SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act For the Fiscal Year Ended September 30, 2003
[X] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
January 1, 2002 to September 30, 2002
`
Commission File Number 000-31249
________________________________
CRITICAL HOME CARE, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0331369
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
762 Summa Avenue, Westbury, New York 11590
(516) 997-1200
(Address and telephone number, including area code,
of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.25 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 month period (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
Revenues for the issuer's most recent fiscal year were $5,446,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the average bid and asked price of such
stock as of February 13, 2004 was $ 3,525,000.
As of February 17, 2004, 24,393,026 shares of registrant's Common Stock were
outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
TABLE OF CONTENTS
_________________
Item Page
Disclosure Regarding Forward-Looking Statements............................2
PART I
Item 1. Description of Business.........................................2
Item 2. Description of Property........................................20
Item 3. Legal Proceedings..............................................20
Item 4. Submission of Matters to a Vote of Security Holders............20
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters............................................20
Item 6. Management's Discussion and Analysis
or Plan of Operations..........................................22
Item 7. Financial Statements...........................................F-1*
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................27
Item 8A. Controls and Procedures........................................28
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)
of the Exchange Act............................................28
Item 10. Executive Compensation.........................................31
Item 11. Security Ownership of Certain Beneficial Owners
and Management ................................................34
Item 12. Certain Relationships and Related Transactions.................36
Item 13. Exhibits List and Reports on Form 8-K....................... 36
Signatures................................................................38
*Page F-1 follows Item #13
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this report include "forward-looking statements"
within the meaning of such term in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, which could
cause actual financial or operating results, performances or achievements
expressed or implied by such forward-looking statements not to occur or be
realized. Such forward-looking statements generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed in this Form 10-KSB. Forward-looking statements may
be identified by the use of forward-looking terminology such as "may," "can,"
"will," "could," "should," "project," "expect," "plan," "predict," "believe,"
"estimate," "aim," "anticipate," "intend," "continue," "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions.
Readers are urged to carefully review and consider the various disclosures
made by us in this Report on Form 10-KSB and our other filings with the U.S.
Securities and Exchange Commission. These reports and filings attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition and results of operations and prospects. The forward-looking
statements made in this Form 10-KSB speak only as of the date hereof and we
disclaim any obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
PART I
Item 1. Description of Business.
General Development of Business
Our company, Critical Home Care, Inc., is the parent corporation of Classic
Healthcare Solutions, Inc., a wholly-owned operating subsidiary which acquired
substantially all of the assets of Homecare Alliance, Inc., and of a second
wholly-owned subsidiary which acquired substantially all of the assets of All
Care Medical Products, Inc. Our company was formed in December 1994 and operated
as a blind pool until September 26, 2002, when it completed the reverse
acquisition with Critical Home Care, Incorporated (Delaware) and changed its
name to Critical Home Care, Inc.
Our company markets, rents and sells surgical supplies, home respiratory
therapy products, orthotics and prosthetics, and durable medical equipment,
manufactured by third parties, primarily to individuals residing at home. We
also intend to provide pharmacy services in the future. In each line of products
and services, we provide patients with a variety of services, related products
and supplies, most of which are prescribed by a physician as part of an overall
plan of treatment. Primarily serving those living on Long Island and in the five
boroughs of New York City, we currently maintain four points of service having
locations in Westbury, Patchogue, Babylon and Lake Success, New York. All
clinicians are licensed where required by applicable law.
On August 8, 2002, Classic Healthcare acquired substantially all of the
assets of Homecare Alliance, Inc. for a purchase price of $250,000 of which
$100,000 was in cash and $150,000 was in promissory notes. On September 13,
2002, Critical Home Care,
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Incorporated, another wholly-owned subsidiary, acquired substantially all
of the assets of All Care Medical Products for a purchase price of $4,025,000
consisting of $200,000 in cash, $325,000 in notes and 1,750,000 shares of our
common stock, valued at $2.00 per share.
On September 26, 2002, New York Medical, Inc. (formerly known as Mojave
Southern, Inc.) and Critical Home Care, Incorporated, merged, whereby New York
Medical cancelled 8,975,000 of its 14,700,000 common shares then outstanding and
issued (a) 16,250,000 new shares of restricted common stock to Critical Home
Care, Incorporated, in exchange for all of the issued and outstanding shares of
Critical Home Care, Incorporated and (b) 1,750,000 new shares of restricted
common stock to consummate the All Care asset purchase. This transaction
resulted in a change of control in New York Medical and a total of 23,725,000
outstanding shares of common stock. In addition, New York Medical changed its
name to our current name, Critical Home Care, Inc. The sole operating subsidiary
of Critical prior to the reverse merger was Classic Healthcare Solutions, Inc.,
which had been acquired by Critical Home Care, Incorporated, on July 12, 2002,
by the issuance of 7,373,000 shares of common stock.
We intend to capitalize on the consolidation opportunities that we believe
exist within the fragmented home healthcare industry and have developed a
strategic growth plan that envisions us becoming a large provider of
comprehensive home healthcare services in the New York City metropolitan area.
We intend to implement this strategy through internal growth and by acquiring
other healthcare service providers. We currently have no arrangements,
understandings or agreements concerning any potential acquisition and do not
intend to pursue this strategy until adequate resources are available. On
October 30, 2002, we entered into a non-binding Letter of Intent with Ocean
Breeze Management, Inc., d/b/a Ocean Breeze Infusion Care of Farmingdale ("Ocean
Breeze"), which is beneficially owned by Staten Island University Hospital,
Staten Island, New York, which, in turn, is affiliated with North Shore
University Hospital in Manhasset, New York. The proposed purchase price was
$1,750,000 in cash and the assumption of up to $190,000 in trade payables for
substantially all of the assets and accounts of Ocean Breeze. This transaction
did not close because the parties could not reach a mutually acceptable
agreement. There can be no assurance that we will acquire any other healthcare
service provider or, if such an acquisition is made, that any acquisition will
result in increased market share, revenues or profits for us.
Description of Business
Products and Services
Through our operating subsidiaries, we specialize in assisting physicians,
hospitals and insurance carriers with the discharge and care of patients in the
home care setting. We provide four types of services and products. They are:
- home respiratory therapy;
- disposable surgical supplies;
- home medical equipment; and
- orthotics and prosthetics.
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In all four lines of products and services, we provide patients with a
variety of services, related products and supplies, most of which are prescribed
by a physician as part of an overall plan of treatment. We purchase or rent the
products needed to complement our services. These services include:
- providing respiratory care;
- educating patients and their caregivers about illnesses and
instructing them on self-care and the proper use of products
in the home;
- monitoring patients' individualized treatment plans;
- reporting to the physician and/or managed care organization;
- maintaining equipment; and
- processing claims to third-party payors.
We primarily provide oxygen and other respiratory therapy services to
patients at home. When a patient is referred to us by a physician, hospital
discharge planner or other source, our customer representative obtains the
necessary medical and insurance coverage information and coordinates the
delivery of patient care. The products necessary for the prescribed therapy are
delivered by our representative to the customer's home. The representative then
provides instructions and training to the customer and the customer's family
regarding appropriate equipment use and maintenance and the prescribed therapy.
Following the initial setup, representatives make periodic visits to the
customer's home, the frequency of which is dictated by the type of therapy. All
services and equipment provided by the Company are coordinated with the
customer's physician. During the period that we provide services and equipment
to a customer, the customer remains under the physician's care and medical
supervision. We employ respiratory therapists and other qualified clinicians to
perform certain training and other functions in connection with our services.
All clinicians are licensed where required by applicable law.
Home Respiratory Therapy
Home respiratory therapy primarily consists of the provision of oxygen
systems, ventilators, sleep apnea equipment, nebulizers, respiratory medications
and related products and services to patients for operation in the home
environment. We provide home respiratory therapy services to patients with a
variety of conditions, including:
- chronic obstructive pulmonary disease, or COPD, such as
emphysema, chronic bronchitis and asthma;
- nervous system-related respiratory conditions;
- congestive heart failure; and
- lung cancer.
We employ a staff of respiratory care professionals to provide support to
our home respiratory therapy patients, according to each patient's
physician-directed treatment plan. We derive approximately 10% of our
respiratory therapy revenues from the provision of oxygen systems, home
ventilators and nebulizers, which are devices to aerosolize medication. We
derive our remaining respiratory revenues from the provision of:
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apnea monitors used to monitor the vital signs of newborns;
- continuous positive airway pressure devices used to treat
obstructive sleep apnea;
- noninvasive positive pressure ventilation;
- respiratory medications in pre-mixed unit dose form; and
- other respiratory therapy products.
We estimate, based on management's experience and knowledge of the
industry, that the national home healthcare market, including home respiratory
therapy, home infusion therapy, home equipment supplies and related services,
represents approximately $4.5 billion in annual sales. We further believe that
the market will experience annual growth in revenues similar to the 7% per year
growth experienced by the market over the last five years. This historical
growth reflects the significant increase in the number of persons afflicted with
COPD, which, in turn, is largely attributable to the increasing proportion of
the U.S. population over the age of 65 years. Growth in the home healthcare
market is further driven by the continued trend toward treatment of patients in
the home as a lower cost alternative to the acute care setting.
Home Medical Equipment; Other Products and Service
We rent and sell patient safety items and ambulatory and patient room
equipment. Our integrated service approach allows patients and managed care
systems accessing either respiratory or therapy services to also access needed
home medical equipment through a single, value-added service source. Rather than
directly providing certain non-core services ourselves, we have affiliated
ourselves with other segment leaders, such as home health nursing organizations,
through formal relationships or ancillary networks. Home medical equipment and
other services provided by us to our customers include:
- hospital beds;
- wheelchairs;
- bathroom safety items;
- seat lift chairs; and
- three- and four-wheel power scooters.
Orthotics and Prosthetics
Orthotics and prosthetics involves the supply of braces and artificial
limbs. These are commonly custom fabricated by others and fitted by a certified
orthotist and/or prosthetist. In fitting with our plan, this segment will be
expanded to become one of our specialty areas. Our vice-president, Bradley
Smith, and the other professionals in his department, are a source of
information regarding custom bracing to a number of insurance carriers. This
factor should strengthen the continuity of referrals to this segment of our
business.
5
Organization and Operations
We operate through local branches, with administrative functions
coordinated from a centralized office. The branches conduct sales calls to the
medical community and receive referrals, as well as deliver the home healthcare
products and services to patients in their homes and other care sites. The
centralized office provides the branches with key support services such as:
- Insurance verification and billing;
- purchasing; and
- equipment maintenance, repair, delivery and warehousing.
We believe that this organizational structure provides us with control over
and consistency among branch offices, with the implementation of standardized
policies and procedures.
We intend to maintain our decentralized approach to management of our local
business operations. We believe that decentralization of managerial
decision-making enables our operating branches to respond promptly and
effectively to local market demands and opportunities. We further believe that
the personalized nature of customer requirements and referral relationships
characteristic of the home healthcare business mandates that we localize our
operating structure. Each operating branch is supervised by a sales oriented
manager who also has responsibility and accountability for the operating and
financial performance of the branch. Service and marketing functions are
performed at the local operating branch level, while strategic development,
financial control and operating policies are administered at the corporate
level. Reporting mechanisms have been established at the operating branch level
to monitor performance and ensure field accountability. Central administrators
supervise individual operating branch supervisors. These central administrators
are also charged with assessing and improving performance of branch operations.
In order to become a leader in the industry, we must remain committed to
providing quality home healthcare services and products while maintaining high
standards of ethical and legal conduct. Thus, operating our business with
honesty and integrity is essential in order for us to increase our market share.
This goal can only be reached through employee education, a confidential
disclosure program, written policy guidelines, periodic reviews, frequent
reinforcement, compliance audits, a formal disciplinary component and other
programs designed not only to comply with the minimums required by federal and
sate laws and regulations but also designed to assure customer satisfaction and
referrals.
Our business is dependent, to a substantial degree, and, as it expands,
will be more dependent, upon the quality of our operating and field information
systems for the maintenance of accurate contract terms, accurate order entry and
pricing, billing and collections. These systems must provide reports that enable
management to effectively monitor and evaluate contract compliance and
profitability. Our information services department must work closely with all of
the corporate departments to ensure that our
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overall systems are compliant with government regulations and payor requirements
and to support business improvement initiatives with technological solutions.
We derive substantially all of our revenues from third-party payors,
including private insurers, managed care organizations, Medicare and Medicaid.
Each third-party payor generally has specific claims requirements. We have
policies and procedures in place to manage the claims submission process,
including verification procedures to facilitate complete and accurate
documentation, for all different sources of payment.
Third party reimbursement is a complicated process, which involves
submission of claims to multiple payors, each of whom has its own claims
requirements and authorized procedures. To operate effectively in this
environment while expanding market share, we have implemented computer systems
to decrease the time required for the submission and processing of third party
payor claims and these systems are upgraded periodically. These systems are
capable of tailoring the submission of claims to the specifications of
individual payors and of making expedited adjustments as necessary to comply
with changing regulatory and reimbursement requirements. If these systems fail
at any time, the processing time of claims and our ability to rapidly collect
accounts receivable will be negatively impacted, which could have adverse
effects on our financial condition and results of operations.
We operate in an environment with complex requirements governing billing
and reimbursement for our products and services. Initiatives focused
specifically on receivables management such as system enhancements, process
refinements and organizational changes have resulted in improvement and
consistency in key accounts receivable indicators. Days sales outstanding at
September 30, 2003 was 133 and days sales outstanding at September 30, 2002 was
105. We utilize information systems expertise to increase utilization of
technology, such as electronic claims submission and electronic funds transfer
with managed care organizations. This can expedite claims processing and reduce
the administrative cost associated with this activity for both us and our
customers/payors. We must also continue to focus resources on certain large
third-party payors to develop internal understanding of the payors' unique
reimbursement requirements, thereby reducing subsequent denials and shortening
the related collection periods.
Quality Control
We are committed to providing consistently high quality products and
services. Our quality control procedures and training programs are designed to
promote greater responsiveness and sensitivity to individual customer needs and
to assure the highest level of quality and convenience to the customer and the
referring physician. Licensed respiratory therapists and certified orthotists
provide professional health care support to customers and assist in our sales
and marketing efforts.
Business Strategy
We believe that the home medical equipment and high-tech pharmacy
industries
7
are poised for consolidation in the New York metropolitan area. There are
many small local providers currently serving the marketplace. Each of these
small providers has full infrastructures in place to support their existing
businesses. However, the consolidation of these providers should allow a
consolidated provider, such as our company, to leverage the talent and locations
of these companies providing greater economies of scale and increasing profits.
We are capitalizing on customer demand for a larger array of integrated
home healthcare services. Along these lines, we expect to be adding specialty
pharmacy services to cover our entire service region. In a number of cases,
managed health companies have encouraged this move, which, we believe, will
allow them to further consolidate their supply sources.
