undesirable side effects in humans. The failure to demonstrate
adequately the safety and efficacy of a medical food or therapeutic drug product
under development could delay or prevent regulatory approval, where required,
and commercial sale of the product and could have a material adverse effect on
Bio Balance. In addition, the FDA may contest the GRAS status of the ingredient
in PROBACTRIX(TM), or contest the status of PROBACTRIX(TM) as a medical food. In
the event Bio Balance seeks approval of its product as an ethical drug, FDA may
require additional clinical trials, which could result in increased costs and
significant development delays. Commercial formulation and manufacturing
processes have yet to be developed for PROBACTRIX(TM). Bio Balance 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 its product, or cause negative
financial and competitive consequences.
27
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 Bio Balance's Ability to produce and
Market its Products. There is no consistent policy regarding the breadth of
claims allowed in specialty Pharma/Medical Foods patents. In addition, patents
may have been granted, or may be granted, to others covering products or
processes Bio Balance needs for developing its product. If Bio Balance's product
or processes infringe upon the patents, or otherwise impermissibly utilize the
intellectual property of others, Bio Balance might be unable to develop,
manufacture, or sell its product. In such event, Bio Balance may be required to
obtain licenses from third parties. Bio Balance cannot be sure that it will be
able to obtain such licenses on acceptable terms, or at all.
Bio Balance Has No Experience in Sales and Marketing; Failure to Assemble
or Contract with and Adequate Sales Organization Could Result in a Lack of
Future Revenues. Bio Balance have no experience in pharmaceutical marketing, or
distribution. To market any of our product directly, Bio Balance would have to
develop a substantial marketing and sales force. Alternatively, Bio Balance may,
for certain products, attempt to obtain the assistance of companies with
established distributions systems and direct sales forces. Bio Balance does not
know if it will be able to establish sales and distribution capabilities or if
it will be able to enter into licensing or other agreements with established
companies to sell our product.
Bio Balance Owns No Manufacturing Facilities and Will Be Dependent on Third
Parties to Make its Product. Bio Balance owns no manufacturing facilities or
equipment, and employ no manufacturing personnel. Bio Balance expects to use
third parties to manufacture certain of its products on a contract basis. Bio
Balance may not be able to obtain contract-manufacturing services on reasonable
terms or at all. If Bio Balance is not able to contract manufacturing services,
it will not be able to make its products.
Bio Balance Has Not Established the Safety or Efficacy of its Initial
Product as a Medical Food, Nor Has it Filed for or Received Any Regulatory
Approvals for the Product as an Ethical Drug and it May Not Obtain Regulatory
Approval for its Product on a Timely Basis, or at All. Bio Balance's activities
are subject to extensive regulation by the FDA and health authorities in foreign
countries. Self determination of GRAS status is required before use of the
ingredient in PROBACTRIX(TM) in a medical food product, and Bio Balance must
confirm that PROBACTRIX(TM) meets the definitional requirements for a medical
food. If Bio Balance plans to market its product as an ethical drug, regulatory
approval for its planned product is required before it can be marketed. Bio
Balance has not yet established GRAS status of its initial product, or its
status as a medical food. Moreover, Bio Balance has not received or filed for
any regulatory approvals for its planned product as an ethical drug.
Establishing GRAS status and obtaining regulatory authorization involves, among
other things, lengthy and detailed laboratory and clinical testing,
manufacturing validation, and other complex procedures. The approval process is
costly, time-consuming, and subject to unexpected delays. The time frame for
approval will depend on, among other things, whether Bio Balance's product is
determined to contain GRAS ingredients and meet the definitional requirements of
a medical food (Bio Balance expects the time for establishing medical food
status to be approximately 12 - 18 months) or as an ethical drug (at least 2-5
years), including testing phases. The FDA has discretion in the approval process
relating to ethical drugs, and Bio Balance cannot predict when or whether the
FDA will approve our product. Bio Balance cannot assure that it will establish
GRAS status for its product ingredients or medical food status, or that it will
apply for drug regulatory approval. Moreover, Bio Balance cannot assure that the
FDA will not require additional information or additional clinical trials that
could substantially delay approval of its applications if it pursues an ethical
drug application. Moreover, Bio Balance cannot be sure that FDA approval of its
product as an ethical drug, if received, will cover the clinical indications it
seeks or that it will not contain significant limitations in the form of
warnings, precautions, or contra-indications. Any failure to obtain, or any
material delay in obtaining, GRAS or medical food status or, in the case of an
ethical drug application, regulatory approvals would materially and adversely
affect Bio Balance's ability to generate product sales. Even if Bio Balance
obtains GRAS status for ingredients, determines that PROBACTRIX(TM) meets the
requirements of a medical food, and regulatory approvals as an ethical drug, it
may not have enough statistically significant data to come to market. Also, a
marketed product is subject to continuing regulatory review, and later discovery
of previously unknown problems with a product or manufacturers; or failure to
comply with manufacturing or labeling requirements may result in restrictions on
such product or enforcement action against the manufacturer, including
withdrawal of the product from the market.
28
Bio Balance's Product May be Denied Medical Food Status. Bio Balance's
regulatory strategy with its initial product is to establish the product as a
medical food and satisfy the applicable GRAS requirement for the marketing of a
medical food containing the PROBACTRIX(TM) ingredient. The advantages of this
are that it is a relatively rapid and relatively inexpensive way to reach the
market. A "medical food" means a food which is formulated to be consumed or
administered under the supervision of a physician and which is intended for the
specific dietary management of a disease or condition for which distinctive
nutritional requirements, based on recognized scientific principles, are
established by medical evaluation. In addition, the medical literature has
become critical of the non-physician control of probiotics as these agents are
becoming recognized as a class of drugs that have been termed living drugs.
Perhaps most importantly, FDA's policies on medical food products have long been
in flux and are not the subject of proposed or final regulations. In the future,
it is possible that the FDA policies in this area could be adopted that would
prevent or severely limit Bio Balance's ability to market the PROBACTRIX(TM)
product as a medical food. Overall, there is no guarantee that Bio Balance will
satisfy the regulatory requirements applicable to medical foods. This will
result in Bio Balance having to obtain clearance as either a dietary supplement
or as a drug and will have to enter the new drug regulatory pathway at either
Phase I, Phase II or Phase III, which could result in the need to raise large
sums of money in excess of $50,000,000.
Potential Failure of Planned Clinical Trials to Produce Statistically
Significant Data Could Impair the Ability to Successfully Market Bio Balance's
Product. Even if Bio Balance is successful in establishing GRAS and medical food
status and obtaining FDA approval as an ethical drug, there still is substantial
risk that the extensive clinical trials that Bio Balance is planning will not
yield sufficient statistically significant data to make strong marketing claims.
This could adversely affect marketing efforts to the medical community which is
traditionally resistant to new treatments even if approved by the FDA unless
also supported by statistically significant data before recommending it to
patients. This could severely limit Bio Balance's ability to successfully market
its product.
Potential Side Effects of Bio Balance's Product Could Impair the Ability
Market the Product. Although no side effects of Bio Balance's product have been
reported, it is possible that any time during clinical trials or patient usage,
side effects may be encountered. If they are common enough or significant enough
this could result in Bio Balance's product being withdrawn from the market.
29
Bio Balance's Product, Even If Approved by the FDA, May Not Be Accepted By
Physicians, Insurers, or Patients. Patients, doctors, and insurers must accept
Bio Balance's product as medically useful and cost-effective for Bio Balance to
be successful. Market acceptance will require substantial education about the
benefits of the product. Bio Balance cannot assure that patients, doctors or
insurers will accept its product, even if approved for marketing, on a timely
basis. If patients, the medical community, and insurers do not accept Bio
Balance's product or acceptance takes a long time, revenues and profits would be
reduced.
Government and Private Insurance Plans May Not Pay for Bio Balance's
Product. The success of Bio Balance's product in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such product from
government health administration authorities, third-party payors and other
organizations. Bio Balance cannot always determine in advance the reimbursement
status of newly approved therapeutic products. Even if a product is approved for
marketing, Bio Balance cannot be sure that adequate reimbursement will be
available. Also, future legislation or regulation, or related announcements or
developments, concerning the health care industry or third party or governmental
coverage and reimbursement may adversely affect Bio Balance's business. In
particular, legislation or regulation limiting consumers' reimbursement rights
could have a material adverse effect on Bio Balance's revenues.
Bio Balance 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, Bio Balance may not realize the expected benefits of our 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 Bio Balance. It is possible that competitors
could acquire or develop technologies that would render Bio Balance's technology
obsolete or noncompetitive. Bio Balance cannot be certain that it will be able
to access the same technologies at an acceptable price, or at all.
There may be Product Liability Losses and Adverse Product Publicity. Bio
Balance, 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. Bio Balance faces the risk that materials used in the manufacture of
the final product may be contaminated with substances that may cause sickness or
injury to persons who have used the products, or that sickness or injury to
persons may occur if the product distributed by Bio Balance 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 Bio Balance. To date,
Bio Balance has not obtained any insurance coverage. The successful assertion or
settlement of any uninsured claim, a significant number of insured claims, or a
claim exceeding Bio Balance's insurance coverage could have a material adverse
effect on Bio Balance. Additionally, Bio Balance is highly dependent upon
consumers' perception of the safety and quality of its product as well as
similar products distributed by other companies. Thus, the mere publication of
reports and negative publicity asserting that such products may be harmful could
have a material adverse effect on Bio Balance, 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 if
such adverse effects resulted from failure to consume the product as directed.
30
Intense Competition May Result in an Inability to Generate Sufficient
Revenues to Operate Profitably. The industry is highly competitive. Numerous
companies, many of which are significantly larger than Bio Balance, which have
greater financial, personnel, distribution and other resources than Bio Balance
and may be better able to withstand volatile market conditions, compete with Bio
Balance in the development, manufacture and marketing of probiotics for the
treatment of IBS. Bio Balance's principal competition comes from domestic and
foreign manufacturers and other wholesale distribution companies who have all
failed to receive FDA approval or have introduced a product to the market for
IBS that was withdrawn. 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 Bristol-Myers, Squibb,
Novataris and Glaxo-Wellcome) are in competition with Bio Balance in this
industry, since they have already spent millions of dollars to develop
treatments for IBS. Increased competition could have a material adverse effect
on Bio Balance, as our competitors may have far greater financial and other
resources available to them and possess extensive manufacturing, distribution
and marketing capabilities far greater than those of Bio Balance.
Bio Balance is Dependent on New Products and Continued Innovation. The
industry in general, including the market for IBS treatments, is characterized
by rapid innovation and advances. These advances result in frequent product
introductions and short product life cycles, requiring a high level of
expenditures for research and development and the timely introduction of new
products. Bio Balance believes its ability to grow and succeed is partially
dependent upon its ability to introduce new and innovative products into such
markets. Bio Balance currently has plans to introduce additional products in its
existing markets such as treatment for Traveler's Diarrhea and Crohn's Disease.
However, there can be no assurance that Bio Balance will be successful in its
plans to introduce additional products to the market.
Intellectual Property Rights May Not Protect the Bio Balance Business. Bio
Balance currently relies on a combination of patents, trademark, trade secret
laws and contractual provisions to protect its proprietary rights in its
product. Bio Balance recently applied for one (1) United States patent
application and thirteen (13) divisional patent applications and one (1) United
states trademark application, one (1) Israeli patent, and one (1) Patent
Cooperation Treaty application extending the period within which patent
applications must be filed in member nations and applications filed therefrom in
the following countries; Japan, European, Korea, Canada, Australia, Mexico,
Brazil, Poland and New Zealand, in connection with PROBACTRIX(TM) , its product.
There can be no assurance that Bio Balance's applications will result in issued
patents and trademarks, or that, if issued, Bio Balance's applications will be
upheld if challenged. Further, even if granted, there can be no assurance that
these patents and trademarks will provide Bio Balance with any protection from
competitors, or, that if they do provide any meaningful level of protection,
that Bio Balance will have the financial resources necessary to enforce its
patent and trademark rights. In addition, there can be no assurance that others
will not independently develop technologies similar to Bio Balance's pending
patents and trademarks, or design around the pending patents. If others are able
to design around the patents, Bio Balance's results of operations could be
materially adversely affected. Further, Bio Balance will have very limited, if
any, protection of its proprietary rights in those jurisdictions where it has
not effected any filings or where it fails to obtain protection through its
filings.
31
There can be no assurance that third parties will not assert intellectual
property infringement claims against Bio Balance in the future with respect to
current or future products. Bio Balance is responsible for defending against
charges of infringement of third party intellectual property rights by Bio
Balance's actions and products and such assertion may require Bio Balance to
refrain from the sale of its product, enter into royalty arrangements or
undertake costly litigation. Further, challenges may be instituted by third
parties as to the validity, enforceability and infringement of Bio Balance's
patents.
Bio Balance's adherence to industry standards with respect to its product
limits Bio Balance's opportunities to provide proprietary features which may be
protected. In addition, the laws of various countries in which Bio Balance's
product may be sold may not protect Bio Balance's product and intellectual
property rights to the same extent as the laws of the United States. As a
consequence, Bio Balance requires all of its personnel to execute
confidentiality agreements and assignment of intellectual property agreements in
favor of Bio Balance. See "Business-Intellectual Property."
FORWARD LOOKING STATEMENTS
Information provided by New York Health Care and Bio Balance in this
Prospectus/Proxy Statement contains, and from time to time New York Health Care
may disseminate materials and make statements which may contain,
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). In particular, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources" contains information
concerning the ability of New York Health Care to service its obligations and
other financial commitments as they come due. The aforementioned forward looking
statements, as well as other forward looking statements made in this
Prospectus/Proxy Statement are qualified in their entirety by these cautionary
statements, which are being made pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the "safe harbor" provisions of the
Act.
New York Health Care cautions investors that any forward-looking statements
made by New York Health Care and Bio Balance are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements as a result of various factors, including, but not
limited to, the following:
(a)In recent years, an increasing number of legislative proposals have been
introduced or proposed by Congress and in some state legislatures which would
effect major changes in the healthcare system. However, New York Health Care
cannot predict the form of healthcare reform legislation, which may be proposed
or adopted by Congress or by state legislatures. Accordingly, New York Health
Care is unable to assess the effect of any such legislation on its business.
There can be no assurance that any such legislation will not have a material
adverse impact on the future growth, revenues and net income of New York Health
Care.
32
(b)New York Health Care derives substantial portions of its revenues from
third-party payers including, both directly and indirectly, government
reimbursement programs such as Medicare and Medicaid and some portions of its
revenues from non-governmental sources, such as commercial insurance companies,
health maintenance organizations and other charge-based contracted payment
sources. Both government and non-government payers have undertaken
cost-containment measures designed to limit payments to healthcare providers.
There can be no assurance that payments under governmental and non-governmental
payer programs will be sufficient to cover the costs allocable to eligible
patients. New York Health Care cannot predict whether or what proposals or
cost-containment measures will be adopted or, if adopted and implemented, what
effect, if any, such proposals might have on the operations of New York Health
Care.
(c)New York Health Care is subject to extensive federal, state and local
regulations governing licensor, conduct of operations at existing facilities,
construction of new facilities, purchase or lease of existing facilities,
addition of new services, certain capital expenditures, cost-containment and
reimbursement for services rendered. The failure to obtain or renew required
regulatory approvals or licenses, the delicensing of facilities owned, leased or
operated by New York Health Care or the disqualification of New York Health Care
from participation in certain federal and state reimbursement programs could
have a material adverse effect upon the operations of New York Health Care.
(d)There can be no assurance that New York Health Care will be able to
continue its substantial historical growth or be able to fully implement its
business strategies or that management will be able to successfully integrate
the operations of its various acquisitions.
(e)Bio Balance's business plans are subject to a variety of matters,
including but not limited to (i) trends effecting the treatment of Irritable
Bowel Syndrome, (ii) the possibility of rapid advances in treatment, (iii) the
impact of competition from substantially larger companies, (iv) the possible
introduction of new products, (v) Bio Balance's need for alliances with
potential manufacturers and marketing organizations, and (vi) other matters.
33
MARKET PRICE INFORMATION
New York Health Care common stock is traded on the Nasdaq SmallCap Market
under the symbol "NYHC" and on the Boston Stock Exchange under the symbol "NYH".
Bio Balance is a recently formed, privately held company whose shares of common
stock have never been publicly traded on any market.
The following table sets forth, for the periods indicated, the high and low
closing sale prices per share (this does not give effect to the proposed
1-for-1.5 share reverse stock split) of the New York Health Care common stock as
reported by NASDAQ.
Fiscal Quarters High $ Low $
- --------------- ------ -----
1999:
First Quarter 1.31 .771
Second Quarter 3.125 .906
Third Quarter 1.188 .625
Fourth Quarter 1.75 .406
2000:
First Quarter 1.75 1.125
Second Quarter 1.313 .625
Third Quarter 1.125 .50
Fourth Quarter 1.031 .25
2001:
First Quarter 2.938 .594
Second Quarter 3.19 2.05
Third Quarter 5.25 2.70
Fourth Quarter 5.35 3.80
2002:
First Quarter 3.95 2.99
Second Quarter 3.90 3.25
Third Quarter 3.65 3.28
Because the market price of New York Health Care's Common stock is subject
to fluctuation due to numerous market forces, the market value of the New York
Health Care shares that holders of Bio Balance common stock will receive
pursuant to the transaction may increase or decrease prior to the closing of the
transaction. Shareholders are urged to obtain current market quotations.
Historical market prices are not indicative of future market prices.
34
THE ANNUAL MEETING OF NEW YORK HEALTH CARE SHAREHOLDERS
General Information
This Prospectus/Proxy Statement is furnished to shareholders of New York
Health Care, Inc., a New York corporation ("New York Health Care" or the
"Company"), in connection with the solicitation of proxies by the Board of
Directors for use at the Annual Meeting of Shareholders to be held on December
10, 2002, at 10:00 a.m. local time, and at any and all adjournments or
postponements thereof for the purposes set forth in the Notice of Annual Meeting
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement,
together with the Form 10-KSB/A Annual Report of New York Health Care for the
fiscal year ended December 31, 2001 and Form 10-Q for the six months ended June
30, 2002, are also being furnished to Bio Balance security holders by New York
Health Care as a prospectus of New York Health Care in connection with the
issuance of New York Health Care's shares of Common stock and warrants in
exchange for the Bio Balance shares of Common stock and warrants as contemplated
by the Exchange Agreement.
The rules of Nasdaq require that an issuer listed on its SmallCap Market
obtain the consent of its shareholders prior to completing any transaction that
would result in the issuance of more than 20% of the issuer's outstanding common
stock. The Bio Balance merger provides that New York Health Care will issue
shares of its common stock and warrants to purchase shares of its common stock
representing, in the aggregate, in excess of 89% of the outstanding common stock
New York Health Care. If New York Health Care were to consummate the Bio Balance
merger transaction without shareholder approval, New York Health Care common
stock could not remain listed on the Nasdaq SmallCap Market. Shareholder
approval of the Bio Balance merger is not required by New York law or by New
York Health Care's Certificate of Incorporation.
Date, Time and Place
The Annual Meeting will be held at 10:00 am on December 10, 2002 at New
York Health Care's offices at 1850 McDonald Avenue, Brooklyn, New York 11223.
Purpose of the Annual Meeting
At the Annual Meeting and any adjournment or postponement thereof, New York
Health Care shareholders will be asked to vote upon the approval and adoption of
the following:
1. Approval and adoption of the Exchange Agreement;
2. Approval of an amendment to the New York Health Care Certificate of
Incorporation. increasing the authorized shares of New York Health
Care common stock from 50,000,000 shares to 100,000,000 shares;
3. Approval of an amendment to the New York Health Care Certificate of
Incorporation. increasing the authorized shares of New York Health
Care preferred stock from 2,000,000 shares to 5,000,000 shares;
35
4. Approval of an amendment to the New York Health Care Certificate of
Incorporation providing for a 1-for-1.5 share reverse split of all of
the issued and outstanding shares of New York Health Care's common
stock to occur on the day before the closing of the Bio Balance
merger;
5. Election of Jerry Braun, Jacob Rosenberg, H. Gene Berger, Charles J.
Pendola, Paul Stark and David C. Katz as the Board of Directors of New
York Health Care until the next Annual Meeting or until their
successors are elected and qualify. Messrs. Braun, Rosenberg, Berger
and Pendola have been members of the New York Health Care Board of
Directors for a number of years. Mr. Stark and Mr. Katz are the
nominees who have been proposed by Bio Balance as provided for in the
Exchange Agreement and whose election will only be effective if the
transaction is completed;
6. Approval of an amendment to the New York Health Care stock option plan
authorizing an additional 3,230,000 shares of New York Health Care
common stock for issuance as stock options;
7. Ratification of the change of control parachute payment provisions
contained in the senior executive officers employment agreements
approved by New York Health Care Compensation Committee; and
8. To transact such other business as may properly come before the
meeting or any other adjournment or adjournments thereof.
Shareholder approval of proposals 1 - 7 are a requirement of the Exchange
Agreement.
Copies of the Exchange Agreement, its amendment and all related exhibits
are attached to this Prospectus/Proxy Statement as Annexes A, B, C, D and E. New
York Health Care's shareholders are encouraged to read the Exchange Agreement
and related exhibits in their entirety and the other information contained in
this document carefully before deciding how to vote.
Record Date for the Annual Meeting
The New York Health Care Board of Directors has fixed the close of business
on November 4, 2002 as the record date for determination of New York Health Care
shareholders entitled to notice of and devote at the Annual Meeting.
Vote Required
In order for the resolutions being voted upon at the Annual Meeting to be
approved, a majority of the votes cast at the Annual Meeting (of which a quorum
is present) must approve the resolutions. Each share of New York Health Care
common stock entitles the holder to one vote per share with respect to the
matters being submitted to the shareholders at the Annual Meeting. There are no
other voting securities of New York Health Care.
36
As of the close of business on October 31, 2002, approximately 3,711,730
shares of New York Health Care common stock were issued and outstanding, and
there were 92 shareholders of record and approximately 500 beneficial owners of
common stock. Directors and executive officers of New York Health Care (and
their respective affiliates) collectively owned approximately 1,154,899 New York
Health Care shares, or approximately 31.1% of the outstanding shares of the New
York Health Care common stock entitled to vote at the Annual Meeting. This does
not include 1,224,899 New York Health Care shares underlying presently
exercisable stock options, warrants and shares of Series A Convertible Preferred
Stock which these directors and officers beneficially own. If all of these stock
options, warrants and shares of Series A Convertible Preferred Stock are
exercised prior to the record date for the Annual Meeting, the directors and
executive officers of New York Health Care (and their respective affiliates)
would collectively own approximately 48.2% of the issued and outstanding shares
of New York Health Care common stock entitled to vote at the Annual Meeting.
As provided for in the Exchange Agreement the officers and directors of New
York Health Care and certain former directors of New York Health Care
collectively holding at least 50.1% of the outstanding shares of common stock
have executed proxies voting in favor of the transactions required for the Bio
Balance merger.
There can be no assurance that the resolutions being voted upon at the
Annual Meeting will be approved. It is very important that as many shareholders
as possible are represented and voting in person or by proxy at the annual
meeting.
Quorum, Abstentions and Broker Non-Votes
A majority of all issued and outstanding voting shares of New York Health
Care as of the record date, represented in person or by proxy, constitutes a
quorum for the transaction of business at the Annual Meeting. New York Health
Care has appointed Anthony Acquaviva, its Controller, to function as the
Inspector of Elections of the Annual Meeting. The Inspector of Elections will
ascertain whether a quorum is present, tabulate votes and determine the voting
results on all matters presented at the New York Health Care shareholders at the
Annual Meeting. If a quorum is not obtained, the Annual Meeting may be postponed
or adjourned without notice for the purpose of allowing additional time for
obtaining additional proxies or votes, and at any subsequent reconvening of the
Annual Meeting, all proxies will be voted in the same manner as the proxies
would have been voted at the original convening of the Annual Meeting, except
for any proxies that have been effectively revoked or withdrawn prior to the
subsequent Annual Meeting.
If you submit a proxy that indicates an abstention from voting in all
manners, your shares will be counted as present for the purpose of determining a
quorum at the Annual Meeting, but they will not be voted on any matter at the
Annual Meeting. In addition, the failure of a New York Health Care shareholder
to return a proxy will have the effect of reducing the number of votes cast at
the Annual Meeting thereby also reducing the number of votes needed to approve
the Bio Balance merger and the resolutions related thereto.
37
Under the rules that govern brokers who have record ownership of shares
that are held in "street name" for their clients, who are the beneficial owners
of the shares, brokers have discretion to vote those shares on routine matters
but not on non-routine matters. The approval of the Bio Balance merger at the
Annual Meeting is not considered a routine matter. Accordingly, brokers will not
have discretionary voting authority to vote your shares at the Annual Meeting. A
"broker non-vote" occurs when brokers do not have discretionary voting authority
and have not received instructions from the beneficial owners of the shares. At
the Annual Meeting, broker non-votes will be counted for the purpose of
determining the presence of the quorum but will not be counted for the purpose
of determining the number of votes cast on a matter. Consequently, New York
Health Care shareholders are urged to return the enclosed proxy card marked to
indicate their vote.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to New York Health Care (sent
to the attention of Mr. Jacob Rosenberg, Secretary) a written notice of
revocation or a duly executed proxy bearing a later date, or by attending the
Annual Meeting and voting in person. Attendance at the meeting will not, by
itself, revoke a proxy.
Voting and Solicitation
The solicitation of proxies will be conducted by mail and New York Health
Care will bear all attendant costs. These costs will include reimbursements paid
to brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of New
York Health Care's common stock. New York Health Care may conduct further
solicitation personally or telephonically through its officers, directors and
regular employees, none of whom will receive additional compensation for
assisting with the solicitation.
PROPOSAL 1: MERGER OF THE BIO BALANCE CORP.
New York Health Care's shareholders are being asked to approve the Stock
for Stock Exchange Agreement dated October 11, 2001 and amended February 13,
2002, July 10, 2002, August 13, 2002 and October 25, 2002 between New York
Health Care and Bio Balance pursuant to which New York Health Care's subsidiary,
NYHC Acquisition, will merge with and into Bio Balance, and each outstanding
share and warrant of Bio Balance will be exchanged for an equal number of New
York Health Care shares and warrants, which will result in the former
shareholders of Bio Balance owning up to 23,143,334 Shares, or as much as
approximately 90% (assuming that Bio Balance has sold 3,000,000 shares in its
private placement, and before the exercise or conversion of currently
outstanding Bio Balance and New York Health Care stock options, warrants and
preferred stock) and no less than 86% (assuming the exercise or conversion of
all currently outstanding stock options, warrants and preferred stock), of all
of the issued and outstanding of New York Health Care shares, together with
warrants to purchase an additional 483,066 New York Health Care shares. At June
15, 2002, there were 261 holders of Bio Balance common stock. The principal
officers and directors of Bio Balance are Paul Stark, Joseph Herbst and Jeanne
Quinto. The principal shareholders of Bio Balance are Hershey Holdings, Birimiza
Associates, KPT Partners and Nekavim Investors, holding in the aggregate
approximately 39% of the outstanding shares.
38
The following is a description of the material aspects of the transaction,
including the Exchange Agreement and the attached schedules. While New York
Health Care and Bio Balance believe that the following description covers the
material terms of the Exchange Agreement, the description may not contain all of
the information that is important to you. You should read this entire document
and the other documents referred to for a more complete understanding of the
transaction, in particular the Exchange Agreement and the amendments to the
Exchange Agreement, attached as Annexes A, B, C, D and E. The discussion of the
Exchange Agreement is qualified in its entirety by reference to the copies of
those documents. You should read the documents in their entirety for a complete
understanding of the transaction.
General
The New York Health Care Board of Directors and the Bio Balance Board of
Directors have each approved the Exchange Agreement. Bio Balance shareholders
who choose to vote against the merger and dissent from the merger transaction,
will be entitled to appraisal rights under Delaware law. See "Appraisal Rights."
Under the Exchange Agreement, NYHC Acquisition, a wholly-owned subsidiary of New
York Health Care, will merge with and into Bio Balance, and each share of Bio
Balance common stock and each Bio Balance warrant will be exchanged for a like
number of New York Health Care shares and warrants. The merger is subject to
approval by a majority of the New York Health Care shares voted at the New York
Health Care shareholders meeting, and approval by a majority of Bio Balance
shares, provided that no more than 10% of the Bio Balance shares exercise
dissenters rights. If more than 10% of the Bio Balance shares exercise
dissenters rights, New York Health Care has the right to cancel the Bio Balance
merger transaction.
Bio Balance will become a direct subsidiary of New York Health Care. None
of New York Health Care, its officers, directors or affiliates currently own any
shares of Bio Balance common stock.
Background of Transaction
During the summer of 2000, prior to the organization of Bio Balance, Mr.
Yitz Grossman ("Mr. Grossman"), one of the individuals involved in its formation
who had suffered from irritable bowel syndrome ("IBS") for many years, was
introduced to representatives of Tetra Pharm (1977) Ltd., a company in Israel
which had a product known as "biobalance" which appeared to be useful in the
treatment of IBS. He obtained some samples of their product and contacted a
physician he was a patient of in the United States who was in Israel, Dr. Harold
Jacob (Dr. Jacob is now a member of the Bio Balance Medical Advisory Board), to
inquire whether the product would be safe to take. After hearing from Dr. Jacob
that he understood that it was safe (having received a manufacturing permit from
the Israeli Ministry of Health for use by humans in May 1998) and available for
sale in Israel (with sales to pharmacies in Israel beginning in August 2000),
Mr. Grossman began using the product and noticed a substantial improvement in
his condition.
39
In September 2000, Mr. Grossman traveled to Israel to have a business
meeting with principals of Tetra Pharm. At that meeting, in conducting due
diligence, Mr. Grossman discovered that ownership of the biobalance technology
was in dispute. Mr. Grossman discovered that Tetra Pharm held no ownership
rights with respect to the product but had an agreement with Dr. Nellie Kelner,
the purported inventor and owner of the product, pursuant to which Tetra Pharm
held the rights to distribute the product. Mr. Grossman also discovered that Dr.
Kelner was engaged in an ongoing arbitration proceeding with Novobiotec, her
former employer, with respect to ownership rights relating to the technology.
While continuing to use the product, Mr. Grossman met a number of times
with Dr. Jacob both in the United States and Israel and, in December 2000,
traveled again to Israel and met with one of the developers of the product, Dr.
Nellie Kelner-Padalka, a physician and research scientist who had immigrated
from the former Soviet Union (Dr. Kelner-Padalka is now a member of the Bio
Balance Technical Advisory Board). Mr. Grossman had discussions with her
regarding the disputes in arbitration, met with attorneys and other persons
involved and continued to investigate the product and the availability of the
intellectual technology related to it.
It was during this period of time that Mr. Jay Spinner, a mutual
acquaintance, introduced Mr. Grossman to Jerry Braun and Jacob Rosenberg,
officers and directors of New York Health Care, with regard to their interest in
acquisition opportunities for New York Health Care. At that time, there were no
discussions between them with regard to the biobalance product or technology.
In January 2001, Mr. Grossman met with Dr. Jacob in New York and reported
dramatic improvement in his condition while using the biobalance product. Dr.
Jacob indicated to Mr. Grossman that clinical trials would be necessary to prove
the effectiveness of the product. After repeated urging by Mr. Grossman to
conduct a small study of the product's effectiveness, Dr. Jacob agreed to
conduct such a study and enlisted the services of Dr. Samuel Adler, Chief of
Gastroenterology at Bikkur Cholim Hospital in Jerusalem. Upon receipt of
approval to conduct the study by the hospital, Dr. Adler began a study initially
administering the product to five patients. Between January and December 2001,
Dr. Adler administered the product to fifty-five patients, including patients
with IBS and Inflammatory Bowel Disease. Dr. Adler regularly examined and
interviewed patients to whom the product was administered to assess the
effectiveness of the product. On March 9, 2001, Mr. Grossman received an e-mail
from Dr. Jacob reporting initial findings indicating improvement in symptoms of
four of five patients studied with IBS and no improvement in symptoms of four
patients with Inflammatory Bowel Disease. In a second e-mail to Mr. Grossman
from Dr. Jacob, on March 21, 2001, Dr. Jacob reported that five of six IBS
patients studied had improved convincingly. In December 2001, Dr. Adler
summarized his findings on all patients studied to date reporting improvement in
symptoms in 28 of 55 patients studied.
In February 2001, Mr. Grossman returned from Israel and began discussions
with Dr. Kelner, Dr. Kelner's attorney, Mr. Tzvi Risch, and with Mark
Olshenitsky and Reuven Spungins, executives of Novobiotec, and Herman Weiss and
Amnon Bechar, executives of Tetra Pharm, and the attorney for Tetra Pharm, Mr.
Ashar Barak, in an effort to resolve disputes so that the technology might be
acquired.
40
In March 2001, following Mr. Grossman's receipt of favorable initial test
results on a very limited number of patients regarding the use of biobalance to
moderate the symptoms of IBS, Mr. Grossman had further discussions with Dr.
Jacob regarding his possibly becoming more engaged in investigation of the
product and its commercial exploitation.
During the spring and summer of 2001, Mr. Grossman made a number of trips
to Israel in an effort to assist Dr. Kelner and Novobiotec in resolving their
disputes and in enabling the technology to be acquired. It was during that
period of time that he proposed the sale of the technology to a newly-formed
company named "The Zig Zag Corp.", which became Bio Balance. Counsel for Bio
Balance was engaged to participate in investigating the opportunity.
During the period between September 2000 and July 2001 a total of over
twenty meetings were held between representatives of Bio Balance, Tetra Pharm,
Novobiotec and Dr. Kelner. Mr. Grossman traveled to Israel approximately ten
times during that period to attend some of those meetings. Mr. Yitzak Fund,
Israeli counsel to Bio Balance, attended meetings at which Mr. Grossman was not
present. Attendance at those meetings included Dr. Kelner, principals of Tetra
Pharm and Novobiotec, counsel for Dr. Kelner and Tetra Pharm, patent counsel for
Novobiotec and various consultants and other persons who had participated in
research relating to the product. A portion of those meetings were held to
conduct further due diligence on the intellectual property and patents. The
majority of the meetings were held in an attempt to resolve the ownership
dispute between Dr. Kelner and Novobiotec. During that same period, a vast
number of telephone conferences were held among Bio Balance representatives and
Dr. Kelner and representatives of Tetra Pharm and Novobiotec to further the same
purposes. When it became apparent that the parties would not be able to resolve
their dispute, Bio Balance changed its strategy to focus on the acquisition of
all rights held by either Dr. Kelner, Novobiotec or Tetra Pharm.
In June 2001, Mr. Grossman met again with Messrs. Braun and Rosenberg from
New York Health Care to discuss the possibility of a business combination which
related, in part, to his interest in the biobalance opportunity among a number
of other prospective business opportunities he had been inquiring about. Mr.
Grossman provided additional materials to Messrs. Braun and Rosenberg on the
biobalance technology and arrangements and continued his conversations and
additional meetings with them during June and July 2001.
In July 2001, a meeting was held among Mr. Grossman and Paul Stark, acting
on behalf of Bio Balance, Yitz Fund, Israeli counsel for Bio Balance, Dr.
Kelner, Tzvi Risch, counsel for Dr. Kelner, Herman Weiss and Amnon Bechar,
acting on behalf of Tetra Pharm, Ahar Barak, counsel for Tetra Pharm, and Reuvin
Spungins, acting on behalf of Novobiotec. At that meeting, the parties came to
an understanding among themselves with a view towards taking appropriate action
to be able to exploit the product and end their disputes. In the course of those
discussions, and as a result of various elements of the tax laws in Israel, the
participants in the biobalance technology formed off-shore companies and
transferred their respective rights to those new entities as follows: Dr. Kelner
and Biosanel Ltd., an entity controlled by Dr. Kelner, transferred their rights
to Uprising Investments Ltd., a Turks and Caicos company; Tetra Pharm and its
shareholders transferred its distribution rights to Kimmey Trading Ltd., a Turks
and Caicos company; and, Novobiotec, along with The International Center for
Alternative Methods, Belbo Ltd., Mark Olshenitsky and Genady Buchman,
transferred their rights to Danron Ltd., an Isle of Man company. After extensive
negotiations, Bio Balance entered into an agreement to acquire the biobalance
technology from each of Uprising Investments Ltd., Kimmey Trading Ltd., and
Danron Ltd. The technology was acquired by Bio Balance for a cash payment of
$510,000 together with 990,000 shares of Bio Balance Common Stock in July 2001.
The cash portion of the purchase price of the technology was funded by the sale
of common stock, at $1.50 per share, to an investor group comprised of Mr. Ron
Katz, Dr. Howard Berg, Mr. Burton Weinstein, Mr. Ronald Shapps, Mr. Robert
Lerea, Mr. Klamen Issacs, Dr. Joseph and Janet Felder, Ms. Claudia Walters,
Dangled Ltd., Waterview Partners and Stourbridge Investments Ltd. For purposes
of the acquisition, the shares issued as a portion of the purchase price were
valued at $1.50 per share which was equal to the price at which shares were sold
to provide funds for the cash portion of the price. Following execution of the
agreement to sell the rights relating to the technology, the pending arbitration
proceeding between Dr. Kelner and Novobiotec was terminated subject to closing
of the agreement.
41
As a result of the acquisition of the rights with respect to the biobalance
technology, Bio Balance issued the 990,000 shares of common stock in escrow and
paid $510,000 in cash as follows: Danron Ltd. received 300,000 shares; Uprising
Investments Ltd. received 300,000 shares; Kimmey Trading Ltd. received 390,000
shares; Reuvin Spungins received $300,000 in cash to settle all claims with
respect to the biobalance technology arising by or through Mr. Spungins, Danron
Ltd. or Novobiotec; and Uprising Investments Ltd. received $210,000 in cash to
settle all claims with respect to the biobalance technology arising by or
through Uprising Investments Ltd. or Dr. Kellner. Danron Ltd. is controlled by
Reuvin Spungins who may be deemed the beneficial owner of the shares held of
record by Danron Ltd. Kimmey Trading Ltd. is controlled by Herman Weiss and
Amnon Bechar who may be deemed the beneficial owners of the shares held of
record by Kimmey Trading Ltd. Uprising Investments Ltd. is controlled by Dr.
Kellner who may be deemed the beneficial owner of the shares held of record by
Uprising Investments Ltd. Except for the service of Dr. Kellner as a member of
Bio Balance's Technical Advisory Board, none of Reuvin Spungins, Hermann Weiss,
Amnon Bechar or Dr. Kellner are affiliates or related parties of Bio Balance or
New York Health Care or of any officers or directors thereof.
In August 2001, a dinner meeting was organized by Mr. Grossman with Mr.
Braun, the attorney from New York Health Care, attorneys for Bio Balance, Dr.
Jacob and Paul Stark and Joseph Herbst, Directors of Bio Balance, for a
discussion of the background, technology and prospective business of Bio Balance
in a possible business combination arrangement with New York Health Care.
During the last quarter of 2001, Mr. Braun and Mr. Rosenberg, on behalf of
New York Health Care, and Mr. Grossman and Mr. Stark, acting on behalf of Bio
Balance, held daily telephone conferences and met several times each week, in
the course of their respective investigations of the business and background of
the participating companies and the Bio Balance technology. Also participating
in selected telephone conferences were the respective legal counsel of Bio
Balance and New York Health Care, Dr. Jacob and Dr. Adler, Ms. Shosh Friedman
and Mr. Yitzak Fund, as well as Gene Berger and Charles Pendola, directors of
New York Health Care. The topics discussed in those telephone conferences and
meetings including: the potential for FDA approval as a drug or medical food;
potential marketing partners, budgets, the future of the health care business,
composition of the board of directors, management and integration issues.
42
In September and October 2001, the New York Health Care Board of Directors
met on a number of occasions to discuss and further investigate the proposed
transaction and to review draft Exchange Agreements with the attorney for New
York Health Care. These meetings were held on September 13, 2001, September 20,
2001, and on October 11, 2001, when the New York Health Care Board of Directors
unanimously approved the Exchange Agreement. On September 4, 2001, the Board of
Directors of Bio Balance unanimously approved the transaction.
New York Health Care filed a Form 8-K report regarding the proposed Bio
Balance merger on October 15, 2001 and issued a press release announcing the
proposed transaction. An amended Form 8-K/A report regarding the Bio Balance
transaction, correcting certain errors in the first filing, was filed November
6, 2001.
In October 2001, the attorney for New York Health Care began discussions
with the Listing Qualifications Division of the Nasdaq Stock Market regarding
New York Health Care maintaining its listing on the SmallCap Market upon
completion of the Bio Balance merger. Representatives from the Listing
Qualifications Division made requests for information regarding various matters
which took a number of weeks to complete. In addition, New York Health Care's
auditors and Bio Balance's auditors engaged in research and discussion
concerning asset valuation, the format and presentation of the financial
statements which would be filed with the SEC in connection with any proposal for
New York Health Care to acquire Bio Balance. These various discussions and
communications took place over a number of weeks. As a result, Bio Balance made
arrangements with the companies from which it acquired its technology to extend
deadlines for completion of a business combination transaction which are
conditions to the technology agreement. Similarly, the New York Health Care
officers entered into discussions with Bio Balance leading to an amendment to
the Exchange Agreement to reasonably extend the deadlines set forth in the
Exchange Agreement as a result of the delays in the progress of the transaction,
and to clarify and resolve ambiguities which had been noticed in the Exchange
Agreement. That process resulted in the execution of the amendment to the
Exchange Agreement dated February 13, 2002.
Reasons for the Transaction
New York Health Care and Bio Balance are proposing this transaction because
their managements each believe that a combination of the two companies will be
beneficial to their combined businesses and to each of their respective
shareholder groups.
New York Health Care has been a licensed home health care agency supplying
paraprofessional services who provide a broad range of health support services
to patients in their homes since February 1983. The services are supplied,
principally pursuant to contracts with health care institutions and agencies
such as county departments of social services, hospitals and health care
reimbursement programs. Historically, home health care has been a business with
moderate profit margins.
43
Over the last few years, profitability has been affected by declining
reimbursement formulas implemented by insurance companies and government subsidy
programs. Although New York Health Care's management believes that its expenses
have been well-managed and its business has grown significantly over the years,
its margins have narrowed. As a result, New York Health Care's management
believes it must increase its sales volume substantially and continue to reduce
costs if it is to provide quality service and profit increases. A substantial
increase in sales volume requires a substantial increase in New York Health
Care's paraprofessional staff. However, competition for qualified staff in the
New York Metropolitan area is intense.
New York Health Care
New York Health Care's management believes that moderate profit margins
inherent to the home health care business are likely to persist into the
foreseeable future. It has therefore been seeking potential acquisitions which,
if properly managed, could provide New York Health Care shareholders with a
potential of a higher profit margin business and, therefore, enhanced equity
value. The management of New York Health Care believes that the acquisition of
Bio Balance offers the potential for the shareholders of New York Health Care to
realize greater value, assuming that Bio Balance can successfully implement its
business plan at an acceptable cost and risk (as to which there can be no
assurance), than if New York Health Care were to continue to operate on a
stand-alone basis.
Based on the foregoing, and the considerations discussed below, on October
11, 2001, the board of directors of New York Health Care unanimously approved
the transaction with Bio Balance.
The decision of New York Health Care's board to approve the transaction was
based on the background discussed above and the potential benefits of the
transaction which it believes will contribute to the success of the combined
company and maximization of shareholder value. These potential benefits include:
-- the potential for a business combination with a innovative
technology-intensive business with significant prospects for rapid
growth and a higher overall profit margins than those which are
presently obtainable from a home health care business standing alone,
resulting in significantly enhanced shareholder value; and
-- improved access to capital by reason of the addition of a business
with a significantly greater potential for higher rates of growth of
revenues and income.
The New York Health Care board also identified and considered a number of
potentially negative factors in the deliberations concerning the transaction,
including the following:
-- the risks inherent in a new, untested business in a highly competitive
environment which included very large competitors with vastly greater
resources;
44
-- the very substantial dilution of the ownership interests of the
existing New York Health care shareholders in favor of the Bio Balance
shareholders;
-- potential difficulty of integrating the operations of New York Health
Care and Bio Balance;
-- potential conflicts among management of New York Health Care and Bio
Balance in allocating resources and sharing power; and
-- potential confusion in the investment community, and lack of price
support, as a result of the diverse nature of the operations of New
York Health Care and Bio Balance.
New York Health Care's board concluded that, on balance, the transaction's
potential benefits to New York Health Care and its shareholders outweighed the
associated risks. The discussion of the information and factors considered by
New York Health Care's board reflects all material factors considered by the
board. In view of the variety of factors considered in connection with its
evaluation of the transaction, New York Health Care did not find it practicable
to, and did not, qualify or otherwise assign relative weight to, the specific
factors considered in reaching its determination.
In reaching its determination, New York Health Care's board of directors
also considered and evaluated, among other things, (i) the results and scope of
the due diligence review conducted by its management and legal counsel with
respect to the background, technology, contracts, and business and operational
plans of Bio Balance, (ii) the recent volatility of and historical trading
prices and trading multiples of New York Health Care common stock and of home
health care related stocks generally, (iii) the financial prospects of New York
Health Care and Bio Balance on an individual and combined basis, (iv) the terms
of the exchange agreement and the other agreements contemplated thereby, and (v)
the operational structure of the transaction.
Bio Balance
Bio Balance is a development stage business which was incorporated on May
21, 2001 whose business is the discovery, manufacturing and marketing of
probiotic agents and ethical drugs for therapy of GI diseases. Probiotics is the
utilization of live microbial agents to benefit an animal or human host by
improving intestinal microbial balance through the stimulation of the growth of
healthy bacteria. Bio Balance acquired the technology, intellectual property and
pending patent applications with respect to its developing probiotic business at
the end of July 2001. It intends to focus the initial development of its
business on digestive disorders such as Irritable Bowel Syndrome.
45
The sellers of the technology, intellectual property and patent
applications to Bio Balance required as a condition of their amended agreement
that Bio Balance enter into a business combination transaction with a company
whose shares were listed for trading on the Nasdaq Stock Market, or accomplish
an initial public offering of its own securities, not later than January 2,
2003.
Bio Balance's management believe that prevailing market conditions
precluded the likelihood of an initial public offering of its securities in the
near future. After an introduction to and investigation of New York Health Care,
the management of Bio Balance concluded that it had a good health care business
with good management in a moderate margin environment with a limited opportunity
for substantial growth in equity value. Moreover, New York Health Care's Common
Stock has been listed for trading on the Nasdaq SmallCap Market and on the
Boston Stock Exchange since it made its public offering in 1996. The managements
of Bio Balance and New York Health Care entered into discussions and
negotiations over a number of months which resulted in the Transaction described
in this Prospectus/Proxy Statement.
