As filed with the Securities and Exchange Commission on May 31, 2005
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW YORK HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
New York 8082 11-2636089
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
1850 McDonald Avenue
Brooklyn, NY 11223
Telephone: (212) 679-7778
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Dennis M. O'Donnell
Chief Executive Officer
363 Seventh Avenue
New York, NY 10001
Telephone: (212) 679-7778
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Robert J. Mittman, Esq.
Ethan Seer, Esq.
Blank Rome LLP
405 Lexington Avenue
New York, NY 10174
Telephone: (212) 885-5000
Facsimile: (212) 885-5001
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed
Amount Maximum Offering Proposed
Title of Each Class of to be Price Per Maximum Amount of
Securities to be Registered Registered (1) Security (2) Offering Price (2) Registration Fee
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Shares of common stock, $.001 par value...... 13,767,807 $0.80 $11,014,245.60 $1,296.38
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(1) All of the shares are offered by certain Selling Stockholders includes
(a) 7,899,362 shares owned by the selling stockholders as of May 31,
2005, (b) 5,868,445 shares underlying (i) 3,949,638 warrants with an
exercise price of $0.78 per share, (ii) 1,777,355 placement agent
warrants with an exercise price of $0.62 per share, and (iii) 141,452
warrants with an exercise price ranging from $3.00 to $3.69. In
accordance with the Rule 416 under the Securities Act of 1933, this
registration statement also covers any additional shares of common stock
that shall become issuable by reason of any stock dividend, stock split,
recapitalization or other similar transaction effected without the
receipt of consideration that results in an increase in the number of
the outstanding shares of common stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For purposes
of this table, we have used the average of the closing bid and asked
prices of the registrant's Common Stock on May 25, 2005, as reported by
the Pink Sheets, LLC.
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The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
TABLE OF CONTENTS
Page
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Prospectus Summary........................................... 1
Risk Factors................................................. 4
Forward-Looking Statements................................... 14
Use of Proceeds.............................................. 16
Price Range of Common Stock.................................. 17
Dividend Policy.............................................. 17
Selected Financial Data...................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 18
Business..................................................... 25
Management................................................... 38
Principal Stockholders....................................... 45
Related Party Transactions................................... 46
Description of Capital Stock................................. 47
Selling Stockholders......................................... 50
Plan of Distribution......................................... 53
Legal Matters................................................ 56
Experts...................................................... 56
Index to Financial Statements................................ F-1
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale 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
cover of this prospectus.
The information in this prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and the Selling Stockholders
are not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to Completion
Dated May 31, 2005
PROSPECTUS
13,767,807 shares of common stock
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NEW YORK HEALTH CARE, INC.
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This prospectus relates to the sale of up to 13,767,807 shares of our common
stock by some of our securityholders. For a list of the selling stockholders,
please see "Selling Stockholders" on page 50. We are not selling any shares of
common stock in this offering and therefore will not receive any proceeds from
the sale of common stock by the selling stockholders. We will, however, receive
proceeds from any exercise for cash of the warrants made before any sale of the
shares of common stock being offered under this prospectus that are underlying
warrants. All costs associated with this registration will be borne by us.
The common stock may be offered from time to time by the selling
stockholders through ordinary brokerage transactions in the over-the-counter
markets, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices and in other ways as described in the
"Plan of Distribution".
Our common stock is listed on the OTC Pink Sheets under the symbol
"BBAL.pk". On May 25, 2005, the last sale price of our common stock as reported
by the OTC Pink Sheets was $0.80 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. FOR MORE
INFORMATION, SEE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 2005
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PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully. Unless the context requires otherwise, the terms "New York
Health Care" means New York Health Care, Inc, and "we", "us" and "our" mean New
York Health Care, Inc. and its consolidated subsidiaries (the "Company").
Our Company
We are engaged in two industry segments, the delivery of home
healthcare services (sometimes referred to as the "home healthcare business")
and, since our acquisition of the BioBalance Corporation ("BioBalance") in a
merger transaction in January 2003 (treated for accounting purposes as a reverse
acquisition of us by BioBalance), the development and planned manufacturing and
marketing of proprietary biotherapeutic agents for the treatment of
gastrointestinal ("GI") disorders. BioBalance is our wholly-owned subsidiary.
For accounting purposes, BioBalance is considered to be the "accounting
acquirer" in the transaction. Our current intention is to actively pursue
BioBalance's business plan of developing, manufacturing and marketing its
initial product PROBACTRIX(R) and other products in its pipeline for treating
gastrointestinal disorders while divesting our home health care business. In
furtherance of these goals, on April 11, 2005, we entered into an agreement to
sell the New Jersey portion of our home health care operations (the "NJ
Business") to Accredited Health Services, Inc. ("Accredited Health") a
subsidiary of National Home Health Care Corp. ("National") for $3.0 million.
This sale closed on May 22, 2005. We are also in the process of negotiating the
sale of the New York portion of our home health care operations to an entity
controlled by Jerry Braun ("Braun"), our former Chief Executive Officer and
Jacob Rosenberg ("Rosenberg"), our former Chief Financial Officer.
Recent Developments
On July 15, 2004, we executed a definitive agreement (the "Purchase
Agreement") for the sale of the assets of our home healthcare business to New
York Health Care, LLC (the "LLC") a company controlled by Messrs. Braun and
Rosenberg, for consideration of $2.7 million in cash, the assumption of all of
the liabilities and obligations with respect to the home healthcare business and
the forgiveness of certain future obligations that may be due to these
individuals pursuant to employment agreements each of them has with us. The sale
was subject to the satisfaction of a number of conditions including obtaining
shareholder and regulatory approvals. Certain of the assets that were to be sold
pursuant to the Purchase Agreement were sold by us to Accredited Health, an
unaffiliated entity. We will consider our home health care division as
discontinued operations if the proposed sale of our entire home health care
business is consummated. We cannot assure you that the conditions to the sale of
our home healthcare business will be satisfied.
On February 24, 2005, the Company consummated a private offering (the
"Offering") which resulted in its issuing an aggregate of 7,899,362 shares (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), and warrants to purchase 3,949,638 shares of Common Stock (the
"Warrants") to persons who qualify as "accredited investors" within the meaning
of rule 501 of Regulation D promulgated under the Securities Act of 1933 (the
"Act"). The aggregate purchase price for the Shares and Warrants was $4,897,600
and net proceeds received by the Company were $4,197,396. Each Warrant is
exercisable to purchase one share of the Company's Common Stock at an exercise
price of $0.78 per share during the five-year period commencing on February 24,
2005. In connection with the Offering, the Company paid to the placement agent
for the Offering (the "Placement Agent") commissions of $470,260 and an
additional $146,616 to cover non-accountable and certain other expenses of the
Placement Agent, and incurred other costs of $83,328. In addition, the Company
issued to the Placement Agent and its designees five-year warrants (the
"Placement Agent Warrants") to purchase an aggregate of 1,777,355 shares of
Common Stock at $0.62 per share. Under the terms of the Offering, we have the
right to call the Warrants that were issued in the Offering upon thirty days
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notice, at a price of $0.01 per Warrant, provided the closing price of the
Common Stock on its principal trading market exceeds $2.00 per share, subject to
anti-dilution adjustments, for a period of 10 consecutive trading days, ending
within 30 days prior to the date on which the notice of redemption is given and
a registration statement covering the shares underlying the Warrants has been
declared and remains effective or the shares issuable upon exercise of the
Warrants are not otherwise subject to any restrictions for their public sale.
The Shares, and the shares of common stock underlying the Warrants and Placement
Agent Warrants are being offered by certain of the selling stockholders pursuant
to this prospectus.
The net proceeds from the Offering are being used to support
BioBalance's operations including research and development, clinical trials and
working capital. In addition BioBalance repaid a $1.7 million loan from us with
the proceeds of the Offering.
In connection with the consummation of the Offering, at the request of
the Placement Agent, at the close of business on February 24, 2005: (i) Mr.
Braun resigned as a director and as our Chief Executive Officer and President
and (ii) Mr. Rosenberg resigned as a director and as our Vice President, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Secretary. Mr. Braun continues to be employed by us as the President of our home
healthcare division and Mr. Rosenberg continues to be employed by us as the Vice
President of our home healthcare division. Other than their ceasing to be our
directors and executive officers, and the resulting changes in their duties and
responsibilities, their respective employment agreements with us remain in
effect. In addition, Messrs. Braun and Rosenberg have board observer rights with
respect to our board of directors until such time as the Asset Sale is
consummated. Pursuant to the terms of their respective employment agreements, as
a result of their resignations from our Board of Directors, on February 24,
2005, each of Braun and Rosenberg received ten year stock options ("Options") to
purchase 500,000 shares of our common stock at an exercise price of $0.85 per
share, pursuant to our Performance Incentive Plan.
In connection with Braun and Rosenberg's agreement with the Placement
Agent to resign as officers and directors of New York Health Care, Inc., in
order to secure our obligations and the obligations of our subsidiary, NYHC
Newco Paxxon, Inc. to (i) consummate the sale of all the assets relating to our
home healthcare business (the "Asset Sale") to the LLC, pursuant to the terms of
the Purchase Agreement or (ii) to comply with any future payment obligations we
may owe to Braun and Rosenberg under their respective employment agreements, we
entered into an agreement (the "Security Agreement"), on February 24, 2005,
which granted Messrs. Braun and Rosenberg a security interest in the assets of
our home healthcare business being conducted in the states of New York and New
Jersey and provided for the deposit of up to $3.55 million in a cash collateral
account (collectively, the "Collateral"). None of BioBalance's assets will be
used as Collateral.
As of the close of business on February 24, 2005, Mr. Dennis O'Donnell
became our Chief Executive Officer and Secretary. Mr. O'Donnell also retained
his positions as the Chief Executive Officer and a director of BioBalance and as
a member of our board of directors.
On March 23, 2005, the security interest that was granted pursuant to
the Security Agreement was terminated and Messrs. Braun and Rosenberg agreed
that we could enter into an agreement with a third party for the sale of the New
Jersey portion of our home health care operations under specified conditions
without being in breach of the Purchase Agreement.
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On April 11, 2005, we entered into an agreement to sell the NJ Business
to Accredited Health for $3.0 million with the consent of Messrs. Braun,
Rosenberg and the LLC. The transaction closed on May 22, 2005.
Funding of the $3.0 million purchase price was received by us upon
execution of the agreement, with the exception of $150,000 (the "Escrow Funds"),
which was placed in escrow to cover actual losses, if any, incurred by
Accredited for which we are required to indemnify Accredited pursuant to the
definitive agreement. If no claims by Accredited for indemnification by us are
made, the Escrow Funds will be released to us 90 days after the formal closing
of the transaction which occurred on May 22, 2005.
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RISK FACTORS
Before you invest in our securities, you should understand the high
degree of risk involved. You should consider carefully the following risks as
well as the other information in this prospectus before you decide to purchase
our securities. If any of the following risks or uncertainties occur, our
business, financial condition and results of operations could be materially and
adversely affected, the trading price of our Common Stock could decline and you
may lose all or part of the money you paid to buy our stock.
Risks Relating to the BioBalance Business
BIOBALANCE IS A DEVELOPMENT STAGE COMPANYWHICH HAS GENERATED NO
REVENUES TO DATE AND HAS A LIMITED OPERATING HISTORY UPON WHICH IT MAY BE
EVALUATED.
BioBalance, incorporated in May 2001, has generated no revenues from
operations, and has no meaningful assets, other than its intellectual property
rights and available cash generated from the Offering and the sale of the NJ
Business. BioBalance faces all of the risks inherent in a new business and those
risks specifically inherent in the business of developing, testing, obtaining
regulatory approvals for, manufacturing, commercializing and selling a new
ethical drug or a new medical food product, with all of the unforeseen costs,
expenses, problems, and difficulties to which such ventures are subject. In July
2001 BioBalance acquired the intellectual property rights with respect to
certain probiotic agents from Israeli companies engaged in the research,
development, marketing or sales of probiotic bacteria and other technology. We
cannot assure that BioBalance will be able to generate revenues or profits from
operation of its business or that BioBalance will be able to generate or sustain
profitability in the future.
FAILURE TO SECURE ADDITIONAL FINANCING WOULD RESULT IN IMPAIRED GROWTH
AND INABILITY TO OPERATE.
BioBalance will be required to expend substantial amounts of working
capital in order to develop, test, obtain the requisite regulatory approvals,
manufacture and market its proposed product and establish the necessary
relationships to implement its business plan. BioBalance had available cash of
$1,494,902 at March 31,2005. On April 11, 2005, we entered into an agreement to
sell certain assets of our home healthcare division in New Jersey to Accredited
Health and the proceeds from the sale in the amount of $2,850,000 were
transferred to BioBalance at that time. A total of $150,000 of the purchase
price was placed in escrow to cover actual losses, if any, incurred by the
Accredited Health for which we are required to indemnify Accredited Health
pursuant to the agreement relating to the sale of the New Jersey Business to the
Accredited Health. If no claims are made by the third party for indemnification
by us the escrowed funds will be released to us 90 days after the formal closing
of the transaction, which occurred on May 22, 2005. We expect these funds will
be sufficient to sustain our operations for the next twelve months. If
BioBalance fails to obtain additional financing, BioBalance's clinical and
regulatory programs would need to be scaled back or cancelled. BioBalance has no
firm agreements or arrangements with respect to any such financing and we cannot
assure you that any needed funds will be available to BioBalance on acceptable
terms or at all. The inability to obtain sufficient funding of BioBalance's
operations in the immediate future could cause BioBalance to curtail or cease it
operations.
THE SALE OF OUR NEW YORK HOME HEALTH CARE BUSINESS IS NOT ASSURED.
We are currently negotiating to sell our remaining home healthcare
operations which are located in New York in whole or in part, to the entity
controlled by Messrs. Braun and Rosenberg. Even if we reach an agreement with
Braun and Rosenberg with respect to such sale, the sale is expected to be
subject to a number of conditions, including, but not limited to, shareholder
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and regulatory approval. Even if shareholder approval and regulatory approval of
the proposed sale are obtained, there can be no assurance that litigation will
not be commenced by a shareholder or other third party seeking to prevent the
sale of the remaining home healthcare business to the entity controlled by Braun
and Rosenberg from being consummated. Until the time, if ever, that our New York
home healthcare business is sold, we expect to continue to operate the remaining
home healthcare business under Braun and Rosenberg, or an entity controlled by
them.
IF WE DIVEST OUR HOME HEALTH CARE BUSINESS, WE WILL BE A PURELY
DEVELOPMENT STAGE COMPANY, HAVING GENERATED NO REVENUES TO DATE AND HAVING
MINIMAL OPERATING HISTORY UPON WHICH WE MAY BE EVALUATED.
To date, the only revenues that have been generated by us have been
produced by the home health care business. BioBalance has generated no revenues
from operations or meaningful assets, other than its intellectual property
rights. We have recently sold the NJ Business and if we sell our remaining home
health care business which is located in New York, our only remaining operating
business will be BioBalance, which faces all of the risks inherent in a new
business and those risks specifically inherent in the business of developing,
manufacturing, introducing and selling a new drug or new product to the market
with all of the unforeseen costs, expenses, problems, and difficulties to which
such ventures are subject. We cannot assure you that BioBalance will be able to
generate revenues or profits from operation of its business.
THE LOSS OF KEY EXECUTIVES OR CONSULTANTS OR THE FAILURE TO HIRE
QUALIFIED EMPLOYEES WOULD DAMAGE OUR BUSINESS.
Because of the highly technical nature of our BioBalance business, we
depend greatly on attracting and retaining experienced management and highly
qualified and trained scientific personnel. Our future success will depend on
the continued services of our key scientific and management personnel with whom
we have entered into various agreements. The management team for BioBalance was
assembled in 2003, including the additions of Dennis O'Donnell as BioBalance's
President and Chief Executive Officer, Dr. Robert Hoerr as Director of Medical
and Regulatory Affairs and Dr. Eileen Bostwick as Director of Research and
Development. We have also retained the services of Dr. Nellie Kelner-Padalka,
the original inventor of PROBACTRIX, and have entered into a written agreement
with Dr. Khursheed Jeejeebhoy and are finalizing an agreement with Dr. Harold
Jacob, both of whom serve on our Medical Advisory Board. We compete intensely
for these professionals with other companies in our industry. If we cannot
retain or hire and effectively integrate a sufficient number of qualified
scientists and experienced professionals, such inability would have a material
adverse effect on our capacity to grow our business and develop our products
through the clinical trial process. We do not presently maintain key person
insurance for any of BioBalance's key personnel. Moreover, as a result of the
resignations of Messrs. Braun and Rosenberg as executive officers of ours, Mr.
O'Donnell is our only executive officer. Although Mr. O'Donnell has previously
served as an officer of subsidiaries or divisions of public companies, he has no
direct experience as a chief executive of a public company.
WE COULD BE REQUIRED TO PAY FUNDS TO SATISFY INDEMNITY AND OTHER
POSSIBLE CLAIMS BY FORMER EMPLOYEES AND CONSULTANTS.
In November 2003, a former director of New York Health Care who was an
officer of BioBalance resigned and a consulting agreement with a consultant to
BioBalance was suspended, and subsequently terminated, as a result of matters
related to certain claims made against the former director and the consultant by
the U.S. Attorney's office relating to an alleged attempt by these two
individuals to manipulate the trading of our Common Stock. We are obligated,
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under certain circumstances, to indemnify the former director against liability
and to pay for his costs of defending himself from certain legal actions that
arose from his activities as a director or officer of ours. To date, our
insurance carrier has advanced funds on our behalf to the former director to
cover the expenses of his defense to the government action. Unless it is legally
determined that the former director is not entitled to indemnification, we will
be required to reimburse the insurance carrier for $250,000 of the amount it
advanced on behalf of the former director. We have accrued the $250,000 in our
financial statements as of March 31, 2005. In addition, the terminated
consulting agreement that BioBalance had entered into in 2001 with the
consultant and a company affiliated with the consultant provided for the payment
to the consultant of annual consulting fees of $250,000 per year through at
least January 2008 and the issuance of 200,000 warrants to the consulting
company, subject to earlier termination of the consulting agreement under
certain circumstances, including for cause, as defined in the agreement, or
without cause. Although BioBalance has notified the consultant of the
termination of the consulting agreement for cause, should the consultant bring
an action to challenge the termination and a court determines that the agreement
was actually terminated without cause, then BioBalance could be obligated under
the agreement to pay to the consulting company a severance payment equal to
three times the sum of its annual base consulting fee and any cash bonus paid to
it in the three-year period preceding the date of termination and to provide the
consultant with certain health and other benefits for a period of five-years. We
have accrued $353,910 as of March 31, 2005, in our consolidated financial
statements related to these potential obligations. There can be no assurance as
to the actual amount of money that we will be required to pay on behalf of its
former director in connection with the indemnification provisions. Moreover, we
believe that we will be able to defend our position in a possible claim by the
consultant that it is owed money under the consulting agreement, although there
can be no assurance as to the amount of monies, if any, that BioBalance may have
to pay under the consulting agreement or that the consultant will not bring an
action against BioBalance or New York Health Care for an alleged breach of the
consulting agreement.
BIOBALANCE'S PRODUCTS ARE IN DEVELOPMENT AND MAY NOT SATISFY REGULATORY
REQUIREMENTS OR BECOME COMMERCIALLY VIABLE.
The products that we are currently developing will require additional
development, testing, and investment in order to market it as a prescription
drug. We cannot be sure that our product research and development efforts will
be successful, that candidates will enter clinical studies as anticipated, that
we will satisfy Good Laboratory Procedures ("GLP"), medical food or prescription
drug requirements or that any required regulatory approvals will be
expeditiously applied for or obtained, or that any products, if introduced, will
be commercially successful. We have conducted anecdotal and pre-clinical trials
and have recently commenced an IBS medical food clinical trial for our initial
product and have established GRAS (Generally Recognized As Safe) status to date.
The results of these pre-clinical and anecdotal trials on products under
development are not necessarily predictive of results that will be obtained from
large scale clinical testing. We cannot be sure that clinical trials of the
products under development will demonstrate the safety and efficacy of such
products or will result in a marketable product. In addition, the administration
alone or in combination with drugs of any product developed by BioBalance may
produce undesirable side effects in humans. The failure to demonstrate
adequately the safety and efficacy of a therapeutic drug product under
development could delay or prevent regulatory approval, where required, and
delay or prevent commercial sale of the product, any of which could have a
material adverse effect on BioBalance. The commercial formulation has yet to be
developed for PROBACTRIX. We may encounter difficulties in manufacturing,
process development and formulation activities that could result in delays in
clinical trials, regulatory submissions, regulatory approvals and
commercialization of our product, or cause negative financial and competitive
consequences. We cannot assure you that PROBACTRIX or any other product will be
successfully developed, be developed on a timely basis or prove to be more
effective than competing products based on existing or newly developed
technologies. The inability to successfully complete development, or a
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determination by us, for financial or other reasons, not to undertake to
complete development of PROBACTRIX or any other product, particularly in
instances in which we have made significant capital expenditures, could have a
material adverse effect on us.
POTENTIAL FAILURE OF PLANNED CLINICAL TRIALS TO PRODUCE STATISTICALLY
SIGNIFICANT DATA COULD IMPAIR OUR ABILITY TO SUCCESSFULLY MARKET OUR PRODUCTS.
There is substantial risk that the studies that we are planning will
not yield sufficient statistically significant data to make strong marketing
claims. This could adversely affect marketing efforts to the medical community,
which is traditionally resistant to new treatments unless supported by
statistically significant data before recommending it to patients. This could
severely limit our ability to successfully market our product.
WE ARE DEPENDENT ON NEW PRODUCTS AND CONTINUED INNOVATION.
The pharmaceutical industry in general, including the market for IBS
and pouchitis treatments, is characterized by rapid innovation and advances.
These advances result in frequent product introductions and short product life
cycles, requiring a high level of expenditures for research and development and
the timely introduction of new products. We believe our ability to grow and
succeed is partially dependent upon our ability to introduce new and innovative
products into such markets. We cannot assure you that we will be successful in
our plans to introduce additional products to the market or expand our current
label indications.
INTELLECTUAL PROPERTY RIGHTS MAY NOT PROTECT OUR BUSINESS.
We have adopted a comprehensive patent policy on current and future
products. We use a combination of patents, trademarks and trade secrets to
protect our proprietary position on PROBACTRIX. We cannot assure you that our
pending or future patent and trademark registration applications will result in
issued patents and registered trademarks, or that, if issued, our applications
will be upheld if challenged. Further, even if granted, we cannot assure you
that these patents and trademarks will provide us with any protection from
competitors or, that if they do provide any meaningful level of protection, that
we will have the financial resources necessary to enforce our patent and
trademark rights. In addition, we cannot assure you that others will not
independently develop technologies similar to those covered by our pending
patents and trade secrets, or design around the pending patents. If others are
able to design around our patents, our results of operations could be materially
adversely affected. Further, we will have very limited, if any, protection of
our proprietary rights in those jurisdictions where we have not affected any
filings or where we fail to obtain protection through our filings. We cannot
assure you that third parties will not assert intellectual property infringement
claims against us in the future with respect to current or future products. We
are responsible for defending against charges of infringement of third party
intellectual property rights by our actions and products and such assertion may
require us to refrain from the sale of our products, enter into royalty
arrangements or undertake costly litigation. Further, challenges may be
instituted by third parties as to the validity, enforceability and infringement
of our patents. Our adherence to industry standards with respect to our product
may limit our opportunities to provide proprietary features which may be
protected. In addition, the laws of various countries in which our product may
be sold may not protect our product and intellectual property rights to the same
extent as the laws of the United States.
THE VALIDITY OF PATENTS COVERING PHARMACEUTICAL AND BIOTECHNOLOGICAL
INVENTIONS AND THE SCOPE OF CLAIMS MADE UNDER SUCH PATENTS IS UNCERTAIN; FAILURE
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TO SECURE NECESSARY PATENTS COULD IMPAIR OUR ABILITY TO PRODUCE AND MARKET OUR
PRODUCTS.
There is no consistent policy regarding the breadth of claims allowed
in specialty pharmaceutical and biotechnology patents. In addition, patents may
have been granted, or may be granted, to others covering products or processes
we need for developing our products. If our products or processes infringe upon
the patents, or otherwise impermissibly utilize the intellectual property of
others, we might be unable to develop, manufacture, or sell our products. In
such event, we may be required to obtain licenses from third parties. We cannot
be sure that we will be able to obtain such licenses on acceptable terms, or at
all.
FAILURE TO ASSEMBLE OR CONTRACT WITH AN ADEQUATE SALES & MARKETING
ORGANIZATION OR PARTNER WITH A LARGER PHARMACEUTICAL COMPANY COULD RESULT IN A
LACK OF FUTURE REVENUES.
To market any of our products directly, we would have to develop a
substantial marketing and sales force. Alternatively, we may, for certain
products, attempt to obtain the assistance of larger pharmaceutical companies
with established distributions systems and direct sales forces. We do not know
if we will be able to enter into agreements with other companies to assist in
the marketing and sales of our products.
WE OWN NO MANUFACTURING FACILITIES AND WILL BE DEPENDENT ON THIRD
PARTIES TO MAKE OUR PRODUCT.
We own no manufacturing facilities or equipment, and employ no
manufacturing personnel. We expect to use third parties to manufacture certain
of our products on a contract basis. We may not be able to obtain
contract-manufacturing services on reasonable terms or at all. If we are not
able to contract manufacturing services, we will not be able to make our
products.
WE MAY BE REQUIRED TO COMPLY WITH GOOD MANUFACTURING PRACTICES.
The manufacture of our proposed products will likely be subject to
current Good Manufacturing Practices ("GMP") prescribed by the FDA in the United
States. We cannot give assurance that we or any entity manufacturing products on
our behalf will be able to comply with GMP or satisfy certain regulatory
inspections in connection with the manufacture of our proposed products. Failure
or delay by any manufacturer of our products to comply with GMP or similar
regulations or satisfy regulatory inspections would have a material adverse
effect on us.
POTENTIAL SIDE EFFECTS OF OUR PRODUCT COULD IMPAIR OUR ABILITY TO
SUCCESSFULLY MARKET OUR PRODUCTS.
Although no side effects of our products have been reported, it is
possible that any time during clinical trials or patient usage, side effects may
be encountered. If they are common enough or significant enough, this could
result in our products being withdrawn from the market or liability claims being
asserted against us.
8
OUR PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, PATIENTS OR THIRD PARTY
PAYERS.
Patients, doctors and third-party payers must accept our products as
medically useful and cost-effective for us to be successful. Doctors and
patients are very important constituents because they directly make all medical
decisions. Third party payers are also very important because they pay for a
major portion of all medical care expenses. Third party payers consist of health
maintenance organizations ("HMOs"), health insurers, managed care providers,
Medicare and Medicaid, and their equivalent organizations in jurisdictions
outside the U.S. In order to achieve our sales targets in the jurisdictions in
which we intend to sell our products, we must educate patients, doctors and
third-party payers on the benefits of our products. We cannot assure you that
patients, doctors or third-party payers will accept our products, even if
approved for marketing, on a timely basis.
GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT PAY FOR OUR PRODUCTS.
The success of our products in the United States and other significant
markets will depend, in part, upon the extent to which a consumer will be able
to obtain reimbursement for the cost of such product from governmental
authorities, third-party payers and other organizations. We cannot determine in
advance the reimbursement status of newly approved therapeutic products. Even if
a product is approved for marketing, we cannot be sure that adequate
reimbursement will be available. Also, future legislation or regulation, or
related announcements or developments, concerning the healthcare industry or
third party or governmental coverage and reimbursement may adversely affect our
business. In particular, legislation or regulation limiting consumers'
reimbursement rights could have a material adverse effect on our revenues.
WE MAY LOSE ANY TECHNOLOGICAL ADVANTAGE BECAUSE PHARMACEUTICAL RESEARCH
TECHNOLOGIES CHANGE RAPIDLY.
The pharmaceutical research field is characterized by rapid
technological progress and intense competition. As a result, we may not realize
the expected benefits of our business strategy. Businesses, academic
institutions, governmental agencies, and other public and private research
organizations are conducting research to develop technologies that may compete
with those of BioBalance. It is possible that competitors could acquire or
develop technologies that would render our technology obsolete or
noncompetitive. We cannot be certain that we will be able to access the same
technologies at an acceptable price, or at all.
WE COULD BE FACED WITH POSSIBLE PRODUCT LIABILITY LOSSES AND ADVERSE
PRODUCT PUBLICITY.
BioBalance, like any other wholesaler, retailer or distributor of
products that are designed to be ingested, faces an inherent risk of exposure to
product liability claims and negative publicity in the event that the use of its
product results in injury. We face the risk that materials used in the
manufacture of the final product may be contaminated with substances that may
cause sickness or injury to persons who have used the products, or that sickness
or injury to persons may occur if the product distributed by us is ingested in
dosages, which exceed the dosage recommended on the product label. In the event
that insurance coverage or contractual indemnification is not adequate, product
liability claims could have a material adverse effect on us. The successful
assertion or settlement of any uninsured claim, a significant number of insured
claims, or a claim exceeding any future insurance coverage, could have a
material adverse effect on us. Additionally, we are highly dependent upon
consumers' perception of the safety and quality of our product as well as
9
similar products distributed by other companies. Thus, the mere publication of
reports and negative publicity asserting that such products may be harmful could
have a material adverse effect on us, regardless of whether such reports are
scientifically supported, regardless of whether the harmful effects would be
present at the dosages recommended for such products, and regardless of whether
such adverse effects resulted from failure to consume the product as directed.
INTENSE COMPETITION MAY RESULT IN OUR INABILITY TO GENERATE SUFFICIENT
REVENUES TO OPERATE PROFITABLY.
The pharmaceutical industry is highly competitive. Numerous companies,
many of which are significantly larger than us, which have greater financial,
personnel, distribution and other resources than us and may be better able to
withstand volatile market conditions, will compete with us in the development,
manufacture and marketing of probiotics for the treatment of IBS or other GI
disorders. There can be no assurance that national or international companies
will not seek to enter, or increase their presence in the industry. In addition,
large nationally known companies (such as Novartis and GlaxoSmithKline) are in
competition with us in this industry, these companies having already spent
millions of dollars to develop treatments for IBS or other GI disorders.
Increased competition could have a material adverse effect on us, as our
competitors may have far greater financial and other resources available to them
and possess extensive manufacturing, distribution and marketing capabilities far
greater than ours.
Risks Relating to the Home Health Care Business
RECENT RULING REGARDING COMPANIONSHIP SERVICES EXEMPTION MAY IMPACT OUR
ABILITY TO PROVIDE HEALTH CARE SERVICES
On July 22, 2004, the federal Second Circuit Court of Appeals issued a
ruling concerning the Fair Labor Standards Act on the validity of the
"companionship services" exemption from minimum wage and overtime payment
requirements to paraprofessional field staff in New York State Home care
providers have long relied on this exemption to provide compensation to home
care aides and personal care workers with the expectation that there is no
obligation for overtime pay. In September 2004, a request for a rehearing was
submitted en banc for the full court. On January 13, 2005, the Court rejected
the request for a rehearing on the issue. At this point, preparations are being
made to submit papers to request a review of the issue before the U.S. Supreme
Court. Simultaneously, a request for a stay of mandate from the Court is pending
resolution at the Supreme Court level.
The implication of these changes for paying the overtime expense for
the home care industry and the State will be challenges to ensuring patient
continuity of care, if agencies can no longer afford to authorize overtime
during an outgoing workforce shortage, and the inability of workers to secure
the number of hours of work they desire, all of these factors may cause a higher
cost per hour serviced thereby adversely affecting profitability.
WE ARE INDIRECTLY DEPENDENT UPON REIMBURSEMENT BY THIRD-PARTY PAYERS;
HEALTH CARE REFORM COULD REDUCE REVENUES.