Our strategy is to increase our market share through internal growth and
strategic acquisitions. We intend to focus our growth primarily in our existing
and nearby geographic markets within the New York metropolitan area. We believe
this area is generally more profitable than adding additional operating centers
in distant markets. Revenue growth will remain dependent upon the overall growth
rate of the home healthcare market and on our ability to increase market share
through effective marketing efforts and selective acquisition of local or
regional competitors. Growing cost containment efforts by government and private
insurance reimbursement programs have created an increasingly competitive
environment, accelerating consolidation trends within the home health care
industry. We will continue to concentrate on providing oxygen and other
respiratory therapy services, as well as adding home infusion therapy to
patients in the home and to provide home medical equipment and other services
where we believe such services will complement our primary business.
An Industry Overview
The home health care industry is composed of three distinct segments. These
segments are represented by the national home health care providers, the
regional home health care companies, and the myriad local, independent "mom and
pop" operations. These companies operate based on their existing relationships
and reputations with referral sources, including local physicians and
hospital-based professionals. In the course of the last several years, managed
care providers have placed an increasing importance on those home health care
companies that can provide an integrated array of health care services within a
surrounding coverage area.
The small independent operations make up approximately 60% of the home care
market and generally provide a limited type of service such as oxygen supply.
Due to changes in Medicare coverage, as well as increased requirements from
managed care operators, these types of organizations are finding it difficult to
adjust to the changing business climate within the industry. In the face of
increasing capital costs, lack of management expertise and technological
deficiencies, many of these companies are available to consolidating companies
within the home health care sector.
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On a broader scale, the home health care industry is entering what some
term the "Golden Age of Home Care." The impact of demographics, especially the
growing number of American seniors, will only increase the importance of home
based care. A report by the research firm Frost & Sullivan, U.S. Home Healthcare
Markets, re-enforces this belief in noting that the number of adult children
caring for their parents at home has risen "from 7 million in 1988 to 22.5
million in 1998." (Source: Healthcare Magazine, July 2000.) We anticipate that
future health care will be concerned with managing chronic conditions rather
than treating acute problems. Additionally, we believe that the cost of
in-patient care has dramatically increased home based care as an even more
attractive option. Set forth below is a typical monthly cost savings (source:
HME WebNet).
Home
Conditions Hospital Costs Healthcare Costs Dollar Savings
---------- -------------- ---------------- --------------
Ventilator Dependent Adults................. $21,750 $7,050 $14,700
Oxygen Dependent Children................... $12,090 $5,250 $6,840
A shift from institution based care to home care is a natural result of
this situation. Industry experts agree that home care will likely become the
center of health care in the near future.
Sales and Marketing
Favorable trends affecting the U.S. population and home health care have
created an environment which should produce increasing demand for the products
and services provided by our company. The average age of the American population
is increasing and, as a person ages, more healthcare services are generally
required. Further, well-documented changes occurring in the healthcare industry
show a trend toward home care over institutional care as a matter of patient
preference and cost containment.
Our sales activities generally are conducted by our full-time sales
representatives. In addition to promoting the high quality of our equipment and
services, the sales representatives are trained to provide information
concerning the advantages of home respiratory care.
We primarily acquire new customers through referrals. Our principal sources
of referrals are physicians, hospital discharge planners, prepaid health plans,
clinical case managers and nursing agencies. Our sales representatives maintain
continual contact with these medical professionals in order to strengthen these
relationships. No single referral source accounted for more than 10% of our
revenues for the two year period ended September 30, 2003. We currently have
more than 1,500 active customers, and the loss of any single customer or group
of customers would not materially impact our business. On the other hand if we
were unable to obtain Medicare or Medicaid reimbursement such event would have a
material adverse effect on our business.
Through our sales force, we market our products and services primarily to
managed care organizations, physicians, hospitals, medical groups, home health
agencies and case managers.
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Suppliers
We purchase our products from a variety of suppliers. We are not dependent
upon any single supplier and believe that our equipment needs can be provided by
several third-party manufacturers.
Competition
The segment of the healthcare market in which we operate is fragmented and
highly competitive. There are a limited number of national providers and
numerous regional and local providers operating in each of our product and
service line markets. Our major operating market is the Metropolitan New York
City area and the competitive factors that are most important are:
- reputation with referral sources, including local physicians
and hospital-based professionals;
- access and responsiveness;
- price of services;
- overall ease of doing business;
- quality of care and service; and
- range of home healthcare services.
We believe that quality of service is the single most important competitive
factor within the home healthcare market. The relationships between a home
healthcare company and its customers and referral sources are highly personal.
There is no incentive for either the physician or the patient to alter this
relationship so long as the home healthcare company is providing responsive,
professional and high-quality service.
Other key competitive factors are efficiency of reimbursement and accounts
receivable management systems. Home healthcare companies compete primarily on
the basis of service, since reimbursement levels are established by fee
schedules promulgated by Medicare, Medicaid or by the individual determinations
of private insurance companies. Furthermore, marketing efforts by home
respiratory care companies are typically directed toward referral sources which
generally do not share financial responsibility for the payment of services
provided to customers.
It is increasingly important to be able to integrate a broad range of home
healthcare services to provide customers access through a single source. We
believe that we compete effectively in each of our product and service lines
with respect to all of the above factors.
Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations have entered, and may continue to
enter, the markets in which we operate. Depending on their individual
situations, it is possible that our competitors may have, or may obtain,
significantly greater financial and marketing resources than we do.
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Government Regulation
We are subject to extensive government regulation, including numerous laws
directed at preventing fraud and abuse and laws regulating reimbursement under
various governmental programs.
The federal government and all states in which we currently operate and
intend to operate regulate various aspects of our business. In particular, our
operating branches are subject to federal laws covering the repackaging of drugs
(including oxygen) and regulating interstate motor-carrier transportation. Our
locations also are subject to state laws governing, among other things,
pharmacies, nursing services, distribution of medical equipment and certain
types of home healthcare activities. Certain of our employees are subject to
state laws and regulations governing the ethics and professional practice of
respiratory therapy and nursing and in the future, pharmacy.
As a healthcare supplier, we are subject to extensive government
regulation, including numerous laws directed at preventing fraud and abuse and
laws regulating reimbursement under various government programs. The marketing,
billing, documentation and other practices of health care companies are all
subject to government scrutiny. To ensure compliance with Medicare and other
regulations, regional carriers often conduct audits and request patient records
and other documents to support claims submitted by our company for payment of
services rendered to patients. Similarly, government agencies periodically open
investigations and obtain information from health care providers pursuant to the
legal process. Violations of federal and state regulations can result in severe
criminal, civil and administrative penalties and sanctions, including
disqualification from Medicare and other reimbursement programs.
Healthcare is an area of rapid regulatory change. Changes in law and
regulations, as well as new interpretations of existing laws and regulations may
affect permissible activities, the relative costs associated with doing
business, and reimbursement amounts paid by federal, state and other third party
payors. We can not predict the future of federal, state and local regulation or
legislation, including Medicare and Medicaid statutes and regulations, or
possible changes in national health care policies, each of which could have a
material adverse impact on our company.
Set forth below are the material laws and regulations that affect our
operations.
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Medicare and Medicaid Reimbursement
As part of the Social Security Amendments of 1965, Congress enacted the
Medicare program, which provides for hospital, physician and other
statutorily-defined health benefits for qualified individuals, such as persons
over 65 and the disabled. The Medicaid program, also established by Congress in
1965, is a joint federal and state program that provides certain
statutorily-defined health benefits to financially needy individuals who are
blind, disabled, aged, or members of families with dependent children. Medicaid
also generally covers financially needy children, refugees and pregnant women. A
substantial portion of our revenue is attributable to payments received from
third-party payors, including the Medicare and Medicaid programs. For the year
ended September 30, 2003, approximately 20% of our net revenue was derived from
Medicare and 6% of net revenues were derived from Medicaid. For the nine months
ended September 30, 2002, approximately 21% of net revenues were derived from
Medicare and less than 1% were derived from Medicaid.
In December 2000, federal legislators enacted the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000. Among other items, this
legislation provides the home healthcare industry with some relief from the
effects of the Balanced Budget Act of 1997, which contained a number of
provisions that are affecting, or could potentially affect, our Medicare
reimbursement levels. The Medicare Balanced Budget Refinement Act of 1999 also
mitigated some of the effects of the Balanced Budget Act of 1997. The Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 provided
reinstatement in 2001 of the full annual cost of living adjustment for durable
medical equipment and provided for minimal increases in 2002 for durable medical
equipment and oxygen. The Balanced Budget Act of 1997 had frozen such
adjustments for each of the years 1998 through 2002.
The Balanced Budget Act of 1997 granted authority to the Secretary of HHS
to increase or reduce the reimbursement for home medical equipment, including
oxygen, by 15% each year under an inherent reasonableness procedure. However,
under the provisions of the Medicare Balanced Budget Refinement Act of 1999,
reimbursement reductions proposed under the inherent reasonableness procedure
have been delayed pending (a) a study by the General Accounting Office to
examine the use of the authority granted under this procedure (completed in July
2000), and (b) promulgation by the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration), of a final rule
implementing the inherent reasonableness authority. This final rule has not yet
been issued. Further, the Balanced Budget Act of 1997 mandated that the Centers
for Medicare & Medicaid Services conduct competitive bidding demonstrations for
Medicare Part B items and services. The competitive bidding demonstrations,
currently in progress, could provide the Centers for Medicare & Medicaid
Services and Congress with a model for implementing competitive pricing in all
Medicare programs. If such a competitive bidding system were implemented, it
could result in lower reimbursement rates, exclude certain items and services
from coverage or impose limits on increases in reimbursement rates.
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The current Bush administration is seeking authority to implement
nationwide competitive bidding for all Part B products and services (except
physician's services). Congress has rejected similar proposals in the past. It
is not clear whether Congress will adopt this latest proposal.
Claims Audits
Durable medical equipment regional carriers are private organizations that
contract to serve as the federal government's agents for the processing of
claims for items and services provided under Part B of the Medicare program.
These carriers and Medicaid agencies also periodically conduct pre-payment and
post-payment reviews and other audits of claims submitted. Medicare and Medicaid
agents are under increasing pressure to scrutinize healthcare claims more
closely. In addition, the home healthcare industry is generally characterized by
long collection cycles for accounts receivable due to complex and time-consuming
requirements for obtaining reimbursement from private and governmental
third-party payors. Such long collection cycles or reviews and/or similar audits
or investigations of our claims and related documentation could result in
denials of claims for payment submitted by our company. Further, the government
could demand significant refunds or recoupments of amounts paid by the
government for claims which, upon subsequent investigation, are determined by
the government to be inadequately supported by the required documentation.
HIPAA
The Health Insurance Portability and Accountability Act mandates the
adoption of standards for the exchange of electronic health information in an
effort to encourage overall administrative simplification and to enhance the
effectiveness and efficiency of the healthcare industry. Ensuring privacy and
security of patient information - "accountability" - is one of the key factors
driving the legislation. The other major factor - "portability" - refers to
Congress' intention to ensure that individuals can take their medical and
insurance records with them when they change employers. In August 2000, HHS
issued final regulations establishing electronic data transmission standards
that healthcare providers must use when submitting or receiving certain
healthcare data electronically. All affected entities, including our company,
were required to comply with these regulations by October 16, 2002 unless the
entity filed an extension form, in which case the date was extended until
October 16, 2003. Our Company filed such an extension and became fully compliant
as at September 30, 2003.
In December 2000, HHS issued final regulations concerning the privacy of
healthcare information. These regulations regulate the use and disclosure of
individuals' healthcare information, whether communicated electronically, on
paper or orally. All affected entities, including our company, were required to
comply with these regulations by April 14, 2003, which the Company has done. The
regulations also provide patients with significant new rights related to
understanding and controlling how their health information is used or disclosed.
In March 2002, HHS issued proposed amendments to the final regulations which if
ultimately adopted, would make our compliance with certain of the requirements
less burdensome.
13
HHS is expected to issue final regulations concerning the security of
healthcare information maintained or transmitted electronically. Security
regulations proposed by HHS in August 1998 would have required healthcare
providers to implement organizational and technical practices to protect the
security of such information. Once the security regulations are finalized, the
company will have approximately two years to comply with such regulations.
Although the enforcement provisions of HIPAA have not yet been finalized,
sanctions are expected to include criminal penalties and civil sanctions. We
anticipate that we will be able to fully comply with the HIPAA regulations that
have been issued by their respective mandatory compliance dates. Based on the
existing and proposed HIPAA regulations, we believe that the cost of compliance
with HIPAA will not have a material adverse effect on our business, financial
condition or results of operations.
The Anti-Kickback Statute
Our company, as a provider of services under the Medicare and Medicaid
programs, is subject to the Medicare and Medicaid fraud and abuse laws,
sometimes referred to as the "anti-kickback statute." At the federal level, the
anti-kickback statute prohibits any bribe, kickback or rebate in return for the
referral of patients, products or services covered by federal healthcare
programs. Federal healthcare programs have been defined to include plans and
programs that provide health benefits funded by the United States Government,
including Medicare, Medicaid, and TRICARE (formerly known as the Civilian Health
and Medical Program of the Uniformed Services), among others. Violations of the
anti-kickback statute may result in civil and criminal penalties and exclusion
from participation in the federal healthcare programs. In addition, a number of
states have laws similar in nature to the anti-kickback statute, that prohibit
certain direct or indirect payments or fee-splitting arrangements between
healthcare providers, if such arrangements are designed to induce or encourage
the referral of patients to a particular provider. Possible sanctions for
violation of these restrictions include exclusion from state-funded healthcare
programs, loss of license and civil and criminal penalties. Such statutes vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies.
Physician Self-Referrals
Certain provisions of the Omnibus Budget Reconciliation Act of 1993,
commonly known as "Stark II", prohibit us, subject to certain exceptions, from
submitting claims to the Medicare and Medicaid programs for "designated health
services" if we have a financial relationship with the physician making the
referral for such services or with a member of such physician's immediate
family. The term "designated health services" includes several services commonly
performed or supplied by us, including durable medical equipment and home health
services. In addition, "financial relationship" is broadly defined to include
any ownership or investment interest or compensation arrangement pursuant to
which a physician receives remuneration from the provider at issue. Violations
of Stark II may result in loss of Medicare and Medicaid reimbursement, civil
penalties and exclusion from participation in the Medicare and Medicaid programs
14
In January 2001, the Centers for Medicare & Medicaid Services issued the
first of two phases of final regulations to clarify the meaning and application
of Stark II and the second phase was issued in May 2003. The first phase
addresses the primary substantive aspects of the prohibition and several key
exceptions. Significantly, the final regulations define previously undefined key
terms, clarify prior definitions, and create several new exceptions for certain
"indirect compensation arrangements", "fair market value" transactions,
arrangements involving non-monetary compensation up to $300, and risk-sharing
arrangements, among others. The regulations also create a new "knowledge"
exception that permits providers to bill for items provided in connection with
an otherwise prohibited referral, if the provider does not know, and does not
act in reckless disregard or deliberate ignorance of, the identity of the
referring physician. The effective date for the bulk of the first phase of the
final regulations was January 4, 2002 and the second phase became effective when
issued in May 2003. Finally, recent enforcement activity and resulting case law
developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II,
especially in the area of joint venture arrangements with physicians.
