SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-KSB
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended September 30, 2002
[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 (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 $1,193,000.
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 January 31, 2003 was $13,442,000.
As of January 31, 2003, 24,368,026 shares of registrant's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [X] No [ ]
Documents incorporated by reference: None
TABLE OF CONTENTS
Item Page
Disclosure Regarding Forward-Looking Statements...............................2
PART I
Item 1. Description of Business............................................3
Item 2. Description of Property...........................................15
Item 3. Legal Proceedings.................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............15
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters...............................................16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................17
Item 7. Financial Statements.............................................F-1*
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................19
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)
of the Exchange Act...............................................20
Item 10. Executive Compensation............................................21
Item 11. Security Ownership of Certain Beneficial Owners
and Management....................................................24
Item 12. Certain Relationships and Related Transactions....................25
Item 13. Controls and Procedures...........................................25
Item 14. Exhibits List and Reports on Form 8-K............................ 26
Signatures...................................................................27
*Page F-1 follows Page 26.
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 Transition 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.
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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 six points of service having
locations in Westbury, Patchogue, Babylon, Woodbury, Massapequa Park and East
Setauket, 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, 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 in 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 acquisition 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 one of the largest providers 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.
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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.
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.
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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:
- 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
state 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 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.
6
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, 2002 was 105 and days sales outstanding at December 31, 2001 was
109. 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 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.
The home healthcare industry has undergone significant changes in the past
five years. With the passing of the Medicare Reform Act of 1997, healthcare
providers were forced to accept widespread cuts in oxygen reimbursement, which
have led to a dramatic shift in the industry landscape. A comparison of the top
ten home health care providers from 1998 to the present shows that more than
half are undergoing significant financial reorganization due to factors
influenced by Medicare reform. This weakness in certain of the largest health
care providers has created an opportunity for regional entities to cut into the
national providers' market share while also consolidating smaller home
healthcare companies. This is our growth strategy.
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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Medicare reimbursement changes have also altered the cost structure for
many of the smaller home care concerns. Respiratory companies have endured
reimbursement cuts of 25% in 1998 and an additional 5% in 1999. Although there
is a five-year moratorium on such cuts, many of the smaller companies have seen
their profit margins evaporate and lack the proper diversification to absorb
such losses. We believe that these factors will result in more integrated and
financially secure operators being able to capture the abandoned market share
that these smaller enterprises can no longer compete in profitably.
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, reinforces 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).
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 nine months ended September 30, 2002. We currently have more
than 1,000 active customers, and the loss of any single customer or group of
customers would not materially impact 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.
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:
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- 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.
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 will be 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.
9
Set forth below are the material laws and regulations that affect our
operations.
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 nine
months ended September 30, 2002, approximately 21% of our net revenue was
derived from Medicare and less than 1% of net revenues were derived from
Medicaid. For the year ended December 31, 2001, approximately 10% 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 provide 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.
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.
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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 believes that it will
be fully compliant by April 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, are required to
comply with these regulations by April 14, 2003. 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.
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 fully able to 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 its 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 in which we operate 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.
11
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 is scheduled to be 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 majority of the first
phase of the final regulations was January 4, 2002 and the second phase is
expected to be effective when issued in May 2003. In addition, a number of the
states in which we may operate have similar prohibitions on physician
self-referrals. 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 obtained by a healthcare provider
from the state (e.g., Medicaid funds provided by the state). We cannot give any
assurance that similar state laws will not be enacted in the states in which we
currently operate or intend to operate.
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.
12
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, some of the states in which we operate or
intend to operate 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 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 or that such compliance will materially affect its capital
expenditures, earnings 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 its 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 and financial condition will
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.
13
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 properly bill and collect
on our accounts receivable and thereby, adversely affect our financial
condition and results of operations.
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 21% of our net revenues for the nine months ended September
30, 2002 and 10% for the year ended December 31, 2001, 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 arrangements with
managed care organizations, although no individual arrangement accounted
for more than 10% of our net revenues in the nine months ended September
30, 2002. Certain competitors of our's 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 its ability to maintain or increase its 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, its results will be adversely affected.