The Transaction provides Bio Balance with the ability to satisfy the
conditions required under its technology acquisition agreements to maintain
ownership of the probiotic technology rights it purchased in July 2001. It
provides for each of New York Health Care and Bio Balance to operate their
businesses independently while providing the Bio Balance business with access to
the public equity markets through New York Health Care which Bio Balance's
management believes would otherwise be unavailable in the current equity
financing climate. The Transaction provides Bio Balance's shareholders with a
large majority of as much as approximately 90% (assuming that Bio Balance has
sold 3,000,000 shares in its private placement, and before the exercise or
conversion of currently outstanding Bio Balance and New York Health Care stock
options, warrants and preferred stock) and no less than 86% (assuming the
exercise or conversion of all currently outstanding stock options, warrants and
preferred stock) of the issued and outstanding shares of New York Health Care
Common Stock while providing New York Health Care stockholders with the
opportunity for significant equity growth in the value of their holdings in the
event Bio Balance is successful in implementing its biotechnology business with
the financing it has been able to raise privately and whatever additional
financing the combined companies may raise in the future.
Based on the foregoing, and the considerations discussed below, on
September 4, 2001, the board of directors of Bio Balance unanimously approved
the transaction with New York Health Care.
The decision of Bio Balance's board to approve the transaction was based on
the background discussed above and the potential benefits of the transaction
that it believes will contribute to the success of the combined company and
maximization of shareholder value. These potential benefits include:
-- satisfaction of the condition of the acquisition of Bio Balance's
intellectual property that an initial public offering or combination
with a Nasdaq listed company occur on or before January 2, 2003;
46
-- improved access to capital markets as a Nasdaq listed company;
-- the level of ownership retained by the Bio Balance shareholders;
-- the existing presence of New York Health Care in the healthcare
industry;
-- the quality of management of New York Health Care and their
understanding of Bio Balance's industry; and
-- participation in the potential profitability of New York Health Care.
The Bio Balance board also identified and considered a number of
potentially negative factors in the deliberations concerning the transaction,
including the following:
-- potential difficulty of integrating the operations of New York Health
Care and Bio Balance;
-- potential conflicts among management of New York Health Care and Bio
Balance in allocating resources and sharing power;
-- dilution of the ownership interest of the existing Bio Balance
shareholders; and
-- potential confusion in the investment community, and lack of price
support, as a result of the diverse nature of the operations of New
York Health Care and Bio Balance.
Bio Balance's board concluded that, on balance, the transaction's potential
benefits to Bio Balance and its shareholders outweighed the associated risks.
The discussion of the information and factors considered by Bio Balance's board
reflects all material factors considered by the board. In view of the variety of
factors considered in connection with its evaluation of the transaction, Bio
Balance did not find it practicable to, and did not, qualify or otherwise assign
relative weight to, the specific factors considered in reaching its
determination.
In reaching its determination, Bio Balance's board of directors also
considered and evaluated, among other things, (i) the results and scope of the
due diligence review conducted by members of management of Bio Balance and its
legal counsel and accountants with respect to the business and operations of New
York Health Care, (ii) information with respect to recent and historical trading
prices and trading multiples of New York Health Care common stock and of health
care stock generally, (iii) information concerning the results of operations,
performance, financial condition and prospects of New York Health Care and the
financial condition and prospects of Bio Balance on a company-by-company basis
and on a combined basis, (iv) the terms of the exchange agreement and the other
agreements contemplated thereby, (v) the structure of the transaction, and (vi)
the tax consequences of the transaction.
47
Determination of the Post-Transaction Ownership Ratios
The terms and conditions of the Exchange Agreement, as amended, provide
that at the completion of the Bio Balance acquisition transaction, the
shareholders of Bio Balance will own as much as approximately 90% (assuming that
Bio Balance has sold 3,000,000 shares in its private placement, and before the
exercise or conversion of currently outstanding Bio Balance and New York Health
Care stock options, warrants and preferred stock) and no less than 86% (assuming
the exercise or conversion of all currently outstanding stock options, warrants
and preferred stock) of all of the issued and outstanding New York Health Care
shares of common stock, and the New York Health Care shareholders will own
approximately 10%. The terms of the transaction, including the ownership ratio,
were determined by negotiations between the respective managements of New York
Health Care and Bio Balance.
Although New York Health Care is an established home health care company,
and Bio Balance is a recently incorporated, development stage enterprise whose
business involves the discovery, manufacturing and marketing of Probiotic agents
and ethical drugs for the therapy of GI diseases, both the New York Health Care
and Bio Balance boards of directors determined that the post-transaction
ownership ratio of the combined company is fair to both sets of shareholders.
New York Health Care Determination
In the view of the New York Health Care board, a smaller ownership portion
of the opportunity for a substantially larger business in terms of revenue and
earnings is preferable to complete ownership of a smaller business with limited
prospects for growth in earnings and equity.
As noted elsewhere in this Prospectus/Proxy Statement, the New York Health
Care board has concluded that its home health care business, while sound and
established, has limited prospects for growth in earnings and equity. The reason
its prospects for significant earnings growth are limited is based on the
declining reimbursement formulas implemented by insurance companies and
government subsidy programs upon which virtually all of New York Health Care's
business depends. Although the gross revenues of that business have grown
substantially over the past few years, and profitability has returned in recent
quarters, its profit margins have continually narrowed and continued profits
require close attention by management to cost control and reduction and a
continuous building of gross revenues. While recent contracts obtained by New
York Health Care from the New York City Human Resources Administration have
provided a substantial additional volume of business and relatively prompt
payment terms, gross profit margins under the contracts are limited to only 16%,
with the result that substantial growth in volume and continued reduction in
already well-controlled costs is essential to increase profits. Moreover, the
increase in profits is likely to be modest, at best, in particular because a
substantial increase in sales volume requires a substantial increase in
paraprofessional staff, for which competition continues to be intense.
48
The New York Health Care Board of Directors therefore came to the
conclusion that the moderate profit margins inherent in the home health care
business are likely to persist into the foreseeable future. In Bio Balance, it
identified an opportunity for a business combination with a company whose
potential profit margins are not limited by constraints such as those affecting
the home health care business.
The market price of New York Health Care's common stock over the last year
and a half has been subjected to wide fluctuations ranging from as low as $.25
per share to as high as $5.35 per share, with the recent market price in the
vicinity of $3.50 per share. The board views the potential of the combination
with the Bio Balance business in Probiotics and related fields as a significant
opportunity for substantial growth in the relatively low market capitalization
of New York Health Care's common stock. The board believes that New York Health
Care shareholders have a far greater opportunity for enhanced equity value while
holding only 10% of the combined company than they do holding 100% of the home
health care business alone.
Bio Balance Board Determination
In evaluating the appropriate ownership ratio of the post-transaction
company, Bio Balance's board evaluated a variety of factors and possible
alternatives. Foremost in the evaluations of the board was satisfaction of the
requirement that Bio Balance combine with a Nasdaq listed company, or undertake
an initial public offering, in order to secure its technology rights.
Given the existing market conditions, Bio Balance's board determined that
an initial public offering was not viable. The board then considered whether Bio
Balance should seek a combination with a Nasdaq listed company or a combination
with an unlisted company followed by application for Nasdaq listing. Bio
Balance's board estimated that combining with a "shell" company would result in
approximately 5% dilution to the Bio Balance shareholders with no certainty that
Nasdaq listing could be obtained or that a market would develop for the stock of
the combined entity. Bio Balance's board determined that increased dilution to
between 10% and 11% would be acceptable if a merger candidate already had an
established trading market and listing on Nasdaq and had no regulatory problems.
Based on that determination and its assessment that New York Health Care
satisfied Bio Balance's merger criteria, Bio Balance's management proposed an
initial ownership ratio of 90% for the Bio Balance shareholders and 10% for the
shareholders of New York Health Care.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock and preferred stock of New York Health Care is required to approve the
proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
49
The Board of Directors of New York Health Care Recommends That Shareholders Vote
For Proposal 1.
The New York Health Care Board of Directors believes that the transaction
is fair and in the best interests of the shareholders of New York Health Care,
and they unanimously recommend the approval and adoption of the Exchange
Agreement and the transaction.
PROPOSAL 2: AMENDMENT OF THE
CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF SHARES OF NEW YORK HEALTH CARE'S AUTHORIZED
COMMON STOCK TO 100,000,000
New York Health Care is currently authorized to issue 50,000,000 shares of
common stock, par value $.01 per share. As of the date of this Prospectus/Proxy
Statement, New York Health Care has issued and outstanding a total of 3,711,730
shares of common stock outstanding, 38,270 shares of common stock in the
treasury and 590,375 shares of Class A Convertible Preferred Stock, each share
of which is convertible at any time into a share of common stock. It also has
reserved an additional 1,485,250 shares of common stock for issuance pursuant to
contractual obligations, consisting of the exercise of the outstanding stock
options, warrants and conversion rights of the preferred stock.
The proposal will authorize an increase of 50,000,000 shares in the
authorized common stock of New York Health Care, with the result that there will
be a total of 100,000,000 authorized shares of common stock. Upon the closing of
the merger transaction there will be 73,183,418 authorised shares of common
stock unissued and unreserved.
The purpose of the proposal is to comply with one of the provisions of the
Exchange Agreement so that there is enough common stock available for issuance
in the future for possible acquisitions, financing and other transactions. As of
the date of this Prospectus/Proxy Statement, there is no particular transaction
under consideration by New York Health Care other than the Bio Balance merger.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock is required to approve the proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
Effect of the Increase in Authorized Shares of Common and Preferred Stock
Implementation of the amendment of the Certificate of Incorporation will
not alter the voting rights or other rights of shareholders and will have no
material tax consequence.
50
The New York Health Care Board of Directors Recommends That The
Shareholders Vote For Proposal 2.
PROPOSAL 3: AMENDMENT OF THE
CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF SHARES OF NEW YORK HEALTH CARE'S AUTHORIZED
PREFERRED STOCK TO 5,000,000
New York Health Care is currently authorized to issue 2,000,000 shares of
preferred stock, par value $.01 per share. As of the date of this
Prospectus/Proxy Statement, New York Health Care has issued and outstanding a
total of 590,375 shares of Class A Convertible Preferred Stock, each share of
which is convertible at any time into a share of common stock.
The proposal will authorize an increase of 3,000,000 shares in the
authorized preferred stock of New York Health Care, with the result that there
will be a total of 5,000,000 authorized shares of preferred stock. Upon the
closing of the merger transaction there will be 4,606,417 authorised shares of
preferred stock unissued and unreserved.
The purpose of the proposal is to comply with one of the provisions of the
Exchange Agreement so that there is enough preferred stock available for
issuance in the future for possible acquisitions, financing and other
transactions. As of the date of this Prospectus/Proxy Statement, there is no
particular transaction under consideration by New York Health Care other than
the Bio Balance merger.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock and preferred stock is required to approve the proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
Effect of the Increase in Authorized Shares of Common and Preferred Stock
Implementation of the amendment of the Certificate of Incorporation will
not alter the voting rights or other rights of shareholders and will have no
material tax consequence.
The New York Health Care Board of Directors Recommends That The Shareholders
Vote For Proposal 3.
51
PROPOSAL 4: AMENDMENT OF THE
CERTIFICATE OF INCORPORATION TO EFFECT
A 1-FOR-1.5 REVERSE STOCK SPLIT
As of the date of this Prospectus/Proxy Statement, New York Health Care has
a total of 3,711,730 New York Health Care shares of common stock issued and
outstanding, 38,270 shares in the Treasury and 590,375 shares of Class A
Convertible Preferred Stock, each share of which is convertible at any time into
a share of common stock. It also has outstanding stock options and warrants to
purchase a total of an additional 1,485,250 shares.
The purpose of the reverse stock split is to comply with one of the
provisions of the Exchange Agreement. The Board of Directors has approved the
proposed reverse stock split and will submit the proposal to the shareholders
for approval at the Annual Meeting.
Effect of The Reverse Stock Split
Consummation of a reverse stock split will reduce the number of currently
issued and outstanding shares of common stock from 3,711,730 to 2,474,486, the
common stock in the Treasury from 38,270 to 25,513 shares and reduce the shares
reserved for issuance pursuant to conversion rights of the issued and
outstanding shares of preferred stock from 590,375 to 393,583 shares. It will
also reduce the shares reserved for issuance pursuant to outstanding stock
options and warrants from 1,485,250 shares to 990,168 shares. Voting rights and
other rights of shareholders will not be altered by a reverse stock split,
except where a small shareholder may own only a fractional interest after a
reverse stock split, in which event such a shareholder will be paid for the
fractional interest as set forth below and will cease to be a shareholder. New
York Health Care believes that there are no shareholders who would have only
fractional share interests after the reverse stock split. Consummation of a
reverse stock split will have no material federal tax consequences to
shareholders.
The par value of the common stock will remain at $.01 following the reverse
stock split, and the number of shares of common stock outstanding will be
reduced by 33.33%. As a consequence, the aggregate par value of the outstanding
common stock will be reduced, while the aggregate capital in excess of par value
attributable to the outstanding common stock for statutory and accounting
purposes will be correspondingly increased. The resolution approving the reverse
stock split provides that this increase in capital in excess of par value will
be treated as capital for statutory purposes.
The conversion ratios of any of New York Health Care's outstanding stock
options and securities having a conversion or redemption feature, such as the
outstanding warrants and Class A Convertible Preferred Stock (each share of
which will then be convertible into two-thirds of a share of common stock), will
be correspondingly adjusted upon the consummation of the reverse stock split.
52
At the effective date of the reverse stock split (which will be the day
just prior to the closing date of the Bio Balance merger), each share of old
common stock issued and outstanding immediately prior thereto will be
reclassified as and changed into two-thirds of a share of New York Health Care's
common stock, par value $.01, subject to the treatment of fractional share
interests as described in this Prospectus/Proxy Statement. Shortly after the
effective date, New York Health Care will send transmittal forms to the holders
of old common stock, to be used in forwarding their certificates of old common
stock for surrender and exchange for certificates representing whole shares of
new common stock.
No certificates or scrip representing fractional share interests in the new
common stock will be issued and no such fractional share interests will entitle
the holder thereof to any rights as a shareholder of New York Health Care. In
lieu of such fractional share interests, each holder of old common stock who
would otherwise be entitled to receive a fractional share of new common stock
will, at the discretion of the board, either be (i) paid cash by New York Health
Care upon surrender of certificates representing old common stock held by such
holder in an amount equal to the product of such fraction multiplied by the
closing price of the old common stock on the Nasdaq SmallCap Market on the
Effective Date or, alternatively, (ii) New York Health Care will make
arrangements with, and provide assistance to, a third party who shall pool
fractional share interests, sell them and return appropriate payment to the
holders of fractional share interests in the amount appropriate.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock and preferred stock is required to approve the proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
The New York Health Care Board of Directors Recommends That The Shareholders
Vote For Proposal 4.
53
PROPOSAL 5: ELECTION OF DIRECTORS
The Amended and Restated Certificate of Incorporation of New York Health
Care provides for New York Health Care's Board of Directors to serve until their
successors have been duly elected and qualified or until they resign, become
disqualified or disabled, or are otherwise removed. The nominees for election to
the Board of Directors are listed below.
Name Age Position
- ------- ----- -------------
Jerry Braun 44 President, Chief Executive Officer and Director
Jacob Rosenberg 44 Vice President, Chief Operating Officer,
Chief Financial and Accounting Officer,
Secretary and Director
H. Gene Berger 61 Director
Charles J. Pendola 56 Director
Paul Stark* 40 Director
David C. Katz* 61 Director
- ------------------
* The election of these nominees will only be effective if the Bio Balance
merger transaction is completed.
Jerry Braun has been the President, Chief Executive Officer and Chief
Operating Officer of New York Health Care since its inception in 1983.
Jacob Rosenberg, has been Secretary and a Director since New York Health
Care's inception in 1983, and Vice President and Chief Operating Officer since
February 1995. Jacob Rosenberg is currently acting as the Chief Financial and
Accounting Officer for New York Health Care.
H. Gene Berger has been a director of New York Health Care since February
1998. Since 1981 Mr. Berger has been the president of Jay Isle Associates, a
consulting firm to the health care industry. From October 1991 to October 1997,
Mr. Berger was employed by Transworld Health Care, Inc., which is a regional
provider of alternate site health care services and products, in a number of
capacities including executive vice president, president, chief operating
officer and chief executive officer.
Charles J. Pendola has been a director of New York Health Care since
February 1998. Since March 2000, Mr. Pendola has been the President of DLJ
Managed Plans Corporation, a division of an investment banking firm; he is also
Senior Vice President of Black Mountain Management, a management consulting
firm. Mr. Pendola has been an independent management consultant to various
organizations in the health care industry since April 1997. From August 1996 to
March 1997 Mr. Pendola was the president and chief executive officer of First
Medical Corporation, an international health care management firm providing
services to health care networks, managed care organizations and independent
health providers in the United States and Europe. From April 1989 to June 1996,
Mr. Pendola was the president and chief executive officer of Preferred Health
Network, a not-for-profit corporation which managed a diversified group of
health care providers and health related organizations including five acute care
hospitals and 20 ambulatory care centers. Mr. Pendola is a certified public
accountant.
54
Paul Stark has been the President of Bio Balance since October 2001. He had
been Secretary and Director of Bio Balance since its inception, became the
Vice-President in September 2001 and was appointed interim President upon the
resignation of the former president, Yitz Grossman. Previously, Mr. Stark was
the managing partner of Waterview Partners, New York, NY, a company providing
strategic advice to public and private companies. From February 1999 to October
1999 Mr. Stark was vice president of Regency Investment Partners, New York, NY,
money managers. Mr. Stark was vice president of investments at KPH Investment
Group, New York, NY, a broker-dealer, from April 1997 to January 1999 and served
as a vice-president of Joseph Stevens & Company, Inc., a broker-dealer, from
February, 1996 through March, 1997. Mr. Stark is a graduate of Toro College
(B.A. 1982).
David C. Katz, a shareholder of Bio Balance, has been employed by
Petrecycle Pty., Ltd. (an Australian corporation), a company in the recycling
business, in technology sales since 1999. From 1998 to 1999 he was self-employed
as a consultant, and from 1989 to 1998 was the President and Chief Operating
Officer of Pure Tec Corp., a consumer products company. Mr. Katz is a director
of United Rentals North America, Inc., a public company. Mr. Katz is a graduate
of the Georgia Institute of Technology (B.A.E. 1963. M.S.I.E. 1965, Industrial
Engineering).
Directors hold their offices until the next annual meeting of the
shareholders and thereafter until their successors have been duly elected and
qualified. Executive officers are elected by the Board of Directors on an annual
basis and serve at the direction of the Board. The executive officers devote all
of their business time to the affairs of New York Health Care. There is no
family relationship between any director or executive officer of New York Health
Care.
55
Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1999, 2000 and 2001, the cash compensation paid by the New York Health Care, as
well as certain other compensation paid with respect to those years and months,
to the Chief Executive Officer and, to the extent applicable, each of the three
other most highly compensated executive officers in all capacities in which they
served:
Annual Long-Term
Compensation Compensation
--------------------------------------- ------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation Options/SARS Compensation
------------------ ---- ---------- --------- ------------ ------------ ------------
Jerry Braun (1) 1999 $212,395 $ 37,000 $ 25,081 (1) 773,750 0
President and Chief 2000 $251,290 $ 0 $ 38,893 (1) 0 0
Executive Officer 2001 $256,710 $ 0 $ 45,111 (1) 0 $ 50,000 (3)
Jacob Rosenberg (2) 1999 $169,726 $ 25,000 $ 25,314 (2) 680,000 0
Chief Operating Officer 2000 $210,149 $ 0 $ 34,839 (2) 0 0
and Chief Financial Officer 2001 $213,252 $ 0 $ 45,145 (2) 0 $ 50,000 (3)
1. Includes $22,769, $18,343 and $15,898 of medical insurance premiums paid on
behalf of such individual for each of the years ended 2001, 2000 and 1999
respectively, $17,342, $15,550 and $9,184 for automobile and
automobile-related costs, including insurance, incurred on behalf of such
individual, respectively, for each of the years ended 2001, 2000 and 1999
and $5,000 in expense allowance for each of the fiscal years ended 2001,
2000 and 1999.
2. Includes $22,769, $18,343 and $15,898 of medical insurance premiums paid on
behalf of such individual for each of the years ended 2001, 2000 and 1999
respectively, $17,376 , $11,496 and $9,416 for automobile and
automobile-related costs, including insurance, incurred on behalf of such
individual, respectively, for each of the years ended 2001, 2000 and 1999
and $5,000 in expense allowance for each of the fiscal years ended 2001,
2000 and 1999.
3. This compensation was accrued in 2000 and paid in 2001. This compensation
is not the same as the 10% pre-tax bonus.
56
Stock Option Grants
The following table sets forth information concerning the grant of stock
options made during 2001 to each of the Named Officers:
Percent of Potential Realizable Value
Total Options at Assumed Annual Rates
Granted to of Stock Price Appreciation
Options Employees in Price Expiration For Option Term
-------------------------------
Name Granted Fiscal Year Per Share Date 5% 10%
---- ------- ----------- --------- ---------- --------- ----------
Jerry Braun............. 100,000 25.0 $0.60 01/2006 $16,577 $36,631
100,000 25.0 $0.65 01/2011 $40,878 $103,593
Jacob Rosenberg......... 100,000 25.0 $0.60 01/2006 $16,577 $36,631
100,000 25.0 $0.65 01/2011 $40,878 $103,593
Stock Option Exercises and Year-End Option Values
The following table sets forth information concerning the exercise of stock
options during 2001 by each of the Named Officers and the number and value of
unexercised options held by the Named Officers at the end of 2001:
Number of Unexercised Value of Unexercised
Shares Options at
In-the Money Options
Acquired on Value at FY-End (#) at FY-End ($)
-------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------ ------------ ------------ ----------- ------------- ----------- -------------
Jerry Braun...... -0- -0- 93,750 -0- -0- -0-
-0- -0- 55,000 -0- -0- -0-
-0- -0- 55,000 -0- 6,875 -0-
-0- -0- 35,000 -0- 25,137 -0-
-0- -0- 35,000 -0- 28,420 -0-
-0- -0- 50,000 -0- 53,125 -0-
-0- -0- 50,000 -0- 56,250 -0-
-0- -0- 100,000 -0- 50,000 -0-
-0- -0- 100,000 -0- 55,000 -0-
-0- -0- 100,000 -0- 60,000 -0-
-0- -0- 100,000 -0- 65,000 -0-
Jacob Rosenberg.. -0- -0- 55,000 -0- -0- -0-
-0- -0- 55,000 -0- 6,875 -0-
-0- -0- 35,000 -0- 25,137 -0-
-0- -0- 35,000 -0- 28,420 -0-
-0- -0- 50,000 -0- 53,125 -0-
-0- -0- 50,000 -0- 56,250 -0-
-0- -0- 100,000 -0- 50,000 -0-
-0- -0- 100,000 -0- 55,000 -0-
-0- -0- 100,000 -0- 60,000 -0-
-0- -0- 100,000 -0- 65,000 -0-
57
Report of the Compensation Committee on Executive Compensation Committee
Policies
The New York Health Care compensation committee is composed of Charles J.
Pendola and H. Gene Berger, two non-employee directors, and Jerry Braun, the
Chief Executive Officer (Mr. Braun does not vote on matters which relate to
compensation or benefits which he may receive). The committee is responsible for
reviewing and approving the compensation of executives of the company and such
other employees as assigned by the board, and the awarding of stock options and
recommendation of executive compensation policies. The objectives of the New
York Health Care compensation program are to encourage the execution of the
company's performance objectives and to provide a level of compensation which
will attract and retain talented executives and appropriately reward their
performance.
The compensation provided by New York Health Care is believed to be
competitive with other companies in the health care services industry generally
and with those in the New York area, as well as with a broader group of
companies of comparable size and complexity.
- - Executive Officer Compensation
New York Health Care executive officer compensation is comprised of base
salary, regularly scheduled raises, annual cash incentive compensation,
long-term incentive compensation in the form of stock options, 401(k) Plan and
related benefits, including an allowance for use in leasing an automobile, and
allowance towards life and disability insurance coverage, and medical insurance
generally available to all employees of the company. Senior executives are
employed pursuant to written employment agreements, which were most recently
entered into in November 1999, at which time change of control (parachute
payment) compensation provisions were added for the Chief Executive Officer and
Chief Operating Officer. See "Executive Compensation."
- - Stock Option Program
The stock option program is the New York Health Care Incentive Stock Option
Plan, which is intended to provide an incentive to key employees and align their
interests with those of the stockholders. Directors who are not employees of the
company are awarded stock purchase warrants with terms and exercise prices
comparable to those which would be provided by stock options awarded at the same
time.
- - Other Programs
From time to time the compensation committee may consider awarding special
bonus payments to executives or other employees of New York Health Care.
58
- - Remuneration of Directors
The company's non-employee directors are paid a monthly fee of $1,000,
together with $1,000 for their attendance at meetings of the board and $500 for
their attendance at committee meetings.
Members of the Compensation Committee:
Charles J. Pendola
H. Gene Berger
Jerry Braun
Stock Performance Graph
The following table depicts the cumulative total return on New York Health
Care's common stock compared to the cumulative total return for the Nasdaq
Composite-US Index and the Nasdaq Health Index. The table assumes the investment
of $100 on December 24, 1996, when the New York Health Care common stock was
first traded in a public market. Reinvestment of dividends is assumed in all
cases (New York Health Care has never declared dividends on its common stock).
Base Period
December December December December December December
24 1996 31 1997 31 1998 31 1999 31 2000 31 2001
----------- --------- -------- -------- --------- --------
New York Health Care, Inc. 100 62.50 25.00 43.75 7.00 84.00
Nasdaq Health Index 100 105.45 89.39 72.87 99.91 106.71
Nasdaq Composite - US 100 125.64 198.56 327.87 197.27 157.06
The comparisons in the table and in the graph above are required by the
rules of the Securities and Exchange Commission and are not intended to forecast
of be indicative of possible future performance of New York Health Care common
stock.
59
Audit Fees
The aggregate fees billed by M.R. Weiser & Co. LLP for the 2001 annual
audit were $40,000, and their fees for review of the interim financial
statements during 2001 were $30,000.
Financial Information Systems Design and Implementation Fees
M.R. Weiser & Co. LLP did not render any professional services to New York
Health Care for financial information systems design and implementation, as
described in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X, during the
year ended December 30, 2001.
All Other Fees
The aggregate fees billed by M.R.Weiser & Co. LLP for all other services
rendered to New York Health Care during the fiscal year ended December 30, 2001,
other than audit services, were $20,000. These "other fees" were primarily for
tax services and an audit of a Medicaid cost report.
Audit Committee Report
The audit committee of the board of directors of New York Health Care is
composed of two non-employee directors. The board, in its business judgment, has
determined that all current members of the audit committee are "independent" as
required by the Nasdaq listing standards.
The audit committee operates under a written charter adopted by the board
and reviewed annually by the committee.
As described more fully in its charter, the purpose of the audit committee
is to assist the Board in its general oversight of New York Health Care's
financial reporting, internal control and audit functions. Management is
responsible for the preparation, presentation and integrity of New York Health
Care's financial statements, accounting and financial reporting principles,
internal controls and procedures designed to ensure compliance with accounting
standards, applicable laws and regulations. M.R. Weiser & Co. LLP, New York
Health Care's independent auditing firm, is responsible for performing an
independent audit of the consolidated financial statements in accordance with
generally accepted auditing standards.
The committee members are not professional accountants or auditors, and
their functions are not intended to duplicate or to certify the activities of
management and the independent auditor, nor can the committee certify that the
independent auditor is "independent" under applicable rules. The committee
serves a board-level oversight role, in which it provides advice, counsel and
direction to management and the auditors on the basis of the information it
receives, discussions with management and the auditors and the experience of the
committee's members in business, financial and accounting matters.
60
Among other matters, the audit committee monitors the activities and
performance of New York Health Care's auditors, including the audit scope, audit
fees, auditor independence matters and the extent to which the independent
auditor may be retained to perform non-audit services. The committee and the
board have ultimate authority and responsibility to select, evaluate and, when
appropriate, replace New York Health Care's independent auditor. The committee
also reviews the results of the audit work with regard to the adequacy and
appropriateness of New York Health Care's financial, accounting and internal
controls. Management and independent auditor presentations to and discussions
with the committee also cover various topics and events that may have
significant financial impact or are the subject of discussions between
management and the independent auditor. In addition, the committee generally
oversees New York Health Care's internal compliance programs.
In performing its oversight role, the audit committee has reviewed and
discussed the consolidated financial statements with management and the
independent accountants. The committee's discussions with the independent
accountants covered matters required to be discussed by Statement on Auditing
Standards No. 61, Communication with Audit Committees. New York Health Care's
independent accountants also provided to the committee the written disclosures
required by Independence Standard No. 1, Independent Discussions with Audit
Committees. The committee has also considered whether the provision of non-audit
services by the independent accountants is compatible with maintaining the
accountants' independence and has discussed with the independent accountants
that firm's independence.
In reliance on the reviews and discussions referred to in this report, the
audit committee recommended to the board that the audited financial statements
be included in New York Health Care's Annual Report on Form 10-KSB/A for the
year ended December 30, 2001 for filing with the SEC.
Audit Committee of New York Health Care
Charles J. Pendola
H. Gene Berger
61
Certain Relationships and Related Transactions
On July 29, 1999, the Registrant's Board of Directors authorized an
increase in the authorized shares of the Registrant's Class A Convertible
Preferred Stock (the "Class A Preferred") from 480,000 shares to 590,375 shares.
Immediately following that authorization, New York Health Care entered an
agreement with Heart to Heart Health Care Services, Inc. ("Heart to Heart"),
which is the holder of the Registrant's promissory note (the "Note") in the
current face amount of $550,000 currently bearing interest at the rate of 9% per
annum, for the conversion of $100,000 of the principal amount of that Note into
110,375 shares of the Registrant's Class A Convertible Preferred Stock at a
conversion price of $.906 per share, each share of which is convertible at any
time into shares of the Registrant's $.01 par value common stock. Heart to Heart
is owned by Jerry Braun, Jacob Rosenberg, Samson Soroka, Hirsch Chitrik and Sid
Borenstein. Messers. Braun and Rosenberg are officers or directors of New York
Health Care. Messers. Chitrik, Borenstein and Soroka are former directors and
Mesers. Chitrik and Soroka are principal shareholders. The conversion
transaction is on substantially the same terms as a prior transaction with Heart
to Heart on August 6, 1998 in which $600,000 of the Note was converted into
480,000 shares of the Class A Preferred. The Registrant had obtained an
independent opinion that the consideration received by New York Health Care in
that transaction was, under the circumstances, fair from a financial point of
view to the Registrant, not including the Heart to Heart shareholders.
On November 12, 1999, New York Health Care granted a warrant for each of H.
Gene Berger and Charles J. Pendola to purchase up to an aggregate of 10,000
shares of New York Health Care's $.01 par value common stock at an exercise
price of $.625 per share at any time commencing May 12, 2000 up until November
11, 2004.
On November 12, 1999, New York Health Care issued stock options pursuant to
the Option Plan to each of Jerry Braun and Jacob Rosenberg. They were each
granted an Incentive Stock Option to purchase up to an aggregate of 50,000
shares of New York Health Care's Common Stock at an exercise price of $.6875 per
share at any time up until May 11, 2004, and a Non-Qualified Stock Option to
purchase up to an aggregate of 50,000 shares of New York Health Care's Common
Stock at an exercise price of $.625 per share at any time up until May 11, 2008.
On July 10, 2000, New York Health Care issued stock options pursuant to the
Option Plan to Jerry Braun and Jacob Rosenberg. They were each granted an
Incentive Stock Option to purchase up to an aggregate of 400,000 shares of New
York Health Care's Common Stock at exercised prices ranging from $.50 to $.55
per share. The options expire in 5-10 years. The exercise price of these options
was not less than the fair market price of the Common Stock as of the date of
grant.
On December 18, 2000, New York Health Care granted a warrant to each of H.
Gene Berger and Charles J. Pendola to purchase up to an aggregate of 10,000
shares of New York Health Care's $.01 par value common stock at an exercise
price of $.50 per share at any time commencing June 18, 2001 up until December
18, 2005.
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On January 2, 2001, New York Health Care issued stock options pursuant to
the Option Plan to Jerry Braun and Jacob Rosenberg. They were each granted an
Incentive Stock Option to purchase up to an aggregate of 400,000 shares of New
York Health Care's Common Stock at exercised prices ranging from $.59 to $.65
per share. The options expire in 5-10 years. The exercise price of these options
was not less than the fair market price of the Common Stock as of the date of
grant.
On January 2, 2001, New York Health Care granted a warrant to each of H.
Gene Berger and Charles J. Pendola to purchase up to an aggregate of 10,000
shares of New York Health Care's $.01 par value common stock at an exercise
price of $.60 per share at any time commencing July 2, 2001 up until January 2,
2006.
The Exchange Agreement provides for the issuance of stock options, to
acquire 500,000 shares during a term of ten years, to each of Jerry Braun and
Jacob Rosenberg, the Chief Executive Officer and Chief Operating and Financial
Officer, respectively, of New York Health Care, as compensation for services
rendered under five year consulting agreements which go into effect in event of
termination of their services as directors during the term of their employment
contracts. The employment contracts currently expire on December 31, 2009.
The transactions described above involve actual or potential conflicts of
interest between New York Health Care and its officers or directors. In order to
reduce the potential for conflicts of interest between New York Health Care and
its officers and directors, prior to entering into any transaction in which a
potential material conflict of interest might exist, New York Health Care's
policy has been and will continue to be that New York Health Care does not enter
into transactions with officers, directors or other affiliates unless the terms
of the transaction are at least as favorable to New York Health Care as those
which would have been obtainable from an unaffiliated source. New York Health
Care has no plans to enter into any additional transactions which involve actual
or potential conflicts of interest between New York Health Care and its officers
or directors and will not enter into any such transactions in the future without
first obtaining independent opinion with regard to the fairness to New York
Health Care of the terms and conditions of any such transaction.
Vote Required
The affirmative vote of the majority of the shares of common stock present
and voting at the annual meeting of shareholders is required to approve the
proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
The New York Health Care Board of Directors Recommends That The Shareholders
Vote For The Election of Each of The Nominees as Set Forth in Proposal 5.
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PROPOSAL 6: APPROVAL OF AMENDMENT TO STOCK OPTION PLAN
General
New York Health Care's shareholders are being asked to approve amendments
to the New York Health Care, Inc. Performance Incentive Plan increasing by
3,230,000 the number of shares of common stock remaining available for issuance
of new options under the option plan from a total of 91,000 to 3,321,000. This
amendment to the option plan is a condition to closing of the Exchange Agreement
in order to provide stock options for issuance to employees as additional
compensation and incentives for performance. If the amendment is not approved,
stock option incentives would be limited to only the 91,000 shares presently
available under the option plan.
In March 1996, New York Health Care's Board of Directors and shareholders
approved and adopted the option plan providing for options to purchase up to
262,500 shares of common stock to key employees of New York Health Care in
connection with New York Health Care's initial public offering. On June 25,
1998, New York Health Care's shareholders ratified an amendment to the option
plan authorizing the reservation of an additional 210,000 shares of common stock
for issuance under that plan for each of two additional years, resulting in a
total of 682,500 shares in the option plan.
On July 28, 1999, New York Health Care's shareholders ratified an amendment
to the option plan that each stock option granted under the plan, including
unexercised options outstanding on the date of the amendment, may be exercisable
in either one, two or three equal annual installments at the discretion of the
Compensation Committee. The amendment also provided an additional 350,000 shares
of common stock for issuance under the option plan after January 1, 2000 so that
the total number of shares which may be issued under the plan increased from
682,500 to 1,032,500 shares.
On December 18, 2000 New York Health Care's shareholders further ratified
an amendment to the option plan to provide for an additional 450,000 shares of
the Corporation's $.01 par value common stock for issuance under the plan after
January 1, 2001 so that the total number of shares which may be issued under the
plan increased from 1,032,500 to 1,482,500 shares.
As of the date of this Prospectus/Proxy Statement, there are options
authorized under the option plan for a total of 1,482,500 shares, of which
options been granted under the plan for a total 1,391,500 Shares, leaving a
total of 91,000 shares available. If the proposal is adopted, there will be
options authorized under the option plan for a total of 4,712,500 shares, of
which options will have been granted under the plan for a total of 1,391,500
shares and options will be reserved for a total of 1,000,000 shares, leaving a
total of 2,321,000 shares available.
The option plan is administered by a Compensation Committee appointed by
the Board of Directors, which is authorized to grant incentive stock options and
non-qualified stock options to selected employees of New York Health Care and to
determine the participants, the number of options to be granted and other terms
and provisions of each option.
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The exercise price of any incentive stock option or non qualified option
granted under the option plan may not be less than 100% of the fair market value
of the shares of common stock of New York Health Care at the time of the grant.
In the case of incentive stock options granted to holders of more than 10% of
the voting power of New York Health Care, the exercise price may not be less
than 110% of the fair market value.
Under the terms of the option plan, the aggregate fair market value
(determined at the time of grant) of shares issuable to any one recipient upon
exercise of incentive stock options exercisable for the first time during any
one calendar year may not exceed $100,000. Options granted under the option plan
become exercisable in whole or in part from time to time as determined by the
Committee at the time of the grant, but in no event may a stock option granted
in conjunction therewith be exercisable prior to the expiration of six months
from the date of grant, unless the grantee dies or becomes disabled prior
thereto. Stock options granted under the option plan have a maximum term of 10
years from the date of grant, except that with respect to incentive stock
options granted to an employee who, at the time of the grant, is a holder of
more than 10% of the voting power of New York Health Care, the stock option
shall expire not more than five years from the date of the grant. The option
price must be paid in full on the date of exercise and is payable in cash or, in
the case of a "cashless exercise," in New York Health Care shares having a fair
market value on the date the option is exercised equal to the option price.
If a grantee's employment by, or provision of services to, New York Health
Care shall be terminated, the committee may, in its discretion, permit the
exercise of stock options for a period not to exceed one year following such
termination of employment with respect to incentive stock options and for a
period not to extend beyond the expiration date with respect to non-qualified
options, except that no incentive stock option may be exercised after three
months following the grantee's termination of employment, unless it is due to
death or permanent disability, in which case they may be exercised for a period
of up to one year following such termination.
The Exchange Agreement provides for the issuance of stock options, to
acquire 500,000 shares during a term of ten years, to each of Jerry Braun and
Jacob Rosenberg, the Chief Executive Officer and Chief Operating and Financial
Officer, respectively, of New York Health Care, as compensation for services
rendered under five year consulting agreements which go into effect in event of
termination of their services as directors during the term of their employment
contracts. The employment contracts currently expire on December 31, 2009.
The board believes the increase in the number of shares of common stock
issuable under the option plan by 3,230,000 shares is necessary to both comply
with the provisions of the Exchange Agreement and to assure that New York Health
Care will continue to have a sufficient reserve of common stock available under
the stock option plan to provide appropriate incentives and to attract and
retain the services of key individuals essential to New York Health Care's
long-term success.
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Federal Income Tax Consequences of the Option Plan
Options granted under the option plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two years after the option grant date and more than one year after the
exercise date, in which case the income is taxed as capital gain. If either of
these two holding periods is not satisfied, then a disqualifying disposition
will result.
If the optionee makes a disqualifying disposition of the purchased shares,
then the income is taxed as ordinary income and New York Health Care will be
entitled to an income tax deduction for the taxable year in which such
disposition occurs, equal to the excess of (i) the fair market value of such
shares on the option exercise date over (ii) the exercise price paid for the
shares. In no other instance will New York Health Care be allowed a deduction
with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are not
vested and subject to repurchase by New York Health Care in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when New York Health Care's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses over (ii) the exercise price paid
for the shares. The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of exercise of
the option an amount equal to the excess of (i) the fair market value of the
purchased shares on the exercise date over (ii) the exercise price paid for such
shares. If the Section 83(b) election is made, the optionee will not recognize
any additional income as and when the repurchase right lapses.
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New York Health Care will be entitled to an income tax deduction equal to
the amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of New York Health Care in which such ordinary income is recognized
by the optionee.
Accounting Treatment
New York Health Care accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. Pursuant to APB
Opinion No. 25, option grants or stock issuances with exercise or issue prices
less than the fair market value of the shares on the grant or issue date will
result in a compensation expense to New York Health Care's earnings equal to the
difference between the exercise or issue price and the fair market value of the
shares on the grant or issue date. Such expense will be accruable by New York
Health Care over the period that the option shares or issued shares are to vest.
Option grants or stock issuances at 100% of fair market value will not result in
any charge to New York Health Care's earnings.
In addition, New York Health Care is subject to the disclosure requirements
of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the disclosure of pro forma net
income and earnings per share. New York Health Care adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from New York Health Care's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values.
Whether or not granted at a discount, the number of outstanding options may
be a factor in determining New York Health Care's earnings per share on a basic
and fully-diluted basis, as New York Health Care uses the treasury stock method
for computing weighted average common and common equivalent shares outstanding.
Option Grants
Information relating to New York Health Care's issuance of stock options
and warrants to executive officers and directors has been fully set forth in New
York Health Care's Form 10-KSB Annual Report for 2001, which is being delivered
to shareholders together with this Prospectus/Proxy statement and that material
is incorporated herein by reference.
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Equity Compensation Plan Information
The following table gives information about New York Health Care common
stock that may be issued upon exercise of (1) options granted pursuant to the
option plan and (2) options or warrants granted pursuant to equity compensation
plans not approved by security holders as of July 31, 2002.
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
exercise of outstanding options, compensation plans (excluding
outstanding options, warrants securities reflected in
Plan category warrants and rights and rights column (a))
------------- ------------------- ---------------------- -----------------------------
Equity compensation plans 1,391,500 $ .81 91,000
approved by security
holders
Equity compensation plans 70,000 $.727 -0-
not approved by security
holders
Total 1,461,500 $ .81 91,000
Shareholder Approval
The affirmative vote of a majority of the outstanding voting shares of New
York Health Care present or represented and entitled to vote at the Annual
Meeting is required for approval of the amendment to the option plan. Should
such shareholder approval not be obtained, then any options granted will have to
be limited to the shares now available under the option plan.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock is required to approve the proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
The New York Health Care Board of Directors Recommends That The Shareholders
Vote For Proposal 6.
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PROPOSAL 7: RATIFICATION OF THE CHANGE OF CONTROL PARACHUTE PAYMENT PROVISIONS
CONTAINED IN THE SENIOR EXECUTIVE OFFICERS EMPLOYMENT AGREEMENTS APPROVED BY NEW
YORK HEALTH CARE COMPENSATION COMMITTEE IN NOVEMBER 1999.
In order to provide appropriate incentive for the continued employment of
New York Health Care's senior executive officers, "change of control" provisions
were included in the new senior executive employment agreements which the New
York Health Care Compensation Committee approved on November 12, 1999 to provide
a higher degree of confidence and security to these senior executives in the
event there would be a "change of control" of New York Health Care. At the
present time, New York Health Care's only senior executive employment contracts
are those of Jerry Braun, as President and Chief Executive Officer, and Jacob
Rosenberg, as Vice President and Chief Operating Officer, each of which will
expire on December 31, 2009.
A "change of control" is defined as constituting one or more of the
following events: (i) the execution of a transaction or series of transactions
in which persons or entities other than the present shareholders of New York
Health Care acquire a majority in book value of the assets currently owned by
New York Health Care; or a majority of the shares of New York Health Care's
voting equity stock; or the power to designate a majority of New York Health
Care's Board of Directors; or otherwise acquire the ability, whether by
contract, stock ownership or otherwise, to control the management and policies
of New York Health Care; (ii) the signing of any agreement for the merger or
consolidation of New York Health Care with another corporation or for the sale
of all or substantially all of the assets of New York Health Care; (iii) the
adoption of any resolution of reorganization or dissolution of New York Health
Care by the shareholders; or (iv) upon the occurrence of any other event or
series of events which, in the opinion of the Board of Directors of New York
Health Care, will, or is likely to, if carried out, result in a change of
control of New York Health Care. The Bio Balance merger transaction is deemed to
constitute a "change of control."
The change of control provisions set in the senior executive's employment
contracts provides the following benefits in the event of a "change of control":
(i) all outstanding options granted to the executive under the stock option plan
will automatically become immediately vested and exercisable in full; (ii) the
executive will receive a lump-sum payment equal to 2.99 times the average of
that executive's base salary and bonus for the previous five years; (iii) New
York Health Care will pay the cost to transfer ownership to the executive of any
automobile provided to that executive by New York Health Care or for which New
York Health Care pays or reimburses the costs of leasing or other form of
ownership; and (iv) to the extent that any such payments (alone or with other
compensation payable to the executive) would subject the executive to an excise
tax under Section 4999 of the Internal Revenue Code, or any successor provision,
New York Health Care will make an additional cash payment to the executive such
that the executive's net after-tax compensation is not reduced by such excise
tax. The payment of any such compensation to an executive contingent on a change
of control which qualifies as a "parachute payment" under Section 280G of the
Internal Revenue Code is limited to the maximum amount that may be paid to that
executive without any part of such compensation being deemed an "excess
parachute payment" under that section. This maximum amount is determined by
multiplying the average of the executive's base salary and bonus for the
previous five years by a factor of three.
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In considering the recommendation of the Board of Directors of New York
Health Care to vote for the proposal to ratify the change in control provisions,
shareholders should be aware that Jerry Braun and Jacob Rosenberg have a
potential conflict of interest because they have interests that are different
from and in addition to the interests of other New York Health Care
shareholders. The Compensation Committee was aware of this potential during its
deliberations regarding the change of control provisions and considered them
during their deliberations in November 1999. Among the considerations were the
fact that the market price of New York Health Care's common stock had been as
low as approximately $.41 per share and at the time of the deliberations was
$.625 per share, and the reduced market price created a greater likelihood of
hostile takeover attempts with respect to New York Health Care. The Compensation
Committee concluded that the change in control provision was appropriate under
the circumstances to provide a higher degree of competence and security to
Messrs. Braun and Rosenberg. However, New York Health Care did not receive any
independent opinion of the fairness of the transaction to New York Health Care's
shareholders as a whole.
The Bio Balance merger will constitute a "change in control". Assuming
current salary and bonus information remains in effect, the approximate value of
the cash payments due under the senior executive employment agreements to each
of Jerry Braun and Jacob Rosenberg, not including any payment that may be made
with respect to any excise tax, would be approximately: Jerry Braun, $747,000;
and Jacob Rosenberg, $606,000.
The senior executive's employment contracts were entered into on November
10, 1999 and were reported in, and attached as exhibits to, the New York Health
Care Form 10-QSB/A for the quarter ended September 30, 1999 which was filed with
the SEC on November 17, 1999.
Shareholder ratification of the change of control parachute payment
provisions of the employment contracts of the senior executive officers is
necessary for completion of the Bio Balance merger transaction.
Vote Required
The affirmative vote of the majority of the outstanding shares of common
stock is required to approve the proposal.
Approval of this proposal by the New York Health Care Shareholders is a
requirement of the Exchange Agreement.
The New York Health Care Board of Directors Recommends That The Shareholders
Vote For Proposal 7.
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Shareholder Proposals
Proposals of the shareholders of New York Health Care which are intended to
be presented by shareholders at New York Health Care's 2002 Annual Meeting (to
be held in 2003) must be received by New York Health Care no later than December
31, 2002 to be included in the proxy statement and form of proxy relating to the
2002 Annual Meeting.
Other Matters
New York Health Care knows of no other matters to be brought before the
Annual Meeting. If any other business should properly come before the Annual
Meeting, the persons named in the proxy intend to vote thereon in accordance
with their best judgment.