False Claims
The False Claims Act imposes civil and criminal liability on individuals or
entities that submit false or fraudulent claims for payment to the government.
Violations of the False Claims Act may result in treble damages, civil monetary
penalties and exclusion from the Medicare and Medicaid programs. The False
Claims Act also allows a private individual to bring what is known as a "qui
tam" lawsuit on behalf of the government against a healthcare provider for
violations of the False Claims Act. A qui tam suit may be brought by, with only
a few exceptions, any private citizen who has material information of a false
claim that has not yet been previously disclosed. Even if disclosed, the
original source of the information leading to the public disclosure may still
pursue such a suit. Although a corporate insider is often the plaintiff in such
actions, an increasing number of outsiders are pursuing such suits.
In a qui tam suit, the private plaintiff is responsible for initiating a
lawsuit that may eventually lead to the government recovering money of which it
was defrauded. After the private plaintiff has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and become the
primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the
private plaintiff's counsel will have primary control over the prosecution
(although the government must be kept apprised of the progress of the lawsuit
and will still receive at least 70% of any recovered amounts). In return for
bringing the suit on the government's behalf, the statute provides that the
private plaintiff is entitled to receive up to 30% of the recovered amount from
the litigation proceeds if the litigation is successful. Recently, the number of
qui tam suits brought against healthcare providers has increased dramatically.
In addition, at least five states - California, Illinois, Florida, Tennessee and
Texas - have enacted laws modeled after the False Claims Act that allow those
states to recover money which was fraudulently
15
obtained by a healthcare provider from the state (e.g., Medicaid funds provided
by the state).
Other Fraud and Abuse Laws
The Health Insurance Portability and Accountability Act of 1996 created two
new federal crimes: "Health Care Fraud" and "False Statements Relating to Health
Care Matters." The Health Care Fraud statute prohibits knowingly and willfully
executing a scheme or artifice to defraud any healthcare benefit program. A
violation of this statute is a felony and may result in fines and/or
imprisonment. The False Statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or
services. A violation of this statute is a felony and may result in fines and/or
imprisonment. Recently, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
healthcare fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
Internal Controls
We maintain several programs designed to minimize the likelihood that we
would engage in conduct or enter into contracts in violation of the Federal and
state fraud and abuse laws. Contracts of the types subject to these laws are
reviewed and approved by the corporate contract services and/or legal
departments. We also maintain various educational programs designed to keep our
managers updated and informed on developments with respect to the fraud and
abuse laws and to remind all employees of our policy of strict compliance in
this area.
While we believe our discount agreements, billing contracts and various
fee-for-service arrangements with other healthcare providers comply with
applicable laws and regulations, we cannot provide any assurance that further
administrative or judicial interpretations of existing laws or legislative
enactment of new laws will not have a material adverse effect on our business.
Healthcare Reform Legislation
Economic, political and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Healthcare reform proposals
have been formulated by the legislative and administrative branches of the
federal government. In addition, many states periodically consider various
healthcare reform proposals. We anticipate that federal and state governmental
bodies will continue to review and assess alternative healthcare delivery
systems and payment methodologies and public debate of these issues will
continue in the future. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment and implementation, we cannot predict
which, if any, of such reform proposals will be adopted or when they may be
adopted or
16
that any such reforms will not have a material adverse effect on our business
and results of operations. Healthcare is an area of extensive and dynamic
regulatory change.
Changes in the law or new interpretations of existing laws can have a
dramatic effect on permissible activities, the relative costs associated with
doing business and the amount of reimbursement by government and other
third-party payors. Recommendations for changes may result from an ongoing study
of patient access by the General Accounting Office and from the potential
findings of the National Bipartisan Commission on the Future of Medicare.
Environmental Matters
We believe that we are currently in compliance, in all material respects,
with applicable federal, state and local statutes and ordinances regulating the
discharge of hazardous materials into the environment. We will not be required
to expend any material amounts in order to remain in compliance with these laws
and regulations and such compliance will not materially affect capital
expenditures, results of operations or competitive position.
Risk Factors Affecting Our Business Operations
We have set forth below a number of risk factors affecting our business
operations.
Our failure to maintain our controls and processes over billing and
collecting or the deterioration of the financial condition of its payors
could reduce our cash collections and increase our accounts receivable
write-offs.
The collection of accounts receivable is one of our most significant
challenges and requires constant focus and involvement by management, and
ongoing enhancements to information systems and billing center operating
procedures. Further, some of our payors may experience financial
difficulties, or may otherwise not pay accounts receivable when due,
resulting in increased write-offs. We can provide no assurance that we will
be able to maintain our current levels of collectibility and days sales
outstanding in future periods. If we are unable to properly bill and
collect our accounts receivable, our results of operations and financial
condition could be adversely affected.
Our implementation of significant system modifications could have a
disruptive effect on related transaction processing and could ultimately
disrupt the collection of revenues and increase accounts receivable and
inventory write-offs.
Changes in government laws and regulations, as well as third-party claims
submission procedures and competitive demands, will require us to
continuously develop, monitor and upgrade our management information
systems. The development and implementation of these system changes could
have a disruptive effect on related transaction processing. Such a
disruptive effect could cause us to be unable to
17
properly bill and collect on our accounts receivable and thereby, adversely
affect our results of operations, and financial condition.
We could be subject to severe fines, facility shutdowns and possible
exclusion from participation in Federal healthcare programs if we fail to
comply with the laws and regulations applicable to our business or if those
laws and regulations change.
We are subject to stringent laws and regulations at both the federal and
state levels, requiring compliance with burdensome and complex billing,
substantiation and record-keeping requirements. Financial relationships
between our company and physicians and other referral sources are subject
to strict and ambiguous limitations. Government officials and the public
will continue to debate healthcare reform. Changes in healthcare law, new
interpretations of existing laws, or changes in payment methodology may
have a dramatic effect on our business and results of operations.
Continued reductions in Medicare reimbursement rates could result in
reduced revenues, earnings and cash flows for our company.
The Balanced Budget Act of 1997 significantly reduced the Medicare
reimbursement rates for home oxygen therapy and included other provisions
that have impacted or may impact reimbursement rates in the future, such as
potential reimbursement reductions under an inherent reasonableness
procedure and competitive bidding. We can provide no assurance that further
reimbursement reductions will not be made. Since Medicare accounted for
approximately 20% of our net revenues for the year ended September 30, 2003
and 21% for the nine months ended September 30, 2002, any further reduction
in reimbursement rates could result in lower revenues, earnings and cash
flows for our company.
In addition, the terrorist attacks of September 11, 2001 and the military
and security activities which followed, their impacts on the United States
economy and government spending priorities, and the effects of any further
such developments pose risks and uncertainties to all U.S.-based
businesses, including our company. Among other things, deficit spending by
the government as the result of adverse developments in the economy and
costs of the government's response to the terrorist attacks could lead to
increased pressure to reduce government expenditures for other purposes,
including governmentally-funded programs such as Medicare.
Continued pressure to reduce healthcare costs could reduce our margins and
limit our ability to maintain or increase our market share.
The current market continues to exert pressure on healthcare companies to
reduce healthcare costs, resulting in reduced margins for home healthcare
providers such as our company. Large buyer and supplier groups exert
additional pricing pressure on home healthcare providers. These include
managed care organizations, which control an increasing portion of the
healthcare economy. We have a number of contractual
18
arrangements with managed care organizations, although no individual
arrangement accounted for more than 10% of our net revenues during the year
ended September 30, 2003 and the nine months ended September 30, 2002.
Certain competitors of ours may have or may obtain significantly greater
financial and marketing resources than us. In addition, relatively few
barriers to entry exist in local home healthcare markets. As a result, we
could encounter increased competition in the future that may increase
pricing pressure and limit our ability to maintain or increase market
share.
We may not be able to successfully integrate acquired businesses, which
could result in a slowdown in cash collections and ultimately lead to
increases in our accounts receivable write-offs.
We anticipate that our acquisition strategy will result in labor-intensive
patient qualification processes and conversions of patient files onto our
billing systems. This can shift focus away from our routine processes.
These activities and the time required to obtain provider numbers from
government payors often delay billing of the newly acquired business, which
may delay cash collections. Moreover, excessive delays may make certain
items uncollectible. The successful integration of an acquired business is
also dependent on the size of the acquired business, the condition of the
patient files, the complexity of system conversions, the scheduling of
multiple acquisitions in a given geographic area and local management's
execution of the integration plan. If we are not successful in integrating
acquired businesses, their results of operations could be adversely
affected.
Seasonality
The home healthcare industry is not seasonal in nature.
Employees
As of January 31, 2004 our parent company, Critical Home Care, Inc., had 4
employees, including three executive officers, and one person performing
accounting, bookkeeping and clerical duties. Our operating subsidiaries employ
an aggregate of 35 persons including the director of operations, one respiratory
therapist, 4 branch managers, who also function as sales representatives; 4
certified or assistant orthotic fitters and prosthetists; 9 persons who are
billing and collection specialists; 6 retail sales and clerical persons; 4
administrative employees; and 5 persons who perform equipment delivery and set
up services and one warehouse manager.
19
Item 2. Description of Property.
We lease facilities at 762 Summa Avenue, Westbury, New York. These
facilities serve as our corporate headquarters and operations center. The
facilities encompass approximately 10,000 square feet of space at a fixed rental
cost of $6,850 per month and the lease expires on June 11, 2007. We also rent 3
points of service locations in Patchogue, Babylon, and Lake Success, New York at
a combined monthly rental of approximately $25,000. These leases expire July 27,
2007, December 31, 2010, and February 29, 2012 respectively.
Item 3. Legal Proceedings.
In April 2003, Ruth Davis and Herman Davis (wife and husband) commenced a
lawsuit in Nassau County Supreme Court against the Company's subsidiary Classic
Healthcare Solutions, Inc. ("Classic"). Plaintiff Mrs. Davis claims to have
sustained injuries on September 15, 2002, from an alleged malfunction of the
chair lift, which she acquired from Classic, and claims damages of $2,000,000.
In addition, plaintiff Mr. Davis claims damages of $500,000 for loss of
services.
The Company's insurance carrier is defending the lawsuit on behalf of the
Company and management believes that there is sufficient insurance coverage
under the insurance policy to satisfy any typical settlement of the claims. In
addition, any product liability insurance carried by the manufacturer of the
chair lift would most likely complement that of Classic. As the lawsuit is only
in the discovery stage, management cannot predict the outcome of the case,
however, management is of the opinion that any settlement in this matter would
not have a material impact on the financial condition or operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market For Common Equity and Related
Stockholder Matters.
Our common stock is traded in the over-the-counter market and was quoted on
the NASD OTC Bulletin Board under the symbol "CCLH" from September 26, 2002
through January 20, 2004. Since January 21, 2004 the common stock has traded
under the symbol CCLHE, due to the non-filing of our annual report on Form-10KSB
for the year ended September 30, 2003 on a timely basis. The Company filed such
report on February 17, 2004. Prior to September 26, 2002, before the reverse
merger with Critical Home Care, Incorporated the
20
Company's Common Stock was quoted under the symbol NYMD.OB from August 6, 2002
through September 25, 2002 and before that the Company was known as Mojave
Southern, Inc. and the stock did not trade nor was it quoted. The following
table presents the range of the high and low bid quotations for our common stock
as reported for each quarter within the last two fiscal years. The quotations
represent prices between dealers and do not include retail markups, markdowns or
commissions and do not necessarily represent actual transactions.
For the Year Ended Sales Prices
September 30, 2003 High Low
-------------------------- -------- -------
October 1, 2002 through $3.40 $2.46
December 31, 2002
January 1, 2003 through $2.50 $.10
March 31, 2003
April 1, 2003 through $.45 $.18
June 30, 2003
July 1, 2003 through $.43 $.19
September 30, 2003
For the Year Ended Bid Prices
September 30, 2002 High Low
----------------------------------- ------- ------
January 1, 2002 through
March 31, 2002 * *
April 1, 2002 through
June 30, 2002 $ 0.03 $0.03
July 1, 2002 through
September 30, 2002 $ 4.10 $0.03
* During the period of January 31, 2001 through May 21, 2002 the Company was
known as Mojave Southern, Inc. and there were no bid or asked quotes nor were
there any purchases or sales of the common stock of the Company.
As of February 16, 2004, there were approximately 230 holders of record of
our common stock. Additionally we believe there are approximately 550
stockholders whose shares are held in street name.
No cash or stock dividends have been declared or paid during the last two
fiscal years and it is unlikely the Company will declare any cash dividends in
the foreseeable future.
21
On October 25, 2002, the Company consummated an initial closing of gross
proceeds of $550,000 pursuant to a private placement under to Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The placement was for
up to a maximum of $2,000,000 of convertible promissory notes (the "Notes") that
were originally due on December 31, 2002 and were automatically convertible into
common shares at the rate of one share for one dollar of notes at the discretion
of the Company. On November 11, 2002, the Company elected to convert the
$550,000 received plus accrued interest of $2,168 into 552,168 common shares.
Pursuant to the extension terms of the private placement offering document and
through February 18, 2003, the Company received an additional $115,858 and the
respective notes were converted into a total of 115,858 shares. The private
placement terminated on February 28, 2003.
EQUITY COMPENSATION PLANS
The following table sets forth certain information as of the fiscal year
ended September 30, 2003, with respect to our compensation plans (including
individual compensation arrangements).
EQUITY COMPENSATION PLAN INFORMATION TABLE
------------------------------ ---------------------------- --------------------------- ----------------------------
(a) (b) (c)
------------------------------ ---------------------------- --------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans None
approved by security holders
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans 1,013,100 common shares $0.68 986,900 common shares
not approved by security
holders
------------------------------ ---------------------------- --------------------------- ----------------------------
Total 1,013,100 common shares $0.68 986,900 common shares
------------------------------ ---------------------------- --------------------------- ----------------------------
Item 6. Management's Discussion and Analysis and Plan of Operations.
GENERAL
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-KSB.
22
RESULTS OF OPERATIONS
For The Year Ended September 30, 2003 Compared to the Year Ended September
30, 2002 (See Footnote 2to the Consolidated Financial Statements)
Sales increased by $ 3,861,000 or 244% for the year ended September 30,
2003, as compared to the year ended September 30, 2002. Approximately $3,118,000
of this increase is attributable to sales generated by the operations of All
Care Medical Products and Homecare Alliance which have been consolidated with
those of the Company since their respective dates of acquisition. The balance of
$ 743,000 represents an increase in sales generated by Classic Healthcare.
Gross profit for the year ended September 30, 2003 was 69.4%, a slight
decrease from the 70.0% recorded in the year ended September 30, 2002. The
decrease is attributable to a different sales mix due to the addition of the
sales of Homecare Alliance and All Care Medical Products. The decrease was
offset, in part by the Company's DME rental income, which comprises a higher
percentage of sales, and generates a slightly higher gross profit than other
sales.