More than 40% of our revenues are paid by Certified Home Health
Agencies and Long-Term Home Health Care Programs, as well as other clients who
receive their payments from "third- party payers," such as private insurance
companies, self-insured employers and HMOs. Our revenues and profitability, like
those of other home health care companies, are affected by the continuing
efforts of third-party payers to contain or reduce the costs of health care by
lowering reimbursement or payment rates, increasing case management review of
services and negotiating reduced contract pricing. Because home care is
generally less costly than hospital-based care, home nursing and home care
10
providers have benefited from cost containment initiatives aimed at reducing the
costs of medical care. However, as expenditures in the home health care market
continue to grow, cost containment initiatives aimed at reducing the costs of
delivering services at non-hospital sites are likely to increase. A significant
reduction in coverage or payment rates of public or private third-party payers
would reduce our revenues and profit margins. While we are not aware of any
substantive changes in the Medicare or Medicaid reimbursement systems for home
health care which are about to be implemented, revised budget plans of New York
State or the federal government could result in limitation or reduction in the
reimbursement of home care costs and in the imposition of limitations on the
provision of services which will be reimbursed. Moreover, third party payers,
particularly private insurance companies, may negotiate fee discounts and
reimbursement caps for services we provide.
SLOW PAYMENTS AND POSSIBLE BAD DEBTS MAY CAUSE WORKING CAPITAL
SHORTAGES AND OPERATING LOSSES.
We generally collect payments from our contractors within one to three
months after services are rendered, but pay our obligations on a current basis.
This timing delay may cause working capital shortages from time to time. We have
a secured revolving credit facility, which may be available to cover these
periodic shortages. Borrowings or other methods of financing may not be
available when needed or, if available, may not be on terms acceptable to us.
Although we have established a bad debt reserve for uncollectible accounts, any
significant increase in bad debts would damage our profitability.
PROFESSIONAL LIABILITY INSURANCE MAY BECOME INADEQUATE, UNAVAILABLE OR
TOO COSTLY.
The administration of home care and the provision of nursing services
entail certain liability risks. We maintain professional liability insurance
coverage with limits of $1,000,000 per claim and $3,000,000 annual aggregate,
with an umbrella policy providing an additional $5,000,000 of coverage. Although
we believe that the insurance we maintain is sufficient for present operations,
professional liability insurance is increasingly expensive and sometimes
difficult to obtain. A successful claim against us in excess of, or not covered
by, our insurance could adversely affect our business and financial condition.
Claims against us, regardless of their merit or eventual outcome, could also
adversely affect our reputation and home health care business.
CHANGES IN FEDERAL AND STATE REGULATION COULD INCREASE COSTS AND REDUCE
REVENUES.
Our home health care business is subject to substantial regulation at
the state level and also under the federal Medicare and Medicaid laws. In
particular, we are subject to state laws regulating home care, nursing services,
health planning and professional ethics, as well as state and federal laws
regarding fraud and abuse in government funded health programs. Changes in the
law or new interpretations for existing laws can increase the relative costs of
doing business and reduce the amount of reimbursement by government and private
third-party payers. Although we have not experienced any difficulties to date
complying with applicable laws, rules or regulations, our failure to obtain,
renew or maintain any required regulatory approvals or licenses could have a
material adverse effect on us and could prevent us from offering our existing
services to patients or from further expansion. Pending legislation in New York
could substantially impact the conduct of our home health care business and
potentially adversely affect the cost of operations and available reimbursement.
Under the pending legislation in New York, certain reporting requirements, as
well as caps on permissible administrative expenses, would be imposed. If the
pending legislation becomes law in its current form, costs of operations of our
home health care business are likely to increase.
11
INTENSE COMPETITION COULD RESULT IN LOSS OF CLIENTS, LOSS OF PERSONNEL,
REDUCED REVENUES AND INABILITY TO OPERATE PROFITABLY.
The home health care industry is marked by low entry costs and is
highly fragmented and competitive. We compete for personnel with hospitals and
nursing homes, and we also compete for both personnel and business with other
companies that provide home health care services, most of which are large
established companies with significantly greater resources, access to capital
and greater name recognition than we have. Our principal business competitors
include Premiere Health Services, National Home Health Care Corp., Patient Care,
Inc., and Personal Touch Home Care Services, Inc. We also compete with many
other small temporary medical staffing agencies. Competition for qualified
paraprofessional personnel in the New York Metropolitan area is intense. We
believe that, given the increasing level of demand for nursing services,
significant additional competition can be expected to develop in the future.
DEPENDENCE ON MAJOR CUSTOMERS AND REFERRAL SOURCES MAY RESULT IN
SUBSTANTIAL DECLINES IN REVENUES IF CUSTOMERS ARE LOST.
The development and growth of our home care and nursing businesses
depends to a significant extent on our ability to establish close working
relationships with hospitals, clinics, nursing homes, physician groups, HMO's,
governmental health care agencies and other health care providers. Many of our
contractual arrangements with customers are renewable annually. Existing
relationships may not be successfully maintained and additional relationships
may not be successfully developed and maintained in existing and future markets.
Our 10 largest customers accounted for approximately 80.8% of gross revenues
during the year ended December 31, 2004. One referral source, New York City
Medicaid, was responsible for approximately 43.4% of our gross revenues for the
year ended December 31, 2004. The loss of, or a significant reduction in,
referrals by these sources, as well as certain other key sources, would have a
material adverse effect on results of operations of our home health care
business.
LOSS OF KEY PERSONNEL MAY RESULT IN IMPAIRMENT OF THE ABILITY TO
DELIVER SERVICES OR MANAGE OPERATIONS.
Our success in the home health care business segment to a large extent
depends upon the continued services of Jerry Braun, President and Chief
Executive Officer of the Home Health Care division, and Jacob Rosenberg, Vice
President, Chief Operating Officer of the Home Health Care division. Although we
have entered into employment agreements with Messrs. Braun and Rosenberg which
expire in 2009, and we are the sole beneficiary of a $5,000,000 life insurance
policy covering Mr. Braun and a $3,000,000 life insurance policy covering Mr.
Rosenberg, the loss of the services of either of these employees for any reason,
including, but not limited, to a violation of their employment agreements, would
damage us. The success of our home health business will also depend, in part,
upon our ability in the future to attract and retain additional qualified
licensed health care, operating, marketing and financial personnel. Competition
in the home health care industry for qualified personnel is often intense and we
may not be able to retain or hire the necessary personnel.
Risks Relating to Our Common Stock
POSSIBLE VOLATILITY OF COMMON STOCK MAY RESULT IN LOSSES TO
SHAREHOLDERS.
The trading price of our Common Stock has been subject to significant
fluctuations and there is a limited market for our Common Stock. Over the last
24 months, the price of our Common Stock has ranged from a high of $4.50 to a
low of $0.46. The price of our Common Stock is likely to continue to be affected
12
by various factors, including but not limited to the results of our development
efforts of PROBACTRIX and other products, variations in quarterly results of
operations, announcements of new contracts or services or acquisitions by us or
our competitors, governmental regulatory action, general trends in the industry
and other factors, such as extreme price and volume fluctuations which have been
experienced by the securities markets from time to time in recent years.
OUR DELISTING FROM NASDAQ DUE TO OUR FAILURE TO SATISFY NASDAQ LISTING
STANDARDS AND OUR STOCK BEING SUBJECT TO THE "PENNY STOCK" RULES HAS RESULTED IN
REDUCED LIQUIDITY AND LOWER STOCK PRICE.
Our Common Stock, which was delisted from the Nasdaq SmallCap market in
April 2004 as a result of Nasdaq's public interest concerns regarding events
relating to the indictments by the U.S. Attorney's Office of a former Director
of New York Health Care who was an officer of BioBalance and a consultant to
BioBalance for allegedly attempting to manipulate our Common Stock, and our
failure to timely hold one of our annual shareholder meetings, is now listed for
trading in the OTC "pink sheets," which provides significantly less liquidity
than a securities exchange (such as the American or New York Stock Exchange) or
an automated quotation system (such as the Nasdaq National or SmallCap Market).
As a result, the liquidity of our Common Stock has been impaired, not only in
the number of shares which can be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and news media's
coverage and lower prices for our Common Stock than might otherwise be attained.
There is currently a very limited volume of trading in our Common Stock and on
many days there is no trading activity at all in our Common Stock. Moreover,
because of the limited volume of trading, our Common Stock is more likely to
fluctuate due to broad market fluctuations, general market conditions,
fluctuations in our operating results, future securities offerings by us,
changes in the market's perception of our business, announcements made by us or
our competitors and general industry conditions. It is possible that our Common
Stock may not be accepted for a listing on an automated quotation system or
securities exchange.
In addition, our Common Stock is subject to the low-priced security or
so-called "penny stock" rules that impose additional sales practice requirements
on broker-dealers who sell such securities. For any transaction involving a
penny stock, the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements must be sent disclosing recent
price information for the penny stocks held in the customer's account. The
regulations relating to penny stocks could limit the ability of broker dealers
to sell our Common Stock and, thus, the ability of shareholders to sell their
shares in the market.
FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
We have previously issued a substantial number of shares of Common
Stock, which are eligible for resale under Rule 144 of the Securities Act of
1933, as amended (the "Securities Act"), and which may become freely tradable.
We have registered or agreed to register a substantial number of shares of
Common Stock that are issuable upon the exercise of options and warrants or that
were previously issued in private transactions. If holders of options or
warrants choose to exercise their purchase rights and sell shares of Common
Stock in the public market, or if holders of currently restricted shares choose
to sell such shares in the public market under Rule 144 or otherwise, the
prevailing market price for the Common Stock may decline. Future public sales of
shares of Common Stock may adversely affect the market price of our Common Stock
or our future ability to raise capital by offering equity securities.
13
ISSUANCE OF PREFERRED STOCK COULD REDUCE THE VALUE OF COMMON STOCK AND
COULD HAVE ANTI-TAKEOVER EFFECTS.
We are authorized by our certificate of incorporation to issue up to
5,000,000 shares of preferred stock, on terms which may be fixed by our board of
directors without further shareholder action. There are now 590,375 shares of
Series A convertible preferred stock currently issued and outstanding which can
be converted, on a 1-for-2/3rds basis, into shares of Common Stock. The terms of
any new series of preferred stock, which may include priority claims to assets
and dividends and special voting rights, could adversely affect the rights of
holders of the Common Stock. The issuance of an additional series of preferred
stock, depending upon the rights and preferences of such series, could make the
possible takeover of our company or the removal of our management more
difficult, discourage hostile bids for control of our company in which
shareholders may receive premiums for their shares of Common Stock, or otherwise
dilute the rights of holders of Common Stock and the market price of the Common
Stock.
WE HAVE NEVER PAID ANY DIVIDENDS ON OUR COMMON STOCK.
We have never paid any dividends on our Common Stock and do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain all earnings. The declaration and payment of future dividends, if any,
will be at the sole discretion of our board of directors and will depend upon
our profitability, financial condition, cash requirements, future prospects, the
rights of any other classes of preferred stock, and other factors deemed
relevant by the board of directors.
SHARES OF OUR COMMON STOCK ISSUED IN CONNECTION WITH OUR ACQUISITION OF
BIOBALANCE MAY HAVE BEEN ISSUED WITHOUT COMPLYING WITH CERTAIN STATE SECURITIES
LAWS.
During October 2003, it was determined that certain of the shares of
Common Stock that we issued to holders of BioBalance stock in connection with
our January 2003 acquisition of BioBalance may not have been exempt from the
registration or qualification requirements of the state securities laws of
certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act. Although we are unable
to quantify the actual number of shares involved that are still owned by the
original recipients of our shares in the acquisition, the per share purchase
price paid by the BioBalance holders for the shares they exchanged in the
acquisition ranged from $.03 to $3.00 per share and we currently believe that
the purchase price paid by such persons who might have certain statutory
rescission rights does not exceed approximately $345,000, exclusive of any
penalties or interest, although no assurance can be given that any such claims
will not exceed this amount. We cannot determine the effect, if any, on our
operations or financial condition that may occur from the failure to register or
qualify these shares under applicable state securities laws. If it is determined
that we offered securities without properly registering or qualifying them under
state laws, or securing exemption from registration, regulators could impose on
us monetary fines or other sanctions as provided under these laws. We are unable
to estimate the amount of monetary fines, if any, or the nature or scope of any
sanctions at this time.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" based on our
current expectations, assumptions, estimates and projections about our business
and our industry. They include statements relating to, among other things:
o Future revenues, expenses and loss or profitability;
14
o Our ability to sell the remainder of our home healthcare
business and focus on BioBalance's business plan of developing
and manufacturing PROBACTRIX and other products;
o The development, manufacture and commercialization of one or
more of our products;
o Projected capital expenditures;
o Competition;
o The effectiveness, quality and cost of our intended products
and services; and
o Anticipated trends in the market for biotherapeutic agents for
the treatment of gastrointestinal disorders.
You can identify forward-looking statements by the use of words such as
"may," "should," "will," "could," "estimates," "predicts," "potential,"
"continue," "anticipates," "believes," "plans," "expects," "future" and
"intends" and similar expressions which are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
In evaluating these forward-looking statements, you should carefully consider
the risks and uncertainties described in "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements reflect our view only as of the
date of this prospectus. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements and risk factors contained throughout this prospectus.
15
USE OF PROCEEDS
We will not receive any proceeds from the shares of Common Stock sold
by the selling stockholders. However, we will receive proceeds from the exercise
for cash of any warrants made before any sale of the shares of common stock
being offered under this prospectus that are underlying warrants. We intend to
use any proceeds from the cash exercise of warrants for BioBalance's working
capital purposes.
16
DIVIDEND POLICY
We have never declared or paid and do not anticipate declaring or
paying any cash dividends on our Common Stock in the near future. Any future
determination as to the declaration and payment of dividends will be at the
discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations, capital
requirements, business factors and other factors as our board of directors deems
relevant. Therefore, there can be no assurance that any dividends on our Common
Stock will be paid in the future.
PRICE RANGE OF COMMON STOCK
Our Common Stock traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") SmallCap Market until April 6,
2004. Since that time, our Common Stock has been trading over-the-counter on the
Pink Sheets. Our Common Stock was also listed on the Boston Stock Exchange
("BSE") until March 5, 2005, when our voluntary delisting application was
granted, although no trades of our Common Stock had been executed on the BSE for
at least two years prior to our making the voluntary application to delist from
the BSE. The following table sets forth, for the quarters indicated, the high
and low sales prices for our Common Stock on the NASDAQ SmallCap Market or the
Pink Sheets as applicable.
Fiscal 2005 High Low
- ----------- ---- ---
First Quarter 1.12 0.51
Second Quarter (through May 25, 2005) 1.05 0.76
Fiscal 2004 High Low
- ----------- ---- ---
First Quarter 3.95 2.99
Second Quarter 1.22 0.60
Third Quarter 0.82 0.50
Fourth Quarter 0.67 0.46
Fiscal 2003 High Low
- ----------- ---- ---
First Quarter 4.50 2.59
Second Quarter 3.20 2.13
Third Quarter 4.39 2.07
Fourth Quarter 4.19 1.96
17
SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 2004, 2003 and 2002 and for the period May 21, 2001 (Inception)
through and as of December 31, 2001 is derived from our audited financial
statements. The selected financial data set forth in the following table for the
three months ended March 31, 2005 and 2004 and as of March 31, 2005 were derived
from unaudited consolidated financial statements which, in the opinion of
management, include all adjustments necessary for a fair presentation of the
results for the unaudited interim periods. Our audited financial statements for
the years ended December 31, 2004, 2003 and 2002 and as of December 31, 2004 and
December 31, 2003 and our unaudited financial statements for the three months
ended March 31, 2005 and 2004 and as of March 31, 2005 are included elsewhere in
this prospectus. You should read this information with our financial statements
and the related notes all of which are included elsewhere in this prospectus.
AS OF AND FOR THE YEARS For the Three Months
ENDED DECEMBER 31 Ended March 31,
--------------------------------------------------------------------------------------------
Period
May 21, 2001
(Inception)
Through
2004 2003 2002 December 2001 2004 2005
------------ ------------ ------------ ------------- ------------ ------------
Net patient service revenue $ 48,854,358 $ 45,060,449 $ -- $ -- $ 11,506,458 $ 12,462,405
Net loss (6,071,685) (22,052,170) (1,399,057) (452,169) (1,227,584) (958,269)
Basic loss per share (0.24) (0.91) (0.07) (0.03) (0.05) (0.03)
Diluted loss per share (0.24) (0.91) (0.07) (0.03) (0.05) (0.03)
Current assets 11,941,842 14,543,209 3,051,720 906,926 13,058,579 15,435,887
Total assets 16,503,195 21,628,968 5,259,449 2,918,836 19,946,284 19,961,979
Current liabilities 13,918,937 12,607,203 349,182 117,070 12,318,717 14,112,035
Long-term liabilities, net of
current portion -- -- -- -- -- --
Shareholders' equity 2,584,258 9,021,765 4,910,267 2,801,766 7,627,567 5,849,944
Book value per share .10 .37 .24 .16 .31 .21
Dividends per share -- -- -- -- --
Shares used in computing loss
per common share:
Basic 24,939,776 24,283,907 20,562,131 17,574,891 24,939,776 28,099,521
Diluted 24,939,776 24,283,907 20,562,131 17,574,891 24,939,776 28,099,521
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Overview
On January 2, 2003, New York Health Care and BioBalance completed a
business combination (a "reverse merger"), accounted for as "reverse
acquisition," in which BioBalance became a wholly-owned subsidiary of New York
Health Care and the stockholders of BioBalance exchanged all of the outstanding
shares of the common stock of BioBalance for approximately 90% of the
outstanding shares of New York Health Care's Common Stock. For accounting
purposes, BioBalance is considered to be the "accounting acquirer" in the
transaction. As a result, the historical financial information in this report
for the years ended December 31, 2004 and December 31, 2003 and for the three
months ended March 31, 2005 and 2004 is that of the consolidated Company while
the data for December 31, 2002 is that of BioBalance, not of New York Health
18
Care. Prior reports of New York Health Care filed with the SEC remain available
on the SEC website at http://www.sec.gov.
We operate in two industry segments; the home health care business,
which business has a 20-year operating history, and the specialty pharmaceutical
business of BioBalance, which commenced in 2001 and is still in its development
stage. All numerical amounts and percentages in the following discussion are
approximate.
See Recent Developments for a description of our sale of the NJ
Business to Accredited Health.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires that we make estimates and
judgments that affect the amounts reported of assets, liabilities, revenues and
expenses and the related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions we
believe to be applicable and reasonable under the current circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
In addition, we are periodically faced with uncertainties, the outcomes
of which are not within our control and will not be known for prolonged periods
of time. Some of these uncertainties are discussed above under "Risk Factors".
We believe the following to be critical accounting policies that affect
the most significant estimates and judgments used in the preparation of our
consolidated financial statements:
Revenue Recognition
We recognize patient service revenue on the date services are rendered.
Unbilled services represent amounts due for services rendered that had not been
billed at the end of each period because authorization had not been received
from the referral source.
Accounts Receivable
Accounts receivable of our home healthcare business consist of trade
receivables recorded at original invoice amounts, less an estimated allowance
for uncollectible accounts. We generally extend trade credit on a short-term
basis. Accordingly, our trade receivables do not bear interest, although we may
apply a finance charge to receivables that are past due. We periodically
evaluate accounts receivable for collectability, based on past credit history of
customers and the current financial condition of those customers. Changes in the
estimated collectability of accounts receivable are recorded in the results of
operations for the fiscal period in which the estimate is revised. Accounts
receivable that we judge to be uncollectible are offset against the allowance
for uncollectible accounts. Generally, we do not require account debtors to
secure the payment of accounts payable.
Goodwill and Other Intangible Assets
Prior to fiscal 2002, we amortized goodwill and intangible assets using
the straight-line method over periods of up to 10 years. SFAS No.142 requires
that goodwill and intangible assets having indefinite lives not be amortized,
but instead be tested for impairment at least annually. Intangible assets
determined to have definite lives are amortized over their remaining useful
lives.
19
Stock Based Compensation
We use the intrinsic-value method of accounting for stock-based awards
granted to employees and the fair value method of accounting for warrants
granted to consultants for services.
Long-Lived Assets
We evaluate long-lived assets, such as intangible assets, equipment and
leasehold improvements, for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
estimated undiscounted cash flows from the use of these assets, when an
impairment exists, the related assets are written down to fair value.
Results of Operations
Three Months Ended March 31, 2005 Compared With Three Months Ended March 31,
2004.
Revenues for the three months ended March 31, 2005 increased to
approximately $12,462,000 from approximately $11,506,000 for the three months
ended March 31, 2004. The increase in revenues is primarily the result of
increased sales volume to some of our existing clients.
Cost of professional care of patients for the three months ended March
31, 2005 increased to approximately $10,024,000 from approximately $9,188,000
for the three months ended March 31, 2004. The increased costs primarily
resulted from the increased revenue.
General and administrative expenses ("G&A") for the three months ended
March 31, 2005 increased to approximately $2,986,000 from approximately
$2,953,000 for the three months ended March 31, 2004. The increase in G&A
expenses is primarily the result of increased professional fees of approximately
$200,000 which was offset by a reduction in insurance expense and business
consulting expense of approximately $135,000.
There was also a decrease of approximately $42,000 in amortization
expense as a result of the partial write off of the NexGen technology by the
BioBalance division of approximately $1,740,000 at December 31, 2004.
We sustained a net loss of approximately $958,000 for the three months
ended March 31, 2005 as compared to a net loss of approximately $1,228,000 for
the three months ended March 31, 2004.
The net loss for the three months ended March 31, 2004 includes net
income of $43,000 from our home healthcare operations which was offset by a net
loss of $1,271,000 from the operations of the BioBalance segment.
The net loss of approximately $958,000 for the three months ended March
31, 2005 includes net income of $75,000 from the home healthcare operations
segment and a net loss of $1,033,000 from the operations of BioBalance which to
date has not generated any revenue.
Results of Operations
Year Ended December 31, 2004 Compared with Years Ended December 31, 2003 and
2002
Revenues in 2004 increased to $48,854,000 from $45,060,000 in 2003. The
increase in revenue is due to an increase in sales volume to some of our
existing home health care clients. There was no reported revenue for the year
2002.
20
Cost of professional care of patients in 2004 increased to $39,214,000
from $36,107,000 in 2003. The increase in cost is due to the increase in sales.
There were no reported costs for the year 2002.
Selling, general and administrative expenses ("SG&A") in 2004 increased
to $12,056,000 from $11,249,000 in 2003 and $830,000 in 2002, an increase of 7%
and 1,255% for the years 2003 and 2002 respectively. The increase in expenses
for the year 2004 compared to 2003 is the result of administrative personnel
increases and other costs associated with the increased revenue. In addition, we
incurred significant legal, accounting and insurance cost in 2004 relating to
the indictment of one of our former directors. The year 2002 only includes the
expenses related to BioBalance.
As a result of the merger in 2003, we recognized goodwill associated
with our home health care business. We have determined, based upon the opinion
of a valuation expert engaged to determine our fair market value as of the date
of the merger, that goodwill was impaired to the extent of $17,869,000. We
determined that in the current market for home health care businesses, the value
of our home health care business would not generate the amount of goodwill
recorded in connection with the merger, assuming the business had been sold in
the open market, based on current sources of revenue and limited profit margin
of the business and potential regulatory threats to the business, which threats,
if realized, could adversely affect the economic structure of its business. The
valuation expert used the capitalized cash flow and the guidelines companies
methodologies in valuing its analysis. The impairment charge of $17,869,000 is
non-cash in nature and does not affect our liquidity.
The net loss of $6,072,000 for the year 2004 includes income of
$351,000 from the operation of our home care segment and a loss of $6,423,000
from our BioBalance segment which to date has not generated any revenue. The net
loss from our BioBalance segment also includes an expense for $1,740,326, the
impairment writedown of the NexGen Platform technology that we purchased in
2003. BioBalance intends to pursue the NexGen Platform technology in the future
as funds and management time allow although there can be no assurance that any
commercially usable product will be derived from the NexGen Platform.
For the year 2003, we suffered a net loss of $22,052,000. This includes
the non-cash impairment charge of $17,869,000, a net loss from our BioBalance
segment of $4,657,000, which includes a non-cash expense in the amount of
$1,591,000 resulting from an increase in the fair value of outstanding stock
options and warrants as a result of the merger, and income of approximately
$474,000 from the operation of our home care segment. The net loss of $1,399,000
for the year 2002 was due principally to product development for PROBACTRIX by
BioBalance. BioBalance had no revenues in 2002.
21
Liquidity and Capital Resources
At March 31, 2005, we had no long-term debt. Future minimum rental
commitments for all non-cancelable lease obligations at March 31, 2005, are as
follows:
Payment due by period
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
----- ------ --------- --------- -------
Contractual Obligations
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations -- -- -- -- --
Operating lease obligations* 1,019,000 275,000 584,000 128,000 32,000
Purchase obligations -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $1,019,000 $ 275,000 $ 584,000 $ 128,000 $ 32,000
========== ========== ========== ========== ==========
* These leases also generally contain provisions allowing rental obligations to
be accelerated upon default in the payment of rent or the performance of other
lease obligations. These leases generally contain provisions for additional rent
based upon increases in real estate taxes and other cost escalations. Because
the leases used in connection with the NJ Business will be assigned to and
assumed by Accredited Health in connection with the closing of the sale of the
NJ Business to Accredited Health, the total operating lease obligations are
expected to decrease by $207,000.
We have no off-balance sheet arrangements and have not entered into any
transactions involving unconsolidated, limited purpose entities or commodity
contracts.
The sources of liquidity and capital resources for the home healthcare
segment are internally generated funds, cash on hand and amounts available under
a $4,000,000 revolving credit facility. Currently, there is no outstanding
indebtedness under this facility.
Loans under this revolving credit loan facility, which expires on
November 29, 2005, may be used only for working capital of our home healthcare
business and other costs arising in the ordinary course of that business. Our
obligations to pay the principal of, and interest on, loans advanced under this
facility are secured by substantially all the assets of our home healthcare
business, and not by any assets of BioBalance. Borrowings under the facility are
permitted to the extent of a borrowing base of up to 85% of "qualified accounts
receivable" of our home healthcare business and there being no events of default
under the relevant loan documents subject to the lender's right to reduce the
borrowing base by applying a liquidity factor percentage based upon a
calculation relating to recent collection histories of certain classes of
qualified accounts receivable. Currently, application of the liquidity factors
formula results in 97% of qualified accounts receivable being part of the
borrowing base. At March 31, 2005, the amount available for borrowing under this
facility, based on the borrowing base formula was $4,000,000. The loan agreement
contains various restrictive covenants, which among other things, require that
we have a minimum tangible net worth greater than $500,000. We have amended our
22
loan agreement to allow us to lend money to BioBalance if there is no
outstanding loan under this agreement. The loan agreement has also been amended
to allow us to invest money in BioBalance. The principal amount of loans
borrowed under this facility bear interest at a variable annual rate equal to
the prime rate charged from time to time by CitiBank, N.A. plus 1.5% (as of
March 31, 2005, 5.75% per annum) and the loan agreement creating this facility
provides for monthly payments of interest on the outstanding loan balance on the
basis of the actual number of days elapsed over a year of 360 days.
Our loan agreement was modified on April 11, 2005, to permit the sale
of the NJ Business to Accredited Health and to lift the lender's lien with
respect to the assets of the NJ Business. As a result of this modification, no
loans under the agreement may be requested or occur until such time as the
parties agree on the adjusted amount of the borrowing base which has occurred in
May 2005 with the result that there is no change in the borrowing amount under
the facility.
For the three months ended March 31, 2005, net cash used in operating
activities was approximately $419,000 as compared to cash used in operating
activities of approximately $2,062,000 during the three months ended March 31,
2004, a decrease of $1,643,000. The $419,000 of cash used in operations for the
three months ended March 31, 2005 was principally due to an increase in accounts
receivable, a decrease in amounts due to HRA and a decrease in amounts due from
lending institution.
The net cash provided by financing activities of approximately
$4,197,000 during the three months ended March 31, 2005 represented the proceeds
from the issuance of common stock and warrants in the Offering.
Net cash used in investing activities for the three months ended March
31, 2005 totaled approximately $58,000 and consisted of the acquisition of
property and equipment and intangible assets.
As of March 31, 2005, approximately $8,623,000 (approximately 43.2%) of
our total assets consisted of accounts receivable from clients who are
reimbursed by third-party payers, as compared to $7,009,000 (approximately
35.1%) as of March 31, 2004. The increase is the result of slower payments by
some clients exceeding their normal 120-day payment cycle.
Days Sales Outstanding ("DSO") is a measure of the average number of
days taken by us to collect its accounts receivable, calculated from the date
services are billed. For the three months ended March 31, 2005, the DSO of our
home care segment was 73, compared to 63 days for the three months ended March
31, 2004. The increase is the result of slower payments by our net 120-day
clients. As of March 31, 2005 BioBalance had no accounts receivable.
Net cash used in operating activities for the year 2004 was $5,073,333,
as compared to net cash provided of $233,269 and net cash used of $958,773 for
the years 2003 and 2002, respectively. The change in net cash used in operating
activities from 2004 to 2003 is due mainly to an increase in accounts receivable
and unbilled services, a decrease in accrued payroll, a decrease in amounts due
to related parties and a net loss for the period, offset by an increase in
accounts payable and accrued expenses and an increase in the amounts due to HRA.
The net cash provided by operating activities for 2003 as compared to net cash
used in operating activities for 2002 is mainly the result of comparing two
business segments in 2003 to only one segment in 2002.
Net cash used in investing activities for the year 2004 totaled
$77,805, as compared to net cash provided of $3,175,321 and net cash used of
$510,419 for the years 2003 and 2002 respectively. The increase in 2003 was due
mainly to cash acquired from the acquisition of our BioBalance subsidiary.
There was no net cash provided by financing activities for the year
ended December 31, 2004. Net cash provided by financing activities for the year
ended December 31, 2003 totaled approximately $1,304,000, as compared to
23
$3,198,000 for the year ended December 31, 2002. The decrease was due mainly to
a decrease in the sales and issuance of Common Stock.
As of December 31, 2004, approximately $8,656,000 (approximately 52.4%)
of our total assets consisted of accounts receivable from customers as compared
to approximately $6,577,000 or 30.4% as of December 31, 2003. As of December 31,
2002 BioBalance had no accounts receivable.
For the years ended December 31, 2004 and 2003, our DSO's were 74 and
62, respectively. For the year ended December 31, 2002, BioBalance had no
revenue and accounts receivable.
BioBalance Segment
As of March 31, 2005, BioBalance had cash on hand of $1,494,902, all of
which was available to fund operations. On April 11, 2005, we entered into an
agreement to sell certain assets of our home healthcare division in New Jersey
to Accredited Health and the proceeds from the sale in the amount of $2,850,000
were transferred to BioBalance. A total of $150,000 of the purchase price was
placed in escrow to cover actual losses, if any, incurred by Accredited Health
for which we are required to indemnify Accredited Health pursuant to the
agreement relating to the sale of the New Jersey Business to Accredited Health.
If no claims are made by the third party for indemnification by us the escrowed
funds will be released to us 90 days after the closing of the transaction, which
occurred on May 22, 2005. BioBalance estimates that its capital requirements for
the remainder of 2005 will be approximately $2,700,000.
BioBalance has incurred product development costs excluding non-cash
compensation of approximately $193,000 and $1,426,423 for the three months ended
March 31, 2005 and twelve months ended December 31, 2004, respectively. The
majority of these costs were for manufacturing clinical supplies, conducting
clinical studies to assess the safety and efficacy of PROBACTRIX and the costs
for preparing and filing the Investigational New Drug ("IND") application for
PROBACTRIX. During this period, BioBalance completed an extended safety study in
healthy human volunteers at ten times the normal dose in 35 subjects for a six
month period. The data from this study has been submitted for publication in a
peer-reviewed medical journal. BioBalance began an Irritable Bowel Syndrome
("IBS") medical food clinical trial at Ichilov Medical Center in Tel Aviv in
November 2003. A second site (St. Michael's Hospital in Toronto) became
operational in the first quarter of 2004, but enrollment was significantly
delayed due to personnel issues. Additional sites in New York and Jerusalem were
added in the third quarter of 2004 to compensate for the slow enrollment. Total
enrollment of 150-200 patients is anticipated for this trial, which will
continue throughout 2005.