Interests of New York Health Care Directors And Executive Officers in The
Transaction
In considering the recommendation of the Board of Directors of New York
Health Care to vote for the proposal to approve and adopt the Exchange
Agreement, shareholders of New York Health Care should be aware that Jerry Braun
and Jacob Rosenberg, officers and directors of the New York Health Care, have a
potential conflict of interest because they have agreements or arrangements that
provide them with interests in the transaction that differ from those of New
York Health Care's shareholders.
The Exchange Agreement provides for the issuance of stock options, to
acquire 500,000 shares during a term of ten years, to each of Jerry Braun and
Jacob Rosenberg, the Chief Executive Officer and Chief Operating and Financial
Officer, respectively, of New York Health Care, as compensation for services
rendered under five year consulting agreements which go into effect in event of
termination of their services as directors during the term of their employment
contracts. The employment contracts currently expire on December 31, 2009.
Both Mr. Braun and Mr. Rosenberg are parties to employment contracts with
New York Health Care, which upon a "change of control" (which will be the result
of the completion of the transaction) provides them with substantial benefits.
The Bio Balance merger will constitute a "change in control." As a result of the
change of control, Mr. Braun and Mr. Rosenberg will each be entitled to receive
a lump-sum payment equal to 2.99 times the average of their annual base salary
and bonus for the previous five years, together with immediate vesting of their
unexercised stock options. In addition, New York Health Care will pay the costs
to either maintain the lease or transfer the ownership of their automobiles for
which New York Health Care has paid the leasing costs.
71
When the employment contracts were approved by the Compensation Committee
of the Board of Directors in November 1999, New York Health Care did not seek or
receive any independent opinion of the fairness of the change in control benefit
transaction to New York Health Care's shareholders as a whole. Assuming current
salary and bonus information remains in effect, the approximate value of the
cash payments due under the employment agreements to each of Jerry Braun and
Jacob Rosenberg, not including any payment that may be made with respect to any
excise tax, would be approximately: Jerry Braun, $747,000; and Jacob Rosenberg,
$606,000.
The Compensation Committee of New York Health Care was aware of these
agreements and arrangements during its deliberations of the merits of the merger
transaction and its determination to recommend to the shareholders of New York
Health Care that they vote for the proposal to approve and adopt the Exchange
Agreement.
Completion and Effectiveness of the Transaction
The transaction will be completed when all of the conditions to completion
of the transaction are satisfied or waived, including the approval and adoption
of the Exchange Agreement by New York Health Care's shareholders and the
registration of New York Health Care shares and warrants issued in connection
with the transaction.
Each of New York Health Care and Bio Balance is working towards completing
the transaction as quickly as possible. Assuming that both New York Health Care
and Bio Balance satisfy or waive all of the conditions to closing contained in
the Exchange Agreement, New York Health Care and Bio Balance anticipate that the
transaction will occur as soon as practicable after approval of the transaction
proposal at the special meeting of Bio Balance' shareholders.
Exchange of Bio Balance Stock and Warrant Certificates for New York Health Care
Stock and Warrant Certificates
From and after the effective time of the transaction, each holder of a
certificate which represented, prior to the effective time, Bio Balance shares
and Bio Balance warrants will have the right to surrender such certificate to
New York Health Care, or an exchange agent, and receive certificates
representing the number of New York Health Care shares and warrants stock equal
to the number of shares of Bio Balance shares and warrants. The surrendered
certificates will be cancelled.
A transmittal letter with instructions for the surrender of certificates
for Bio Balance shares and warrants will be sent to each Bio Balance
shareholder. If any Bio Balance certificates are lost, stolen or destroyed, a
Bio Balance shareholder or warrant holder must provide an appropriate affidavit
of that fact. New York Health Care may require the owner of the lost, stolen or
destroyed Bio Balance certificates to deliver a bond as indemnity against any
claim that may be made against New York Health Care with respect to the Bio
Balance certificates alleged to have been lost, stolen or destroyed.
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Material United States Federal Income Tax Consequences of the Transaction
The following is a discussion of the material federal income tax
consequences of the merger to New York Health Care and Bio Balance and the
respective holders of New York Health Care and Bio Balance common stock and
constitutes the opinion of Rosen Seymour Shapss Martin & Company LLP, special
tax consultant to New York Health Care and Bio Balance, insofar as it relates to
matters of federal tax law. It is based upon current provisions of the Internal
Revenue Code (referred to below as the Code), existing regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. No attempt has been made to comment on all federal income tax
consequences of the merger that may be relevant to particular holders, including
holders that are subject to special tax rules such as dealers in securities,
foreign persons, mutual funds, insurance companies, tax-exempt entities and
holders who do not hold their shares as capital assets.
Holders of Bio Balance common stock are urged and expected to consult their
own tax advisers regarding the federal income tax consequences of the merger in
light of their personal circumstances and the consequences under applicable
state, local and foreign tax laws.
In the opinion of special tax consultant, Rosen Seymour Shapss Martin &
Company LLP:
* the merger will qualify as a reverse triangular merger pursuant to Internal
Revenue Code Sections 368(a)(1)(A) and 368(a)(2)(E);
* neither New York Health Care nor Bio Balance will recognize any gain or
loss on the proposed transaction; and
* the shareholders of New York Health Care and Bio Balance will not recognize
any gain or loss due to the receipt by Bio Balance shareholders of New York
Health Care stock in exchange for Bio Balance stock, and the substitution
of New York Health Care warrants and options for Bio Balance warrants and
options.
The foregoing opinions address all of the material federal income tax
consequences of the merger to the participants in the merger and to the
shareholders of New York Health Care and Bio Balance. Such opinions are based
upon the merger agreement, the facts set forth in this prospectus/proxy
statement, written representations of officers of New York Health Care and Bio
Balance which are described in the opinion, current provisions of the Code,
existing regulations thereunder, current administrative rulings of the Internal
Revenue Service, court decisions and the assumption that the transactions
contemplated by the merger agreement will be carried out strictly in accordance
with the terms thereof. Shareholders of New York Health Care and Bio Balance
should be aware that such opinions are not binding on the IRS and no assurance
can be given that the IRS will not adopt a contrary position or that a contrary
IRS position would not be sustained by a court. The opinion of Rosen Seymour
Shapss Martin & Company LLP has been filed with the SEC as an exhibit to the
registration statement of which this prospectus/proxy statement is a part.
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Accounting Treatment of the Transaction
New York Health Care will account for the transaction as a reverse
acquisition using the purchase method of accounting for a business combination.
Under this method of accounting, the assets and liabilities of New York Health
Care, including intangible assets, will be recorded by Bio Balance at their
estimated fair values as of the date of the completion of the transaction.
Management has not yet allocated the purchase price between goodwill and
intangible asserts (the allocation of the purchase price reflected in the
unaudited pro forma condensed consolidated financial statements shown elsewhere
in this Prospectus/Proxy Statement is preliminary), but it anticipates that
substantially all of the purchase price will be allocated to goodwill. The
results of operations and cash flows of New York Health Care will be included in
Bio Balance's financial statements following the completion of the transaction,
and the historical financial statements, prior to the transaction date, will be
those of Bio Balance.
Restrictions on Market Sales of Shares by Affiliates of Bio Balance and Others
The New York Health Care shares to be issued to Bio Balance shareholders in
connection with the transaction will be registered under the Securities Act of
1933 and will be freely transferable under the Securities Act, except for New
York Health Care shares issued to any person who is deemed to be an "affiliate"
of Bio Balance at the time of the closing. Persons who may be deemed to be
affiliates include individuals or entities that control, are controlled by, or
are under the common control of Bio Balance and may include Bio Balance
executive officers and directors, as well as Bio Balance's significant
shareholders. Affiliates may not sell their New York Health Care shares acquired
in connection with the transaction except pursuant to: an effective registration
statement under the Securities Act covering the resale of those shares; an
exemption under Rule 145 under the Securities Act; or any other applicable
exemption under the Securities Act. See "Shares Eligible For Future Sale."
Appraisal Rights
Bio Balance will merge with NYHC Acquisition, a newly-formed, wholly-owned
subsidiary of New York Health Care organized under Delaware law. As a result,
the Bio Balance shareholders who vote against the merger are entitled to
exercise dissenter's or appraisal rights as a result of the transaction to
demand payment for their shares under applicable law.
Under the Delaware General Corporation Law, any holder of Bio Balance
capital stock who does not wish to accept the transaction consideration in
respect of his, her or its shares of capital stock has the right to dissent from
the transaction and to seek an appraisal of, and to be paid the fair value,
exclusive of any element of value arising from the accomplishment or expectation
of the transaction, for his, her or its shares of stock, judicially determined,
and paid to the shareholder in cash, together with a fair rate of interest, if
any, provided that the shareholder fully complies with the provisions of Section
262 of the Delaware General Corporation Law. A copy of Section 262 is attached
as Annex F to this Prospectus/Proxy Statement.
74
Perfecting your appraisal rights can be complicated. The procedural rules
are specific and must be followed precisely. Failure to comply with the
procedure may cause a termination of your appraisal rights. The following
information is intended as a brief summary of the material provisions of the
statutory procedures you must follow in order to perfect your appraisal rights.
Please review Section 262, attached as Annex F to this Prospectus/Proxy
Statement, for the complete procedure. Neither New York Health Care nor Bio
Balance will give you any notice other than as described in this document and as
required by the Delaware General Corporation Law.
Appraisal Rights Procedures
Upon the merger of Bio Balance with NYHC Acquisition, you will receive a
timely notice in the mail and, if you are a Bio Balance shareholder and you wish
to exercise your appraisal rights, you must satisfy the provisions of Section
262 of the Delaware General Corporation Law. Section 262 requires the following:
Written demand: You must deliver a written demand for appraisal to Bio
Balance.
Continuously hold your Bio Balance shares: You must continuously hold your
shares of Bio Balance shares, from the date you make the demand for appraisal.
Formal demand: A written demand for appraisal of Bio Balance shares is only
effective if it is signed by, or for, the shareholder of record who owns such
shares at the time the demand is made. The demand must be signed as the
shareholder's name appears on the Bio Balance stock certificate(s). If you are
the beneficial owner of Bio Balance capital stock, but not the shareholder of
record, you must have the shareholder of record sign a demand for appraisal.
If you own Bio Balance shares in a fiduciary capacity, such as a trustee,
guardian or custodian, you must disclose the fact that you are signing the
demand for appraisal in that capacity.
If you own Bio Balance shares with more than one person, such as in a joint
tenancy or tenancy in common, all the owners must sign, or have signed for them,
the demand for appraisal. An authorized agent, which could include one or more
of the joint owners, may sign the demand for appraisal for a shareholder of
record; however, the agent must expressly disclose who the shareholder of record
is and that the agent is signing the demand as that shareholder's agent.
If you are a record owner, such as a broker, who holds Bio Balance shares
as a nominee for others, you may exercise a right of appraisal with respect to
the shares held for one or more beneficial owners, while not exercising such
right for other beneficial owners. In such a case, you should specify in the
written demand the number of shares as to which you wish to demand appraisal. If
you do not expressly specify the number of shares, we will assume that your
written demand covers all the shares of Bio Balance shares that are in your
name.
If you are a Bio Balance shareholder who elects to exercise appraisal
rights, you should mail or deliver a written demand to:
75
Appraisal Demand
The Bio Balance Corp.
16 East 34th Street
New York, NY 10016
It is important that Bio Balance receive all written demands for appraisal
required by the notice you will receive. As explained above, this written demand
should be signed by, or on behalf of, the shareholder of record. The written
demand for appraisal should specify the shareholder's name and mailing address,
the number of shares of stock owned, and that the shareholder is thereby
demanding appraisal of that shareholder's shares.
If you fail to comply with any of these conditions after the merger becomes
effective, you will only be entitled to receive the transaction consideration
provided in the Exchange Agreement.
Written notice: Within ten days after the closing of the merger, New York
Health Care and Bio Balance must give written notice that the merger has become
effective to each shareholder who has fully complied with the conditions of
Section 262.
Petition with the Chancery Court: Within 120 days after the merger, either
the surviving corporation or any shareholder who has complied with the
conditions of Section 262 may file a petition in the Delaware Court of Chancery.
This petition should request that the chancery court determine the value of the
shares of stock held by all the shareholders who are entitled to appraisal
rights. If you intend to exercise your appraisal rights, you should file this
petition in the chancery court. Bio Balance and New York Health Care have no
intention at this time to file this petition. Because Bio Balance and New York
Health Care have no obligation to file this petition, if you do not file this
petition within 120 days after the closing, you will lose your rights of
appraisal.
Withdrawal of demand: If you change your mind and decide you no longer want
appraisal rights, you may withdraw your demand for appraisal rights at any time
within 60 days after the closing of the merger. You may also withdraw your
demand for appraisal rights after 60 days after the closing of the merger, but
only with the written consent of Bio Balance. If you effectively withdraw your
demand for appraisal rights, you will receive the transaction consideration
provided in the Exchange Agreement.
Request for appraisal rights statement: If you have complied with the
conditions of Section 262, you are entitled to receive a statement from Bio
Balance. This statement will set forth the number of shares that have demanded
appraisal rights and the number of shareholders who own those shares. In order
to receive this statement, you must send a written request to Bio Balance within
120 days after the merger. After the merger, Bio Balance has ten days after
receiving a request to mail you the statement.
76
Listing on the Nasdaq SmallCap Market of the New York Health Care Common Stock
to Be Issued in the Transaction
New York Health Care will use its best commercial efforts to cause the
shares of New York Health Care common stock to be issued in connection with the
transaction to be approved for listing on The Nasdaq SmallCap Market, subject to
official notice of issuance, before the completion of the transaction.
The Exchange Agreement
The following summary of the Exchange Agreement is qualified in its
entirety by reference to the complete text of the Exchange Agreement, as
amended, which is incorporated by reference and attached as Annexes A, B, C, D
and E to this Prospectus/Proxy Statement.
Conditions to Completion of the transaction.
Each of New York Health Care's and Bio Balance's obligations to complete
the transaction are subject to the satisfaction or waiver of specified
conditions before completion of the transaction, including the following:
The Exchange Agreement and the transaction must be approved at the New York
Health Care annual meeting;
All other necessary regulatory authorizations or approvals shall have been
received; no order, injunction or proceeding, law or other legal restraint
preventing completion of the transaction may be in effect;
New York Health Care's registration statement on Form S-4, of which this
Prospectus/Proxy Statement forms a part, must be effective;
The shares of New York Health Care common stock to be issued in the
transaction must be approved for listing on The NASDAQ Market;.
There will have been no material adverse change in the business, assets,
operations, earnings, prospects or conditions of New York Health Care or Bio
Balance;
The representations and warranties of New York Health Care and Bio Balance
as set forth in the Exchange Agreement will be accurate;
Bio Balance shareholders representing not less than 51% of the Bio Balance
shares will have agreed to the Exchange and not more than 10% of the shares will
have exercised dissenters rights;
No Bio Balance shareholder will own 10% or more of the New York Health Care
shares on a fully-diluted basis;
77
New York Health Care shareholders will have approved (i) the election of
the designees to the New York Health Care Board of Directors; (ii) amendment of
the New York Health Care certificate of incorporation to increase its authorized
shares of common stock from 50 million to 100 million and its authorised shares
of preferred stock from 2,000,000 to 3,000,000 and to effect a reverse split of
all of the issued and outstanding New York Health Care common stock in a ratio
of one share of common stock for every one and a half shares outstanding; (iii)
an amendment to its stock option plan authorizing the reservation of an
additional 3,230,000 New York Health Care shares for issuance under the stock
option plan; and (iv) the change of control parachute payment provisions of the
senior executive employment contracts.
Bio Balance will have completed its private placement of Bio Balance common
stock in which it has received gross proceeds of at least $5,000,000.
Bio Balance Private Placement
The Exchange Agreement requires Bio Balance to complete a private
placement, at its sole cost and expense, of up to 3,000,000 shares of its common
stock at a price of not less than $2.00 per share in which it receives not less
than $6,000,000 of gross proceeds prior to the closing. If Bio Balance does not
receive at least $5,000,000 of gross proceeds from its private placement on or
before the closing date, New York Health Care has a right to terminate the
merger transaction. If Bio Balance receives not less than $5,000,000 of gross
proceeds on or before the closing date, the merger transaction will be completed
and New York Health Care will undertake a private placement of its common stock,
on terms no less favorable to New York Health Care than those of the Bio Balance
private placement for up to 120 days after the closing to complete the unsold
portion of the Bio Balance private placement. All of the proceeds of the Bio
Balance private placement and the New York Health Care private placement, if
any, after payment of all of the expenses of the offerings, will be contributed
to the capital of Bio Balance for its exclusive use.
If Bio Balance has not received $6,000,000 of gross proceeds from its
private placement prior to the closing, Hershey Holdings, Birimiza Associates
and KPT Partners, shareholders of Bio Balance, have agreed to defer receipt of
an aggregate of 3,222,222 New York Health Care shares of common stock issuable
at closing. If New York Health Care receives gross proceeds equaling at least
the amount which would be required to complete the full amount of the Bio
Balance private placement during the 120 days after the closing, it will issue
and deliver the New York Health Care shares of common stock unissued at closing
to those Bio Balance shareholders who had agreed to defer receipt.
Bio Balance has agreed to pay to New York Health Care the sum of $200,000
in the event it has failed to obtain at least $6,000,000 of gross proceeds from
its private placement not later than the closing date. Bio Balance has deposited
$100,000 in escrow towards fulfillment of that commitment, which will be
returned to Bio Balance in the event it completes the full amount of its private
placement at or prior to closing.
78
Termination.
The Exchange Agreement may be terminated at any time prior to completion of
the transaction, whether or not the approval of the New York Health Care
shareholders has already been obtained, or by mutual written consent duly
authorized by the boards of directors of New York Health Care and Bio Balance,
or by either New York Health Care or Bio Balance if the transaction is not
completed by January 2, 2003, except that the right to terminate the transaction
agreement will not be available to any party whose failure to fulfill any
obligation under the Exchange Agreement has been the cause of, or has resulted
in, the failure of the transaction to have consummated on or before such date.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following information is provided to assist you in your analysis of the
financial aspects of the merger. The New York Health Care annual information is
derived from the audited consolidated financial statements of New York Health
Care as of and for each of the years ended December 31, 1997 through 2001, which
were audited by M.R. Weiser & Co. LLP, independent accountants, and are
incorporated by reference into this joint proxy statement/prospectus. New York
Health Care's unaudited information for the six months ended June 30, 2002 and
2001 are derived from the unaudited consolidated financial statements which
include all adjustments, consisting only of normal recurring adjustments, which
are, in New York Health Care's opinion, necessary for a fair presentation of its
results of operations for such periods and are incorporated by reference into
this joint proxy statement/prospectus. The Bio Balance information is derived
from the audited financial statements of Bio Balance as of December 31, 2001 and
for the period May 21, 2001 (inception) to December 31, 2001, which were audited
by Holtz Rubenstein & Co., LLP, independent accountants, and are included in
this joint proxy statement/ prospectus. The Bio Balance unaudited information as
of and for the six months ended June 30, 2002 is derived from the unaudited
consolidated financial statements, which include all adjustments, consisting
only of normal recurring adjustments, which are, in Bio Balance's opinion,
necessary for a fair presentation of its results of operations for such a
period, and are included in this joint proxy/prospectus.
It is important for you to read the following summary selected historical
financial data of New York Health Care together with the financial statements
and accompanying notes contained in the Annual Report on Form 10-KSB/A and
quarterly reports on Form 10-Q of New York Health Care as filed with the
Securities and Exchange Commission, as well as the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" all of which are incorporated by reference into this joint proxy
statement/prospectus. It is important for you to read the following summary
selected historical financial data of Bio Balance together with the financial
statements and accompanying notes as well as the section entitled "Bio Balance's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this joint proxy statement/prospectus.
79
NEW YORK HEALTH CARE HISTORICAL FINANCIAL INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ------------ ------------ ------------- ------------
Total revenues $34,320,710 $29,383,547 $23,772,346 $20,223,674 $13,231,066
Net income (loss) 352,886 (1,195,481) (236,439) 341,152 183,863
Basic earnings (loss) per share 0.10 (0.33) (0.06) 0.09 0.05
Diluted earnings (loss) per share 0.07 (0.33) (0.06) 0.09 0.05
Current assets 6,700,825 6,811,437 6,860,679 6,433,380 5,137,853
Total assets 8,443,601 8,699,903 10,333,152 9,988,447 6,443,994
Current liabilities 4,209,565 4,823,884 5,100,670 4,097,179 2,020,503
Long-term liabilities, net of
current portion 18,281 34,081 195,063 678,038 100,000
Shareholders' equity 4,215,755 3,841,938 5,037,419 5,213,230 4,323,491
Book value per share 1.14 1.05 1.37 1.41 1.15
Dividends per share - - - - -
Shares used in computing earnings (loss) per common share:
Basic 3,681,268 3,668,730 3,684,685 3,739,864 3,750,000
Diluted 5,323,954 3,668,730 3,684,685 3,933,179 3,750,000
AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30,
----------------------------------
2002 2001
------------ ------------
Total revenues $ 19,057,740 $ 16,186,542
Net income 174,117 110,254
Basic earnings per share 0.05 0.03
Diluted earnings per share 0.03 0.02
Current assets 8,087,610 6,537,622
Total assets 9,950,690 8,362,225
Current liabilities 5,539,430 4,383,159
Long-term liabilities, net of
current portion 8,789 26,874
Shareholders' equity 4,402,471 3,952,192
Book value per share 1.19 1.08
Dividends per shares - -
Shares used in computing earnings
per common share:
Basic 3,701,321 3,668,730
Diluted 5,442,285 5,175,605
80
BIO BALANCE HISTORICAL FINANCIAL INFORMATION (1)
AS OF AND FOR THE PERIOD AS OF AND FOR THE
MAY 21, 2001(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, 2001 JUNE 30, 2002
------------------------ ------------------
Total revenues - -
Net loss $ (452,169) $ (718,598)
Basic loss per share (0.03) (0.04)
Diluted loss per share (0.03) (0.04)
Current assets 906,926 1,784,231
Total assets 2,918,836 3,740,519
Current liabilities 117,070 231,685
Shareholders' equity 2,801,766 3,508,834
Book value per share .14 .17
Dividends per share - -
Shares used in computing loss
per common share:
Basic 17,574,891 19,079,028
Diluted 17,574,891 19,079,028
(1) Bio Balance was formed in May 2001. The company is in the development stage
and has devoted its efforts primarily to various organizational activities.
Transitional Disclosure of SFAS 142 for New York Health Care, Inc.
SFAS 142 requires that goodwill and certain intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001. The Corporation ceased amortizing goodwill effective January 1, 2002.
Following are pro forma results assuming goodwill had not been amortized prior
to January 1, 2002:
For The Year Ended
December 31,
--------------------------------
2000 2001
---------- ------------
Reported net (loss) income $(1,195,481) $352,886
Add back: goodwill amortization,
net of tax 50,150 51,252
------------ -----------
Adjusted net income $(1,145,331) $404,138
============ ===========
Basic earnings per share:
As reported (0.33) 0.10
============ ===========
As adjusted for nonamortization
of goodwill (0.31) 0.11
============ ===========
Diluted earnings per share:
As reported (0.33) 0.07
============ ===========
As adjusted for nonamortization
of goodwill (0.31) 0.08
============ ===========
81
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 2002 and the unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 2001 and the six months ended June
30, 2002 of New York Health Care and for the period May 21, 2001 to December 31,
2001 and for the six months ended June 30, 2002 of The Bio Balance Corporation
are based on the historical financial statements of New York Health Care and Bio
Balance after giving effect to the merger as a purchase of New York Health Care
by Bio Balance using the purchase method of accounting and the assumptions and
adjustments described in the accompanying notes to the unaudited pro forma
condensed consolidated financial statements. The pro forma financial statements
assume that New York Health Care will issue approximately 21.3 million shares of
New York Health Care common stock to the former Bio Balance stockholders for
100% of Bio Balance's outstanding shares, if Bio Balance is able to raise $6
million in a private placement prior to closing. If Bio Balance does not receive
at least $5 million in the Private Placement, New York Health Care has the right
to terminate the merger transaction. If Bio Balance is unable to raise $6
million but raises at least $5 million in the private placement, the merger
transaction will be completed and New York Health Care will undertake a Private
Placement to raise the unsold portion of the $6 million Bio Balance Private
Placement. In that event, certain shareholders of Bio Balance have agreed to
defer receipt of 3,222,222 shares of New York Health Care. If more than the $5
million but less than $6 million is raised, the deferred shares will not be
issued. The unaudited pro forma condensed consolidated financial statements have
been prepared to show each of the two assumptions relating to the amounts raised
in the private placement. Under the first assumption, $5 million is raised and
18,111,112 shares are exchanged. Under the second assumption, $6 million is
raised and 21.3 million shares are exchanged. The actual number of shares of New
York Health Care common stock and options/warrants to be issued will be
determined based on the actual number of shares of Bio Balance's common stock
and options/warrants outstanding at the completion of the merger. Because the
former Bio Balance stockholders will own approximately 89% or 86% of the merged
company after the completion of the merger with the raising of $6 million or $5
million, respectively, Bio Balance is considered to be the accounting acquiror
in the transaction.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
2002 is presented to give effect to the proposed merger as if it occurred on
June 30, 2002 and combines the historical balance sheets of New York Health Care
and Bio Balance at June 30, 2002. The unaudited pro forma condensed consolidated
statements of operations of New York Health Care and Bio Balance for the periods
ended December 31, 2001 and June 30, 2002 are presented as if the combination
had taken place on January 1, 2001, and due to the fact that Bio Balance began
operations on May 21, 2001, combines the historical results of New York Health
Care for the year ended December 31, 2001 and the six months ended June 30, 2002
with the historical results of Bio Balance for the period May 21, 2001 to
December 31, 2001 and the six months ended June 30, 2002, respectively.
82
The pro forma condensed consolidated financial statements have been
obtained from, and should be read with, the historical consolidated financial
statements and accompanying notes of New York Health Care included in New York
Health Care's annual report on Form 10-KSB/A for the year ended December 31,
2001 filed on July 19, 2002 and Form 10-Q for the six months ended June 30, 2002
filed on August 14, 2002 and incorporated herein by reference, and the
historical financial statements and accompanying notes of Bio Balance which are
included in this proxy statement.
The unaudited pro forma condensed consolidated financial statements are
presented for informational purposes only and, while they are based on
assumptions that management believes are reasonable, they are not necessarily
indicative of the financial position or results of operations of New York Health
Care that would have occurred had the merger been completed as of the dates
indicated. The unaudited pro forma condensed consolidated financial statements
are not meant to project New York Health Care's financial position or results of
operations for any period or as of any date, nor do they give effect to any
matters other than those described above or in the notes.
Under the purchase method of accounting, the total estimated purchase
price, calculated as described in Note 1 to these unaudited pro forma condensed
consolidated financial statements, is allocated to the net tangible and
intangible assets of New York Health Care, based on their estimated fair values
as of the completion of the merger. The allocation of the purchase price
reflected in the unaudited pro forma condensed consolidated financial statements
is preliminary. Management believes substantially all of the purchase price will
be allocated to goodwill. Management intends to hire independent valuation
specialists in order to assist management in determining the fair values of the
assets. The final valuation will be based on the actual net tangible and
intangible assets of New York Health Care that exist as of the date of
completion of the merger. In the opinion of management, that allocation is not
expected to materially differ from the preliminary allocation included in the
unaudited pro forma condensed consolidated financial statements. Management has
estimated the fair value of the outstanding shares of preferred stock of New
York Health Care to be the fair value of the underlying common stock of New York
Health Care. Management believes this is an appropriate method as the common
stock and preferred stock have the same entitlements. This estimate is
preliminary and a valuation specialist will assist management in determining the
fair value of the preferred stock shortly after the merger has been completed.
The estimated fair value may differ from the preliminary fair value included in
the unaudited pro forma condensed consolidated financial statements.
83
Unaudited Pro Forma Condensed Consolidated Balance Sheet
of New York Health Care, Inc and The Bio Balance Corporation
June 30, 2002
Assuming
$1 Million
Raised in
Additional Assuming
Assuming $5 Million Raised Private $6 Million
in Private Placement Placement Raised
Historical -------------------------- ----------------------------
-------------- Pro Forma Pro Forma Pro Forma Pro Forma
Bio Balance NYHC Adjustments Combined Adjustments Combined
----------- ------ ------------ ----------- ------------- ------------
A S S E T S
Current assets:
Cash and cash equivalents $1,748,898 $2,410,381 $2,126,180 (a) $6,285,459 $954,049 (e) $7,239,508
Due from lending institution 14,968 14,968 14,968
Accounts receivable, net 5,326,695 5,326,695 5,326,695
Unbilled services 99,461 99,461 99,461
Other current assets 35,333 104,105 139,438 139,438
Deferred tax asset 132,000 (132,000)(b) - -
---------- --------- ---------- ------------ ---------- -----------
Total current assets 1,784,231 8,087,610 1,994,180 11,866,021 954,049 12,820,070
Property and equipment, net 304,245 304,245 304,245
Deferred tax assets 130,000 (130,000)(b) - -
Goodwill and other intangible
assets acquired in acquisition 19,240,000 (b) 19,240,000 19,240,000
Intangibles, net 1,908,288 1,375,459 (1,375,459)(b) 1,908,288 1,908,288
Deposits 48,000 53,376 101,376 101,376
---------- ---------- ----------- ------------ ----------- -----------
Total assets $3,740,519 $9,950,690 $19,728,721 $33,419,930 $ 954,049 $34,373,979
========== ========== =========== ============ =========== ===========
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
Current liabilities:
Accrued payroll $3,282,588 $3,282,588 $3,282,588
Current portion of lease
obligations payable 18,500 18,500 18,500
Accounts payable and
accrued expenses $231,685 1,115,979 $1,353,495 (b) 2,851,159 2,851,159
150,000 (b)
Income taxes payable 91,400 91,400 91,400
Due to HRA 1,030,963 1,030,963 1,030,963
------------ ---------- ------------- ----------- -----------
Total current liabilities 231,685 5,539,430 1,503,495 7,274,610 7,274,610
------------ ---------- ------------- ----------- -----------
Lease obligations payable,
less current portion 8,789 8,789 8,789
------------ ---------- ------------- ----------- -----------
Shareholders' equity:
Preferred stock $.01 par value 5,904 (5,904)(b) 5,904 5,904
5,904 (c)
Common stock, $.0001 par value 2,025 75 (a) -
(2,100)(c)
Common stock, $.01 par value 37,500 (37,500)(b) 206,111 32,222 (e) 238,333
206,111 (c)
Additional paid-in capital 4,692,746 4,733,131 2,126,105 (a) 27,954,029 921,827 (e) 28,875,856
(4,733,131)(b)
20,501,517 (b)
843,576 (d)
(209,915)(c)
Deficit (1,170,767) (342,581) 342,581 (b) (1,765,981) (1,765,981)
(595,214)(d)
Unearned compensation (15,170) (248,362)(d) (263,532) (263,532)
------------ ---------- ------------- ----------- ------- -----------
3,508,834 4,433,954 18,193,743 26,136,531 954,049 27,090,580
Less: Treasury stock (31,483) 31,483 (b) - -
------------ ---------- ------------- ----------- ------- -----------
Total shareholders' equity 3,508,834 4,402,471 18,225,226 26,136,531 954,049 27,090,580
------------ ---------- ------------- ----------- ------- -----------
Total liabilities and
shareholders' equity $3,740,519 $9,950,690 $19,728,721 $33,419,930 $954,049 $34,373,979
=========== ========== =========== ============= ============ ============
See the accompanying notes to unaudited pro forma combined
consolidated financial statements
84
Unaudited Pro Forma Condensed Consolidated Statement of Operations
of New York Health Care, Inc and The Bio Balance Corporation
Period
May 21, 01 For the
through year ended For the six months
Dec 31, 01 Dec 31, 01 June 30, 2002
Historical Historical
----------------------------------- ----------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Bio Balance NYHC Adjustments Combined Bio Balance NYHC Adjustments Combined
------------ ----------- ------------ -------- ----------- --------- ----------- --------
Net patient
service revenue $34,320,710 $34,320,710 $19,057,740 $19,057,740
----------- ----------- ----------- -----------
Expenses:
Professional care of
Patients 25,711,247 25,711,247 14,767,910 14,767,910
General and administrative $197,046 7,198,359 $212,835 (d) 7,608,240 $466,550 3,906,667 $106,418(d) 4,479,635
Other operating expenses 168,123 168,123 147,048 147,048
Bad debts expense 586,499 586,499 62,035 62,035
Depreciation and
amortization 87,000 191,985 278,985 105,000 77,770 182,770
------------ ----------- ------------ ---------- ---------- ---------- --------- -----------
Total operating expenses 452,169 33,688,090 212,835 34,353,094 718,598 18,814,382 106,418 19,639,398
------------ ----------- ------------ ----------- ---------- ---------- --------- -----------
(Loss) income
from operations (452,169) 632,620 (212,835) (32,384) (718,598) 243,358 (106,418) (581,658)
------------ ----------- ------------ ----------- --------- ---------- --------- -----------
Nonoperating expenses:
Interest income 11,355 11,355
Interest expense (129,734) (129,734) (4,596) (4,596)
------------ ----------- ------------ ----------- --------- ---------- --------- -----------
Nonoperating (expenses)
income, net - (129,734) - (129,734) - 6,759 - 6,759
------------ ----------- ------------ ----------- --------- ---------- --------- ----------
(Loss) income before
(benefit) provision
for income taxes (452,169) 502,886 (212,835) (162,118) (718,598) 250,117 (106,418) (574,899)
------------ ----------- ------------ ----------- --------- ---------- --------- ----------
(Benefit) provision for
income taxes:
Current 219,000 219,000 105,000 105,000
Deferred (69,000) (69,000) (29,000) (29,000)
------------ ----------- ------------ ----------- --------- ---------- ---------- -----------
150,000 150,000 76,000 76,000
------------ ----------- ------------ ----------- --------- ---------- ---------- -----------
Net (loss) income
applicable to
common stock ($452,169) $352,886 ($212,835) ($312,118) ($718,598) $174,117 ($106,418) ($650,899)
============ =========== ============ =========== ========= ========== ========== ==========
Assuming $5 Million Raised in Private Placement
Historical, Historical,
Historical Restated For Pro Forma Historical Restated For Pro Forma
NYHC Stock Split (1) Combined NYHC Stock Split (1) Combined
---------- --------------- --------- --------- --------------- --------
Basic earnings (loss) per share $0.10 $0.14 ($0.02) $0.05 $0.07 ($0.03)
===== ===== ======= ===== ===== ======
Diluted earnings (loss) per share $0.07 $0.10 ($0.02) $0.03 $0.05 ($0.03)
===== ===== ======= ===== ===== ======
Weighted average shares
outstanding 3,681,268 2,454,179 20,565,291 3,701,321 2,467,547 20,578,659
========= ========= ========== ========= ========= ==========
Diluted weighted average
shares outstanding 5,323,954 3,549,303 20,565,291 5,442,285 3,628,190 20,578,659
========= ========= ========== ========= ========= ==========
Assuming $6 Million Raised in Private Placement
Basic earnings (loss) per share $0.10 $0.14 ($0.01) $0.05 $0.07 ($0.03)
===== ===== ======= ===== ===== ======
Diluted earnings (loss) per share $0.07 $0.10 ($0.01) $0.03 $0.05 ($0.03)
===== ===== ======= ===== ===== ======
Weighted average shares
outstanding 3,681,268 2,454,179 23,787,513 3,701,321 2,467,547 23,800,881
========= ========= ========== ========= ========= ==========
Diluted weighted average
shares outstanding 5,323,954 3,549,303 23,787,513 5,442,285 3,628,190 23,800,881
========= ========= ========== ========= ========= ==========
(1) The information for New York Health Care gives effect to the one for one
and one half reverse stock split contemplated in the merger.
See the accompanying notes to unaudited pro forma condensed
consolidated financial statements
85
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Basis of Pro Forma Presentation
On October 11, 2001, New York Health Care, Inc. entered into a Stock for
Stock Exchange Agreement with The Bio Balance Corporation, which was
amended on February 13, 2002, July 10, 2002, August 13, 2002 and October
24, 2002. The July 10, 2002 amendment substantively changed the agreement
and, therefore, its date of announcement (July 19, 2002) serves as the
measurement date. The merger between New York Health Care and Bio Balance
has been accounted for in the unaudited pro forma condensed consolidated
financial statements by the purchase method of accounting as a reverse
acquisition with Bio Balance being the accounting acquiror and New York
Health Care being the accounting acquiree (the legal acquiror), pursuant to
the guidance in Statement of Financial Accounting Standards No. 141,
"Business Combinations".
The unaudited pro forma condensed consolidated financial statements provide
for the issuance of approximately 21.3 million shares if $6 million is
raised by Bio Balance in a Private Placement and approximately 18.1 million
shares if at least $5 million but less than $6 million is raised by Bio
Balance in a Private Placement, of New York Health Care common stock valued
at approximately $13.1 million based on New York Health Care's common stock
outstanding at July 19, 2002 at an average closing price for a six day
period ended July 24, 2002 ($5.30) (after giving effect to a one for one
and one half reverse stock split). The purchase price will be based on the
outstanding common stock, preferred stock, options and warrants of New York
Health Care on the date of closing of the merger.
The estimated total purchase price of the merger is as follows:
Value of NYHC common stock $13,100,000
Value of NYHC preferred stock 2,100,000
Value of NYHC outstanding options/warrants 5,300,000
Bio's estimated transaction costs 150,000
-------------
Total estimated purchase price $20,650,000
=============
The measurement date for the purchase price will be the date of merger if
at least $5 million but less than $6 million is raised by Bio Balance. If
$6 million is raised, July 19, 2002 will be the measurement date. For pro
forma purposes the measurement date of July 19, 2002 was used for both the
$5 million and $6 million raise. New York Health Care's common stock,
preferred stock and options at June 30, 2002 remained unchanged through
July 19, 2002. The value of the preferred stock was calculated based on the
common stock equivalents for the convertible preferred stock outstanding at
July 19, 2002, which amounted to approximately $2.1 million. The value of
the common stock was used to value the preferred stock since both
securities have the same entitlements. Approximately $5.3 million of value
was assigned to the outstanding New York Health Care options at July 19,
2002. The fair value of the options was determined using the Black-Scholes
valuation model. As part of the Agreement, if the two officers/directors
from New York Health Care are terminated from the Board of Directors prior
to the expiration of their employment agreements they will enter into
consulting agreements with New York Health Care for a period of not less
than five years commencing with the date of termination. As compensation,
New York Health Care will issue an option to each officer/director to
acquire 500,000 shares of New York Health Care common stock at the fair
market value on date of termination. These options are contingent upon
future services and will be recorded under EITF 96-18.
If at least $5 million but less than $6 million is raised in the private
placement and assuming the date of the consummation of the merger is
October 22, 2002 and such date is used as the measurement date, the
purchase price would be $19,750,000 (based on New York Health Care's common
stock, preferred stock and options outstanding at July 19, 2002) and the
closing price of New York Health Care's common stock on October 22, 2002
($5.10 per share, after giving effect to a one for one and one half reverse
stock split).
86
As of October 24, 2002, Bio Balance had raised $3,007,967 of the capital
required to be raised in its private placement as a condition of closing
the merger. Bio Balance has met with, and received indications of interest
from, various investors with respect to raising the balance of the $6
million private placement. Bio Balance management has indicated that it
expects to complete at least $5 million of the private placement on or
before January 2, 2003, and that it expects to complete the entire $6
million private placement either at the closing of the merger or within the
subsequent period permitted by the merger agreement. Based on the
information provided by Bio Balance management, the management of New York
Health Care expects that the entire $6 million amount will be raised.
As the merger has not yet been completed, the valuation of the convertible
preferred stock is, as set forth above, based on management's estimate that
the fair value of the underlying common stock of New York Health Care
approximates the fair value of New York Health Care's convertible preferred
stock. Management valued the preferred stock based on the common stock
because both securities have the same rights. The valuation of the
preferred stock reflected in the unaudited pro forma condensed consolidated
financial statements is preliminary. The actual valuation of the
convertible preferred stock will be based upon an independent valuation
obtained after completion of the merger. The adjustments included in the
unaudited pro forma condensed consolidated financial statements will change
based upon the final valuation of the convertible preferred stock. The
value may differ from the preliminary value included in the unaudited pro
forma condensed consolidated financial statements, which could result in a
change in the purchase price.
Under the purchase method of accounting, the total estimated purchase price
as shown in the table above is allocated to New York Health Care's net
tangible and intangible assets based on their estimated fair values as of
the date of the completion of the merger. As the merger has not yet been
completed, the allocation of the purchase price reflected in the unaudited
pro forma condensed consolidated financial statements is preliminary.
Management has not allocated the purchase price between goodwill and
intangible assets. It anticipates that substantially all of the intangible
assets portion of the purchase price will be allocated to goodwill. The
actual purchase price allocation to reflect the fair values of assets
acquired and liabilities assumed will be based upon an independent
valuation of the allocation of the purchase price. The adjustments included
in the unaudited pro forma condensed consolidated financial statements will
change based upon the final allocation of the total purchase price. The
allocation may differ from the preliminary allocation included in the
unaudited pro forma consolidated financial statements, which could result
in an increase in amortization of intangible assets.
Preliminary estimated purchase price allocation:
Net tangible assets of NYHC (includes effect of
pro forma adjustment due to change in control) $ 1,410,000
Intangible (substantially all goodwill) 19,240,000
-------------
Total preliminary estimated purchase price $ 20,650,000
=============
87
The unaudited pro forma condensed consolidated financial statements give
effect to the acquisition as if such transaction occurred for balance sheet
purposes on June 30, 2002 and for the statement of operations purposes on
May 21, 2001 with respect to Bio Balance and January 1, 2001 with respect
to New York Health Care.
The market price ($5.30 per share) used to determine the purchase price was
based on an average closing price over several days before and after the
announcement of the merger. Subsequent to the measurement date the market
price has decreased and the stock was trading at approximately $5.12 on
September 16, 2002. A drop in the market price may result in an immediate
impairment in the value of goodwill recorded at the date of the closing of
the merger. The aggregate impact has not been determined. The above market
prices give effect to the one for one and one half reverse stock split
contemplated in the merger.
Of the total estimated purchase price, approximately $19.24 million has
been allocated to goodwill and other intangibles. Goodwill represents the
excess of the purchase price of an acquired business over the fair value of
the underlying net tangible and intangible assets. Management anticipates
that substantially all of the intangible assets portion of the purchase
price will be allocated to goodwill.
In accordance with the Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets," goodwill and intangible assets with
indefinite lives recorded in this merger will not be amortized but instead
will be tested for impairment at least annually (more frequently if certain
indicators are present). In the event that the management of the
consolidated company determines that the value of goodwill or intangible
assets with indefinite lives has become impaired, the consolidated company
will incur an accounting charge for the amount of impairment during the
fiscal quarter in which the determination is made.
2. Pro Forma Adjustments
Pro forma adjustments are necessary to reflect certain transactions that
are required to occur prior to the effective date of the merger, to reflect
the estimated purchase price, to adjust amounts related to New York Health
Care tangible and intangible assets to a preliminary estimate of their fair
values, and to reflect value of Bio Balance's options/warrants that will be
exchanged for New York Health Care's options/warrants.
88
(a) Completion of a Private Placement by Bio Balance
The Agreement requires certain actions to take place prior to closing. One
of the actions is for Bio Balance to have completed a Private Placement in
which it seeks to raise gross proceeds of $6 million for the sale of Bio
Balance common stock. If the Private Placement does not raise $6 million
but raises at least $5 million certain shareholders of Bio Balance will
defer receipt of an aggregate of 3,222,222 shares issuable at closing of
the New York Health Care common stock, and New York Health Care will
undertake a private placement of its common stock, on terms no less
favorable to New York Health Care than those of the Bio Balance private
placement for up to 120 days after the closing to complete the unsold
portion of the Bio Balance private placement. If New York Health Care
raises the balance of the Bio Balance private placement funding, the
deferred shares will be issued. If the Bio Balance Private Placement does
not raise at least $5 million by the closing, the proposed merger will be
cancelled. At June 30, 2002, Bio Balance had raised gross proceeds of
approximately $2.8 million. The pro forma condensed consolidated balance
sheets reflect assumptions as to raising either $5 million or $6 million in
the Private Placement. The adjustment reflects the anticipated raising of
additional gross proceeds of $2.2 million and net proceeds of $2.1 million
for approximately 755,000 common shares of Bio Balance. The next adjustment
column reflects an additional raise of $1 million in gross proceeds and of
$954,000 of net proceeds for the deferred 3,222,222 shares of New York
Health Care common stock.
(b) Acquisition of New York Health Care by Bio Balance
Bio Balance will acquire New York Health Care for an aggregate
consideration valued at approximately $20.65 million comprised of:
o $13.1 million based on the value of the common stock based on an
average share price for the six day period ending on July 24, 2002 and
consisting of approximately 21.3 million shares of common stock of New
York Health Care.
o $2.1 million is based on the fair value of the preferred stock.
o $5.3 million of fair value was assigned to the New York Health Care
options outstanding (1,036,833) at July 19, 2002. The number of
options outstanding gives effect to the one for one and one half
reverse stock split contemplated in the merger.
o $150,000 value for Bio Balance's estimated transaction costs.
89
The fair value of the shares of New York Health Care common stock was
determined by treating the market value of the New York Health Care stock
at July 19, 2002 as having been effectively received by New York Health
Care shareholders. The fair value of the preferred stock was determined
based on the fair value of the underlying common stock. The fair value of
the stock options was determined by reference to an option-pricing model
and the number of New York Health Care options was treated as having been
granted by Bio Balance under reverse acquisition accounting rules. To
determine the fair value of these options, the following assumptions were
used: expected volatility of 153%; risk-free interest rates ranging from
4.09% to 4.88% and expected lives of approximately 5.6 years.
The adjustment to additional paid-in capital was determined as follows:
Purchase price $20,650,000
Bio Balance's transaction costs (150,000)
------------
$20,500,000
============
The adjustment also eliminates the historical deficit ($342,581),additional
paid in capital ($4,733,131),common stock ($37,500), preferred
stock($5,904) and treasury stock($31,483)of New York Health Care and Bio
Balance's transaction costs ($150,000). The adjustment records the fair
value of New York Health Care tangible and intangible assets, including the
liability due to officers due to a change in control of New York Health
Care. New York Health Care's estimated fair value at June 30, 2002
approximates book value except that the value of the deferred tax assets
and goodwill was not included.
NYHC book value at June 30, 2002 $ 4,400,000
Deferred taxes (262,000)
Goodwill (1,375,000)
Liability due to change in control (1,353,000)
----------
Fair value of NYHC assets $ 1,410,000
==========
(c) To record the recapitalization of Bio Balance. This includes the
elimination of Bio Balance's common stock and recording the common
stock and preferred stock of New York Health Care that will be
outstanding after the merger.