Selling, general and administrative expenses totaled $5,499,000 for the
year ended September 30, 2003 compared to $1,231,000 in the year ended September
30, 2002. The net increase of $4,268,000 consists primarily of selling, general
and administrative expenses of approximately $ 2,667,000 attributable to the
operations of Alliance and All Care, including a bad debt write off of $614,000
relative to certain historical accounts receivable of All Care, that were
generated prior to their acquisition, and subsequent to their acquisition by
Critical on September 12, 2002. In addition, the Company expensed costs of
$103,000 and $35,000, respectively, for the termination of credit negotiations
with Health Care Business Credit Corp., and Health Capital Management Special
Purpose Corporation, incurred professional fees and other expenses of $25,000
related to the terminated Ocean Breeze acquisition, and professional fees and
other expenses related to becoming a public company increased by approximately
$264,000. There was also a non-cash charge of $228,000 for stock option
compensation and there was an increase of approximately $946,000 in the selling,
general and administrative expenses of Classic. The increase of $946,000
consists primarily of an increase of approximately $ 517,000 in salaries and
related taxes and benefits from $477,000 in the year 2002 to $994,000 in the
2003. Of this increase, $ 106,000 is attributable to the two officers of Classic
who were paid a minimum salary in 2002 and who were paid pursuant to employment
contracts in 2003. The balance is comprised of employee review increases and the
payroll cost in the increase in number of staff at Classic. In addition, the
Company recorded a bad debt write off of $376,000 relative to certain historical
accounts receivable of Classic that were generated prior to and subsequent to
the acquisition by Critical on July 12, 2002, and there was a net increase of
approximately $ 53,000 in all other expenses.
Net interest expense for the year ended September 30, 2003 was $142,000 as
compared to $28,000 in the year ended September 30, 2002. Total interest expense
incurred during the year ended September 30, 2003 was $157,000 including $75,000
of
23
amortization of deferred interest, and $82,000 of interest on notes payable.
This amount was netted against interest income of $ 15,000 which was the result
of forgiveness of interest by certain noteholders. The average debt outstanding
for the year ended September 30, 2003 was approximately $ 1,138,000, and for the
year ended September 30, 2002 was immaterial, since most of the debt was
incurred after September 12, 2002.
Other income of $138,000 consists of net proceeds from billings for
services provided by Alliance to their patients prior to the acquisition of
their assets by Critical on August 8, 2002. Alliance was unable to bill for such
services as their Medicare license was terminated effective December 17, 2001.
The prospective billing was part of the acquired Alliance operations but could
not be billed until the Company had the legal right to submit such billings to
Medicare. On December 16, 2002, the Company was given such authorization to bill
by Medicare and began to do so. Based upon billing and collections through the
end of the year September 30, 2003, the net receipts from such billings are
anticipated to be $138,000.
Amortization of debt discount and beneficial conversion feature, a non-cash
charge, represents the difference between fair market value of the Company's
common stock and the conversion price of convertible notes on the date sold and
issued pursuant to the private placement during the period of October, 2002
through January, 2003. The amount of debt discount pursuant to this calculation
is limited to the amount of investment made in the convertible promissory notes.
The actual difference between the fair value and the conversion price was
$995,000 and the amount recorded in the financial statements is limited to the
total investment of $666,000.
Amortization of deferred debt discount of $30,000 in 2003 represents the
amount of amortization of the $ 56,000 fair value of stock options granted to
certain noteholders as explained in the Company's financial statements. The
amortization is for the period from February 14, 2003 to September 30, 2003.
There was no such comparable expense in the prior year.
The Company recorded a charge for impairment of goodwill in the amount of
$1,500,000 during the year ended September 30, 2003. There was no such
comparable expense in the year ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary needs for liquidity and capital resources are the funding of
operating and administrative expenses related to our management of the Company
and its subsidiaries.
As of September 30, 2003 the Company had a working capital deficit of
$891,000 as compared to a deficit of $ 51,000 as of September 30, 2002.
During the year ended September 30, 2003, cash decreased by $52,000. The
Company's cash of $2,000 and estimated funds that will be generated from
operations are not sufficient to both support current levels of operations for
the next twelve months, as
24
well as to pay current liabilities when due. The Company therefore has
instituted various payroll and expense reductions, including outsourcing its
billing and collection process. These steps, plus other cost saving measures as
required by management, will reduce operational costs.
For the year ended September 30, 2003, net cash used in operating
activities was $880,000. This was primarily attributable to a net loss of
$4,012,000, an increase in accounts receivable of $ 787,000 (net of allowance
for doubtful accounts), and offset, in part, by a $1,500,000 charge for
impairment of goodwill concerning the Company's acquisition of the assets of All
Care Medical Products, Inc., amortization of debt discount and the beneficial
conversion feature of the Company's Common Stock in its private placement and a
decrease in inventory of $19,000.
Cash flow used in investing activities for the year ended September 30,
2003, was $90,000 used to purchase property, plant and equipment consisting
primarily of rental equipment acquisitions.
Cash flows provided by financing activities were $918,000 consisting
primarily of $666,000 proceeds from the private placement of convertible
promissory notes all of which were converted, proceeds from non-affiliated
lenders of $475,000 and from shareholders of $427,000. This was offset, in part,
by the Company's payment of $300,000 of notes relating to two asset acquisition
and $281,000 of notes payable to private lenders.
During the year ended September 30, 2003, the President of the Company
advanced funds to the Company in the aggregate amount of $ 427,000. Such amounts
were used to support operations and pay liabilities as they became due. These
amounts are due and payable from May 2004 through October 2005.
Subsequent to September 30, 2003, the President of the Company has advanced
additional funds to the Company in the aggregate amount of $277,000. Such
amounts are due and payable October through December 2004, and are evidenced by
notes with an 8% annual interest rate due at maturity.
On February 3, 2004 the Company entered into an Amended and Restated
promissory Note for a total of $ 500,000 (the "Restated Note") with Stephen
Garchik, Trustee ("Garchik") and simultaneously executed a related stock options
agreement and a registration rights agreement in favor of Garchik. The stock
options agreement provides Garchik with ten year options to acquire 500,000
shares of the Company's common stock at $0.25 per share and all such options
vested upon grant while the registration rights agreement provides Garchik with
certain piggy-back registration rights in the event the Company files a
registration statement. The Restated Note bears interest at an annual rate of
Prime, as published in the Wall Street Journal (4% as of February 17. 2004),
plus one, and the principle plus all accrued interest is due on June 30, 2004.
25
The Restated Note is comprised of $250,000 previously loaned to the Company
in February 2003 and originally due on April 15, 2004 and $250,000 which was
loaned to the Company on February 3, 2004.
In addition if further financing does not take place the Company will take
further measures to reduce expenditures, possible closure of facility locations,
further reductions in personnel, reduction in overhead costs as deemed
necessary. In such circumstances the Company will seek other sources of funding.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with generally accepted
accounting principles. Preparation of the statements in accordance with these
principles requires that we make estimates, using available data and our
judgment, for such things as valuing assets, accruing liabilities and estimating
expenses. The following is a list of what we feel are the most critical
estimations that we must make when preparing our financial statements.
Accounts Receivable - Allowance for Doubtful Accounts
We routinely review our accounts receivable, by customer account aging, to
determine the collectability of the amounts due based on information we receive
from the customer, past history and economic conditions. In doing so, we adjust
our allowance accordingly to reflect the cumulative amount that we feel is
uncollectible. This estimate may vary from the proceeds that we actually
collect. If the estimate is too low, we may incur higher bad debt expense in the
future resulting in lower net income. If the estimate is too high, we may
experience lower bad debt expense resulting in higher net income.
Fixed Assets - Depreciation
In order to operate our business, we maintain office machinery and
equipment, furniture and fixtures and durable medical equipment that we rent and
sell to customers. These assets have extended lives. We estimate the life of
individual assets to spread the cost over the expected life. The basis for such
estimates is use, technology, required maintenance and obsolescence. We
periodically review these estimates and adjust them if necessary. Nonetheless,
if we overestimate the useful life of an asset, at a point in the future, we
would have to incur higher depreciation costs or a write off which would result
in lower net income. If we underestimate the life of an asset, we would absorb
too much depreciation in the early years and experience higher net income in the
later years when the asset is still in service.
Goodwill - Intangible Asset Impairment
We have acquired the assets of two companies, one which required the
recording of Goodwill. In recording any such transaction we are required to
recognize the full purchase price. The difference between the value of the
assets and liabilities acquired, including transaction costs, and the purchase
price was recorded as goodwill. If goodwill is not
26
impaired, it remains as an asset on our balance sheet at the recorded value. If
it is impaired, we are required to write down the asset to an amount that
accurately reflects its carrying value. We have had a valuation expert perform
the study contemplated by accounting standards to assist us in determining
whether our goodwill balance is impaired. However, in conducting the valuation,
the experts relied, in part, on estimated future cash flows that we provided.
Changes in estimated cash flows may result in a material negative impact on the
conclusion of the valuation of goodwill and a resulting impairment write down in
the future. Under these circumstances, the Company performed an analysis to test
the carrying value of goodwill at June 30, 2003 to determine whether there was
an indication of impairment. The amount of any impairment is measured as the
excess of the carrying value over the implied fair value. Such analysis resulted
in an impairment of goodwill of approximately $ 1,500,000, which has been
charged to expense during the year ended September 30, 2003. It was determined
at year end by our review and analysis, in conjunction with independent
professionals, that no additional adjustment for impairment was required.
Item 7. Financial Statements.
The financial statements follow Item 14 of this report.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
Mark Sherman, CPA, based in Las Vegas ("Sherman"), was the auditor for
Mojave Southern, Inc. ("Mojave") and New York Medical, Inc. ("NYMI") and
resigned as such on October 14, 2002 in conjunction with the reverse merger
between the Company and Critical Home Care, Incorporated. There were no
disagreements between Sherman and the management of Mojave or NYMI.
As a result of the reverse merger, the historical financial statements of
Classic Healthcare Solutions, Inc., the operating subsidiary of the Company,
became the historical financial statements of the Company for reporting
purposes.
On October 14, 2002 we engaged Grassi and Co., CPA's P.C. to serve as our
independent public accountants for the fiscal year then ending December 31,
2002. On December 10, 2002, the Board of Directors approved a change in our
fiscal year end from a calendar year ending December 31 to a fiscal year ending
September 30. Such change was effective for book and tax purposes as of the year
(nine months) ended September 30, 2002 and Grassi & Co., CPA's, P.C. has audited
the financial statements included herein as of and for such period.
On May 7, 2003 the Company filed a report on Form 8-K to disclose a change
in the Company's certifying accountants. Critical Home Care, Inc., with the
approval of the
27
Audit Committee of the Board of Directors, dismissed its independent
accountants, Grassi & Co., CPA's, P.C. on May 2, 2003. The reports of Grassi &
Co.,CPA's, P.C. on the consolidated financial statements of Critical Home Care,
Inc. as of September 30, 2002 and December 31, 2001 for the nine months and year
ended respectively contained no adverse opinion or disclaimer of opinion and
were not otherwise qualified or modified as to uncertainty, audit scope or
accounting principle. There were no disagreements between Grassi & Co.,CPA's,
P.C. and management of Critical Home Care, Inc.
On May 2, 2003 the Company with the approval of the Audit Committee of the
Board of Directors, engaged Marcum & Kliegman LLP as its new independent public
accountants.
Item 8A. Controls and Procedures
Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c) have concluded that as of September 30, 2003 (the "Evaluation Date")
our disclosure controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Changes in internal controls
Subsequent to the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures, nor were there any significant deficiencies
or material weaknesses in our internal controls. As a result, no corrective
actions were required or undertaken.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Our current executive officers, directors and significant employees are as
follows:
Name Age Position
---- --- --------
David Bensol 48 Chief Executive Officer, President
and Chairman of the Board
Bradley Smith 52 Vice President, Secretary
and a Director
Eric S. Yonenson 55 Chief Financial Officer
Mitchell Cooper 49 Director
Barbara Levine 53 Director
Delbert Spurlock 61 Director
28
David Bensol has served as our Chief Executive Officer, President and
Chairman of our Board of Directors since September 26, 2002, after working in
the healthcare industry for over 25 years. He served as the Chief Executive
Officer and a director of our subsidiary, Classic Healthcare, since its
formation in October 2000. From 1978 until March 1998, Mr. Bensol was the
President, Chief Executive Officer and sole owner of Newbridge Surgical
Supplies, Inc., a medical supplier for home medical equipment, acute care
pharmacies and specialty support surface providers throughout the five boroughs
of New York City and the suburban counties of Nassau and Suffolk. In March 1998,
Newbridge Surgical was acquired by Home Care Supply, Inc., another medical
supplier to the home medical equipment market for the New York City metropolitan
area. Upon Newbridge Surgical's acquisition by Home Care, Mr. Bensol became Home
Care's executive vice president, a position he retained through January 2000.
While at Home Care, he supervised Home Care's acquisition and subsequent
consolidation of two other medical suppliers to the home medical equipment
market for the New York City metropolitan area. From February 2000 to March
2001, Mr. Bensol served as the chief operating officer of American Prescription
Providers, Inc., a New York based mail order pharmacy.
Bradley Smith has served as our Secretary and a director since September
26, 2002. He has over 25 years of experience in the home medical equipment
industry. He served as Vice President - Director of Clinical Services and a
director of our subsidiary, Classic Healthcare, since he co-founded the company
with David Bensol in October 2000. From 1980 to 1995, Mr. Smith was the
President and sole owner of Levittown Surgical Supply, Inc., a medical supplier
to the home medical equipment market for Nassau and Suffolk Counties. In
February 1995, Levittown Surgical was acquired by Newbridge Surgical Supplies,
Inc., a medical supplier to the home medical equipment market for the five
boroughs of New York City and the suburban counties of Nassau and Suffolk. In
March 1998, Newbridge Surgical was acquired by Home Care Supply, Inc., another
medical supplier to the home medical equipment market for the New York City
metropolitan area. Mr. Smith directed the orthotics and prosthetic programs at
both Newbridge Surgical and Home Care Supply through August 2000.
Eric S. Yonenson became the Chief Financial Officer of the Company on March
10, 2003. From June 1994 through October 1998 Mr. Yonenson was the Chief
Financial Officer of Newbridge Surgical Supplies, Inc., which was acquired by
Home Care Supply, Inc., another medical supplier to the home medical equipment
market. From November 1998 through August 2000, Mr. Yonenson was a supervisor
with Margolin Winer & Evens LLP, a certified public accounting firm. From
September 2000 until March 2003 was the controller of Jac.Vandenberg, Inc. a
national fruit distributor. Mr. Yonenson is a certified public accountant, and
is a member of the American Institute of Certified Public Accountants and New
York State Society of Certified Public Accountants.
29
Mitchell Cooper became a director of the Company on September 26, 2002. Mr.
Cooper has been a partner in the Mineola law firm of Spizz & Cooper, LLP, since
1983 where he specializes in tax matters. Mr. Cooper is a certified public
accountant and holds a Master of Laws in Taxation from New York University
School of Law. He is also a Special Professor of Law at Hofstra University Law
School and an Adjunct Professor of Law at Touro Law School, where he teaches
Finance and Accounting for Lawyers, Corporate Taxation, Advanced Corporate
Taxation, Estate and Gift Taxation and Estate Planning.