BioBalance is pursuing accelerated regulatory approval of PROBACTRIX as
a prescription drug for the prevention and/or treatment of pouchitis and has
filed an IND application with the U.S. Food and Drug Administration ("FDA").
Pouchitis is a non-specific inflammation of the "pouch" or ileal reservoir,
which usually occurs during the first two years after bowel reconstruction due
to ulcerative colitis. Symptoms of pouchitis include steadily increasing stool
frequency that may be accompanied by incontinence, bleeding, fever and/or a
feeling of urgency. There are currently no approved treatments for pouchitis.
BioBalance also will seek orphan drug designation for this indication. "Orphan
drug" refers to a product that treats a rare disease affecting less than a
specified number of persons (200,000 in the U.S.). The orphan drug regulatory
strategy provides a significantly shorter approval process and less costly
clinical studies. Additional clinical studies can subsequently be conducted to
determine whether there is support for broader usage. BioBalance submitted the
IND to the FDA at year-end 2004. On February 2, 2005, we were notified by the
FDA that the IND was on clinical hold and that comments would be sent to us
within 30 days. Comments on the IND were received on March 4, 2005. BioBalance
has reviewed the comments and is currently working to provide a response to all
24
of the issues raised by the FDA. We expect to have a response prepared and sent
back to the FDA by July 2005. We feel that all of the issues raised by the FDA
can be properly addressed, but we can give no assurance that the FDA will agree
with all of our responses to the issues raised or give us clearance to move
forward with the clinical trials.
BUSINESS
OVERVIEW
We are engaged in two industry segments, the delivery of home
healthcare services (sometimes referred to as the "home healthcare business")
and, since the acquisition of BioBalance in a merger transaction in January 2003
(treated for accounting purposes as a reverse acquisition of New York Health
Care by BioBalance), the development and planned manufacturing and marketing of
proprietary biotherapeutic agents for the treatment of gastrointestinal ("GI")
disorders. BioBalance is our wholly-owned subsidiary. For accounting purposes,
BioBalance is considered to be the "accounting acquirer" in the transaction.
For more information as to the financial performance of our home
healthcare and BioBalance business segments, see the section of this prospectus
entitled, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 14 of Notes to Consolidated Financial Statements
included elsewhere in this report.
HISTORY, DEVELOPMENT AND OVERVIEW OF THE COMPANY
New York Health Care was initially organized to act as a licensed home
healthcare agency engaged primarily in supplying the services of
paraprofessionals who provide a broad range of health care support services to
patients in their homes.
Our home healthcare business operates in all five boroughs of New York
City and the counties of Nassau, Westchester, Rockland, Orange, Dutchess,
Ulster, Putnam and Sullivan, in the State of New York. Our home healthcare
services are supplied principally pursuant to contracts with healthcare
institutions and governmental agencies, such as various county departments of
social services, the New York City Human Resources Administration, Beth Abraham
Long-Term Home Health Services and Kingsbridge Medical Center, all of which are
located in New York. We ceased our home healthcare operations in New Jersey upon
consummation of our sale of the NJ Business to Accredited Health, which occurred
on May 22, 2005.
Our primary objective, in our healthcare business, is to enhance our
position in the home healthcare market by increasing the promotion of our full
service and specialty healthcare capabilities to existing and new referral
sources; as well as maintaining our regular training and testing programs, and
recruitment activities. See "Home Health Care Business"
BioBalance is a development stage specialty pharmaceutical company
incorporated in Delaware in May 2001. BioBalance is focused on the development
of patented biotherapeutic agents for gastrointestinal (GI) disorders with
significant unmet needs. BioBalance has pioneered the development of these
agents based on what BioBalance believes to be outstanding science and a
pharmaceutical development approach (e.g. randomized, double blind,
placebo-controlled clinical trials in FDA-approved centers). BioBalance has not,
to date, generated any revenues, other than income from short-term investment of
such proceeds.
25
We believe that products developed from BioBalance's core technology
will restore the microbial balance in the GI tract by displacing pathogenic
bacteria and preventing their re-colonization. For example, recent clinical
studies independently conducted by Dr. Mark Pimentel at Cedars-Sinai Medical
Center in California have linked the overgrowth of pathogenic bacteria to
Irritable Bowel Syndrome (IBS) symptoms. We believe that these studies support
the rationale for our potential products to address a potential root cause of GI
disease, while also providing symptom relief. As such, it could represent a
major shift in the treatment of many GI disorders.
CORPORATE STRATEGY
We intend to actively pursue BioBalance's business plan of developing,
manufacturing and marketing its initial product PROBACTRIX(R) and other products
in its pipeline for treating gastrointestinal disorders while divesting our home
healthcare business. In furtherance of these goals, as noted above, in July
2004, we executed the Purchase Agreement for the sale of the assets of our home
health care business to the LLC for consideration of $2.7 million in cash, the
assumption of all of the liabilities and obligations with respect to the home
health care business and the forgiveness of certain future obligations that may
be due to Braun and Rosenberg pursuant to employment agreements each of them has
with us. The proposed sale was subject to the satisfaction of a number of
conditions including obtaining shareholder and regulatory approvals. Since the
execution of the Purchase Agreement, National made an unsolicited offer for the
NJ Business which resulted in our entering into an agreement on April 11, 2005
to sell the NJ Business to Accredited Health for $3 million with a formal
closing of this sale to occur within 45 days. This transaction closed on May 22,
2005. Messrs. Braun and Rosenberg and the LLC consented to the sale of the NJ
Business to Accredited Health. We have commenced negotiations with Messrs. Braun
and Rosenberg to sell them the remaining assets of the home healthcare business
which were used in connection with the operations of that business in various
locations in the State of New York (the "New York Assets"). There can be no
assurance that an agreement to sell the remaining portion of our home healthcare
business to Messrs. Braun and Rosenberg will be entered into or, if it is, that
any transaction called for by such agreement will be consummated. Upon any sale
of the New York Assets to the LLC, Messrs. Braun or Rosenberg or otherwise will
be subject to the receipt of any applicable shareholder and regulatory approvals
for such sale. Therefore, while BioBalance does not expect to have access to the
financial or operating resources of our home healthcare business, it has
received a substantial portion of the funds from the sale of the NJ Business to
Accredited Health and currently expects to seek additional funding in the future
from the sale of our equity, debt or convertible securities.
BIOBALANCE BUSINESS
Overview
Our BioBalance subsidiary is a development-stage company focused on the
development of novel treatments for various GI disorders that we believe are
poorly addressed by current therapies. These include pouchitis, IBS, Crohn's
disease, ulcerative colitis, and diarrhea caused by antibiotics, chemotherapy
and travel. We believe that our initial potential product, PROBACTRIX, a
probiotic (a bacterial culture that supports a good and healthy balance of
microorganisms) can reduce symptoms of pouchitis, IBS and other GI disorders. We
have developed patented biotherapeutic agents for GI disorders based on
outstanding science and a pharmaceutical development approach (e.g. randomized,
double blind, placebo-controlled clinical trials).
Our current efforts consist of developing clinically validated products
for GI diseases and conditions where current therapies are inadequate or may
have significant side effects. Unlike conventional treatments, we believe that
26
our core technology restores the microbial balance in the GI tract by displacing
pathogenic bacteria and preventing their re-establishment. Clinical trials
conducted independently at the Cedars-Sinai Medical Center in California have
linked the overgrowth of pathogenic bacteria to IBS symptoms. Therefore, we
believe that our products may address an underlying root cause of many GI
disorders in addition to providing symptom relief with no demonstrated side
effects.
Our initial potential product is PROBACTRIX, a proprietary, live,
single strain (M17) of E.coli bacteria, which we plan to develop as a treatment
for pouchitis, IBS and a variety of other GI disorders. Prior clinical studies
have confirmed that this product can reduce the symptoms of IBS and other GI
disorders and, therefore, is able to improve the quality of life of patients
using the product to treat these disorders.
We are pursuing an accelerated regulatory approval for the use of
PROBACTRIX in the U.S. and Europe by filing an IND application with the FDA and
with comparable regulatory agencies in Europe and seeking "orphan drug"
designation for the prevention and/or treatment of pouchitis. Pouchitis is a
non-specific inflammation of the ileal reservoir, which can be a long-term
problem for some patients. This usually occurs during the first two years after
bowel reconstruction due to ulcerative colitis. Most pouchitis sufferers
experience symptoms including steadily increasing stool frequency that may be
accompanied by incontinence, bleeding, fever and/or a feeling of urgency. We
believe that current treatments (including antibiotics) are often ineffective in
relieving symptoms. "Orphan drug" refers to a product that treats a rare disease
affecting less than a specified number of persons (200,000 in the U.S.). Current
federal laws require that a drug be the subject of an approved marketing
application before it is transported or distributed across state lines. Because
a sponsor of a drug will probably want to ship the investigational drug to
clinical investigations in many states, it must seek an exemption from that
legal requirement. The IND is the means through which the sponsor technically
obtains this exemption from the FDA. FDA approval of an IND permits the sponsor
to conduct clinical trials in the humans. We submitted the IND to the FDA at
year-end 2004. On February 2, 2005, we were notified by the FDA that the IND was
on clinical hold and that comments would be sent to us within 30 days. Comments
on the IND were received on March 4, 2005. BioBalance has reviewed the comments
and is currently working to resolve all of the issues raised by the FDA. We
expect to have a response prepared and sent back to the FDA by July, 2005.
Although we believe that we can adequately address all of the issues raised by
the FDA, we can give no assurance that the FDA will agree with all of our
responses to the issues raised or give us clearance to proceed with the clinical
trials.
Our core intellectual property, including rights to two patented
Bacillus strains, B. subtilis and B. licheniformis, is protected by patents that
have been filed in the US and certain foreign countries. The patented
formulation used for PROBACTRIX consists of a proprietary strain of
non-pathogenic E.coli, derived from an organism that was originally isolated
from the intestinal mircoflora of a healthy volunteer in a liquid formulation.
The technology and the processes comprise conditions that preserve M-17 E.coli
in the biologically active form. Patents have been filed by BioBalance for
technology that could extend the product's shelf life for two years or longer at
room temperature. In addition, we received approval of the registration of
PROBACTRIX as a registered trademark in the U.S. on March 1, 2005.
We have sub-contracted with a third-party for the manufacture of
sufficient quantities of PROBACTRIX in the U.S. to satisfy our clinical trial
needs. We have successfully transferred the manufacturing process of PROBACTRIX
from Israel to the University of Minnesota Biotech Center and, after confirming
that several batches met specifications, again have transferred the process to a
commercial pilot-scale production facility in Minnesota. We are working with a
third-party manufacturer (Benchmark Biolabs Inc.) to transfer production of
PROBACTRIX to their facility in Lincoln, Nebraska for manufacturing of
PROBACTRIX for the FDA-sanctioned clinical trials.
27
Regulatory Strategy
Our regulatory strategy involves pursuing an accelerated approval for
PROBACTRIX in the U.S. and Europe by filing an IND application and seeking
orphan drug designation for the prevention and/or treatment of pouchitis. There
are currently no approved treatments for pouchitis. Additional clinical studies
can subsequently be conducted to determine whether there is support for broader
usage.
BioBalance originally planned to pursue marketing of PROBACTRIX as a
medical food for IBS, given limited resources and the significant time required
for prescription drug development. Industry studies indicate that it takes
approximately 7-13 years for the average prescription drug to progress from the
IND filing to market introduction. However, following discussions with
regulatory consultants and potential pharmaceutical licensees, it was determined
that a shorter pathway to drug development through filing an IND for an orphan
drug indication would be the most economically attractive course. This involved
addressing pouchitis, a narrowly focused indication with unmet therapeutic
needs, rather than IBS. Pouchitis also offered the potential for orphan drug
designation and expedited FDA approval. We believe, although there is no
assurance, that we can achieve FDA approval for PROBACTRIX as a prescription
drug to treat pouchitis in approximately 48 months after IND approval.
We plan to conduct double blind, placebo controlled studies if we
obtain a FDA endorsement of the clinical development plan via an approved IND
for the pouchitis indication. The first step would involve a safety/efficacy
study in the target population. This study would likely be followed with a
pivotal Phase III trial in approximately 75-100 pouchitis patients. The product
could be approved for marketing in the U.S. by 2009 or earlier with fast track
designation although no assurance can be given as to any approval date.
Despite the longer time-to-market, we believe that the prescription
drug route is vastly more attractive than the medical food route for the
following reasons:
o prescription drugs are priced significantly higher than
non-prescription products;
o gross margins are typically 90% on prescription drugs versus
60%-70% for non-prescription products;
o prescription drugs are reimbursable by health insurance plans,
while non-prescription products such as medical foods are
generally non-reimbursable; and
o there is a greater likelihood of establishing a marketing
partnership or licensing agreement with a major pharmaceutical
company if PROBACTRIX were marketed as a prescription drug
rather than a medical food.
A prescription drug can be assigned orphan drug status by the FDA and
European regulatory authorities if the indication addresses a target population
of less than 200,000 sufferers in the U.S. or less than 5 sufferers per 10,000
persons in Europe. There is a separate Office of Orphan Drug Product Development
at the FDA designed to help facilitate rapid approval of orphan drug
applications. Once approved, orphan drugs are given seven year exclusivity in
the U.S. and ten years of exclusivity in Europe. Additional benefits of
receiving orphan drug status in the U.S. include study design assistance, a 50%
reduction in the filing cost of the NDA/BLA and may also include partial funding
of clinical costs by the FDA. The NDA/BLA is the vehicle through which drug
sponsors formally propose that the FDA approve a new pharmaceutical for sale and
marketing in the U.S. The NDA/BLA requests permission from FDA to market a drug
in the U.S. In Europe, a drug product is filed with the European Medicines
Agency (EMEA) for marketing throughout the European Commission area. The EMEA
28
has a Committee for Orphan Medicinal Products (COMP) whereby drugs are
designated "orphan drug" status for the European Union.
Longer term, we are currently considering expanding the label
indication of PROBACTRIX to include a number of additional GI indications,
including the prevention or treatment of antibiotic-associated diarrhea (AAD).
Recent medical research indicates that antibiotics significantly alter
intestinal microflora, a key factor in causing diarrhea, for up to three months
following treatment, however, we currently have not yet formulated any plans
with respect to the expansion of the label indications of PROBACTRIX. We plan to
explore regulatory approval for a veterinary formulation of PROBACTRIX as an
animal feed additive to replace antibiotics. The issue of using antibiotics as
an animal feed additive has generated significant attention as governments and
consumer groups have called for the reduction or elimination of unnecessary
antibiotic use in farm animals. McDonalds Corp., the world's largest purchaser
of animal products, announced that its suppliers must phase out inappropriate
use of antibiotics on farm animals. It is known that repeated use of antibiotics
can cause farm animals to become weak and retarded. We believe, although there
is no assurance, that PROBACTRIX has a particularly high safety and efficacy
profile in many different kinds of animals. We can not assure you that we will
ever market Probactrix as an animal feed additive.
Products
PROBACTRIX
Our initial product, PROBACTRIX, is a non-pathogenic probiotic, which
we believe addresses the root cause of many GI disorders, including pouchitis,
IBS, IBD and diarrhea, by inhibiting the growth of pathogenic bacteria and
preventing their re-colonization. Clinical studies in over 14,000 patients have
confirmed that this product can reduce the symptoms of various GI disorders.
This product was approved as a biological agent for the treatment of a
broad range of GI disorders and diarrheas in Russia in May 1998, as a food
supplement for human use by the Ministry of Health of Israel in May 1998 and for
use as animal food by the Ministry of Agriculture of Israel in September 1998.
In August 2000, Tetra-Pharm, an Israeli pharmaceutical company, agreed to cease
manufacture and sale of the product in conjunction with its agreement to sell
all rights relating to the product to BioBalance. Since then, production of the
formula has been limited to supplying hospitals and universities where
BioBalance is conducting further research.
The basic active component in PROBACTRIX is a selective strain of
non-pathogenic E.coli bacteria, which is contained in a pleasant tasting liquid
suspension. This bacterium is a commonly represented species in the healthy
microflora of humans and animals. It has been used for the preparation of
Colibacterin, Bificon and other medicines and food supplements outside the U.S.
The research on PROBACTRIX originated in Russia from studies by Dr.
Nellie Kelner-Padalka, a pediatrician and our scientific founder. These studies
found liquid food supplements containing E.coli M-17 to be effective in treating
intestinal infections of various origins. However, shelf life was short and the
product had a strong odor that made it difficult for some patients to ingest.
Dr. Kelner-Padalka later brought her studies to Israel where several
technologies were used to expand the shelf life and improve the smell and taste.
As part of the regulatory approval process of E. coli M-17 in Russia, a
scientific panel determined the product's mechanism of action included the
following:
o Rapid suppression of pathogenic microorganisms and their
repulsion.
29
o Restoration of the normalization of the body's immune system
due to increased synthesis of immunoglobulin, interferon and
activation of macrophages.
o Stimulation of the enzyme complex (protease, amylase, lipase
and cellulase), which helps to improve digestion.
o Binding, neutralizing and withdrawing toxic substances
(including heavy metals) from the body.
o Improvement of the absorption of selected micronutrients
including B-complex vitamins and essential amino acids.
The patented formulation used for PROBACTRIX consists of a proprietary
strain of non-pathogenic E.coli, derived from an organism that was originally
isolated from the intestinal microflora of healthy volunteers, which is
preserved in a liquid extract formulation. The technology and the processes
comprise conditions that preserve M-17 E. coli in the biologically active form.
Additional patents have been filed by BioBalance for technology that could
extend the product's shelf life for two years or longer at room temperature.
NexGen Product Platform
We have acquired the rights to several strains of Bacillus that have
exhibited anti-inflammatory, anti-bacterial and anti-viral properties, which may
be effective in treating a variety of GI diseases. We refer to these strains of
Bacillius as our NexGen Product Platform. We believe Bacillus strains are
therapeutically effective against rotavirus and campylobacter pathogens, which
are the leading causes of infectious diarrhea. We believe this technology could
also be effective in treating ulcerative colitis. There was a predecessor
product (called Biosporin), based on the Bacillus strains acquired, which was
approved in Russia. Currently we have not yet formalized any plan with respect
to the development of our NexGen Product Platform and no assurance can be given
that we will ever commercially market any product related to this product
platform.
Prior Clinical Studies
The active ingredient in PROBACTRIX has undergone safety and efficacy
testing by more than 14,000 patients in controlled trials as well as case study
reports and has shown safety and efficacy in adults and children as young as six
months old. The product has been shown effective in a broad range of GI diseases
and conditions including IBS, IBD, pouchitis, Crohn's disease, ulcerative
colitis and diarrhea caused by antibiotics, chemotherapy and travel.
Two clinical studies recently conducted at Cedars-Sinai Medical Center
showed the link between IBS symptoms and pathogenic bacteria and support the
rationale for the use of PROBACTRIX as an effective treatment for IBS.
Clinical studies conducted in Israel indicate that PROBACTRIX is
effective at addressing various GI symptoms in both male and female patients
with no apparent side effects. Patients typically reported a marked reduction in
abdominal symptoms. Most recently, two pilot studies have been completed in
Israel with the current formulation. The first was an open label study conducted
on 63 patients with IBS, which were unresponsive to other therapies, and 20
patients with Crohn's disease. After four to six weeks of therapy, 52% of the
IBS patients had an excellent response, 35% and 30% of the Crohn's disease
patients had an excellent and partial response, respectively, and no adverse
events were observed.
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An open-label trial, examining the impact of PROBACTRIX on patients
with Crohn's disease, reported that three of the eight patients experienced a
marked reduction in abdominal symptoms, two dropped out, two experienced no
improvement and one experienced a worsening of symptoms.
A randomized, double blind pilot study conducted by Tiomny, et al. in
2003 reported that PROBACTRIX relieved major symptoms of IBS with no side
effects. This study involved 20 patients, who were experiencing severe symptoms
of diarrhea and constipation with a mean duration of eight years. Eight of the
ten patients in the placebo group withdrew from the study due to lack of
response. All ten patients in the treatment group completed the study. The
treatment group experienced significant improvement in IBS symptom relief with
no apparent side effects.
Current Studies
We conducted a high-dose safety trial on PROBACTRIX to verify the
excellent safety results found in prior studies and to support Phase I status
for the prescription drug effort. Phase I studies focus on the safety of a drug
or biological agent, and are typically conducted in healthy adult volunteers at
relatively high doses. This study was completed in the third quarter of 2004. In
addition, we have recently begun a randomized, multi-center double blind,
placebo-controlled, clinical trial in approximately 200 IBS patients to study
the effectiveness of PROBACTRIX as a medical food. Sites for this study include
Cornell Medical Center in New York City, St. Michael's Hospital in Toronto,
Canada, Bikur Cholim Hospital in Jerusalem, Israel, and Sourasky Medical Center
in Tel Aviv, Israel.
Veterinary Application
BioBalance or its predecessors has conducted numerous clinical studies
in farm animals to support the use of PROBACTRIX as a veterinary feed additive
to replace antibiotics. BioBalance believes that enough safety and efficacy data
may already be accumulated to present an attractive case for licensing to
appropriate corporate partners. BioBalance believes that a new and potentially
safer anti-diarrheal veterinary product, such as PROBACTRIX, could be
particularly successful. Veterinary experts believe that repeated applications
of antibiotics often leave animals weak and growth retarded. BioBalance believes
that PROBACTRIX has a particularly high safety and efficacy profile in many
different kinds of animals. There are numerous probiotic products in the
veterinary market but lack of well-designed scientific studies. Significantly,
PROBACTRIX has been studied for its use in preventing bacterial diarrhea in
piglets and as a replacement for gentamycin and Advocin, which are most often
used to treat diarrhea in these animals. No assurances can be given that we will
ever market Probactrix as a veterinary feed additive.
MANUFACTURING
BioBalance has successfully transferred the manufacturing process of
PROBACTRIX from Israel to the University of Minnesota Biotech Center, enabling
sufficient quantities of PROBACTRIX to be produced in the U.S. for clinical
trials under contract manufacture. BioBalance has not yet selected contract
manufacturers for production of commercial quantities of PROBACTRIX, but may
rely on a marketing partner to oversee the product's manufacture. The process
for growing E. coli and formulating the bacteria into a probiotic agent is not
complicated but requires specialized fermentation facilities maintained and
operated under FDA laboratory and manufacturing requirements a prescription drug
product. BioBalance has contracted with a third-party manufacturer and is
currently working to transfer the manufacturing technology to their
state-of-the-art facility.
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INTELLECTUAL PROPERTY
BioBalance uses a combination of patents, trademarks and trade secrets
to protect its core technology, which is proprietary and protected by 34 filed
patents in the U.S. and certain foreign countries. In the U.S., BioBalance has
filed applications for 16 patents covering applications of its PROBACTRIX(R)
technology, of which 14 have been issued. The patent expiration dates range from
2020 to 2023. It has also filed patent applications covering application of its
core technology in Japan, European, Korea, Canada, Australia, Mexico, Brazil,
Poland, Russia and New Zealand. BioBalance is also aggressively pursuing
additional patent applications relating to its core technology. On March 1,
2005, it received notification that PROBACTRIX has been approved as a registered
trademark in the U.S.
In August 2003, BioBalance acquired the GI rights to a line of
biotherapeutic agents (NexGen Platform). The purchase includes the rights to two
patented strains of Bacillus (B. subtilis and B. licheniformis) for $3,850,000
which included a one-time cash payment of $250,000 and one million shares of our
Common Stock valued at $3,600,000. See "NexGen Product Platform" above.
BioBalance is also looking to obtain rights for other agents showing promise in
treating various GI diseases. At December 31, 2004 it was determined that the
investment in the NexGen Product Platform was impaired and as a result of the
impairment analysis a total of $1,740,326 was expensed during the fourth
quarter. The impairment was determined by an independent valuation firm using a
discounted cash flow model. The impairment is due to a number of factors
including the acceleration of our efforts to obtain regulatory approvals and
take other action necessary to market PROBACTRIX as a prescription product,
overall limited funding available to us to develop the NexGen Product Platform
and available management time. While BioBalance believes that the NexGen
Platform is a viable technology that can be commercialized, any steps we may
take in the future in furthermore of such commercialization will continue to be
delayed until the above mentioned factors are resolved.
BIOBALANCE EMPLOYEES
At March 31, 2005, BioBalance had two full time employees and
outsourced most of its clinical and regulatory needs through consultants. While
BioBalance has no definitive plans with respect to the size of its workforce or
persons who will fill specific positions, BioBalance plans to evaluate its needs
relative to research and development, product manufacturing and marketing and
finance and administration in light of then current alliances and partnerships
and will seek to hire personnel based on that evaluation.
HOME HEALTH CARE BUSINESS
Overview
We provide a broad range of home health and personal care support
services in capacities ranging from companions to live-ins, including assistance
with personal hygiene, dressing and feeding, meal preparation, light
housekeeping and shopping and, to a limited extent, physical therapy and
standard skilled nursing services such as the changing of dressings, injections
and administration of medications.
Our services are provided principally by our staff of professionals and
paraprofessionals (some are bilingual), who provide personal care to patients,
and, to a lesser extent, by our staff of skilled nurses. Approximately 99% of
our home health revenues in 2004 were attributable to services by our
paraprofessional staff.
We are approved by New York State Department of Health for the training
and certification of Home Health Aides and Personal Care Aides. In addition, we
are approved by the New Jersey Board of Nursing for the training of Certified
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Home Health Aides in the State of New Jersey. In order to provide a qualified
and reliable staff, we continuously recruit, train, provide continuing education
for and offer benefits and other programs to encourage retention of our staff.
Recruiting is conducted primarily through advertising, direct contact with
community groups and employment programs, and the use of benefits programs
designed to encourage new employee referrals by existing employees.
On April 11, 2005 we entered into an agreement to sell our home
healthcare operations in the State of New Jersey to Accredited Health. This
transaction closed on May 22, 2005. See - Recent Developments.
Organization and Operations
We operate 24 hours a day, seven days a week, to receive referrals and
coordinate services with physicians, case managers, patients and their families.
Services are provided through 11 principal and branch offices and 2 recruitment
and training offices. Each office is typically staffed with an
administrator/branch manager, director of nursing, nursing supervisor, home care
coordinators, clerical staff and nursing services staff.
Our principal office retains all functions necessary to ensure quality
of patient care and to maximize financial efficiency. Services performed at the
principal office include billing and collection, quality assurance, financial
and accounting functions, policy and procedure development, system design and
development, corporate development and marketing. We use financial reporting
systems through which we monitor data for each branch office, including
collections, revenues and staffing. Our systems also provide monthly, financial
comparisons to prior periods and comparisons among our branch offices.
Referral Sources
We obtain patients primarily through contracts, referrals from
hospitals, community-based health care institutions and social service agencies,
case management and insurance companies. Referrals from these sources accounted
for substantially all of our net revenues in 2004. We generally conduct business
with most of our institutional referral sources under one-year contracts that
fix the rates and terms of all referrals but do not require that any referrals
be made. Under these contracts, the referral sources refer patients to us and we
bill the referral sources for services provided to patients. Approximately 98
such contracts were in effect and active as of December 31, 2004.
One or more referring institutions have accounted for more than 5% of
our net revenues during our last fiscal year, as set forth in the following
table:
Referring Institution Percentage of Net Revenues 2004
--------------------- -------------------------------
New York City Medicaid (HRA) 43.4%
New Jersey Medical Assistance Program 10.4%
Beth Abraham Long Term Home Health Program 6.4%
Overall, our 10 largest referring institutions accounted for
approximately 80.8% of net revenues for 2004.
"Days Sales Outstanding" ("DSO") is a measure of the average number of
days required for us to collect accounts receivable, calculated from the date
services are billed. For the year ended December 31, 2004 our DSO were 74.
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Reimbursement
We are reimbursed for services, primarily by referring institutions,
such as health care institutions and social service agencies, which in turn
receive their reimbursement from Medicaid, Medicare and, to a much lesser
extent, through direct payments by insurance companies and private payers. New
York State and New Jersey Medicaid programs constitute our largest reimbursement
sources, when including both direct Medicaid reimbursement and indirect Medicaid
payments through many of our referring institutions. For 2004, payments from
referring institutions that receive direct payments from Medicare and Medicaid,
together with direct reimbursement to us from Medicaid, accounted for
approximately 99% of net revenues. Direct reimbursements from private insurers,
prepaid health plans, patients and other private sources accounted for
approximately 1% of net revenue for 2004.
The New York State Department of Health, in conjunction with local
Departments of Social Services, sets annual reimbursement rates for patients
covered by Medicaid. These rates are generally established on a county-by-county
basis, using a complex reimbursement formula applied to cost reports filed by
providers.
Third party payers, including Medicaid, Medicare and private insurers,
have taken extensive steps to contain or reduce the costs of health care. These
steps include reduced reimbursement rates, increased utilization review of
services and negotiated prospective or discounted pricing and adoption of a
competitive bid approach to service contracts. Home-based healthcare, which is
generally less costly to third party payers than hospital-based care, has
benefited from many of these cost containment measures.
We negotiate contracts on the basis of services to be provided, in
connection with contracts either currently in effect with us or with other
agencies. Prevailing market conditions are such that, despite escalating
operating expenses, reduced contract rates are regularly negotiated as a result
of internal budget restraints and reductions mandated by managed care contracts
between our clients and HMO's and other third party administrators. While we
anticipate that this trend is likely to continue for the foreseeable future, we
do not expect the impact on us to be significant, since we believe our rates are
competitive. Accordingly, we expect to be subject to only minor rate reductions.
However, as expenditures in the home health care market continue to grow,
initiatives aimed at reducing the costs of health care delivery at non-hospital
sites are increasing. A significant change in coverage or a reduction in payment
rates by third party payers, particularly by New York State Medicaid, would have
a material adverse effect upon our home health care business.
Performance Improvement
We believe that our reputation for quality patient care has been and
will continue to be a significant factor in our success. To this end, we have
established a performance improvement management program, including a
performance improvement program to ensure that our service standards are
implemented and that the objectives of those standards are met.
We believe that we have developed and implemented service standards
that comply with or exceed the service standards required by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"). In November
2003, our New York offices received full accreditation from the JCAHO for the
next three years (expiring in November 2006). We have not sought JCAHO
accreditation for our New Jersey offices because such accreditation is not
required by any of the contracts in that state. An adverse determination by
JCAHO regarding our home health care operations or any branch office could
adversely affect our reputation and competitive position.
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Sales and Marketing
Messrs. Braun and Rosenberg, officers of our health care division, are
principally responsible for the marketing of our services. Each
administrator/branch manager is also responsible for sales activities in the
branch office's local market area. We attempt to cultivate strong, long-term
relationships with referral sources through high quality service and education
of local health care personnel about the appropriate role of home health care in
the clinical management of patients.
Government Regulation
The federal government and the States of New York, where we operate,
and New Jersey, where we operated until May 22, 2005, regulate various aspects
of our business. Changes in the law or new interpretations of existing laws can
have a material adverse effect on our permissible activities, the relative costs
associated with doing business and the amount of reimbursement by government and
other third-party payers.
We are licensed by New York State as a home care services agency. New
York State law requires approval by the New York State Public Health Council
("Council") of any change in "the controlling person" of an operator of a
licensed home care services agency ("LHCSA"). Control of an entity is presumed
to exist if any person owns, controls or holds the power to vote 10% or more of
the voting securities of the LHCSA. A person seeking approval as a controlling
person of a LHCSA, or of an entity that is the operator of a LHCSA, must file an
application for Council approval prior to becoming a controlling person.