(d) To record value of compensation expense resulting from the exchange of
Bio Balance's options/warrants to New York Health Care's
options/warrants. These options/warrants are being accounted for
because the intrinsic value of the options/warrants immediately after
the merger is greater than the intrinsic value of the award
immediately before the merger. These options/warrants will be recorded
as variable options/warrants after the merger. The vested portion is
not shown as an expense in the pro forma condensed consolidated
financial statements because it is non-recurring. The unvested portion
is expensed in the proforma condensed consolidated financial
statements as if the merger was to have occurred on January 1, 2001.
This expense is considered recurring because it would have been
expensed by Bio Balance without completing the merger.
(e) To record an additional $1 million in proceeds and the issuance
3,222,222 shares of New York Health Care common stock.
90
3. Pro Forma Earnings (Loss) Per Share (1)
Pro forma loss per share has been determined based on the amount of pro
forma net income (loss) divided by the sum of the weighted average number
of shares of New York Health Care outstanding during the periods plus the
additional shares issued by New York Health Care in the acquisition and
immediately prior to the acquisition.
For the year ended December 31, 2001 $5 million $6 million
------------------------------------ Raised Raised
---------- ----------
Shares used to compute NYHC basic loss
per share 2,454,179 2,454,179
Shares issued in merger 18,111,112 21,333,334
---------- ----------
Shares used to compute pro forma basic
loss per share 20,565,291 23,787,513
========== ==========
For the year ended December 31, 2001 $5 million $6 million
------------------------------------ Raised Raised
---------- ----------
Shares used to compute NYHC diluted
loss per share 2,454,179 2,454,179
Shares issued in merger 18,111,112 21,333,334
---------- ----------
Shares used to compute pro forma diluted
loss per share 20,565,291 23,787,513
========== ==========
For the six months ended June 30, 2002
--------------------------------------
Shares used to compute NYHC basic loss
per share 2,467,547 2,467,547
Shares issued in merger 18,111,112 21,333,334
---------- ----------
Shares used to compute pro forma basic 20,578,659 23,800,881
========== ==========
For the six months ended June 30, 2002
--------------------------------------
Shares used to compute NYHC diluted loss
per share 2,467,547 2,467,547
Shares issued in merger 18,111,112 21,333,334
---------- ----------
Shares used to compute pro forma diluted
loss per share 20,578,659 23,800,881
========== ==========
(1) The information for New York Health Care gives effect to the one for one
and one half reverse stock split contemplated in the merger.
91
BIO BALANCE BUSINESS
General
Bio Balance is a development stage company, which owns "probiotic"
technology and intellectual property and has engaged in the research,
development and limited marketing in Israel of a product for the treatment of
gastrointestinal diseases and disorders in animals and humans, including
irritable bowel syndrome ("IBS") and chronic diarrhea.
"Probiotics" are living microorganisms or microbial mixtures which are
administered to benefit the animal or human host by improving its microbial
balance by stimulating the growth of healthy bacteria. Bio Balance has filed
numerous patent applications in Israel, the United States, and abroad on its
core technologies.
Bio Balance's first product, PROBACTRIX(TM) has undergone toxicity and
animal studies in established laboratories in Israel and the former Soviet Union
and has received approval from the State of Israel, Ministry of Agriculture,
Division of Animal Feed Quality Assurance for veterinarian use and from the
State of Israel, Ministry of Health for use as a human food supplement.
PROBACTRIX(TM) was available in Israeli pharmacies from August 2000 until July
2001 when Bio Balance entered into an agreement to acquire all rights with
respect to the product. PROBACTRIX(TM) consists of a proprietary strain of
non-pathogenic (i.e. non-toxic) M-17 Escherichia Coli ("E.coli") bacteria
preserved in a proprietary vegetable extract formulation. Various clinical
studies in the former Soviet Union and in Israel, as well as published
scientific articles support the beneficial effects of non-pathogenic E.coli.
Bio Balance intends to comply with applicable requirements for the
introduction of its first product, PROBACTRIX(TM), to the United States market
as a medical food. Medical foods are not subject to the FDA regulatory criteria
and market clearance standards applicable to "drugs". Instead, medical foods are
food for special dietary use. As such, medical foods may be marketed following a
self-determination that the products functional ingredient is "generally
recognized as safe" (GRAS), and that the product meets the definitional medical
food criteria. Bio Balance commenced the GRAS determination process in the
spring of 2002 and presently expects completion of that process in 2003.
Following completion of GRAS and medical food determination, and assuming GRAS
and medical food status is determined, Bio Balance intends to conduct at least
two clinical trials to obtain statistically significant data to support
marketing efforts before commencing marketing of PROBACTRIX(TM) in the United
States.
As a secondary product offering, Bio Balance also plans on introducing a
version of its product as a pharmaceutical drug and thereafter market the
product in the United States. FDA approval of the product as a pharmaceutical
drug is a time consuming and costly process requiring extensive clinical studies
to prove the safety and efficacy of a product. Clinical studies and clearance of
a pharmaceutical drug can cost $50 million or more and require 2 to 5 years to
complete. Because of its ability to market PROBACTRIX(TM) as a medical food, and
because of the time and cost associated with introduction of PROBACTRIX(TM) as a
pharmaceutical drug, Bio Balance has not as yet commenced the FDA approval
process and has no current time table to begin that process. Bio Balance does
not expect to commence the FDA approval process unless and until it can secure
adequate financing to support that effort. Bio Balance was incorporated on May
21, 2001 in the State of Delaware under the name The Zig Zag Corp. and changed
its name to The Bio Balance Corp. in September 2001. From its inception, Bio
Balance has been a development stage company and has not generated any revenues.
From inception to August 15, 2002, Bio Balance has raised gross proceeds of
approximately $3,734,000 from the private placement of 9,816,614 shares of its
common stock to investors other than the founders.
92
Recent Purchase of Technology
In July 2001, Bio Balance acquired all the intellectual property rights it
uses in its business from Danron Ltd., Uprising Investment Ltd., and Kimmey
Trading Ltd., each of which was engaged in the research, development, limited
marketing and sales of probiotic bacteria, and other technology for cash
consideration of $510,000 and an aggregate of 990,000 Bio Balance shares. The
assets purchased consist of all know-how, patent applications, contracts and
other intellectual property rights possessed by Danron Ltd., Uprising Investment
Ltd., and Kimmey Trading Ltd., including pending U.S., Israeli and international
patent applications, relating to the following:
1. isolation, propagation and analysis of probiotic bacteria;
2. live microbial food supplement and the technology for its manufacture and
preservation;
3. live microbial preparations and the technology for their manufacture and
preservation for use in various industrial and environmental applications,
including, but not limited to, the production and use of bioactive filters,
fermentation processes, production, storage and use of bio-pesticides and
production storage and use of oil-spills degrading bio-preparations;
4. production, analysis and use of plant derived extracts having beneficial
therapeutic activity; and
5. production, analysis and use of plant derived extracts having beneficial
microbial preservation activity.
The 990,000 shares are subject to an eight-month escrow period, which ended
on April 18, 2002 in order to allow for compensation of Bio Balance for any
claims, losses, liabilities, etc. incurred by Bio Balance, its officers or
directors as a result of any inaccuracy or breach of a representation or
warranty of Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. or
failure of Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. to
perform their obligations.
Pursuant to the terms of the Asset Purchase Agreement, in the event of a
transaction providing for a stock-for-stock exchange, Danron Ltd., Uprising
Investment Ltd., and Kimmey Trading Ltd. shall in exchange for the Bio Balance
shares receive a like number of shares of the common stock of the surviving or
acquiring entity (in this case, New York Health Care). If the valuation of the
New York Health Care shares received by Danron Ltd., Uprising Investment Ltd.,
and Kimmey Trading Ltd. in the transaction is less than $1,980,000, Danron Ltd.,
Uprising Investment Ltd., and Kimmey Trading Ltd. are entitled to receive,
rounded down to the nearest whole number of New York Health Care shares, an
additional number of shares calculated as (A) (i) $1,980,000 divided by (ii) the
per share valuation of the New York Health Care shares in the transaction, minus
(B) the aggregate number of shares issued or issuable to Danron Ltd., Uprising
Investment Ltd., and Kimmey Trading Ltd. under the Asset Purchase Agreement. If
the New York Health Care shares are valued at less than $2.00 each upon
consummation of the transaction, each shareholder of Bio Balance other than
Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. will have the
amount of New York Health Care shares they would otherwise receive in the
transaction proportionately reduced.
93
Additionally, Danron Ltd., Uprising Investment Ltd., and Kimmey Trading
Ltd. were granted a 30-day buyback provision, enabling Danron Ltd., Uprising
Investment Ltd., and Kimmey Trading Ltd. to buy back the assets from Bio Balance
in the event a closing of the transaction, or an initial public offering of the
stock of Bio Balance, is not completed within 360 days of August 18, 2001 by
returning their 990,000 shares to Bio Balance together with repayment of the
cash portion of the purchase price, $510,000, with interest. Danron Ltd.,
Uprising Investment Ltd., and Kimmey Trading Ltd. have 30 days after the 360-day
period to exercise their buyback. In the event Danron Ltd., Uprising Investment
Ltd., and Kimmey Trading Ltd. exercise their buyback right, Bio Balance will be
forbidden for a period of three (3) years from the date of exercise of the
buyback right to engage directly or indirectly in the development, manufacture
and marketing of any product using the E.coli bacteria. In such case, Bio
Balance will be forced to shut down its operations. The Exchange Agreement
described below will qualify as a "transaction" and, if completed within the
period permitted in the Asset Purchase Agreement (originally, by August 13,
2002), Danron Ltd., Uprising Investment Ltd., and Kimmey Trading Ltd. will have
no further buyback rights to the assets.
On July 26, 2002, each of Danron Ltd. and Kimmey Trading Ltd. executed an
amendment to the Asset Purchase Agreement, and on August 28, 2002 Uprising
Investments Ltd. executed the amendment, deferring the commencement of the
buyback period until November 13, 2002. In October 2002, Danron Ltd., Kimmy
Trading Ltd. And Uprising Investment Ltd. executed a further amendment to the
Asset Purchase Agreement deferring commencement of the buyback period until
January 2, 2002. Although the Bio Balance Exchange Agreement with New York
Health Care will qualify as a "transaction" described above, the transaction is
subject to various conditions prior to closing the exchange. In the event the
exchange is not consummated by January 2, 2003, Danron Ltd., Uprising Investment
Ltd., and Kimmey Trading Ltd. will have the right to buy back the assets.
Irritable Bowel Syndrome
Description of Irritable Bowel Syndrome ("IBS")
Irritable bowel syndrome is a chronic gastrointestinal disorder
characterized by a combination of chronic or recurrent gastrointestinal
symptoms, accompanied by pain that can be severe at times. Chronic illness may
involve repeated episodes of deterioration in which the patient confronts and
adjusts to the effects on ones lifestyle. Similar to other common chronic
conditions, it is a disorder that needs to be taken very seriously.
94
The cause of IBS is not known and there is no cure. The symptoms appear to
be due to an increased sensitivity of the bowel, which results in spasm of the
bowel muscle. IBS is a disorder of the way in which the bowel functions. It is
sometimes referred to as a `functional bowel disorder' because there are no
physical signs of disease when the colon is examined.
IBS is a disturbance in the regulation of bowel function. In IBS the normal
rhythmic wave pattern of the gut (peristalsis) is disrupted and spasms of the
bowel muscle can occur. This disruption of brain-gut function can result in
symptoms that include pain and altered bowel function including diarrhea and/or
constipation.
When a person has IBS, the muscles in the bowel are very sensitive. Food or
stress that would not affect a normal person can cause pain, bloating, and
diarrhea to someone with IBS. Other symptoms can include gas, nausea, vomiting,
and mucous in the stool. About 30% of people affected by IBS will experience
mainly diarrhea and about 20% will experience mainly constipation. The remainder
will experience symptoms that alternate between constipation and diarrhea.
The impact of IBS symptoms ranges from inconvenience to disabling. It is
comparable to other chronic diseases. For the millions of IBS sufferers with
multiple symptoms, there has been little that provides sustained relief from
pain, diarrhea, and the constant sense of urgency to have a bowel movement.
IBS causes a great deal of discomfort and distress, even if it does not
cause permanent intestinal harm. It does not lead to intestinal bleeding of the
bowel or to serious diseases such as cancer. For some, IBS is just a mild
annoyance, but for many people it can be disabling. They may be afraid to go to
social events, to a work, or travel even short distances. Hope often shifts from
the desire for a cure to just finding ways to cope with the disease.
IBS robs people of daily life. For some this occurs in small ways. They are
barely noticeable until they realize they have given much of their life to
coping with the disorder. For others it is very dramatic. Day after day it
causes one to be afraid to leave home. They constantly fear experiencing fecal
incontinence--at work or school, in a social setting, or even in the privacy of
their own home. Painful intestinal cramping and diarrhea overwhelm their body.
It is difficult for those who do not experience the severity of IBS to
imagine what daily living is like. Imagine waking everyday, or even several
times a week, with GI flue like symptoms. You feel severe abdominal cramping to
the point of being doubled over in pain, accompanied by nausea, and diarrhea.
You may be in your bathroom for an hour or more before, exhausted, you feel you
can leave your home. You plan your day around the availability of restrooms. You
are hesitant to eat because symptoms might start all over again. You sometimes
miss work, or cancel appointments because of IBS.
95
It affects not only your professional or educational life, but your
personal life as well. It is difficult to plan trips, eat in restaurants, go to
a movie, take public transportation, or even go for a walk--you need quick or
immediate access to a bathroom. Your fear of not making it to a bathroom, of
having an "accident," can be disabling. Your friendships and your most intimate
relationships are affected. Your disease is invisible as you strive to hide it
from others but it affects every aspect of your life.
IBS presents some unique challenges. To patients, the symptoms are often
unmentionable and embarrassing, and to physicians, in the absence of structural
abnormalities, symptoms may be relegated to being "psychiatric," or not truly
existing as clinical entities. However, the understanding of IBS pathophysiology
and treatment has changed dramatically over the past decade and the disorder is
not perceived as "illegitimate."
- - Number of Affected Individuals
According to IBS Self Help Group, an organization formed to support those
who suffer from IBS, IBS (1) is more prevalent in the U.S. than depression,
asthma, diabetes and coronary heart disease, (2) affects an estimated 40 million
Americans, and (3) is the second leading cause of school and work absenteeism
behind the common cold. The Mayo Foundation for Medical Education and Research
states, at its web site MayoClinic.com, that IBS is one of the most common
gastrointestinal disorders that physicians see accounting for approximately 3
million physician visits annually in the United States.
According to a Pharmacor study published in 2001 by Decision Resources, in
1999, the total number of diagnosed IBS patients in the seven major
pharmaceutical markets was 16.5 million with diagnosed cases in those markets
expected to increase to 19.4 million in 2009. This number does not take into
account undiagnosed IBS sufferers. Experts, according to the Pharmacor study,
estimate that nearly 20% of the world's population suffers from IBS.
In a large U.S. survey undertaken on irritable bowel syndrome (www.ims-
global.com//insight/news-story991122a.htm) published in September 1999, nearly
40% of women reported experiencing abdominal pain they described as intolerable
without some kind of relief. Moreover, regardless of the severity of their
abdominal pain, most women in the survey said that their symptoms forced them to
miss days from work, limit travel, or avoid social outings.
- - Current treatments
To date, there has been no cure for IBS, and the cause of IBS remains
unknown. The common "treatment" has been a combination of sensible diet, stress
management, and a program of therapeutic supplements and/or prescription drugs
including laxatives, anti-diarrheal and anti-spasmodic products. A significant,
unmet market lies in the treatment of IBS.
Recognizing this significant market potential, several large pharmaceutical
companies have spent a great deal of money and effort to address this problem
and failed. The following are the medical community's most recent unsuccessful
attempts for an effective treatment of IBS:
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Lotronex(R): On February 9, 2000, GlaxoWellcome's IBS drug Lotronex(R)
(alosetron hydrochloride) a potent and selective 5HT3 receptor antagonist, was
approved by the FDA for the treatment of IBS in female, diarrhea predominant
patients. Lotronex(R) had been shown in two large (>600 patients), placebo
controlled studies to be of benefit in the treatment of non-constipated, female
IBS patients. The principal benefit was observed in those with
diarrhea-predominant disease. Many patients with diarrhea-predominant IBS found
relief in Lotronex(R). From March 2000 to November 2000, more than 450,000
prescriptions were dispensed. This rapid market acceptance of Lotronex(R) can be
explained by the lack of an effective treatment, as well as by the concentrated
active proscriber base for the gastrointestinal (GI) market. While Lotronex(R)
may have benefited many, its effects were short-lived. On November 28 2000,
GlaxoWellcome voluntarily pulled Lotronex(R) from the market upon the FDA's
request after safety concerns arose over reports of serious gastrointestinal
side effects associated with the drug. Such side effects included extreme
constipation and in some rare cases fatal ischemic colitis. In June 2002, the
FDA approved reintroduction of Lotronex(R) under a risk-management program
limiting the drug's use to women who have severe IBS characterized predominantly
by diarrhea and who have failed conventional therapy.
Zelmac(R): (tegaserod) developed by Novartis and Bristol-Myers Squibb acts
similarly to Lotranex(R), as antagonists of the neuronal receptors thought to be
responsible for motility and bowel pain. In May, 2001, Novartis and
Bristol-Myers Squibb announced that they were voluntarily withdrawing the
marketing application for Zelmac(R) from the European Agency for the Evaluation
of Medicinal Products as the Committee for Proprietary Medicinal Products had
expressed concerns regarding "the relevance of the observed clinical effect" and
also questioned the methodological conduct of some preclinical studies.
Renzapride(R): developed by Alizyme Inc. is a 5-HT4 receptor agonist /5-HT3
receptor antagonist, receptors that influence gastric motility. It is currently
in Phase II trials. In October 2000, Alizyme announced positive results from its
Phase IIa clinical trial of ATL-1251, which was conducted in patients with
constipation-predominant irritable bowel syndrome. They have also received
approval to commence a Phase II b clinical trial for 500 people. People given
ATL-1251 demonstrated an improvement in a number of symptoms associated with IBS
and ATL-1251 was generally well tolerated.
Probiotics
- - The Gastrointestinal (GI) Tract
The primary role of the gastrointestinal tract is to digest food and absorb
nutrients in order to meet the metabolic requirements and demands needed for
normal human growth and development. The gastrointestinal tract functions as a
barrier against antigens from microorganisms and food. Immuno-physiologic
regulation in the gut depends on the establishment of indigenous microflora.
97
Furthermore, the intestinal mucosa provides a protective host defense
against the constant presence of antigens from food and microorganisms in the
gut lumen. Protection against potentially harmful agents is ensured by many
factors, including saliva, gastric acid, peristalsis, mucus, intestinal
proteolysis, and specifically the intestinal micro-flora. Because some of these
bacteria are beneficial to health while others are dangerous, the microbial
colonization of the intestine has important health implications for humans,
ranging from infection susceptibility to toxic or carcinogenic effects.
Microbial colonization (the clinging of bacteria to the intestinal wall)
begins after birth, but the development of the intestinal microflora and the gut
barrier is a gradual process. The maternal intestinal flora is a source of
bacteria colonizing the newborn's intestine. Colonization is also determined by
contact with its surroundings. Initially, facultative anaerobic strains
dominate. Thereafter, differences exist in the composition of species, primarily
influenced by choice of diet. After weaning, the composition of the microflora
resembles that of the adult flora. Although bacteria are distributed throughout
the intestine, the major concentration of microbes can be found in the large
intestine.
It is estimated that the human intestine contains more that 400 different
bacterial species and approximately 100 trillion (1014) bacterial cells, which
is more than ten times the number of cells comprising the human body. The most
prevalent resident bacterial species inhabiting the adult intestinal tract in
Western societies include Bacteroides, eubacteria, peptostreptococci,
bifidobacteria, enterobacteria, streptococci, lacto bacilli, clostridia and
staphylococci.
The intestines of man and animals constantly have both beneficial or good
microorganisms (e.g. L. acidophilus, L. casei, and L. bifidus), and pathogens or
bad microorganisms (e.g. Salmonella typhimurium, Staphlococcus aureus, E. Coli
and Colstridium perfringens). These populations of organisms wage a constant war
with each other in order to maintain a proper balance. The unfriendly pathogenic
microbes are beneficial to the ecology of the intestines when they are in the
minority and in balance with the friendly beneficial bacteria. When pathogenic
microbes significantly outnumber the beneficial ones, health problems result.
For optimum "gut flora balance," the beneficial bacteria should predominate,
presenting a barrier to invading pathogenic organisms. Approximately 85% of the
intestinal microflora in a healthy person should be beneficial bacteria and 15%
pathogenic bacteria.
The intestinal microflora is very important to the host for several
reasons. The gut microflora is an important constituent in the intestine's
defense barrier. The microflora increases resistance to new colonization, or
invasion by pathogenic organisms. They also protect against the overgrowth of
already-present potentially pathogenic organisms. Another important intestinal
flora function is its high metabolic activity. The host is further protected
because the gut microflora elicit specific immune responses at a local and a
systemic level.
In addition to participation in tolerance induction, intestinal
colonization acts as an important antigenic stimulus for the maturation of the
gut-associated lymphoid tissue. The capacity to generate IgA-producing cells
progressively increases in response to intestinal antigenic stimulation,
particularly the establishment of the gut microflora. Upon colonization,
organisms have been shown to translocate to the mesenteric lymph node, but the
number of translocating bacteria begins to decrease with the onset of specific
IgA response, reflecting maturation of the intestine's immunologic defense
mechanisms. These results suggest that intestinal microflora are important in
human individuals and that qualitative differences in the composition of the
microflora might affect immunologic homeostasis.
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- - The GI Microflora Problem
Many factors affect the composition of the bacteria present in the
intestines. Throughout the human life cycle, conditions exist that produce
increased risk for infection, increased activity of opportunistic pathogens and
decreased protection from normal microflora. Several pathways can upset the
intestinal micro floral balance. The administration of antimicrobial agents
(antibiotics) is a common cause of micro floral imbalance. Stress to the host,
in the form of diet or climate, aging, medication, illness, infection,
geographic location, socioeconomic circumstances and lifestyle can upset this
balance and change the gut's pH and other environmental factors to favor the
growth of pathogens.
Micro floral imbalance leads to decreased resistance to pathogenic
colonization and to alterations in the metabolic activities of the intestinal
flora by the pathogenic bacteria. Diarrhea is the most common result, but other
GI disorders can also develop. Studies have found that these pathogens produce
endotoxins, which cause symptoms such as fever, leucopenia, circulatory
problems, and hyperglycemia.
The amount and type of fermentable material (i.e. growth substrate) in the
gut also plays a role in determining the bacterial species present. Diet, not
only regulates the species and concentration of microorganisms in the gut, but
also has been reported to influence the metabolic activities of those
microorganisms. Thus, it may be possible, at least transiently, to manipulate
the gut microbiotia through bacterial supplementation.
It is the recognition of the effects of colonizing microbes in association
with the human body and the combination of wanting to encourage the positive and
discourage the negative properties of invading microbes that have led to
probiotic theory. The demonstration that the gut microflora are an important
constituent in the intestinal mucosal barrier has introduced the concept of
probiotic therapy: the therapeutic application of potentially beneficial
microorganisms, which act as probiotics.
"Probiotics" are live microorganisms or microbial mixtures that are
administered to benefit the animal or human host by improving its microbial
balance by stimulating the growth of healthy bacteria.
The criteria for a microorganism to be defined as probiotic include that
the strain
be of human origin,
be safe for human use,
be stable in acid and bile,
adhere to the intestinal mucosa.
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The establishment of proper microflora balance in the natural microflora
has led to the introduction of novel therapeutic interventions based on the
consumption of cultures of beneficial live microorganisms that act as
probiotics. The positive results from human volunteer or clinical studies, even
in the absence of compelling mechanistic studies, provide validity to the
probiotic concept. This concept has been developed further through the decades,
and today, especially in Europe and Japan, probiotic-focused research, product
development and marketing are at an all-time high.
In addition to their proposed direct effects on humans, probiotics may have
additional utility in animal agriculture. Probiotics have been tested for
preventing pathogens of animal origin from colonizing in food animals, and the
products derived from them. Probiotic bacteria can be found worldwide in a
variety of products, including conventional food products, dietary supplements
and medical foods.
The probiotic theory offers an intriguing approach to controlling negative
metabolic or pathogenic activities of microbes to which we are exposed on a
daily basis. Probiotics have the ability to provide this benefit. Dietary
probiotic approaches have obvious advantages in terms of cost, reduced side
effects and ease of market penetration to large numbers of people, when compared
to standard drug based solutions.
- - History of Probiotics
Microbes have been essential to food and alcoholic fermentations for
thousands of years. Over the last century, different microorganisms have been
used for their ability to prevent and cure diseases, leading to the coining of
the term probiotics, or "pro-life". The concept of probiotics evolved around
1900, when Nobel Prize-winning Elie Metchnickoff hypothesized that the long,
healthy lives of Bulgarian peasants were the result of their consumption of
fermented milk products.
The first clinical trials were completed in the 1930s regarding probiotic
effects on constipation. Research on probiotics has steadily increased since
then, much of it taking place in Europe and Asia. Worldwide, probiotics are
currently available in a variety of food products and supplements. In the U.S.,
food products containing probiotics are most exclusively dairy products - fluid
milk and yogurt - due to the historical association of lactic acid bacteria with
fermented milk. The most frequently used bacteria in these products belong to
the Lactobacillus and Bifidobacterium species.
Due to their long history of use in food fermentation, the FDA has
designated many probiotics to be generally recognized as safe (GRAS). Even for
those without GRAS status, the industry has used probiotic bacteria in food
fermentations with the assumption that their history of use implies their
safety. The food industry will need to carefully assess the safety and efficacy
of probiotics before incorporating them into food products.
100
- - Probiotic Selection Criteria
Historically the selection of probiotic strains has been based on the
criteria of efficacy and the absence of side effects. Additional criteria for
the use of appropriate strains include the ability to 1) exert a beneficial
effect on the host 2) survive transit through the intestinal tract 3) adhere to
the intestinal epithelial cell lining 4) produce antimicrobial substances that
target pathogens 5) stabilize the intestinal microflora. For probiotics to be
commercially viable, they must have viable shelf life in food or preparations,
contain a large number of viable cells at the time of consumption and be both,
non-pathogenic and nontoxic.
- - The Effect of Probiotics
Published scientific literature and clinical studies undertaken in Israel
and the former Soviet Union suggest that probiotics can decrease the incidence,
duration and severity of many gastrointestinal illnesses.
Specifically, the safety and efficacy of non-pathogenic E.coli has been the
subject of a number of clinical studies conducted in 1997 and 1998 at
twenty-seven medical research and therapeutic institutions in the former Soviet
Union and Israel, including various departments of the Moscow Medical Institute;
the G.N. Gabrichevsky Institute for Epidmiology and Microbiology in Moscow; the
Ministry of Health of the Dagestan Republic; various departments of the Russian
Academy of Medical Sciences; and the Rabin Medical Center at Tel Aviv
University, Israel. Those studies covered a broad range of uses of E.coli
including: clinical efficacy (1) in patients undergoing therapy, with
dyspeptical symptoms, developed following antibiotherapy, and in patients with
large bowel irritable syndrome, (2) in chronic gastrointestinal diseases
accompaied with diarrhea syndrome with subsequent development of intestinal
disbiosis, (3) in surgical diseases, (4) in pediatric patients, (5) in acute
infectious diarrheal diseases as a single therapeutic preparation, (6) in acute
infectious diarrhea, complicated by severe pathological background, (7) in the
treatment of patients with acute intestinal infections and viral hepatitis with
pronounced intestinal disbiosis, (8) in a region with increased infectious
morbibity, (9) in the treatment of diarrheal syndrom and intestinal disbiosis in
patients with HIV-infections, (10) in the prevention and treatment of diarrheal
syndrome and other intestintal dysfunctions induced by anticancer treatment and
late radiation enterocolitis, and (11) effect on the immune status of patients
with neoplastic cancers during radiation and chemotherapy. The results of those
clinical studies were reported in three publications released in 1999. In each
of those studies it was concluded that introduction of an E.coli probiotic was
effective in the treatment of symptoms studied with no observed safety concerns
being noted.
Additional studies on animals have been conducted with respect to the use
of E.coli probiotics, including an acute oral toxicity study on rats conducted
by Harlan Biotech Israel Ltd. in 1999 which study indicated that the product was
safe and nontoxic.
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Scientific articles supporting the potential beneficial effects of
probiotics, include: Probiotics and Functional Foods in Gastrointestinal
Disorders, Martin H. Flock, MD and JoAnn Hong-Curtiss, MD, Current
Gastroenterology Reports, 2001, 3:343-350; Non-pathogenic Escherichia coli
versus mesalazine for the treatment of ulcrative colitis: a randomised trial, BJ
Rembacken, ATR Axon, The Lancet, August 21, 1999, 354:635-639; Evaluation of
probiotic treatment in a neonatal animal model, D.J. Lee, R.A. Drongowski, A.G.
Coran, C.M. Harmon, Pediatric Surgery International, 2000, V. 4, No. 4, 237-242;
Probiotics and E.coli Infections in Man, R. Lodinova-Zadnikova, U. Sonnenborn,
H. Tlaskalova, The Veterinary Quarterly, V. 20, Supp. 3, June 1998, S78-S81;
Antagonistic effect of Lactobacillus acidophilus, Saccharomyces boulardii and
Escherichia coli combinations against experimental infections with Shigella
flexneri and Salmonela enteritidis subsp. typhimurium in gnotobiotic mice,
J.V.M. Filho-Lima, E.C. Vieira and J.R. Nicoli, Journal of Applied Microbiology,
March 2000, V. 88, No. 3, 365-370; and Escherichia coli as a Probiotic?, G.J.
Jansen, A.C.M. Wildeboer-Veloo, D. van der Waaij, J.E. Degener, Infection 26
(1998) No. 4, 232-233
Those publications and studies indicate that probiotic bacteria, and
specifically E Coli:
- -- preserve intestinal integrity and mediate the effects of a number of other
intestinal diseases;
- -- encourage the colonization of the gut and the restoration of micro floral
balance;
- -- can prevent the overgrowth of potential pathogens in the gastrointestinal
tract;
- -- improve symptoms of inflammatory bowel disease (IBD), and ulcerative
colitis with consumption of certain strains of lacto bacilli;
- -- may inhibit the gastric colonization and activity of Helicobacter pylori,
which is associated with gastritis, peptic ulcers and gastric cancer;
- -- are useful in the treatment of many types of diarrhea, including
antibiotic-induced diarrhea in adults, travelers' diarrhea and diarrheal
disease in young children caused by rotaviruses;
- -- promote the endogenous host defense mechanism, in addition to the effects
of probiotics on non-immunologic gut defense that are characterized by the
stabilizing of the gut;
- -- enhance both specific and nonspecific immune responses;
Those publications and studies showed no harmful inflammatory response from
the use of probiotics.
Because diarrhea is a major cause of infant death worldwide and can be
incapacitating in adults, the widespread use of probiotics could be an
important, non-invasive means to prevent and treat these diseases, particularly
in developing countries.
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The action of microorganisms during the preparation of cultured foods or in
the digestive tract has been shown to improve the quantity, availability and
digestibility of some dietary nutrients. In addition to nutrient synthesis, the
actions of microorganisms in the digestive tract can, to a limited extent
improve the digestibility of some dietary nutrients. These nutrients, such as
enzymes, are released into the intestinal lumen that exerts synergistic effects
on digestion, alleviating symptoms of intestinal malabsorption. In addition,
SCFA concentration helps to maintain an appropriate pH in the colonic lumen,
which is critical in the expression of many bacterial enzymes and in foreign
compound and carcinogen metabolism in the gut.
Probiotics may also suppress viable counts of an undesired organism in
other ways. They can produce antibacterial compounds and compete for nutrients
or physical real estate on the intestine wall. Both are properties that the bad
organisms need to survive. Further, they may alter the microbial metabolism by
increasing or decreasing enzyme activity. They may additionally stimulate the
immune system by increasing antibody levels. The probiotic elements themselves
are bound to the carrier in a manner that protects the beneficial microorganisms
from the above activities during their passage through the GI tract.
- - How Probiotics Works
The mechanism(s) by which probiotics exert their effects on the host are
still speculative. Probiotics may antagonize pathogens directly through
production of antimicrobial and antibacterial compounds such as cytokines,
hydrogen peroxide, bacteriocins, and butyric acid. Probiotics target specific
groups of pathogenic organisms. This decreases the number of pathogens by
affecting their metabolism or by stimulating immunity to them.
Probiotics reduce gut pH by stimulating the lactic acid - producing
microflora, competing for binding and receptor sites that pathogens occupy
improving immune function and stimulating immunomodulatory cells or producing
lactase which aids in lactose digestion.
Competitive colonization enables probiotics to compete for binding and
receptor sites that pathogens occupy, thereby minimizing the ability of
pathogens to colonize and grow. Probiotic bacteria compete with pathogens for
available nutrients and other growth factors removing the nourishment that the
pathogens need to survive.
Among the possible mechanisms of probiotic therapy is the promotion of the
non-immunologic gut defense barrier, which includes the normalization of
increased intestinal permeability and altered gut micro ecology. Another
possible mechanism of probiotic therapy is improvement of the intestinal tract
immunologic barrier, particularly through intestinal immunoglobulin A responses
and alleviation of intestinal inflammatory responses, thereby producing a
gut-stabilizing effect. Many probiotic effects are mediated through immune
regulation, particularly through balance control of proinflammatory and
anti-inflammatory cytokines.
103
It is uncertain whether the ability of probiotics to adhere to intestinal
mucosal cells is required for optimal health effects. Some experts believe that
adhesion is necessary, with adhesion properties depending upon bacterial
concentration, resident pH, transit time, and dietary factors. Others believe
that probiotics exert their effect through only a loose affiliation with the
mucosal layer that does not require site-specific attachment. Microbes may exert
their effects without adhesion if consumed on a regular basis, as in the case of
yogurt bacteria aiding lactose digestion.
Bio Balance's Technology and Product
The basic active component in Bio Balance's product is M-17 Escherichia
Coli (E.coli), the most competitive bacterium in healthy microflora of man and
animals. It has been used for the preparation of Colibacterin, Bificon and other
medicines and food supplements.
Clinical studies of liquid food supplements with M-17 E.COLI were performed
in the former Soviet Union in the late 1980's. In those studies, and in studies
conducted in Israel, these biologically active food supplements were found
efficient in the treatment of intestine infections of various etiologies and
showed no harmful side effects.
- - Bio Balance Technology
Bio Balance's first product, PROBACTRIX(TM) is a non-pathogenic E-coli
based probiotic microorganism. PROBACTRIX(TM) contains a single species of a
non-pathogenic probiotic microorganism. Bio Balance believes the PROBACTRIX(TM)
formulation is useful in the restoration of normal GI function and Bio Balance
believes PROBACTRIX(TM) may be utilized to maintain or reinstate normal
gastrointestinal microflora. It may also aid in the prevention and/or treatment
of numerous gastrointestinal infections or disorders. The following list
highlights several diseases, infections, and disorders for which Bio Balance
believes PROBACTRIX(TM) can be effective:
IBS
Chronic diarrhea;
Infectious diarrhea caused by Salmonella or Shigella
C. Difficile, E. coli, Campylobacter, Clostridium, and other bacterium
Diarrhea resulting from antibiotic therapy, radiotherapy, or chemotherapy
Bio Balance also intends to explore the utility of PROBACTRIX(TM) in the
treatment of gastrointestinal complications of immune disorders.
The proprietary formulation used for Bio Balance's product consists of a
proprietary strain of non-pathogenic E. coli preserved in a proprietary
vegetable extract formulation. The proprietary strain of E. coli derives from an
organism that was originally isolated from the intestinal microflora of healthy
volunteers. The product is based on research and clinical studies by the
inventors. The technology and the processes comprise conditions that preserve
M-17 E.COLI in the biologically active form with a shelf life of one year at
room temperature.
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The formula was approved as a food supplement for human use by the Ministry
of Health of Israel in May 1998 and was approved for use as an animal food by
the Ministry of Agriculture of Israel in September 1998. In August 2000, Tetra
Pharm began supplying the formula to pharmacies in Israel and continued
manufacture and sale of the product until July 2001 when Tetra Pharm agreed to
cease manufacture and sale of the product in conjunction with its agreement to
sell all rights relating to the product to Bio Balance and after which date
production of the formula has been limited to supplying hospitals and
Universities where Bio Balance is conducting further research. The formula has
been extensively tested and used on animals (poultry and piglets) as well as on
a number of human volunteers with known gastrointestinal disorders. Bio Balance
is not aware of any side effects occurring as a result of the use of the
product. Bio Balance plans on introducing the product into the United States
market upon attaining GRAS and medical food status, including the successful
completion of at least two clinical trials designed to provide statistically
significant data supporting the effectiveness and safety of the product. There
can be no assurance that Bio Balance's product will satisfy applicable
regulations for use as a medical food in the United States or that the product
will ever be accepted as a medical technology.
The Need for FDA Approval of Bio Balance's Product
Government authorities in the United States and other countries extensively
regulate, among other things, the research, development, testing, manufacture,
labeling, promotion, advertising, distribution and marketing of products such as
PROBACTRIX (TM).
Bio Balance plans on introducing its product, PROBACTRIX (TM) into the
United States as a medical food. Bio Balance also plans, at a later date, to
introduce a different version of its product as an ethical drug. The regulatory
scheme varies greatly between a medical food and an ethical drug. Bio Balance's
preference is to introduce Bio Balance's product first as a medical food since
the approval process for a medical food will be both timely and cost effective.
- - Medical Foods
Overview. A "medical food" means a food which is formulated to be consumed
or administered enterally under the supervision of a physician and which is
intended for the specific dietary management of a disease or condition for which
distinctive nutritional requirements, based on recognized scientific principals,
are established by medical evaluation. Thus, unlike dietary supplement or
conventional foods, a medical food that is intended for the specific dietary
management of a disease or condition for which distinctive nutritional
requirements have been established may bear scientifically valid claims relating
to providing distinctive nutritional support for a specific disease or
condition.
Medical foods are distinguished from the broader category of foods for
special dietary use (e.g., hypoallergenic foods) and from foods that make health
claims (i.e., dietary supplements) by the requirement that medical foods be used
under medical supervision.
It should be noted, however, that medical foods are not foods that are
simply recommended by a physician or other health care professional as part of
an overall diet designed to reduce the risk of a disease or medical condition or
as weight loss products.
Regulations for medical foods review and/or listing as well as registration
requirements for medical foods manufacturers have not yet been established and,
for now, such products are reviewed on a case-by-case basis.
In order to be distributed in the U.S., medical foods are required to
conform to those regulations dealing with general food safety and labeling,
however, they do not have to include nutrition information on their labels, and
their claims do not need to meet specific standards but the label must clearly
state that the product is intended to be used to manage a specific medical
disorder or condition, and for use under medical supervision. Of course, the
product must meet the medical food definition, and be formulated so as to be
safe and efficacious as a medical food.
105
It should be noted, however, the FDA has for some time been exploring ways
to more specifically regulate medical foods. Some examples include methods for
safety evaluations, standards for claims, and requirements for specific
information on the labels. No due date for this initiative has been published,
and it is unlikely to occur in the near future. Should FDA establish more
stringent regulatory requirements for medical foods, this could significantly
impact the cost and timeline for bringing the PROBACTRIX (TM) product to market.
In order to market a product as a medical food, the product must satisfy
two specific criteria, (1) the product must meet the statutory definition of a
medical food, and (2) the ingredients in the medical food must be either
approved food additives or "generally recognized as safe" (GRAS). The time frame
for establishing PROBACTRIX' (TM) status as a medical food which contains GRAS
ingredients may be as short as 12 months and the cost could be as little as
several million dollars.
Unlike an ethical drug, marketing of a product as a medical food requires
no approvals of, or filings with, FDA(although voluntary filings may be made at
Bio Balance's discretion). Instead, a "self determination" process is utilized
to establish both satisfaction of the medical foods statutory definition and
GRAS status.
Statutory Definition Requirement. Bio Balance believes that PROBACTRIX (TM)
will satisfy the statutory definition of a medical food since it: (i) is a
formulated and processed product for the partial or exclusive feeding of a
patient by means of oral intake; (ii) is intended for the dietary management of
a patient who, because of therapeutic or chronic medical needs, has limited or
impaired capacity to ingest, digest, absorb or metabolize ordinary foodstuffs or
certain nutrients, or who has other special medically determined nutrient
requirements, the dietary management of which cannot be achieved by the
modification of the normal diet alone; (iii) provides nutritional support
specifically modified for the management of the unique nutrient needs that
result from the specific disease or condition, as determined by medical
valuation; (iv) is intended only for a patient receiving active and ongoing
medical supervision wherein the patient requires medical care on a recurring
basis, for among other things, instructions on the use of the medical food; and
(v) is intended for use under medical supervision.
GRAS Requirement. Under the current regulatory scheme, products coming
within the definition of a medical food must make a determination that the
ingredients in the product are either approved food additives or generally
recognized as safe (GRAS) before introducing the product to market. GRAS status
is determined by the company introducing the product without the need for any
pre-marketing clearance from the FDA, although a process of voluntary
notification to the agency is available, in which case the FDA has 90 days to
raise questions or objections to the GRAS self-determination.
Establishment of an ingredient as GRAS based upon scientific procedures
requires (1) technical evidence of safety and functionality for the intended use
and use levels as defined under the Federal Food, Drug and Cosmetic Act, and (2)
a conclusion that this technical evidence is generally known and accepted by
relevant experts. The technical elements standard of GRAS requires that
information about the substance establish that the intended use of the substance
is safe. Satisfaction of the "general recognition" requirement of GRAS,
106
according to the proposed rules, may be established through information
published in a peer-reviewed scientific journal, publication of data and
information in secondary scientific literature, such as scientific review
articles, textbooks and compendia, or the opinion or recommendation of an
authoritative body.
Bio Balance began the process of establishing GRAS status in the spring of
2002 with the retention of Daniel Kracov of Patton Boggs, who then hired Nancy
Rachman of Novigen Sciences/Exponent to develop and implement a process to
establish GRAS and to conduct clinical studies to obtain statistically
significant data to support the marketing of the product as safe and effective.
Under that process, (1) an exhaustive review and write-up relating to scientific
literature relating to the safety of the product will be performed, (2)
laboratory testing will be conducted to verify that the product in question is
the same as reflected in the scientific literature reviewed, and (3) a panel of
experts will review the literature and laboratory results and render an opinion
as to whether the product satisfies GRAS status.
A panel composed of the GRAS experts and additional members with relevant
expertise will also review PROBACTRIX (TM) for medical food status and provide
an opinion as to whether the product meets the medical food definition. As of
June 20, 2002, the literature review had been completed and laboratory testing
to verify the character of Bio Balance's product had been completed at one
university and similar testing at a second university was under way. Bio Balance
anticipates that completion of the GRAS and medical food determination process
will occur in 2003. The estimated cost of carrying out these determinations,
exclusive of any additional data development, is between $190,000 and $280,000.
While Bio Balance believes that the current regulatory rules will allow Bio
Balance to begin marketing its product as a medical food immediately following
determination of GRAS and medical food status based upon data currently under
development, prior to such determinations Bio Balance intends to undertake at
least two clinical trials to develop statistically sufficient efficacy data to
support marketing of its product for specific conditions. Those trials are
anticipated to require several months to perform and to cost approximately
$600,000 per trial.
Although Bio Balance intends to comply with the procedures and regulations
to establish and market its products a s medical food, there can be no assurance
that the FDA will not contest the GRAS status of the ingredients(s) in
PROBACTRIX (TM) or the status of our product as a medical food, in which case
introduction of our product to the market could be delayed for an extended
period, or indefinitely, pending resolution of the product's status or, in the
alternative, compliance with the regulatory process applicable to ethical drugs.
Biological Drug
Bio Balance also plans to introduce a different version of its product and
plans to apply to the FDA for approval of our product, PROBACTRIX(TM), as an
ethical drug.
Bio Balance believes that another version of our product may fall within
the scope of biological therapeutic or a biotechnology-derived product.
In contrast to most drugs that are chemically synthesized with a known
structure, most biological products are complex mixtures that are not easily
identified or characterized and are derived from living sources, such as humans,
animals, plants and microorganisms.
Biological products are approved for marketing under provisions of the
Public Health Service Act (PHS Act). However, because most biological products
also meet the definition of drugs under the Federal Food, Drug, and Cosmetic Act
(FD&C Act), they are also subject to regulation under the FD&C Act provisions.
Under the PHS Act, any company which wants to introduce a biological
product into the US market must hold a license for the product issued by CBER.
Licensing of biological products under the PHS Act is very similar to the new
drug approval process for human drugs under the FD&C Act. Following initial
laboratory and animal testing, a biological product is studied in clinical
trials in humans under an investigational new drug application (IND). If the
data generated by the studies demonstrate that the product is safe and effective
for its intended use, the data are submitted to CBER as part of a Biologics
License Application (BLA) for review and approval for marketing.
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- - Regulatory Requirements
Clinical Studies
Clinical development of a drug and biological drug product is often
described as consisting of three sequential phases (Phase I-III) with a fourth
(IV) post-approval phase.
Phase I Clinical Studies
Phase I starts with the initial administration of the investigational new
product into humans. Normally, studies in this phase have non-therapeutic
objectives and are conducted in healthy volunteers.
Phase I studies can be open; baseline controlled or, preferably, use
randomization and blinding to improve the validity of observations.
Phase II Clinical Studies
The primary objective of Phase II is to explore therapeutic efficacy in
patients. Phase II studies should be conducted in a group of patients who are
selected by relatively narrow criteria (i.e., a specific GI disorder), leading
to a relatively homogeneous population. An important goal of these studies is to
determine the dose and regimen for Phase III studies. Additional objectives to
be considered include evaluation of potential study endpoints, therapeutic
regimens (including concomitant therapies) and target populations (e.g., mild
versus severe disease).
Phase III Clinical Studies
The primary objective of Phase III studies is to demonstrate the
therapeutic benefit of the product, i.e., to confirm the preliminary evidence
accumulated in Phase II studies that the product is safe and effective for use
in the intended indication and target population. These studies are intended to
provide an adequate basis for the marketing approval and to support adequate
instructions for use of the product. That means that Bio Balance will have to
demonstrate that Bio Balance has already completed Phase I studies on animals
proving that the product is non-toxic and Phase II trials proving our efficacy.
In the event Bio Balance must file with the FDA for approval as a biological
drug, Bio Balance intends to consult with experienced FDA counsel to determine
if data compiled in previous clinical studies in the former Soviet Union and
Israel are sufficient to satisfy FDA Phase I and Phase II requirements. If that
data is not sufficient to satisfy those requirements, Bio Balance will be
required to begin with Phase I or Phase II studies.
The alternatives presented above significantly differ from each other in
many aspects. In respect to timetable, the faster path is the medical food
alternative whose approval process could take less than two years. With respect
to cost, the most expensive alternative is the drug path for which clinical
studies are an integral (and costly) part of it including the supporting
services that are required (e.g., laboratory testing, regulatory services, etc.)
with a cost of $50 million or more (depending on which Phase II or III) and
anywhere from 2 years to 5 years depending on which Phase Bio Balance must begin
with. The cost of the medical food path, on the other hand, would likely not be
in excess of $5,000,000. In the event Bio Balance is unable to convince the FDA
that Bio Balance is ready to move directly into Phase III testing, Bio Balance
plans on proposing to the FDA an advanced Phase II stage - efficacy. There can,
however, be no assurance that the FDA will agree with Bio Balance's proposal and
may require us to begin with either Phase I or Phase II studies.