Barbara Levine, Ph.D. became a director of the Company on September 27,
2002. She is the Co-Director of the Human Nutrition Program at The Rockefeller
University and the Director of Nutrition Information Center at The New York
Hospital-Weill Medical College of Cornell University. Dr. Levine holds numerous
professional memberships and is actively involved with local and national
committees related to diet, nutrition and health issues.
Delbert Spurlock, Jr. became a director of the Company on October 17, 2002.
Since May 1993, Mr. Spurlock has served as the Associate Publisher/Executive
Vice President of the Daily News L.P., New York Daily News. From 1991 until
January 1993, Mr. Spurlock was Deputy Secretary of Labor, U.S. Department of
Labor. Prior thereto, from 1981 to 1989 he was employed by the Department of the
Army, Pentagon, Washington, D.C. From 1981 to 1983, he was General Counsel and
from 1983 to 1989, he was Assistant Secretary of the Army. Mr. Spurlock has held
other government positions, had his own private law firm, and had numerous
presentations and publications.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Vacancies on the Board of
Directors may be filled by the remaining directors until the next annual
stockholders' meeting. Officers serve at the discretion of the Board.
We currently have one standing committee, the Audit Committee. The Audit
Committee was formed on October 18, 2002. The members of the Audit Committee are
Mr. Cooper (chairman), Dr. Levine and Mr. Spurlock. Mr. Cooper serves as the
Audit Committee financial expert. The Company believes that all members of the
audit committee are independent as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act. The duties of the Audit Committee include
recommending the selection of an independent auditor, reviewing the audit, or
proposed report of audit, and the accompanying management letter or other
statement to be included in the Annual Report to Shareholders and ensuring that
the Company has adequate internal accounting controls. Additionally, the
Committee reviews policies, and procedures in place to assure compliance with
applicable laws, regulations and company policy.
30
Code of Ethics
On December 22, 2003, our Board of Directors adopted a Code of Ethics which
applies to the principal executive officer, principal financial officer,
principal accounting officer or controller and persons performing similar
functions. We will provide a copy of the Code of Ethics, without charge, to any
person who sends a written request addressed to the Secretary at Critical Home
Care, Inc., 762 Summa Avenue, Westbury, New York 11590. A copy of the Code of
Ethics has been filed as an exhibit to this Annual Report.
The Company intends to disclose any waivers or amendments to its Code of
Ethics in a report on Form 8-K Item 10 filing rather than from its website.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, based solely on a review of such materials as
are required by the Securities and Exchange Commission, no officer, director or
beneficial holder of more than ten percent of the Company's issued and
outstanding shares of Common Stock failed to file in a timely manner with the
Securities and Exchange Commission any form or report required to be so filed
pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended,
during the fiscal year ended September 30, 2003, with the following exceptions:
Barbara Levine and Delbert Spurlock each failed to timely file a Form 4
reporting the grant of the second installment of a stock option on September 26,
2003; and David S. Bensol failed to timely file a Form 4 reporting the open
market purchase of common stock in June, 2003.
Item 10. Executive Compensation.
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each other executive officer
of the Company (collectively, the "Named Executive Officers") whose salary and
bonus exceeded $100,000 for the fiscal year ended September 30, 2003, and the
fiscal year (nine months) ended September 30, 2002, the year in which the
registrant acquired Critical Home Care Incorporated.
Summary Compensation Table
Annual Compensation Long-Term Compensation Awards
---------------------------------- ----------------------------------------------
Restricted
Stock Securities Underlying
Name and Principal Position Year Salary ($) BONUS ($) Award(s) ($) Options/SARs (#)
----------------------------- ------- ------------------- --------------- -------------------- -------------------------
David Bensol, Chief 2003 $ 113,654(1) - - -
Executive Officer, 2002 * 59,135 - - 100,000 (1)
President and Chairman of 2001 - - - -
the Board
Bradley Smith, Executive 2003 $ 125,000 - - -
Vice President, Secretary 2002 * 59,135 - - 75,000 (2)
and a Director 2001 - - - -
Eric S. 2003 $ 65,019 (3,4) - - 250,000 (3)
Yonenson 2002 - - - -
Chief Financial Officer 2001 - - - -
----------------------------- ------- -------------------
* Amount paid for the nine months ended September 30, 2002
31
(1) Pursuant to Mr. Bensol's Employment Agreement, he received options to
purchase 100,000 shares which vested quarterly, commencing on December 31,
2002, and are exercisable for a five year period following the date of
grant provided Mr. Bensol remains an employee of the Company. Additionally
Mr. Bensol voluntarily amended his employment contract during the year to
reduce his annual compensation, by $36,000, during the period January 1,
2003 through June 30, 2003.
(2) Pursuant to Mr. Smith's Employment Agreement, he received options to
purchase 75,000 shares which vested quarterly, commencing on December 31,
2002, and are exercisable for a five year period following the date of
grant provided Mr. Smith remains an employee of the Company.
(3) Pursuant to Mr. Yonenson's Employment Agreement, he received options to
purchase 250,000 shares which 50,000 shares vested upon grant, and the
balance vests ratably on a monthly basis as of the last day of the month
for each of the first 36 months following the date of grant as long as Mr.
Yonenson remains an employee of the Company.
4) Mr. Yonenson commenced his employment with the Company on March 10, 2003,
at an annual salary of $115,000 per year.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the named Executive Officers during the fiscal year ended September
30, 2003.
Number of Shares Percent of Total Options
Underlying Options Granted to Employees in Exercise Price Expiration
Name Granted Fiscal Year Per Share Date
---- ------- ----------- --------- ----
David Bensol None - - -
Bradley Smith None - - -
Eric Yonenson 250,000 62% $0.17 3/17/08
_________________________
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table summarizes for the Named Executive Officers the total
number of shares acquired upon exercise of options during the fiscal year ended
September 30, 2003, and the value realized (fair market value at the time of
exercise less exercise price), the total number of unexercised options, if any,
held at September 30, 2003, and the aggregate dollar value of in-the-money,
unexercised options, held at September 30, 2003. The value of the unexercised,
in-the-money options at September 30, 2003, is the difference between their
exercise price and the fair market value of the underlying common stock on
September 30, 2003. The closing bid price of our common stock on September 30,
2003 was $0.20.
32
Value of Unexercised
Shares Acquired Upon Number of Securities In-The-Money
Exercise of Options Underlying Unexercised Options at
During Fiscal 2003 Options at September 30, 2003 September 30, 2003
------------------ ----------------------------- ------------------
Name Number Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------ -------------- ----------- ------------- ----------- -------------
David
Bensol None -0- 100,000 -0- -0- -0-
Bradley
Smith None -0- 75,000 -0- -0- -0-
Eric
Yonenson None -0- 83,333 166,667 $2,500 $5,000
COMPENSATION OF DIRECTORS
Our directors who are officers or employees of the company will not be
compensated for service on the Board of Directors or any committee thereof.
Directors who are non-officers or non-employees have each been granted
non-qualified stock options and receive $1,000 for attendance at each board
meeting and $500 for each telephonic board meeting. These directors are also
entitled to nominal compensation to cover travel costs.
EMPLOYMENT AGREEMENTS
On September 26, 2002, we entered into an employment agreement with David
Bensol, whereby Mr. Bensol agreed to serve as our Chief Executive Officer,
President and Chairman of our Board of Directors for a term of three years. The
agreement shall be automatically extended for successive one year periods unless
we notify Mr. Bensol in advance in writing. The agreement provides Mr. Bensol
with an annual salary of $150,000, with an increase of 10% if our net income for
four quarters ending on the most recent December 31st is greater than our net
income for the four quarters ended on the preceding December 31st. Other than in
the year ending December 31, 2002, Mr. Bensol shall be entitled to an annual
bonus as is determined by our Board of Directors. Mr. Bensol's compensation also
includes options to purchase 100,000 shares of common stock of the company,
which vested quarterly commencing on December 31, 2002 and are exercisable at
$1.00 per share for a five year period following the date of the grant. Mr.
Bensol is entitled to participate in any pension, profit sharing, group
insurance, option plan, hospitalization and group health and benefit plans that
we make available to senior executives. Mr. Bensol also receives four weeks paid
vacation time. The agreement also contains a non-competition provision for 24
months subsequent to any termination of his employment. Additionally Mr. Bensol
voluntarily amended his employment contract during the year to reduce his annual
compensation, by $ 36,000, during the period January 1, 2003 through June 30,
2003
On September 26, 2002, we entered into an employment agreement with Bradley
Smith, whereby Mr. Smith agreed to serve as our Executive Vice President,
Secretary and a director for a term of three years. The agreement shall be
automatically extended for successive one year periods unless we notify Mr.
Smith in advance in writing. The
33
agreement provides Mr. Smith with an annual salary of $125,000, with an increase
of 7% if our net income for four quarters ending on the most recent December
31st is greater than our net income for the four quarters ended on the preceding
December 31st. Other than in the year ending December 31, 2002, Mr. Smith shall
be entitled to an annual bonus as is determined by our Board of Directors. Mr.
Smith's compensation also includes options to purchase 75,000 shares of common
stock of the company, which vested quarterly commencing on December 31, 2002 and
are exercisable at $1.00 per share for a five-year period following the date of
the grant. Mr. Smith is entitled to participate in any pension, profit sharing,
group insurance, option plan, hospitalization and group health and benefit plans
that we make available to senior executives. Mr. Smith also receives four weeks
paid vacation time. The agreement contains a non-competition provision for 24
months subsequent to any termination of his employment.
On March 10, 2003, the Company entered into an employment agreement with
Eric S. Yonenson, whereby Mr. Yonenson agreed to serve as our Chief Financial
Officer for a term of three years. The agreement provides Mr. Yonenson with an
annual salary of $115,000, certain performance based increases and an annual
bonus as determined by our Board of Directors. Mr. Yonenson's compensation also
includes options to purchase 250,000 shares of common stock of the Company,
50,000 of which vested immediately and the balance vest ratably on a monthly
basis for the 36 months following the date of the grant. These options are
exercisable at a $0.17 per share for a five-year period following the date of
the grant. Mr. Yonenson is entitled to participate in any pension, profit
sharing, group insurance, option plan, hospitalization and group health and
benefit plans that we make available to senior executives. Mr. Yonenson also
receives four weeks paid vacation time.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth as of February 16, 2004, the beneficial
ownership of our common stock, our only class of voting securities, by (i) each
person who is known to be the beneficial owner of more than 5% of our common
stock, (ii) each of our directors and Named Executive Officers and (iii) all
directors and officers as a group. To our knowledge, each person named has the
sole voting and investment power with respect to the securities listed as owned
by him or it.
34
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership (2) Class (2)
-------------------- ------------------------ ---------
David Bensol..................................... 6,111,768 (3) 24.95%
Bradley Smith.................................... 1,092,641 (4) 4.47%
Eric S. Yonenson ................................ 94,444 (7) 0.39%
Mitchell Cooper.................................. 50,000 (5) 0.20%
Barbara Levine................................... 100,000 (6) 0.41%
Delbert Spurlock................................. 100,000 (6) 0.41%
Harbor View Fund, Inc. (8)....................... 2,109,448 8.65%
Allied International Fund, Inc. (9).............. 2,012,774 8.25%
Rubin Family Irrevocable Stock Trust (10)........ 2,783,065 11.41%
Luigi Piccione (11).............................. 1,750,000 7.17%
All Directors and Officers as
a Group (6 persons).......................... 7,548,853 30.30%
(1) Unless otherwise noted, address is c/o the Company, 762 Summa Avenue,
Westbury, New York 11590.
(2) Calculated based on 24,393,026 shares issued and outstanding as of February
13 , 2004. Includes shares currently outstanding and, as to each person
named, those shares which are not outstanding but which such person has the
right to acquire within 60 days.
(3) Includes 100,000 shares of common stock issuable upon exercise of presently
exercisable stock options.
(4) Includes 75,000 shares of common stock issuable upon exercise of presently
exercisable stock options.
(5) Includes 50,000 shares upon exercise of presently exercisable options.
(6) Includes currently exercisable options to acquire 100,000 shares at
September 30, 2003. But does not include the 50,000 shares issuable upon
exercise of options to be granted on each of the next three respective
anniversary dates of their joining the Board on September 26 of 2004, 2005
and 2006.
(7) Includes currently exercisable options to acquire 83,333 shares at
September 30, 2003, and 11,111 options which vested in the 60 days
subsequent to September 30, 2003.
(8) The address of this entity is c/o Snow Becker Krauss P.C., 605 Third
Avenue, New York, New York 10158.
(9) The address for this entity is 488 Madison Avenue, New York, New York
10022.
35
(10) The address for this entity is 18 Pine Tree Drive, Great Neck, New York
11024.
(11) The address for this person is 15 Percy Williams Drive, East Islip, New
York 11730.
Item 12. Certain Relationships and Related Transactions.
See Item 10. "Executive Compensation" for information concerning employment
agreements entered into between the Company and David Bensol, Chief Executive
Officer, Bradley Smith, Executive Vice President and Eric S. Yonenson, Chief
Financial Officer including options granted by the Company to each of the
executive officers.
On September 26, 2002, in connection with his joining the Board of
Directors, Mitchell Cooper was granted a five-year non-qualified stock option to
purchase 50,000 shares of Common Stock exercisable at $1.50 per share vested
immediately.
In addition, on September 26, 2002, also on in connection with their
joining the Board of Directors, Dr. Barbara Levine and Delbert Spurlock, Jr.
were each granted five-year non-qualified stock options to purchase 50,000
shares of common stock at an exercise price of $1.50 per share, all of which
options vested immediately. In addition, Dr. Levine and Mr. Spurlock were each
awarded future grants of options to purchase up to 200,000 shares of common
stock based upon their continued service to the Company. These options would be
granted in 50,000 share increments on each of the first four anniversary dates
of their joining the Board of Directors exercisable at the fair market value on
the respective dates of grant on the anniversary dates. Accordingly, on
September 26, 2003, Dr. Levine and Mr. Spurlock were each granted options to
purchase 50,000 shares of common stock at $0.23 per share, the fair market value
on the date of grant, all of which vested upon grant and are exercisable for
five years. In the event of a buyout of the Company, their remaining future
options shall be granted and will vest immediately.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Exhibit Description
2.1(1) Asset Purchase Agreement, dated September 13, 2002, between All
Care Medical Products Inc. and Critical Home Care, Incorporated.
3.1(2) Certificate of Incorporation of the Company.
3.2(2) By-Laws of the Company.
4.1(2) 2002 Employee Stock Incentive Plan
10.1(1) Employment Agreement, dated as of September 26, 2002, by and
between the Company and David S. Bensol.
36
10.2(1) Employment Agreement, dated as of September 26, 2002, by and
between the Company and Bradley Smith.
10.3(1) Consulting Agreement, dated as of June 28, 2002, by and between
Critical Home Care, Incorporated, All Care Medical Products, Inc., and
Luigi Piccione.
10.4(2) Consulting Agreement, dated as of November 15, 2002 by and between
the Company and Rockwell Capital Partners, LLC.