14
Seasonality
The home healthcare industry is not seasonal in nature.
Employees
Our parent company, Critical Home Care, Inc., currently has 5 employees,
including its two executive officers, an executive assistant, the corporate
controller and one person performing accounting, bookkeeping and clerical
duties. Our operating subsidiaries employ an aggregate of 41 persons including
the director of operations, one respiratory therapist, 6 branch managers, who
also function as sales representatives; 6 certified or assistant orthotic
fitters and prosthetists; 11 persons who are billing and collection specialists;
4 retail sales and clerical persons; 2 bookkeeping and accounting supervisory
persons, 4 administrative employees; and 5 persons who perform equipment
delivery and set up services and one warehouse manager.
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 $6,230 per month and the lease expires on June 11, 2007. We also rent 5
points of service locations in Patchogue, Babylon, Woodbury, Massapequa Park and
East Setauket, New York at a combined monthly rental of approximately $30,000.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
15
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Our common stock is traded in the over-the-counter market and has been
quoted on the OTC Bulletin Board under the symbol "CCLH" since September 26,
2002. Prior thereto, before current management took control, the 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.
Nine Months Ended Bid Prices Ask Prices
September 30, 2002 High Low High Low
---- --- ---- ---
January 1, 2002 through
March 31, 2002 * * * *
April 1, 2002 through
June 30, 2002 $ 0.03 $ 0.03 None None
July 1, 2002 through
September 30, 2002 $ 4.10 $ 0.03 $4.20 $3.05
Fiscal Year Ended
September 30, 2001
January 1, 2001 through
March 31, 2001 * * * *
April 1, 2001 through
June 30, 2001 * * * *
July 1, 2001 through
September 30, 2001 * * * *
October 1, 2001 through
December 30, 2001 * * * *
* - 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 January 31, 2003, there were approximately 362 holders of record of
our common stock.
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.
On October 25, 2002, the Company consummated an initial closing of gross
proceeds of $550,000 pursuant to an ongoing private placement pursuant to Rule
506 of Regulation D under the Securities Act of 1933, as amended. The placement
is for up to a maximum of $2,000,000 of convertible promissory notes (the
"notes") that were originally due on December 31, 2002 and can be automatically
converted 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. The offering is ongoing and the offering period and due date of
the notes has been extended through February 28, 2003 pursuant to the extension
terms of the private placement offering document and through February 18, 2003,
the Company has received an additional $115,858 and the respective notes were
converted into a total of 115,858 shares.
16
Item 6. Management's Discussion and Analysis of Financial Condition and Results
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.
RESULTS OF OPERATIONS
The Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001
Sales increased by $572,000, or 80%, in the nine months ended September 30,
2002 as compared to the comparable 2001 period. Approximately $297,000 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 $
275,000 represents an increase in sales generated by Classic Healthcare.
Gross profit in the nine month 2002 period was 70.1%, a slight increase
from the 69.5% recorded in the prior year's comparable period. The increase is
attributable to a different sales mix due to the addition of the sales of
Homecare Alliance and All Care Medical Products.
Selling, general and administrative expenses totaled $1,065,000 in the 2002
nine month period, an increase of $694,000 over the $371,000 incurred in the
2001 comparable period. The net increase consists of acquisition related costs
of $96,000 incurred in the current year's nine month period; an increase of
$35,000 in professional fees relative to becoming a public company,
approximately $159,000 of selling, general & administrative expenses of the
Homecare Alliance and All Care Medical Products operations, which have been
consolidated with those of the company since their respective dates of
acquisition, stock option compensation of $120,000 and an increase of $254,000
in the selling, general and administrative expenses of Classic. The $254,000
increase primarily consists of rent increases of $20,000, an increase of
$122,000 in officers' salaries and related taxes from $6,000 in the 2001 nine
month period to $128,000 in the 2002 nine month period, as the two officers of
Classic Healthcare did not take any compensation in fiscal 2001 until September
and an increase in other salaries and related taxes of approximately $100,000.