We are subject to federal and state laws prohibiting payments for
patient referrals and regulating reimbursement procedures and practices under
Medicare, Medicaid and state programs. The federal Medicare and Medicaid
legislation contains anti-kickback provisions, which prohibit any remuneration
in return for the referral of Medicare and Medicaid patients. Courts have, to
date, interpreted these anti-kickbacks laws to apply to a broad range of
financial relationships. Violations of these provisions may result in civil and
criminal penalties, including fines of up to $15,000 for each separate service
billed to Medicare in violation of the anti-kickback provisions, exclusion from
participation in the Medicare and state health programs such as Medicaid and
imprisonment for up to five years.
Our healthcare operations potentially subject us to the Medicare and
Medicaid anti-kickback provisions of the Social Security Act. These provisions
are broadly worded and often vague, and the future interpretation of these
provisions and their applicability to our operations cannot be fully predicted
with certainty. Any such non-compliance or violation could have a material
adverse effect on our home health care business.
Various federal and state laws regulate the relationship among
providers of healthcare services, including employment or service contracts, and
investment relationships. These laws include the broadly worded fraud and abuse
provisions of the Social Security Act that are applicable to the Medicare and
Medicaid programs, which prohibit various transactions involving Medicare or
Medicaid covered patients or services. Among other things, these provisions
restrict referrals for certain designated health services by physicians to
entities with which the physician or the physician's immediate family member has
a "financial relationship" and the receipt of remuneration by anyone in return
for, or to induce, the referral of a patient for treatment or purchasing or
leasing equipment or services that are paid for, in whole or in part, by
Medicare or Medicaid. Violations of these provisions may result in civil or
criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare and Medicaid programs. The future interpretation
of these provisions and their applicability to our operations cannot be fully
predicted with certainty.
35
New York and New Jersey also have statutes and regulations prohibiting
payments for patient referrals and other types of financial arrangements with
health care providers that, while similar in many respects to the federal
legislation, vary from state to state, are often vague and have infrequently
been interpreted by courts or regulatory agencies. Sanctions for violation of
these state restrictions may include loss of licensure and civil and criminal
penalties.
We believe that our operations, in general, comply in all material
respects with applicable federal and state anti-kickback laws, and that we will
be able to arrange our future business relationships so as to comply with the
fraud and abuse provisions.
Management believes that the trend of federal and state legislation is
to subject the home health care and nursing services industry to greater
regulation and enforcement activity, particularly in connection with third-party
reimbursement and arrangements designed to induce or encourage the referral of
patients to a particular provider of medical services. We attempt to be
responsive to such regulatory climate. However, we are unable to accurately
predict the effect, if any, of such increased regulatory or enforcement
activities on our future results of operations.
In addition, we are subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws, and environmental laws (which relate, among other things, to
the disposal, transportation and handling of hazardous and infectious wastes)
and federal and state securities laws, including the Sarbanes-Oxley Act of 2002
and the rules and regulations thereunder (relating to corporate governance and
the quality of disclosure by public companies). To date, none of these laws and
regulations has had a material adverse effect on our home health care business
or the competitive position of such business or required any material
expenditure by us. We cannot assure that we will not be adversely affected by
such laws and regulations in the future.
We cannot accurately predict what additional legislation, if any, may
be enacted in the future relating to our business or the health care industry,
including third-party reimbursement, or what affect any such legislation may
have on us.
We have never been denied any home health care license we have sought
to obtain. We believe that our home health care operations are in material
compliance with all applicable state and federal regulations and licensing
requirements.
Competition
The home health care market is highly fragmented and significant
competitors are often localized in particular geographical markets. Our largest
competitors include Premiere Health Services, National Home Health Care Corp.,
Patient Care, Inc., and Personal Touch Home Care Services, Inc. The home health
care business is marked by low entry costs so that given the increasing level of
demand for nursing services, significant additional competition can be expected
to develop in the future. Some of the companies with which we presently compete
in home health care have substantially greater financial and human resources
than we do. We also compete with many other small temporary medical staffing
agencies.
We believe that the principal competitive factors in our industry are
quality of care, including responsiveness of services and quality of
professional personnel; breadth of therapies and nursing services offered;
successful referrals from referring Government agencies, hospitals and health
maintenance organizations; general reputation with physicians, other referral
sources and potential patients; and price. We believe that our competitive
strengths have been the quality, responsiveness, flexibility and breadth of
36
services and staff we offer, and to some extent our competitive pricing, as well
as our reputation with referral sources and patients.
The United States health care industry generally faces a shortage of
qualified personnel. Accordingly, we experience intense competition from other
companies in recruiting health care personnel for our home health care
operations. Our success to date has depended, to a significant degree, on our
ability to recruit and retain qualified health care personnel. Most of the
registered and licensed nurses and health care paraprofessionals who we employ
are also registered with, and may accept placements from time to time through,
our competitors. We believe we are able to compete successfully for nursing and
paraprofessional personnel by aggressive recruitment through newspaper
advertising, work fairs/job fairs, flexible work schedules and competitive
compensation arrangements. We cannot assure you, however, that we will be able
to continue to attract and retain sufficient qualified personnel. The inability
to either attract or retain such qualified personnel would have a material
adverse effect on our business.
Home Health Care Employees
At March 31, 2005, our home health care business had 1,927 employees,
of whom 94 are salaried, including two division officers, a controller, seven
administrators/branch managers, 18 nurses, 12 accounting staff, seven clerical
staff and 47 field staff supervisors. The remaining 1,833 employees are paid on
an hourly basis and consist of professional and paraprofessional staff. Three
hundred (300) of these employees are no longer employed by us as of May 22,
2005, as a result of the sale of the New Jersey Business to Accredited.
None of our Home Health Care or BioBalance employees are compensated on
an independent contractor basis or represented by a labor union. We believe that
our employee relations are good.
Properties
All of our executive and branch offices are located in facilities
leased from unaffiliated persons.
Our corporate headquarters is located in a building containing
approximately 6,000 square feet located in Brooklyn, New York under a lease
expiring in 2010, at a monthly rental of approximately $7,000 subject to annual
increases and rent escalations based on increases in real estate taxes. Our home
health care business is administered from our corporate headquarters and 12
branch and recruitment offices located in New York (six offices) and New Jersey
(six offices) under month to month tenancies and term leases expiring from June
2005 through April 2010 at annual rentals ranging from approximately $14,000 to
$55,000 and additional rent based upon increases in real estate taxes and other
cost escalations. The six leases with respect to our New Jersey offices were
assigned to and assumed by Accredited Health in connection with the closing of
the sale of the NJ Business to Accredited Health.
BioBalance's executive office is located in the Borough of Manhattan,
City of New York under a lease expiring in May 2006 at a monthly rental of
approximately $6,200.
Legal Proceedings
We are subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on our results of operations or financial position.
37
MANAGEMENT
Our executive officers and directors are as follows:
Name Age Position
- ---- --- --------
Dennis M. O'Donnell 49 Director, Chief Executive Officer and Secretary of New York
Health Care and President & CEO of The BioBalance Corporation
Fred E. Nussbaum 57 Director
Mordecai H. Dicker 44 Director
Mark Gray 46 Director
Dennis O'Donnell has been one of our directors since January 2004,
Chief Operating Officer of BioBalance since May 2003 and President of BioBalance
since November 2003. On February 24, 2005, he became our Chief Executive Officer
and Secretary. Mr. O'Donnell has more than 20 years of general management,
marketing and business development experience in the pharmaceutical, consumer
healthcare and nutritional industries, principally with Wyeth (formerly American
Home Products) from 1983 to 2002, including as manager of the Wyeth's
Respiratory and GI/Topicals Divisions from 1994 to 1996; Senior Vice President
of Global Business Development & Strategic Planning for Wyeth's OTC Drug
Division from 1996 to 1998 (where he identified drugs, devices and medical foods
for potential acquisition); and Executive Vice President and General Manager of
Wyeth's Solgar division, a manufacturer of premium dietary supplements,
probiotics and specialty nutritional products. From February 2002 to April 2003,
he was a consultant to the pharmaceutical and consumer healthcare industries.
Mr. O'Donnell is a registered pharmacist, with a B.S. in Pharmacy from St.
John's University and an MBA in Marketing & Finance from New York University's
Stern School of Business.
Fred E. Nussbaum has been one of our directors since January 2004. Mr.
Nussbaum became our Chairman of the Board in February 2005. Mr. Nussbaum is
licensed as a certified public accountant in New York and has, for more than the
past five years, provided accounting and auditing services to individuals,
partnerships, corporations and not-for-profit and charitable organizations. From
1997 to 1999 Mr. Nussbaum was the Chief Financial Officer of DEB-EL Foods
Corporation, a large producer of eggs and egg-based products in the Northeast.
Mr. Nussbaum is a member of the American Institute of Certified Public
Accountants as well as the New York State Society of Certified Public
Accountants. He has a BBA from the Bernard M. Baruch College of the City
University of New York.
Mordecai H. Dicker has been one of our directors since January 2004.
From 1998 to 1999, Mr. Dicker was our Program Director, responsible for payroll,
billing, accounts receivable and cash receipts. From 2000 to 2003, Mr. Dicker
was Administrator of the Sayreville Senior Living Center, Inc., a 230-bed
long-term care facility. Since 2003, he has been the Administrator of the
Franklin Care Center, a 180-bed long-term care facility.
Mark Gray has been one of our directors since January 2004. From 1985
to 2000, Mr. Gray was an independent computer consultant serving insurance,
banking, technology and consumer goods corporations in the development and
management of various computer systems and software. From 2000 to 2003, Mr. Gray
was the Director of Clinical Services for CATECG Medical Services, PC, a
provider of mobile diagnostic cardiology and neurology services to hospitals and
other medical care facilities in the New York metropolitan area. Since 2003, he
has been Executive Vice President of ESF Marks, LLC, a computer software
company. Mr. Gray has a B.A. in Medical Computer Science from Brooklyn College
of the City University of New York.
38
Directors hold office until the next annual meeting of the stockholders
and/or until their successors have been duly elected and qualified, or until
death, resignation or removal. Executive officers are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board. There is
no family relationship between any of our directors or executive officers.
Audit Committee
The Board of Director has a standing Audit Committee. The members of
the Audit Committee are Mordecai Dicker, Mark Gray and Fred E. Nussbaum. Fred E.
Nussbaum serves as Chairman of the Audit Committee and as the Audit Committee
financial expert. The Board has determined that each member of the Audit
Committee, including our audit committee expert, is "independent," as that term
is defined in the applicable SEC rules and would also be independent under NASD
Marketplace rules.
Section 16(a) Compliance Reporting
Section 16(a) of the Exchange Act requires our directors and executive
officers and holders of more than 10% of our Common Stock to file reports with
the SEC about their ownership of Common Stock and other of our securities. These
persons are required by SEC rules to furnish us with copies of all Section 16(a)
forms they file. We are required to identify anyone who filed a required report
late during 2004.
Based solely on our review of forms we received and written
representations from reporting persons stating that they were not required to
file these forms, we believe, that during 2004, all Section 16(a) filing
requirements were satisfied on a timely basis.
Code of Ethics
We have adopted a Code of Ethics for Senior Financial Officers which
applies to our Executive Officer and Chief Financial and Principal Accounting
Officer. A copy of this Code has been filed with the Securities and Exchange
Commission.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
2002, 2003 and 2004, the cash compensation paid by us, as well as certain other
compensation paid with respect to those fiscal years, to our Chief Executive
Officer and to each of the three other most highly compensated executive
officers of ours and our BioBalance subsidiary, whose total salary and bonuses
for the fiscal year 2004, in all capacities in which served, was $100,000 or
more (collectively, the "Named Executive Officers"):
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------------- -------------
NAME AND
PRINCIPAL SECURITIES
POSITION OTHER ANNUAL UNDERLYING ALL OTHER
YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SARS COMPENSATION ($)
---- ---------- --------- ---------------- ------------ ----------------
Jerry Braun (6)
President and Chief
Executive Officer 2004 $341,026 $276,325 $49,823(1) 200,000 Shares $644,789(3)
2003 $333,872 $ 35,000 $44,085(1) 200,000 Shares $412,500(3)
2002 $325,200 $405,000 $48,395(1) $ 0
- ------------------------------------------------------------------------------------------------------------------
Jacob Rosenberg (6)
Chief Operating Officer
and Chief Financial 2004 $288,560 $271,340 $47,862(2) 200,000 Shares $545,737(3)
Officer 2003 $257,557 $ 30,000 $46,447(2) 200,000 Shares $337,500(3)
2002 $242,815 $401,000 $50,582(2) $ 0
- ------------------------------------------------------------------------------------------------------------------
Dennis O'Donnell (5)
President and Chief
Operating Officer of 2004 $200,000 $ 0 $20,321(4) 150,000 Shares $ 0
BioBalance 2003 $126,923 $ 0 $12,198(4) 200,000 Shares $ 0
2002 $ 0 $ 0 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------
39
(1) Includes $35,518, $31,081 and $25,720 of medical insurance premiums
paid on behalf of such individual for the fiscal years 2004, 2003 and
2002, respectively, $4,305, $3,004 and $12,675 for automobile and
automobile-related costs, including insurance, incurred on behalf of
such individual, respectively, for the fiscal years 2004, 2003 and 2002
and $10,000 in expense allowance for the fiscal years ended 2004, 2003
and 2002.
(2) Includes $35,518, $31,081 and $25,720 of medical insurance premiums
paid on behalf of such individual for the fiscal years 2004, 2003 and
2002, respectively, $2,344, $5,366 and $14,862 for automobile and
automobile-related costs, including insurance, incurred on behalf of
such individual, respectively, for each of the fiscal years 2004,2003
and 2002 and $10,000 in expense allowance for the fiscal years ended
2004, 2003 and 2002.
(3) Change in control payment. This change in control took place with the
merging of New York Health Care and BioBalance on January 2, 2003.
(4) Includes $20,321 and $12,198 for medical insurance premiums paid on
behalf of such individual for the fiscal years 2004 and 2003,
respectively.
(5) Dennis O'Donnell became President of BioBalance on November 26, 2003.
On February 24, 2005, he became our Chief Executive Officer and
Secretary.
(6) Messrs. Braun and Rosenberg resigned as executive officers and
directors of New York Health Care on February 24, 2005.
Option/SAR Grants in 2004
The following table provides certain information with respect to stock
options granted to the Named Executive Officers in 2004.
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Grant Date
Name Options/SARs Employees in Fiscal Exercise Price Per Expiration Present Value
Granted Year (1) Share ($/sh) Date (2)
- ----------------------------------------------------------------------------------------------------------------------------
Jerry Braun 200,000 36.36% 2.13 01/28/14 $248,940
Jacob Rosenberg 200,000 36.36% 2.13 01/28/14 $248,940
Dennis O'Donnell 100,000 18.18% .50 09/13/14 $ 32,000
50,000 9.09% 2.13 01/28/14 $ 62,235
(1) Based on the total number of options granted to our employees in 2004,
including the Named Officers.
(2) Estimated fair value of each option grant on the date of grant was
determined by use of the Black-Scholes option pricing model.
40
Stock Option Exercises and Year End Values
The following table sets forth, for the Named Executive Officers, the
number of shares covered by stock options as of December 31, 2004, and the value
of "in-the-money" stock options, which represents the positive spread between
the exercise price of a stock option and the market price of the shares subject
to such option on December 31, 2004. No options were exercised by the Named
Officers in 2004.
Number of Securities Value of Unexercised
Underlying Unexercised In- the-Money
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End
Shares Acquired on Exercisable/ Exercisable/
Name Exercise Value Realized Unexercisable Unexercisable
- -------------------------- ----------------------- --------------------- -------------------------- -----------------------
Jerry Braun 862,496/0 Shs $ 0
Jacob Rosenberg 799,996/0 Shs $ 0
Dennis O'Donnell 216,667/133,333 Shs $ 0
Compensation of Directors
Directors who are employees of ours do not receive any additional
compensation for their services as directors. Each non-employee director of New
York Heath Care is paid a fee of $2,000 per month, plus $1,000 for each Board
meeting attended and $500 for attendance at each meeting of a committee of the
Board of Directors of which such director is a member. New York Health Care also
reimburses each director for all expenses of attending such meetings.
No additional compensation of any nature is paid to employee directors.
New York Health Care also issues Common Stock purchase warrants to
non-employee directors from time to time in recognition of their services.
Employment Agreements of the Named Executive Officers; Change in Control
Arrangements
New York Health Care entered into amended employment agreements with
Messrs. Jerry Braun and Jacob Rosenberg for employment terms that expire on
December 26, 2009. Messrs. Braun and Rosenberg served as our executive officers
February 24, 2005, and continue to serve as officers of New York Health Care's
home health care division.
Mr. Braun's amended agreement provides for (i) initial annual base
compensation of $233,000 and annual salary increases of 10%; (ii) reimbursement
of business expenses; (iii) participation in the New York Health Care's bonus,
401(k) and stock option plans; (iv) $750 per month automobile leasing cost
allowance and reimbursement of automobile insurance and maintenance costs; (v)
$10,000 per year allowance for the cost of insurance and other items (which has
41
been in effect since January 2002); and (vi) 48 days of compensated absences per
year. Mr. Braun's current annual base compensation under the amended agreement
is approximately $375,000. Mr. Braun resigned as an executive officer and
director of ours on February 24, 2005. Mr. Braun has continued to be employed by
New York Health Care as the President of its Home Health Care division. Other
than his ceasing to be an executive officer and director, his employment
agreement with us remains in effect.
Mr. Rosenberg's employment agreement has the same general terms and
conditions as Mr. Braun's, except that his initial annual base compensation was
approximately $186,000. Mr. Rosenberg's current annual base compensation under
the agreement is approximately $300,000. Mr. Rosenberg resigned as an executive
officer and director of New York Health Care on February 24, 2005. Mr. Rosenberg
has continued to be employed by New York Health Care as the Vice President of
its Home Health Care division. Other than his ceasing to be an executive officer
and director, his employment agreement remains in effect.
These employment agreements also provide additional benefits if a
"change of control" of New York Health Care occurs. A "change of control" is
deemed to have occurred if:
o New York Health Care enters into an agreement for its merger
or consolidation with another corporation or for the sale of
all or substantially all of it's assets, followed by
termination of the executive's employment within 12 months;
o persons, other than New York Health Care's then current
stockholders, acquire (1) a majority in book value of New York
Health Care's assets, (2) a majority of its Common Stock, (3)
the power to designate a majority of New York Health Care's
Board of Directors, or (4) otherwise acquire the ability to
control New York Health Care's management; or
o any other event (or series of events) occurs which, in the
opinion of New York Health Care's board of directors, will, or
is likely to, if carried out, result in a change of control of
New York Health Care.
In the event of a change of control,
o the unexercised stock options of each executive will
immediately vest and be exercisable in full;
o New York Health Care will pay each executive a lump-sum
payment equal to 2.99 times the average of their annual base
salary and bonus for the previous five years and the cost of
either maintaining the lease or transferring ownership of the
automobile for which New York Health Care had been paying the
leasing costs for the executive, and
o to the extent any payments received by an executive from New
York Health Care subjects the executive to an excise tax under
Section 499 of the Internal Revenue Code, New York Health Care
will make an additional payment to the executive so that the
executive's net after-tax compensation is not reduced by the
excise tax.
All "change of control" compensation is limited by each employment
agreement, to the extent the compensation may qualify as a "parachute payment"
under Section 280G of the Internal Revenue Code, to the maximum amount that may
be paid to that executive without any part of that compensation being deemed to
be an "excess parachute payment." That maximum amount is generally determined by
multiplying the average of the executive's annual base salary and bonus for the
previous five years by a factor of three. A change of control took place on
January 2, 2003 when New York Health Care merged with BioBalance and New York
Health Care recorded a liability of $1,940,526. The change of control provision
is still contained in their employment agreements and may, under certain
42
circumstances, be triggered again upon the occurrence of another change of
control event.
Messrs. Braun and Rosenberg also participate, together with all other
salaried employees of our home healthcare business, in a bonus plan pursuant to
which 10% of the annual pre-tax net income of our home healthcare business
income is contributed to a bonus pool which is distributable to these employees
in amounts determined by our Compensation Committee.
Mr. O'Donnell is party to a three-year employment agreement pursuant to
which he will serve as BioBalance's Chief Executive Officer until May 3, 2006.
Mr. O'Donnell will also agree to serve, if requested, as one of our officers and
to be nominated or appointed as a member of our Board of Directors. Under the
agreement, Mr. O'Donnell's base annual salary was $200,000, which increased to
$225,000 upon the completion of the Offering. In addition, Mr. O'Donnell
received a ten-year option to purchase 200,000 shares of our Common Stock under
our existing stock option plan at an exercise price of $2.48. An additional
option to purchase 50,000 shares of our Common Stock at its then fair market
value will be granted each year during the term of the agreement. Mr. O'Donnell
is entitled to bonus payments upon the satisfaction of specified financial
performance criteria, certain lump-sum payments upon the occurrence of certain
change of control events, and insurance and other benefits. In September 2004,
Mr. O'Donnell received 50,000 ten-year options under his employment agreement
and an additional 50,000 ten-year options as a bonus, with an exercise price of
$0.50. These options related to Mr. O'Donnell's first year of service under his
employment contract. In 2004, Mr. O'Donnell was awarded a bonus of $66,667 in
accordance with his contract. This amount was accrued on the books at December
31, 2004, and paid in the first quarter of 2005.
In January 2004, Mr. O'Donnell was granted 50,000 ten-year options with
an exercise price of $2.13.
On May 6, 2005 the Board of Directors of New York Healthcare approved
the payment of a bonus to Mr. O'Donnell pursuant to the terms of his employment
agreement with us and in consideration of his performance on our behalf. The
Bonus consists of a cash payment to Mr. O'Donnell of $90,000 and the issuance to
Mr. O'Donnell of options to purchase 100,000 shares of our common stock at $0.80
per share. The options vested in full on the date of grant and expire on May 6,
2015.
Savings and Equity Compensation Plans
401(k) Plan
We maintain an Internal Revenue Code Section 401(k) salary deferral
savings plan (the "Plan") for all of its eligible New York home health care
division employees who have been employed for at least one year and are at least
21 years old (effective July 1, 1996, field staff employees at our Orange County
branch office in Newburgh, New York ceased being eligible to participate in the
Plan). Subject to certain limitations, the Plan allows participants to
voluntarily contribute up to 15% of their pay on a pre-tax basis. Under the
Plan, we may make matching contributions on behalf of the re-tax contributions
made by participants.
Equity Compensation Plans
The following table summarizes with respect to options and warrants
under our equity compensation plans at December 31, 2004:
43
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- ------------------------
Equity compensation plans 2,058,333 2.03 2,611,167
approved by security
holders(1)
Equity compensation plans 794,786 2.56
not approved by security
holders(2)
Total 2,853,119
(1) Represents shares of our Common Stock issuable pursuant to our
Performance Incentive Plan, as amended (the "Option Plan"). Does not
include the 500,000 options granted to each of Messrs. Braun and
Rosenberg on February 24, 2005. Our board of directors and stockholders
approved and adopted the Option Plan in March 1996. Our stockholders
approved amendments to the Option Plan (previously adopted by the board
of directors) in 1998, 1999, 2000 and 2002. Under the terms of the
amended Option Plan, as amended, up to 4,712,500 shares of Common Stock
may be granted at December 31, 2004. The Option Plan is administered by
the standing compensation committee (the "Committee") of the board of
directors, which is authorized to grant incentive stock options and
non-qualified stock options to selected employees and to determine the
participants, the number of options to be granted and other terms and
provisions of each option. Options become exercisable in whole or in
part from time to time as determined by the Committee, but in no event
may a stock option be exercisable within six months from the date of
grant, unless the grantee dies or becomes disabled prior to the end of
the period. Stock options have a maximum term of 10 years from the date
of grant, except that the maximum term of an incentive stock options
granted to an employee who, at the date of grant, is a holder of more
than 10% of the outstanding Common Stock (a "10% holder") may not
exceed five years from the date of the grant. The exercise price of an
incentive stock option or nonqualified option granted under the Option
Plan may not be less than 100% of the fair market value per share of
the Common Stock at the date of grant, except that the exercise price
of an incentive stock options granted to a 10% holder may not be less
than 110% of the fair market value. The exercise price of options must
be paid in full on the date of exercise and is payable in cash or in
shares of Common Stock having a fair market value on the exercise date.
(2) Includes 62,500 shares of Common Stock issuable upon exercise of a
non-plan option granted to an executive officer of New York Health Care
in 1996 at an exercise price of $4.50 per share which expires in 2006,
80,834 shares of Common Stock issuable upon exercise of warrants
granted to non-employee directors at exercise prices not less than 100%
of the fair market value per share of the Common Stock at the
respective dates of grant and generally expiring three to 10 years from
the date of grant, 330,000 shares of Common Stock issuable upon
exercise of warrants issued to consultants in consideration for
services performed or to be performed for us at exercise prices not
less than 100% of the fair market value per share of the Common Stock
at the respective dates of grant; and 321,452 shares of Common Stock
issuable upon exercise of non-plan options and warrants issued by us in
exchange for non-plan options and warrants issued by BioBalance in
connection with our acquisition of BioBalance.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding shares of
the Common Stock beneficially owned as of May 25, 2005 by (i) each person, known
to us, who beneficially owns more than 5% of the Common Stock,(ii) each Named
Executive Officer, (iii) each of New York Health Care's directors and (iv) all
officers and directors as a group:
Shares Percentage
Name and Address of Beneficially of Stock
Beneficial Owner (1) Owned (1) Outstanding(1)
-------------------- --------- --------------
Dennis O'Donnell (4) 527,368 1.61%
Fred E. Nussbaum (5) *
Mark Gray (6) *
Mordecai Dicker (7) *
Jerry Braun (2) 2,139,454 6.51%
Jacob Rosenberg (3) 1,694,761 5.16%
Pinchas Stefansky (8) 2,024,000 6.16%
Hershey Holdings
Leon House
Secretary's Lane
P.O. Box 450, Gibraltar
Douglas Andrew Ryan (9) 1,800,000 5.48%
Birizma Associates
c/o Tallhurst Ltd.
P.O. Box 795, Gibraltar
Bernard Korolnick (10) 1,729,208 5.27%
KPT Partners
c/o Alton Management
Splelhof 14A, Postach 536
8750 Glarus, Switzerland
Rivvi Rose (11) 1,950,000 5.94%
Nekavim Investors
1/1 Library Run
P.O. Box 317, Gibraltar
All executive officers and directors 527,368 1.61%
as a group (4)
-----------------------
* Less than one percent (1%).
(1) The shares of Common Stock owned by each person or by the group, and
the shares included in the total number of shares of Common Stock
outstanding, have been adjusted in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, to reflect the ownership
of shares issuable upon exercise of outstanding options, warrants or
other Common Stock equivalents which are exercisable within 60 days. As
provided in such Rule, such shares issuable to any holder are deemed
outstanding for the purpose of calculating such holder's beneficial
ownership but not any other holder's beneficial ownership unless
otherwise indicated, the address of each shareholder is c/o New York
Health Care.
45
(2) Includes a total of 1,362,496 shares issuable upon the exercise of
stock options granted to Mr. Braun and 147,594 Shares issuable upon the
conversion of shares of Class A Convertible Preferred Stock.
(3) Includes a total of (i) 1,299,996 shares issuable upon the exercise of
stock options granted to Mr. Rosenberg, (ii) 73,797 Shares issuable
upon the conversion of his shares of Class A Convertible Preferred
Stock and (iii) 120,968 shares and 60,484 warrants of Common Stock
owned by his wife.
(4) Includes a total of 450,000 shares issuable upon the exercise of stock
options granted to Mr. O'Donnell and also 8,064 shares issuable upon
the exercise of warrants.
(8) All shares are owned of record by Hershey Holdings, of which Mr.
Stefansky holds sole voting and investment power.
(9) All shares are owned of record by Birizma Associates, of which Mr. Ryan
holds sole voting and investment power.
(10) All shares are owned of record by KPT Partners, of which Mr. Korolnick
holds sole voting and investment power.
(11) All shares are owned of record by Nekavim Investors, of which Ms. Rose
holds sole voting and investment power.
RELATED PARTY TRANSACTIONS
On July 15, 2004, we executed the Purchase Agreement providing for the
sale of the assets of our home healthcare business to the LLC, a company
controlled by Messrs. Braun and Rosenberg, who at the time were our chief
executive officer and chief operating officer, for consideration of $2.7 million
in cash, the assumption of all of the liabilities and obligations with respect
to the home healthcare business and the forgiveness of certain future
obligations that may be due to these individuals pursuant to employment
agreements each of them has with us. On April 11, 2005, with the consent of
Messrs. Braun, Rosenberg and the LLC, we entered into an agreement to sell the
NJ Business to Accredited Health, a subsidiary of National for $3.0 million.
There are ongoing discussions regarding the sale of the remaining portion of the
assets of our home healthcare business to the LLC.
On February 24, 2005, we consummated the Offering. In connection with
the consummation of the Offering, Braun and Rosenberg, who were at the time
executive officers of ours, at the request of the Placement Agent for the
Offering, resigned irrevocably as directors and executive officers of New York
Health Care. In connection with Braun and Rosenberg's agreement with the
Placement Agent, in order to secure our obligations to (i) consummate the sale
of all the assets relating to our home healthcare business (the "Asset Sale") to
the LLC, pursuant to the terms of the Purchase Agreement or (ii) to comply with
any future payment obligations we owe to Braun and Rosenberg under their
respective employment agreements with us, we entered into the Security
Agreement, on February 24, 2005, which granted Messrs. Braun and Rosenberg a
46
security interest in the assets of our home healthcare business being conducted
in the states of New York and New Jersey and provided for the deposit of up to
$3.55 million in cash collateral (the "Collateral"). None of the assets of
BioBalance will be used as Collateral to secure our obligations to Braun and
Rosenberg.
Messrs. Braun and Rosenberg will be entitled to receive all or a
portion of the Collateral (and any additional amounts that they are entitled to
under their employment agreements and the Agreement) if prior to the
consummation of the Asset Sale: (i) we breach the Purchase Agreement and the
breach is not cured within any applicable cure period or waived by Messrs Braun
and Rosenberg, (ii) there are changes in the composition of a majority of New
York Health Care's Board of directors (other than the resignations of Messrs
Braun and Rosenberg or a reduction in the number of Board members resulting from
death, disability or resignation of a member or the additions of directors that
have been expressly approved in writing by Messrs Braun and Rosenberg) (iii) an
event occurs that would be considered "good reason" for the resignation of
Messrs. Braun and Rosenberg under their employment agreements with the us or
would be considered a "change of control" under those employment agreements or
(iv) the Asset Sale has been terminated or abandoned for any reason prior to
December 31, 2005 (other than as a result of a breach of the Purchase Agreement
by, or a failure to act by, NY Health Care LLC or Braun or Rosenberg).
At the close of business on February 24, 2005: (i) Mr. Braun resigned
as a director and as our Chief Executive Officer and President and (ii) Mr.
Rosenberg resigned as a director and as our Vice President, Chief Operating
Officer, Chief Financial Officer, Chief Accounting Officer and Secretary. Mr.
Braun continues to be employed as the President of our home healthcare division
and Mr. Rosenberg continues to be employed as the Vice President of our home
healthcare division. Other than their ceasing to be officers and directors, and
the resulting changes in their duties and responsibilities, their respective
employment agreements with us remain in effect. In addition, Messrs. Braun and
Rosenberg have board observer rights with respect to our board of directors
until such time as the Asset Sale is consummated. Pursuant to the terms of their
respective employment agreements, as a result of their resignations from New
York Health Care's Board of Directors, on February 24, 2005, each of Braun and
Rosenberg received Options to purchase 500,000 shares of our Common Stock at an
exercise price of $0.85 per share, pursuant to our Performance Incentive Plan.