10.5(2) Form of Investor Subscription Documents
10.6(2) Form of Convertible Promissory Note
10.7*Employment Agreement, dated as of March 10, 2003, by and between the
Company and Eric Yonenson.
10.8*Premises lease by and between HomeCare Alliance, Inc. as tenant and
Dawson Holding Company as Landlord
14.1 * Code of Ethics
21.1 * List of Subsidiaries of the Company.
31.1 * Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a).
31.2 * Certification of the Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a).
32.1 * Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 * Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(1) Incorporated by reference to the Company's quarterly report on Form
10-QSB for the quarter ended September 30, 2002. (2) Incorporated by
reference to the Company's transition report on Form 10-KSB for the
period ended January 1, 2002 to September 20, 2002.
* Filed herewith
(B) REPORTS ON FORM 8-K
None
37
CRITICAL HOME CARE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2003 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
CRITICAL HOME CARE, INC.
CONTENTS
Page
Independent Auditors' Reports F-1-F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6-F-7
Notes to Consolidated Financial Statements F-8-F-22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Critical Home Care, Inc.
Westbury, New York
We have audited the accompanying consolidated balance sheet of Critical
Home Care, Inc. and subsidiaries (the "Company") as of September 30, 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Critical
Home Care Inc. and Subsidiaries at September 30, 2003, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for 2003 have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 1 to the consolidated financial statements, the Company
had an accumulated deficit of $7,951,000 and working capital deficiency of
$891,000. The Company also realized a net loss of $4,012,000 for the year ended
September 30, 2003. The Company's recurring losses from operations and its
difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans in regards to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/Marcum & Kliegman LLP
New York, New York
January 23, 2004 Except Notes 1 and 11 which are dated
February 3, 2004
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Critical Home Care, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows for the nine months ended September 30, 2002 of Critical Home
Care, Inc. and subsidiaries (collectively, the "Company"). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of its operations and
its cash flows for the nine months ended September 30, 2002 and in accordance
with accounting principles generally accepted in the United States of America.
Grassi & Co.
Certified Public Accountants
New York, NY
February 5, 2003
F-2
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS September 30,
------ 2003
--------------
Current Assets
Cash and cash equivalents $ 2,000
Accounts receivable, net of allowance for
doubtful accounts of $828,000 890,000
Inventory 266,000
Prepaid expenses and other current assets 87,000
----------
TOTAL CURRENT ASSETS 1,245,000
Property and equipment - net 630,000
Security deposits 30,000
Goodwill 1,857,000
Other intangibles 80,000
----------
TOTAL ASSETS $3,842,000
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cash overdrafts $ 39,000
Current portion of long-term debt 7,000
Accounts payable 785,000
Accrued expenses and other current liabilities 316,000
Notes payable - other, net of discount of $26,000 612,000
Notes payable - officer 377,000
---------
TOTAL CURRENT LIABILITIES 2,136,000
---------
LONG-TERM DEBT
Notes payable - asset acquisition 233,000
Note payable - officer 50,000
Other, net of current portion 4,000
---------
TOTAL LONG-TERM DEBT 287,000
---------
TOTAL LIABILITIES 2,423,000
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.25 par value, 5,000,000 shares
authorized, none issued and outstanding -
Common stock, $0.25 par value, 100,000,000 shares
authorized 24,393,000 issued and outstanding 6,098,000
Additional paid-in capital 3,272,000
Accumulated deficit (7,951,000)
----------
TOTAL STOCKHOLDERS' EQUITY 1,419,000
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,842,000
==========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CRITICAL HOME CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine
For the Year Ended Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
NET SALES $ 5,446,000 $1,286,000
COST OF GOODS SOLD 1,665,000 384,000
--------- -------
GROSS PROFIT 3,781,000 902,000
--------- ---------
OPERATING EXPENSES:
Selling, general and administrative 5,499,000 1,065,000
Depreciation and amortization 94,000 12,000
Impairment of goodwill 1,500,000 -
--------- ---------
TOTAL OPERATING EXPENSES 7,093,000 1,077,000
LOSS FROM OPERATIONS (3,312,000) (175,000)
OTHER INCOME (EXPENSE):
Interest expense, net (142,000) (28,000)
Amortization of debt discount and
deferred financing costs (666,000) -
Amortization of deferred debt discount,
notes payable - other (30,000) -
Management and billing fees - 96,000
Other income 138,000 -
---------- ----------
(700,000) 68,000
---------- ----------
LOSS BEFORE PRO-FORMA CREDIT
FOR INCOME TAXES (4,012,000) (107,000)
PRO-FORMA CREDIT FOR INCOME TAXES (X) - (43,000)
----------- ----------
PRO-FORMA NET LOSS $(4,012,000) $ (64,000)
=========== ==========
BASIC AND DILUTED LOSS
PER SHARE $ (0.17) $ (0.00)
=========== ==========
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 24,308,027 16,432,000
========== ==========
(X) The amount for provision for income tax credit and net loss are stated on a pro-forma basis for the
2002 period due to the historical entity having had Subchapter S Status through July 11, 2002.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CRITICAL HOME CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND FOR THE YEAR ENDED SEPTEMBER 30, 2003
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance, January 1, 2002 15,896,000 $3,974,000 $ - $(3,832,000) $ 142,000
Common stock issued for:
Settlement of amounts
due to affiliate 254,000 63,000 32,000 - 95,000
Interest paid in
common stock 100,000 25,000 75,000 - 100,000
Reverse acquisition
of New York
Medical, Inc. 5,725,000 1,431,000 (1,431,000) - -
Acquisition of All
Care Assets 1,750,000 438,000 3,062,000 - 3,500,000
Stock option compensation 120,000 - 120,000
Debt cancellation pursuant
to reverse acquisition 61,000 - 61,000
Net loss - - - (107,000) (107,000)
---------- ---------- ---------- ---------- -----------
Balance, September 30, 2002 23,725,000 5,931,000 1,919,000 (3,939,000) 3,911,000
---------- --------- --------- ---------- ---------
Common stock issued for
conversion of convertible
promissory notes and interest 668,000 167,000 501,000 - 668,000
Stock option compensation - - 228,000 - 228,000
Value of debt discount - - 568,000 - 568,000
Deferred debt discount - - 56,000 - 56,000
Net loss - - - (4,012,000) (4,012,000)
---------- ---------- --------- ---------- ----------
Balance, September 30, 2003 24,393,000 $6,098,000 $3,272,000 $(7,951,000) $ 1,419,000
========== ========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine
For the Year Ended Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,012,000) $ (107,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for bad debts 992,000 91,000
Depreciation and amortization 161,000 12,000
Stock option compensation 228,000 120,000
Interest paid with common stock 77,000 25,000
Amortization of debt discount and deferred
financing costs 666,000 -
Amortization of deferred debt discount
notes payable - other 30,000 -
Impairment of goodwill 1,500,000 -
Changes in operating assets and liabilities
Accounts receivable (787,000) (276,000)
Inventory 19,000 32,000
Prepaid expenses and other current assets (52,000) (18,000)
Security deposits 5,000 (21,000)
Accounts payable 328,000 60,000
Accrued expenses and other current liabilities (35,000) 91,000
---------- ---------
Total Adjustments 3,132,000 116,000
---------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (880,000) 9,000
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions - (380,000)
Purchases of property and equipment (90,000) (5,000)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (90,000) (385,000)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdrafts 39,000 -
Proceeds from sale of convertible promissory notes,
net of $98,000 of debt issue costs 568,000 -
Payment of long-term debt (7,000) (5,000)
Proceeds from notes payable - other 475,000 501,000
Proceeds from (repayments of) notes
payable - stockholders 427,000 (35,000)
Payment of notes payable - acquisitions (300,000) (50,000)
Payment of notes payable - other (284,000) -
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 918,000 411,000
---------- ---------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS $ (52,000) $ 35,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 54,000 $ 19,000
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,000 $ 54,000
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, C0NTINUED
For the Nine
For the Year Ended Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Supplementary information:
Cash paid during the period for:
Interest $ 2,000 $ 1,000
========= ==========
Taxes $ - $ 1,000
========= ==========
Non-Cash Investing and Financing Activities:
Issuance of stock for asset acquisition $ - $3,500,000
========= ==========
Deferred Debt Discount $ 56,000 $ =
========= ==========
Conversion of Notes Payable to Common Stock $ 666,000 $ =
========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
1. DESCRIPTION OF BUSINESS, CHANGE OF FISCAL YEAR AND BASIS OF PRESENTATION
Critical Home Care, Inc. and subsidiaries (collectively, the "Company") is
incorporated in Nevada and based in Long Island, New York. The Company markets,
rents and sells surgical supplies, orthotic and prosthetic products and durable
medical equipment, such as wheelchairs and hospital beds. The Company also
provides oxygen and other respiratory therapy services and equipment and
operates in four retail outlets in the New York metropolitan area. Clients and
patients are primarily individuals residing at home. The Company's equipment and
supplies are readily available in the marketplace and the Company is not
dependent on a single supplier. Reimbursement and payor sources include
Medicare, Medicaid, insurance companies, managed care groups, Health Maintenance
Organizations ("HMO'S"), Preferred Provider Organizations ("PPO's") and private
pay.
On December 10, 2002, the Board of Directors approved a change of the
Company's fiscal year from a calendar year ending December 31 to a fiscal year
ending September 30. Such change was effective as of the fiscal year (nine
months) ended September 30, 2002 for both financial reporting and tax purposes.
The consolidated financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities and commitments in the normal course
of business. At September 30, 2003, the Company had an accumulated deficit of
$7,951,000, a working capital deficiency of $891,000 and had realized a net loss
of $4,012,000 for the year ended September 30, 2003.
The business plan and growth strategy are dependent on working capital.
Management has been aggressively seeking to raise additional capital through
Accounts Receivable financing and private sector loans, but have been unable to
secure such financing, other than a loan from a private individual for $250,000
on February 3, 2004. Currently, management is seeking to raise approximately
$240,000 of additional working capital from another private individual. If the
Company is unable to secure this financing as well as other financing of at
least a combined total of $500,000, our cash on hand and cash equivalents and
funds from operations will not be sufficient to meet our working capital and
capital expenditure needs for the next twelve months.
If the Company is successful in securing capital, but fails to achieve
revenue growth assumptions, the Company will have to raise further equity or
debt financing and/or curtail certain expenditures contained in the current
operating plans. Management cannot assure that our sales efforts or expense
reduction programs will be successful, or that any additional financing will be
available to the Company, or, if available, that the terms will be satisfactory.
If the Company is not successful in raising additional capital or unable to
generate sufficient cash flows to meet obligations as they come due, the
Company's financial condition and results of operations will be materially and
adversely affected and the Company will not be able to continue to operate as a
going concern beyond August 2004. If the Company is successful in raising
additional capital but fails to increase its revenue or reduce expenses, the
Company's financial condition and results of operations may be materially and
adversely affected and the Company may not be able to continue as a going
concern. The Company's financial statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
to amounts and classification of liabilities that may be necessary should we be
unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation - The consolidated financial statements include the
accounts of the Critical Home Care, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
F-8
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates in the preparation of financial statements - The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 consolidated financial statements as well as the
reported amounts of revenues and expenses during the reporting period. These
estimates primarily relate to the net realizable amounts of payments from
customers, patients, and other third party payors in regard to allowance for
doubtful accounts. Additionally, estimates are used to calculate the valuation
of goodwill, inventory obsolescence and other asset valuations. Actual results
could differ from these estimates.
Revenue recognition - Revenues are recorded in the period the services were
rendered at established rates reduced by provisions for doubtful accounts and
contractual adjustments. Such adjustments represent the difference between
charges at established rates and estimated recoverable amounts and were
recognized in the period the services were rendered. Any differences between
estimated contractual adjustments and actual final settlements were recognized
as contractual adjustments in the year final settlements were determined. The
Company reports revenues in its financial statements net of such adjustments,
however, appeals are sometimes filed and if such appeals are decided in the
Company's favor, revenues would be readjusted. The Company estimates the
allowance for uncollectible accounts and contractual adjustments based on
historical experience.
Allowance for doubtful accounts - The Company reviews all Accounts
Receivable balances, and provides for an allowance for uncollectible accounts,
and estimates for its bad debt expense based on historical analysis of its
records. The basis of this analysis is from the aging of the receivable files,
and the patient, payer provider records, and additionally their payment history.
Items that are greater than one year old are reserved for 100%. The balance of
any reserve, which is established, is estimated based on the collection history
from Company records.
Concentration of credit risk - The Company primarily provides health care
services, medical need related equipment and customized devices and is
reimbursed by the patient's third-party insurers or governmentally funded health
care insurance programs. The Company performs ongoing credit evaluations for its
private pay customer patients and open account customers. The ability of the
Company's debtors to meet their obligations is dependent upon the financial
stability of the insurers of the Company's customer patients and future
legislation and regulatory actions. The Company maintains reserves for potential
losses from these receivables that historically have been within management's
expectations.
The Company grants credit without collateral to its patients, who are
primarily insured under third party agreements. Approximately 21% and 11% of the
Company's accounts receivable at September 30, 2003 consists of amounts due from
Medicare and Medicaid, respectively. The Company operates its business primarily
in the New York Metropolitan area. Additionally a substantial portion of our
revenue is attributable to payments received from third party payers, including
the Medicare and Medicaid programs. For the year ended September 30, 2003
approximately 20% of our revenue was derived from Medicare and approximately 6%
was derived from Medicaid. In fiscal 2002, revenues from Medicare and Medicaid
were 21% and 1%, respectively.
Reclassifications - Certain reclassifications have been made to the
consolidated financial statements shown for the prior years in order to have
them conform to the current year's classifications.
Impairment of Long-lived assets - The Company reviews its long-lived assets
for impairment whenever changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. To determine if impairment exists,
the Company compares
F-9
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
the estimated future undiscounted cash flows from the related long-lived assets
to the net carrying amount of such assets. Once it has been determined that an
impairment exists, the carrying value of the asset is adjusted to fair value.
Factors considered in the determination of fair value include current operating
results, trends and the present value of estimated expected future cash flows.
Other Intangible Assets - The intangible asset at September 30, 2003
consists of a covenant not to compete agreement, with a gross carrying amount of
$100,000, which is being amortized over the 5-year term of the agreement. At
September 30, 2003, the intangible asset is recorded net of $20,000 of
accumulated amortization. Amortization expense will be $20,000 in each of the
next four years.
Property and equipment - Property and equipment are recorded at cost and
depreciation is calculated on a straight-line basis over the estimated useful
lives of the related assets as set forth in the table below.
Computer equipment 3 to 5 years
Delivery vehicles 2 to 5 years
Office equipment and
furniture and fixtures 3 to 5 years
Rental equipment 3 to 5 years
Leasehold improvements the shorter of economic
life or lease term
Fair Value of financial instruments - The Company's financial instruments
consist of cash, accounts receivable, accounts payable and loans and notes
payable. It is management's opinion that the Company is not exposed to
significant interest, currency or credit risk arising from its financial
instruments and that due to their primarily short term nature, their fair values
approximate their carrying values, unless otherwise noted.