Interest expense for the nine months ended September 30, 2002 was $28,000
as compared to $1,000 in the prior years comparable nine month period. The
increase of $27,000 is all related to the various notes payable issued pursuant
to loans and advances made to the Company and includes interest paid with common
stock valued at $25,000.
Other income of $96,000 in the nine month period ended September 30, 2002
represents a management fee paid by All Care to Critical for managing the All
Care operations from July 1, 2002 up through the closing date of the asset
acquisition. Other income of $25,000 in the nine months ended September 30, 2001
consists of billing fees earned by Classic Healthcare for processing healthcare
billings of an unrelated entity.
LIQUIDITY AND CAPITAL RESOURCES
Our primary needs for liquidity and capital resources are the funding of
operating and administrative expenses related to our management and our
subsidiaries which includes expenses incurred relative to seeking merger and/or
acquisition candidates.
During the nine months ended September 30, 2002, cash increased by $35,000.
The cash of $54,000 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 well as to pay current liabilities when due. We, therefore
intend to raise capital in order to meet all of our obligations. On October 25,
2002 we received gross proceeds of $550,000 pursuant to an initial closing of a
Private Placement of 8% Convertible Promissory Notes which were originally due
on December 31, 2002. We have the right to elect to have the noteholders convert
the notes into common shares of our company at the rate of one share for each
dollar at any time through the due date of the Notes and on November 11, 2002 we
converted the proceeds of $550,000 into 550,000 common shares and issued 2,168
common shares in payment of accrued interest. The offering period and due date
of the Notes have been extended through February 28, 2003 pursuant to the
extension terms of the private placement offering document. Through February 18,
2003, another $115,858 has been raised and the respective notes were converted
into 115,858 shares of the Company's common stock.
17
On February 18, 2003, the Company and Health Care Business Credit
Corporation ("HCBCC") signed a financing commitment letter covering an asset
based credit facility of up to $5,000,000 for a period of three years and a
commitment fee of $75,000 was charged to the Company. Management anticipates
that a definitive loan agreement will be executed on or before February 28, 2003
and that the initial funding will approximate $500,000 net of related expenses.
Advances will be available of up to 85% of eligible receivables, as defined, and
the basic terms of the loan agreement are expected to include, among others, a
prepayment penalty, an interest rate of Prime plus 2 percent, an annual unused
line fee of 1/2 % on the unused portion of the facility and compliance with
certain covenants related to debt service coverage. The lender will have a
perfected first priority valid and enforceable lien and security interest on all
of the Company's accounts receivable and its related tangible assets. We
anticipate that the amounts that will be available from time to time under the
credit facility will be sufficient to pay our obligations as they come due. In
the event that the transaction described above does not close, the Company will
have to obtain alternate sources of working capital. The Company has been
negotiating loans of $250,000 and $125,000 respectively, with two different
potential investors. The current proposed structure includes a term of 14 months
pursuant to promissory notes, an interest rate of Prime, as defined, plus 1% and
certain stock options. There can be no assurance that any of these proposed
transactions will occur.
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 collectibility 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 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. 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 is recorded as goodwill. If goodwill is not
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. In the circumstances, we determined that no impairment needs be
recognized as of September 30, 2002.
18
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. ("Classic"), the operating subsidiary of the
Company, became the historical financial statements of the Company for reporting
purposes. Therefore, the financial statements as of and for the year ended
December 31, 2001 are those of Classic. Such financial statements had been
audited by Grassi and Co., CPA's P.C. ("Grassi") in May 2002.
On October 14, 2002, we engaged Grassi to serve as our independent public
accountants for the fiscal year 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 is
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.
19
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 47 Chief Executive Officer, President
and Chairman of the Board
Bradley Smith 52 Vice President, Secretary
and a Director
Mitchell Cooper 48 Director
Barbara Levine 53 Director
Delbert Spurlock 61 Director
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.
Mitchell Cooper became a director of the Company on September 26, 2002. Mr.
Cooper is a partner in the Mineola law firm of Spizz & Cooper, LLP, 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.
20
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. 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 controls, policies, and
procedures in place to assure compliance with applicable laws, regulations and
company policy.