On March 23, 2005, the security interest that was granted pursuant to
the Security Agreement was terminated and Messrs. Braun and Rosenberg agreed
that we could enter into an agreement with a third party for the sale of the New
Jersey portion of our home health care operations under specified conditions
without being in breach of the Purchase Agreement. The LLC has also consented to
the sale. We entered into an agreement to sell the NJ Business to Accredited
Health on April 11, 2005. This Transaction closed on May 22, 2005. See - Recent
Developments for a more detailed explanation of the above transactions.
DESCRIPTION OF SECURITIES
General
We are authorized to issue 100,000,000 shares of Common Stock, and
5,000,000 shares of preferred stock. As of May 23, 2005 there were 32,843,138
shares of Common Stock outstanding and there are 590,375 shares of preferred
stock outstanding, which has been designated as Series A Convertible Preferred
Stock.
47
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event we
liquidate, dissolve or windup, the holders of Common Stock are entitled to share
in all assets remaining which are available for distribution to them after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the Common Stock. Holders of shares of
Common Stock have no conversion, preemptive or other subscription rights, and
there are no redemption provisions applicable to the Common Stock.
Preferred Stock
The authorized preferred stock can be issued from time to time in one
or more series. The Board of Directors has the power, without shareholder
approval, to issue shares of one or more series of preferred stock, at any time,
for such consideration and with such relative rights, privileges, preferences
and other terms as the Board of Directors may determine, including terms
relating to dividend rates, redemption rates, liquidation preferences and
voting, sinking fund and conversion or other rights. The rights and terms
relating to any new series of preferred stock could adversely affect the voting
power or other rights of the holders of the Common Stock or could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control.
Series A Convertible Preferred Stock
The description of the Series A Convertible Preferred Stock (the
"Preferred A Stock") as set forth below is only a summary of the terms of the
Preferred A Stock which is qualified in its entirety by reference to the
certificate of amendment to our certificate of incorporation designating the
Preferred A Stock, a copy of which is available from us upon request.
The Preferred A Stock converts to Common Stock at an initial rate of
two-thirds (2/3) of a share of Common Stock per share of Preferred A Stock
converted, subject to adjustment under certain circumstances, including a
subdivision or combination of the Common Stock or a dividend payable in Common
Stock.
The Preferred A Stock has no voting rights other than as provided by
law or with respect to any matter that affects the rights and preferences of the
Preferred A Stock.
The Preferred A Stock entitles the holders to payment of quarterly
dividends, in arrears, based upon an annual rate equal to 9% of the original
purchase price of the Preferred A Stock. In recent years, we have not paid any
dividends on the Preferred A Stock.
Warrants
In connection with the Offering of our common stock and warrants that
closed on February 24, 2005, we issued warrants ("Investor Warrants") to
purchase 3,949,638 shares of our common stock. The shares underlying the
Investor warrants are being registered in this registration statement. The
Investor Warrants are exercisable at a price of $0.78 per share (subject to
adjustment in the event of stock splits, stock dividends, recapitalizations or
similar events) and expire on February 24, 2010, subject to earlier redemption
48
by us as described in the next sentence. We may redeem the Investor Warrants
upon 30 days written notice at a price of $0.01 per Investor Warrant, provided
the closing price of our common stock on its principal trading market exceeds
$2.00 per share, subject to anti-dilution adjustments, for a period of 10
consecutive trading days, ending within 30 days prior to the date on which the
notice of redemption is given and a registration statement covering the shares
underlying the Investor Warrants has been declared and remains effective or the
shares are not otherwise subject to any restrictions for their public sale.
In connection with the Offering we also issued warrants ("Placement
Agent Warrants") to purchase 1,777,355 shares of our common stock to the
placement agent in the Offering. The shares underlying the Placement Agent
Warrants are being registered in this registration statement. The Placement
Agent Warrants are exercisable at a price of $0.62 per share(subject to
adjustment in the event of stock splits, stock dividends, recapitalizations or
similar events) and expire on February 24, 2010. The Placement Agent Warrants
also contain a "cashless-exercise" feature.
Limitation of Liability and Indemnification Matters
Our amended Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by New York law. Specifically, a
director will not be personally liable to us or our shareholders for damages for
any breach of duty in his or her capacity as a director unless a judgment or
other final adjudication adverse to the director establishes that:
o his or her acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law,
o he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled,
or
o his or her acts violated Section 719 of the New York Business
Corporation Law, which relates to unlawful declarations of
dividends or other distributions of assets to shareholders or
the unlawful purchase of our shares.
This provision is intended to afford directors protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. We believe this provision will assist us in maintaining and
securing the services of directors who are not our employees. As a result of
this provision, shareholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties although it may
still be possible to obtain injunctive or other equitable relief with respect to
those actions. If equitable remedies are found not to be available to
shareholders for any particular case, shareholders may not have any effective
remedy against the challenged conduct. This provision does not affect the
directors' responsibilities, under any other laws, such as the federal
securities laws or other state or federal laws.
Our Bylaws also provide that directors and officers shall be
indemnified against liabilities arising from their service as directors or
officers to the fullest extent permitted by law. To obtain this benefit, there
is generally a requirement that the individual acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests. We may not indemnify any director or officer if a judgment or other
final adjudication adverse to him or her establishes that his or her acts were
committed in bad faith, were the result of active and deliberate dishonesty and
were material to the cause of action so adjudicated, or that he or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled.
In addition, New York law provides that the indemnification
permitted under New York law shall not be deemed exclusive of any other rights
to which the directors and officers may be entitled under our Bylaws, any
agreement, a vote of shareholders, or otherwise as long as those rights are not
inconsistent with New York Law.
Additionally, as permitted under New York law, we have
obtained directors' and officers' liability insurance for our officers and
directors.
Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Transfer Agent
The transfer agent and registrar for the Common Stock is Continental
Stock Transfer & Trust Company, New York, New York.
49
SELLING STOCKHOLDERS
Based on information provided by the selling stockholders, the
following table sets forth certain information regarding the selling
stockholders:
The table below assumes for calculating each selling stockholder's
beneficial and percentage ownership that options, warrants or convertible
securities that are held by such stockholder (but not held by any other person)
and are exercisable within 60 days from the date of this prospectus have been
exercised and converted. The table also assumes the sale of all of the shares
being offered.
Common Stock Beneficially
Owned After the Offering
------------------------
Number of Shares of
Common Stock
Beneficially Owned Percent of
Prior to Shares Number Outstanding
Selling Stockholder the Offering Being Offered of Shares Shares
------------------- ------------ ------------- --------- ------
Mona Abrams 60,482 60,482 0 *
Martha Quiros and Paula Andre 483,871 483,871 0 *
Norman Antin 132,550 120,967 11,583 *
Alan Bankhalter 60,482 60,482 0 *
Gilbert Bates 35,515 14,515 21,000 *
Little Gem Life Sciences 392,902 362,902 30,000 *
Howard Berg 1,407,579 1,347,579 60,000 *
Lesley Berman 60,484 60,484 0 *
Moshe J. and Judith C. Bernstein 36,291 36,291 0 *
Susan K. Berry and Allan Berry 36,291 36,291 0 *
Sol Blisko 160,484 60,484 100,000 *
Mody K. Boatright PSP 77,419 77,419 0 *
David Bock Reality INC Profit Sharing 60,484 60,484 0 *
Plan DTD 08/06/1985
David Boyer 245,035 241,935 3,100 *
Jerry Braun (1) 2,333,002 193,548 2,139,454 6.51
Melvin and Gloria Brenner 12,097 12,097 0 *
Delaware Charter custodian for Leonard 72,580 72,580 0 *
J. Brenner
Brent D. Butcher 120,967 120,967 0 *
David Chazanovitz 60,484 60,484 0 *
David Clarke 241,935 241,935 0 *
William and Ann Collins 36,291 36,291 0 *
Fredric Colman 886,935 886,935 0 *
Richard Crane 39,032 29,032 10,000 *
Roque DeLaPaz IRA 36,291 36,291 0 *
David Dubrow 100,484 60,484 40,000 *
Daniel Eichner 165,484 60,484 105,000 *
Murry England 542,225 428,225 114,000 *
Shirley A. Ens 60,484 60,484 0 *
Joseph A. Ens Jr 60,484 60,484 0 *
Joseph Ens and Shirley Ens 26,613 26,613 0 *
50
Common Stock Beneficially
Owned After the Offering
------------------------
Number of Shares of
Common Stock
Beneficially Owned Percent of
Prior to Shares Number Outstanding
Selling Stockholder the Offering Being Offered of Shares Shares
------------------- ------------ ------------- --------- ------
Joseph Ens Jr. TTEE defined benefit plan 50,806 50,806 0 *
David R. Falk 61,584 60,484 1,100 *
Neal Fink 108,871 108,871 0 *
Neal Fink and Jean Adelman Fink 60,484 60,484 0 *
John Flick 33,674 21,774 11,900 *
John O. Forrer 221,445 205,645 15,800 *
Delaware Charter Guarantee and Trust 21,774 21,774 0 *
IRA R/O, Steven Francesco TTEE
George Feussner 60,484 60,484 0 *
Neal H. Gehring 30,241 30,241 0 *
CGM Cust FBO Alvin Gilmour, DDS Roth 60,484 60,484 0 *
Conversion IRA
Morton A. Gordon 39,193 24,193 15,000 *
Ronald L. Gurewitz 60,484 60,484 0 *
John Hardy 135,967 120,967 15,000 *
Keith Harris 60,484 60,484 0 *
Richard Gregg Hillman 120,967 120,967 0 *
Richard and Donna Hoefer 360,109 266,127 93,982 *
Dennis J. Holman 145,547 118,547 27,000 *
Gerald Holman 48,339 42,339 6,000 *
Bernard and Selma Izes 30,241 30,241 0 *
Howard Izes 30,241 30,241 0 *
Peter Janssen 72,580 72,580 0 *
Scott F. Jasper 24,193 24,193 0 *
Jelcada LP 96,774 96,774 0 *
Jo Bar Enterprises 89,984 60,484 29,500 *
Michael Jorgenson and Marta C. Tacher 24,193 24,193 0 *
Tae Kang 72,580 72,580 0 *
David Karlton 90,484 60,484 30,000 *
David C. Katz 72,580 72,580 0 *
John W. Lahr 72,580 72,580 0 *
Robert Lempert 34,193 24,193 10,000 *
Mitchell J. Lipcon TTEE Profit Sharing 63,887 48,387 15,500 *
KP
Mitchell J. Lipcon TTEE PSP 38,709 38,709 0 *
Robert Lishman - GlenBrook Capital 241,935 241,935 0 *
William and Rita Lurie 138,917 120,967 17,950 *
Tim McCartney 48,387 48,387 0 *
Donald and Mary McHugh 44,193 24,193 20,000 *
51
Common Stock Beneficially
Owned After the Offering
------------------------
Number of Shares of
Common Stock
Beneficially Owned Percent of
Prior to Shares Number Outstanding
Selling Stockholder the Offering Being Offered of Shares Shares
------------------- ------------ ------------- --------- ------
Merkel & Cocke PA PSP 60,484 60,484 0 *
Mellon HBV Master Leveraged 531,844 459,678 72,166 *
Multi-Strategy Fund LP
Mellon HBV Master US Event Driven Fund 491,093 302,419 188,674 *
LP
Mellon HBV Master Multi - Strategy Fund 908,513 689,515 218,998 *
LP
Miriam Mooney Trust - Joan Connolly 60,484 60,484 0 *
Miriam Mooney Trust - David Forrer 60,484 60,484 0 *
Miriam Mooney Trust - Catherine Forrer 60,484 60,484 0 *
Richard Molinsky 452,043 205,645 246,398 *
Paul Northcutt 130,055 72,580 57,475 *
Dennis O'Donnell 328,368 24,193 304,175 *
Richard Pawliger 241,934 241,934 0 *
Robert Poggenpohl 24,193 24,193 0 *
David C. Ptolemy and Regina P 10,758 7,258 3,500 *
Ptolemy
Kenneth Rosenblatt 12,997 12,097 900 *
Marvin Rosenblatt 72,958 60,484 12,474 *
Miriam Rosenberg 181,452 181,452 0 *
Steven R. Rothstein 96,774 96,774 0 *
Richard Rudin - Strategic Community 72,580 72,580 0 *
Solutions Inc.
Jeffrey Rubin 120,968 120,968 0 *
Guillermo Salcedo 72,580 72,580 0 *
Glenn and Michelle Shear 24,193 24,193 0 *
Samuel Solomon 29,032 29,032 0 *
Joel A. Stone 93,984 60,484 33,500 *
Phillip and Sherrie Thomas 24,193 24,193 0 *
Fred Utter 24,193 24,193 0 *
Becky Utter 24,193 24,193 0 *
Harvey Weintraub 87,097 87,097 0 *
Ronald L. White 120,967 120,967 0 *
Kal Zeff 483,871 483,871 0 *
Matthew J. Zepka 14,515 14,515 0 *
Jeffrey Goldberg 6,200 6,200 0 *
Alexander Fainberg 5,900 5,900 0 *
WestPark Capital, Inc. 3,396 3,396 0 *
Starobin Partners, Inc. 3,375 3,375 0 *
Harry Datys 1,258,577 1,258,577 0 3.83
52
Common Stock Beneficially
Owned After the Offering
------------------------
Number of Shares of
Common Stock
Beneficially Owned Percent of
Prior to Shares Number Outstanding
Selling Stockholder the Offering Being Offered of Shares Shares
------------------- ------------ ------------- --------- ------
Roger Castillero 27,823 27,823 0 *
Sandy McCall 3,024 3,024 0 *
Ivan Jimenez 1,815 1,815 0 *
Jaime Alfaro 40,000 40,000 0 *
Alex Ryshawy 10,000 10,000 0 *
Vince Colicchio 19,000 19,000 0 *
Juan Arvelo 16,000 16,000 0 *
Jean Paul Desrochers 10,000 10,000 0 *
Ricardo Rivas 186,122 186,122 0 *
Charles P. Garcia 65,144 65,144 0 *
Alexis C. Korybut 65,144 65,144 0 *
Kirk Kubach 27,917 27,917 0 *
Christina Avila 9,306 9,306 0 *
Robert Mateika 9,306 9,306 0 *
Robert Abrams 9,306 9,306 0 *
Joseph Stevens & Co. 38,291 38,291 0 *
Kathleen Datys 28,495 28,495 0 *
R. Jerry Falkner 20,000 20,000 0 *
Harlan Kleiman 15,888 15,888 0 *
Greg Murphy 15,528 15,528 0 *
Elite Capital Funding 5,944 5,944 0 *
Richard Cardinale 3,400 3,400 0 *
Paul Graham 2,565 2,565 0 *
Vida Harband 2,000 2,000 0 *
Kate Winkler 2,000 2,000 0 *
Marie Jorajuria 2,000 2,000 0 *
David Maltese 1,570 1,570 0 *
Michael Dimitri 1,310 1,310 0 *
Investing in Industry Inc. 1,261 1,261 0 *
Jane Clifford 1,200 1,200 0 *
----------
Total 13,767,807
==========
--------------------------
* Less than one percent (1%)
(1) The 193,548 shares being offered by the Selling Stockholder
are beneficially owned by the Selling Stockholder jointly with
his wife.
Plan of Distribution
All costs, expenses and fees in connection with the registration of the
shares offered by this prospectus shall be borne by us. Brokerage costs, if any,
attributable to the sale of shares will be borne by the selling stockholder.
53
Subject to certain contractual restrictions noted above, the shares may
be sold by the selling stockholder by one or more of the following methods:
o under a 10b5-1 trading plan;
o block trades in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the shares as principal to facilitate the
transaction;
o purchases by a broker or dealer as principal and resale by
such broker dealer for its account pursuant to this
prospectus;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
o through put and call options relating to the shares;
o negotiated transactions;
o a combination of any such methods of sale at market prices
prevailing at the time of the sale or at negotiated prices;
and
o any other method permitted pursuant to applicable law.
The transactions described above may or may not involve brokers or
dealers.
A selling stockholder will not be restricted as to the price or prices
at which the selling stockholder may sell its shares. Sales of shares by the
selling stockholder may depress the market price of our Common Stock since the
number of shares which may be sold by the selling stockholder is relatively
large compared to the historical average weekly trading of our Common Stock.
Accordingly, if the selling stockholder were to sell, or attempt to sell, all of
such shares at once or during a short time period, we believe such a transaction
could adversely affect the market price of our Common Stock.
From time to time a selling stockholder may pledge its shares under
margin provisions of customer agreements with its brokers or under loans with
third parties. Upon a default by the selling stockholder, the broker or such
third party may offer and sell any pledged shares from time to time.
In effecting sales, brokers and dealers engaged by a selling
stockholder may arrange for other brokers or dealers to participate in the sales
as agents or principals. Brokers or dealers may receive commissions or discounts
from the selling stockholder or, if the broker-dealer acts as agent for the
purchaser of such shares, from the purchaser in amounts to be negotiated, which
compensation as to a particular broker dealer might be in excess of customary
commissions which are not expected to exceed those customary in the types of
transactions involved. Broker-dealers may agree with the selling stockholder to
sell a specified number of such shares at a stipulated price per share, and to
the extent the broker-dealer is unable to do so acting as agent for selling
stockholders, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer commitment to the selling stockholder.
Broker-dealers who acquire shares as principal may then resell those shares from
time to time in transactions
o in the over-the counter market or otherwise;
o at prices and on terms prevailing at the time of sale;
54
o at prices related to the then-current market price; or
o in negotiated transactions.
These resales may involve block transactions or sales to and through
other broker-dealers, including any of the transactions described above. In
connection with these sales, these broker-dealers may pay to or receive from the
purchasers of those shares commissions as described above. The selling
stockholder may also sell the shares in open market transactions under Rule 144
under the Securities Act, rather than under this prospectus.
The selling stockholder and any broker-dealers or agents that
participate with the selling stockholder in sales of the shares may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
these sales. In this event, any commissions received by these broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
The selling stockholder may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
The selling stockholder is subject to applicable provisions of the
Securities Exchange Act of 1934 and the SEC's rules and regulations, including
Regulation M, which provisions may limit the timing of purchases and sales of
the shares by the selling stockholder.
In order to comply with certain states' securities laws, if applicable,
the shares may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the shares may not be sold unless
the shares have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
55
LEGAL MATTERS
The validity of the shares of Common Stock offered by this prospectus
will be passed upon for our company by Blank Rome LLP, New York, New York.
EXPERTS
Weiser, LLP, an independent registered public accounting firm, has
audited our consolidated financial statements at and for the years ended
December 31, 2003 and 2004 as set forth in its report. Holtz Rubenstein Reminick
LLP, an independent registered public accounting firm, has audited our financial
statements at and for the year ended December 31, 2002. We have included these
financial statements in the prospectus and elsewhere in the registration
statement in reliance on the reports of Weiser LLP and Holtz Rubenstein Reminick
LLP, given on its authority as an expert in accounting and auditing.
56
INDEX TO FINANCIAL STATEMENTS
================================================================================
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NEW YORK HEALTH CARE, INC.:
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
for the years ended December 31, 2004 and 2003 F-1
Report of Independent Registered Public Accounting Firm
for the year ended December 31, 2002 F-2
Consolidated Balance Sheets at December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-31
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-32
Consolidated Balance Sheets at March 31, 2005 (unaudited)
and December 31, 2004 F-33
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004 F-34
Unaudited Consolidated Statements of Shareholders' Equity
for the three months ended March 31, 2005 F-35
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 F-36
Notes to Unaudited Consolidated Financial Statements F-37
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
New York Health Care, Inc.
We have audited the accompanying consolidated balance sheets of New York Health
Care, Inc. and Subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
York Health Care, Inc. and Subsidiaries as of December 31, 2004 and 2003, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
We have also audited the financial statement Schedule II for the years ended
December 31, 2004 and 2003. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ Weiser LLP
Weiser LLP
April 11, 2005
New York, NY
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
New York Health Care, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows, and financial statement Schedule II
(Valuation and Qualifying Accounts) of New York Health Care, Inc. (formerly The
Bio Balance Corporation) for the year ended December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of New York Health
Care, Inc. (formerly The Bio Balance Corporation), for the year ended December
31, 2002 in conformity with U.S. generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Holtz Rubenstein Reminick LLP
Holtz Rubenstein Reminick LLP
Melville, New York
March 4, 2003
F-2
NEW YORK HEALTH CARE , INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
2004 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 2,186,756 $ 7,337,896
Due from lending institution 566,523 208,721
Accounts receivable, net of allowance for uncollectible
amounts of $460,000 and $397,000, respectively 8,656,311 6,577,283
Unbilled services 65,627 100,114
Prepaid expenses and other current assets 466,625 319,195
------------- -------------
Total current assets 11,941,842 14,543,209
Property and equipment, net 87,006 145,898
Goodwill, net 900,587 900,587
Other intangible assets, net 3,496,295 5,971,622
Other assets 77,465 67,652
------------- -------------
Total assets $ 16,503,195 $ 21,628,968
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,328,127 $ 1,786,044
Accounts payable and accrued expenses 7,326,115 5,849,732
Due to HRA 5,264,695 3,756,507
Due to related parties - 1,190,526
Income taxes payable - 24,394
------------- -------------
Total current liabilities 13,918,937 12,607,203
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; Class A Preferred, 590,375 shares
authorized, issued and outstanding 5,904 5,904
Common stock, $.01 par value, 100,000,000 shares
authorized; 24,943,821 shares issued and
24,939,776 outstanding. 249,438 249,438
Additional paid-in capital 32,313,470 32,679,292
Accumulated deficit (29,975,081) (23,903,396)
Less: Treasury stock (4,045 common shares at cost) (9,473) (9,473)
------------- -------------
Total shareholders' equity 2,584,258 9,021,765
------------- -------------
Total liabilities and shareholders' equity $ 16,503,195 $ 21,628,968
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
Net patient service revenue $ 48,854,358 $ 45,060,449 $ -
-------------- -------------- --------------
Expenses:
Professional care of patients 39,214,216 36,106,721 -
-------------- -------------- --------------
General and administrative
(excluding noncash compensation) 12,052,255 9,941,923 810,427
Noncash compensation 4,127 1,307,119 19,414
-------------- -------------- --------------
Total general and administrative expenses 12,056,382 11,249,042 829,841
-------------- -------------- --------------
Product development
(excluding noncash compensation) 1,426,423 956,262 354,616
Noncash compensation (369,949) 284,340 -
-------------- -------------- --------------
Total product development 1,056,474 1,240,602 354,616
-------------- -------------- --------------
Goodwill impairment - 17,869,339 -
Impairment of intangible assets 1,740,326 - -
Bad debts expense 90,400 50,250 -
Depreciation and amortization 871,710 606,747 214,600
-------------- -------------- --------------
Total operating expenses 55,029,508 67,122,701 1,399,057
-------------- -------------- --------------
Loss from operations (6,175,150) (22,062,252) (1,399,057)
-------------- -------------- --------------
Non-operating income (expenses):
Interest income 69,877 51,255 -
Interest expense (29,538) (2,173) -
-------------- -------------- --------------
Non-operating income (expenses), net 40,339 49,082 -
-------------- -------------- --------------
Loss before (benefit) provision for income taxes (6,134,811) (22,013,170) (1,399,057)
(Benefit) provision for income taxes:
Current (63,126) 39,000 -
-------------- -------------- --------------
Net loss $ (6,071,685) $ (22,052,170) $ (1,399,057)
============== ============== ==============
Basic and diluted loss per share $ (0.24) $ (0.91) $ (0.07)
-------------- -------------- --------------
Weighted and diluted average shares outstanding 24,939,776 24,283,907 20,562,131
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Common Stock Preferred Stock Additional Treasury Stock Total
-------------------- ---------------- Paid-In ------------------- Accumulated Shareholders'
Shares Amount Shares Amount Capital Shares Amount Deficit Equity
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
Balance at
January 1, 2002 19,700,667 $197,007 - $ 0 $ 3,056,928 - $ - $ (452,169) $ 2,801,766
Common stock
issued for cash 1,415,827 14,158 - - 3,473,986 - - - 3,488,144
Amortization of
unearned compensation - - - - 19,414 - - - 19,414
Net loss - - - - - - - (1,399,057) (1,399,057)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2002 21,116,494 211,165 - - 6,550,328 - - (1,851,226) 4,910,267
Common stock issued
for cash, net 327,327 3,273 - - 1,010,535 - - - 1,013,808
Reverse acquisition on
January 2, 2003 2,500,000 25,000 590,375 5,904 19,940,579 24,846 (31,483) - 19,940,000
Revaluation of options
/warrants as part of
reverse acquisition - - - - 721,100 - - - 721,100
Common stock
Issued for purchase
of intangible assets
on August 20, 2003 1,000,000 10,000 - - 3,590,000 - - - 3,600,000
Issuance of treasury
Stock (during Sept 2003)
pursuant to the exercise
of options at an average
exercise price of $.86 - - - - (3,969) (20,001) 21,170 - 17,201
Issuance of treasury
stock (during Oct 2003)
pursuant to the exercise
of options at an average
exercise price of $1.50 - - - - 360 (800) 840 - 1,200
Warrants earned
for service - - - - 870,359 - - - 870,359
Net Loss - - - - - - - (22,052,170) (22,052,170)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2003 24,943,821 249,438 590,375 5,904 32,679,292 4,045 (9,473) (23,903,396) 9,021,765
Warrants earned
for service - - - - 15,743 - - - 15,743
Reduction of
compensation expense
due to revaluation
of options/warrants - - - - (381,565) - - - (381,565)
Net loss - - - - - - - (6,071,685) (6,071,685)
---------- -------- ------- ------- ------------ -------- --------- ------------- -------------
BALANCE AT
DECEMBER 31, 2004 24,943,821 $249,438 590,375 $ 5,904 $32,313,470 4,045 $ (9,473) $(29,975,081) $ 2,584,258
========== ======== ======= ======= ============ ======== ========= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
The above statements give retroactive effect to change in par value from $.0001
to $.01, due to reverse merger.
F-5
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (6,071,685) $ (22,052,170) $ (1,399,057)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Impairment of intangible assets 1,740,326
Goodwill impairment - 17,869,339 -
Noncash compensation (365,822) 1,591,459 19,414
Depreciation and amortization 871,710 606,747 214,600
Bad debts expense 90,400 50,250 -
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable and unbilled services (2,134,953) (1,352,003) -
Increase in prepaid expenses and other current assets (147,430) (98,231) (25,842)
Increase in due from lending institution (357,802) (55,896) -
(Increase)decrease in other assets (9,813) 8,927 -
(Decrease)increase in accrued payroll (457,917) 588,269 120,000
Increase in accounts payable and accrued expenses 1,476,383 1,977,474 112,112
Increase in due to HRA 1,508,188 1,824,710 -
Decrease in due to related parties (1,190,526) (750,000) -
(Decrease)increase in income tax payable (24,394) 24,394 -
-------------- -------------- --------------
Net cash (used in) provided by
operating activities (5,073,335) 233,269 (958,773)
-------------- -------------- --------------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary - 3,548,658 -
Acquisition of property and equipment (8,495) (50,724) -
Acquisition of intangible assets (69,310) (422,613) (148,723)
Increase in other assets - - (13,333)
Decrease (increase) in restricted cash - 100,000 (100,000)
Increase in deferred merger cost - - (248,363)
-------------- -------------- --------------
Net cash (used in) provided by investing activities (77,805) 3,175,321 (510,419)
-------------- -------------- --------------
Cash flows from financing activities:
Exercise of options - 18,401 -
Payments on lease obligation payable - (18,281) -
Proceeds of issuance of common stock - 1,013,808 3,488,144
Decrease (increase) in subscription receivable - 290,000 (290,000)
-------------- -------------- --------------
Net cash provided by financing activities - 1,303,928 3,198,144
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (5,151,140) 4,712,518 1,728,952
Cash and cash equivalents at beginning of year 7,337,896 2,625,378 896,426
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 2,186,756 $ 7,337,896 $ 2,625,378
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION:
New York Health Care, Inc. ("New York Health Care") was organized under the laws
of the State of New York in 1983. New York Health Care provides services of
registered nurses and paraprofessionals to patients throughout New York and New
Jersey. The BioBalance Corporation, ("BioBalance") a Delaware Corporation, was
formed in May 2001. BioBalance is a specialty pharmaceutical company focused on
the development of proprietary biotherapeutic agents for various
gastrointestinal diseases that are poorly addressed by current therapies.
BioBalance is pursuing accelerated prescription drug development of its lead
product, PROBACTRIX(TM) by filing an investigational new drug ("IND")
application for the prevention and/or treatment of pouchitis. There can be no
assurance that BioBalance will be successful in marketing any such products.
The consolidated entity, collectively referred to as the "Company", includes
BioBalance and New York Health Care, Inc. and its wholly owned subsidiary NYHC
Newco Paxxon, Inc. D/B/A Helping Hands Healthcare ("Helping Hands"). All
significant intercompany balances and transactions have been eliminated.
On January 2, 2003, BioBalance acquired New York Health Care in a transaction
accounted for as a reverse acquisition (See Note 2). The accompanying
consolidated financial statements of the Company reflect the historical results
of the predecessor entity, BioBalance, prior to January 2, 2003 and the
consolidated results of operations of the Company subsequent to the acquisition
date of January 2, 2003.
The common stock and per share information in the consolidated financial
statements and related notes have been retroactively adjusted to give effect to
the reverse acquisition on January 2, 2003.
COMPANY DEVELOPMENTS:
In November 2003, the Company learned that an individual then serving as a
director of the Company and president of BioBalance (Mr. Stark) and another
individual then serving as a consultant (Mr. Grossman) to BioBalance were the
subjects of a federal indictment alleging that they conspired to manipulate the
price and demand for the Company's common stock by offering to pay a bribe,
consisting of warrants to purchase 500,000 shares of the Company's common stock
and causing the Company's board of directors to approve the issuance of the
warrants by disguising the warrants as compensation to an outside consultant to
be engaged to perform financial advisory services for BioBalance. At the
Company's request, the then director of the Company and president of BioBalance
resigned from all positions with the Company and the Company's Board of
Directors authorized an independent internal investigation regarding the subject
matter of the indictment.
In November 2003, the board also authorized suspension of the warrants referred
to in the indictment and a stock option to purchase 100,000 shares of common
stock granted to Mr. Stark and the termination of a consulting agreement between
BioBalance and Emerald Asset Management, Inc., a company owned and controlled by
Mr. Grossman, and appointed Dennis O'Donnell, BioBalance's Chief Operating
Officer, as President of BioBalance.
The law firm retained by the Company to conduct the independent internal
investigation found no evidence that any current officer, director or employee
of the Company knew of, or participated in, any alleged attempt to manipulate
the Company's common stock and, concluded that the Company responded properly
to the indictment based on the information at the time available to the Company.
F-7
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2004, the staff of Listing Investigations, a division of Nasdaq
Stock Market, Inc., ("Nasdaq"), notified the Company, after requesting and
obtaining information and documents from the Company, that they had determined
that the Company no longer qualified for inclusion in the Nasdaq Stock Market
primarily based on public interest concerns and the Company's failure to timely
hold its 2002 annual stockholders' meeting in compliance with the Nasdaq
marketplace rules. In response, the Company requested a hearing before a Nasdaq
Listing Qualifications Panel to review the staff determination. The hearing was
held and on April 5, 2004, the Company announced that the Panel had determined
that the Company's common stock was delisted from Nasdaq, effective with the
opening of business on April 6, 2004. The Panel addressed concerns regarding
events related to the indictment and the Company's failure to timely hold its
2002 Annual Stockholder's meeting. Subsequently, the Company's common stock
began trading in the Over-the-Counter Market on the Pink Sheets.