108
Bio Balance Business Strategies
Bio Balance intends to pursue continued development of candidate
probiotics. Using proprietary technology, Bio Balance hopes to make various
probiotic agents more effective in various clinical GI tract disorders. It is
Bio Balance's intention to maintain a pipeline of new products by adding a
research and development program, employees and consultants. Bio Balance's
development programs will focus on unmet medical needs in the gastrointestinal
area that Bio Balance believes provide substantial commercial opportunity with
relatively limited competition. As described above, Bio Balance's first product
is PROBACTRIX(TM), and Bio Balance intends to develop additional products and
line extensions and also to pursue in-licensing opportunities to add breadth and
depth to its research and development. Bio Balance is presently evaluating new
formulations and clinical uses for its product. There can be no assurance that
Bio Balance will be successful in developing any other probiotics product or
even in establishing a research and development program.
Bio Balance plans to market and sell its product in the United States as
medical food if it successfully completes the GRAS and medical food
determinations and clinical trials. Bio Balance's marketing strategy will
include one or more of the following approaches:
A direct sales force focused on physicians specializing in the field of
gastroenterology. Bio Balance believes that a relatively small sales force will
initially be effective, as its first product targets a specialized group of
physicians. This sales force may also be used to market and sell its future
products.
Alternatively, Bio Balance may elect to enter into a partnership or
licensing arrangement with a company that already specializes in the sale of
prescription drugs directed to the gastroenterologist. Bio Balance will also
explore sale to a larger well-established pharmaceutical company
Even if Bio Balance decides to market and sell its product in the United
States, Bio Balance may decide to license its foreign product rights to other
pharmaceutical companies to commercialize its product abroad. At this point in
time, Bio Balance has not determined which way Bio Balance will proceed with its
marketing strategy.
Bio Balance will take a product-focused approach towards drug development.
The key elements of its business strategy will be as follows:
109
Develop a probiotic for therapy of Inflammatory Bowel Disease. The existing
probiotic approach to IBD leaves room for innovation, improvement and
application of other IBDs. This product candidate is focused on improving
the balance of flora within the digestive tract to promote gastrointestinal
health and the removal of unfriendly bacteria, by presenting more of the GI
tract to viable probiotic bacteria.
Leverage experienced scientific and drug development expertise to develop
other probiotic agents. Bio Balance intends to establish relationships with
experienced developers of probiotic agents to further development of
additional probiotic agents. Dr. Nelli Kelner-Padalka, a member of Bio
Balance's Medical Advisory Board with substantial experience in the use of
probiotics in the GI tract and a developer of Bio Balance, has previously
developed six other probiotic substances and was decorated in the former
USSR with the Inventor of the USSR state prize of Kirghizstan. In addition
to having access to Dr. Kelner's expertise, Bio Balance is involved in
discussions with Universities in Israel and other individuals with
experience in probiotic development with a view to entering into agreements
to perform probiotic research and development activities. To date, other
than Dr. Kelner's service on Bio Balance's Medical Advisory Board, no
agreements have been entered into with any Universities or individuals to
perform probiotics research and development.
Optimize clinical and regulatory strategies to shorten time to market. Bio
Balance believes that by initially focusing on acute treatments, it can
achieve an abbreviated development time, and faster time to market, which
it hopes will benefit patients with irritable bowel syndrome and disease.
Notwithstanding its objective of getting PROBACTRIX(TM) to market as a
medical food, Bio Balance intends to, although it cannot assure that it
will be able to, perform clinical trials to rapidly assess effectiveness
for well-defined endpoints in the treatment of irritable bowel syndromes,
chronic diarrhea and infectious disorders of the GI tract.
Retain significant marketing rights to Bio Balance product candidates. Bio
Balance's goal is to retain marketing rights to its product candidates for
as long as it is commercially advantageous. By completing as much of the
pre-clinical and clinical development work by itself as is feasible, Bio
Balance hopes to be able to negotiate more favorable terms for any such
marketing arrangements.
Bio Balance Marketing and Sales
Bio Balance's marketing and sales decisions and strategies will be dictated
primarily by the actions and reactions to its regulatory pathway. Bio Balance
will not make sales and marketing decisions until it has satisfied the
applicable GRAS requirement for medical foods and completed clinical trials
which provide statistically significant data to support the efficacy of its
first product, PROBACTRIX(TM).
110
Bio Balance's primary approach to regulatory compliance is as a medical
food, which Bio Balance believes will be satisfied in 2003. Traditional
pharmaceutical detail distribution can be applied with quick results using
existing channels. Being designated a medical food allows Bio Balance to make
claims relating to the distinctive nutritional requirements of a disease or
disorder. Bio Balance expects that the product will be marketed primarily to
physicians and sold through hospitals, clinics and pharmacies. While the FDA
does not generally favor direct marketing or retail sales of medical foods, the
only current limitations on the direct marketing or sale of medical foods
through retail channels are prohibitions of fraudulent claims and the
requirement that the product satisfy the statutory definition of a medical food
which requires that the product is intended for use under physician supervision
and is so labeled. For example, a medical food may be advertised in magazines
read by patients with gastrointestinal diseases and disorders, advising patients
of the existence of the product, urging them to ask their physician about the
product, and informing them as to where the product may be purchased if their
physician believes it would be helpful to their condition. By utilizing a
multiple distribution channel approach, Bio Balance believes it will be
positioned to reach customers who can be referred by or back to the physician.
In the event that the FDA or other government agencies were to prohibit or
otherwise restrict the direct marketing or retail sale of medical foods,
awareness of PROBACTRIX(TM) among potential consumers could be severely limited
which could in turn curtail product sales.
Bio Balance currently has no sales, marketing or distribution capabilities.
In order to commercialize any of its product candidates, Bio Balance must either
initially develop sales, marketing and distribution capabilities or make
arrangements with third parties to perform these services. Bio Balance intends
to sell market and distribute some products directly and rely on relationships
with third parties to sell, market and distribute other products. To market any
of its products directly, Bio Balance must develop a marketing and sales force
with technical expertise and with supporting distribution capabilities. Bio
Balance cannot assure that Bio Balance will be able to develop any marketing or
distribution capabilities.
Bio Balance may elect to market and sell it's product by developing its own
sales force to call upon doctors specializing in the field of gastroenterology.
This will entail the development of a direct sales force in the U.S. and Canada.
Bio Balance believes that a relatively small sales force of fewer than 100 sales
representatives can be used for these products because prescribing decisions
will be made by roughly one group of physicians, primarily gastroenterologists.
If Bio Balance elects to direct market Bio Balance's products, Bio Balance will
begin hiring a sales force as the regulatory pathway to market becomes more
visible. Bio Balance cannot guarantee that it will develop a sales force with
the necessary technical expertise and distribution capabilities.
Alternatively, Bio Balance may elect to enter into a licensing arrangement
with a company that already specializes in the sale of medical foods and or
prescription drugs directed to gastroenterologists. Bio Balance is evaluating
opportunities to partner with other companies to develop and commercialize its
product. Bio Balance may also explore an outright sale to a larger
well-established pharmaceutical company. There can be no assurance that Bio
Balance will be successful in entering into any partnership or licensing
arrangements or in the sale of Bio Balance.
Even if Bio Balance decides to market and sell its product in the United
States, Bio Balance may decide to license its foreign product rights to other
pharmaceutical companies to commercialize its product abroad. In the United
States, Bio Balance does not intend to enter into co-promotion arrangements or
out-license its product candidates until its product candidates are in the later
stages of development, but Bio Balance may promote its product candidates
through marketing relationships with one or more companies that have established
distribution systems and direct sales forces. In international markets,
initially Bio Balance intends to seek strategic relationships to market, seek
and distribute its product candidates, but Bio Balance may eventually become
involved in direct sales and marketing activities in other parts of the world.
There can be no assurance that Bio Balance will be successful in establishing
any marketing relationships.
111
Bio Balance Manufacturing
Bio Balance intends to use contract manufacturers for at least the next few
years to produce sufficient quantities of PROBACTRIX(TM) for use in its
pre-clinical and anticipated clinical trials instead of developing this
capability internally. Bio Balance will also rely on third parties to provide
the components of these product candidates. Outsourcing has been effective in
similar situations with other companies. Bio Balance has not yet selected
contract manufacturers for formulation for commercialization. If these
facilities become unavailable for any reason, if its contract manufacturers fail
to comply with the FDA's current good manufacturing practices, or if its
contract manufactures terminate their agreements, Bio Balance would have to find
an alternative source for manufacturing its drug candidates. Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving production yields, quality assurance and shortage of
qualified personnel.
If contract manufacturers are unable to scale up production to meet its
commercial needs, Bio Balance's revenue may be adversely affected.
The process for manufacturing e-coli bacteria and formulating them into a
probiotic agent is complicated. Bio Balance has no experience in
commercial-scale manufacture of PROBACTRIX(TM). Bio Balance's product candidates
will need to be manufactured in facilities and using processes that comply with
the FDA's GMP requirements, GLPs, and other similar regulations, including
foreign regulations. It may take a substantial period of time to begin producing
probiotic e-coli bacteria in compliance with such regulations. If Bio Balance is
unable to establish and maintain relationships with third parties for
manufacturing sufficient quantities of its product candidates and their
components that meet its planned time and cost parameters, the development and
timing of its clinical trials may be adversely affected.
Clinical Testing
Bio Balance does not have the ability to independently conduct clinical
studies and obtain regulatory approvals for its product candidates. Bio Balance
intends to rely on third-party clinical research organizations, or CROs, to
perform these functions. However, Bio Balance has not yet finalized agreements
with any CROs to perform these functions. Bio Balance has entered into an
agreement with Novigen Sciences to provide the services of Nancy Rachman, Ph.D.
who, along with a team of experts, will identify the clinical trials necessary
and then hire a qualified CRO. Bio Balance intends to have contracts in place
with CROs at least 1 to 2 months prior to commencement of work under each such
contract.
Future Plans
Following the introduction of Bio Balance's first product, PROBACTRIX(TM),
for the treatment of IBS, Bio Balance plans to conduct product research, studies
and clinical trials with a view to developing similar products for other GI
disorders, such as Traveler's diarrhea (TD) and Crohn's Disease.
112
Competition
The industry is highly competitive. Numerous companies, many of which are
significantly larger than Bio Balance, which have greater financial, personnel,
distribution and other resources than Bio Balance and may be better able to
withstand volatile market conditions, compete with Bio Balance in the
development, manufacture and marketing of probiotics for the treatment of IBS.
Bio Balance's principal competition comes from domestic and foreign
manufacturers and other wholesale distribution companies who have all failed to
receive FDA approval or have introduced a product to the market for IBS that was
subject to FDA imposed restrictions. 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
Bristol-Myers, Squibb, Novataris and Glaxo-Wellcome) are in competition with Bio
Balance in this industry, since they have already spent millions of dollars to
develop treatments for IBS. Increased competition could have a material adverse
effect on Bio Balance, as its competitors may have far greater financial and
other resources available to them and possess extensive manufacturing,
distribution and marketing capabilities far greater than those of Bio Balance.
Bio Balance Intellectual Property Rights
Bio Balance currently relies on a combination of patents, trademark, trade
secret laws and contractual provisions to protect its proprietary rights in its
product. Bio Balance recently applied for one (1) United States patent
application and thirteen (13) divisional patent applications and one (1) United
states trademark application, one (1) Israeli patent, and one (1) Patent
Cooperation Treaty application and applications filed therefrom in the following
countries; Japan, European, Korea, Canada, Australia, Mexico, Brazil, Poland and
New Zealand, in connection with PROBACTRIX(TM). There can be no assurance that
Bio Balance's applications will result in issued patents and trademarks, or
that, if issued, Bio Balance's applications will be upheld if challenged.
Further, even if granted, there can be no assurance that these patents and
trademarks will provide Bio Balance with any protection from competitors, or,
that if they do provide any meaningful level of protection, that Bio Balance
will have the financial resources necessary to enforce its patent and trademark
rights. In addition, there can be no assurance that others will not
independently develop technologies similar to Bio Balance's pending patents and
trademarks, or design around the pending patents. If others are able to design
around the patents, Bio Balance's results of operations could be materially
adversely affected. Further, Bio Balance will have very limited, if any,
protection of its proprietary rights in those jurisdictions where it has not
effected any filings or where it fails to obtain protection through its filings.
There can be no assurance that third parties will not assert intellectual
property infringement claims against Bio Balance in the future with respect to
current or future products. Bio Balance is responsible for defending against
charges of infringement of third party intellectual property rights by Bio
Balance's actions and products and such assertion may require Bio Balance to
refrain from the sale of its product, enter into royalty arrangements or
undertake costly litigation. Further, challenges may be instituted by third
parties as to the validity, enforceability and infringement of Bio Balance's
patents.
113
Bio Balance's adherence to industry standards with respect to its product
limits Bio Balance's opportunities to provide proprietary features which may be
protected. In addition, the laws of various countries in which Bio Balance's
product may be sold may not protect Bio Balance's product and intellectual
property rights to the same extent as the laws of the United States. As a
consequence, Bio Balance requires all of its personnel to execute
confidentiality agreements and assignment of intellectual property agreements in
favor of Bio Balance. See "Bio Balance -Intellectual Property Rights."
Employees
Bio Balance currently has two full time employees. Bio Balance plans to
hire a full time Chief Executive Officer and other employees, as needed,
following closing of the transaction with New York Health Care. While Bio
Balance has no definitive plans with respect to the size of its workforce or
persons who will fill specific positions, Bio Balance 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. Bio
Balance believes that it will be better positioned to attract and retain
qualified personnel as a subsidiary of a publicly traded company following
closing of the transaction with New York Health Care.
Facilities
Bio Balance's executive offices are currently located at 16 East 34 Street,
New York, NY 10016 pursuant to a lease agreement for the period beginning
December 1, 2001 through November 29, 2003 at a monthly rental price of $5,000.
Legal Proceedings
Bio Balance is not aware of any pending or threatened litigation or the
basis for any litigation that would materially adversely affect its business or
financial condition.
BIO BALANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Inception to June 30, 2002
Bio Balance was incorporated in 2001 and is a specialty Pharma/Medical Food
Company devoted to the discovery, manufacturing and marketing of probiotic
agents for therapy of gastrointestinal diseases and disorders in animals and
humans, including irritable bowel syndrome ("IBS") and chronic diarrhea. From
its inception, Bio Balance has been a development stage company. It has had no
revenues since inception and does not foresee any revenues form sales of its
products in the foreseeable future. Bio Balance's efforts since inception have
been focused on acquiring its technology, raising capital and building its
management and medical advisory teams.
114
In July 2001, Bio Balance acquired all the assets it uses in its business
from unaffiliated parties engaged in the research, development, marketing and
sales of probiotic bacteria and other technology for cash consideration of
$510,000 and an aggregate of 990,000 shares.
Since inception, Bio Balance has raised gross proceeds of approximately
$3,859,000 from private placements of its common stock. It is seeking to raise a
total of $6,000,000 to fund its operations in another private placement, of
which raising of at least $1,992,000 is one of the conditions to New York Health
Care closing on the Exchange Agreement, and there is no assurance it will be
successful in this undertaking.
For the period May 21,2001 (inception) through December 31, 2001 and
January 1, 2002 through June 30, 2002, Bio Balance sustained net losses of
$452,000 and $719,000, respectively. These losses are attributable to the lack
of revenues and the costs incurred in organizing Bio Balance and undertaking
preliminary activities for the commencing of operations. Bio Balance anticipates
that it will continue to lose money during 2002.
Plan of Operation
Bio Balance intends to comply with applicable requirements for the
introduction of its first product, PROBACTRIX(TM), to the United States market
as a medical food. Medical foods are not subject to the FDA regulatory criteria
and market clearance standards applicable to "drugs". Instead, medical foods are
food for special dietary use. As such, medical foods may be marketed following a
self-determination that the ingredients in the product are lawful for the
intended use (either approved food additives or "generally recognized as safe"
(GRAS)). Bio Balance commenced the GRAS determination process in the spring of
2002 and presently expects completion of that process in 2003. Following
completion of GRAS and medical food determination, and assuming GRAS and medical
food status is determined by expert panels convened by Bio Balance, Bio Balance
intends to conduct at least two clinical trials to obtain statistically
significant data to support marketing efforts before commencing marketing of
PROBACTRIX(TM) in the United States. Being designated a medical food allows Bio
Balance to make substantiated claims relating to satisfying the distinctive
requirements of specific gastrointestinal diseases and disorders, claims more
akin to those typically made for ethical pharmaceuticals, while being marketing
to physicians and direct marketed or sold through retail channels to patients
who are under medical supervision and have been directed to purchase the
product.
Bio Balance also plans on introducing a version of its product as a
pharmaceutical drug and thereafter market the product in the United States. FDA
approval of the product as a pharmaceutical drug is a time consuming and costly
process. Bio Balance has not as yet commenced the FDA approval process and has
no current time table to begin that process.
Bio Balance's marketing and sales decisions and strategies will be dictated
primarily by the actions and reactions to its regulatory pathway. Bio Balance
will not make sales and marketing decisions until it has satisfied the
applicable requirement for medical foods and completed clinical trials which
provide statistically significant data to support the efficacy of its first
product, PROBACTRIXTM. Bio Balance's marketing strategy will include one or more
of the following approaches:
115
Bio Balance currently has no sales, marketing or distribution capabilities.
In order to commercialize any of its product candidates, it must either
initially develop sales, marketing and distribution capabilities or make
arrangements with third parties to perform these services. It intends to sell,
market and distribute some products directly and rely on relationships with
third parties to sell, market and distribute other products. To market any of
its products directly, it must develop a marketing and sales force with
technical expertise and with supporting distribution capabilities.
Bio Balance may elect to market and sell its product by developing its
sales force to call upon doctors specializing in the field of gastroenterology.
This will entail the development of a direct sales force in the U.S. and Canada.
Bio Balance believes that a relatively small sales force of fewer than 100 sales
representatives could be used for these products, because prescribing decisions
will be made principally by one group of physicians, gastroenterologists. If Bio
Balance elects to direct market its products, it will begin hiring a sales force
as the regulatory pathway to market becomes more visible. However, there can be
no assurance that Bio Balance will develop a sales force with the necessary
technical expertise and distribution capabilities.
Alternatively, Bio Balance may elect to enter into a licensing arrangement
or partnership with a company that already specializes in the sale of medical
foods and or prescription drugs directed to gastroenterologists. Bio Balance is
evaluating opportunities to partner with other companies to develop and
commercialize its product. It may also explore an outright sale to a larger
well-established pharmaceutical company. There can be no assurance that it will
be successful in entering into any partnership, licensing or sale arrangements.
Even if Bio Balance decides to market and sell its product in the United
States, it may decide to license foreign product rights to other pharmaceutical
companies to commercialize the product abroad. In the United States, Bio Balance
does not intend to enter into co-promotion arrangements or out-license its
product candidates until its product candidates are in the later stages of
development, but it may promote its product candidates through marketing
relationships with one or more companies that have established distribution
systems and direct sales forces. In international markets, it intends to
initially seek strategic relationships to market, seek and distribute its
product candidates, but may eventually become involved in direct sales and
marketing activities in other parts of the world. There can be no assurance that
Bio Balance will be successful in establishing any marketing relationships.
Bio Balance intends to pursue continued development of candidate
probiotics. Using proprietary technology, Bio Balance hopes to make various
probiotic agents more effective in various clinical GI tract disorders. It is
Bio Balance's intention to maintain a pipeline of new products by adding a
research and development program, employees and consultants. Bio Balance's
development programs will focus on unmet medical needs in the gastrointestinal
area that Bio Balance believes provide substantial commercial opportunity with
relatively limited competition. As described above, Bio Balance's first product
is PROBACTRIX(TM), and Bio Balance intends to develop additional products and
line extensions and also to pursue in-licensing opportunities to add breadth and
depth to its research and development. Bio Balance is presently evaluating new
formulations and clinical uses for its product. There can be no assurance that
Bio Balance will be successful in developing any other probiotics product or
even in establishing a research and development program.
116
Bio Balance will take a product-focused approach towards drug development.
The key elements of its business strategy will be as follows:
Develop a probiotic for therapy of Inflammatory Bowel Disease. The existing
probiotic approach to IBD leaves room for innovation, improvement and
application of other IBDs. This product candidate is focused on improving
the balance of flora within the digestive tract to promote gastrointestinal
health and the removal of unfriendly bacteria, by presenting more of the GI
tract to viable probiotic bacteria.
Leverage experienced scientific and drug development expertise to develop
other probiotic agents. Bio Balance intends to establish relationships with
experienced developers of probiotic agents to further development of
additional probiotic agents. Dr. Nelli Kelner-Padalka, a member of Bio
Balance's Medical Advisory Board with substantial experience in the use of
probiotics in the GI tract and a developer of Bio Balance, has previously
developed six other probiotic substances and was decorated in the former
USSR with the Inventor of the USSR state prize of Kirghizstan. In addition
to having access to Dr. Kelner's expertise, Bio Balance is involved in
discussions with Universities in Israel and other individuals with
experience in probiotic development with a view to entering into agreements
to perform probiotic research and development activities. To date, other
than Dr. Kelner's service on Bio Balance's Medical Advisory Board, no
agreements have been entered into with any Universities or individuals to
perform probiotics research and development.
Optimize clinical and regulatory strategies to shorten time to market. Bio
Balance believes that by initially focusing on acute treatments, it can
achieve an abbreviated development time, and faster time to market, which
it hopes will benefit patients with irritable bowel syndrome and disease.
Notwithstanding its objective of getting PROBACTRIX(TM) approved as a
medical food, Bio Balance intends to, although it cannot assure that it
will be able to, perform clinical trials to rapidly assess effectiveness
for well-defined endpoints in the treatment of irritable bowel syndromes,
chronic diarrhea and infectious disorders of the GI tract.
Retain significant marketing rights to Bio Balance product candidates. Bio
Balance's goal is to retain marketing rights to its product candidates for
as long as it is commercially advantageous. By completing as much of the
pre-clinical and clinical development work by itself as is feasible, Bio
Balance hopes to be able to negotiate more favorable terms for any such
marketing arrangements.
117
Liquidity and Capital Resources
During 2001, Bio Balance raised a total of gross proceeds of $1,956,000
from a series of private placements. During the period January 1, 2002 through
August 15, 2002, it raised an additional $1,778,000 of gross proceeds from the
sale of common stock. As of June 30, 2002, Bio Balance had cash on hand of
approximately $1,649,000, all of which is available to fund operations. Bio
Balance estimates that its capital requirements in 2002 will be approximately
$1,500,000. This budget assumes that Bio Balance will continue along the Medical
Food Approval track with the FDA and will not seek approval for any of its
products as an ethical drug. If such approval is required, Bio Balance's capital
requirements would be much greater, and there can be no assurance that such
additional capital would be available to it or, if available, on acceptable
terms.
BIO BALANCE MANAGEMENT
The executive officers and directors of Bio Balance, and their ages as of
the date hereof, are as follows:
Name Age Position
------ ----- ----------
Paul Stark 40 President and Director
Joseph Herbst 51 Vice-President
Jeanne Quinto 29 Secretary, Treasurer and Director
Directors are elected every three (3) years with a limitation of three (3)
terms.
Paul Stark - has been Secretary and Director of Bio Balance since its
inception. On September 20, 2001, he became the Vice-President of Bio Balance.
Mr. Stark was appointed interim President on October 17, 2001 upon the
resignation of Bio Balance's former president, Yitz Grossman, and resigned as
Secretary. Previously, Mr. Stark was the managing partner of Waterview Partners,
New York, NY, a company providing strategic advice to public and private
companies. Before joining Waterview Partners, Mr. Stark was a vice president of
Regency Investment Partners, New York, NY, money managers. In April 1997, Mr.
Stark joined KSH Investment Group, New York, NY, a broker-dealer, as a vice
president of investments. Mr. Stark also served as a vice-president of Joseph
Stevens & Company, Inc., the placement agent of the Bio Balance private
placement of its common stock, from February, 1996 through March, 1997.
Joseph Herbst - Mr. Joseph Herbst has spent the last 30 years managing and
developing biotechnology and information systems technology. Since 1996, he has
consulted to design and implement high tech management information systems for
clients in the healthcare and insurance industries. He served as an advisor for
investment banking firms in evaluating technological companies, with emphasis on
the pragmatic issues dealing with technology and bringing it to market. He also
has maintained a position as Assistant Professor of Computer Science and
Chairman of Data Communications and Computer Architecture committees at Touro
College in New York. From 1989 to 1996 he served as president of Cellvision
Inc., a biotechnology company which developed instrumentation to measure
biological phenomena in tissue, where he managed the development of advanced
biological imaging and measurement systems. From 1986 to 1989, he was project
and group manager for the development of scientific instruments used in
evaluating biological material. From 1976 to 1986 as a design engineer, he
developed medical ultrasound imaging systems for identifying and imaging
characteristics of the human body. From 1971 to 1976, he developed various
cardiac-monitoring instruments. Mr. Herbst received a Bachelor of Science in
Electric Engineering degree from the Polytechnic Institute of New York in 1979
and a Masters of Science in Electric Engineering in 1983.
118
Jeanne Quinto - has been Treasurer and Director of Bio Balance since its
inception. In October, 2001, Ms. Quinto took on additional responsibilities as
corporate secretary. Prior to that and for over five years beginning in November
1995, Ms. Quinto was employed by Target Capital Corp., a New York City based
consulting firm as the assistant to the president.
Bio Balance Director Compensation
To date, no amount has been paid to a director for the services of such
individual on the Board.
Bio Balance Medical Advisory Board
The Medical Advisory Board consists of the following five members:
Samuel N. Adler, M.D. (Chairman of Medical Advisory Board) - Professor
Adler has been Chief of Gastroenterology at Bikur Cholim Hospital in Jerusalem
since 1986. From 1987 to the present, Professor Adler has also been a Clinical
Associate Professor of Medicine at Touro College's Barry Z. Levine School of
Health Sciences. From 1983 to 1985, Professor Adler was the Attending Physician
in the Division of Gastroenterology at Mercy Hospital, Rockville Center, New
York, and at South Nassau Communities Hospital, Oceanside, New York. From 1981
to 1985, Dr. Adler was the Attending Physician, Division of Gastroenterology at
Nassau county Medical Center, East Meadow, New York. Dr. Adler received his M.D.
at the University of Basel, Basel Switzerland. He was granted board
certification by the American Board of Internal Medicine in 1979 and by the
Board of Gastroenterology in 1981. Dr. Adler has experience in early stage
technology of probiotics together with experience in the Bio Balance product.
Dr. Adler is also a member of medical advisory board of Given Imaging Limited,
Israel.
Harold Jacob, M.D. - Dr. Jacob currently maintains a private practice in
gastroenterology. Dr. Jacob previously served as Co-Chief of Gastroenterology at
St. John's Episcopal Hospital in New York, Clinical Assistant Professor of
Medicine at SDNY Brooklyn and Chief of Castro at South Nassau Communities
Hospital, Oceanside, New York. He is a member of the American College of
Medicine and American Gastroenterological Association (AGA) and a Fellow of the
American College of Gastroenterology (ACG). He has an M.D., Albert Einstein
College of Medicine and a B.A., Yeshiva University, New York. He was granted
board certification by the American Board of Internal Medicine in 1980 and by
the Board of Gastroenterology in 1983.
119
Kursheed Jeejeebhoy, M.D. - Dr. Jeejeebhoy is currently a cross-appointed
Professor at the Departments of Nutritional Sciences and Physiology, University
of Toronto (Toronto, Canada) and is the attending physician of Gastroenterology
at St. Michael's Hospital (Toronto, Canada). From 1970 to 1990, he was Chief of
the Division of Gastroenterology at Toronto General Hospital (Toronto, Canada).
From 1985 to 1990, Dr. Jeejeebhoy was Director of the Division of
Gastroenterology at the University of Toronto (Toronto Canada). From July 1970
to 1990, he was Senior Staff Physician at Toronto Hospital (Toronto, Canada).
From 1971 to 1975, Dr. Jeejeebhoy was Associate Professor at the Department of
Medicine at the University of Toronto (Toronto, Canada). From 1974 to 1980, he
was Coordinator at the Division of Gastroenterology (Training Program) at the
Department of Medicine of the University of Toronto (Toronto, Canada). Dr.
Jeejeebhoy received his M.B., B.S. (Madras) in 1959; M.R. C.P. (Lond) 1961;
Ph.D. (Lond) 1963; F.R.C.P. (Edin) in 1966; F.R.C.P. (C) F.R.C.P. (Canada) in
1976. On numerous occasions, he has been a special lecturer and Professor in the
Departments of Nutrition and Food Science in Canada. Dr. Jeejeebhoy has won
numerous awards and supervised at least twenty doctors in training. Dr.
Jeejeebhoy has also written more than 100 publications in the fields of
gastroenterology and IBS.
Marc Sicklick, M.D. - Dr. Sicklick is an allergist currently in private
practice in Cedarhurst, New York. Dr. Sicklick is also an associate clinical
professor of pediatrics at Albert Einstein College of Medicine, in New York, and
an attending physician at North Shore University Hospital (New York) and St.
John's Episocopal Hospital (New York). From 1979 to the present time, he has
been the attending physician at Montefiore Hospital (Bronx, New York). From 1982
to the present, Dr. Sicklick has also been the attending physician at South
Nassau Community Hospital (Oceanside, New York). From 1983 to 1999, he was chief
of the Division of Allergy at St. John's Episocpal Hospital (Far Rockaway, New
York). Dr. Sicklick is the author of numerous publications in the fields of
pediatric asthma and allergies. Dr. Sicklick received his medical degree from
Albert Einstein College of Medicine in New York in 1974.
Nellie Kelner-Padalka - Dr. Kelner-Padalka is a physician and researcher
with expertise in bacteriology and nutrition. From 1996 to the present, she has
been the general manager of the BIOSANEL Ltd. in Israel; her own company in
which she worked to further develop the Bio Balance product. From 1996 to 1998,
Dr. Kelner-Padalka was a medical manager of the International Center "Belbo
Ltd.", Tel Aviv, Israel, a producer and marketer of dietary supplements. From
1994 to 1996, she was a research scientist in the field of biotechnology in
Israel. Dr. Kelner-Padalka helped invent Bio Balance after fifteen years of
research and development in this area. She is also the author of two books and
fifty-four research papers. Dr. Kelner-Padalka received inventor of the USSR
award in 1984, and was decorated with "Exemplary of Public Health of the USSR"
award in 1986. Dr. Kelner-Padalka received a Doctor of Medical Sciences (Ph.D.,
M.D.) in 1984 from the Medical Institute U.S.S.R.
120
Technical Advisory Board
The Technical Advisory Board consists of the following four members:
Professor Sergie Braun (Chief Technical Officer) - is currently Chairman of
the Department of Biological Chemistry and Associate Professor at the Institute
of Life Sciences and Chief of the Biotechnology Laboratory-Hebrew University of
Jerusalem. In 1995, Professor Braun was Editor of Special Issue of the Journal
of Sol-Gel Science and Technology devoted to biological applications of sol-gel
materials. Also, in 1995, he was a member of the International Advisory Board
and of The Organizing Committee International Conference "BIOCATALYSIS-95." From
1991 to 1994, Professor Braun was chairman of the Hebrew University, Graduate
Biotechnology Program in Israel. From 1984 to 1985, he was a visiting Professor
at the Institute of Radio Chemistry, The Research Center of Karsruche
(Karlsruche, FRG). Professor Braun has written sixty major scientific
publications; obtained fifteen patents, and has worldwide recognition in
microbiology and the industrialization of bacteriological processes. Dr. Braun
received his Ph.D. degree in 1982 from Hebrew University. From 1982 to 1984, he
was a post-doctural associate in the laboratory of Professor E. Racker, Section
of Biochemistry Molecular and Cell Biology, Cornell University, Ithaca, New
York.
Professor Emanuel Hanski- is currently Head of Medical Microbiology at the
Hebrew University Hadassah Medical School Institute of Microbiology. From
1996-1999, he was Professor of Medical Microbiology and from 1991- 1995 he was
an Associate Professor at the Hebrew University Hadassah Medical School. In 1990
and 1991 he was an Associate Professor of Medical Microbiology at Washington
University Medical School in St. Louis, Missouri. From 1983-1990 Professor
Hanski held several positions at the Weizmann Institute of Science, including
Investigator, Senior Investigator and Associate Professor. Professor Hanski
received his PhD. Degree in 1979 from the Hebrew University. He received his
Masters in Science in 1976 and Bachelors in Science degrees in 1974, both from
the Hebrew University .
Elliot Jacob, Ph.D. - is currently Senior Vice-President and Founder of
Medifocus.com, Inc., a provider of customized medical literature, and research
reports for attorneys located in Silver Spring, Maryland. From 1994 to 1997, Dr.
Jacob was Chief of the Microbiology Branch at Walter Reed Army Institute of
Research, Walter Reed Army Medical Center, Washington, D.C. From 1986 to 1994,
he was Senior Research Scientist at Walter Reed Army Institute of Research,
Walter Reed Army Medical Center, Washington, D.C. From 1982 to 1994, Dr. Jacob
was principal investigator at the Naval Medical Research Institute, Bethesda,
M.D. Dr. Jacob has written numerous articles in the field of treatment of
infections in fractures and war wounds. He received his Ph.D. in Microbiology
from the University of Maryland, Graduate School, Baltimore, M.D. in 1982 and
his Bachelor of Science from Yeshiva University, New York, NY, in 1975.
Herman Weiss - is currently President of Tetra-Pharm Ltd., a pharmaceutical
company specializing in the research and develop of probiotics and other natural
products. From 1990 to 1997, Mr. Weiss was general manager of two retail
pharmacies located in Israel. He received his pharmacy degree from the Hebrew
University in Jerusalem, Israel in 1986 and a degree in Homeopathic Studies from
the University of Bar-Ilan, Israel, in 1994.
121
Bio Balance Limitation on Liability; Indemnification of Directors
The Bio Balance Certificate of Incorporation includes certain provisions
permitted pursuant to the Delaware General Corporation Law whereby directors of
Bio Balance shall be indemnified against certain liabilities to Bio Balance or
its shareholders. The Certificate of Incorporation also limits to the fullest
extent permitted by Delaware law a director's liability to Bio Balance or its
shareholders for monetary damages for breach of fiduciary duty of care as a
director, except liability for (i) breach of the director's duty of loyalty to
Bio Balance or its shareholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of the laws, (iii)
under Section 174 of the Delaware law (relating to unlawful payments of
dividends or unlawful stock repurchases or redemptions) or (iv) any transaction
from which the director derives an improper personal benefit. This provision of
the Certificate of Incorporation has no effect on the availability of equitable
remedies, such as injunction or rescission. Bio Balance believes that these
provisions will facilitate Bio Balance's ability to continue to attract and
retain qualified individuals to serve as directors of Bio Balance.
Bio Balance Related Party Transactions
On June 1, 2001, Bio Balance entered into an eight-year consulting
agreement with Emerald Asset Management, Inc. ("Emerald") to provide the
consulting services of Yitz Grossman. Mr. Grossman consults on a part-time basis
with respect to mergers and acquisitions, a potential initial public offering
and recruitment of personnel. Mr. Grossman is the president and sole shareholder
of Emerald, and was Bio Balance's president from inception through October 17,
2001. As compensation for the consulting services, Emerald is paid a yearly
amount of $250,000, is to receive a bonus as may be determined by Bio Balance's
Board of Directors and was issued warrants to purchase 200,000 shares with an
exercise price of $1.00 per share during a period ending June 1, 2011.
On June 1, 2001, Bio Balance entered into a consulting agreement with
Medical Instrument Development Inc. ("MIDI) and Dr. Harold Jacobs to develop
clinical trials infrastructure for Bio Balance's product line, support marketing
communications and maintain Bio Balance's intellectual property. The agreement
ended April 15, 2002 and provided for a total compensation to MIDI of $65,000.
On August 1, 2001, Bio Balance sold 400,000 shares of its common stock at a
price of $1.50 per share.
On August 31, 2001, Bio Balance entered into a three-year consulting
agreement with Dr. Sergei Braun to act as Bio Balance's Chief Technical Officer.
Dr. Braun receives an annual compensation of $36,000 and also received warrants
to purchase 10,000 shares with an exercise price of $1.50 per share during a
period ending August 31, 2004. Dr. Braun is the Chief Technical Officer of Bio
Balance.
122
On August 31, 2001, Bio Balance entered into a three-year consulting
agreement with BMF Engineering to provide engineering consulting including
reverse engineering services. BMF Engineering receives an annual compensation of
$12,000 and also was issued warrants to purchase 200,000 shares with an exercise
price of $1.50 per share during a period ending August 31, 2004.
On October 1, 2001, Bio Balance entered into a one-year oral employment
agreement with Jeanne Quinto, Bio Balance's treasurer and director, for an
annual compensation of $45,000.
On November 30, 2001, Bio Balance sold 339,000 shares of its common stock
at a price of $3.00 per share through Joseph Stevens & Co., Inc., its Placement
Agent.
On January 30, 2002, Bio Balance sold 391,656 shares of its common stock at
a price of $3.00 per share through Joseph Stevens & Co., Inc., its Placement
Agent for previous private placements of its securities.
DESCRIPTION OF BIO BALANCE SECURITIES
The following is a summary of Bio Balance's capital stock and certain
provisions of its certificate of incorporation and by-laws.
General
Bio Balance is authorized to issue 75,000,000 shares of common stock, par
value $.0001 per share, 20,334,990 of which are issued and outstanding as of
October 31, 2002, and 5,000,000 shares of preferred stock, par value $.0001 per
share, none of which are issued and outstanding. There are also reserved 483,066
shares of common stock for the exercise of outstanding warrants.
Common Stock
The holders of the Bio Balance shares have one vote for each share held of
record on each matter submitted to a vote of shareholders. The Bio Balance
shares do not have cumulative voting rights and vote as a class on all matters
requiring shareholder approval. Therefore, the holders of a majority of the Bio
Balance shares may elect all of the directors of Bio Balance, and control its
affairs and day-to-day operations.
Subject to the prior rights of any series of preferred stock that may from
time to time be outstanding, if any (see below), holders of the Bio Balance
shares are entitled to receive dividends ratably when, as and if declared by the
Board of Directors, out of funds legally available therefore and are entitled
upon liquidation of Bio Balance to share ratably in the net assets of Bio
Balance available for distribution after payment of all obligations of Bio
Balance. The Bio Balance shares are not redeemable and have no preemptive or
similar rights. All outstanding Bio Balance shares are validly issued, fully
paid and non-assessable.
123
Preferred Stock
Bio Balance is authorized to issue 5,000,000 shares of "blank check"
preferred stock. The preferred stock is to be cancelled upon completion of the
merger.
Warrants
There are warrants to purchase 483,066 Bio Balance shares outstanding as of
the date of this Prospectus/Proxy Statement. The warrants have terms ranging
from three to ten years and exercise prices ranging from $1.00 per share to
$3.00 per share with certain anti-dilution protection and "piggyback"
registration rights.
SHARES ELIGIBLE FOR FUTURE SALE
The New York Health Care common stock will be tradable under the symbols
"NYHC" and "NYH." New York Health Care common stock is presently listed for
trading on the Nasdaq SmallCap Market and the Boston Stock Exchange. New York
Health Care has been advised by Nasdaq that it will continue to have a listing
on its SmallCap Market if New York Health Care, upon the conclusion of the
transaction, meets the initial listing requirements for new listings in the
Nasdaq SmallCap Market. It is a condition to the completion of the transaction
that New York Health Care meet the initial listing requirements of the Nasdaq
SmallCap Market so as to enable continuation of its SmallCap listing.
Persons who are deemed to be affiliates of Bio Balance prior to the
completion of the transaction must have registered shares with a current
prospectus, or comply with Rule 145 or another available exemption from
registration under the Securities Act of 1933 (the "Securities Act") if they
wish to sell or otherwise transfer the shares of New York Health Care common
stock which they receive in the transaction. Moreover, there are contractual
restrictions on transfer of New York Health Care shares which are set forth in
the Exchange Agreement and affect a number Bio Balance shareholders.
The sale of substantial amounts of common stock in the public market
following the transaction could adversely affect the market price of the common
stock. Upon the completion of the transaction, a total of 18,387,949
(post-split) shares will be subject to restrictions on sale in accordance with
the terms of the Exchange Agreement. A total of 17,396,625 shares of New York
Health Care's common stock issued to Bio Balance shareholders will be restricted
from sale for various periods of time ranging from as early as 120 days after
the date of this Prospectus/Proxy Statement and as late as August 10, 2003. A
total of 991,324 (post-split) shares of New York Health Care common stock held
of record and beneficially by its President and Vice-President will be
restricted from sale for a period of 120 days after the date of this
Prospectus/Proxy Statement, after which they will be able to sell not more than
10% of their shares per month for as long as they are directors of New York
Health Care. The restrictions on the NYHC restricted shareholders permit
transfers to family trusts and registered charities provided the transferees
abide by the restrictions, although they will be permitted to sell not more than
1,000 shares of common stock each trading day during a period ending 120 days
after the date of this Prospectus/Proxy Statement, after which the restriction
will expire. In addition, New York Health Care may release the restriction on
the shares held by the NYHC restricted shareholders provided it also releases
restrictions on the shares issued to Bio Balance shareholders in a ratio of one
share held by the NYHC restricted shareholders for two shares held by the Bio
Balance shareholders.
124
Transfer Agent and Warrant Agent
Continental Stock Transfer & Trust Company, New York, New York, is the
transfer agent and registrar for the shares of New York Health Care common
stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
NEW YORK HEALTH CARE AND BIO BALANCE
The following tables sets forth certain information regarding the New York
Health Care shares and Bio Balance shares beneficially owned as of October 31,
2002 by (i) each person, known to New York Health Care, who beneficially owns
more than 5%, (ii) each of New York Health Care directors and (iii) all officers
and directors of each of New York Health Care's as a group:
New York Health Care
Percentage of Stock Outstanding (2)
Shares
Beneficially
Owned (1)
Name of Beneficial Owner Before Transaction After Transaction
Jerry Braun* (3)(9) 1,800,639 38.25% 7.09%
Jacob Rosenberg* (4)(9) 1,140,096 25.32% 4.92%
Samson Soroka (5) 551,606 14.43% 1.72%
Hirsch Chitrik (6) 604,075 15.77% 2.13%
H. Gene Berger* (7) 40,000 1.06% .10%
Charles J. Pendola* (8) 30,000 0.8% .08%
All officers and directors
as a group (4 persons)(1)(2)
(3)(4)(7)(8) 3,010,835 54.07% 7.47%
- ------------------------
* Director
(1) The New York Health Care shares owned by each person or by the group, and
the shares included in the total number of New York Health Care shares
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.
125
(2) The Percentage of Stock Outstanding Before Transaction is on a pre-split
basis. The Percentage of Stock Outstanding After Transaction reflects the 1
- for - 1.5 share reverse stock split which is provided for in the
transaction and assumes acquisition of 100% of the 25,617,820 Bio Balance
shares expected to be issued and outstanding at the closing of the
transaction.
(3) Includes a total of 773,750 New York Health Care shares issuable upon the
exercise of stock options granted to Mr. Braun and 221,391 Shares issuable
upon the conversion of shares of Class A Convertible Preferred Stock.
(4) Includes a total of 680,000 New York Health Care shares issuable upon the
exercise of stock options granted to Mr. Rosenberg and 110,695 shares
issuable upon the conversion of his shares of Class A Convertible Preferred
Stock.
(5) Includes 110,695 New York Health Care shares issuable upon the conversion
of Mr. Soroka's shares of Class A Convertible Preferred Stock.
(6) Includes 118,075 New York Health Care shares issuable upon the conversion
of Mr. Chitrik's shares of Class A Convertible Preferred Stock and 100,000
shares owned of record by a charitable foundation which are attributed to
Mr. Chitrik as beneficial ownership. Mr. Chitrik disclaims beneficial
ownership of those shares.
(7) Includes 40,000 New York Health Care shares issuable upon the exercise of
common stock purchase warrants granted to Mr. Berger.
(8) Includes 30,000 New York Health Care shares issuable upon the exercise of a
common stock purchase warrant granted to Mr. Pendola.
Bio Balance
Number of Percentage of Bio Percentage of New
Shares Balance Shares York Health Care
Name of Beneficial Owner
Beneficially Owned Before Shares Owned
Owned (1) Transaction (1) After Transaction(1)(4)
--------- --------------- -----------------------
Paul Stark* (2) 73,000 .36% .28%
Joseph Herbst * 150,000 .74% .59%
Jeanne Quinto* 25,000 .12% .1%
Yitz Grossman (3) 1,275,025 6.22% 4.94%
Pinchas Stefansky (5)(9) 2,024,000 9.97% 7.9%
Douglas Andrew Ryan (6)(9) 1,800,000 8.87% 7.03%
Bernard Korolnick (7) 2,036,709 10.04% 7.95%
Rivvi Rose (8)(9) 2,100,000 10.35% 8.20%
All officers and
directors as a
group (3 persons) 248,000 1.22% .97%
- ---------------------------
* Director
126
(1) The Bio Balance shares owned by each person or by the group, and the shares
included in the total number of Bio Balance shares outstanding, have been
adjusted in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended, to reflect the ownership of shares issuable upon exercise
of outstanding options, warrants or other common stock equivalents which
are exercisable within 60 days. As provided in such Rule, such shares
issuable to any holder are deemed outstanding for the purpose of
calculating such holder's beneficial ownership but not any other holder's
beneficial ownership..
(2) An aggregate of 33,000 shares are owned by Paul Stark's children. Mr. Stark
disclaims beneficial ownership of those shares. An additional 40,000 shares
are owned by Waterview Partners, a New York partnership, of which Mr. Stark
is President. Mr. Stark disclaims beneficial ownership of those 40,000
shares.
(3) Consists of (a) warrants to purchase 200,000 shares owned by Emerald Asset
Management, Inc. of which Mr. Grossman is the sole shareholder and (b)
1,075,025 shares owned by the wife and children of Mr. Grossman, as to
which Mr. Grossman disclaims beneficial ownership.
(4) Assumes acquisition of 100% of the Bio Balance shares and a total of
25,617,820 New York Health Care shares issued and outstanding at closing.
(5) All shares are held of record by Hershey Holdings, of which Mr. Stafansky
holds sole voting and investment power.
(6) All shares are held of record by Birimiza Associates, of which Mr. Ryan
holds sole voting and investment power.
(7) All shares are held of record by KPT Partners, of which Mr. Korolnick holds
sole voting and investment power.
(8) All shares are held of record by Nekavim Investors, of which Ms. Rose holds
sole voting and investment power.
(9) Pinchas Stefansky, Douglas Andrew Ryan and Rivvi Rose have agreed to defer
the receipt of 1,222,222 shares, 1,000,000 shares, and 1,000,000 shares,
respectively, of New York Health Care common stock issuable at closing of
the merger if Bio Balance has raised less than $6 million in its private
placement. Those shares will be cancelled if an aggregate of $6 million has
not been received from the private placement within 120 days following
closing.