Advertising expense - advertising expenses are expensed when incurred.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of disposables, supplies and
equipment used in conjunction with patient service.
Earnings (loss) per share - The Company follows Statement of Financial
Accounting Standards, ("SFAS") No. 128, "Earnings per Share",("EPS") for
computing and presenting earnings(loss) per share, which requires, among other
things, dual presentation of basic and diluted earnings (loss) per share on the
face of the statement of operations. Basic EPS is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities, or other contracts to issue common
stock were exercised or converted into common stock. Outstanding stock options
to acquire 1,013,100 and 325,000 common shares for the year ended September 30,
2003 and the nine months ended September 30, 2002, respectively, have not been
considered in the computation of dilutive earnings per share since their effect
would be antidilutive.
Stock-based compensation - In December 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, " Accounting for Stock Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results. The disclosure
requirements apply to all companies for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. As permitted under SFAS No. 123, the Company continues to apply the
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees". As required under SFAS No.148, the following table presents pro
forma net loss and the basic and diluted loss per share as if the fair
value-based method had been applied to all awards.
F-10
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For the Nine
For the Year Ended Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss as reported $(4,012,000) $(107,000)
Add: stock based employee compensation expense
under the intrinsic value method 228,000 -
Less: stock-based employee
compensation expense
determined under the fair
value method, net of related
tax effects (441,000) -
----------- ----------
Proforma loss $(4,225,000) $(107,000)
=========== =========
Net loss per share:
Basic and diluted loss per share
as reported $(0.17) $(0.01)
====== ======
Pro Forma basic and diluted loss
per share $(0.17) $(0.01)
====== ======
The fair value of options at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions:
For the Nine
For the Year Ended Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Expected life (years) 5 5
Interest rate 4-5% 4-5%
Annual rate of dividends 0% 0%
Volatility 210% 91%
Cash and cash equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
Income taxes - The Company accounts for income taxes in accordance with
SFAS No. 109 "Accounting for Income Taxes"("FAS 109"). It requires an asset and
liability approach for financial accounting and reporting for income taxes.
F-11
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation - effective December 10, 2002, the Company changed
its fiscal year end from December 31, to September 30. The consolidated
financial statements include the presentation of the transition period beginning
January 1, 2002 and ending September 30, 2002.
The following table presents certain unaudited financial information for
the year ended September 30, 2002:
For the Year
Ended
September 30,
2002
-----------
(Unaudited)
Net sales $1,585,000
Cost of Sales 475,000
-------
Gross Profit 1,110,000
---------
Operating expenses:
Selling, general and administrative 1,231,000
Depreciation and amortization 15,000
------
1,246,000
Loss from Operations (136,000)
--------
Other income (expense)
Interest expense, net (28,000)
Management and billing fees 96,000
------
68,000
------
Loss before pro-forma credit for income taxes (68,000)
Pro-forma credit for income taxes (27,000)
-------
Pro-forma net loss $(41,000)
========
Basic and diluted loss per share $0.00
=====
Basic and diluted weighted average
common shares outstanding 16,102,000
==========
Intangible assets - In June 2001, the FASB issued SFAS No. 141, "Business
Combinations" and SFAS No.142, "Goodwill and Other Intangible Assets". SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and is effective for all business combinations initiated after
June 30, 2001. SFAS No. 142 requires goodwill be tested for impairment under
certain circumstances, and written off when impaired, rather than being
amortized as previous standards required. The adoption of SFAS No. 141 and SFAS
No. 142, did not have a material effect on the Company's consolidated financial
position or results of operations for the nine months ended September 30, 2002.
For the year ended September 30, 2003, pursuant to SFAS No. 142 the Company has
recorded a charge of $1,500,000 for the impairment of goodwill. (See Note 8)
F-12
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent pronouncements - In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities." SFAS No.146
addresses the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities that are
currently accounted for in accordance with Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 includes costs related to terminating
a contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and certain termination benefits provided to employees who
are involuntarily terminated. SFAS No.146 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of FASB 146 did not
have a material impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivatives
embedded in other contracts and for hedging activities under SFAS 133. This
Statement is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designed after June
30, 2003. The guidance should be applied prospectively. The provisions of this
Statement that relate to SFAS 133 Implementation Issues that have been effective
for fiscal quarters that began prior to June 15,2003, should continue to be
applied in accordance with respective effective date. In addition, certain
provisions relating to forward purchases or sales of when-issued securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30,2003. The adoption of SFAS No.149 did not
have a material impact on the Company's consolidated financial statements.
In November 2002,the FASB issued Interpretation No. 45, ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires a company, at
the time it issues a guarantee to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for the Company as of December 31, 2002. The adoption of the
recognition requirements of FIN 45 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No.46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.51."
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 have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
ending after September 15, 2003. The adoption of FIN 46 did not have a material
impact on the Company's consolidated financial statements.
F-13
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", ("SFAS No.
150"). SFAS No.150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No.150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
No 150 did not have a material impact on the Company's consolidated financial
statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2003 consists of the following:
Accumulated Net Book Value
Cost Depreciation September 30, 2003
---- ------------ ------------------
Delivery vehicles $ 49,000 $ 21,000 $ 28,000
Leasehold improvements 142,000 29,000 113,000
Office equipment and
furniture and fixtures 170,000 46,000 124,000
Rental equipment 432,000 67,000 365,000
------- ------ -------
$793,000 $163,000 $630,000
======== ======== ========
Depreciation expense for the year ended September 30, 2003 and the nine
months ended September 30, 2002 was $141,000 and $12,000 respectively.
4. NOTES PAYABLE
During the year ended September 30, 2003, the Company and certain holders
of notes payable - asset acquisitions, notes payable - other and note payable -
officer agreed to amend the respective maturity dates of their notes whereby
they became long term obligations.
During October and December of 2002, the Company consummated an initial
closing of gross proceeds of $666,000 pursuant to a private placement. The
private placement was for up to a maximum of $2,000,000 of convertible
promissory notes bearing interest at the rate of eight percent (8%) per annum
that were due February 28, 2003. The promissory notes were automatically
convertible into common shares at the rate of one share for one dollar of notes
at the discretion of the Company. In November 2002 and February 2003, the
Company elected to convert the total proceeds of $666,000 into 666,000 common
shares and paid $2,000 of accrued interest on such notes through the issuance an
additional 2,000 common shares. As a result of the conversion price of $1.00
being less than the fair market value of $2.50 per share on the dates the notes
were purchased there was a beneficial conversion feature of $995,000. Such
amount, however, is limited to the total investment made and the Company,
therefore, recorded a debt discount and beneficial conversion feature non-cash
charge of $666,000 during the year ended September 30, 2003.
F-14
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
4. NOTES PAYABLE (continued)
Notes payable, are summarized as follows:
Short term: September 30, 2003
------------------
Notes payable, other - issued between July 1, 2002 and September 19, 2002
pursuant to working capital loans, bearing interest at 8% to 12% per annum
payable through September 30, 2003. These notes have not been paid and are
secured by certain assets of the Company. Waivers have been received
extending repayment terms, and the dates of maturity to range from March
31, 2004 through May 31, 2004. $163,000
Notes payable, other - In February 2003, pursuant to working capital loans,
the Company entered into three unsecured promissory note agreements for an
aggregate of $475,000, bearing interest at an annual rate of five percent
(5%) per annum. The promissory notes are due and payable on the earlier of
April 21, 2004 or upon the Company raising no less that $500,000 in equity.
(See Note 11) In connection with two of the agreements, the Company granted
5 year stock options to acquire 187,500 shares of common stock, which are
exercisable at $1.00 per share. The promissory notes payable at September
30, 2003 are recorded net of a $26,000 debt discount. 449,000
-------
$612,000
========
Notes payable, officer, issued from May of 2003 through September 2003
pursuant to unsecured working capital loans from the President of the
Company bearing interest at 8% per annum and payable May 2004 through
September 2004. $377,000
========
Long term:
Notes payable, asset acquisition, issued September 13, 2002 pursuant to the
All Care Acquisition Agreement, unsecured, originally due September 30,
2003, as modified on April 16, 2003 bearing interest at 7% per annum and
payable on August 15, 2005. $233,000
=== ===== ========
Note payable, officer, issued in January 2003 pursuant to an unsecured
working capital loan from the President of the Company bearing interest at
8% and payable October 16, 2005. $50,000
= === ===== =======
Note payable, other for the purchase of a delivery vehicle is payable in
monthly installments of $558 including interest at 6.9% per annum maturing
in April 2005 and secured by the delivery vehicle. $4,000
==== ======
F-15
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
5. ACQUISITIONS
On August 8, 2002, Classic Healthcare Solutions, Inc. ("Classic"), a wholly
owned subsidiary of the Company, acquired substantially all of the assets of
Homecare Alliance, Inc. ("Alliance") for a purchase price of $250,000 of which
$100,000 was in cash and $150,000 was payable through the issuance of Notes. On
September 13, 2002, through another wholly owned subsidiary, the Company
acquired substantially all of the assets of All Care Medical Products, Inc.
("All Care") for a purchase price of $4,025,000 consisting of $200,000 in cash,
$325,000 in notes, and 1,750,000 shares of the Company's common stock valued at
$2.00 per share. The primary purpose of these acquisitions was to expand the
Company's product lines and market area as well as to consolidate the overhead
expenses and to increase revenues. Goodwill of $3,357,000 arose in the All Care
transaction, which is not deductible for tax purposes.
The revenues and costs of these two operations have been included with
those of the Company since their respective dates of acquisition. The allocation
of the purchase prices, including certain acquisition costs of $25,000 and
$130,000 respectively, was as follows:
Alliance All Care
-------- --------
Cash $ - $ 78,000
Accounts receivable - 557,000
Inventory 168,000 433,000
Fixed assets 107,000 206,000
Security deposits - 14,000
Goodwill - 3,357,000
Accounts payable - (230,000)
Loan payable to stockholder - (15,000)
Accrued liabilities - (245,000)
-------- ----------
$275,000 $4,155,000
======== ==========
On September 26, 2002, New York Medical, Inc., (a Nevada corporation)
("NYMI") and Critical Home Care, Incorporated ("Critical") consummated an
acquisition whereby NYMI cancelled 8,975,000 of its 14,700,000 common shares
then outstanding and issued (a) 16,250,000 new shares of restricted common stock
to the stock holders of Critical in exchange for all of the issued and
outstanding shares of Critical and, (b) 1,750,000 new shares of restricted
common stock to consummate the All Care Asset Purchase, as described above. This
transaction resulted in a change in control of NYMI and a total of 23,725,000
outstanding shares of common stock. In addition, NYMI changed its name to
Critical Home Care, Inc. The sole operating subsidiary of Critical prior to the
acquisitions described above was Classic which had been acquired by Critical on
July 12, 2002.
For accounting purposes, the transaction between NYMI and Critical is
considered, in substance, a capital transaction rather than a business
combination. The exchange has been accounted for as a reverse acquisition under
the purchase method of accounting since the former shareholders of Critical now
own a majority of the outstanding common stock of NYMI. Accordingly, the
combination of Critical with NYMI has been recorded as a recapitalization of
Critical, pursuant to which Critical has been treated as the continuing entity
for accounting purposes and the historical financial statements presented are
those of Critical. Such historical financial statements reflect the results of
operations of Classic which was a Sub Chapter S corporation through the date of
F-16
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
its acquisition on July 12, 2002, and all historical tax effects have therefore
been shown on a pro-forma basis.
5. ACQUISITIONS (continued)
The acquisition of Alliance was not considered material for purposes of
including pro-forma information but the acquisition of All Care was. Therefore,
the pro-forma unaudited condensed statements of operations presented below
represents what the results of operations of the combined companies would have
been had the All Care acquisition taken place at the beginning of the fiscal
period shown.
For the Nine Months
ended September 30,
2002
--------------------
Sales $4,172,000
Cost of sales 1,353,000
---------
Gross profit 2,819,000
Operating expenses 2,767,000
---------
Operating income 52,000
Other income 3,000
---------
Income before taxes $ 55,000
Pro-forma income taxes 22,000
---------
Pro-forma net income $33,000
---------
Basic and diluted earnings per share $0.00
==========
Basic and diluted weighted common shares outstanding 16,432,000
==========
6. RELATED PARTY TRANSACTIONS
Effective October 23, 2000, the Company leased office space from RVC Realty
Corp. ("RVC"), which is owned by a trust that was established for the benefit of
the children of the President of the Company. Rent expense for that facility was
incurred in the amount of $46,000 during the nine months ended September 30,
2002. The lease was terminated effective as of December 31, 2002 and the related
expense was accrued at September 30, 2002, as the operations of that location
were consolidated into another facility. At December 31, 2001, the Company owed
$95,000 to RVC for rent and real estate taxes. Such amount was non-interest
bearing and was settled and paid in full in July 2002 through the issuance of
254,000 shares of the Company's common stock.
In July 2002, the Company owed Mr. Bensol and Mr. Smith $61,000 pursuant to
working capital loans made to the Company during 2001. Such amount was
contributed to capital by the two shareholders in connection with the
acquisition of Classic.
F-17
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
Notes payable - officer - During the period October 1, 2002 through
September 30, 2003 the President and CEO of the Company loaned the Company
$422,000. Of the amounts loaned $ 50,000 is long term and $377,000, is short
term. The funds were used for working capital. (See Note 4)
7. INCOME TAXES
The provision for income taxes for the year ended September 30, 2003, and
the nine months ended September 30, 2002 consists of the following:
Components of the provision (benefit) for income taxes are as follows:
2003 2002
---- ----
Current
Federal $ -0- $ -0-
State and local -0- -0-
Deferred
Federal -0- -0-
State and local -0- -0-
---- ----
Total $ -0- $ -0-
==== ====
F-18
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
2003 2002
---- ----
Income tax provision at 34% ( 34.0%) (34.0%)
State and local income taxes net (6.0%) (6.0%)
of federal benefit
Non deductible goodwill impairment 14.9% 0.0%
Non deductible amortization of beneficial conversion
feature 5.7% 0.0%
Net operating losses not utilized 19.4% 40.0%
------- ------
0.0% 0.0%
======= =======
As of September 30, 2003, the Company has net operating loss carryforwards of
approximately $1,411,000 that will be available to offset future taxable income
through the dates shown below:
September 30,
2022 $ 220,000
2023 1,191,000
---------
$1,411,000
==========
Significant components of the Company's deferred tax assets and liabilities
are comprised of the following:
September 30, 2003
------------------
Allowance for doubtful accounts $ 331,000
Non-deductible expenses 121,000
Net operating loss 564,000
Fixed assets (10,000)
----------
Total $ 1,006,000
Valuation allowance (1,006,000)
----------
Net deferred taxes $ -0-
===========
FAS 109 requires that a valuation allowance be established when it is "more
likely than not" that all or a portion of deferred tax assets will not be
realized. A review of all available positive and negative evidence needs to be
considered, including a company's performance, the market environment in which
the company operates, the length of carryback and carryforward periods, and
expectation of future profits, etc. FAS 109 further states that forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as the cumulative losses in recent years. Therefore,
cumulative losses weigh heavily in the overall assessment. The Company will
provide a full valuation allowance on future tax benefits until it can sustain a
level
F-19
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
of profitability that demonstrates its ability to utilize the assets, or other
significant positive evidence arises that suggests the Company's ability to
utilize such assets. The valuation allowance increased by approximately $
918,000.