On May 13, 2004, the Company executed a non-binding letter of intent with
executive officers of the Company who have since resigned (see below), for the
acquisition of its home healthcare business, subject to satisfaction of a number
of conditions, including execution of a definitive acquisition agreement,
obtaining various corporate and regulatory approvals, including stockholder
approval, obtaining an acceptable fairness opinion and receipt by the Company of
at least $4 million to finance its remaining operations. On July 15, 2004, the
Company executed a definitive agreement (the "Purchase Agreement") for the sale
of the assets of its home healthcare business to a company controlled by its
chief executive officer and chief operating officer for consideration of $2.7
million in cash, the assumption of all of the liabilities and obligations with
respect to the home healthcare business and the forgiveness of certain future
obligations that may be due to them pursuant to Employment Agreements each of
them has with the Company. The sale is subject to the satisfaction of a number
of conditions including obtaining shareholder and regulatory approvals; such
conditions had not been satisfied as of April 11, 2005. As noted below, on April
11, 2005, the Company entered into a definitive sales agreement to sell certain
of the assets to an unaffiliated entity.
The Company will consider its home health care division as a discontinued
operations of the entire home health care business upon shareholder approval of
the proposed sale.
We cannot assure you that the conditions to the sale of the entire home
healthcare business will be satisfied.
On or about September 23, 2004, the Company commenced an offering for sale (the
"Offering") of a minimum aggregate offering of $4,000,000 and a maximum
aggregate offering of $6,000,000, of shares of its unregistered common stock,
$0.01 par value ("Common Stock") and associated warrants to persons who qualify
as "accredited investors" as defined in the rules under the Securities Act of
1933, as amended, (the "Securities Act") pursuant to the terms of a Confidential
Private Placement Memorandum. The purchase price per share of Common Stock sold
in the Offering, will be equal to 95% of the volume weighted average price of
the Common Stock for the 10 trading days prior to the initial closing of the
Offering, but not less than $0.60 nor more than $1.00 per share.
For every two shares of Common Stock purchased in the Offering, investors will
receive a five-year redeemable warrant to purchase shares of Common Stock (the
"Warrants"). Each Warrant is exercisable for one share of Common Stock at an
exercise price equal to 125% of the price per share of Common Stock sold in the
Offering.
On February 24, 2005, the Company consummated the Offering which resulted in its
issuing an aggregate of 7,899,362 shares (the "Shares") of the Company's common
stock, par value $0.01 per share (the "Common Stock"), and warrants to purchase
3,949,638 shares of Common Stock (the "Warrants") to persons who qualify as
"accredited investors" within the meaning of rule 501 of Regulation D
promulgated under the Securities Act. The aggregate purchase price for the
Shares and Warrants was $4,897,600. Each Warrant is exercisable to purchase one
share of the Company's Common Stock at an exercise price of $0.78 per share
during the five-year period commencing on February 24, 2005. The Shares and
Warrants were issued to the purchasers without registration under the Act, in
reliance upon the exemptions from registration provided under Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. In connection with
the Offering, the Company paid the Placement Agent commissions of $470,260 and
an additional $146,616 to cover non-accountable and certain other expenses of
the Placement Agent. In addition, the Company issued to the Placement Agent and
its designees five-year warrants to purchase an aggregate of 1,777,355 shares of
the Company's common stock at $0.62 per share.
F-8
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The proceeds from this offering will be used to support BioBalance operations
including R&D, clinical trials and working capital. In addition, a $1.7 million
loan from New York Health Care to BioBalance was repaid from the proceeds of
the Offering.
In connection with the consummation of the Offering, Messrs. Jerry Braun
("Braun") and Jacob Rosenberg ("Rosenberg") then executive officers of the
Company agreed with the request of the Placement Agent to resign irrevocably as
directors and executive officers of the Company. Therefore, in order to secure
the obligations of the Company and its subsidiary, NYHC Newco Paxxon, Inc.
agreed to (i) consummate the sale of all the assets relating to the Company's
home healthcare business (the "Asset Sale") to New York Health Care, LLC, an
entity controlled by Braun and Rosenberg pursuant to the terms of the Purchase
Agreement or (ii) comply with any future payment obligations of the Company to
Braun and Rosenberg under their respective employment agreements with the
Company, the Company entered into an agreement (the "Agreement") on February 24,
2005, which supercedes an escrow agreement dated August 3, 2004 that was
canceled, and which granted Messrs. Braun and Rosenberg a security interest in
the assets of the Company's home healthcare business being conducted in the
states of New York and New Jersey and provides for the deposit of up to $3.55
million in a cash collateral account (collectively, the "Collateral"). None of
the assets of BioBalance will be used as Collateral to secure the Company's
obligations to Braun and Rosenberg under their respective employment agreements
or the Agreement.
The Agreement provided that Messrs. Braun and Rosenberg will be entitled to
receive all or a portion of the Collateral (and any additional amounts that they
are entitled to under their employment agreements and the Agreement) if prior to
the consummation of the Asset Sale: (i) the Company breaches the Purchase
Agreement and the breach is not cured within any applicable cure period or
waived by Messrs Braun and Rosenberg, (ii) there are changes in the composition
of a majority of the Company's Board of directors (other than the resignations
of Messrs Braun and Rosenberg or a reduction in the number of Board members
resulting from death, disability or resignation of a member or the additions of
directors that have been expressly approved in writing by Messrs Braun and
Rosenberg) (iii) an event occurs that would be considered "good reason" for the
resignation of Messrs. Braun and Rosenberg under their employment agreements
with the Company or would be considered a "change of control" under those
employment agreements or (iv) the Asset Sale has been terminated or abandoned
for any reason prior to December 31, 2005 (other than as a result of a breach of
the Purchase Agreement by, or a failure to act by, New York Health Care LLC or
Braun or Rosenberg).
F-9
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of their respective employment agreements, as a result of
their resignations from the Company's Board of Directors as of the close of
business on February 24, 2005, on that date, each of Braun and Rosenberg
received ten year stock options to purchase 500,000 shares of the Company's
common stock at an exercise price of $0.85 per share, pursuant to the Company's
Performance Incentive Plan.
At the close of business on February 24, 2005:(i) Mr. Braun resigned as a
director and as the Company's Chief Executive Officer and President and (ii) Mr.
Rosenberg resigned as a director and as the Company's Vice President, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and
Secretary. Mr. Braun will continue to be employed by the Company as the
President of its home healthcare division and Mr. Rosenberg will continue to be
employed by the Company as the Vice President of the Company's home healthcare
division. Other than their ceasing to be officers of the Company and the
resulting changes in their duties and responsibilities, their respective
employment agreements with the Company remain in effect. In addition, Messrs.
Braun and Rosenberg will have board observer rights with respect to the
Company's board of directors until such time as the Asset Sale is consummated.
As of the close of business on February 24, 2005, Mr. O'Donnell became the
Company's Chief Executive Officer and Secretary. Mr. O'Donnell also retains his
position as the Chief Executive Officer and a director of BioBalance and as a
director of the Company. His salary was increased by $25,000 to $225,000.
On March 24, 2005, Mr. Braun and Mr. Rosenberg agreed with New York Healthcare,
and its subsidiary, NYHC Newco Paxxon, Inc., to terminate the security interest
in the Company's home healthcare business that had been granted to Messrs. Braun
and Rosenberg pursuant to the Agreement. Messrs Braun and Rosenberg have also
consented, under certain conditions, that the Company may sell all or a portion
of the Company's home health care operations in the State of New Jersey (the
"New Jersey Operations") to one or more third parties and to the use by the
Company of the proceeds of any such sale to finance the operations of its
BioBalance Corporation subsidiary.
On April 11, 2005, the Company entered into a definitive agreement with
Accredited Health Services, Inc. ("Accredited"), a wholly owned subsidiary of
National Home Health Care Corp., pursuant to which Accredited will acquire
certain assets of the Company's New Jersey home healthcare business (the "NJ
Business") for $3 million. Revenues for the New Jersey business were
approximately $6.6 million in 2004. Pursuant to the terms of the definitive
agreement, funding of the purchase price was received by the Company upon
execution of the agreement, with the exception of $150,000 (the "Escrow Funds"),
which was placed in escrow to cover actual losses, if any, incurred by
Accredited for which the Company is required to indemnify Accredited pursuant to
the definitive agreement. If no claims by Accredited for indemnification by the
company are made, the Escrow Funds will be released to the Company 90 days after
the formal closing of the transaction which will occur within 45 days of the
signing of the definitive agreement, subject only to an orderly transition of
the business.
Below is selected financial data for the New Jersey home healthcare business
(unaudited):
December 31,
----------------------
2004 2003
---------- ----------
Current assets $ 516,277 $ 541,485
Total assets 542,093 584,304
Total current liabilities $ 284,970 $ 323,289
Year Ended Year Ended
December 31, December 31,
2004 2003
------------- -------------
Net patient service revenue $ 6,567,915 $ 6,490,823
Professional care of patients 4,433,245 4,254,593
RISK FACTORS ASSOCIATED WITH FAIR LABOR STANDARDS ACT:
On July 22, 2004, the federal Second Circuit Court of Appeals issued a ruling
concerning the Fair Labor Standards Act on the validity of the "companionship
services" exemption from minimum wage and overtime payment requirements to
paraprofessional field staff in New York State.
F-10
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Home care providers have long relied on this exemption to provide compensation
to home care aides and personal care workers with the expectation that there is
no obligation for overtime pay.
In September 2004, a request for a rehearing was submitted en banc for the full
court. On January 13, 2005, the Court rejected the request for a rehearing on
the issue.
At this point, preparations are being made to submit papers to request a review
of the issue before the U.S. Supreme Court. Simultaneously, a request for a
stay of mandate from the Court pending a resolution at the Supreme Court level.
The implications of these changes for paying the overtime expense for the home
care industry and the State will be challenges to ensuring patient continuity of
care, if agencies can no longer afford to authorize overtime during workforce
shortage, and the inability of workers to secure the number of hours of work
they desire.
ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that could affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE:
Accounts receivable consists of trade receivables recorded at original invoice
amount, less an estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis; thus trade receivables do not bear
interest, although a finance charge may be applied to receivables that are past
due. Trade receivables are periodically evaluated for collectibility based on
past credit history with customers and their current financial condition.
Changes in the estimated collectibility of trade receivables are recorded in the
results of operations for the period in which the estimate is revised. Trade
receivables that are deemed uncollectible are offset against the allowance for
uncollectible accounts. The Company generally does not require collateral for
trade receivables.
REVENUE RECOGNITION:
The Company recognizes patient service revenue on the date services are
rendered. Unbilled services represent amounts due for services rendered that
had not been billed at the end of each period because written authorization had
not been received from the referral source.
PROPERTY AND EQUIPMENT:
Property and equipment is carried at cost and is depreciated under the
straight-line method over the following estimated useful lives of the assets.
Leasehold improvements are amortized over the estimated useful lives of the
improvements or the life of the lease, whichever is shorter.
F-11
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Machinery and equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease
GOODWILL AND OTHER INTANGIBLE ASSETS:
Statement of Financial Accounting Standards (SFAS No. 142) "Goodwill and Other
Intangible Assets" requires that goodwill and intangible assets having
indefinite lives not be amortized, but instead be tested for impairment at least
annually. Intangible assets determined to have definite lives are amortized over
their remaining useful lives.
INCOME TAXES:
The Company used the asset and liability method to calculate deferred tax assets
and liabilities. Deferred taxes are recognized based on the differences between
financial reporting and income tax bases of assets and liabilities using enacted
income tax rates. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
LONG-LIVED ASSETS:
Long-lived assets, such as intangible assets other than goodwill, furniture,
equipment and leasehold improvements, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable through estimated undiscounted future cash flows from the use
of these assets. When any such impairment exists, the related assets will be
written down to fair value.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
STOCK BASED COMPENSATION:
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. No stock-based compensation cost is included in net loss,
as all options granted to employees during periods presented had an exercise
price equal to the market value of the stock on the date of grant.
In accordance with SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure," the following table presents the effect on net loss
and net loss per share had compensation cost for the Company's stock plans been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation".
The fair value of each option grant is estimated on the date of grant by use of
the Black-Scholes option pricing model:
F-12
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- ---------------- --------------
Net loss, as reported $ (6,071,685) $ (22,052,170) $ (1,399,057)
Less stock-based compensation expense
determined under fair value method for
all employee stock options, net of tax
effect (711,723) ( 1,620,705) -
-------------- ---------------- --------------
Pro forma net loss $ (6,783,408) $ (23,672,875) $ (1,399,057)
============== ================ ==============
Basic and diluted loss per share, as reported $ (0.24) $ (0.91) $ (0.07)
Basic and diluted loss per share, pro forma $ (0.27) $ (0.97) $ (0.07)
The options' assumptions used to estimate these values are as follows:
2004 2003
----------- -----------
Risk free interest rate 1.59%-2.81% 1.10%-3.23%
Expected volatility of common stock 88%-103% 67%-102%
Dividend yield 0% 0%
Expected option term 3yrs. 1-5yrs.
The weighted average fair value of options was $1.12 and $2.29 for options
granted during the years ended December 31, 2004 and 2003, respectively.
LOSS PER SHARE:
Basic loss per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities including the
presumed conversion of the preferred stock from the date of its issuance. Due to
losses during the years ended December 31, 2004, 2003 and 2002 potential common
stock attributable to options, warrants and convertible preferred stock
outstanding of 3,246,701 for 2004, 3,649,234 for 2003 and 538,066 for 2002, were
not included in the computation of diluted earnings per share, because to do so
would be antidilutive.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Financial Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 ("FIN 46-R"). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to the periods ending after March 15, 2004. The
adoption of FIN 46 did not have an impact on the Company's consolidated
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," or SFAS No. 123R. SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, requires that compensation cost relating to
share-based payment transactions be recognized in
F-13
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the financial statements, based on the fair value of the equity or liability
instruments issued. SFAS No. 123R is effective as of the beginning of the first
interim or annual reporting period that begins after December 31, 2005 and
applies to all awards granted, modified, repurchased or cancelled after the
effective date. We do not expect the adoption of this standard to have a
significant impact on our consolidated results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an amendment of APB Opinion No. 29," or SFAS No. 153. SFAS No. 153
eliminates the exception for nonmonetary exchanges of similar productive assets
of APB Opinion No. 29 and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in the fiscal periods
beginning after June 15, 2005. We do not expect the adoption of this standard
to have a significant impact on our consolidated results of operations or
financial position.
NOTE 2 - ACQUISITION OF NEW YORK HEALTH CARE, INC. AND PRIVATE PLACEMENT:
On January 2, 2003, BioBalance consummated a business combination with New York
Health Care. As a result of the merger, BioBalance shareholders exchanged all
of their BioBalance shares for 21,443,821 shares of common stock of New York
Health Care. New York Health Care effectuated a one and one-half for one
reverse stock split simultaneously with the merger. Because the former
BioBalance stockholders own a majority of the common stock (89.7%) of the merged
company, BioBalance is considered to be the accounting acquirer in the
transaction. The acquisition of New York Health Care provides BioBalance with
access to the public equity markets through New York Health Care, which would
otherwise be unavailable to BioBalance.
The purchase price of the acquisition was as follows (rounded to the nearest
thousand):
Value of New York Health Care common stock $13,100,000
Value of New York Health Care preferred stock 1,890,000
Value of New York Health Care options/warrants 4,950,000
BioBalance's transaction costs 390,000
-----------
Total purchase price $20,330,000
===========
Common stock valued at approximately $13.1 million is based on New York Health
Care's common stock outstanding at January 2, 2003, at an average closing price
for a six day period ended July 24, 2002 ($5.30) (measurement date) (after
giving effect to the one and one half for one reverse stock split).
The value of the preferred stock was calculated using the common stock price
less a 10% discount which reflects the limited marketability of the common stock
into which the preferred stock is convertible. The fair value of $4.9 million
of the New York Health Care options/warrants was determined using the
Black-Scholes valuation model. To determine the fair value of these
options/warrants, the following assumptions were used: expected volatility of
122%, risk-free interest rates ranging from 1.62% to 4.55%, and expected life of
approximately 4.95 years.
F-14
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the merger, outstanding BioBalance options/warrants (586,452 shares)
became exercisable for New York Health Care's common stock. Compensation
expense of $721,100 was recorded on January 2, 2003 for the increase in the fair
value of the vested BioBalance options/warrants as a result of the merger. The
unvested options/warrants will be remeasured at the fair value on the date of
vesting and recorded as compensation expense, which was $33,928 for the year
ended December 31, 2003 and $15,743 for the year ended December 31, 2004.
As part of their amended employment agreements, if the two officers/directors
from New York Health Care are terminated or resign from the Board of Directors
prior to the expiration of their employment agreements, the Company is required
to issue an options to each officer/director to acquire 500,000 shares of the
Company common stock at the fair market value on the date of termination. The
Company issued these options to Messrs. Braun and Rosenberg on February 24,
2005. As Messrs Braun and Rosenberg will continue as officers of the health care
divison the options were issued in accordance with the Company's Performance
Incentive Plan. In addition, the agreements required a payment to them if a
change in control of New York Health Care occurred. This amounted to $1,940,526
and was recorded as a liability in due to related parties in the net assets of
New York Health Care on January 2, 2003. As of December 31, 2003, this amounted
to $1,190,526. During the year ended December 31, 2003, payments of $750,000
were made related to this obligation, and during the year ended December 31,
2004, the remaining $1,190,526 was paid.
Under the purchase method of accounting, the total estimated purchase price as
detailed above was allocated to New York Health Care's net tangible and
intangible assets based on their fair values as of January 2, 2003. At
January 2, 2003, New York Health Care's tangible assets and liabilities at fair
value were as follows (rounded to the nearest thousand):
Cash $ 3,549,000
Due from lending institution 153,000
Accounts receivable 5,280,000
Unbilled services 96,000
Prepaid expenses and other current assets 185,000
Property and equipment 225,000
Other assets 53,000
Accrued payroll (1,198,000)
Current portion of lease obligation (18,000)
Accounts payable and accrued expenses (3,382,000)
Due to related parties (1,941,000)
Due to HRA (1,932,000)
------------
$ 1,070,000
============
Based on the independent valuation prepared using estimates and assumptions
provided by management, the total purchase price of $20,330,000 has been
allocated as follows:
Purchase price allocation:
Net tangible assets of New York Health Care $ 1,070,000
Goodwill 18,770,000
Customer base 390,000
Patient list 100,000
-----------
$20,330,000
===========
F-15
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited supplemental pro forma information is presented to
illustrate the effects of the acquisition on the historical operating results
for the year ended December 31, 2002, as if the acquisition had occurred at the
beginning of that period. Since the acquisition occurred on January 2, 2003,
there is no difference in the pro forma information for the year ended December
31, 2003.
Year Ended
December 31,
2002
--------------
Net revenue $ 38,880,477
Net loss for the period $ (1,020,689)
Net loss per share $ (0.05)
Private Placement:
On January 2, 2003, BioBalance completed a private placement of 327,327 shares
of its common stock. The shares were offered to accredited investors at a price
of approximately $3.27 per share for aggregate gross proceeds of $1,072,000 and
net proceeds of $1,013,808.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment, at cost consists of the following at December 31:
2004 2003
-------- --------
Machinery and equipment $141,661 $133,161
Furniture and fixtures 87,536 87,536
Leasehold improvements 54,033 54,033
-------- --------
283,230 274,730
Less accumulated depreciation
and amortization 196,224 128,832
-------- --------
$ 87,006 $145,898
======== ========
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS:
As a result of the merger, the Company had recognized goodwill on the
transaction. The goodwill is associated with the home care business and on the
date of the merger, the Company determined that the goodwill was impaired. The
indicator leading to an impairment was the fact that, based on the then current
home health care market, the home health care business could not be sold in the
open market for its recorded purchase price. The Company hired a valuation
expert who valued the Company using the capitalized earnings/cash flow
methodology and the market multiple approach. Based on these methodologies, it
was determined that an impairment had been incurred. The goodwill impairment
amounted to $17,869,339 for the year ended December 31, 2003.
F-16
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill by reportable segment for the
years ended December 31, 2004 and 2003 were as follows:
New York Bio-
Health Care Balance
------------- -----------
Balance as of
January 1, 2003 $ - $ -
Acquisition
January 2, 2003 18,769,926 -
Impairment
January 2, 2003 (17,869,339) -
------------- -----------
Balance as of
December 31, 2003 900,587 -
Impairment for the
year ended December 31, 2004 - -
------------- -----------
Balance as of
December 31, 2004 $ 900,587 $ -
============= ===========
The impairment charges are noncash in nature and do not affect the Company's
liquidity.
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
December 31, 2004
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,706,337 $ 896,840 $ 1,809,497 10
Patents/trademarks 1,112,905 278,357 834,548 10
Non-compete agreement 770,000 211,750 558,250 5
Patient list 100,000 40,000 60,000 5
Customer base 390,000 156,000 234,000 5
--------------- ------------- -------------
$ 5,079,242 $ 1,582,947 $ 3,496,295
=============== ============= =============
December 31, 2003
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
----------------------------------------------------------
Intellectual property $ 3,576,500 $ 539,189 $ 3,037,311 10
Patents/trademarks 1,913,751 83,690 1,830,061 10
Non-compete agreement 770,000 57,750 712,250 5
Patient list 100,000 20,000 80,000 5
Customer base 390,000 78,000 312,000 5
--------------- ------------- -------------
$ 6,750,251 $ 778,629 $ 5,971,622
=============== ============= =============
F-17
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 20, 2003, the Company purchased from NexGen Bacterium Inc. ("NexGen")
certain proprietary technology and intellectual property assets that did not
constitute a business. The purchase price for the assets is comprised of a
$250,000 payment and the issuance of 1,000,000 shares of the Company's $.01
par-value common stock. The stock was valued at $3,600,000 based on a closing
price of $3.60 per share on August 20, 2003. The asset acquisition agreement
includes noncompete provisions restricting NexGen from competing with the
Company for a period of five years. Management has allocated the purchase price
as follows: intellectual property: $1,540,000, patents: $1,540,000, and
noncompete agreement: $770,000. For the years ended December 31, 2004 and
2003, the Company has also incurred fees approximating $69,000 and $173,000,
respectively, principally in connection with patent and trademark applications
for the technology. These assets are being amortized over their estimated
useful lives of 10 years for intellectual property and patents and 5 years for
the noncompete agreement.
At December 31, 2004 it was determined that the investment in the NexGen
Platform was impaired and as a result of the impairment analysis a total of
$1,740,326 was expensed during the 4th quarter. The impairment was determined by
an independent valuation firm using a discounted cash flow model. The impairment
is due to a number of factors including the acceleration of PROBACTRIX as a
prescription product, overall limited funding available and available management
time. While BioBalance believes that the NexGen Platform is a viable technology
that can be commercialized, it will continue to be delayed until the above
mentioned factors are resolved.
As of December 31, 2004, approximately $3.2 million of intangible assets net of
accumulated amortization relate to BioBalance. BioBalance is a research and
development company and has had significant losses since inception. The Company
cannot assure that BioBalance will be able to generate revenues or profits from
operations of its business or that BioBalance could be able to generate or
sustain profitability in the future.
Amortization expense amounted to $804,318, $477,029 and $214,600 for the years
ended December 31, 2004, 2003 and 2002, respectively.
AMORTIZATION EXPENSE:
For The Years
Ended
December 31,
-----------
2005 $ 607,143
2006 607,143
2007 607,143
2008 451,149
2009 355,149
Thereafter 868,568
----------
$3,496,295
==========
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
2004 2003
---------- ----------
Accounts payable $ 622,730 $ 500,186
Accrued expenses 2,150,896 967,851
Accrued employee benefits 4,552,489 4,381,695
---------- ----------
$7,326,115 $5,849,732
========== ==========
F-18
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LINE OF CREDIT:
New York Health Care has a $4,000,000 line of credit with G.E. Capital Health
Care Financial Services that expires November 29, 2005. The availability of
the line of credit is based on a formula of eligible accounts receivable. At
December 31, 2004, approximately $4,000,000 was available to the Company.
Certain assets of the Company collateralize the line of credit. The agreement
contains various restrictive covenants, which among other things, require that
the Company maintain a minimum tangible net worth. Borrowings under the
agreement bear interest at prime plus 1 1/2% (6.75%) at December 31, 2004.
At December 31, 2004, there was an amount due from G.E. Capital Health Care
Financial Services of $566,523. This is due to a lockbox being used by the
Company; all collections are deposited with G.E. Capital Health Care Financial
Services and then transferred to the bank.
On March 29, 2004, the loan agreement was amended to allow New York Health Care
to lend money to its subsidiary BioBalance if there is no outstanding loan under
this agreement. The agreement has also been amended to allow New York Health
Care to invest money in BioBalance. At December 31, 2004, New York Health Care
loaned BioBalance $1,500,000.
On January 19, 2005, the loan agreement was amended to allow the resignations of
Messrs. Jerry Braun and Jacob Rosenberg as officers and directors of the
Company, conditioned upon Messrs. Braun and Rosenberg remaining managers of the
Home Health Care division.
In addition, on April 11, 2005, the Company's loan agreement was modified to
permit the sale of the NJ Business to Accredited Health and to remove the
lender's lien with respect to the assets of the New Jersey Operations. As a
result of this modification, no loans under the agreement may be requested or
occur until the net worth requirement has been amended to the lender's
satisfaction. At April 11, 2005, such amount has not been determined.
NOTE 7 - INCOME TAXES:
Deferred tax attributes resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at December 31, 2004 and 2003
follows (rounded to the nearest thousand):
2004 2003
------------ ------------
Current assets:
Allowance for doubtful accounts $ 194,000 $ 166,000
Prepaid expenses (154,000) -
------------ ------------
40,000 166,000
Valuation allowance (40,000) (166,000)
------------ ------------
Net current deferred tax asset $ - $ -
============ ============
Noncurrent assets:
Net operating loss carryforwards $ 3,588,000 $ 695,000
Depreciation 44,000 28,000
Amortization of goodwill 765,000 857,000
Amortization of intangibles 255,000 113,000
------------ ------------
4,652,000 1,693,000
Valuation allowance (4,652,000) (1,693,000)
------------ ------------
Net noncurrent deferred tax asset $ - $ -
============ ============
F-19
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004, the Company had net operating loss carryforwards of
approximately $8,400,000, which expire between 2021 through 2024.
The (benefit) provision for income taxes, consist of the following:
2004 2003 2002
------------ ------------ ---------
Current tax (benefit) expense $ (63,126) $ 39,000 $ -
Deferred tax expense
(not including amount listed below) 2,800,000 1,007,000 -
Net change in valuation allowance (2,800,000) (1,007,000) -
------------ ------------ ---------
$ (63,126) $ 39,000 $ -
============ ============ =========
The (benefit) provision for income taxes is comprised of the following:
2004 2003 2002
--------- ------- -----
Current:
Federal $ - $ - $ -
State (63,126) 39,000 -
--------- ------- -----
$(63,126) $39,000 -
========= ======= =====
The statutory Federal income tax rate and the effective rate is reconciled as
follows:
2004 2003 2002
----- ----- -----
Statutory Federal income tax rate 34% 34% 34%
State taxes, net of Federal tax benefit 12 12 10
Valuation allowance (45) (45) (44)
Over/under accrual (1) (1) -
----- ----- -----
- - -
===== ===== =====
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of December 31, 2004 and 2003, the carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, accrued expenses and
accrued payroll, due to HRA, and due to related parties approximates fair value
due to their short-term nature.
NOTE 9 - SHAREHOLDERS' EQUITY:
COMMON STOCK
On January 29, 2002, the Company issued 391,656 shares of common stock in a
private placement.
F-20
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the period April 2002 through June 2002, the Company issued 153,000 shares of
its common stock in private placement for gross proceeds of $459,000.
In the period July 1, 2002 through September 30, 2002, the Company issued 49,000
shares of common stock in private placement for gross proceeds of $147,000.
In the period October 1, 2002 through December 31, 2002, the Company issued
822,171 shares of common stock in private placements for gross proceeds of
$2,080,033. $290,000 of the gross proceeds were received in January 2003.
In January 2003, the Company issued 327,327 shares of common stock for gross
proceeds of $1,072,000.
On January 2, 2003, the Company recapitalized 2,475,154 shares of common stock
and 590,375 shares of preferred stock in connection with the reverse
acquisition.
On August 20, 2003, the Company issued 1,000,000 shares of common stock in
connection with the purchase of intangible assets.
PREFERRED STOCK
The Company has authorized 590,375 shares of Class A preferred stock. The
holders of the preferred stock are entitled to a dividend equal to 9% of the
purchase price for shares of the preferred stock before any dividend is paid on
common stock. Dividends may be declared quarterly at the discretion of the
Board of Directors and are not cumulative. The holders of preferred stock
receive no preference on liquidation and such shares may be converted into
two-thirds of one share of common stock at any time. The Class A preferred
stockholders are entitled to vote on matters that affect them.
TREASURY STOCK
The Company issued treasury stock for the exercise of options that occurred in
September and October 2003. The Company assigned a cost to the treasury stock
based on the first-in, first-out method.
NOTE 10 - STOCK OPTION/WARRANTS:
The following tables summarize options and warrants issued during the years
ended December 31, 2004, 2003 and 2002 to consultants and employees (including
non-employee Board of Directors):
Warrants:
These warrants were issued to or earned by consultants
Grants for 2004 None
- ------------------
Grant Date Number of warrants Exercise Price Expiration term
- ------------------ ------------------ --------------- ---------------
January 1, 2003 7,205 $ 3.47 5 yrs
January 1, 2003 25,528 $ 3.22 5 yrs
January 1, 2003 15,653 $ 3.37 5 yrs
January 15, 2003 100,000 $ 4.15 1 yr
February 3, 2003 35,000 $ 3.40 1 yr
April 14, 2003 500,000 $ 2.50 1 yr
July 15, 2003 135,000 $ 2.70 1 yr
September 15, 2003 100,000 $ 3.69 5 yrs
*December 17, 2003 75,000 $ 2.51 2 yrs
Grant Date Number of warrants Exercise Price Expiration term
- ------------------ ------------------ --------------- ---------------
January 30, 2002 39,166 $ 3.00 5 yrs
November 4, 2002 25,000 $ 1.50 2 yrs
November 7, 2002 20,000 $ 1.50 2 yrs
F-21
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
*These are performance based warrants which were earned on December 17, 2003.
For accounting purposes they are deemed to be outstanding. The Company
recognized a noncash compensation charge of $102,203 during the year ended
December 31, 2003.
Some of these warrants granted in 2003 vest immediately, some warrants vest
monthly. These warrants are expensed at the fair value on the date of vesting.
For accounting purposes, unvested warrants are not considered outstanding. For
the year ended December 31, 2004, $15,743 was expensed as compensation expense
for these warrants. For the year ended December 31, 2003, $870,359 was
expensed as compensation for these warrants, which includes compensation expense
for the BioBalance warrants of $33,928 for the year ended December 31, 2003 and
75,000 performance based warrants earned in December 2003 of $102,203.
The fair value of options granted to consultants during 2002 was $72,450. Fair
value is estimated based on the Black-Scholes option pricing model with the
following assumptions. For grants in 2002, the expected volatility used was 0%
and risk-free interest rate of 3.0% and expected lives equal to the lives of the
warrants.
Nasdaq implemented a rule on July 1, 2003 that requires a company to obtain
shareholder approval prior to the issuance of warrants to consultants or
non-employee members of the Board of Directors. The Company committed to issue
warrants to certain consultants subsequent to July 1, 2003. Therefore, these
commitments of warrants are re-valued at each balance sheet date with the
appropriate adjustment made to compensation expense. Once shareholder approval
is obtained, no further adjustment to compensation expense will be recorded.
For the year ended December 31, 2004, the re-valued warrants generated a
reduction in compensation of $381,565. For the year ended December 31, 2003,
the re-valued warrants generated a compensation expense of $19,511.