New York Health Care After The Bio Balance Acquisition
The following tables sets forth certain information regarding the New York
Health Care shares which, assuming that all 23,143,334 New York Health Care
shares registered in this offering have been exchanged for 100% of the then
issued and outstanding Bio Balance shares and a total of 25,617,820 New York
Health Care shares issued and outstanding at closing, will be beneficially owned
by (i) each person, known to New York Health Care, who beneficially owns more
than 5%, (ii) each of the then New York Health Care directors and (iii) all
officers and directors of New York Health Care's as a group:
127
Shares Percentage of Stock Outstanding
Beneficially After the
Name of Beneficial Owner Owned (1) Closing of The Transaction(2)
- ------------------------ --------- -----------------------------
Jerry Braun* (3) 1,200,426 4.6%
Jacob Rosenberg* (4) 760,064 2.97%
H. Gene Berger *(5) 27,400 .11%
Charles J. Pendola* (6) 20,000 .08%
Paul Stark*(7) 73,000 .28%
David C. Katz 15,000 .06%
Pinchas Stefansky (8)(12) 2,024,000 7.9%
Douglas Andrew Ryan (9)(12) 1,800,000 7.03%
Bernard Korolnick (10) 2,036,709 8.0%
Rivvi Rose (11)(12) 2,100,000 8.2%
All officers and directors
as a group (6 persons)(1)(2)
(3)(4)(5)(6)(7) 2,080,890 8.1%
- -----------------------
* Director
(1) The New York Health Care shares owned by each person or by the group, and
the shares included in the total number of New York Health Care shares
outstanding, have been adjusted in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, to reflect the ownership of
shares issuable upon exercise of outstanding options, warrants or other
common stock equivalents which are exercisable within 60 days. As provided
in such Rule, such shares issuable to any holder are deemed outstanding for
the purpose of calculating such holder's beneficial ownership but not any
other holder's beneficial ownership.
(2) The Percentage of Stock Outstanding is on a post-split basis which reflects
the 1-for-1.5 share reverse stock split which is provided for in the
transaction and assumes acquisition of 100% of the 25,617,820 Bio Balance
shares expected to be issued and outstanding at the closing of the
transaction.
(3) Includes a total of 515,833 New York Health Care 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.
(4) Includes a total of 453,333 New York Health Care shares issuable upon the
exercise of stock options granted to Mr. Rosenberg and 73,797 shares
issuable upon the conversion of his shares of Class A Convertible Preferred
Stock.
(5) Includes 23,667 New York Health Care shares issuable upon the exercise of
common stock purchase warrants granted to Mr. Berger.
(6) Includes 20,000 New York Health Care shares issuable upon the exercise of a
common stock purchase warrant granted to Mr. Pendola.
(7) Includes an aggregate of 33,000 shares are owned by Paul Stark's children
and an additional 40,000 shares owned by Waterview Partners, a New York
partnership, of which Mr. Stark is President. Mr. Stark disclaims
beneficial ownership of these 73,000 shares.
128
(8) All shares are held of record by Hershey Holdings, of which Mr. Stafansky
holds sole voting and investment power.
(9) All shares are held of record by Birizma Associates, of which Mr. Ryan
holds sole voting and investment power.
(10) All shares are held of record by KPT Partners, of which Mr. Korolnick holds
sole voting and investment power.
(11) All shares are held of record by Nekavim Investors, of which Ms. Rose holds
sole voting and investment power.
(12) Pinchas Stefansky, Douglas Andrew Ryan and Rivvi Rose have agreed to defer
the receipt of 1,222,222 shares, 1,000,000 shares, and 1,000,000 shares,
respectively, of New York Health Care common stock issuable at closing of
the merger if Bio Balance has raised less than $6 million in its private
placement. Those shares will be cancelled if an aggregate of $6 million has
not been received from the private placement within 120 days following
closing.
LEGAL MATTERS
The validity of the issuance of the New York Health Care common stock and
warrants will be passed upon for New York Health Care by Scheichet & Davis,
P.C., New York, New York. William J. Davis, Esq., a member of Scheichet & Davis,
P.C., is the beneficial owner of 2,000 New York Health Care shares. Certain
legal matters will be passed upon for Bio Balance by Vanderkam & Sanders,
Houston, Texas.
EXPERTS
The historical financial statements of New York Health Care as of December
31, 2000 and 2001, and for the years ended December 31, 1999, 2000 and 2001,
included in the New York Health Care Form 10-KSB for the fiscal year ended
December 31, 2000 and the Form 10-KSB/A for the fiscal year ended December 31,
2001, which are incorporated by reference into this Prospectus/Proxy Statement,
have been audited by M.R. Weiser & Co. LLP, independent certified public
accountants. Their reports appear in the New York Health Care Form 10-KSB for
the fiscal year ended December 31, 2000 and the Form 10-KSB/A for the fiscal
year ended December 31, 2001 and were included in reliance upon the authority of
that firm as experts in auditing and accounting.
The financial statements of Bio Balance as of and for the period May 21,
2001 (inception) through December 31, 2001 included in this Prospectus/Proxy
Statement have been audited by Holtz Rubenstein & Co., LLP, independent
auditors, as stated in their report appearing herein.
Certain matters with respect to federal income tax consequences in
connection with the transaction have been passed upon for Bio Balance by Rosen
Seymour Shapss Martin & Company LLP, independent certified public accountants.
129
WHERE YOU CAN FIND MORE INFORMATION
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE IMPORTANT
BUSINESS AND FINANCIAL INFORMATION ABOUT US THAT IS NOT INCLUDED IN OR DELIVERED
WITH THIS PROSPECTUS/PROXY STATEMENT. SEE "WHERE YOU CAN FIND ADDITIONAL
INFORMATION" AND "INCORPORATION OF INFORMATION BY REFERENCE." THIS INFORMATION,
EXCLUDING EXHIBITS UNLESS THEY ARE SPECIFICALLY INCORPORATED INTO THE REFERENCE
INTO THE INFORMATION, IS AVAILABLE WITHOUT CHARGE TO ANY HOLDER OR BENEFICIAL
OWNER OF BIO BALANCE COMMON STOCK OR WARRANTS UPON WRITTEN OR ORAL REQUEST TO
JACOB ROSENBERG, SECRETARY AND VICE PRESIDENT, NEW YORK HEALTH CARE, INC., 1850
MCDONALD AVENUE, BROOKLYN, NEW YORK, 11223, TELEPHONE NUMBER (718) 375-6700. TO
OBTAIN TIMELY DELIVERY OF THIS INFORMATION, YOU MUST REQUEST THIS INFORMATION NO
LATER THAN FIVE BUSINESS DAYS BEFORE THE NEW YORK HEALTH CARE SHAREHOLDERS
MEETING. THEREFORE, YOU MUST REQUEST INFORMATION ON OR BEFORE DECEMBER 5, 2002.
The following documents have been filed by New York Health Care with the
Securities and Exchange Commission (SEC File No. 1-12451) which are incorporated
by reference into this Prospectus/Proxy Statement:
New York Health Care's Annual Report on Form 10-KSB/A for the fiscal year
ended December 31, 2001 (filing dated July 19, 2002).
New York Health Care's Report on Form 8-K for the event of March 18, 2002
(filing dated March 25, 2002).
New York Health Care's Quarterly Report on Form 10-Q for the fiscal
quarters ended March 31, 2002 (filing dated May 15, 2002) and June30, 2002
(filing dated August 14, 2002).
Any statement contained in the document incorporated or deemed to be
incorporated by reference into this Prospectus/Proxy Statement will be deemed to
be modified or superceded for purposes of this Prospectus/Proxy Statement to the
extent that a statement contained in it or any other subsequently filed document
that is deemed to be incorporated by reference into it, modifies or supercedes
the statement. Any statement so modified or superceded will not be deemed,
except as modified or superceded, to constitute a part of this Prospectus/Proxy
Statement.
You may read and copy any materials which we file with the SEC at the SEC's
Public Reference Room located at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.Y., Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding New York Health Care. The address of
the SEC Website is http://www.sec.gov.
130
New York Health Care has filed a Registration Statement on Form S-4
under the Securities Act with the SEC with respect to the shares and warrants to
be issued in the exchange transaction. This Prospectus/Proxy Statement
constitutes the prospectus of New York Health Care filed as part of the
Registration Statement. This Prospectus/Proxy Statement does not contain all of
the information set forth in the Registration Statement because certain parts of
the Registration Statement are omitted in accordance with the rules and
regulations of the SEC. The Registration Statement and its Exhibits are
available for inspection and copying as set forth above.
131
THE BIO BALANCE CORPORATION
(A Development Stage Company)
REPORT ON AUDIT OF FINANCIAL STATEMENTS
PERIOD MAY 21, 2001 (INCEPTION)
THROUGH DECEMBER 31, 2001,
SIX MONTHS ENDED JUNE 30, 2002,
PERIOD MAY 21, 2001 (INCEPTION)
THROUGH JUNE 30, 2001,
AND PERIOD MAY 21, 2001 (INCEPTION)
THROUGH JUNE 30, 2002
INDEX TO FINANCIAL STATEMENTS
Page
Independent auditors' report F-1
Balance sheets F-2
Statements of operations F-3
Statement of stockholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-11
132
Independent Auditors' Report
Board of Directors and Stockholders
The Bio Balance Corporation
New York, New York
We have audited the accompanying balance sheet of The Bio Balance Corporation (a
development stage company) as of December 31, 2001, and the related statements
of operations, stockholders' equity and cash flows for the period May 21, 2001
(inception) through December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Bio Balance Corporation as
of December 31, 2001, and the results of its operations and its cash flows for
the period May 21, 2001 (inception) through December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
January 17, 2002 (except for Note 8, as to which
the date is January 29, 2002)
F-1
THE BIO BALANCE CORPORATION
(A Development Stage Company)
BALANCE SHEETS
December 31, June 30,
2001 2002
ASSETS (unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 896,426 $ 1,648,898
Restricted cash (Note 7) - 100,000
Prepaid expenses and other current assets 10,500 35,333
Total --------- ------------
current assets 906,926 1,784,231
INTANGIBLE ASSETS, net of accumulated
amortization of $87,000 and $192,000,
respectively (Notes 3 and 4) 2,001,910 1,908,288
OTHER ASSETS 10,000 48,000
---------- -------------
$ 2,918,836 $ 3,740,519
========= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other
current liabilities $ 117,070 $ 231,685
---------- ------------
COMMITMENTS AND CONTINGENCY
(Notes 4 and 5)
STOCKHOLDERS' EQUITY: (Notes 3, 4 and 5)
Common stock, $.0001 par value;
authorized 75,000,000 shares,
19,700,667 and 20,245,323
shares issued and outstanding,
respectively 1,970 2,025
Preferred stock, $.0001 par value;
authorized 5,000,000 shares; 0 shares
issued and outstanding - -
Additional paid-in capital 3,273,633 4,692,746
Deficit accumulated during the
development stage (452,169) (1,170,767)
Unearned compensation (21,668) (15,170)
----------- ------------
2,801,766 3,508,834
----------- ------------
$ 2,918,836 $ 3,740,519
=========== ============
See notes to financial statements
F-2
THE BIO BALANCE CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period Period Period
May 21, May 21, May 21,
2001 Six 2001 2001
(Inception) Months (Inception) (Inception)
through Ended through through
December 31, June 30, June 30, June 30,
2001 2002 2001 2002
(unaudited)(unaudited) (unaudited)
------------ ----------- ---------- -----------
EXPENSES: (Notes 2, 3 and 5)
Organization costs $ 92,500 $ - $ - $ 92,500
Product development 75,623 147,048 5,416 222,671
Amortization of intangible assets 87,000 105,000 - 192,000
General and administrative 197,046 466,550 28,047 663,596
----------- ---------- --------- ----------
NET LOSS $ (452,169) $(718,598) $(33,463) $(1,170,767)
=========== ========== ========= ===========
NET LOSS PER SHARE (Note 4) $ (.03) $ (.04) $ - $ (.07)
=========== ========== ========= ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 17,574,891 19,079,028 14,168,880 17,540,138
=========== ============ ========== ===========
See notes to financial statements
F-3
THE BIO BALANCE CORPORATION
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(Notes 3, 4 and 5)
Common Stock Preferred Stock Deficit
75,000,000 Shares 5,000,000 Shares Accumulated
$.0001 Par Value $.0001 Par Value Additional During the
Par Par Paid-in Development Unearned
Shares Value Shares Value Capital Stage Compensation Total
--------- ------- -------- --------- ------------- ------------- ------------ -----
BALANCE, May 21, 2001 - $ - - $ - $ - $ - $ - $ -
Common stock issued
to founders
($.0001 per share) 8,896,709 890 - - - - - 890
Common stock issued for
cash ($.03 per
share), net 8,456,625 845 - - 247,462 - - 248,307
Common stock issued for
services
($.03 per share) 550,000 55 - - 16,445 - - 16,500
Common stock issued for cash
($1.50 per share), net 400,000 40 - - 587,377 - - 587,417
Common stock issued for
services
($1.50 per share) 40,000 4 - - 59,996 - - 60,000
Common stock issued for asset
acquisition ($1.50 per share) 990,000 99 - - 1,484,901 - - 1,485,000
Warrants issued for
future services - - - - 26,000 - (26,000) -
Common stock issued for
cash ($3.00 per share), net 367,333 37 - - 851,452 - - 851,489
Amortization of unearned
compensation - - - - - - 4,332 4,332
Net loss - - - - - (452,169) - (452,169)
---------- ------- ----------- ------- ----------- ------------- ---------- -----------
BALANCE, December 31, 2001 19,700,667 1,970 - - 3,273,633 (452,169) (21,668) 2,801,766
Common stock issued for cash
($3.00 per share), net
(unaudited) 544,656 55 - - 1,419,113 - - 1,419,168
Amortization of unearned
compensation (unaudited) - - - - - - 6,498 6,498
Net loss (unaudited) - - - - - (718,598) - (718,598)
---------- ------- ----------- ------- ----------- ------------- ---------- -----------
BALANCE, June 30, 2002
(unaudited) 20,245,323 $2,025 - $ - $4,692,746 $(1,170,767) $(15,170) $3,508,834
========== ======= ========== ======= =========== ============= ========== =========
See notes to financial statements
F-4
THE BIO BALANCE CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period Period Period
May 21, May 21, May 21,
2001 Six 2001 2001
(Inception) Months (Inception) (Inception)
through Ended through through
December 31, June 30, June 30, June 30,
2001 2002 2001 2002
----- ------ ------ ----------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (452,169) $(718,598) $ (33,463) $(1,170,767)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-cash compensation 60,000 - - 60,000
Amortization 91,332 111,498 - 202,830
Changes in operating assets and liabilities:
Increase in assets:
Prepaid expenses and other current assets (10,500) (24,833) - (35,333)
Increase in liabilities:
Accounts payable and accrued expenses 117,070 114,615 33,408 231,685
---------- --------- --------- -----------
Net cash used in operating activities (194,267) (517,318) (55) (711,585)
---------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash - (100,000) - (100,000)
Other assets (10,000) (38,000) - (48,000)
Acquisition of intangible assets (587,410) (11,378) - (598,788)
---------- --------- --------- -----------
Net cash used in investing activities (597,410) (149,378) - (746,788)
---------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,688,103 1,419,168 163,725 3,107,271
---------- ---------- --------- -----------
Net cash provided by financing activities 1,688,103 1,419,168 163,725 3,107,271
---------- ---------- --------- -----------
Net increase in cash and cash equivalents 896,426 752,472 163,670 1,648,898
Cash and cash equivalents at beginning of period - 896,426 - -
---------- ---------- ---------- -----------
Cash and cash equivalents at end of period $ 896,426 $1,648,898 $ 163,670 $ 1,648,898
========== ========== ========== ===========
See notes to financial statements
F-5
THE BIO BALANCE CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
PERIOD MAY 21, 2001 (INCEPTION)
THROUGH DECEMBER 31, 2001,
SIX MONTHS ENDED JUNE 30, 2002,
PERIOD MAY 21, 2001 (INCEPTION)
THROUGH JUNE 30, 2001,
AND PERIOD MAY 21, 2001 (INCEPTION)
THROUGH JUNE 30, 2002
(Information with respect to the six months ended June 30, 2002, the
period May 21, 2001 (inception) through June 30, 2001, and
the period May 21, 2001
(inception) through June 30, 2002 is
unaudited)
1. Nature of Operations:
The Bio Balance Corporation (the "Company"), a Delaware corporation, was
formed in May 2001. The Company is a biotechnology company devoted to the
discovery, manufacturing and marketing of probiotic agents for therapy of
gastrointestinal diseases. A probiotic is a live microorganism or microbial
mixture administered to beneficially affect the host by improving its microbial
balance.
The Company is in the development stage, as defined in Statement of
Financial Accounting Standard No. 7, "Accounting and Reporting for Development
Stage Enterprises". To date, the Company has devoted its efforts primarily to
various organizational activities, including negotiating of the technology
acquisition agreement, developing its business strategy, hiring management
personnel, raising capital through private offerings, and undertaking
preliminary activities for the commencement of operations. The Company has not
generated any revenue to date. Although the Company is preparing for the tests
required by the Food and Drug Administration ("FDA") for the manufacture and
marketing of its technology, there is no guarantee that the Company will obtain
regulatory approval. Further, if the Company is successful in obtaining FDA
approval, there can be no assurance that the Company will be successful in
marketing any such products.
2. Summary of Significant Accounting Policies:
a. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
b. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
2. Summary of Significant Accounting Policies: (Cont'd) d.Income taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. At December 31, 2001 and June 30, 2002, the
deferred tax assets relating to the Company's net operating loss carryforwards
($181,000 and $468,000, respectively) were fully reserved.
e. Comprehensive income (loss)
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. Comprehensive loss
was equivalent to net loss for all periods presented.
f. Concentration of risk
The Company invests its excess cash in deposits and money market accounts
with major financial institutions and in commercial paper of companies with
strong credit ratings. g.Net loss per share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires dual presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if stock options or convertible
securities were exercised or converted into common stock. Shares held in escrow
are excluded from the weighted average number of shares outstanding until all
necessary conditions have been satisfied at the end of the reporting period.
Basic and diluted loss per share amounts were equivalent for all periods
presented.
h. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation."
i.Intangible assets
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible
Assets". SFAS No. 141 requires the use of the purchase method of accounting for
business combinations and prohibits the use of the pooling of interests method.
SFAS No. 141 also expands the definition of intangible assets acquired in a
purchase business combination. SFAS No. 142 eliminates the amortization of
goodwill, requires annual impairment testing of goodwill and introduces the
concept of indefinite life intangible assets. The new rules also prohibit the
amortization of goodwill associated with business combinations that close after
June 30, 2001.
F-7
2. Summary of Significant Accounting Policies: (Cont'd)
j. Impairment of long-lived assets In October 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disclosure of Long-lived Assets".
SFAS No. 144 addresses significant issues relating to the implementation of
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of", develops a single accounting model,
based on the framework established in SFAS No. 121 for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired.
k. Unaudited financial statements The financial statements at June 30, 2002
and for the six months ended June 30, 2002, the period May 21, 2001
(inception) through June 30, 2001, and the period May 21, 2001 (inception)
through June 30, 2002 are unaudited; however, in the opinion of management
all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial statements for this
interim period have been made. The results of the interim period are not
necessarily indicative of the results to be obtained for a full fiscal
year.
3. Intangible Assets:
On July 31, 2001, the Company acquired technology, including patents,
relating to certain probiotic agents. Aggregate consideration paid totaled
$2,036,500, including 990,000 shares of the Company's common stock (valued at
$1,485,000), $510,000 cash to fund the payment of claims against the Sellers,
and associated acquisition costs of $41,500. The Company has also incurred fees
approximating $64,000 through June 30, 2002 in connection with patent
applications for the technology. Beginning in the spring of 2002, the Company
commenced taking those actions necessary to have it first product, PROBACTRIX,
qualify as a medical food. Those actions include the testing and panel review
necessary for the product to be established as generally recognized as safe
("GRAS") and related clinical studies to obtain data that the product is safe
and effective. In addition to qualifying the product as a medical food, this
process will also render a different version of the product ready for submission
to the FDA for approval as an ethical drug. The cost of technology and patents
is being charged to operations over their estimated useful lives (10 years).
4. Stockholders' Equity:
The Company has authorized 75,000,000 shares, par value $0.0001, of common
stock. The common stock has one vote per share, with no cumulative voting. There
are no pre-emptive rights, conversion rights, preferences, redemption provision,
sinking fund provisions or any liability for further calls or assessments. There
are no stated liquidation rights other than those that may exist under Delaware
law.
The Company has authorized 5,000,000 shares, par value $0.0001, of
preferred stock. Shares of preferred stock may be issued in such classes or
series, and may have such voting powers, and such designations, preferences and
other special rights and qualifications, or restrictions thereof, as shall be
set by the Board of Directors.
In May 2001 the Company issued 8,896,709 shares of common stock to its
founders for cash proceeds of $890.
F-8
4. Stockholders' Equity: (Cont'd)
In June 2001 the Company issued 8,456,625 shares of common stock in a
private placement for gross cash proceeds approximately $253,400. In addition,
550,000 shares of common stock (valued at $16,500) were issued for services
provided.
In July and August 2001 the Company issued 400,000 shares of its common
stock in a private placement for gross cash proceeds of $600,000. An additional
40,000 shares (valued at $60,000) were issued to a consultant for services.
In November and December 2001 the Company issued 367,333 shares of its
common stock in private placements for gross cash proceeds of $1,102,000.
On January 29, 2002 the Company issued 391,656 shares of common stock in a
private placement (see Note 8).
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 August 15, 2002, the Company issued
48,000 shares of common stock in a private placements for gross proceeds of
$144,000.
The Company granted options to acquire 73,066 shares of common stock to an
underwriter in connection with private placements of its common stock. The
options have an exercise price of $3.00 per share.
On July 31, 2001 the Company issued 990,000 shares of its common stock
(valued at $1,485,000) as consideration for the acquisition of technology. The
acquisition agreement provides that the Sellers may request a buyback of the
technology, in exchange for a return of the 990,000 shares issued, in the event
the Company fails to (i) enter into an Equity Transaction (the "Transaction")
within 180 days after the purchase and (ii) consummate the Transaction by
November 11, 2002, as amended in July and August 2002. An Equity Transaction is
defined as (i) an initial public offering of the Company's common stock, (ii) a
merger with a publicly traded entity, or (iii) an acquisition of the Company by
a publicly traded entity. In addition, the acquisition agreement provides that,
in the event of a stock-for-stock exchange, the Sellers will be entitled to
receive additional securities if the value of the 990,000 shares issued is less
than $1,980,000 based on the per share value of the securities being exchanged.
The shares issued to the Sellers are held in escrow, to be released upon the
earlier of (i) the closing of an Equity Transaction or (ii) final resolution of
the escrow fund, as defined.
On October 11, 2001, the Company entered into a stock exchange agreement
with an unrelated company (see Note 7).
5. Commitments:
a. Consulting agreements
The Company is party to a consulting agreement with an entity controlled by
its former President and a founder. The agreement provides for a minimum annual
compensation of $250,000 and was effective commencing on October 1, 2001. The
agreement is in effect for five years and provides for an extension until the
eighth anniversary, if, prior to June 1, 2005, the Company shall have obtained
at least $6,000,000 in equity capital from one or more sources. The agreement
also grants 200,000 stock warrants, each to purchase one share of common stock
at an exercise price of $1.00, each expiring on June 1, 2011. The warrants had a
fair value of $0. The Company may also pay a bonus per annum, may grant such
other stock options and other incentives at its sole discretion.
F-9
5.Commitments: (Cont'd)
a. Consulting agreements (cont'd)
The Company is party to three additional agreements with unrelated third
parties relating to medical research consulting services. These agreements,
which expire from April 15, 2002 through August 31, 2003, provide for aggregate
annual consulting fees of $113,000. In addition, the consultants were issued
warrants to purchase 210,000 shares of the Company's common stock at an exercise
price of $1.50 per share.
The fair value of the warrants issued under consulting agreements in 2001
($26,000) was recorded as unearned compensation. The fair value was estimated
using the Black-Scholes option-pricing model, with the following assumptions: a
stock price equal to the price of the most recent private placement that had
taken place; an expected volatility of 0%; a risk free interest rate of 3.0%; no
future dividends; and expected lives equal to the lives of the respective
warrants.
b. Medical study
In February 2002 the Company engaged a medical consultant to prepare a
medical study of certain of its products. The fee for this study ($67,000) is
payable at specified dates through December 31, 2002.
c. Lease
The Company leases its facility under an operating lease, expiring in
November 2003, which provides for monthly lease payments of $5,000. Rent expense
approximated $10,000, $30,000 and $40,000 for the period May 21, 2001
(inception) through December 31, 2001, the six months ended June 30, 2002,and
the period May 21, 2001 (inception) through June 30, 2002, respectively.
6. Supplemental Information - Statement of Cash Flows:
No cash payments for interest or income taxes were made during the period May
21, 2001 (inception) through December 31, 2001. Cash paid for interest and
income taxes for the six months ended June 30, 2002 approximated $0 and $2,500,
respectively.
7. Business Combination:
On October 11, 2001, the Company entered into a stock exchange agreement
(the "Agreement") with New York Health Care, Inc. ("NYHC"), a publicly traded
company engaged in providing healthcare services. Under the terms of the
Agreement, as amended, the Company's shareholders will exchange at least 90% of
the Company's common stock for shares of NYHC's $0.01 par value common stock on
a one-for-one basis. Although in the form of a merger, the transaction is, in
substance, an acquisition of NYHC by The Bio Balance Corporation as the control
of NYHC will transfer from NYHC stockholders to The Bio Balance Corp.
stockholders. Consummation of the transaction is subject, among other things, to
the approval of NYHC's stockholders.
At June 30, 2002, $100,000 cash was held in escrow in connection with the
NYHC transaction.
F-10
8. Subsequent Event:
On January 29, 2002, the Company issued 391,656 shares of common stock in a
private placement for gross cash proceeds approximating $1,175,000.
F-11
STOCK FOR STOCK EXCHANGE AGREEMENT
THIS STOCK FOR STOCK EXCHANGE AGREEMENT ("Agreement") is made and entered
into as of the 11th day of October, 2001, by and among The Bio Balance Corp.
(formerly The Bio Balance Corp.), a Delaware corporation ("Bio Balance"), for
itself and for the benefit of the shareholders and warrantholders of Bio Balance
as of the Closing Date (individually "Bio Balance Shareholder" and collectively
"Bio Balance Shareholders"), as Seller, and New York Health Care, Inc., a New
York corporation ("NYHC"), as Buyer. Collectively, the Bio Balance Shareholders,
Bio Balance and NYHC are referred to as "Parties," and sometimes the Bio Balance
Shareholders, sometimes Bio Balance and sometimes NYHC are individually referred
to as "Party."
WHEREAS, the Bio Balance Shareholders as of the Closing Date will own 100%
of the issued and outstanding $.0001 par value common stock of Bio Balance and
rights to purchase Bio Balance common stock ("Bio Balance Shares");
WHEREAS, the Bio Balance Shareholders desire to exchange all but not less
than 90% of the Bio Balance Shares and 100% of the outstanding Options (as
defined in Section 1.2) for corresponding shares of NYHC's $0.01 par value
common stock and rights to purchase NYHC common stock ("NYHC Shares") and NYHC
desires to effectuate such exchange, on the terms and subject to the conditions
contained herein; and
WHEREAS, the Bio Balance Shareholders and NYHC desire this transaction to
be a tax-free reorganization pursuant to Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises made herein and in consideration of the covenants, representations,
warranties and conditions set forth herein, the receipt and sufficiency of which
are hereby acknowledged, the Parties, intending to be legally bound, agree as
follows:
ARTICLE 1
EXCHANGE OF BIO BALANCE SHARES FOR NYHC SHARES
1.1. Exchange of Bio Balance Shares for NYHC Shares. Subject to the terms
and conditions of this Agreement, the Bio Balance Shareholders shall transfer to
NYHC the Bio Balance Shares and, in exchange therefor, NYHC hereby agrees to
issue the NYHC Shares to the Bio Balance Shareholders (the "Exchange"). The NYHC
Shares shall be issued to the Bio Balance Shareholders on the following basis:
one NYHC Share for one Bio Balance Share. The foregoing exchange ratio assumes
and reflects the one for one and one-half (1:1-1/2) reverse split of NYHC's
outstanding common stock described in Section 3.2.a.(iii) herein.
1.2. Bio Balance Stock Options, Warrants and Convertible Securities. Except
as set forth on Schedule 1.2, as of immediately prior to the Closing, Bio
Balance will have outstanding stock options, warrants or convertible securities
to acquire common stock or other securities of Bio Balance (collectively
"Options"), which on an "as if issued" basis, together with all outstanding
common stock including the common stock issuable in the Private Placement
described in Section 3.4, will not be more than 23,043,334 common shares. In the
event additional Bio Balance Shares are required to be issued pursuant to the
Asset Purchase Agreement (defined in Section 4.1(c), then the number of NYHC
Shares issuable to holders of Bio Balance Shares who did not receive Bio Balance
Shares pursuant to the Asset Purchase Agreement, will be proportionately
reduced.
A-1
1.3. NYHC Stock Options, Warrants and Convertible Securities. As of
immediately prior to the Closing, NYHC will not have outstanding any stock
options, warrants or convertible securities to acquire common stock or other
securities of NYHC (collectively "Options") except as set forth on Schedule 1.3,
which on an "as if issued" basis, together with all outstanding common stock
will not be more than 4,050,000 common shares.
1.4. Change of Control of Bio Balance. The parties agree that at Closing
the officers, directors, consultants and key employees ("Key Employees") of Bio
Balance will be as are set forth on Exhibit A that is attached hereto and
incorporated herein by this reference, which schedule may be amended by Bio
Balance with the consent of NYHC prior to the effective date of the S-4
Registration Statement described in Section 3.3, which consent will not be
unreasonably withheld.
1.5. Change of Control of NYHC. The parties agree that at Closing the
officers, directors and key employees ("Key Employees") of NYHC will be as are
set forth on Exhibit B that is attached hereto and incorporated herein by this
reference.
ARTICLE 2
CLOSING
2.1. The Closing. Subject to the conditions precedent contained herein, the
Exchange ("Closing") shall take place at the offices of Scheichet & Davis, P.C.,
800 Third Avenue, 29th Floor, New York, NY 10022 at 1:00 p.m. (local time) on
(i) February 13,, 2002, or (ii) if by April 29, 2002 (A) any required NYDH
Consent (as defined in Section 4.1(n)) has not been obtained, (B) the Securities
Compliance (as defined in Section 3.3) has not been completed or (C) the
Shareholder Consent has not been obtained, then on such later date as the NYDH
Consent, the Securities Compliance and the Shareholder Consent shall have been
obtained and completed, or (iii) such other date and time as is mutually agreed
to by Bio Balance and NYHC ("Closing Date").
ARTICLE 3
ACTIONS PRIOR TO CLOSING
3.1. NASDAQ Approval. Within ten (10) days after the date of this Agreement
NYHC shall submit this Agreement and other documents delivered herewith to The
Nasdaq Stock Market, Inc. ("NASDAQ") pursuant to the rules and regulations
governing companies with a class of stock listed for trading on the NASDAQ
SmallCap Market ("Smallcap"). Within seventy-five (75) days after Closing, NYHC
must receive "no objections" from NASDAQ for the Exchange and other transactions
set forth in this Agreement, subject only to NYHC obtaining the approval of NYHC
Shareholders of the Exchange ("NASDAQ Approval"). The written NASDAQ Approval
may not be conditioned on NYHC being required to apply for a SmallCap listing
based on NASDAQ's "new listing" requirements.
3.2. Shareholder Consent.
a. Shareholder Meeting. Prior to Closing, NYHC shall convene a meeting
of its shareholders and use its best efforts to obtain the consent of NYHC
Shareholders of each of the following matters:
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(i) The election to the board of directors of two members to be
identified by Bio Balance. The board of directors after the meeting shall
be comprised of six directors.
(ii) Amendment of the Articles of Incorporation of NYHC for the
increase in the authorized $.01 par value common stock of NYHC from
50,000,000 shares to 100,000,000 shares.
(iii) The reverse split of NYHC $.01 par value common stock in the
ratio of one share of common stock for each 1.5 shares outstanding, so that
holders of common stock and rights to receive common stock shall receive
one share of common stock for each 1.5 shares of common stock held or
entitled to be received.
(iv) Approval of the Exchange and all other transactions described in
this Agreement.
(v) The approval of an amendment to the New York Health Care, Inc.
Performance Incentive Plan (the "Stock Option Plan") authorizing the
reservation of an additional 2,230,000 shares of the Company's $.01 par
value common stock for issuance under the Stock Option Plan after April 29,
2002 for the promotion and benefit of Bio Balance's business.
Collectively, the approval of the requisite number of shareholders is the
"Shareholder Consent."
b. Proxy Statement. On or before the later of forty-five (45) days after
NYHC has received the Bio Balance Financial Statements and twenty (20) days
after NYHC has received the private placement memorandum to be employed by Bio
Balance in connection with the Private Placement, NYHC will file a preliminary
proxy statement with the Securities and Exchange Commission. The Company further
covenants to use its best efforts to conduct the meeting of NYHC Shareholders on
or before February 14, 2002.
c. Insider Approval. Upon execution of this Agreement, NYHC will deliver to
Bio Balance the irrevocable proxies of officers and directors of the Company
owning not less than 50.1% of the capital stock permitted to vote on the subject
matter of the Shareholder Consent, in favor of the Shareholder Consent.
3.3. Registration. NYHC will prepare and file with the Securities and
Exchange Commission a registration statement on Form S-4 ("S-4 Registration
Statement") for the purpose of registering the offer of the NYHC Shares to the
Bio Balance Shareholders and make all filings required to be made with state
regulatory authorities, the unrestricted resale (except as otherwise described
herein) of the NYHC Shares received by Bio Balance Shareholders in the Exchange
("Securities Compliance").
3.4. Private Placement. Bio Balance shall conduct a private placement of
its common stock on the terms more particularly described in Schedule 3.4
("Private Placement") at Bio Balance's sole cost and expense. Bio Balance will
offer up to 3,000,000 common shares at a per share price of not less than $2.00.
Up to 300,000 Bio Balance common stock purchase warrants will be issued to
broker-dealers who participate in the Private Placement. NYHC shall cooperate
with Bio Balance in the preparation of the documents necessary to conduct the
Private Placement and all filings required to be made in connection with the
Private Placement. All proceeds from the Private Placement will be employed to
pay expenses of the Private Placement and then exclusively for use by Bio
Balance in furtherance of its business.
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3.5 Lockup.
a. NYHC Lockup. The officers and directors of NYHC identified on Schedule
3.5a shall agree to restrictions on the sale and transfer of the NYHC common
stock set forth on Schedule 3.5a, for the period set forth on Schedule 3.5a.
b. Bio Balance Lockup. The Bio Balance Shareholders identified on Schedule
3.5b shall agree to restrictions on the sale and transfer of the NYHC Shares
received by them in the Exchange, set forth on Schedule 3.5b, for the period set
forth on Schedule 3.5b.
c. All of the NYHC common shares subject to the foregoing lockups shall be
imprinted with the following legend which may be removed at the holder's request
after the expiration of the lockup period.
"The Common Shares of New York Health Care, Inc. represented by this
certificate are subject to certain restrictions on sale, transfer or
conveyance. A description of the restrictions may be obtained from the
Company."
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Bio Balance. Bio Balance represents
and warrants to NYHC as follows:
a. Authorization. The execution, delivery and performance of this Agreement
have been duly authorized, adopted and approved by the board of directors of Bio
Balance. Bio Balance has taken all necessary corporate action and has all of the
necessary corporate power to enter into this Agreement and to consummate the
transactions described in this Agreement. This Agreement has been duly and
validly executed and delivered by an officer of Bio Balance, and assuming that
this Agreement is the valid and binding obligation of NYHC, is the valid and
binding obligation of Bio Balance, enforceable against it in accordance with its
terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect or by legal or equitable principles relating to or limiting creditors'
rights generally, and except that the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. Bio Balance has the ability to consummate the Exchange.
b. Organization; Subsidiaries. Bio Balance is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Bio Balance has the corporate power and authority to own and lease its assets
and to carry on its business as it is now being conducted and is duly qualified
to do business as a foreign corporation in each jurisdiction where it conducts
business, except where the failure to be so qualified would not have a material
adverse effect on the business, operations, earnings, prospects, assets or
condition (financial or otherwise) of Bio Balance. As of the date hereof, Bio
Balance is only qualified to do business in Delaware. Bio Balance does not own
any shares of capital stock or other interest in any corporation, partnership,
association or other entity.
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c. Capitalization. The number of authorized, issued and outstanding shares
of Company Stock as of the date hereof is as set forth on Schedule A. Bio
Balance has not issued any shares of capital stock which could give rise to
claims for violation of any federal or state securities laws (including any
rules or regulations promulgated thereunder) or the securities laws of any other
jurisdiction (including any rules or regulations promulgated thereunder). Except
as described herein and on the schedules and exhibits hereto, as of the date
hereof, there are no options, warrants, calls, convertible securities or
commitments of any kind whatsoever relating to the shares of Bio Balance Stock
subject hereto or any of the unissued shares of capital stock of Bio Balance,
and there are no voting trusts, voting agreements, stockholder agreements or
other agreements or understandings of any kind whatsoever which relate to the
voting of the capital stock of Bio Balance, except as set forth in an asset
purchase agreement by and among Danron Ltd., an Isle of Mann company; Uprising
Investment Ltd., a Turks and Caicos Islands company; Kimmey Trading Ltd., a
Turks and Caicos Islands company; and Bio Balance dated as of July 31, 2001 and
all addenda and attachments thereto ("Asset Purchase Agreement"), annexed hereto
as Exhibit C.
d. Financial Statements. Bio Balance will promptly deliver to NYHC audited
financial statements of Bio Balance as at August 31, 2001 (the "Bio Balance
Financial Statements"). The Bio Balance Financial Statements will fairly
present, in all material respects, the financial position of Bio Balance at
August 31, 2001 and the results of operations and cash flows of Bio Balance for
the period indicated in conformity with generally accepted accounting principles
applied on a consistent basis.
e. Owned Real Property. Bio Balance does not own (of record or
beneficially), nor does it have any interest in any real property.
f. Leased Property; Tenancies. Bio Balance does not lease any property,
real or otherwise. Accordingly, Bio Balance is not a party to any leases or
subleases with respect to any property.
g. Title. Bio Balance's only assets are those reflected on the balance
sheet of the Bio Balance Financial Statements and as more particularly described
in the Asset Purchase Agreement. Bio Balance has good and marketable title to
all of such assets and to those assets purchased by Bio Balance after the date
thereof. The assets reflected on the balance sheet of the Bio Balance Financial
Statements, and as described in the Asset Purchase Agreement, and those
purchased by Bio Balance after the dates thereof, are owned free and clear of
all adverse claims, liens, mortgages, charges, security interests, encumbrances
and other restrictions or limitations of any kind whatsoever, except: (i) as
stated in the Bio Balance Financial Statements (including the notes thereto);
(ii) as stated in the Asset Purchase Agreement (iii) for liens for taxes or
assessments not yet due and payable or which are being contested by Bio Balance
in good faith; (iv) for minor liens imposed by law for sums not yet due or which
are being contested by Bio Balance in good faith; and (v) for imperfections of
title, adverse claims, charges, restrictions, limitations, encumbrances, liens
or security interests that are minor and which do not detract in any material
respect from the value of any of the assets subject thereto or which do not
impair the operations of Bio Balance in any material respect or affect the
present use of the assets in any material respect. Bio Balance has not made any
commitments or received any notice, oral or written, from any public authority
or other entity with respect to the taking or use of any of Bio Balance's
assets, whether temporarily or permanently, for any purpose whatsoever, nor is
there any proceeding pending or, to the knowledge of Bio Balance, threatened
which could adversely affect any asset owned or used by Bio Balance as of the
date hereof.
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h. Condition of Assets. All documents and agreements pursuant to which Bio
Balance has obtained the assets or the right to use any assets are valid and
enforceable in all respects in accordance with their respective terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect, or
by legal or equitable principles, relating to or limiting creditors' rights
generally and except that the remedy of specific performance and injunctive and
other forms of equitable relief are subject to certain equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought.
All licenses, permits and authorizations related to the location or operation of
the business of Bio Balance are in good standing and are valid and enforceable
in all respects in accordance with their respective terms. There is not, under
any of the foregoing instruments, documents or agreements, any existing default,
nor is there any event which, with notice or lapse of time or both, would
constitute a default arising through Bio Balance or any third party which could:
(i) have a material adverse effect on the business, assets, operations,
earnings, prospects or condition (financial or otherwise) of Bio Balance; or
(ii) materially adversely affect its use of any assets. Bio Balance is not in
violation of and has complied with all applicable codes, statutes, regulations,
ordinances, notices and orders of any governmental authority with respect to the
use, maintenance, condition, operation and improvement of any assets, except
where the failure to comply with which would not have a material adverse effect
on the business, assets, operations, earnings, prospects or condition (financial
or otherwise) of Bio Balance. Bio Balance's use of any improvements for the
purposes for which any of the assets are being used as of the date hereof does
not violate any such code, statute, regulation, ordinance, notice or order. Bio
Balance possesses all licenses, permits and authorizations required to be
obtained by Bio Balance with respect to Bio Balance's ownership, operation and
maintenance of the assets for all uses for which such assets are operated or
used by Bio Balance as of the date hereof, except where the failure to do so
would not have a material adverse effect on the business, assets, operations,
earnings, prospects or condition (financial or otherwise) of Bio Balance. All of
the assets are in good operating condition and repair, subject to normal wear
and use and each such item is usable in a manner consistent with current use by
Bio Balance.
i. Intellectual Property. Bio Balance has applied for a servicemark
(trademark) for the name Bio Balance in the State of Israel. Bio Balance has
applied for a trademark/servicemark registration with the United States Patent
and Trademark Office for the name BACTRIX. Except for the above and other
trademarks, trade-names and servicemarks that will be applied for in the normal
course, Bio Balance does not own, license or use any registered and unregistered
trademarks, service marks or trade names, trade secrets, registered or
unregistered copyrights, or computer programs or software (the "Intellectual
Property") except as described in the Bio Balance Financials or Asset Purchase
Agreement.
j. Accounts Receivable. As of the date hereof, Bio Balance has no accounts
receivable.
k. Accounts Payable. As of the date hereof, except as set forth in the Bio
Balance Financial Statements or arising out of transactions described in this
Agreement, Bio Balance has no accounts payable outside of the ordinary course of
business.
l. Absence of Undisclosed Liabilities. Other than as set forth in the Bio
Balance Financial Statements, Bio Balance has not had nor does it have any
indebtedness, loss or liability of any nature whatsoever, whether accrued,
absolute, contingent or otherwise and whether due or become due, which is
material to Bio Balance's business, assets, operations, prospects, earnings or
condition (financial or otherwise) of Bio Balance.
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m. Absence of Certain Changes or Events. Except as expressly disclosed or
set forth in this Agreement and the exhibits and schedules hereto, Bio Balance
has not, since August 31, 2001:
(i) issued, sold, granted or contracted to issue, sell or grant any of
its stock, notes, bonds, other securities or any option to purchase any of
the same;
(ii) amended its articles of organization or bylaws;
(iii) made any capital expenditures or commitments for the acquisition
or construction of any property, plant or equipment;
(iv) entered into any transaction, which could be deemed to be
material to Bio Balance or its business;
(v) incurred any damage, destruction or any other loss to any of its
assets in an aggregate amount exceeding Twenty-Five Thousand Dollars
($25,000) whether or not covered by insurance;
(vi) suffered any loss in an aggregate amount exceeding Twenty-Five
Thousand Dollars ($25,000) nor become aware of any intention on the part of
any client, dealer or supplier to discontinue its current relationship with
Bio Balance, the loss or discontinuance of which, alone or in the
aggregate, could have a material adverse effect on Bio Balance's business,
assets, operations, earnings, prospects or condition (financial or
otherwise) of Bio Balance;
(vii) entered into, modified, amended or altered any contractual
arrangement with any client, dealer or supplier, the execution,
performance, modification, amendment or alteration of which, alone or in
the aggregate, could have a material adverse effect on Bio Balance's
business, assets, operations, earnings, prospects or condition (financial
or otherwise) of Bio Balance;
(viii) incurred any material liability or obligation (absolute or
contingent);
(ix) experienced any material adverse change in Bio Balance's
business, assets, operations, earnings, prospects or condition (financial
or otherwise) of Bio Balance or experienced or have knowledge of any event
which could have a material adverse effect on Bio Balance's business,
assets, operations, earnings, prospects or condition (financial or
otherwise) of Bio Balance;
(x) declared, set aside or paid any dividend or other distribution in
respect of the capital stock of Bio Balance;
(xi) redeemed, repurchased, or otherwise acquired any of its capital
stock or securities convertible into or exchangeable for its capital stock
or entered into any agreement with respect to any of the foregoing;
(xii) purchased, disposed of or contracted to purchase or dispose of,
or granted or received an option or any other right to purchase or sell,
any of its assets;
(xiii) increased the rate of compensation payable or to become payable
to the officers or employees of Bio Balance, or increased the amounts paid
or payable to such officers or employees under any bonus, insurance,
pension or other benefit plan, or made any arrangements therefor with or
for any of said officers or employees;
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(xiv) adopted or amended any collective bargaining, bonus,
profit-sharing, compensation, stock option, pension, retirement, deferred
compensation or other plan, agreement, trust, fund or arrangement for the
benefit of its employees; or
(xv) changed any material accounting principle, procedure or practice
followed by Bio Balance or changed the method of applying such principle,
procedure or practice.
n. Agreements. Set forth on Schedule 4.1n hereto is a true, correct and
complete list of all contracts, agreements and other instruments material to the
business or operation of Bio Balance, including without limitation, those to
which Bio Balance is a party and those by which any of its assets are bound (the
"Material Agreements"). Copies of all such agreements have heretofore been
delivered or made available by Bio Balance to NYHC. Other than as set forth on
Schedule 4.1n, there is no contract, agreement or other instrument to which Bio
Balance is a party or which affects the assets, liabilities or outstanding
securities of Bio Balance. Bio Balance may enter into up to ten additional
consulting agreements with directors, consultants and advisory board members
substantially similar to the agreements previously delivered to NYHC and on
substantially similar terms ("Additional Consulting Agreements"). Each such
consultant may be granted the right to purchase up to 10,000 shares of Bio
Balance common stock at a per share purchase price of $1.50. Such right will be
exercisable for two years after the issue date. From and after the Closing, the
right to purchase Bio Balance common stock will be exchanged for the right to
purchase NYHC Shares on a one for one basis with all other terms being
substantially the same. Neither Bio Balance, nor any third party is in default
and no event has occurred which, with notice or lapse of time or both, could
cause or become a default by Bio Balance, or any third party, under any Material
Agreement. Each Material Agreement is enforceable in accordance with its terms,
against all other parties thereto, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect, or by legal or equitable principles, relating
to or limiting creditors' rights generally and except that the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
o. Non-Contravention; Consents. Neither the execution and delivery of this
Agreement by Bio Balance, nor consummation of the Exchange, does or will: (i)
violate or conflict with any provision of the articles of incorporation or
bylaws of Bio Balance; (ii) violate or, with the passage of time, result in the
violation of any provision of, or result in the acceleration of or entitle any
party to accelerate any obligation under, or result in the creation an
imposition of any lien, charge, pledge, security interest or other encumbrance
upon any of the assets, which are material to the business or operation of Bio
Balance, pursuant to any provision of any mortgage, lien, lease, agreement,
permit, indenture, license, instrument, law, order, arbitration award, judgment
or decree to which Bio Balance is a party or by which it or any of such assets
are bound, the effect of which violation, acceleration, creation or imposition
could have a material adverse effect on the business, assets, operations,
earnings, prospects or (financial or otherwise) of Bio Balance; (iii) violate or
conflict with any other restriction of any kind whatsoever to which Bio Balance
is subject or by which any of its assets may be bound, the effect of any of
which violation or conflict could have a material adverse effect on the
business, assets, operations, earnings, prospects or (financial or otherwise) of
Bio Balance; or (iv) constitute an event permitting termination by a third party
of any agreement, including the Material Agreements, to which Bio Balance is a
party or is subject, which termination could have a material adverse effect on
the business, assets, operations, earnings, prospects or condition (financial or
otherwise) of Bio Balance. No consent, authorization, order or approval of, or
filing or registration with, any governmental commission, board or other
regulatory body is required in connection with the execution, delivery and
performance of the terms of this Agreement by Bio Balance, except as same may
derive from NYHC.