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.
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, 2002, with the following exceptions:
David S. Bensol and Bradley Smith each failed to timely file a Form 4 reporting
the grant of a stock option upon the completion of the reverse merger
acquisition of the Company.
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 $100,000 for the fiscal year (nine months) ended September 30,
2002, and the fiscal years ended December 31, 2001 and 2000.
21
Summary Compensation Table
Annual Compensation Long-Term Compensation Awards
--------------------------------------- ---------------------------------------
Restricted Securities
Stock Underlying
Name and Principal Position Year Salary ($) Bonus ($) Award(s) ($) Options/SARs (#)
------------------------------ ------- ------------------- ------------------- ------------------- -------------------
David Bensol, Chief 2002 * $59,135 $100,000 100,000 (1)
Executive Officer, President 2001 - -
and Chairman of the Board 2000 - -
Bradley Smith, Executive 2002 * $59,135 $75,000 75,000 (2)
Vice President, Secretary 2001 - -
and a Director 2000 - -
-------------------------------------------------
* Amount paid for the nine months ended September 30, 2002
(1) Pursuant to Mr. Bensol's Employment Agreement, he a) is being
compensated at an annual salary of $150,000 and b) received options to purchase
100,000 shares which vest quarterly over the next year, commencing on December
31, 2002, and shall be exercisable for a five year period following the date of
grant provided Mr. Bensol remains an employee of the company.
(2) Pursuant to Mr. Smith's Employment Agreement, he a) is being
compensated at an annual salary of $125,000 and b) received options to purchase
75,000 shares which vest quarterly over the next year, commencing on December
31, 2002, and shall be exercisable for a five year period following the date of
grant provided Mr. Smith remains an employee of the company.
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 shall vest quarterly commencing on December 31, 2002 and be exercisable at
a price equal to $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 includes a non-competition provision for
24 months subsequent to any termination of his employment.
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 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 shall
vest quarterly commencing on December 31, 2002 and be exercisable at a price
equal to $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 also includes a non-competition provision for 24
months subsequent to any termination of his employment.
22
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, 2002.
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 100,000 57% $1.00 (1)
Bradley Smith 75,000 43% $1.00 (2)
-----------------------------------------
(1) Pursuant to Mr. Bensol's Employment Agreement, he received options to
purchase 100,000 shares which vest quarterly over the next year, commencing on
December 31, 2002 and shall be exercisable for a five year period following the
date of grant provided Mr. Bensol remains an employee of the company.
(2) Pursuant to Mr. Smith's Employment Agreement, he received options to
purchase 75,000 shares which vest quarterly over the next year, commencing on
December 31, 2002 and shall be exercisable for a five year period following the
date of grant provided Mr. Smith remains an employee of the company.
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, 2002, 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, 2002, and the aggregate dollar value of in-the-money,
unexercised options, held at September 30, 2002. The value of the unexercised,
in-the-money options at September 30, 2002, is the difference between their
exercise or base price ($1.00), and the fair market value of the underlying
common stock on September 30, 2002. The closing bid price of our common stock on
September 30, 2002 was $3.25.
Value of Unexercised
Shares Acquired Upon Number of Securities In-The-Money
Exercise of Options Underlying Unexercised Options at
During Fiscal 2002 Options at September 30, 2002 September 30, 2002
------------------ ----------------------------- ------------------
Name Number Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------ -------------- ----------- ------------- ----------- -------------
David
Bensol None -0- -0- 100,000 -0- $225,000
Bradley
Smith None -0- -0- 75,000 -0- $168,750
23
EQUITY COMPENSATION PLANS
The following table sets forth certain information as of the fiscal year
ended September 30, 2002, 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 2,000,000 common shares $1.23 1,675,000 common shares
not approved by security
holders
------------------------------ ---------------------------- --------------------------- ----------------------------
Total 2,000,000 common shares $1.23 1,675,000 common share
------------------------------ ---------------------------- --------------------------- ----------------------------
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth as of February 12, 2003, 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.