PERFORMANCE INCENTIVE PLAN:
On March 26, 1996, the Company's Board of Directors adopted the Performance
Incentive Plan, (the "Option Plan"). Under the terms of the Option Plan, as
amended, up to 4,712,500 shares of common stock may be granted at December 31,
2004. The Option Plan is administered by the Compensation Committee which was
appointed by the Board of Directors. The Committee determines which key
employee, officer or director on the regular payroll of the Company, shall
receive stock options. Granted options are exercisable commencing six months
after the date of grant, and expire up to ten years after the date of grant. The
exercise price of any incentive stock option or nonqualified option granted
under the Option Plan may not be less than 100% of the fair market value of the
shares of common stock of the Company at the time of the grant.
F-22
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options/Warrants:
These options and warrants were issued to employees and non-employee Board of
Directors in accordance with the Company's Performance Incentive Plan.
Grant Date Number of Options Exercise Price Expiration Term
- ------------------ ----------------- --------------- ---------------
January 29, 2004 450,000 $ 2.13 10 yrs
September 14, 2004 100,000 $ 0.50 10 yrs
Grant Date Number of Options Exercise Price Expiration Term
- ------------------ ----------------- --------------- ---------------
March 7, 2003 560,000 $ 3.14 10 yrs
June 16, 2003 7,500 $ 2.87 3 yrs
June 26, 2003 200,000 $ 2.48 10 yrs
September 26, 2003 80,000 $ 3.77 10 yrs
Since the options were given to employees at not less than fair value on the
date of grant, no compensation expense was recorded.
On November 26, 2003, the Company suspended the 100,000 options granted on March
7, 2003, to Paul Stark, the former President of BioBalance. The options are
considered outstanding but can not be exercised until the Company gives notice
that they may be exercised. The options have been recorded under the intrinsic
value method and are included in the Black-Scholes calculation above.
At December 31, 2004, the Company has 4,834,592 shares of common stock reserved
for issuance of these options/warrants and for options/warrants granted
previously.
Activity in stock options and warrants, including those outside the Performance
Incentive Plan, for each of the three years ended December 31, is summarized as
follows:
Shares Under Weighted Average
Options/Warrants Exercise Price
----------------- -----------------
Balance at December 31, 2002 538,066 $ 1.52
New York Health Care's
options and warrants, due to merger 1,024,167 1.84
Options and warrants granted *1,840,886 3.40
Options exercised (20,801) .88
Options cancelled/expired (126,667) 2.25
----------------- -----------------
Balance at December 31, 2003 3,255,651 2.27
Options and warrants granted 550,000 1.83
Options exercised - -
Options canceled/expired (952,532) 2.31
----------------- -----------------
Balance at December 31, 2004 2,853,119 2.17
=================
Eligible for exercise at December 31, 2004 2,753,119 2.23
=================
*Includes the performance based warrants discussed above.
F-23
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about options and warrants
outstanding and exercisable at December 31, 2004.
Options/Warrants Outstanding Options/Warrants Exercisable
----------------------------- -----------------------------
Weighted
Weighted Average
Options/ Average Weighted Options/ Options/
Range of Warrants Remaining Average Warrants Warrants
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercisable
- --------------- ----------- ---------------- -------------- ------------ -----------
$ 4.50 62,500 1.24 years $ 4.50 62,500 $ 4.50
$ 3.77 80,000 8.54 years 3.77 80,000 3.77
$ 3.69 100,000 3.71 years 3.69 100,000 3.69
$ 3.22-3.47 48,386 3.00 years 3.31 48,386 3.31
$ 3.14 560,000 8.19 years 3.14 560,000 3.14
$ 3.00 33,900 1.92 years 3.00 33,900 3.00
$ 3.00 39,166 2.08 years 3.00 39,166 3.00
$ 2.87 7,500 1.46 years 2.87 7,500 2.87
$ 2.70 135,000 0.54 years 2.70 135,000 2.70
$ 2.55 75,333 3.42 years 2.55 75,333 2.55
$ 2.51 75,000 0.96 years 2.51 75,000 2.51
$ 2.48 200,000 8.49 years 2.48 200,000 2.48
$ 2.13 450,000 9.08 years 2.13 450,000 2.13
$ 1.50 51,333 3.98 years 1.50 51,333 1.50
$ 1.50 20,000 0.85 years 1.50 20,000 1.50
$ 1.00 200,000 6.42 years 1.00 200,000 1.00
$ 0.98 66,667 4.86 years 0.98 66,667 0.98
$ 0.89-0.98 275,000 3.43 years 0.93 275,000 0.93
$ 0.75-0.83 273,334 2.96 years 0.79 273,334 0.79
$ 0.50 100,000 9.70 years 0.50 - 0.00
----------- ------------
2,853,119 5.87 years 2.17 2,753,119 2.23
=========== ============
F-24
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
In November 2003, a director, who was also an officer of BioBalance resigned,
and a consulting agreement with a consultant to BioBalance was suspended, and
subsequently terminated, as a result of matters related to certain claims made
against the former director and consultant by the U.S. Attorney's office. The
matters related to an alleged attempt by these two individuals to manipulate the
Company's common stock. The Company is obligated, under certain circumstances,
to indemnify the former director against liability and to pay for his costs of
defending himself from certain legal actions that arose from his activities as a
director or officer of the Company. To date, the Company's insurance carrier has
advanced funds on behalf of the Company to the former director to cover the
expenses of his defense to the government action. Unless it is legally
determined that the former director is not entitled to indemnification, the
Company would be required to reimburse the insurance carrier for $250,000 of the
amount it advanced on behalf of the former director. As of December 31, 2004,
the Company has accrued the $250,000 on its financial statements. In addition,
the terminated consulting agreement that BioBalance had entered into in 2001
with the consultant and a company affiliated with the consultant provided for
the payment to the consultant of annual consulting fees of $250,000 per year
through at least January 2008 and the issuance of 200,000 warrants to the
consulting company, subject to earlier termination of the consulting agreement
under certain circumstances, including for cause, as defined in the agreement,
or without cause. Although BioBalance has notified the consultant in writing on
September 23, 2004, of the termination of the consulting agreement for cause,
should the consultant bring an action to challenge the termination and a
court determines that the agreement was actually terminated without cause,
then BioBalance could be obligated under the agreement to pay to the
consulting company a severance payment equal to three times the sum of its
annual base consulting fee ($750,000) any cash bonus paid to it in the
three-year period preceding the date of termination and to provide the
consultant with certain health and other benefits for a period of five years.
The Company has accrued approximately $359,000 in its consolidated financial
statements as of December 31, 2004 relating to this consulting agreement which
includes $125,000 in the third quarter of 2004 to cover additional payments
provided for in the consulting agreement which reflects the maximum the Company
may be required to pay. Moreover, the Company believes that it will be able to
defend its position in a possible claim by the consultant that it is owed money
under the consulting agreement, although there can be no assurance as to the
amount of monies, if
F-25
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any, that BioBalance may have to pay under the consulting agreement or that the
consultant will not bring an action against BioBalance or the Company for an
alleged breach of the consulting agreement.
During October 2004, it was determined that certain of the shares of Common
Stock that the Company issued to holders of BioBalance stock in connection with
the Company's January 2003 acquisition of BioBalance may not have been exempt
from the registration or qualification requirements of the state securities laws
of certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act of 1933, as amended.
Although the Company is unable to quantify the actual number of shares involved
that are still owned by the original recipients of the Company's Common Stock
received in the BioBalance acquisition, the per share purchase price paid by the
BioBalance holders for the BioBalance shares they exchanged in the acquisition
ranged from $.03 to $3.00 per share and the Company currently believes that the
purchase price paid by such persons who might have certain statutory rescission
rights does not exceed approximately $345,000, exclusive of any penalties or
interest, although no assurance can be given that any such claims will not
exceed this amount. The Company cannot determine the effect, if any, on its
operations or financial condition that may occur from the failure to register or
qualify these shares under applicable state securities laws. If it is determined
that the Company offered Common Stock in connection with the BioBalance
acquisition without properly registering or qualifying the shares under state
laws, or securing exemption from registration, regulators could impose on the
Company monetary fines or other sanctions as provided under these laws. The
Company is unable to estimate the amount of monetary fines, if any, or the
nature or scope of any sanctions at this time and is continuing its
investigation of this matter.
LEASE COMMITMENTS
The Company leases office space under noncancellable operating leases in New
York and New Jersey that expire between June 2005 and March 2010.
At December 31, 2004, future minimum lease payments due under operating leases
approximate:
2005 $ 423,000
2006 315,000
2007 143,000
2008 126,000
2009 127,000
2010 32,000
----------
Total minimum future payments $1,166,000 (1)
==========
Rental expense charged to operations was approximately $461,000, $432,000 and
$60,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
(1) At December 31, 2004, the New Jersey operations future minimum lease
payments due under operating leases approximates: 2005 - $112,000, 2006 -
$71,000, 2007 - $21,000, and 2008 - $3,000.
EMPLOYMENT AGREEMENTS:
In June 2004, the Company entered into an employment agreement with Dennis
O'Donnell the president of BioBalance that expires on May 5, 2006 at an annual
compensation of $200,000. The board approved an increase of $25,000 upon the
closing of the Offering that took place on February 24, 2005.
F-26
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 10, 1999, the Company entered into employment agreements with two
officers, with terms beginning December 27, 1999 and expiring in 2004. The
agreements called for initial aggregate annual compensation of approximately
$420,000 with an annual increase of 10% and provided for certain additional
benefits. This employment agreement was amended on January 2, 2003 pursuant to
the Stock for Stock Exchange Agreement between the Company and The BioBalance
Corporation. Under the amended employment agreement, the two officers'
employment was extended until December 31, 2009. The amendment also calls for
assurance that the two officers continue their election as Directors for the
full term of their employment contracts. If the officers are terminated as
Directors, the Company shall enter into consulting agreements with the officers,
effective the date of termination. In such case, consulting services will be
provided on an as needed basis for a period of not less than five years and, as
compensation for consulting services, each officer will be granted an option to
acquire 500,000 shares of the Company's common stock for a term of no less than
ten years at a price per share equal to the closing price of the stock on the
date of such termination. The employment agreements were further amended to
eliminate the requirement for consulting agreements. Messrs Braun and Rosenberg
on February 24, 2005, agreed to a further amendment that their resignations as
Executive Officers and Directors would be irrevocable. On February 24, 2005,
Messrs Braun and Rosenberg resigned as Executive Officers and Directors of the
Company and each received, in accordance with their amended employment
agreements, 500,000 10 year options to purchase the Company's common stock at an
exercise price of $0.85 per share.
On January 13, 2005 and March 15, 2004, the Compensation Committee approved
bonuses of $500,000 to be paid to the two officers for the years ended December
31, 2004 and 2003, respectively; such amounts were accrued as of December 31,
2004 and 2003.
401(K) PLAN:
The Home Health Care segment maintains an Internal Revenue Code Section 401(k)
salary deferred savings plan (the "Plan") for eligible employees who have been
employed for at least one year and are at least 21 years old. Subject to
certain limitations, the Plan allows participants to voluntarily contribute up
to 15% of their pay on a pretax basis. The Company currently contributes 50% of
each dollar contributed to the Plan by participants up to a maximum of 3% of the
participant's salary. The Plan also provides for certain discretionary
contributions by the Company as determined by the Board of Directors. The
Company's contributions offset by unvested, forfeited matching funds amounted to
$40,000 and $54,000 for the years ended December 31, 2004 and 2003,
respectively. The Bio Balance segment did not have a 401(k) plan for the year
ended December 31, 2002.
BONUS PLAN:
The Home Health Care segment of the Company has established a bonus plan
pursuant to which 10% of the Company's pre-tax net income is contributed to a
bonus pool which is available for distribution to all employees as decided by
the Company's Compensation Committee. A bonus of $44,000 and $58,000 was
accrued as of December 31, 2004 and 2003, respectively.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of temporary cash investments, which from time-to-time
exceed the Federal depository insurance
F-27
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
coverage and commercial accounts receivable. The Company has cash investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. Cash and cash equivalents held in one bank
exceed federally insured limits by approximately $2,765,000 at December 31,
2004. The Company does not require collateral on commercial accounts receivable
as the customer base generally consists of large, well-established institutions.
MAJOR CUSTOMERS:
Two major customers accounted for approximately 54% and 60% of net patient
service revenue for the years ended December 31, 2004 and 2003, respectively.
In addition, three customers represented approximately 49% and 44% of accounts
receivable at December 31, 2004 and 2003, respectively.
BUSINESS RISKS:
The Company's primary business, offering home health care services, is heavily
regulated at both the federal and state levels. While the Company is unable to
predict what regulatory changes may occur or the impact on the Company of any
particular change, the Company's operations and financial results could be
negatively affected.
Further, the Company operates in a highly competitive industry, which may limit
the Company's ability to price its services at levels that the Company believes
appropriate. These competitive factors may adversely affect the Company'
financial results.
CAUTIONARY STATEMENT
BioBalance operates in a competitive environment that involves a number of
risks, some of which are beyond its control. Although we believe the
expectations for BioBalance are based on reasonable assumptions, we can give no
assurance that our expectations will be attained. Factors that could cause
actual events or results to differ materially from expected results involve both
known and unknown risks. Key factors include, among others: our need to secure
additional financing and at acceptable terms; the high cost and uncertainty of
clinical trials and other development activities involving pharmaceutical
products; the dependence on third parties to manufacture its products; the
unpredictability of the duration and results of regulatory approval for our
products; our dependence on our lead biotherapeutic agent, PROBACTRIX(TM) and
the uncertainty of its market acceptance; the possible impairment of, or
inability to enforce, intellectual property rights and the subsequent costs of
defending these rights; and the loss of key executives or consultants.
NOTE 12 - THIRD-PARTY RATE ADJUSTMENTS AND REVENUE AND CERTAIN CONTRACTS:
Approximately 4% and 5% of net patient service revenue was derived under New
York State Medicaid reimbursement programs during the years ended December 31,
2004 and 2003, respectively. These revenues are based, in part, on cost
reimbursement principles and are subject to audit and retroactive adjustment.
Differences between current rates and subsequent revisions are reflected in the
year that the revisions are determined. There was no revenue generated by
BioBalance for the years ended 2004, 2003 and 2002.
F-28
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an agreement with the City of New York acting through the
Department of Social Services of The Human Resources Administration ("HRA") to
provide personal care services to certain qualified individuals as determined by
HRA. The agreement with HRA sets a fixed direct labor cost in the reimbursement
rate. Should the Company incur direct costs of home attendant services below
this fixed rate, the Company must repay the difference to HRA, subject to final
audit by the City of New York. As of December 31, 2004 and 2003, the amount
included in due to HRA relating to direct labor costs amounted to $844,950 and
$828,555, respectively. In addition, the City's reimbursement methodology for
general and administrative expenses is based on a fixed amount per client based
on the number of cases. The Company is reimbursed at an hourly rate. Any
amount over this fixed rate must be repaid to HRA. As of December 31, 2004 and
2003, this amount was $4,419,745 and $2,927,952, respectively, subject to final
audit by the City of New York. The aggregate amount due to HRA was $5,264,695
and $3,756,507 at December 31, 2004 and 2003, respectively. As of December 31,
2004, HRA had completed their audit for the fiscal year ended June 30, 2001.
In January 2003, the New York State Department of Health ("DOH") approved
additional funding to home health care agencies in a form of a rate increase.
The additional funding is to be used exclusively for the recruitment and
retention of home health care employees. Any unspent money relating to
recruitment and retention is recorded as an accrued liability until such time as
it is spent. As of December 31, 2004 and 2003, the Company accrued approximately
$1,716,000 and $1,318,000, respectively, related to recruitment and retention
funds not yet expended and are included in accrued employee benefits.
NOTE 13- SUPPLEMENTAL CASH FLOW DISCLOSURES:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
------------- ------------- -------------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 29,538 $ 2,173 $ -
============= ============= =============
Income taxes $ 49,608 $ 58,465 $ 6,800
============= ============= =============
Supplemental schedule of noncash
investing and financing activities:
The Company purchased intangibles
which were partially acquired through
the issuance of 1,000,000 shares of
common stock. (See note 4)
$ - $ 3,600,000 $ -
============= ============= =============
F-29
NOTE 14 - SEGMENT REPORTING:
The Company has two reportable business segments: New York Health Care, a home
health care agency that provides a broad range of health care support services
to patients in their homes, and BioBalance, a segment that is developing a
biotherapeutic agent for the treatment of gastrointestinal disorders.
BioBalance has not generated any revenue as of December 31, 2004.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Elimination of
New York Bio- Intersegment Total
Health Care Balance Activity Consolidated
------------- ------------ ---------------- --------------
Year ended December 31, 2004
Revenue:
Net patient service revenue $ 48,854,358 $ - $ - $ 48,854,358
Sales - - - -
------------- ------------ ---------------- --------------
Total revenue $ 48,854,358 $ - $ - $ 48,854,358
============= ============ ================ ==============
Income (loss) before (benefit) provision
for income taxes $ 290,204 $(6,425,015) $ - $ (6,134,811)
============= ============ ================ ==============
Depreciation and amortization $ 159,119 $ 712,591 $ - $ 871,710
============= ============ ================ ==============
Interest income $ 90,307 $ 2,343 $ (22,773) $ 69,877
============= ============ ================ ==============
Interest expense $ 29,538 $ 22,773 $ (22,773) $ 29,538
============= ============ ================ ==============
Income tax (benefit) expense $ (63,126) $ - $ - $ (63,126)
============= ============ ================ ==============
Noncash compensation $ - $ (365,822) $ - $ (365,822)
============= ============ ================ ==============
Assets $ 14,646,001 $ 3,379,967 $ ( 1,522,773) $ 16,503,195
============= ============ ================ ==============
Expenditures for long lived assets $ - $ 77,817 $ - $ 77,817
============= ============ ================ ==============
New York Bio- Total
Health Care Balance Consolidated
------------- ------------ --------------
Year ended December 31, 2003
Revenue:
Net patient service revenue $ 45,060,449 $ - $ 45,060,449
Sales - - -
------------- ------------ --------------
Total revenue $ 45,060,449 $ - $ 45,060,449
============= ============ ==============
Loss before (benefit) provision for income taxes $(17,370,598) $(4,642,572) $ (22,013,170)
============= ============ ==============
Depreciation and amortization $ 225,563 $ 381,184 $ 606,747
============= ============ ==============
Interest income $ 35,720 $ 15,535 $ 51,255
============= ============ ==============
Interest expense $ 2,173 $ - $ 2,173
============= ============ ==============
Income tax (benefit) expense $ 24,500 $ 14,500 $ 39,000
============= ============ ==============
Noncash compensation $ - $ 1,591,459 $ 1,591,459
============= ============ ==============
Assets $ 14,801,531 $ 6,827,437 $ 21,628,968
============= ============ ==============
Expenditures for long assets $ 12,245 $ 4,061,092 $ 4,073,337
============= ============ ==============
Prior to its acquisition of New York Health Care on January 2, 2003, BioBalance
had only one segment, which did not generate any revenue.
F-30
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Cost of
Net Patient Professional
Service Care of Net Basic and
2004 Revenue Patients Loss Diluted EPS
- -------------- ------------ ------------- ------------ -------------
First quarter $ 11,506,458 $ 9,187,896 $(1,227,584) $ (0.05)
Second quarter 12,171,007 9,807,932 (1,162,071) (0.05)
Third quarter 12,397,208 9,961,241 (1,013,904) (0.04)
Fourth quarter 12,779,685 10,257,147 (2,668,126)(1) (0.11)
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost of
Net Patient Professional
Service Care of Net Basic and
2003 Revenue Patients Loss Diluted EPS
- -------------- ------------ ------------- ------------- -------------
First quarter $ 11,994,489 $ 9,706,778 $(19,004,862) $ (0.79)
Second quarter 10,820,260 8,531,889 (689,088) (0.03)
Third quarter 11,044,365 8,821,090 (1,099,192) (0.05)
Fourth quarter 11,201,335 9,046,964 (1,259,028) (0.04)
(1) In the fourth quarter of 2004, it was determined that the NexGen intangible
assets were impaired by $1,740,326 as a result of an impairment analysis
performed. See note 4.
F-31
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ------------------------------------- ----------- ------------------------ ----------- ------------
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions End of Period
- ------------------------------------- ----------- ----------- ----------- ------------ --------------
Year ended December 31, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 397,000 $ 90,400 $ - $ (27,400) $ 460,000
Deferred tax asset valuation
allowance $ 1,859,000 $ 2,800,000 $ - $ - $ 4,659,000
Year ended December 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ 50,000 *$ 694,000 $ (347,000) $ 397,000
Deferred tax asset valuation
allowance $ 852,000 $ 1,007,000 $ - $ - $ 1,859,000
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ - $ - $ - $ -
Deferred tax asset valuation
allowance $ 208,000 $ 644,000 $ - $ - $ 852,000
*Cash collected in excess of the estimated fair value of accounts receivable of
New York Health Care acquired in the reverse merger, offset by an additional
equal amount of $347,000.
F-32
NEW YORK HEALTH CARE , INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
------------ ------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 5,907,652 $ 2,186,756
Due from lending institution 78,941 566,523
Accounts receivable, net of allowance for uncollectible
amounts of $495,000 and $460,000 respectively 8,543,951 8,656,311
Current portion of notes receivable 275,797 --
Unbilled services 79,265 65,627
Prepaid expenses and other current assets 550,281 466,625
------------ ------------
Total current assets 15,435,887 11,941,842
Property and equipment, net 117,386 87,006
Notes receivable, net of current portion 78,100 --
Goodwill, net 900,587 900,587
Other intangible assets, net 3,351,914 3,496,295
Other assets 78,105 77,465
------------ ------------
Total assets $ 19,961,979 $ 16,503,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,303,692 $ 1,328,127
Accounts payable and accrued expenses 7,257,038 7,326,115
Due to HRA 5,551,305 5,264,695
------------ ------------
Total current liabilities 14,112,035 13,918,937
------------ ------------
Commitment and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; 5,904 5,904
Class A Preferred, 590,375 authorized, issued and outstanding
Common stock, $.01 par value, 100,000,000 shares authorized;
32,843,183 shares issued and 32,839,138 outstanding as of March 31, 2005: 328,432 249,438
24,943,821 shares issued and 24,939,776 outstanding as of December 31, 2004
Additional paid-in capital 36,458,431 32,313,470
Accumulated deficit (30,933,350) (29,975,081)
Less: Treasury stock (4,045 common shares at cost) (9,473) (9,473)
------------ ------------
Total shareholders' equity 5,849,944 2,584,258
------------ ------------
Total liabilities and shareholders' equity $ 19,961,979 $ 16,503,195
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-33
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
Net patient service revenue $ 12,462,405 $ 11,506,458
------------ ------------
Expenses:
Professional care of patients 10,024,030 9,187,896
------------ ------------
General and administrative
(excluding noncash compensation) 2,986,120 2,949,425
Noncash compensation -- 3,690
------------ ------------
Total general and
administrative expenses 2,986,120 2,953,115
------------ ------------
Product development
(excluding noncash compensation) 193,411 427,584
Noncash compensation 26,559 (170,304)
------------ ------------
Total product development 219,970 257,280
------------ ------------
Bad debts expense 35,000 120,000
Depreciation and amortization 171,941 223,049
------------ ------------
Total operating expenses 13,437,061 12,741,340
------------ ------------
Loss from operations (974,656) (1,234,882)
------------ ------------
Non-operating income (expenses):
Interest income 35,630 12,307
Interest expense (2,081) (5,009)
------------ ------------
Non-operating income (expenses), net 33,549 7,298
------------ ------------
Loss before provision for income taxes (941,107) (1,227,584)
Provision for income taxes:
Current 17,162 --
------------ ------------
Net loss $ (958,269) $ (1,227,584)
============ ============
Basic and diluted loss per share $ (0.03) $ (0.05)
------------ ------------
Weighted and diluted average shares
outstanding 28,099,521 24,939,776
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-34
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
Common Stock Preferred Stock Treasury Stock
-------------------- ----------------- Additional ----------------- Total
Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Capital Shares Amount Deficit Equity
---------- --------- -------- ------- ------------ ------- -------- ------------- ------------
Balance at January 1, 2005 24,943,821 $249,438 590,375 $ 5,904 $ 32,313,470 4,045 $ (9,473) $ (29,975,081) $ 2,584,258
Proceeds from issuance
of Common Stock
and Warrants on
February 24, 2005 7,899,362 78,994 4,118,402 4,197,396
Increase in compensation
expense due to a
revaluation of
options/warrants 26,559 26,559
Net loss (958,269) (958,269)
---------- --------- -------- ------- ------------ ------- -------- ------------- ------------
Balance at March 31, 2005 32,843,183 $ 328,432 590,375 $ 5,904 $ 36,458,431 4,045 $ (9,473) $ (30,933,350) $ 5,849,944
========== ========= ======== ======= ============ ======= ======== ============= ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-35
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $ (958,269) $(1,227,584)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash compensation 26,559 (166,614)
Depreciation and amortization 171,941 223,049
Bad debts expense 35,000 120,000
Changes in operating assets and liabilities:
Increase in accounts receivable
and unbilled services (290,175) (452,032)
Increase in prepaid expenses and other current
assets (83,656) (132,119)
Decrease (increase) in due from lending institution 487,582 (127,923)
Increase in other assets (640) (9,812)
Decrease in accrued payroll (24,435) (541,816)
(Decrease) increase in accounts payable and
accrued expenses (69,077) 160,970
Increase in due to HRA 286,610 366,754
Decrease in due to related parties -- (250,000)
Decrease in income tax payable -- (24,394)
----------- -----------
Net cash used in operating activities (418,560) (2,061,521)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (43,687) (8,500)
Acquisition of intangible assets (14,253) (6,683)
----------- -----------
Net cash used in investing activities (57,940) (15,183)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 4,197,396 --
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,720,896 (2,076,704)
Cash and cash equivalents at beginning of period 2,186,756 7,337,896
----------- -----------
Cash and cash equivalents at end of period $ 5,907,652 $ 5,261,192
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-36
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Consolidation:
New York Health Care, Inc. ("New York Health Care") was organized under the laws
of the State of New York in 1983. New York Health Care provides services of
registered nurses and paraprofessionals to patients throughout New York and New
Jersey. The BioBalance Corporation, ("BioBalance") a Delaware Corporation, was
formed in May 2001. BioBalance is a specialty pharmaceutical company focused on
the development of proprietary biotherapeutic agents for various
gastrointestinal diseases that are poorly addressed by current therapies.
BioBalance is pursuing accelerated prescription drug approval of its lead
product, PROBACTRIX(R), for the treatment and/or prevention of pouchitis with
the U.S. Food and Drug Administration ("FDA"). There can be no assurance that
BioBalance will be successful in gaining approval for this indication. The
consolidated entity, collectively referred to, unless the context otherwise
requires, as the "Company", "we", "our" or similar pronouns, includes New York
Health Care and its wholly-owned subsidiaries, BioBalance and NYHC Newco Paxxon,
Inc. D/B/A Helping Hands Healthcare ("Helping Hands"). All significant
inter-company balances and transactions have been eliminated.
The accompanying interim consolidated financial statements have been prepared by
the Company without audit, in accordance with the instructions for Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and therefore do not include all information and notes normally provided
in the annual financial statements and should be read in conjunction with the
audited financial statements and the notes thereto included in Form 10-K/A of
New York Health Care for the year ended December 31, 2004 as filed on April 28,
2005 with the SEC.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (which consist of normal and recurring adjustments)
necessary for a fair presentation of the financial statements. The results of
operations for the three months ended March 31, 2005 are not necessarily
indicative of the results to be expected for the full year.
Recent Developments:
In connection with the consummation of the Offering (see Note 2), at the close
of business on February 24, 2005, at the request of the Placement Agent, (i) Mr.
Jerry Braun resigned as a director and as the Company's Chief Executive Officer
and President and (ii) Mr. Jacob Rosenberg resigned as a director and as the
Company's Vice President, Chief Operating Officer, Chief Financial Officer,
Chief Accounting Officer and Secretary. In connection with Braun and Rosenberg's
agreement with the Placement Agent to resign as officers and directors of the
Company, in order to secure the obligations of the Company and Helping Hands, to
(i) consummate the sale of all the assets relating to the Company's home
healthcare business (the "Asset Sale") to New York Health Care, LLC, a company
controlled by Messrs. Braun and Rosenberg (the "LLC"), pursuant to the terms of
the Purchase Agreement signed July 15, 2004 among the Company, Helping Hands and
the LLC ("Purchase Agreement") or (ii) to comply with any future payment
obligations of the Company to Braun and Rosenberg under their respective
employment agreements with the Company, the Company entered into an agreement
(the "Security Agreement"), on February 24, 2005, which granted Messrs. Braun
and Rosenberg a security interest in the assets of the Company's home healthcare
business being conducted in the states of New York and New Jersey and provided
for the deposit of up to $3.55 million in a cash collateral account
(collectively, the "Collateral"). Under terms of the Security Agreement, none of
BioBalance funds will be used as Collateral.
F-37
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Mr. Braun continues to be employed by the Company as the President of its home
healthcare division and Mr. Rosenberg continues to be employed by the Company as
the Vice President of the Company's home healthcare division. Other than their
ceasing to be officers of the Company, and the resulting changes in their duties
and responsibilities, their respective employment agreements with the Company
remain in effect. In addition, Messrs. Braun and Rosenberg have board observer
rights with respect to the Company's board of directors until such time as the
Asset Sale is consummated. Pursuant to the terms of their respective employment
agreements, as a result of their resignations from the Company's Board of
Directors, on February 24, 2005, each of Braun and Rosenberg received ten year
stock options ("Options") to purchase 500,000 shares of Common Stock at an
exercise price of $0.85 per share, pursuant to the Company's Performance
Incentive Plan.
As of the close of business on February 24, 2005, Mr. Dennis O'Donnell became
the Company's Chief Executive Officer and Secretary. Mr. O'Donnell also retained
his position as the Chief Executive Officer and a director of BioBalance and as
a director of the Company.
On March 23, 2005, the security interest that was granted pursuant to the
Security Agreement was terminated and Messrs. Braun and Rosenberg agreed that
the Company could enter into an agreement with a third party for the sale of the
New Jersey portion of the Company's home healthcare operations (the "NJ
Business") under specified conditions without being in breach of the Purchase
Agreement.
On April 11, 2005, the Company entered into an agreement to sell the NJ Business
to Accredited Health Services, Inc. ("Accredited Health"), a subsidiary of
National Home Health Care Corp., for $3,000,000. In addition to Messrs. Braun
and Rosenberg, the LLC also consented to the sale of the NJ Business to
Accredited Health and agreed that such sale would not result in a breach of the
Purchase Agreement. Funding of the purchase price in the amount of $3,000,000
was made on April 11, 2005 and a formal closing for the sale, which is subject
only to an orderly transition of the NJ Business to Accredited Health, will
occur by May 26, 2005. An aggregate of $150,000 of the purchase price was placed
in escrow to cover actual losses, if any, incurred by Accredited Health for
which the Company is required to indemnify Accredited Health pursuant to the
agreement. If no claims by Accredited Health for indemnification by the Company
are made, the escrowed funds will be released to the Company 90 days after the
formal closing of the transaction.
F-38
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is selected financial data for the New Jersey home healthcare business
(unaudited):
March 31,
-------------------
2005 2004
-------- --------
Current assets $574,442 $518,140
======== ========
Total assets $597,438 $554,962
======== ========
Total current liabilities $371,426 $391,904
======== ========
Quarter Ended Quarter Ended
March 31, March 31,
2005 2004
----------- -----------
Net patient service revenue $ 1,709,624 $ 1,580,575
=========== ===========
Professional care of patients $ 1,174,594 $ 1,057,456
=========== ===========
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.
Stock Based Compensation:
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. No stock-based compensation cost is included in net loss,
as all options granted during periods presented had an exercise price equal to
the market value of the stock on the date of grant.
Recently Issued Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," or SFAS No. 123R. SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, requires that compensation cost relating to
share-based payment transactions be recognized in the financial statements,
based on the fair value of the equity or liability instruments issued. SFAS No.