The provision (credit) for income taxes is reflected on a pro-forma basis
using a blended rate of 40% for Federal and State taxes that would have been
applicable had the Company been required to file tax returns covering the full
fiscal periods included in the financial statements. Actual income taxes due
will be different as Classic was a sub-chapter S corporation through July 12,
2002 and only its results of operations from that date through September 30,
2002 were included in the Company's tax return for fiscal 2002.
8. IMPAIRMENT OF GOODWILL
SFAS 142 requires that an impairment test for goodwill and other intangible
assets be performed in two steps, (i) determine impairment based upon fair value
of a reporting unit as compared to its carrying value, and (ii) if there is an
impairment, measure the impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. Due to continued losses
realized by the All Care division at June 30, 2003, management performed a test,
which resulted in a $1,500,000 impairment charge during the third quarter of
fiscal 2003. The methodology included various financial calculations and
assumptions that projected future operations of the All Care division (the
reporting unit) on its own. At September 30, 2003 the Company obtained an
independent valuation from a third party and management concluded that no
additional adjustment for impairment was required.
9. STOCK OPTION PLAN
On September 26, 2002, the Company's Board of Directors adopted the
Critical Home Care, Inc. 2002 Employee Stock Incentive Plan (the "Plan"). The
Plan covers an aggregate of 2 million shares of the Company's common stock which
may be granted to employees, salaried officers, directors and other key persons
employed by, or having a business relationship with, the Company, or its
subsidiaries, in the form of incentive stock options, non-qualified stock
options, and/or awards of stock granted under the Plan during the ten year
period following the date of the Plan's adoption.
Pursuant to the terms of their employment agreements, each dated September
26, 2002, David Bensol, Chief Executive Officer and Bradley Smith, Executive
Vice President, were awarded five-year options to purchase 100,000 and 75,000
shares of common stock, respectively. All such options vested quarterly from
December 31, 2002 through September 30, 2003 and are exercisable at $1.00 per
share for five years from the date of grant. At September 26, 2002 the fair
market value of these options was $2.30, per share. As a result, the Company has
recorded a charge to operations for stock option compensation in the amount of
$228,000 during the year ended September 30, 2003.
In September 2002, in connection with his joining the Board of Directors,
Mitchell Cooper was granted a five-year non-qualified stock option to purchase
50,000 shares of common stock exercisable at $1.50 per share, the fair market
value, all of which options vested immediately.
In addition, on September 26, 2002, also in connection with their joining
the Board of Directors, Dr. Barbara Levine and Delbert Spurlock, Jr. were each
granted five-year non-qualified stock options to purchase 50,000 shares of
common stock at an exercise price of $1.50 per share, all of which options
vested immediately. Dr. Levine and Mr. Spurlock will be granted options to
purchase up to 200,000 shares of common stock based upon their continued service
to the Company. These options will be granted in 50,000 share increments on each
of the first four anniversary dates of their joining the Board of Directors and
will be exercisable at the fair market value on the respective
F-20
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
of Directors and will be exercisable at the fair market value on the respective
dates of grant. The first such grant of options to acquire 50,000 common shares
was awarded to each of Mr. Spurlock and Dr. Levine on September 26, 2003. These
options are exercisable at $0.23 per share the fair market value on date of
grant vested in full upon grant and expire on September 25, 2008. In the event
of a buyout of the Company, their remaining future options shall be granted and
will vest immediately.
In February 2003, in connection with loans to the Company in the aggregate
amount of $325,000 from two unrelated parties, the Company granted five-year
options to acquire 187,500 shares of the Company's common stock. The options are
exercisable at $1.00 per share and were fully vested upon grant (see Note 4).
On March 10, 2003, in connection with his joining the Company as Chief
Financial Officer, Eric S. Yonenson was granted five-year options to purchase up
to 250,000 shares of common stock. The options are exercisable at $0.17 per
share, the fair market value on the date of grant, and expire on March 9, 2008.
50,000 options vested upon grant, and the balance vests ratably on a monthly
basis as of the last day of the month for each of the first 36 months following
the date of the grant. As at September 30, 2003 an additional 33,333 shares have
vested.
On April 17, 2003, the Company granted five-year options to acquire 168,900
shares of the Company's common stock to 34 employees. Such options are
exercisable at $0.25 per share and vested 20% upon the date of grant with the
remaining options vesting at 20% per year on each of the four anniversary dates
following the date of grant. As of September 30, 2003, 18,300 of these options
had been forfeited by eight employees as a result of the termination of their
employment.
The following table illustrates the Company's issuance of stock options and
outstanding stock option balances since the Company adopted the Plan:
September 30, 2003 September 30, 2002
------------------ ------------------
Outstanding Weighted Average Outstanding Weighted Averag
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
Outstanding at beginning of year 325,000 $1.23 -
Granted 706,400 0.45 325,000 $1.23
Exercised - - - -
Forfeited (18,300) 0.25 - -
------- ---- ------- ------
1,013,100 $ .68 325,000 $1.23
========= ===== ======= =====
Additional information pertaining to outstanding options at September 30,
2003:
Remaining Average Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price Range Options (Years) Price Options Price
----------- ------- ------- ----- ------- -----
$ 1.50 150,000 3.99 $ 1.50 150,000 $1.50
$ .23 100,000 4.99 $ .23 100,000 $ .23
$ 1.00 175,000 3.99 $ 1.00 175,000 $1.00
$ .25 150,600 4.58 $ .25 30,120 $0.25
$ .17 250,000 4.50 $ .17 83,333 $0.17
$ 1.00 187,500 4.17 $ 1.00 187,500 $1.00
------- ------ ------- -----
1,013,100 $ .68 725,953 $0.98
========= ====== ======= =====
F-21
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
9. STOCK OPTION PLAN (continued)
The Company has elected to account for its stock based compensation plan
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.25) and to
provide the pro-forma disclosure required by SFAS No. 123. Under the provisions
of APB No.25, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of
grant over the amount an option holder must pay to acquire the stock. The
Company recorded $228,000 of stock option compensation to operations for the
year ended September 30, 2003.
10. COMMITMENTS AND CONTINGENCIES
The Company leases facilities at 762 Summa Avenue, Westbury, New York.
These facilities serve as the corporate headquarters and operations center. The
facilities encompass approximately 10,000 square feet at a fixed monthly rental
of $6,850 and the lease expires in June 2007. The Company also rents three
points of service locations in Patchogue, Babylon and Lake Success all located
on Long Island, New York at a combined rental of approximately $25,000 per
month. The leases expire in July 2007, December 2010 and February 2012
respectively. Total rent expense for the year ended September 30, 2003 and for
the nine months ended September 30, 2002 was $328,000 and 86,000 respectively.
Future minimum rental payments, by year and in the aggregate under
operating leases with a term of one year or more consist of the following at
September 30, 2003:
For the Years Ended September 30, Amount
------
2004 $ 398,000
2005 390,000
2006 394,000
2007 331,000
2008 67,000
Thereafter 188,000
---------
Total $1,768,000
==========
On January 31, 2004 the Company cancelled the lease for its prior location
in Woodbury, New York and received a release for the balance of their lease
commitment through November 2009 from the landlord. In addition, on February 1,
2004 the Company signed a lease for its new Lake Success, New York location that
becomes effective on March 1, 2004 and future rental cost is included in the
above table.
On September 26, 2002, the Company entered into an employment agreement
with David S. Bensol, whereby Mr. Bensol agreed to serve as our Chief Executive
Officer, President and Chairman of our Board of Directors for a term of three
years. The agreement shall be automatically extended for successive one year
periods unless we notify Mr. Bensol in advance in writing. The agreement
provides Mr. Bensol with annual salary of $150,000, certain performance based
increases and an annual bonus as determined by our Board of Directors. Mr.
Bensol's compensation also includes options to purchase 100,000 shares of common
stock of the Company (see Note 9), which vested quarterly commencing on December
31, 2002 and are exercisable at a $1.00 per share for a five-year period
following the date of the grant. Mr. Bensol is entitled to participate in any
pension, health care and benefit plans that we make available to senior
executives. The agreement includes a 24-month non-competition provision
effective from the date of termination of employment.
F-22
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
10. COMMITMENTS AND CONTINGENCIES (continued)
On September 26, 2002, the Company entered into an employment agreement
with Bradley M. Smith, whereby Mr. Smith agreed to serve as our Executive Vice
President, Secretary and Director for a term of three years. The agreement shall
be automatically extended for successive one year periods unless we notify Mr.
Smith in advance in writing. The agreement provides Mr. Smith with an annual
salary of $125,000, certain performance based increases and an annual bonus as
determined by our Board of Directors. Mr. Smith's compensation also includes
options to purchase 75,000 shares of common stock (see Note 9) of the Company,
which vested quarterly commencing on December 31, 2002 and are exercisable at a
$1.00 per share for a five-year period following the date of the grant. Mr.
Smith is entitled to participate in any pension, health care and benefit plans
that we make available to senior executives. The agreement includes a 24-month
non-competition provision effective from the date of termination of employment.
In connection with the All Care Asset purchase, which closed on September
13, 2002, the Company entered into a consulting agreement with Luigi Piccione,
the seller of the All Care Assets. Such agreement calls for annual payments of
$150,000 and has a term of five years unless terminated earlier for specific
reasons stated in the agreement such as fraud, willful misconduct and the like.
On March 10, 2003, the Company entered into an employment agreement with
Eric S. Yonenson, whereby Mr. Yonenson agreed to serve as our Chief Financial
Officer for a term of three years. The agreement provides that Mr. Yonenson with
an annual salary of $115,000, certain performance based increases and an annual
bonus as determined by our Board of Directors. Mr. Yonenson's compensation also
includes options to purchase 250,000 shares of common stock of the Company,
50,000 shares vested immediately, the balance vests ratably on a monthly basis
for the first 36 months following the date of the grant after the first month
anniversary of the agreement. These options are exercisable at a $0.17 per share
for a five-year period following the date of the grant. Mr. Yonenson is entitled
to participate in any pension, health care and benefit plans that we make
available to senior executives. As at September 30, 2003 an additional 33,333
shares have vested.
In April 2003, the Company entered into an Amended Consulting Agreement
with Rockwell Capital Partners, LLC ("Rockwell"), its investment banker. The
agreement expires in November 2005, unless terminated earlier pursuant to its
terms. The agreement calls for Rockwell to provide consulting services relating
to strategic planning, product development and general business and financial
matters. The annual fee to be paid to Rockwell is $125,000 through November 2004
and $130,0000 thereafter.
During September and October of 2003, the Company entered into three
eighteen month operating equipment leases, which are payable in monthly
installments of approximately $3,700, which were collateralized by certain
equipment of the Company. Certain officers of the Company guaranteed these
leases. Subsequent to the lease agreements the Company sold the collateralized
equipment, which constituted a default in the agreements.
F-23
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended September 30, 2003
and For the Nine Months ended September 30, 2002
10. COMMITMENTS AND CONTINGENCIES (continued)
Legal proceedings - In April 2003, Ruth Davis and Herman Davis (wife and
husband) commenced a lawsuit in Nassau County Supreme Court against the
Company's subsidiary Classic Healthcare Solutions, Inc. ("Classic"). Plaintiff
Mrs. Davis claims to have sustained injuries on September 15, 2002, from an
alleged malfunction of the chair lift, which she acquired from Classic, and
claims damages of $2,000,000. In addition, plaintiff Mr. Davis claims damages of
$500,000 for loss of services.
The Company's insurance carrier is defending the lawsuit on behalf of the
Company and management believes that there is sufficient insurance coverage
under its insurance policy to satisfy any typical settlement of the claims. In
addition, any product liability insurance carried by the manufacturer of the
chair lift would most likely complement that of Classic. As the lawsuit is only
in the discovery stage, management cannot predict the outcome of the case,
however, management is of the opinion that any settlement in this matter would
not have a material impact on the financial condition or operations of the
Company.
11. SUBSEQUENT EVENTS
The President of the Company has advanced additional funds to the Company
in the aggregate amount of $277,000 during October through December 2003. Such
amounts are due during October through December 2004.
Effective October 1, 2003, the Company began to outsource its billing and
collections of receivables to a third party. The Company will pay fees either
based on the amount of receivables collected by the third party or a fee for
each transaction processed, depending on the type of receivable.
In February 2004, the Company entered into an Amended and Restated
Promissory Note for a total of $500,000 (the "Restated Note") with Stephen
Garchik, Trustee ("Garchik") and simultaneously executed a related stock option
agreement and a registration rights agreement in favor of Garchik. The stock
option agreement provides Garchik with ten-year options to acquire 500,000
shares of the Company's common stock at $0.25 per share and all such options
vested upon grant and the registration rights agreement provides Garchik with
certain piggyback registration rights in the event the Company files a
registration statement. The Restated Note bears interest at Prime, as published
in the Wall Street Journal (4.0% as of February 17, 2004), plus one and
principal and all accrued interest is due on June 30, 2004.
The Restated Note is comprised of $250,000 previously loaned to the Company
in February 2003 and originally due on April 15, 2004 and $250,000 which was
loaned to the Company on February 3, 2004.
F-24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(unaudited)
Year ended September 30, 2003 and the Nine Months Ended September 30, 2002
Balance at Charged to Charged to Balance at
Beginning Costs and Other Additions End of
Description of Period Expenses Accounts (Deductions) Period
------------- ---------- -------- -------- ------------ ------
Year
- ----
Allowance for doubtful accounts:
September 30, 2002 56,000 156,000 175,000 322,000
406,000 A
(233,000) B 495,000
September 30, 2003 495,000 992,000 - 333,000 C 828,000
A: Reserve acquired pursuant to the All Care Asset Acquisition
B: Write off of All Care bad debts of $132,000 and Classic bad debts of $101,000
C: Net Increase in reserve due to write offs and adjustments to reserve.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRITICAL HOME CARE, INC.
By: /s/ David Bensol
--------------------
David Bensol
Chief Executive Officer, President
and Chairman of the Board
By: /s/ Eric S. Yonenson
------------------------
Eric S. Yonenson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ David Bensol February 17, 2004
----------------
David Bensol
Chief Executive Officer, (Principal Executive Officer)
President and Chairman of the Board
/s/ Eric S. Yonenson February 17, 2004
--------------------
Eric S. Yonenson
Chief Financial Officer
(Principal Financial Officer)
/s/ Bradley Smith February 17, 2004
-----------------
Bradley Smith
Executive Vice President,
Secretary and a Director
/s/ Mitchell Cooper February 17, 2004
-------------------
Mitchell Cooper
Director
/s/Barbara Levine February 17, 2004
------------------
Barbara Levine
Director
/s/ Delbert Spurlock, Jr. February 17, 2004
-------------------------
Delbert Spurlock, Jr.
Director