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership (2) Class (2)
David Bensol..................................... 6,336,768 (3) 26.01%
Bradley Smith.................................... 1,036,391 (4) 4.25%
Mitchell Cooper.................................. 50,000 (5) 0.20%
Barbara Levine................................... 50,000 (6) 0.20%
Delbert Spurlock................................. 50,000 (6) 0.20%
Harbor View Fund, Inc. (7)....................... 2,109,448 8.66%
Allied International Fund, Inc. (8).............. 2,012,774 8.26%
Rubin Family Irrevocable Stock Trust (9)......... 2,783,065 11.42%
Luigi Piccione (10).............................. 1,750,000 7.18%
--------- -----
All Directors and Officers as
a Group (5 persons) ......................... 7,523,159 (11) 30.63%
========= ======
24
(1) Unless otherwise noted, address is c/o the Company, 762 Summa Avenue,
Westbury, New York 11590.
(2) Calculated based on 24,368,026 shares issued and outstanding as of
January 31, 2003. 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 25,000 shares of common stock issuable upon exercise of stock
options which became exercisable on December 31, 2002, but does not include
75,000 shares of common stock issuable upon exercise of stock options not
currently exercisable.
(4) Includes 18,750 shares of common stock issuable upon exercise of stock
options which became exercisable on December 31, 2002, but does not include
56,250 shares of common stock issuable upon exercise of stock options not
currently exercisable.
(5) Includes 50,000 shares upon exercise of presently exercisable options.
(6) Includes 50,000 shares issuable upon exercise of presently exercisable
options but does not include the 200,000 shares issuable upon exercise of
options to be granted in the future.
(7) The address of this entity is c/o Snow Becker Krauss P.C., 605 Third
Avenue, New York, New York 10158.
(8) The address for this entity is 125 Michael Drive, Syosset, New York
11791.
(9) The address for this entity is 18 Pine Tree Drive, Great Neck, New York
11024.
(10) The address for this person is 15 Percy Williams Drive, East Islip, NY
11730.
(11) Includes 193,750 shares issuable upon exercise of presently
exercisable options.
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, and Bradley Smith, Executive Vice President, 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, 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. In the event of a buyout of the Company, their
remaining future options shall be granted and will vest immediately.
Item 13. Controls and procedures
Evaluation of disclosure controls and procedures.
Our chief executive officer and our acting 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 a date within 90 days of the filing date of
this report (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.
25
Item 14. 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 * Certificate of Incorporation of the Company.
3.2 * By-Laws of the Company.
4.1 * 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.
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 * Consulting Agreement, dated as of November 15, 2002 by and between the Company and Rockwell Capital Partners, LLC.
10.5 * Form of Investor Subscription Documents
10.6 * Form of Convertible Promissory Note
21.1 * List of Subsidiaries of the Company.
99.1 * 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.
99.2 * 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.
* Filed herewith
-------------------------------------------------
(b) Reports on Form 8-K
Current Report, on Form 8-K, dated September 26, 2002 and filed on
September 26, 2002, which reports the change of control of the Company and the
acquisition of Critical Home Care, Incorporated, a Delaware corporation, is
hereby incorporated by reference, including exhibits attached thereto, into this
Form 10-KSB for the nine months ended September 30, 2002.
26
ITEM 7
CRITICAL HOME CARE INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
CRITICAL HOME CARE, INC.
CONTENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 F-2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001, the Year Ended December 31, 2001 and
the Period from October 23, 2000 (Inception) to December 31, 2000 F-3
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 2002, the Year Ended December 31, 2001 and
the Period from October 23, 2000 (Inception) to December 31, 2000 F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001, Year Ended December 31, 2001 and
the Period from October 23, 2000 (Inception) to December 31, 2000 F-5
Notes to Consolidated Financial Statements F-6-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Critical Home Care, Inc.