123R is effective as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005 and applies to all awards granted,
modified, repurchased or cancelled after the effective date. We do not expect
the adoption of this standard to have a significant impact on our consolidated
results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets-an amendment of APB Opinion No. 29," or SFAS No. 153. SFAS No. 153
eliminates the exception for non-monetary exchanges of similar productive assets
of APB Opinion No. 29 and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for non-monetary asset exchanges occurring in the fiscal periods
beginning after June 15, 2005. We do not expect the adoption of this standard to
have a significant impact on our consolidated results of operations or financial
position.
F-39
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - PRIVATE PLACEMENT:
On February 24, 2005, the Company consummated a private offering (the
"Offering") which resulted in its issuing an aggregate of 7,899,362 shares (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), and warrants to purchase 3,949,681 shares of Common Stock (the
"Warrants") to persons who qualify as "accredited investors" within the meaning
of rule 501 of Regulation D promulgated under the Securities Act of 1933 (the
"Act"). The aggregate purchase price for the Shares and Warrants was $4,897,600
and net proceeds received by the Company were $4,197,396. Each Warrant is
exercisable to purchase one share of the Company's Common Stock at an exercise
price of $0.78 per share during the five-year period commencing on February 24,
2005. In connection with the Offering, the Company paid to the placement agent
for the Offering (the "Placement Agent") commissions of $470,260 and an
additional $146,616 to cover non-accountable and certain other expenses of the
Placement Agent, other costs of $83,328 and the value of the Placement Agent
Warrants, described below. In addition, the Company issued to the Placement
Agent and its designees five-year warrants (the "Placement Agent Warrants") to
purchase an aggregate of 1,777,356 shares of Common Stock at $0.62 per share.
The Company based on the Black Scholes calculation has assigned a fair value to
the Placement Agent Warrants of $624,705. The Company allocated $2,679,518 and
$893,173 of net proceeds using the relative fair value method of allocation to
the Common Stock and Warrants, respectively. Under the terms of the Offering,
the Company has the right to call the Warrants that were issued in the Offering
upon thirty days notice, at a price of $0.01 per Warrant, provided the closing
price of the Common Stock on its principal trading market exceeds $2.00 per
share, subject to anti-dilution adjustments, for a period of 10 consecutive
trading days, ending within 30 days prior to the date on which the notice of
redemption is given and a registration statement covering the shares underlying
the Warrants has been declared and remains effective or the shares issuable upon
exercise of the Warrants are not otherwise subject to any restrictions for their
public sale.
The Company has agreed to file a registration statement with respect to the
Common Stock and Warrants issued in the Offering within 45 days after the
closing of the Offering (the"Required Due Date"). If the registration statement
is not filed by the Required Due Date (unless the failure to file resulted from
the financial statements of the Company for the year 2004 not being available),
or if the registration statement is not declared effective within 180 days after
the closing, then monthly cash delay payments equal to 1.5% of the aggregate
gross proceeds from the Offering are due to the holders of the Common Stock and
Warrants.
The net proceeds from the Offering are being used to support BioBalance's
operations including research and development, clinical trials and working
capital. In addition, a $1.7 million loan from the Company to BioBalance was
repaid from the proceeds of the Offering.
NOTE 3 - LOSS PER SHARE:
Basic loss per share excludes dilution and is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities including the
presumed conversion of the preferred stock from the date of its issuance. Due to
losses for the three months ended March 31, 2005 and 2004, potential common
stock attributable to options, warrants and preferred stock outstanding of
9,973,738 for the three months ended March 31, 2005 and 4,099,234 for the three
months ended March 31, 2004, were not included in the computation of diluted
earnings per share, because to do so would be antidilutive.
F-40
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - NOTES RECEIVABLE:
The Company entered into an agreement on February 3, 2005, with one of its
customers converting that customer's accounts receivable balance into a note
receivable. The note is payable in monthly installments of $19,525 until July
14, 2006. In addition, five additional monthly payments are being made
commencing February 14, 2005, aggregating to $41,497 at March 31, 2005. Interest
is paid monthly at 6% per annum on the remaining balance of the successive
monthly installments of $19,525 ($312,400 at March 31, 2005).
NOTE 5 - INTANGIBLE ASSETS:
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
March 31, 2005
-------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
-------------- ------------ ------------- ------------
Intellectual property $2,706,337 $ 964,498 $1,741,839 10
Patents/trademarks 1,127,158 306,333 820,825 10
Non-compete agreement 770,000 250,250 519,750 5
Patient list 100,000 45,000 55,000 5
Customer base 390,000 175,500 214,500 5
---------- ---------- ----------
$5,093,495 $1,741,581 $3,351,914
========== ========== ==========
December 31, 2004
-------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
-------------- ------------ ------------- ------------
Intellectual property $2,706,337 $ 896,840 $1,809,497 10
Patents/trademarks 1,112,905 278,357 834,548 10
Non-compete agreement 770,000 211,750 558,250 5
Patient list 100,000 40,000 60,000 5
Customer base 390,000 156,000 234,000 5
---------- ---------- ----------
$5,079,242 $1,582,947 $3,496,295
========== ========== ==========
As of March 31, 2005, approximately $3.1 million of the intangible assets net of
accumulated amortization relate to BioBalance. BioBalance is a research and
development company and has had significant losses since inception. The Company
cannot assure that BioBalance will be able to generate revenues or profits from
operations of its business or that BioBalance will be able to generate or
sustain profitability in the future.
F-41
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at:
March 31, 2005 December 31, 2004
-------------- -----------------
Accounts payable $ 573,762 $ 622,730
Accrued expenses 1,974,229 2,150,896
Accrued employee benefits 4,709,047 4,552,489
---------- ----------
$7,257,038 $7,326,115
========== ==========
NOTE 7 - LINE OF CREDIT:
New York Health Care has a $4,000,000 line of credit with G.E. Capital Health
Care Financial Services that expires November 29, 2005. The availability of the
line of credit is based on a formula of eligible accounts receivable. The loan
agreement was amended in 2004 to allow New York Health Care to lend money to
BioBalance if there is no outstanding loan under this agreement. The agreement
has also been amended to allow New York Health Care to invest money in
BioBalance. As of March 31, 2005, approximately $4,000,000 was available to the
Company. Certain assets of the Company collateralize the line of credit. The
agreement contains various restrictive covenants, which among other things,
require that the Company maintain a minimum tangible net worth. Borrowings under
the agreement bear interest at prime plus 1 1/2% at March 31, 2005 (7.25%).
At March 31, 2005, there was an amount due from G.E. Capital Health Care
Financial Services of $78,941. This is due to a lockbox being used by the
Company; all collections are deposited with G.E. Capital Health Care Financial
Services and then transferred to the Company's bank account.
On April 11, 2005, the Company's loan agreement was modified to permit the sale
of the NJ Business to Accredited Health and to lift the lender's lien with
respect to the assets of the NJ Business. As a result of this modification, no
loans under the agreement may be requested or occur until such time as the
parties agree on the adjusted amount of the borrowing base. Such an amendment
will result in a decrease in the amount available for borrowing under the
facility.
NOTE 8 - STOCK OPTIONS/WARRANTS:
In accordance with SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure," the following table presents the effect on net loss
and net loss per share if compensation cost for the Company's stock plans had
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation".
F-42
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of each option grant is estimated on the date of grant by use of
the Black-Scholes option pricing model:
For The Three Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
Net loss, as reported $ (958,269) $(1,227,584)
Less stock-based compensation expense
determined under fair value method for
all employee stock options, net of tax effect (686,889) (601,230)
----------- -----------
Pro forma net loss $(1,645,158) $(1,828,814)
=========== ===========
Basic and diluted loss per share, as reported $ (0.03) $ (0.05)
Basic and diluted loss per share, pro forma $ (0.06) $ (0.07)
The options' assumptions used to estimate these values are as follows:
For The Three Months Ended
March 31,
--------------------------
2005 2004
-------- ------
Risk free interest rate 1.59% 1.72%
Expected volatility of common stock 88% 92%
Dividend yield 0% 0%
Expected option term 3-5 yrs. 3 yrs.
During the quarter ended March 31, 2005, the following options were issued to
employees in accordance with the Company's Performance Incentive Plan. Since the
options were given to employees at not less than fair value on the date of
grant, no compensation expense was recorded.
Grant Date Number of Options Exercise Price Expiration Term
- ----------------- ----------------- -------------- ---------------
February 24, 2005 1,000,000 $ 0.85 10 Years
The NASD implemented a marketplace rule on July 1, 2003 that requires a company
whose securities are listed on Nasdaq to obtain shareholder approval prior to
the issuance of options or warrants to certain categories of recipients
including among others, consultants or non-employee members of the Board of
Directors.
The Company committed to issue warrants to certain consultants subsequent to
July 1, 2003 at a time when it was subject to the NASD marketplace rule.
Therefore, these commitments of warrants will be re-valued at each balance sheet
date with the appropriate adjustment made to compensation expense. Once
shareholder approval is obtained, no further adjustment to compensation expense
will be recorded. For the three months ended March 31, 2005, the revaluation of
the warrants resulted in an increase in compensation of $26,559.
On February 24, 2005, in connection with the Offering the Company issued
3,949,681 Warrants to investors in the Private Placement and 1,777,356 Warrants
to the Placement Agent (see Note 2).
F-43
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 6, 2005, Dennis O'Donnell was issued 100,000 options and a cash bonus of
$90,000 pursuant to the terms of his employment agreement with the Company and
in consideration of his performance on behalf of the Company.
NOTE 9 - INCOME TAXES:
The temporary differences that give rise to deferred tax assets are impairment
of intangible assets for financial statement purposes over tax purposes, the
direct write-off method for receivables, using accelerated methods of
amortization and depreciation for property and equipment for tax purposes, and
using statutory lives for intangibles for tax purposes. Also included in the
deferred tax asset is a net operating loss carry-forward. At March 31, 2005 and
December 31, 2004, the Company has computed a deferred tax asset in the amount
of approximately $5,027,000 and $4,652,000, respectively. A full valuation
allowance has been recorded against the net deferred tax assets because, it is
not more likely than not, such assets will be recognized in the foreseeable
future. The valuation allowance increased by $375,000 during the three months
ended March 31, 2005.
NOTE 10 - SUPPLEMENTAL CASH FLOW DISCLOSURES:
For The Three Months Ended
March 31,
-------------------
2005 2004
-------- --------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 2,081 $ 5,009
======== ========
Income taxes $ 17,162 $ 48,355
======== ========
Supplemental Schedule of noncash financing activity:
The Company entered into an agreement on
February 3, 2005 to convert an accounts receivable
balance to a note receivable with one of its customers $353,897 $ 0
======== ========
The Company issued Placement Agent Warrants
as part of the Private Placement Offering $624,705 $ 0
======== ========
NOTE 11 - SEGMENT REPORTING:
The Company has two reportable business segments: New York Health Care, a home
health care agency that provides a broad range of health care support services
to patients in their homes, and BioBalance, a company that is developing a
probiotic agent for the treatment of gastrointestinal disorders. BioBalance has
not generated any revenue as of March 31, 2005.
F-44
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New York Bio- Total
Health Care Balance Consolidated
----------- ------- ------------
Three Months Ended March 31, 2005
Revenue:
Net patient service revenue $ 12,462,405 $ -- $ 12,462,405
Sales -- -- --
------------ ------------ ------------
Total revenue $ 12,462,405 $ -- $ 12,462,405
============ ============ ============
Net income (loss) $ 74,489 $ (1,032,758) $ (958,269)
Total assets $ 15,245,646 $ 4,716,333 $ 19,961,979
Three Months Ended March 31, 2004
Net patient service revenue $ 11,506,458 $ -- $ 11,056,458
Sales $ -- $ -- $ --
------------ ------------ ------------
Total revenue $ 11,506,458 $ -- $ 11,506,458
============ ============ ============
Net income (loss) $ 43,047 $ (1,270,631) $ (1,227,584)
Total assets $ 13,921,844 $ 6,024,440 $ 19,946,284
F-45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution.
The following table sets forth the estimated costs and expenses, other
than underwriting discounts and commissions, to be paid by us in connection with
the issuance and distribution of the shares of Common Stock being registered
hereby.
Securities and Exchange Commission registration fee....... $ 1,288.67
$
$
Accounting fees and expenses.............................. $ 20,000,00
Legal fees and expenses................................... $ 35,000.00
Printing and engraving costs.............................. $ 5,000.00
Blue Sky qualification fees and expenses.................. $ 1,000.00
Miscellaneous expenses.................................... $ 5,000.00
----------------
Total..................................................... $ 67,288.67
- -----------------------
Item 14. Indemnification Of Directors And Officers
Article 7 of the Business Corporation Law of the State of New York (the
"BCL"), in general, allows corporations to indemnify their officers and
directors against any judgment, fine, settlement and reasonable expenses
incurred in any non-derivative civil or criminal action, or against any
settlement and reasonable expenses in any derivative civil action, if the
officer or director acted in good faith and for a purpose he reasonably believed
to be in, or not opposed to, the best interests of the corporation. In the case
of a criminal action, the officer or director must have had no reasonable cause
to believe that his conduct was unlawful. Partial indemnification is allowed in
cases where the officer or director was partially successful in defeating the
claim. Such Article establishes procedures for determining whether the standard
of conduct has been met in the particular case, for timely notification to
shareholders, for prepayment of expenses and for payment pursuant to a court
order or as authorized by disinterested directors or the shareholders. Article 7
also provides that it is not exclusive of any other rights to which an officer
or director may be entitled under the certificate of incorporation or the bylaws
or a corporation or pursuant to an agreement, resolution of shareholders or
resolution of directors that are authorized by the certificate of incorporation
or the bylaws of a corporation; provided that no indemnification may be made if
a judgment or other final adjudication adverse to the officer or director
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
Article Third of the our Restated Certificate of Incorporation, as
amended, provides with respect to the indemnification of directors and officers,
among other things, that (a) we may, to the fullest extent permitted by Sections
721 through 726 of the New York Business Corporation Law, as amended, indemnify
all persons whom it may indemnify pursuant thereto, (b) our directors shall not
II-1
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability for certain transactions
or events as set forth in such Article Third, (c) each person who was or is made
a party, or is threatened to be made a party, to or is involved in any action,
suit or proceeding, by reason of the fact that he or she is or was a director or
officer of ours, shall be indemnified and held harmless by us to the fullest
extent authorized by the New York Business Corporation Law, against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith and (d) the right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in such Article Third shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders and disinterested
directors or otherwise.
The indemnification provisions in our Restated Certificate of
Incorporation, as amended and our amended and restated bylaws may be
sufficiently broad to permit indemnification of our directors and officers for
liabilities arising under the Securities Act. It is the position of the SEC that
indemnification for liabilities under the Securities Act is against public
policy and is, therefore, unenforceable.
Item 15. Recent Sales Of Unregistered Securities
On February 24, 2005 we consummated the Offering which resulted in our
issuing an aggregate of (i) 7,899,362 shares (the "Shares") of our common stock,
par value $0.01 per share (the "Common Stock"), and warrants to purchase
3,949,681 shares of Common Stock (the "Warrants") to persons who qualify as
"accredited investors" within the meaning of rule 501 of Regulation D
promulgated under the Act. The aggregate purchase price for the Shares and
Warrants was $ 4,897,600. Each Warrant is exercisable to purchase one share our
Common Stock at an exercise price of $0.78 per share during the five-year period
commencing on February 24, 2005. The Shares and Warrants were issued to the
purchasers without registration under the Act, in reliance upon the exemptions
from registration provided under Section 4(2) of the Act and Regulation D
promulgated thereunder. The issuances did not involve any public offering; no
general solicitation or general advertising was used in connection with the
Offering; we obtained representations from the purchasers regarding their
investment intent, experience and sophistication; the purchasers either received
or had access to adequate information about us in order to make informed
investment decisions; the purchasers represented that they were "accredited
investors" within the meaning of Rule 501 of Regulation D and the Shares and
Warrants were issued with restricted securities legends. In connection with the
Offering, we paid the Placement Agent commissions of $470,260 and an additional
$146,616 to cover non-accountable and certain other expenses of the Placement
Agent. In addition, we issued to the Placement Agent and its designees five-year
warrants to purchase an aggregate of 1,777,356 shares of our common stock at
$0.62 per share.
Item 16. Exhibits and Financial Statement Schedules
The following is a list of exhibits that comprise a part of the
Registration Statement:
2.1 Stock for Stock Exchange Agreement between the Company and
BioBalance dated October 11, 2001, as amended by Amendment No.
1 dated February 13, 2002, Amendment No. 2 dated July 10,
2002, Amendment No. 3 dated August 13, 2002 and Amendment No.
4 dated October 25, 2002 (incorporated herein by reference to
Exhibits No. 2.1-2.4, inclusive, to the Company's registration
statement on Forms S-4, SEC file no. 333-85054).
2.2 Purchase and Sale agreement dated as of July 15, 2004 by and
among the Company, NYHC Newco Paxxon Inc. and New York Health
Care, LLC. (7)
2.3 Asset Purchase Agreement dated as of April 11, 2005 by and
among Accredited Health Services, Inc., New York Healthcare,
Inc. and NYHC Newco Paxxon Inc. (10)
II-2
3.1 Certificate of Incorporation of the Company. (1)
3.2 Restated Certificate of Incorporation of the Company. (1)
3.3 Certificate of Correction of Restated Certificate of
Incorporation of the Company. (1)
3.4 Amendment to the Certificate of Incorporation filed October
17, 1996. (1)
3.5 By-laws of the Company. (1)
3.6 Amendment to the Certificate of Incorporation of the Company
filed December 4, 1996. (1)
3.7 Certificate of Designations, Rights and Preferences of New
York Health Care, Inc. Class A Convertible Preferred Stock.
(2)
3.8 Certificate of Amendment to the Certificate of Incorporation
of New York Health Care, Inc. filed on September 10, 2004
(incorporated by reference to the applicable Exhibit filed
with the Company's 8-K filed on September 15, 2004)
3.9 Amended By-Laws of the Company (9)
4.1 Form of certificate evidencing shares of Common Stock. (1)
5.1 Opinion of Blank Rome LLP
10.1 Engagement Letter Agreement between the Company and Sterling
Financial Investment Group, Inc. dated May 6, 2004. (5)
10.2 Employment Agreement for Dennis O'Donnell (6)
10.3 Option agreement dated September 14, 2004 between the Company
and Dennis O'Donnell (7)
10.4 Form of Option Agreement under the Company's Performance
Incentive (Stock Option) Plan (7)
10.5 Placement Agreement dated November 19, 2004 between the
Company and Sterling Financial Investment Company, Inc.
(incorporated by reference to the applicable Exhibit filed
with the Company's Form 8-K filed on November 23, 2004)
10.8 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Rockland, Westchester and Bronx
Counties dated May 8, 1995. (1)
10.9 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Dutchess, Orange, Putnam, Sullivan
and Ulster Counties dated May 8, 1995. (1)
10.10 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Nassau, Suffolk and Queens Counties
dated May 8, 1995. (1)
10.11 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Orange and Rockland Counties dated
July 1, 1995. (1)
10.12 Personal Care Aide Agreement by and between the Company and
Nassau County Department of Social Services dated October 18,
1995. (1)
10.13 State of New York Department of Health Offices of Health
Systems Management Home Care Service Agency License for the
Company doing business in Bronx, Kings, New York, Queens and
Richmond Counties dated December 29, 1995. (1)
10.14 Homemaker and Personal Care Agreements by and between the
Company and the County of Rockland Department of Social
Services dated January 1, 1996. (1)
II-3
10.15++ Employment Agreement by and between the Company and Jerry
Braun dated November 12, 1999. (3)
10.16++ Employment Agreement by and between the Company and Jacob
Rosenberg dated November 12, 1999. (3)
10.17 Loan Security Agreement among New York Health Care, Inc., NYHC
Newco Paxxon, Inc. and Heller Healthcare Finance, Inc. dated
November 28, 2000. (incorporated by reference to Exhibits to
the Company's Form 8-K Report filed December 8, 2000)
10.18 Amendment No. 1 to Loan and Security Agreement and Consent and
Waiver with Heller Healthcare Finance, Inc. dated November 27,
2002 (incorporated by reference to Exhibit to the Company's
Form 8-K Current Report filed on December 4, 2002)
10.19 Amendment No. 2 to Loan and Security Agreement among GE HFS
Holding, Inc., the Company and Newco Paxxon, Inc. dated March
29, 2004 (5)
10.20 Amendment No. 3 to Loan and Security Agreement among GE HFS
Holdings, Inc., the Company and Newco Paxxon, Inc. dated March
29, 2004 (incorporated by reference to the Form 8-K filed by
the Company on December 12, 2004)
10.21 Amendment No. 4 dated January 13, 2005 to Loan and Security
Agreement by and among New York Health Care, Inc., NYHC Newco
Paxxon, Inc. and GE HFS Holdings, Inc. (incorporated by
reference to the exhibit filed with the Company's Current
Report on Form 8-K for the event dated January 13, 2005)
10.22 Amendment dated February 7, 2005 to the Placement Agent
agreement dated November 19, 2004, between the Company and
Sterling Financial Group, Inc.(11)
10.23 Amendment dated February 18, 2005 to the Placement agent
agreement dated November 19, 2004, between the Company and
Sterling Financial Group, Inc. (11)
10.24 Agreement dated February 24, 2005, among the Company, Jerry
Braun and Jacob Rosenberg. (11) 10.25 Agreement dated March
24, 2005, among the Company, Jerry Braun and Jacob Rosenberg
(11) 10.26 Form of Investor Warrant issued by New York Health
Care, Inc. in connection with the Private Offering of its
securities that closed on February 24, 2005. (11)
10.27 Form of Placement Agent Warrant issued by New York Health
Care, Inc. in connection with the Private Offering of its
securities that closed on February 24, 2005. (11)
10.28 Summary of Executive Compensation. (11)
10.51++ Amended Performance Incentive Plan (Stock Option Plan) of the
Company. (4)
10.52++ Amendment to Employment Agreement between the Company and
Jerry Braun dated January 28, 2003. (4)
10.53++ Amendment to Employment Agreement between the Company and
Jacob Rosenberg dated January 28, 2003 (4).
14.1 Code of Ethics for Senior Financial Officers (8).
23.1 Consent of Blank Rome LLP (included in Exhibit 5)
23.2* Consent of Weiser LLP.
23.3* Consent of Holtz Rubenstein Reminick LLP.
II-4
* Filed herewith.
** To be filed by amendment.
++ Compensation plan.
(1) Incorporated by reference to Exhibits filed as part of the
Company's Registration Statement on Form SB-2 under S.E.C.
File No. 333-08152, which was declared effective on December
20, 1996.
(2) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form10-QSB report for the quarter ended
June 30, 1998.
(3) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form10-QSB Report for the quarter ended
September 30, 1999.
(4) Incorporated by reference to the applicable Exhibits filed as
part of Company's Form 10-K Annual Report for the year ended
December 31, 2002.
(5) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended March
31, 2004.
(6) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended June 30,
2004.
(7) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended
September 30, 2004.
(8) Incorporated by reference to the applicable Exhibit filed as
part of the Company's Form 10-K for the year ended December
31, 2003.
(9) Incorporated by reference to the applicable Exhibit filed as
part of the Company's Form 10-K/A for the year ended December
31, 2005.
(10) Incorporated by reference to the Exhibit to the Company's Form
8-K filed on May 26, 2005.
(11) Incorporated by reference to the applicable Exhibits to the
Company's Form 10-Q for the quarter ended March 31, 2005.
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
II-5
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or
(4) or 497(h) under the Act as part of this registration statement as
of the time it was declared effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the
initial bona fide offering of those securities.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration
statement;
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(4) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant as described in Item 14 of this Part II to the registration
statement, or otherwise, Registrant has been advised that in the opinion of the
Securities Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a director, officer or
controlling person of Registration in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on May 27, 2005.
NEW YORK HEALTH CARE, INC.
By: /s/ Dennis M. O'Donnell
Dennis M. O'Donnell
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement was signed by the following persons in the
capacities and on the dates stated.
Name Title Date
/s/ Dennis M. O'Donnell Chief Executive Officer, Secretary and May 27, 2005
- ---------------------------- Director (Principal Executive,
Dennis M. O'Donnell Financial and Accounting Officer)
/s/ Fred E. Nussbaum Director May 27, 2005
- ----------------------------
Fred E. Nussbaum
/s/ Mark Gray Director May 27, 2005
- ----------------------------
Mark Gray
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EXHIBIT INDEX
2.1 Stock for Stock Exchange Agreement between the Company and
BioBalance dated October 11, 2001, as amended by Amendment No.
1 dated February 13, 2002, Amendment No. 2 dated July 10,
2002, Amendment No. 3 dated August 13, 2002 and Amendment No.
4 dated October 25, 2002 (incorporated herein by reference to
Exhibits No. 2.1-2.4, inclusive, to the Company's registration
statement on Forms S-4, SEC file no. 333-85054).
2.2 Purchase and Sale agreement dated as of July 15, 2004 by and
among the Company, NYHC Newco Paxxon Inc. and New York Health
Care, LLC. (7)
2.3 Asset Purchase Agreement dated as of April 11, 2005 by and
among Accredited Health Services, Inc., New York Healthcare,
Inc. and NYHC Newco Paxxon Inc. (10)
3.1 Certificate of Incorporation of the Company. (1)
3.2 Restated Certificate of Incorporation of the Company. (1)
3.3 Certificate of Correction of Restated Certificate of
Incorporation of the Company. (1)
3.4 Amendment to the Certificate of Incorporation filed October
17, 1996. (1)
3.5 By-laws of the Company. (1)
3.6 Amendment to the Certificate of Incorporation of the Company
filed December 4, 1996. (1)
3.7 Certificate of Designations, Rights and Preferences of New
York Health Care, Inc. Class A Convertible Preferred Stock.
(2)
3.8 Certificate of Amendment to the Certificate of Incorporation
of New York Health Care, Inc. filed on September 10, 2004
(incorporated by reference to the applicable Exhibit filed
with the Company's 8-K filed on September 15, 2004)
3.9 Amended By-Laws of the Company (9)
4.1 Form of certificate evidencing shares of Common Stock. (1)
5.1 Opinion of Blank Rome LLP
10.1 Engagement Letter Agreement between the Company and Sterling
Financial Investment Group, Inc. dated May 6, 2004. (5)
10.2 Employment Agreement for Dennis O'Donnell (6)
10.3 Option agreement dated September 14, 2004 between the Company
and Dennis O'Donnell (7)
10.4 Form of Option Agreement under the Company's Performance
Incentive (Stock Option) Plan (7)
10.5 Placement Agreement dated November 19, 2004 between the
Company and Sterling Financial Investment Company, Inc.
(incorporated by reference to the applicable Exhibit filed
with the Company's Form 8-K filed on November 23, 2004)
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10.8 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Rockland, Westchester and Bronx
Counties dated May 8, 1995. (1)
10.9 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Dutchess, Orange, Putnam, Sullivan
and Ulster Counties dated May 8, 1995. (1)
10.10 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Nassau, Suffolk and Queens Counties
dated May 8, 1995. (1)
10.11 State of New York Department of Health Office of Health
Systems Management Home Care Service Agency License for the
Company doing business in Orange and Rockland Counties dated
July 1, 1995. (1)
10.12 Personal Care Aide Agreement by and between the Company and
Nassau County Department of Social Services dated October 18,
1995. (1)
10.13 State of New York Department of Health Offices of Health
Systems Management Home Care Service Agency License for the
Company doing business in Bronx, Kings, New York, Queens and
Richmond Counties dated December 29, 1995. (1)
10.14 Homemaker and Personal Care Agreements by and between the
Company and the County of Rockland Department of Social
Services dated January 1, 1996. (1)
10.15++ Employment Agreement by and between the Company and Jerry
Braun dated November 12, 1999. (3)
10.16++ Employment Agreement by and between the Company and Jacob
Rosenberg dated November 12, 1999. (3)
10.17 Loan Security Agreement among New York Health Care, Inc., NYHC
Newco Paxxon, Inc. and Heller Healthcare Finance, Inc. dated
November 28, 2000. (incorporated by reference to Exhibits to
the Company's Form 8-K Report filed December 8, 2000)
10.18 Amendment No. 1 to Loan and Security Agreement and Consent and
Waiver with Heller Healthcare Finance, Inc. dated November 27,
2002 (incorporated by reference to Exhibit to the Company's
Form 8-K Current Report filed on December 4, 2002)
10.19 Amendment No. 2 to Loan and Security Agreement among GE HFS
Holding, Inc., the Company and Newco Paxxon, Inc. dated March
29, 2004 (5)
10.20 Amendment No. 3 to Loan and Security Agreement among GE HFS
Holdings, Inc., the Company and Newco Paxxon, Inc. dated March
29, 2004 (incorporated by reference to the Form 8-K filed by
the Company on December 12, 2004)
10.21 Amendment No. 4 dated January 13, 2005 to Loan and Security
Agreement by and among New York Health Care, Inc., NYHC Newco
Paxxon, Inc. and GE HFS Holdings, Inc. (incorporated by
reference to the exhibit filed with the Company's Current
Report on Form 8-K for the event dated January 13, 2005)
10.22 Amendment dated February 7, 2005 to the Placement Agent
agreement dated November 19, 2004, between the Company and
Sterling Financial Group, Inc.(11)
10.23 Amendment dated February 18, 2005 to the Placement agent
agreement dated November 19, 2004, between the Company and
Sterling Financial Group, Inc. (11)
10.24 Agreement dated February 24, 2005, among the Company, Jerry
Braun and Jacob Rosenberg. (11) 10.25 Agreement dated March
24, 2005, among the Company, Jerry Braun and Jacob Rosenberg
(11) 10.26 Form of Investor Warrant issued by New York Health
Care, Inc. in connection with the Private Offering of its
securities that closed on February 24, 2005. (11)
II-9
10.27 Form of Placement Agent Warrant issued by New York Health
Care, Inc. in connection with the Private Offering of its
securities that closed on February 24, 2005. (11)
10.28 Summary of Executive Compensation. (11)
10.51++ Amended Performance Incentive Plan (Stock Option Plan) of the
Company. (4)
10.52++ Amendment to Employment Agreement between the Company and
Jerry Braun dated January 28, 2003. (4)
10.53++ Amendment to Employment Agreement between the Company and
Jacob Rosenberg dated January 28, 2003 (4).
14.1 Code of Ethics for Senior Financial Officers (8).
23.1 Consent of Blank Rome LLP (included in Exhibit 5)
23.2* Consent of Weiser LLP.
23.3* Consent of Holtz Rubenstein Reminick LLP.
* Filed herewith.
** To be filed by amendment.
++ Compensation plan.
(1) Incorporated by reference to Exhibits filed as part of the
Company's Registration Statement on Form SB-2 under S.E.C.
File No. 333-08152, which was declared effective on December
20, 1996.
(2) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form10-QSB report for the quarter ended
June 30, 1998.
(3) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form10-QSB Report for the quarter ended
September 30, 1999.
(4) Incorporated by reference to the applicable Exhibits filed as
part of Company's Form 10-K Annual Report for the year ended
December 31, 2002.
(5) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended March
31, 2004.
(6) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended June 30,
2004.
(7) Incorporated by reference to the applicable Exhibits filed as
part of the Company's Form 10-Q for the quarter ended
September 30, 2004.
(8) Incorporated by reference to the applicable Exhibit filed as
part of the Company's Form 10-K for the year ended December
31, 2003.
(9) Incorporated by reference to the applicable Exhibit filed as
part of the Company's Form 10-K/A for the year ended December
31, 2005.
(10) Incorporated by reference to the Exhibit to the Company's Form
8-K filed on May 26, 2005.
(11) Incorporated by reference to the applicable Exhibits to the
Company's Form 10-Q for the quarter ended March 31, 2005.
II-10