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p. Employee Benefit Plans. Except as provided for in any employment
agreements described on Schedule 4.1(n), Bio Balance does not have any "employee
benefit plans" as such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (the "Benefit
Plans") covering the employees of Bio Balance.
q. Labor Relations. There are no agreements with or pending petitions for
recognition of any labor union or association as the exclusive bargaining agent
for any or all of the employees of Bio Balance and no such petition has been
pending at any time since Bio Balance's inception. There has not been any
organizing effort by any union or other group seeking to represent any employees
of Bio Balance as its exclusive bargaining agent at any time since Bio Balance's
inception. There are no labor strikes, work stoppages or other labor disputes
now pending or threatened against Bio Balance, nor has there been any such labor
strike, work stoppage or other labor dispute or grievance at any time since Bio
Balance's inception. Bio Balance has no knowledge that any executive, key
employee or any group of employees of Bio Balance has any plans to terminate
his/her employment with Bio Balance.
r. Insurance. Bio Balance has no insurance policies or binders of insurance
or programs of self-insurance. However, Bio Balance may purchase employee
medical insurance prior to Closing. In such event, a copy of the medical
insurance policy will be promptly delivered to NYHC.
s. Tax Matters. Bio Balance has timely filed with the appropriate taxing
authorities all returns (including, without limitation, information returns and
other material information) in respect of Taxes required to be filed through the
date hereof. The information contained in such returns is complete and accurate
in all material respects. Bio Balance has not requested any extension of time
within which to file returns (including, without limitation, information
returns) in respect of any Taxes. Bio Balance has accurately computed and timely
paid all Taxes for periods beginning before the date hereof, or an adequate
reserve has been established therefor, as set forth in the Bio Balance Financial
Statements. NYHC shall have no obligation or liability for or with respect to
(a) any Taxes or other assessments as a consequence of the transactions
contemplated by this Agreement all of which Taxes shall be paid by Bio Balance,
or each Bio Balance Shareholder, as the case may be, or (b) any other Taxes or
assessments of Bio Balance, or each Bio Balance Shareholder of any kind
whatsoever or any penalties or interest with respect to such Tax liabilities.
Bio Balance has withheld or collected from each payment made to each of its
employees, consultants, contractors and other payees the amount of Taxes
required to be withheld and collected therefrom for all periods through the date
hereof. Any liability for Taxes due and payable through the date of this
Agreement for which no returns are due or have been filed (including, without
limitation, property, payroll and withholding taxes) have been properly accrued
or provided for on the books of Bio Balance. No material deficiencies for Taxes
have been claimed, proposed, or assessed by any taxing or other governmental
authority against Bio Balance. There are no pending or, to the best knowledge of
Bio Balance, threatened audits, investigations or claims for or relating to any
material liability in respect of Taxes, and there are no matters under
discussion with any governmental authorities with respect to Taxes that, in the
reasonable judgment of Bio Balance, or its counsel is likely to result in a
material amount of Taxes. The federal, state and local returns of Bio Balance
have never been audited, and Bio Balance has not been notified that any taxing
authority intends to audit a return for any other period. No extension of a
statute of limitations relating to Taxes is in effect with respect to Bio
Balance. Bio Balance: (i) has not been an includible corporation in an
affiliated group that files consolidated income tax returns; (ii) is not a party
to any tax-sharing agreements or similar arrangements; and (iii) is not a
"foreign person" as defined in section 1445(f)(3) of the Code.
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The term "taxes" or "tax" as used in this section or referred to elsewhere
in this Agreement shall mean all taxes, charges, fees, levies, penalties, or
other assessments, including without limitation, income, capital gain, profit,
gross receipts, ad valorem, excise, property, payroll, withholding, employment,
severance, social security, workers' compensation, occupation, premium, customs
duties, windfall profits, sales, use, and franchise taxes, imposed by the United
States, or any state, county, local or foreign government or any subdivision or
agency thereof, and including any interest, penalties or additions attributable
thereto.
t. Compliance with Applicable Law. Bio Balance has been and is in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules and regulations applicable to the business, except where the
failure to comply with which would not materially adversely affect the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
Bio Balance or which would subject any officer or director of Bio Balance to
civil or criminal penalties or imprisonment. Bio Balance has complied with the
rules and regulations of all governmental agencies having authority over its
business and its operations, including without limitation, agencies concerned
with intra-state and interstate commerce, occupational safety and employment
practices, except where the failure to comply would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of Bio Balance. Bio Balance has no any knowledge of nor
received any notice of violation of any such rule or regulation since Bio
Balance's inception which could result in any liability of Bio Balance for
penalties or damages or which could subject Bio Balance to any injunction or
government writ, order or decree. To the knowledge of Bio Balance, there are no
facts, events or conditions that could interfere with, prevent continued
compliance with or give rise to any liability under any foreign, federal, state
or local governmental laws, statutes, ordinances or regulations applicable to
the business, assets, operations, earnings, prospects or condition (financial or
otherwise) of Bio Balance, except where the failure to do so would not have a
material adverse effect on the business, operations, earnings, prospects, assets
or condition (financial or otherwise) of Bio Balance.
u. Litigation. There is no action, suit, proceeding or investigation
pending or, to the knowledge of Bio Balance, threatened, which could restrict
the ability of Bio Balance to perform its obligations hereunder or could have a
material adverse effect on the business, assets, operations, earnings, prospects
or condition (financial or otherwise) of Bio Balance. Bio Balance is not in
default in respect of any judgment, order, writ, injunction or decree of any
court or any federal, state, local or other governmental agency, authority,
body, board, bureau, commission, department or instrumentality which could have
a material adverse effect on the business, assets, operations, earnings,
prospects or condition (financial or otherwise) of Bio Balance.
v. Permits. Bio Balance holds all permits, licenses, orders and approvals
of all federal, state or local governmental or regulatory authorities, agencies
or bodies required for the conduct and operation of Bio Balance's business as
currently conducted, except where the failure to do so would not have a material
adverse effect on the business, operations, earnings, prospects, assets or
condition (financial or otherwise) of Bio Balance. All such permits, licenses,
orders, and approvals are in full force and effect and no suspension,
termination or revocation of any of the foregoing is threatened. None of such
permits, licenses, orders or approvals will be materially adversely affected by
consummation of the Exchange. Bio Balance has no knowledge of nor has received
any notice of violation of any of such rules or regulations since Bio Balance's
inception which would result in any liability of Bio Balance for penalties or
damages or which would subject Bio Balance to any injunction or governmental
writ, order or decree.
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w. Unlawful Payments. Neither Bio Balance nor any officer, director,
employee, agent or representative of Bio Balance has paid or received, directly
or indirectly, any bribe or kickback, illegal political contribution, payment
from corporate funds which was incorrectly recorded on the books and records of
Bio Balance, unlawful payment from corporate funds to governmental or municipal
officials in their individual capacities for the purpose of affecting their
action or the actions of the jurisdiction which they represent to obtain
favorable treatment in securing business or licenses or to obtain special
concessions of any kind whatsoever, or illegal payment from corporate funds to
obtain or retain any business.
x. Officers, Directors and Employees. Schedule 4.1x hereto sets forth a
true, correct and complete list of all of the officers, directors and principal
employees of Bio Balance as of the date hereof, including their respective
names, titles, salaries and bonuses since Bio Balance's inception. Bio Balance
has also provided true, correct and complete copies of any employment agreements
between Bio Balance and any of the foregoing officers, directors and principal
employees of Bio Balance in effect as of the date hereof.
y. Loans to or from Affiliates. There exist no outstanding loans by Bio
Balance to any current or former officer, director, employee, consultant or
stockholder of Bio Balance or any affiliate of any of the foregoing. There are
no outstanding loans to Bio Balance by any current or former officer, director,
employee, consultant or stockholder of Bio Balance.
z. Books and Records.
(i) The books of account and other financial records of Bio Balance
are complete and correct and have been maintained in accordance with good
business practices.
(ii) All material corporate action of the boards of directors of Bio
Balance (including any committees) since the date of Bio Balance's
incorporation has been authorized, approved and/or ratified in the minute
books of Bio Balance.
aa. Bank Accounts. Set forth on Schedule 4.1aa is a true, correct and
complete list of the names of each bank, savings and loan, or other financial
institution, at which Bio Balance maintains any account (including any cash
contribution or similar accounts) and the names of all persons authorized to
draw thereon or who have access thereto. As of the date hereof, Bio Balance has
no credit or loan facility or guaranty established and/or maintained by or on
behalf of Bio Balance.
bb. Solvency of Bio Balance. Since its inception and through the Closing
Date, Bio Balance has been and will be solvent. "Solvent" shall mean, for
purposes of application of this provision, that: (i) the fair saleable value of
Bio Balance's property is in excess of the total amount of its debts; and (ii)
Bio Balance is able to pay its debts as they mature.
cc. Agreements with Affiliates. Except as otherwise described or disclosed
in this Agreement, Bio Balance is not a party to any instrument, license, lease
or other agreement, written or oral, with any officer or director of Bio
Balance.
dd. Accuracy of Information Furnished. Bio Balance represents that no
statement made by Bio Balance set forth herein or in the exhibits or the
schedules hereto, and no statement set forth in any certificate or other
instrument or document required to be delivered by or on behalf of Bio Balance
pursuant hereto or in connection with the Exchange, contained, contains or will
contain any untrue statement of a material fact, or omits, omitted or will omit
to state any material fact which is necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
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4.2 Representations and Warranties of NYHC. NYHC represents and warrants to
NYHC as follows:
a. Authorization. The execution, delivery and performance of this Agreement
have been duly authorized, adopted and approved by the board of directors of
NYHC. NYHC has taken all necessary corporate action and has all of the necessary
corporate power to enter into this Agreement and to consummate the Exchange.
This Agreement has been duly and validly executed and delivered by an officer of
NYHC, and assuming that this Agreement is the valid and binding obligation of
Bio Balance, is the valid and binding obligation of NYHC, enforceable against it
in accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect, or by legal or equitable principles, relating
to or limiting creditors' rights generally and except that the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. NYHC has the ability to consummate
the Exchange.
b. Organization; Subsidiaries. NYHC is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York.
NYHC has the corporate power and authority to own and lease its assets and to
carry on its business as it is now being conducted and is duly qualified to do
business as a foreign corporation in each jurisdiction where it conducts
business, except where the failure to be so qualified would not have a material
adverse effect on the business, operations, earnings, prospects, assets or
condition (financial or otherwise) of NYHC. As of the date hereof, NYHC is
qualified to do business in New Jersey. NYHC does not own any shares of capital
stock or other interest in any corporation, partnership, association or other
entity except as disclosed in prospectuses, registration statements and reports
filed with the Securities and Exchange Commission (the "Commission") and
publicly available on the Commission's EDGAR Filing System (collectively "SEC
Documents").
c. Capitalization. The number of authorized, issued and outstanding shares
of Company Stock as of the date hereof is as set forth on Schedule A. NYHC has
not issued any shares of capital stock which could give rise to claims for
violation of any federal or state securities laws (including any rules or
regulations promulgated thereunder) or the securities laws of any other
jurisdiction (including any rules or regulations promulgated thereunder). As of
the date hereof, there are no options, warrants, calls, convertible securities
or commitments of any kind whatsoever relating to the shares of NYHC Stock
subject hereto or any of the unissued shares of capital stock of NYHC, and there
are no voting trusts, voting agreements, stockholder agreements or other
agreements or understandings of any kind whatsoever which relate to the voting
of the capital stock of NYHC except as set forth on Schedule A and in the SEC
Documents.
d. Financial Statements. The SEC Documents contain the (i) audited balance
sheets of NYHC as of December 31, 2000, 1999 and 1998 (including the notes
thereto), and the related statements of operations, cash flows and shareholders'
equity (deficit) for each of the years then ended, and (ii) unaudited balance
sheets of NYHC as of June 30, 2001 and March 31, 2001 (including any notes
thereto), and the related statements of operations, cash flows and shareholders'
equity (deficit) for each of the periods then ended (collectively, the "NYHC
Financial Statements"). The NYHC Financial Statements fairly present the
financial condition and the results of operations, changes in stockholders'
equity and cash flows of NYHC at the respective dates of and for the periods
referred to in the NYHC Financial Statements, which were prepared in conformity
with GAAP, consistently applied.
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e. Financial Statement Compliance. NYHC's Fi accordance with Regulation S-X
or S-B, as applicable, adopted under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), for the periods specified.
f. Owned Real Property. Except as set forth in the SEC Documents, NYHC does
not own (of record or beneficially), nor does it have any interest in, any real
property.
g. Leased Property; Tenancies. Except as set forth in the SEC Documents,
NYHC does not lease any property, real or otherwise.
h. Title. NYHC has good and marketable title to all of the assets set forth
on the most recent balance sheet included in the NYHC Financial Statements (the
"Current Balance Sheet"), and those assets purchased by NYHC after the date
thereof. (collectively "NYHC Assets"). The NYHC Assets are owned free and clear
of all adverse claims, liens, mortgages, charges, security interests,
encumbrances and other restrictions or limitations of any kind whatsoever,
except: (i) as stated in the NYHC Financial Statements; (ii) for liens for taxes
or assessments not yet due and payable or which are being contested by NYHC in
good faith; (iii) for minor liens imposed by law for sums not yet due or which
are being contested by NYHC in good faith; and (iv) for imperfections of title,
adverse claims, charges, restrictions, limitations, encumbrances, liens or
security interests that are minor and which do not detract in any material
respect from the value of any of the NYHC Assets subject thereto or which do not
impair the operations of NYHC in any material respect or affect the present use
of the NYHC Assets in any material respect. NYHC has not made any commitments or
received any notice, oral or written, from any public authority or other entity
with respect to the taking or use of any of the NYHC Assets, whether temporarily
or permanently, for any purpose whatsoever, nor is there any proceeding pending
or, to the knowledge of NYHC, threatened which could adversely affect any NYHC
Asset owned or used by NYHC as of the date hereof.
i. Condition of Assets. Except as described in the SEC Documents, all
documents and agreements pursuant to which NYHC has obtained the NYHC Assets or
the right to use any NYHC Assets are valid and enforceable in all respects in
accordance with their respective terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect, or by legal or equitable
principles, relating to or limiting creditors' rights generally and except that
the remedy of specific performance and injunctive and other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought. Except as described
in the SEC Documents, all licenses, permits and authorizations related to the
location or operation of the business of NYHC are in good standing and are valid
and enforceable in all respects in accordance with their respective terms. There
is not, under any of the foregoing instruments, documents or agreements, any
existing default, nor is there any event which, with notice or lapse of time or
both, would constitute a default arising through NYHC or any third party which
could: (i) have a material adverse effect on the business, NYHC Assets,
operations, earnings, prospects or condition (financial or otherwise) of NYHC;
or (ii) materially adversely affect its use of any NYHC Assets. Except as
described in the SEC Documents, NYHC is not in violation of and has complied
with all applicable codes, statutes, regulations, ordinances, notices and orders
of any governmental authority with respect to the use, maintenance, condition,
operation and improvement of any NYHC Assets, except where the failure to comply
with which would not have a material adverse effect on the business, NYHC
Assets, operations, earnings, prospects or condition (financial or otherwise) of
NYHC. NYHC's use of any improvements for the purposes for which any of the
assets are being used as of the date hereof does not violate any such code,
statute, regulation, ordinance, notice or order. Except as described in the SEC
Documents, NYHC possesses all licenses, permits and authorizations required to
be obtained by NYHC with respect to NYHC's ownership, operation and maintenance
of the assets for all uses for which such assets are operated or used by NYHC as
of the date hereof, except where the failure to do so would not have a material
adverse effect on the business, NYHC Assets, operations, earnings, prospects or
condition (financial or otherwise) of NYHC. All of the NYHC Assets are in good
operating condition and repair, subject to normal wear and use and each such
item is usable in a manner consistent with current use by NYHC.
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j. Intellectual Property. NYHC does not own, license or use any registered
and unregistered trademarks, service marks or trade names, trade secrets,
registered or unregistered copyrights, or computer programs or software (the
"Intellectual Property") except as described in the SEC Documents.
k. Accounts Payable. Except as set forth in the NYHC Financial Statements
and on Schedule 4.2k, as of the date hereof, NYHC has no accounts payable
outside of the ordinary course of business.
l. Absence of Undisclosed Liabilities. Other than as set forth in the NYHC
Financial Statements or on Schedule 4.2l, NYHC has not had nor does it have any
indebtedness, loss or liability of any nature whatsoever, whether accrued,
absolute, contingent or otherwise and whether due or become due, which is
material to NYHC's business, assets, operations, prospects, earnings or
condition (financial or otherwise) of NYHC.
m. Absence of Certain Changes or Events. Except as disclosed in the SEC
Documents or on Schedule 4.2m and except as expressly set forth in this
Agreement, NYHC has not, since December 31, 2000:
(i) issued, sold, granted or contracted to issue, sell or grant any of
its stock, notes, bonds, other securities or any option to purchase any of
the same;
(ii) amended its articles of organization or bylaws;
(iii) made any capital expenditures or commitments for the acquisition
or construction of any property, plant or equipment;
(iv) entered into any transaction, which could be deemed to be
material to NYHC or its business;
(v) incurred any damage, destruction or any other loss to any of its
assets in an aggregate amount exceeding Fifty Thousand Dollars ($50,000)
whether or not covered by insurance;
(vi) suffered any loss in an aggregate amount exceeding Fifty Thousand
Dollars ($50,000) nor become aware of any intention on the part of any
client, dealer or supplier to discontinue its current relationship with
NYHC, the loss or discontinuance of which, alone or in the aggregate, could
have a material adverse effect on NYHC's business, assets, operations,
earnings, prospects or condition (financial or otherwise) of NYHC;
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(vii) entered into, modified, amended or altered any contractual
arrangement with any client, dealer or supplier, the execution,
performance, modification, amendment or alteration of which, alone or in
the aggregate, could have a material adverse effect on NYHC's business,
assets, operations, earnings, prospects or condition (financial or
otherwise) of NYHC;
(viii) incurred any material liability or obligation (absolute or
contingent);
(ix) experienced any material adverse change in NYHC's business,
assets, operations, earnings, prospects or condition (financial or
otherwise) of NYHC or experienced or have knowledge of any event which
could have a material adverse effect on NYHC's business, assets,
operations, earnings, prospects or condition (financial or otherwise) of
NYHC;
(x) declared, set aside or paid any dividend or other distribution in
respect of the capital stock of NYHC;
(xi) redeemed, repurchased, or otherwise acquired any of its capital
stock or securities convertible into or exchangeable for its capital stock
or entered into any agreement with respect to any of the foregoing;
(xii)purchased, disposed of or contracted to purchase or dispose of,
or granted or received an option or any other right to purchase or sell,
any of its assets;
(xiii) increased the rate of compensation payable or to become payable
to the officers or employees of NYHC, or increased the amounts paid or
payable to such officers or employees under any bonus, insurance, pension
or other benefit plan, or made any arrangements therefor with or for any of
said officers or employees;
(xiv) adopted or amended any collective bargaining, bonus,
profit-sharing, compensation, stock option, pension, retirement, deferred
compensation or other plan, agreement, trust, fund or arrangement for the
benefit of its employees; or
(xv) changed any material accounting principle, procedure or practice
followed by NYHC or changed the method of applying such principle,
procedure or practice.
n. Agreements. Except as otherwise disclosed in the SEC Documents, set
forth on Schedule 4.2n hereto is a true, correct and complete list of all
material contracts, agreements and other instruments material to the business or
operation of NYHC, including without limitation, those to which NYHC is a party
and those by which any of its assets are bound (the "Material Agreements").
Copies of all such agreements have heretofore been delivered or made available
by NYHC to Bio Balance. Other than as set forth on Schedule 4.2n, there is no
material contract, agreement or other instrument to which NYHC is a party or
which affects the assets, liabilities or outstanding securities of NYHC. Neither
NYHC, nor any third party is in default and no event has occurred which, with
notice or lapse of time or both, could cause or become a default by NYHC, or any
third party, under any Material Agreement. Each Material Agreement is
enforceable in accordance with its terms, against all other parties thereto,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect, or
by legal or equitable principles, relating to or limiting creditors' rights
generally and except that the remedy of specific performance and injunctive and
other forms of equitable relief are subject to certain equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought.
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o. Non-Contravention; Consents. Neither the execution and delivery of this
Agreement by NYHC, nor consummation of the transactions described herein, does
or will: (i) violate or conflict with any provision of the articles of
incorporation or bylaws of NYHC; (ii) violate or, with the passage of time,
result in the violation of any provision of, or result in the acceleration of or
entitle any party to accelerate any obligation under, or result in the creation
an imposition of any lien, charge, pledge, security interest or other
encumbrance upon any of the assets, which are material to the business or
operation of NYHC, pursuant to any provision of any mortgage, lien, lease,
agreement, permit, indenture, license, instrument, law, order, arbitration
award, judgment or decree to which NYHC is a party or by which it or any of such
assets are bound, the effect of which violation, acceleration, creation or
imposition could have a material adverse effect on the business, NYHC Assets,
operations, earnings, prospects or (financial or otherwise) of NYHC; (iii)
violate or conflict with any other restriction of any kind whatsoever to which
NYHC is subject or by which any of its assets may be bound, the effect of any of
which violation or conflict could have a material adverse effect on the
business, assets, operations, earnings, prospects or (financial or otherwise) of
NYHC; or (iv) constitute an event permitting termination by a third party of any
agreement, including the Material Agreements, to which NYHC is a party or is
subject, which termination could have a material adverse effect on the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
NYHC. No consent, authorization, order or approval of, or filing or registration
with, any governmental commission, board or other regulatory body is required in
connection with the execution, delivery and performance of the terms of this
Agreement by NYHC, except for the Securities Compliance, Shareholder Consent,
NASDAQ Approval and, if required, the consent of the New York State Department
of Health ("NYDH Consent").
p. Employee Benefit Plans. Except as set forth in the SEC Documents, NYHC
does not have any "employee benefit plans" as such term is defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (the "Benefit Plans") covering the employees of NYHC.
q. Labor Relations. There are no agreements with or pending petitions for
recognition of any labor union or association as the exclusive bargaining agent
for any or all of the employees of NYHC and no such petition has been pending at
any time since NYHC's inception. There has not been any organizing effort by any
union or other group seeking to represent any employees of NYHC as its exclusive
bargaining agent at any time since NYHC's inception. There are no labor strikes,
work stoppages or other labor disputes now pending or threatened against NYHC,
nor has there been any such labor strike, work stoppage or other labor dispute
or grievance at any time since NYHC's inception. NYHC has no knowledge that any
executive, key employee or any group of employees of NYHC has any plans to
terminate his/her employment with NYHC.
r. Insurance. NYHC has furnished to Bio Balance a list of, or made
available true and complete copies of, all insurance policies and fidelity bonds
relating to the assets, business, operations, employees, officers or directors
of NYHC. To the knowledge of NYHC, there is no material claim by NYHC pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds or in respect
of which such underwriters have reserved their rights. All premiums payable
under all such policies and bonds have been timely paid and the NYHC has
otherwise complied in all material respects with the terms and conditions of all
such policies and bonds. Such policies and bonds are of the type and in amounts
required and/or customarily carried by entities conducting businesses similar to
those of NYHC. NYHC does not know of any threatened termination of, material
premium increase (other than in the ordinary course of business) with respect
to, or material alteration of coverage under, any of such policies or bonds.
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s. Tax Matters. NYHC has timely filed with the appropriate taxing
authorities all returns (including, without limitation, information returns and
other material information) in respect of Taxes required to be filed through the
date hereof. The information contained in such returns is complete and accurate
in all material respects. NYHC has not requested any extension of time within
which to file returns (including, without limitation, information returns) in
respect of any Taxes. NYHC has accurately computed and timely paid all Taxes for
periods beginning before the date hereof, or an adequate reserve has been
established therefor, as set forth in Schedule 4.2s. Bio Balance shall have no
obligation or liability for or with respect to (a) any Taxes or other
assessments as a consequence of the transactions contemplated by this Agreement
all of which Taxes shall be paid by NYHC, or each NYHC Shareholder, as the case
may be, or (b) any other Taxes or assessments of NYHC, or each NYHC Shareholder
of any kind whatsoever or any penalties or interest with respect to such Tax
liabilities. NYHC has withheld or collected from each payment made to each of
its employees, consultants, contractors and other payees the amount of Taxes
required to be withheld and collected therefrom for all periods through the date
hereof. Any liability for Taxes due and payable through the date of this
Agreement for which no returns are due or have been filed (including, without
limitation, property, payroll and withholding taxes) have been properly accrued
or provided for on the books of NYHC. No material deficiencies for Taxes have
been claimed, proposed, or assessed by any taxing or other governmental
authority against NYHC. There are no pending or, to the best knowledge of NYHC,
threatened audits, investigations or claims for or relating to any material
liability in respect of Taxes, and there are no matters under discussion with
any governmental authorities with respect to Taxes that, in the reasonable
judgment of NYHC, or its counsel is likely to result in a material amount of
Taxes. The federal, state and local returns of NYHC have never been audited, and
NYHC has not been notified that any taxing authority intends to audit a return
for any other period. No extension of a statute of limitations relating to Taxes
is in effect with respect to NYHC. NYHC: (i) has not been an includible
corporation in an affiliated group that files consolidated income tax returns;
(ii) is not a party to any tax-sharing agreements or similar arrangements; and
(iii) is not a "foreign person" as defined in section 1445(f)(3) of the Code.
The term "taxes" or "tax" as used in this section or referred to elsewhere
in this Agreement shall mean all taxes, charges, fees, levies, penalties, or
other assessments, including without limitation, income, capital gain, profit,
gross receipts, ad valorem, excise, property, payroll, withholding, employment,
severance, social security, workers' compensation, occupation, premium, customs
duties, windfall profits, sales, use, and franchise taxes, imposed by the United
States, or any state, county, local or foreign government or any subdivision or
agency thereof, and including any interest, penalties or additions attributable
thereto.
t. Compliance with Applicable Law. Except as described in the SEC
Documents, NYHC has been and is in compliance with all foreign, federal, state
and local laws, statutes, ordinances, rules and regulations applicable to the
business, except where the failure to comply with which would not materially
adversely affect the business, assets, operations, earnings, prospects or
condition (financial or otherwise) of NYHC or which would subject any officer or
director of NYHC to civil or criminal penalties or imprisonment. NYHC has
complied with the rules and regulations of all governmental agencies having
authority over its business and its operations, including without limitation,
agencies concerned with intra-state and interstate commerce, occupational safety
and employment practices, except where the failure to comply would not have a
material adverse effect on the business, operations, earnings, prospects, assets
or condition (financial or otherwise) of NYHC. NYHC has no any knowledge of nor
received any notice of violation of any such rule or regulation since NYHC's
inception which could result in any liability of NYHC for penalties or damages
or which could subject NYHC to any injunction or government writ, order or
decree. To the knowledge of NYHC, there are no facts, events or conditions that
could interfere with, prevent continued compliance with or give rise to any
liability under any foreign, federal, state or local governmental laws,
statutes, ordinances or regulations applicable to the business, assets,
operations, earnings, prospects or condition (financial or otherwise) of NYHC,
except where the failure to do so would not have a material adverse effect on
the business, operations, earnings, prospects, assets or condition (financial or
otherwise) of NYHC.
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u. Litigation. Except as described in the SEC Documents, there is no
action, suit, proceeding or investigation pending or, to the knowledge of NYHC,
threatened, which could restrict the ability of NYHC to perform its obligations
hereunder or could have a material adverse effect on the business, assets,
operations, earnings, prospects or condition (financial or otherwise) of NYHC.
NYHC is not in default in respect of any judgment, order, writ, injunction or
decree of any court or any federal, state, local or other governmental agency,
authority, body, board, bureau, commission, department or instrumentality which
could have a material adverse effect on the business, assets, operations,
earnings, prospects or condition (financial or otherwise) of NYHC.
v. Permits. Except as described in the SEC Documents, NYHC holds all
permits, licenses, orders and approvals of all federal, state or local
governmental or regulatory authorities, agencies or bodies required for the
conduct and operation of NYHC's business as currently conducted, except where
the failure to do so would not have a material adverse effect on the business,
operations, earnings, prospects, assets or condition (financial or otherwise) of
NYHC. All such permits, licenses, orders, and approvals are in full force and
effect and no suspension, termination or revocation of any of the foregoing is
threatened. None of such permits, licenses, orders or approvals will be
materially adversely affected by consummation of the Exchange. NYHC has no
knowledge of nor has received any notice of violation of any of such rules or
regulations since NYHC's inception which would result in any liability of NYHC
for penalties or damages or which would subject NYHC to any injunction or
governmental writ, order or decree.
w. Unlawful Payments. Neither NYHC nor any officer, director, employee,
agent or representative of NYHC has paid or received, directly or indirectly,
any bribe or kickback, illegal political contribution, payment from corporate
funds which was incorrectly recorded on the books and records of NYHC, unlawful
payment from corporate funds to governmental or municipal officials in their
individual capacities for the purpose of affecting their action or the actions
of the jurisdiction which they represent to obtain favorable treatment in
securing business or licenses or to obtain special concessions of any kind
whatsoever, or illegal payment from corporate funds to obtain or retain any
business.
x. Officers, Directors and Employees. Schedule 4.2x hereto sets forth a
true, correct and complete list of all of the officers, directors and principal
employees of NYHC as of the date hereof, including their respective names,
titles, and current salaries and bonuses. NYHC has also provided true, correct
and complete copies of any employment agreements between NYHC and any of the
foregoing officers, directors and principal employees of NYHC in effect as of
the date hereof.
y. Loans to or from Affiliates. There exist no outstanding loans by NYHC to
any current or former officer, director, employee, consultant or stockholder of
NYHC or any affiliate of any of the foregoing. There are no outstanding loans to
NYHC by any current or former officer, director, employee, consultant or
stockholder of NYHC.
z. Books and Records.
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(i) The books of account and other financial records of NYHC are
complete and correct and have been maintained in accordance with good
business practices.
(ii) All material corporate action of the boards of directors of NYHC
(including any committees) since the date of NYHC's incorporation has been
authorized, approved and/or ratified in the minute books of NYHC.
aa. Solvency of NYHC. Since its inception and through the Closing Date,
NYHC has been and will be solvent. "Solvent" shall mean, for purposes of
application of this provision, that: (i) the fair saleable value of NYHC's
property is in excess of the total amount of its debts; and (ii) NYHC is able to
pay its debts as they mature.
bb. Agreements with Affiliates. Except as described in the SEC Documents,
NYHC is not a party to any instrument, license, lease or other agreement,
written or oral, with any officer or director of NYHC.
cc. The NYHC Shares. The NYHC Shares upon issuance:
(i) will be free and clear of any security interests, liens, claims or
other encumbrances and not subject to restrictions upon transfer under the
Securities Act of 1933 (the "1933 Act"), except for the restrictions
imposed by the 1934 Act on "insiders" as defined therein, State laws, and
the Lockup as described in Section 3.5 of this Agreement;
(ii) will be duly and validly authorized, issued, fully paid and
nonassessable;
(iii) will not have been issued or sold in violation of any preemptive
or other similar rights of the holders of any securities of NYHC; and
(iv) will not subject the holders thereof to personal liability by
reason of being such holders.
dd. Reporting Company. NYHC is a publicly-held company subject to reporting
obligations pursuant to Sections 15(d) and 13 of the 1934 Act and has a class of
common shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to
the provisions of the 1934 Act, NYHC has filed all reports and other materials
required to be filed thereunder with the Securities and Exchange Commission
during the preceding twelve months.
ee. Information Concerning NYHC. The SEC Documents contain all material
information relating to NYHC and its operations and financial condition as of
their respective dates which information is required to be disclosed therein.
The SEC Documents do not contain any untrue statement of a material fact or omit
to state a material fact in light of the circumstances when made required to be
stated therein or necessary to make the statements therein not misleading.
ff. Listing. NYHC's common stock is quoted and listed for trading on the
NASDAQ SmallCap Market ("SmallCap"). NYHC has not received any oral or written
notice from NASDAQ that its common stock will be delisted from SmallCap or that
the common stock does not meet all requirements for the continuation of such
listing.
gg. Information on Bio Balance. NYHC has been furnished with information
concerning operations, financial condition and other matters of Bio Balance as
NYHC has requested. NYHC has considered all factors NYHC deems material in
deciding on the advisability of purchasing the Bio Balance Shares. NYHC, with
its representatives, has such knowledge and experience in financial, tax and
other business matters as to enable NYHC to make an informed investment decision
with respect to the Exchange.
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hh. Intent. NYHC is entering into this Agreement for its own account. NYHC
has no present arrangement (whether or not legally binding) at any time to sell
the Bio Balance Shares to or through any person or entity.
ii. Compliance with Securities Act. NYHC understands and agrees that the
Bio Balance Shares have not been registered under the 1933 Act, by reason of
their exchange in a transaction that does not require registration under the
1933 Act (based in part on the accuracy of the representations and warranties of
NYHC contained herein), and that the Bio Balance Shares must be held unless a
subsequent disposition is registered under the 1933 Act or is exempt from such
registration.
jj. Accuracy of Information Furnished. NYHC represents that no statement
made by NYHC set forth herein or in the exhibits or the schedules hereto, and no
statement set forth in any certificate or other instrument or document required
to be delivered by or on behalf of NYHC pursuant hereto or in connection with
the Exchange, contained, contains or will contain any untrue statement of a
material fact, or omits, omitted or will omit to state any material fact which
is necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
4.3. Representations and Warranties of Bio Balance Shareholders.
a. Title to Shares. Each Bio Balance Shareholder by tendering the Bio
Balance Shares for exchange will be deemed to represent and warrant that he is
the legal and beneficial owner of the number of shares of Company Stock as set
forth in Schedule A hereto and that such Bio Balance Shares owned by such Bio
Balance Shareholder fully paid, non-assessable and are owned free of preemptive
rights and free and clear of any and all adverse claims, liens, mortgages,
charges, security interests, encumbrances and other restrictions or limitations
of any kind whatsoever.
ARTICLE 5
CONDITIONS
5.1 Conditions to Obligations of NYHC. The obligation of NYHC to consummate
the transactions described in this Agreement is subject to the fulfillment of
each of the following conditions, which may be waived in whole or in part by
NYHC to the extent permitted by applicable law:
a. No Material Adverse Change. No material adverse change in the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
Bio Balance, and no event which would materially and adversely affect the
business, assets, operations, earnings, prospects or condition (financial or
otherwise) of Bio Balance shall have occurred since the date of the Financial
Statements provided by Bio Balance pursuant to Section 4.1(d).
b. Copies of Resolutions. Bio Balance shall have furnished NYHC with
certified copies of resolutions duly adopted by the board of directors of each
of Bio Balance authorizing the execution, delivery and performance of the terms
of this Agreement and all other necessary or proper corporate action to enable
Bio Balance to comply with the terms of this Agreement.
c. Certificates of Good Standing. At the Closing, Bio Balance shall have
furnished NYHC with certified copies of certificates of good standing of Bio
Balance dated not more than five (5) business days prior to the Closing Date. d.
Opinion of Bio Balance's Counsel. An opinion of counsel for Bio Balance that:
(i) the Bio Balance Shares constitute all of the issued and outstanding equity
securities in Bio Balance and are fully paid and nonassessable; (ii) Bio Balance
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, with full corporate power and authority to own
its properties and engage in its business as presently conducted or
contemplated, and is duly qualified and in good standing as a foreign
corporation under the laws of each other jurisdiction in which it conducts
business except where the failure to be so qualified would not have a material
adverse effect on the financial condition of Bio Balance; (iii) neither the
execution and delivery of this Agreement nor the consummation of any or all of
the transactions contemplated by this Agreement breaches or constitutes a
default under any agreement or commitment known to counsel to which Bio Balance
is a party, or violates any provision of the Articles of Incorporation or Bylaws
of Bio Balance, or causes the acceleration of the maturity of any debt or
obligation of Bio Balance that is known to counsel, or violates any statute,
law, regulation or rule, or any judgment, decree or order of any court or other
governmental or quasi-governmental body; and (iv) counsel knows of no litigation
pending or threatened which would adversely affect Bio Balance or the
transactions contemplated by this Agreement.
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e. Accuracy of Representations and Warranties. Each of the representations
and warranties of Bio Balance and the Bio Balance Shareholders set forth in this
Agreement shall have been true, correct and complete in all material respects
when made and shall also be true, correct and complete in all material respects
at and as of the Closing Date, with the same force and effect as if made at and
as of the Closing Date. Bio Balance and the Bio Balance Shareholders shall have
performed and complied in all material respects with all agreements and
covenants required by this Agreement to be performed by Bio Balance and the Bio
Balance Shareholders at or prior to the Closing Date.
f. Delivery of Officers' Certificates. Bio Balance shall have delivered to
NYHC certificates, dated as of the Closing Date, and signed by the President of
Bio Balance representing and affirming on behalf of Bio Balance that: (i) the
representations and warranties made by Bio Balance as set forth in Section 4.1
of this Agreement and referred to in Subsection 5.1e above were and are true,
correct and complete as required by Subsection 5.1e above and the conditions set
forth in this Section 5.1 have been satisfied. Bio Balance shall also have
delivered certificates signed by its Secretary with respect to the authority and
incumbency of the officers of Bio Balance officers executing this Agreement and
any documents required to be executed or delivered in connection therewith.
g. Delivery of Stock Certificates. At the Closing, the Bio Balance
Shareholders shall have delivered to NYHC certificates representing not less
than 90% of the Bio Balance Shares and 100% of the Options, outstanding as of
the Closing Date, which certificates shall be properly endorsed in blank or
shall be accompanied by a properly executed stock power.
h. Consents and Waivers. Any and all necessary consents, authorizations,
orders or approvals described in Subsection 4.1o above shall have been obtained,
except as the same shall have been waived by NYHC.
i. Litigation. There shall be no effective injunction, writ or preliminary
restraining order or any order of any kind whatsoever with respect to Bio
Balance or the Bio Balance Shareholders issued by a court or governmental agency
(or other governmental or regulatory authority) of competent jurisdiction
restraining or prohibiting the consummation of the transactions described in
this Agreement or making consummation thereof unduly burdensome to Bio Balance
or the Bio Balance Shareholders. As of the Closing Date, no proceeding or
lawsuit shall have been commenced, be pending or have been threatened by any
governmental or regulatory agency or authority or any other person with respect
to the transactions described in this Agreement.
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j. Delivery of Documents and Other Information. Bio Balance shall have
delivered to NYHC all of the agreements, contracts, documents and other
instruments required to be delivered pursuant to the provisions of this
Agreement.
k. Percentage Ownership of NYHC. On the date of the Exchange, no Bio
Balance Shareholder or affiliated group of Bio Balance Shareholders will own, of
record or beneficially, 10% or more of the NYHC Shares on a fully diluted basis
(assuming the exercise of all Bio Balance Options).
5.2 Conditions to Obligations of Bio Balance and the Bio Balance
Shareholders. The obligations of Bio Balance and the Bio Balance Shareholders to
consummate the transactions described in this Agreement are subject to the
fulfillment of each of the following conditions, which may be waived in whole or
in part by Bio Balance and/or the Bio Balance Shareholders to the extent
permitted by law:
a. Copies of Resolutions. NYHC shall have furnished the Bio Balance
Shareholders with certified copies of resolutions duly adopted by the board of
directors of NYHC authorizing the execution, delivery and performance of the
terms of this Agreement and all other necessary or proper corporate action to
enable NYHC to comply with the terms of this Agreement.
b. Certificates of Good Standing. NYHC shall have furnished the Bio Balance
Shareholders with certified copies of certificates of good standing of NYHC
dated not more than five (5) business day prior to the Closing Date.
c. Opinion of NYHC's Counsel. NYHC shall have furnished to Bio Balance,
with an opinion of Scheichet & Davis, P.C., counsel to NYHC and other counsel to
NYHC with respect to health care matters, dated as of the Closing Date, that:
(i) NYHC is a corporation duly organized, validly existing and in good standing
under the laws of the State of New York, with full corporate power and authority
to own its properties and engage in its business as presently conducted or
contemplated, and is duly qualified and in good standing as a foreign
corporation under the laws of each other jurisdiction in which it conducts
business except where the failure to be so qualified would not have a material
adverse effect on the financial condition of NYHC; (ii) neither the execution
and delivery of this Agreement nor the consummation of any or all of the
transactions contemplated by this Agreement breaches or constitutes a default
under any agreement or commitment known to counsel to which NYHC is a party, or
violates any provision of the Articles of Incorporation or Bylaws of NYHC, or
causes the acceleration of the maturity of any debt or obligation of NYHC that
is known to counsel, or violates any statute, law, regulation or rule, or any
judgment, decree or order of any court or other governmental or
quasi-governmental body; (iii) counsel knows of no litigation pending or
threatened which would adversely affect NYHC or the transactions contemplated by
this Agreement; (iv) consummation of the transactions contemplated by this
Agreement required no action by or in respect of, or filing with any New York
health care agency including the New York Department of Health, that has not
been made and consent obtained; (v) the Shareholder Consent has been obtained;
(vi) the Securities Compliance has been obtained; (vii) the Exchange Shares,
when issued in compliance with this Agreement, will be duly authorized, validly
issued, fully paid, and non-assessable and free of preemptive rights set forth
in the Articles, Bylaws and any agreement filed as an exhibit to the SEC
Documents, and may be restricted from transfer but only to the extent set forth
in this Agreement; and (viii) in connection with the registration of the
Exchange Shares, counsel advised NYHC as to the requirements of the Securities
Act and the applicable Rules and Regulations and rendered other legal advice and
assistance in the course of preparation of the S-4 Registration Statement and
Prospectus, including review and discussion of the contents thereof. On the
basis of the information that was developed in the course of the performance of
such services considered in the light of counsel's understanding of the
Securities Act, including the requirements of Forms S-4, counsel had no reason
to believe that (a) the S-4 Registration Statement (other than the financial
statements and related statements and schedules) as of its Effective Date
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (b) the Prospectus (other than the
financial statements and related statements and schedules) as of the Effective
Date of the S-4 Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Counsel will not be
required to assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the S-4 Registration Statement or the Prospectus.
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d. Accuracy of Representations and Warranties. Each of the representations
and warranties of NYHC set forth in this Agreement shall have been true, correct
and complete in all material respects when made and shall also be true, correct
and complete in all material respects at and as of the Closing Date, with the
same force and effect as if made at and as of the Closing Date. NYHC shall have
performed and complied with in all material respects all agreements and
covenants required by this Agreement to be performed by NYHC at or prior to the
Closing Date.
e. Delivery of Officers' Certificates. NYHC shall have delivered to Bio
Balance and Bio Balance Shareholders, certificates, dated the Closing Date and
signed by the Chief Executive Officer of NYHC, affirming that: (i) the
representations and warranties of NYHC as set forth in Section 4.2 of this
Agreement and referred to in Subsection 5.2d above were and are true, correct
and complete as required by Subsection 5.2d above; and (ii) the conditions set
forth in this Section 5.2 have been satisfied. NYHC shall also have delivered a
certificate signed by the Secretary of NYHC with respect to the authority and
incumbency of the officers of NYHC officers executing this Agreement and any
documents required to be executed or delivered in connection therewith
f. Stock Certificates. At the Closing, NYHC shall have issued and delivered
to the Bio Balance Shareholders certificates representing the NYHC Shares, which
certificates shall be in the name of the respective Bio Balance Shareholders, as
set forth on Schedule A hereto.
g. Consents and Waivers. Any and all necessary consents, authorizations,
orders or approvals described in Subsection 4.2o above shall have been obtained,
except as the same shall have been waived by Bio Balance and/or the Bio Balance
Shareholders.
h. Shareholder Consent. The Shareholder Consent shall have been obtained
and a certified copy of such component NYHC Shareholder resolutions shall have
been delivered.
i. Securities Compliance. The Securities Compliance shall have been
accomplished.
j. S-4. The S-4 Registration Statement shall have become effective under
the Securities Act and no stop order suspending the effectiveness of the S-4
Registration Statement or injunction preventing the issuance and free trading of
the Exchange Shares shall have been issued and no proceedings for such purpose
shall have been initiated or threatened by the SEC or any other entity.
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k. Lockup. The NYHC common shares subject to the lock-up described in
Section 3.5a shall have been imprinted with the legend described in Section
3.5c.
l. Litigation. There shall be no effective injunction, writ or preliminary
restraining order or any order of any kind whatsoever with respect to NYHC
issued by a court or governmental agency (or other governmental or regulatory
authority) of competent jurisdiction restraining or prohibiting the consummation
of the transactions described in this Agreement or making the consummation
thereof unduly burdensome to NYHC. As of the Closing Date, no proceeding or
lawsuit shall have been commenced, be pending or have been threatened or by any
governmental or regulatory agency or authority or any other person with respect
to the transactions described in this Agreement.
5.3 Post-Closing Covenants and Agreements. On the day of the Exchange and
subsequent thereto, NYHC and Bio Balance hereby covenant and agree as follows:
a. Heller Health Care Finance Line of Credit. The Heller Health Care
Finance line of credit and any replacement line of credit of NYHC will be drawn
upon only for the financing of the NYHC home health care business and shall not
be drawn upon for disbursement with respect to the financing of the business of
Bio Balance.
b. Private Placement Proceeds. The proceeds of the Private Placement will
be employed exclusively to pay expenses of the Private Placement and for use by
Bio Balance in furtherance of its business.
c. Short Form Merger. If less than 100% of the Bio Balance shareholders
submit their Bio Balance Shares and Options for exchange into NYHC Shares and
Options within 30 days after the closing of the Exchange, NYHC will form a
wholly-owned subsidiary corporation ("Newco") pursuant to the Delaware General
Corporation Law capitalized with all of the Bio Balance Shares and Options which
NYHC received in the Exchange for NYHC Shares and Options, and Newco will then
promptly perform all actions required for it to merge with Bio Balance pursuant
to Sections 253 and 262 of the Delaware General Corporation Law, unless then
NYHC Board of Directors as constituted immediately after Closing, adopts a
resolution barring such action within such 30-day period.
d. SmallCap Listing. Bio Balance will take all action reasonably necessary
on its part to preserve the NYHC SmallCap listing, and will refrain from taking
any action which may jeopardize the NYHC SmallCap listing.
e. No Commingling of Accounts. Bio Balance and NYHC shall each maintain
separate banking and other financing accounts and shall not commingle their
respective funds or accounts.
f. Expense Reimbursement. Bio Balance will promptly reimburse NYHC for all
additional expenses of NYHHC (i) arising after the Closing as a result of its
acquisition of Bio Balance and the status of Bio Balance as a subsidiary of NYHC
or merged entity pursuant to Section 5.3(c), (ii) transfer agent costs in
connection with the preparation and distribution of the NYHC Shares, and (iii)
listing of the NYHC Shares on the SmallCap and Boston Stock Exchange.
A-24
ARTICLE 6
INDEMNIFICATION
6.1 Indemnification by Bio Balance. Bio Balance agrees to indemnify in
respect of, and hold NYHC harmless against, any and all damages, claims,
deficiencies, losses, and expenses (including, without limitation, legal and
investigatory and other fees in attempting to avoid the same or defending
against the same) (collectively "Damages") resulting from any misrepresentation,
breach of warranty, or non-fulfillment or failure to perform any covenant or
agreement on the part of Bio Balance made as a part of or contained in this
Agreement or in any certificate executed and delivered pursuant to this
Agreement or in connection with the transactions contemplated hereby.
6.2 Indemnification by NYHC. NYHC agrees to indemnify in respect of, and
hold Bio Balance and Bio Balance Shareholders harmless against, any and all
damages, claims, deficiencies, losses, and expenses (including, without
limitation, legal and investigatory and other fees in attempting to avoid the
same or defending against the same) (collectively "Damages") resulting from any
misrepresentation, breach of warranty, or non-fulfillment or failure to perform
any covenant or agreement on the part of NYHC made as a part of or contained in
this Agreement or in any certificate executed and delivered pursuant to this
Agreement or in connection with the transactions contemplated hereby. Provided
NYHC timely complies with its obligations described in Section 3.1, NYHC's
indemnification shall not apply to a failure to obtain the NASDAQ Approval if
the failure to obtain that NASDAQ Approval is result of the Exchange or because
NYHC is required to apply for a SmallCap listing based on NASDAQ's "new listing"
requirements, or a delisting from the SmallCap due to matters not within the
control of NYHC.
6.3 Indemnifying Parties. The party claiming indemnification hereunder is
hereinafter referred to as the "Indemnified Party" and the party against whom
such claims are asserted hereunder is hereinafter referred to as the
"Indemnifying Party."
6.4 Limitation of Liability. Neither party shall be liable to the other
party to this Agreement except to the extent that the aggregate amount of
Damages for which they would otherwise (but for this provision) be liable under
this Section, net of any insurance payments, exceeds in the aggregate the sum of
twenty-five thousand dollars ($25,000) and then only to the extent of such
excess.
6.5 Other Rights and Remedies Not Affected. The indemnification rights of
the parties under this Section are independent of and in addition to such rights
and remedies as the parties may have at law or in equity or otherwise for any
misrepresentation, breach of warranty or failure to fulfill any agreement or
covenant hereunder on the part of any party including without limitation the
right to seek specific performance, rescission or restitution, none of which
rights or remedies shall be affected or diminished hereby.
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ARTICLE 7
TERMINATION AND REMEDIES FOR BREACH OF THIS AGREEMENT
7.1 Termination by Mutual Agreement. This Agreement may be terminated at
any time prior to the Closing by consent of Bio Balance and NYHC, provided that
such consent to terminate is in writing and is signed by Bio Balance and NYHC.
7.2 Termination for Failure to Close. This Agreement may be terminated by
any of the parties hereto if the Closing shall not have occurred by April 29,
2002, provided that, the right to terminate this Agreement pursuant to this
section shall not be available to any party whose failure to fulfill any of its
obligations hereunder has been the cause of or resulted in the failure to
consummate the Exchange by the foregoing date.
7.3 Termination by Operation of Law. This Agreement may be terminated by
any of the parties hereto if, in the reasonable opinion of counsel to the
respective parties hereto, there shall be any statute, rule or regulation that
renders consummation of the Exchange illegal or otherwise prohibited, or a court
of competent jurisdiction or any government (or governmental authority) shall
have issued an order, decree or ruling, or has taken any other action
restraining, enjoining or otherwise prohibiting the consummation of such
transactions and such order, decree, ruling or other action shall have become
final and nonappealable.
7.4 Effect of Termination or Default; Remedies. In the event of termination
of this Agreement as set forth above, this Agreement shall forthwith become void
and there shall be no liability on the part of any Non-Defaulting Party (as
defined below). The foregoing shall not relieve any Defaulting Party from
liability for damages actually incurred as a result of such party's breach of
any term or provision of this Agreement.
7.5 Remedies; Specific Performance. In the event that any party shall fail
or refuse to consummate the Exchange (except pursuant to Sections 7.1, 7.2 or
7.3 above) or if any default under or breach of any representation, warranty,
covenant or condition of this Agreement on the part of any party (the
"Defaulting Party") shall have occurred that results in the failure to
consummate the Exchange, then in addition to the other remedies provided herein,
the non-defaulting party (the "Non-Defaulting Party") shall be entitled to seek
and obtain money damages from the Defaulting Party and/or may seek to obtain an
order of temporary or permanent injunctive relief or specific performance
thereof against the Defaulting Party from a court of competent jurisdiction,
provided that, the Non-Defaulting party seeking any injunctive relief or
specific performance such protection must file its request with such court
within forty-five (45) days after it becomes aware of the Defaulting Party's
failure, refusal, default or breach and further provided, that in no event shall
a Defaulting Party be liable for special, incidental or consequential damages.
In addition, the Non-Defaulting Party shall be entitled to obtain from the
Defaulting Party court costs, disbursements and attorneys' fees incurred in
connection with or in pursuit of enforcing the rights and remedies provided
hereunder.
ARTICLE 8
MISCELLANEOUS
8.1 Fees and Expenses. Except as otherwise described herein, each party
hereto shall pay its own expenses incident to negotiation, execution, delivery
and performance of the terms of this Agreement and the consummation of the
Exchange.
A-26
8.2 Modification, Amendments and Waiver. The parties hereto may amend,
modify or otherwise waive any provision of this Agreement by unanimous consent,
provided that such consent and any amendment, modification or waiver is in
writing and is signed by each of the parties hereto.
8.3 Inspection of Properties and Books. Bio Balance shall, at reasonable
times acceptable to NYHC and Bio Balance, assist any individual or individuals
designated by NYHC with reasonable prior notice to visit or inspect any property
of Bio Balance with respect to its business, including books of accounts and
records with respect to the business, to make extracts or copies of such books
and records and to discuss the affairs, finances and accounts of Bio Balance
with its officers, and shall use its best efforts to obtain access for NYHC to
accountants' work papers. NYHC agrees to treat all such material (the
"Evaluation Material") confidentially, and shall not disclose any Evaluation
Material or any information contained therein to any party, except as otherwise
set forth herein; provided, however, that NYHC is authorized to disclose the
Evaluation Material to its investment bankers, financial advisors and legal
counsel. NYHC shall instruct its investment bankers, financial advisors, legal
counsel, officers, directors, employees, agents or representatives of the
confidential nature of the Evaluation Material and shall be responsible for
insuring that the Evaluation Material is kept confidential by such persons.
8.4 Assignment. Neither NYHC, Bio Balance, nor the Bio Balance Shareholders
shall have the authority to assign its rights or obligations under this
Agreement without the prior written consent of the other parties hereto.
8.5 Burden and Benefit. This Agreement shall be binding upon and, to the
extent permitted in this Agreement, shall inure to the benefit of the parties
and their respective successors and assigns. In the event of a default by Bio
Balance of its respective obligations hereunder, the sole and exclusive recourse
and remedy of NYHC shall be against Bio Balance, and any of Bio Balance's
assets; under no circumstances shall any officer or director of Bio Balance be
liable in law or equity for any obligations of Bio Balance hereunder. In the
event of a default by NYHC of any of its obligations hereunder, the sole and
exclusive recourse and remedy of the Bio Balance Shareholders and Bio Balance
shall be against NYHC and its assets; under no circumstances shall any officer,
director, stockholder or affiliate of NYHC be liable in law or equity for any
obligations of NYHC hereunder.
8.6 Brokers. Bio Balance represents and warrants to NYHC that there are no
brokers or finders entitled to any brokerage or finder's fee or other commission
or fee based upon arrangements made by or on behalf of Bio Balance, or any Bio
Balance Shareholder or any other person in connection with this Agreement. NYHC
represents and warrants to Bio Balance and the Bio Balance Shareholders that no
broker or finder is entitled to any brokerage or finder's fee or other
commission or fee based upon arrangements made by or on behalf of NYHC in
connection with this Agreement.
8.7 Entire Agreement. This Agreement and the exhibits, lists and other
documents referred to herein contain the entire agreement among the parties
hereto with respect to the Exchange and supersede all prior agreements with
respect thereto, whether written or oral.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard, however, to
such jurisdiction's principles of conflicts of laws.
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8.9 Notices. Any notice, request, instruction or other document to be given
hereunder by any party hereto shall be in writing and delivered personally, by
facsimile transmission or telex, or sent by commercial overnight delivery
service or registered or certified mail (return receipt requested), postage
prepaid, addressed as follows:
If to Bio Balance or
The Bio Balance
Shareholders: The Bio Balance Corp.
40 Fulton Street, 7th Floor
New York, New York 10038
Attn: Yitz Grossman, President
Facsimile: (212) 964-4630
with a copy to: Grushko & Mittman, P.C.
551 Fifth Avenue, Suite 1601
New York, New York 10176
Attn: Edward M. Grushko, Esq.
Facsimile: (212) 697-3575
If to NYHC: New York Health Care, Inc.
1850 McDonald Avenue
Brooklyn, New York 11223
Facsimile: (718) 375-4007
with a copy to: Scheichet & Davis, P.C.
800 Third Avenue - 29th Floor
New York, New York 10022
Facsimile: (212) 371-7634
Attn: William Davis, Esq.
or to such other persons or addresses as may be designated in writing by the
party to receive such notice. If sent as aforesaid, the date any such notice
shall be deemed to have been delivered on the date of transmission of a
facsimile, the day after delivery to a commercial overnight delivery service, or
five (5) days after delivery into a United States Post Office.
8.10 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be an original or a facsimile copy, but all of
which shall constitute but one agreement.
8.11 Rights Cumulative. All rights, powers and privileges conferred
hereunder upon the parties, unless otherwise provided, shall be cumulative and
shall not be restricted to those given by law. Failure to exercise any power
given any party hereunder or to insist upon strict compliance by any other party
shall not constitute a waiver of any party's right to demand exact compliance
with any of the terms or provisions hereof.
8.12 Severability of Provisions. The provisions of this Agreement shall be
considered severable in the event that any of such provisions are held by a
court of competent jurisdiction to be invalid, void or otherwise unenforceable.
Such invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
A-28
8.13 Headings. The headings set forth in the articles and sections of this
Agreement and in the exhibits and the schedules to this Agreement are inserted
for convenience of reference only and shall not be deemed to constitute a part
hereof.
8.14 Knowledge Standard. When used in this Agreement, the phrase "to the
best knowledge of, " "knowledge of, " "known to" or similar phrases shall mean
the actual knowledge of: (i) with respect to NYHC, the officers and directors of
NYHC; (ii) with respect to Bio Balance, the officers and directors of Bio
Balance; and (iii) the Bio Balance Shareholders.
8.15 Joint Preparation. This Agreement was jointly prepared by NYHC and Bio
Balance, and is not to be construed against any party hereto. Should any
provision of this Agreement be found to be illegal or unenforceable by any court
of competent jurisdiction and cannot be modified to be enforceable, such
provision shall immediately become null and void leaving the remainder of this
Agreement in effect.
8.16 Force Majure. In the event either party is prevented from performing
under this Agreement due to weather, strikes, labor disputes, natural disasters
or acts of G-d, or similar occurrences which are beyond such party's control,
such party's performance shall be suspended for the time equal to the delay
caused by such events.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THE BIO BALANCE CORP.
By: /s/ Paul Stark
-----------------------
Its: President
-----------------------
NEW YORK HEALTH CARE, INC.
By: /s/ Jerry Braun
-----------------------
Its: President
-----------------------
AMENDMENT NO. 1 TO STOCK FOR STOCK EXCHANGE AGREEMENT
This AMENDMENT NO. 1 (the "Amendment") is made and entered into as of the
13th day of February, 2002, by and among The Bio Balance Corp., a Delaware
corporation ("Bio Balance"), for itself and for the benefit of the shareholders
and warrantholders of Bio Balance, and New York Health Care, Inc., a New York
corporation ("NYHC").
WHEREAS, Bio Balance and NYHC (the "Parties") entered into a "Stock For
Stock Exchange Agreement" dated October 11, 2001 ("Agreement"); and
WHEREAS, the Parties have agreed to amend the Agreement as provided for in
this Amendment;
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises made in the Agreement and in this Amendment and in consideration of the
covenants, representations, warranties and conditions set forth therein and
herein, the receipt and sufficiency of which are hereby acknowledged, the
Parties, intending to be legally bound, agree as follows:
1. Article 2.1 of the Agreement is hereby amended to read as follows:
"2.1. The Closing. Subject to the conditions precedent contained herein,
the Exchange ("Closing") shall take place at the offices of Scheichet &
Davis, P.C., 800 Third Avenue, 29th Floor, New York, NY 10022 at 1:00 p.m.
(local time) at a date mutually agreed between the parties not later than
August 13, 2002 (the "Closing Date")."
2. Article 3.1 of the Agreement is hereby amended to read as follows:
"3.1. NASDAQ Approval. NYHC shall promptly submit this Agreement and other
documents delivered herewith to The Nasdaq Stock Market, Inc. ("NASDAQ")
pursuant to the rules and regulations governing companies with a class of
stock listed for trading on the NASDAQ SmallCap Market ("Smallcap"). As of
the Closing, NYHC must receive "no objections" from NASDAQ for the Exchange
and other transactions set forth in this Agreement, subject only to NYHC
obtaining the approval of NYHC Shareholders of the Exchange ("NASDAQ
Approval"). The NASDAQ Approval may be conditioned on NYHC being required
to apply for a SmallCap listing based on NASDAQ's "new listing"
requirements.
B-1
3. Article 3.2a.(v) and 3.2b.of the Agreement are hereby amended to read as
follows:
"3.2. Shareholder Consent.
a. (v) The approval of an amendment to the New York Health Care, Inc.
Performance Incentive Plan (the "Stock Option Plan") authorizing the
reservation of an additional 2,230,000 shares of the Company's $.01 par
value common stock for issuance under the Stock Option Plan after the
meeting of the NYHC Shareholders referred to in Article 3.2b. below.
b. Proxy Statement. NYHC will file a Form S-4 Registration Statement (the
"Registration Statement") with the Securities and Exchange Commission as
promptly as reasonably possible. The Company further covenants to use its
best efforts to prosecute the Registration Statement to an "effective date"
to enable the meeting of NYHC Shareholders to be held on or before the
Closing Date."
4. Article 3.4 of the Agreement is hereby amended to read as follows:
"3.4. Private Placement. Bio Balance shall complete a private placement of
its common stock on the terms more particularly described in Schedule 3.4
("Private Placement") at Bio Balance's sole cost and expense in which it
shall raise not less than $6,000,000 of gross proceeds prior to the Closing
Date. NYHC shall cooperate with Bio Balance in the preparation of the
documents necessary to conduct the Private Placement and all filings
required to be made in connection with the Private Placement. All proceeds
from the Private Placement will be employed to pay expenses of the Private
Placement and then exclusively for use by Bio Balance in furtherance of its
business. "
5. Schedule 3.5a of the Agreement is hereby amended to read as follows:
"SCHEDULE 3.5a
NYHC LOCKUP
1,501,985 NYHC Common Shares owned by Jerry Braun and Jacob Rosenberg will
be restricted from sale, transfer or hypothecation until 120 days after the
effective date of the S-4 Registration Statement referred to in Section 3.3 of
the Agreement (the "Effective Date"), provided all such Shares owned and
transferred by them which Share are subject to the irrevocable proxies described
in Section 3.2(c) remain subject to the irrevocable proxies through the Closing
Date or termination of this Agreement. Thereafter, for so long as each such
holder is a director of NYHC each calendar month, each such holder may convey
not more than 10% of the NYHC Common Shares owned by him on the Effective Date.
B-2
Each such holder may transfer NYHC Common Shares owned by them as of the
date of this Agreement to family trusts and registered charities provided such
transferred NYHC Common Shares remain subject to restriction from further sale,
transfer or hypothecation until 120 days after the Effective Date. Thereafter,
for so long as each such holder is a director of NYHC each calendar month, each
such transferee may convey not more than 10% of the NYHC Common Shares received
by the transferee. The foregoing notwithstanding, registered charities who
receive NYHC Common Shares may sell up to 1,000 NYHC Shares per trading day
commencing on the Effective Date and until 120 days thereafter."
6. The execution, delivery and performance of this Amendment has been duly
authorized, adopted and approved by the Parties. Each of the Parties has
taken all necessary corporate action and has all of the necessary corporate
power to enter into this Amendment and to consummate the transactions
described in this Amendment. This Amendment has been duly and validly
executed and delivered by an authorized officer of each of the Parties and
is the valid and binding obligation of each of the Parties, enforceable
against each of them in accordance with its terms.
7. All of the other provisions, terms and conditions of the Agreement and the
schedules annexed thereto remain unimpaired and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THE BIO BALANCE CORP.
Attest:
/S/ Jeanne Quinto By: /S/ Paul Stark
- ------------------------------ ---------------------------------
Jeanne Quinto, Secretary Paul Stark
Its: President and Director
NEW YORK HEALTH CARE, INC.
Attest:
/S/ Jacob Rosenberg By: /S/ Jerry Braun
- ----------------------- ---------------------------------
Jacob Rosenberg, Jerry Braun
Secretary Its: President and CEO
AMENDMENT NO. 2 TO STOCK FOR STOCK EXCHANGE AGREEMENT
This AMENDMENT NO. 2 (the "Amendment No. 2") is made and entered into as of
the 10th day of July, 2002, by and among The Bio Balance Corp., a Delaware
corporation ("Bio Balance"), for itself and for the benefit of the shareholders
and warrantholders of Bio Balance, and New York Health Care, Inc., a New York
corporation ("NYHC").
WHEREAS, Bio Balance and NYHC (the "Parties") entered into a "Stock for
Stock Exchange Agreement" dated October 11, 2001 (the "Agreement");
WHEREAS, the Parties entered into "Amendment No. 1 to Stock for Stock
Exchange Agreement" dated February 13, 2002 ("Amendment No. 1"); and
WHEREAS, the Parties have agreed to amend the Agreement, as previously
amended pursuant to Amendment No. 1, as provided for in this Amendment No. 2.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises made in the Agreement and in this Amendment No. 2 and in consideration
of the covenants, representations, warranties and conditions set forth therein
and herein, the receipt and sufficiency of which are hereby acknowledged, the
Parties, intending to be legally bound, agree as follows:
1. The second and third "WHEREAS" clauses of the Exchange Agreement are
hereby amended to reflect the Parties' intent that the Exchange be restructured
as a merger of Bio Balance with a newly-formed wholly-owned subsidiary of NYHC
and to read in full as follows:
"WHEREAS, the Bio Balance Shareholders desire to cause a newly-formed
wholly-owned subsidiary of NYHC to be merged with and into Bio Balance (the
"Merger") in which Bio Balance will become a wholly-owned subisidiary of
NYHC and each share of Bio Balance common stock would be converted (the
"Exchange") into one share of NYHC common stock (the "NYHC Shares") and
NYHC desires to effectuate the Merger and Exchange on the terms and subject
to the conditions contained herein.
WHEREAS, the Bio Balance Shareholders and NYHC desire this transaction
to be a tax-free reorganization pursuant to Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended."
2. Article 1.1 of the Agreement is hereby amended to convert the nature of
the Exchange from a "stock for stock exchange" to a "triangular merger" and to
read in full as follows:
C-1
"1.1 The Merger. Subject to the terms and conditions of this Agreement,
NYHC Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
NYHC formed solely for the purpose of carrying out the Merger (the "Merger Sub")
shall be merged (the "Merger") with and into Bio Balance. Following the Merger,
the separate corporate existence of the Merger Sub shall cease and Bio Balance
shall continue as the surviving corporation (the "Surviving Corporation"). The
Merger shall have the effects set forth in the Delaware General Corporation Law
(the "DGCL"). Without limiting the generality of the foregoing, and subject
thereto, at the Closing Date, all of the properties, rights, privileges,
immunities, powers and franchises of Bio Balance and the Merger Sub shall vest
in the Surviving Corporation, and all debts, liabilities, obligations and duties
of Bio Balance and the Merger Sub shall become debts, liabilities, obligations
and duties of the Surviving Corporation."
3. New Article 2.2 is hereby added to the Agreement to set forth the
procedures for the Exchange of shares at closing and to read in full as follows:
"2.2 The Exchange. On the Closing Date, by virtue of the Merger and
without any action on the part of any of the parties hereto or any holder
of shares of Bio Balance common stock or NYHC common stock:
(a) Securities of NYHC. Each share of common stock, and all options,
warrants and other securities convertible or exercisable into shares of
common stock, of NYHC outstanding immediately prior to the Closing Date
shall be adjusted to reflect the reverse stock split referred to in Section
3.2(a)(iii) herein.
(b) Conversion of Bio Balance Common Stock. Each share of common stock
of Bio Balance outstanding immediately prior to the Closing Date shall be
converted into and exchangeable for the right to receive one fully paid and
non-assessable share of common stock, par value $0.01 per share, of NYHC.
(c) Securities of the Surviving Corporation. The issued and
outstanding securities of Bio Balance shall remain outstanding and shall be
unchanged as a result of the Merger (except that ownership of the Bio
Balance shares shall pass to NYHC pursuant to Section 2.2(b)) except as
otherwise provided for in this Agreement.
(d) Cancellation of Treasury Shares and NYHC Owned Shares. Each share
of Merger Sub common stock issued and outstanding immediately prior to the
Closing Date that is owned by NYHC, the Merger Sub or by any other
subsidiary of NYHC shall automatically be cancelled and shall cease to
exist, and no consideration shall be delivered or deliverable in exchange
therefor.
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(e) Assumption of Warrants and Options of Bio Balance. At the Closing
Date, NYHC shall assume all obligations under outstanding warrants or
options to purchase shares of common stock of Bio Balance. At the Closing
Date, each outstanding warrant or option to purchase shares of common stock
of Bio Balance, whether vested or unvested, shall be deemed to constitute
an option, warrant or derivative security to acquire, on the same terms and
conditions as were applicable prior to the Closing Date, the same number of
shares of NYHC common stock as the holder of such warrant, option or
derivative securities would have been entitled to receive pursuant to the
Merger had such holder exercised such warrant, option or derivative
security in full immediately prior to the Closing Date, at a price per
share equal to the applicable price prior to the Closing Date.
(f) Certain Adjustments. If between the date of this Agreement and the
Closing Date the outstanding shares of NYHC common stock shall have been
changed into a different number of shares or a different class by reason of
any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares or any similar event, the amount of
shares of NYHC common stock to be issued pursuant to Sections 2.2(b) or (d)
above shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares or any similar event.
4. Article 3.2a.(iv) and (v) are hereby amended to reflect the revised
structure of the transaction and an agreement to increase the shares reserved
under NYHC's stock option plan and new subsections (vi) and (vii) are added to
amend the Articles of Incorporation of NYHC to increase the authorized shares of
preferred stock and to reflect the requirement that NYHC shareholders approve
the change of control provisions of certain emploment agreements, which
provisions shall read in full as follows:
"(iv) Approval of the Merger and Exchange and all other transactions
described in this Agreement.
(v) The approval of an amendment to the New York Health Care, Inc.
Performance Incentive Plan (the "Stock Option Plan") authorizing the
reservation of an additional 3,230,000 shares of the Company's $.01 par
value common stock for issuance under the Stock Option Plan after the
meeting of the NYHC Shareholders referred to in Article 3.2b. below.
(vi) Amendment of the Articles of Incorporation of NYHC for the
increase in the authorized $.01 par value preferred stock of NYHC from
2,000,000 shares (before giving effect to the reverse split referred to in
Article 3.2a.(iii)) to 5,000,000 shares (after giving effect to the reverse
split referred to in Article 3.2a.(iii))."
(vii) Approval of the change of control provisions contained in the
senior executive officers employment agreements approved by New York Health
Care Compensation Committee.
C-3
5. New Article 3.2A is hereby added to the Agreement to reflect the
requirement that Bio Balance secure shareholder approval of the Merger and
amendment of Bio Balance's Certificate of Incorporation to eliminate the
authorized preferred stock and to read in full as follows:
"3.2A Bio Balance Shareholder Consent. Prior to Closing, Bio Balance
shall (a) cause the shareholders of Bio Balance to execute a unanimous
consent, or (b) convene a meeting of its shareholders and obtain the
consent of the Bio Balance Shareholders approving:
(i) The Merger and all other transactions described in this Agreement.
(ii) Amendment of the Certificate of Incorporation of Bio Balance to
eliminate its authorized preferred stock."
6. Article 3.4 of the Agreement is hereby amended to provide that closing
may occur if less than $6,000,000 of gross proceeds, but not less than
$5,000,000 of gross proceeds, have been received from the Private Placement;
provided that (i) NYHC shall carry on a private placement (the "Post-Closing
Placement"), through the offer of shares of NYHC, for a period of up to 120 days
following closing or until an aggregate of $6,000,000 of gross proceeds have
been received from the Private Placement and the Post-Closing Placement,
whichever is earlier (the "Extended Offering Period"); (ii) Bio Balance shall
deposit in escrow the sum of $100,000 which shall be disbursed (a) to NYHC,
along with an additional $100,000 payment, in the event that closing occurs with
less than $6,000,000 of gross proceeds from the Private Placement, or (b) to Bio
Balance in the event closing occurs and $6,000,000 of gross proceeds have been
received from the Private Placement or the Agreement is terminated; (iii)
certain shareholders (the "Deferring Shareholders") of Bio Balance agree to
defer receipt of an aggregate of 3,222,222 of the NYHC Shares (the "Contingent
Shares") otherwise issuable at Closing such that all remaining shareholders of
Bio Balance will receive one share of NYHC common stock for each share of Bio
Balance common stock held prior to Closing; and (iv) at the end of the Extended
Offering Period, the Contingent Shares shall be (a) issued to the Deferring
Shareholders in the same amounts that the Deferring Shareholders agreed to defer
receipt of the Contingent Shares if, and only if, not less than an aggregate of
$6,000,000 of gross proceeds from the Private Placement and Post-Closing
Placement have been received by the end of the Extended Offering Period, or (b)
unissued, and any obligation to issue said shares shall terminate, if less than
$6,000,000 of aggregate gross proceeds from the Private Placement and
Post-Closing Placement have been received by the end of the Extended Offering
Period. Amended Article 3.4 shall read in full as follows:
"3.4 Private Placement. Bio Balance shall complete a private placement of
its common stock on the terms more particularly described in Schedule 3.4 (the
offer and sale of shares of Bio Balance common stock on or after October 11,
2001 and in accordance with Schedule 3.4 is referred to as the "Private
Placement"), at Bio Balance's sole cost and expense in which it shall raise not
less than $6,000,000 (the "Full Amount Offered") of gross proceeds prior to the
Closing Date; provided, however, that notwithstanding the failure to receive
gross proceeds from the Full Amount Offered prior to the Closing Date, Closing
shall occur, subject to satisfaction of the other terms and conditions of this
Agreement, if not less than $5,000,000 (the "Minimum Closing Funding") of gross
proceeds have been received from the Private Placement on or before the Closing
Date. NYHC shall cooperate with Bio Balance in the preparation of the documents
necessary to conduct the Private Placement and all filings required to be made
in connection with the Private Placement. All proceeds from the Private
Placement will be employed to pay expenses of the Private Placement and then
exclusively for use by Bio Balance in furtherance of its business. In order to
accommodate the closing of the Merger where the Minimum Closing Funding, but
less than the Full Amount Offered, has been subscribed and paid for, the
following provisions shall be applicable:
C-4
a. NYHC shall carry on a private placement (the "Post-Closing Placement"),
through the offer of shares of NYHC, for a period of up to 120 days following
closing or until gross proceeds received from the Private Placement and the
Post-Closing Placement equal, in the aggregate, the Full Amount Offered,
whichever is earlier (the "Extended Offering Period"). With respect to the
offering of securities pursuant to the Post-Closing Placement, (i) the total
number of shares offered, when combined with the shares sold in the Private
Placement, shall not exceed the maximum number of shares authorized to be sold
as set forth in Schedule 3.4 and the price per share shall not be less than the
minimum offering price set forth in Schedule 3.4, (ii) NYHC shall cooperate
fully in carrying out such offering, (iii) Bio Balance shall be responsible for
the payment of all costs incurred in connection with the Post-Closing Placement,
and (iv) all proceeds from such sale of securities, after payment of offering
expenses, shall be contributed to the capital of Bio Balance for the exclusive
use of Bio Balance. To the extent that shares of NYHC Common Stock are sold
under the Post-Closing Placement and the shares are not otherwise registered
under the Securities Act of 1933, the sale of those shares may include
registration rights pursuant to which NYHC will promptly file a registration
statement, at the sole expense of Bio Balance, on Form S-3, or such other form
as may be available, with respect to the resale of such shares and NYHC
management will cooperate fully in the preparation and filing of any such
registration statement.
b. Bio Balance shall deposit in escrow the sum of $100,000 which shall be
disbursed (i) to NYHC, along with payment by Bio Balance to NYHC of an
additional $100,000, at the Closing Date in the event that closing occurs with
gross proceeds from the Private Placement of less than the Full Amount Offered,
or (ii) to Bio Balance, (A) at the Closing Date, in the event closing occurs and
gross proceeds from the Full Amount Offered have been received from the Private
Placement or, (B) upon termination of the Agreement, in the event the Agreement
is terminated.
C-5
c. Certain shareholders (the "Deferring Shareholders") of Bio Balance shall
agree in writing to defer receipt of an aggregate of 3,222,222 NYHC Shares (the
"Contingent Shares") such that all remaining shareholders of Bio Balance will
receive one share of NYHC common stock for each share of Bio Balance common
stock held prior to Closing.
d. At the end of the Extended Offering Period, the Contingent Shares shall
be (i) issued to the Deferring Shareholders in the same amounts that the
Deferring Shareholders agreed to defer receipt of the Contingent Shares if, and
only if, aggregate gross proceeds from the Private Placement and the
Post-Closing Placement in an amount not less than the Full Amount Offered have
been received by the end of the Extended Offering Period, or (ii) unissued, and
any obligation to issue said shares shall terminate, if gross proceeds from less
than the Full Amount Offered have been received by the end of the Extended
Offering Period.
Nothing herein shall in any way preclude or restrict the ability of NYHC to
raise additional capital above and beyond the Full Amount Offered following the
Closing Date through the sale of securities of NYHC to fund the operations of
Bio Balance; provided, however, that for a period of one year from the Closing
Date, no sales of common stock shall be made at less than $2.00 per share unless
a majority of the directors serving on the Closing Date approve such sale.
7. Schedule 3.5a. of the Agreement is hereby amended to clarify that only
the shares of NYHC common stock and preferred stock actually held by Jerry Braun
and Jacob Rosenberg as of the date hereof and at Closing, excluding shares
underlying unexercised warrants or options held at Closing, shall be subject to
the lock-up and to read in full as follows:
"SCHEDULE 3.5a.
NYHC LOCKUP
All shares of NYHC Common Stock and preferred stock owned of record or
beneficially by Jerry Braun and Jacob Rosenberg as of the date hereof or at
Closing, excluding shares underlying unexercised warrants or options held at the
Closing Date, will be restricted from sale, transfer or hypothecation until 120
days after the effective date of the S-4 Registration Statement referred to in
Section 3.3 of the Agreement (the "Effective Date"), provided all such Shares
owned and transferred by them which Shares are subject to the irrevocable
proxies described in Section 3.2(c) remain subject to the irrevocable proxies
through the Closing Date or termination of this Agreement. Thereafter, so long
as each such holder is a director of NYHC, each such holder may, each calendar
month, convey not more than 10% of the NYHC Common shares owned by him on the
Effective Date.
C-6
Each such holder may transfer NYHC Common Shares owned by them as of the
date of this Agreement to family trusts and registered charities provided such
transferred NYHC Common shares remain subject to restriction from further sale,
transfer or hypothecation until 120 days after the Effective Date. Thereafter,
for so long as each such holder is a director of NYHC each calendar month, each
such transferee may convey not more than 10% of the NYHC Common shares received
by the transferee. The foregoing notwithstanding, registered charities who
receive NYHC Common Shares may sell not more than 1,000 NYHC Shares per trading
day commencing on the Effective Date and until 120 days thereafter."
8. The introductory language of Article 4.2 is amended to clarify that the
representations and warranties of NYHC are to and for the benefit of Bio Balance
and to read in full as follows:
"4.2 Representations and Warranties of NYHC. NYHC represents and warrants
to Bio Balance as follows:"
9. The third paragraph of Schedule 4.2n is amended to clarify certain
provisions of the employment contracts between NYHC and each of Jerry Braun and
Jacob Rosenberg such that upon any termination of services as a director of NYHC
(for any reason other than death) during the term of their employment contracts
as in effect on the Closing Date, NYHC shall enter into consulting agreements
with each such person and grant certain stock options to those persons. The
third paragraph of Schedule 4.2n, as amended, shall read in full as follows:
"3. in the event of termination of service to NYHC as a director, for any
reason other than death, NYHC shall, effective on the date of termination, enter
into consulting agreements with each of Mr. Braun and Mr. Rosenberg whereby each
of such persons will provide consulting services to NYHC on an as needed basis
for a period not less than five years and, as compensation for those services,
will be granted an option to acquire 500,000 shares of NYHC common stock for a
term of not less than ten years at a price per share equal to the closing price
of NYHC's common stock on the date of such termination and the underlying shares
shall be promptly registered on SEC Form S-8 or on any other SEC form
appropriate for such registration so that such shares shall have been fully
registered no later than 90 days after such termination of the employment
contract; and"
10. The fourth paragraph of Schedule 4.2n, as well as the letter agreement
dated October 11, 2001, is amended to eliminate the deferral of the change in
control benefits and to read in full as follows:
C-7
"4. for purposes of the employment contracts between New York Health Care,
Inc. and each of Jerry Braun and Jacob Rosenberg, the "Closing" of the "Merger",
as defined in the Stock for Stock Exchange Agreement between The Bio Balance
Corp. and New York Health Care, Inc., as amended, shall be deemed a "change of
control" of New York Health Care, Inc. as referred to in paragraph 5 of each of
those employment contracts."
11. Article 4.2ff of the Agreement is hereby amended to clarify that NYHC's
common stock is traded on the Boston Stock Exchange in addition to the Nasdaq
SmallCap Market and to read in full as follows:
"ff. Listing. NYHC's common stock is quoted and listed for trading on the
NASDAQ SmallCap Market ("SmallCap") and the Boston Stock Exchange ("BSE"). NYHC
has not received any oral or written notice from NASDAQ or the BSE that its
common stock will be delisted from SmallCap or BSE or that the common stock does
not meet all requirements for the continuation of such listings, other than
notice from SmallCap that continued listing following the Closing Date would be
subject to satisfactory compliance with the initial listing standards, including
satisfaction of the minimum bid price requirements."
12. Article 5.1g of the Agreement is hereby amended to reflect the change
in structure from a stock-for-stock exchange to a merger and to eliminate the
requirement that a minimum number of Bio Balance Shares accept the exchange and
to replace the same with a provision requiring that the shareholders of Bio
Balance approve the Merger and no more than 10% of the Bio Balance Shares shall
have exercised dissenter's rights, and to read in full as follows:
"g. Approval of Merger; Dissenters' Rights. The Merger and the matters
requiring a vote of shareholders of Bio Balance pursuant to Article 3.2A of this
Agreement shall have been approved by the requisite vote required to approve
such matters under the DGCL and the Certificate of Incorporation and Bylaws of
Bio Balance and the number of shares of Bio Balance common stock with respect to
which dissenters' rights shall have been asserted as of the Closing Date shall
not exceed 10% of the total Bio Balance Shares outstanding as of the Closing
Date."
13. Article 5.2c of the Agreement is deleted to reflect the change in the
structure of the transaction from a share-for-share exchange to a merger.
14. Article 5.2d of the Agreement is hereby amended to clarify that Bio
Balance will take reasonable action to preserve the listing of NYHC's common
stock on the Boston Stock Exchange in addition to the Nasdaq SmallCap Market and
to read in full as follows:
"d. SmallCap and BSE Listing. Bio Balance will take all action reasonably
necessary on its part to preserve the NYHC SmallCap and BSE listings, and will
refrain from taking any action which may jeopardize the NYHC SmallCap and BSE
listings."
C-8
15. Article 7.2 of the Agreement is hereby amended to make the outside
closing date consistent with Article 2.1 and to read in full as follows:
"7.2 Termination for Failure to Close. This Agreement may be
terminated by any of the parties hereto if the Closing shall not have
occurred by August 13, 2002, provided that, the right to terminate
this Agreement pursuant to this section shall not be available to any
party whose failure to fulfill any of its obligations hereunder has
been the cause of or resulted in the failure to consummate the Merger
by the foregoing date."
16. Article 8.9 of the Agreement is hereby amended to reflect the
appointment of new legal counsel by Bio Balance and to substitute in the notice
provisions new counsel in place of Grushko & Mittman, P.C. and to read in full
as follows:
"with a copy to: Vanderkam & Sanders
440 Louisiana St., Suite 475
Houston, Texas 77002
Attn: Michael Sanders, Esq.
Facsimile: (713) 547-8910"
17. The execution, delivery and performance of this Amendment has been duly
authorized, adopted and approved by the Parties. Each of the Parties has taken
all necessary corporate action and has all of the necessary corporate power to
enter into this Amendment and to consummate the transactions described in this
Amendment. This Amendment has been duly and validly executed and delivered by an
authorized officer of each of the Parties and is the valid and binding
obligation of each of the Parties, enforceable against each of them in
accordance with its terms.
18. All of the other provisions, terms and conditions of the Agreement and
the schedules annexed thereto remain unimpaired and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THE BIO BALANCE CORP.
Attest:
/s/ Jeanne Quinto By: /s/ Paul Stark
- --------------------------- --------------------------
Jeanne Quinto, Secretary Paul Stark
President and Director
NEW YORK HEALTH CARE, INC.
Attest:
/s/ Jacob Rosenberg By: /s/ Jerry Braun
- --------------------------- --------------------------
Jacob Rosenberg, Secretary Jerry Braun
President and CEO
AMENDMENT NO. 3 TO STOCK FOR STOCK EXCHANGE AGREEMENT
This AMENDMENT NO. 3 (the "Amendment No. 3") is made and entered into as of
the 13th day of August, 2002, by and among The Bio Balance Corp., a Delaware
corporation ("Bio Balance"), for itself and for the benefit of the shareholders
and warrantholders of Bio Balance, and New York Health Care, Inc., a New York
corporation ("NYHC").
WHEREAS, Bio Balance and NYHC (the "Parties") entered into a "Stock for
Stock Exchange Agreement" dated October 11, 2001 (the "Agreement"), an
"Amendment No. 1 to Stock for Stock Exchange Agreement" dated February 13, 2002
("Amendment No. 1"), and an "Amendment No. 2 to Stock for Stock Exchange
Agreement" dated July 10, 2002 ("Amendment No. 2"); and
WHEREAS, the Parties have agreed to amend the Agreement, as previously
amended pursuant to Amendment No. 1 and Amendment No. 2, as provided for in this
Amendment No. 3.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises made in the Agreement and in this Amendment No. 3 and in consideration
of the covenants, representations, warranties and conditions set forth therein
and herein, the receipt and sufficiency of which are hereby acknowledged, the
Parties, intending to be legally bound, agree as follows:
1. Article 2.1 of the Agreement is hereby amended to to extend the outside
closing date and to read in full as follows:
"2.1 The Closing. Subject to the conditions precedent contained
herein, the Exchange ("Closing") shall take place at the offices of
Scheichet & Davis, P.C., 800 Third Avenue, 29th Floor, New York, NY
10022 at 1:00 p.m. (local time) at a date mutually agreed between the
parties not later than November 11, 2002 (the "Closing Date")."
2. Article 7.2 of the Agreement is hereby amended to make the outside closing
date consistent with Article 2.1 and to read in full as follows:
"7.2 Termination for Failure to Close. This Agreement may be
terminated by any of the parties hereto if the Closing shall not have
occurred by November 11, 2002, provided that, the right to terminate
this Agreement pursuant to this section shall not be available to any
party whose failure to fulfill any of its obligations hereunder has
been the cause of or resulted in the failure to consummate the Merger
by the foregoing date."
D-1
3. The third paragraph of Schedule 4.2n is amended to reference the form of
consulting agreement to be entered into between NYHC and each of Jerry
Braun and Jacob Rosenberg upon any termination of services as a director of
NYHC (for any reason other than death) during the term of their employment
contracts as in effect on the Closing Date. The third paragraph of Schedule
4.2n, as amended, shall read in full as follows:
"3. in the event of termination of service to NYHC as a director, for any
reason other than death, NYHC shall, effective on the date of
termination, enter into consulting agreements, substantially in the
form attached hereto as Exhibit A, with each of Mr. Braun and Mr.
Rosenberg whereby each of such persons will provide consulting
services to NYHC on an as needed basis for a period not less than five
years and, as compensation for those services, will be granted an
option to acquire 500,000 shares of NYHC common stock for a term of
not less than ten years at a price per share equal to the closing
price of NYHC's common stock on the date of such termination and the
underlying shares shall be promptly registered on SEC Form S-8 or on
any other SEC form appropriate for such registration so that such
shares shall have been fully registered no later than 90 days after
such termination of the employment contract; and"
4. The execution, delivery and performance of this Amendment has been duly
authorized, adopted and approved by the Parties. Each of the Parties has
taken all necessary corporate action and has all of the necessary corporate
power to enter into this Amendment and to consummate the transactions
described in this Amendment. This Amendment has been duly and validly
executed and delivered by an authorized officer of each of the Parties and
is the valid and binding obligation of each of the Parties, enforceable
against each of them in accordance with its terms.
5. All of the other provisions, terms and conditions of the Agreement and the
schedules annexed thereto remain unimpaired and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THE BIO BALANCE CORP.
Attest:
/s/ Jeanne Quinto By: /s/ Paul Stark
- ----------------------------- --------------------------
Jeanne Quinto, Secretary Paul Stark
President and Director
NEW YORK HEALTH CARE, INC.
Attest:
/s/ Jacob Rosenberg By: /s/ Jerry Braun
- ----------------------------- ---------------------------
Jacob Rosenberg, Secretary Jerry Braun
President and CEO
D-2
AMENDMENT NO. 4 TO STOCK FOR STOCK EXCHANGE AGREEMENT
-----------------------------------------------------
This AMENDMENT NO. 4 (the "Amendment No. 4") is made and entered into as of
the 24th day of October, 2002, by and among The Bio Balance Corp., a Delaware
corporation ("Bio Balance"), for itself and for the benefit of the shareholders
and warrantholders of Bio Balance, and New York Health Care, Inc., a New York
corporation ("NYHC").
WHEREAS, Bio Balance and NYHC (the "Parties") entered into a "Stock for
Stock Exchange Agreement" dated October 11, 2001 (the "Agreement"), an
"Amendment No. 1 to Stock for Stock Exchange Agreement" dated February 13, 2002
("Amendment No. 1"), an "Amendment No. 2 to Stock for Stock Exchange Agreement"
dated July 10, 2002 ("Amendment No. 2") and an "Amendment No. 3 to Stock for
Stock Exchange Agreement"dated August 13, 2002 ("Amendment No. 3"); and
WHEREAS, the Parties have agreed to amend the Agreement, as previously
amended pursuant to Amendment No. 1, Amendment No. 2 and Amendment No. 3, as
provided for in this Amendment No. 4.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises made in the Agreement and in this Amendment No. 4 and in consideration
of the covenants, representations, warranties and conditions set forth therein
and herein, the receipt and sufficiency of which are hereby acknowledged, the
Parties, intending to be legally bound, agree as follows:
1. Article 2.1 of the Agreement is hereby amended to to extend the outside
closing date and to read in full as follows:
"2.1 THE CLOSING. Subject to the conditions precedent contained
herein, the Exchange ("Closing") shall take place at the offices of
Scheichet & Davis, P.C., 800 Third Avenue, 29th Floor, New York, NY
10022 at 1:00 p.m. (local time) at a date mutually agreed between the
parties not later than January 2, 2003 (the "Closing Date")."
2. Article 7.2 of the Agreement is hereby amended to make the outside closing
date consistent with Article 2.1 and to read in full as follows:
"7.2 TERMINATION FOR FAILURE TO CLOSE. This Agreement may be
terminated by any of the parties hereto if the Closing shall not have
occurred by January 2, 2003, provided that, the right to terminate
this Agreement pursuant to this section shall not be available to any
party whose failure to fulfill any of its obligations hereunder has
been the cause of or resulted in the failure to consummate the Merger
by the foregoing date."
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3. The execution, delivery and performance of this Amendment has been duly
authorized, adopted and approved by the Parties. Each of the Parties has taken
all necessary corporate action and has all of the necessary corporate power to
enter into this Amendment and to consummate the transactions described in this
Amendment. This Amendment has been duly and validly executed and delivered by an
authorized officer of each of the Parties and is the valid and binding
obligation of each of the Parties, enforceable against each of them in
accordance with its terms.
4. All of the other provisions, terms and conditions of the Agreement and
the schedules annexed thereto remain unimpaired and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THE BIO BALANCE CORP.
Attest:
/s/ Jeanne Quinto By: /s/ Paul Stark
- -------------------- -------------------
Jeanne Quinto, Secretary Paul Stark
President and Director
NEW YORK HEALTH CARE, INC.
Attest:
/s/ Jacob Rosenberg By: /s/ Jerry Braun
- ---------------------- ---------------------
Jacob Rosenberg, Secretary Jerry Braun
President and CEO
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DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
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b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security or an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections (b) or
(c) hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation
has become effective; or
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(2) If the merger or consolidation was approved pursuant to
sec.228 or sec.253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date or the merger or
consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of
stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that
is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled
to receiver either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to
the date the notice is given, provided, that if the notice is given on
or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
his written request for such statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
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(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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