We have audited the accompanying consolidated balance sheets of Critical
Home Care, Inc. and subsidiaries (collectively, the "Company") as of September
30, 2002 and December 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the nine months and 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 2002 and December 31, 2001, and the consolidated results of
its operations and its cash flows for the nine months and year then ended 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-1
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
---- ----
ASSETS
Current Assets
Cash $ 54,000 $ 19,000
Accounts receivable, net of allowance for
doubtful accounts of $495,000 and $56,000 1,095,000 353,000
Inventory 485,000 55,000
Prepaid expenses 35,000 17,000
Deferred interest 75,000 -
---------- ---------
TOTAL CURRENT ASSETS 1,744,000 444,000
---------- --------
Property and equipment - at cost, net 481,000 36,000
Security deposits 35,000 -
Goodwill 3,357,000 -
Other intangibles 100,000 -
--------- -------
TOTAL ASSETS $ 5,717,000 $ 480,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 7,000 $ 7,000
Accounts payable 461,000 106,000
Accrued expenses and other current liabilities 351,000 17,000
Notes payable, asset acquisitions 532,000 -
Notes payable, other 444,000 -
Due to shareholders - 97,000
Due to affiliate - 95,000
--------- --------
TOTAL CURRENT LIABILITIES 1,795,000 322,000
LONG-TERM DEBT, net of current portion 11,000 16,000
------ ------
TOTAL LIABILITIES 1,806,000 338,000
--------- -------
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, 23,725,000 and 15,896,000 pro-forma
shares issued and outstanding 5,931,000 3,974,000
Additional paid-in capital 3,350,000 -
Accumulated deficit (5,370,000) (3,832,000)
----------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,911,000 142,000
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,717,000 $ 480,000
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements
F-2
CRITICAL HOME CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended Year ended October 23,2000
September 30, December 31, (Inception) to
2002 2001 2001 December 31, 2000
---- ---- ---- -----------------
(unaudited)
NET SALES $ 1,286,000 $ 714,000 $ 1,013,000 $ 4,000
COST OF GOODS SOLD 384,000 218,000 310,000 19,000
--------- -------- -------- -----------
GROSS PROFIT 902,000 496,000 703,000 (15,000)
--------- -------- -------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,065,000 371,000 535,000 26,000
Depreciation 12,000 6,000 9,000 -0-
--------- --------- -------- ---------
TOTAL OPERATING EXPENSES 1,077,000 377,000 544,000 26,000
--------- --------- -------- ---------
(LOSS) INCOME FROM OPERATIONS (175,000) 119,000 159,000 (41,000)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (28,000) (1,000) (1,000) -
Other expense - - (2,000) -
Management and billing fees 96,000 25,000 25,000 -
-------- -------- --------- --------
68,000 24,000 22,000 -
-------- -------- --------- --------
(LOSS) INCOME BEFORE PRO-FORMA (CREDIT)
PROVISION FOR INCOME TAXES (107,000) 143,000 181,000 (41,000)
PRO-FORMA (CREDIT) PROVISION FOR INCOME TAXES (43,000) 57,000 74,000 (16,000)
---------- ------- ---------- --------
PRO-FORMA NET (LOSS) INCOME $ (64,000) $ 86,000 $ 107,000 $ (25,000)
========== ========= ========== =========
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE * $ (0.0039) $ 0.0054 $ 0.0067 $ (0.0016)
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 16,432,000 15,896,000 15,896,000 15,896,000
========== ========== ========== ==========
* Stock options were outstanding only in fiscal 2002 and therefore, diluted
net loss would only be applicable in the nine months ended September 30, 2002
but is not shown as the result would be anti-dilutive.
The accompanying notes are an integral part of these consolidated financial statements
F-3
CRITICAL HOME CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months ended September 30, 2002,
the Year ended December 31, 2001 and
October 23, 2000 (inception) to December 31, 2000
Additional
Common Stock Paid In Accumulated
Shares Amount Capital Deficit Total
------ ------ -------- --------- ------
Balance, October 23, 2000 15,896,000 $3,974,000 - (3,972,000) $ 2,000
(As adjusted for the
reverse acquisition)
Net loss - - - (41,000) (41,000)
---------- --------- -------- --------- ---------
Balance, December 31, 2000 15,896,000 3,974,000 (4,013,000) (39,000)
Net income 181,000 181.000
--------- --------- -------- --------- ---------
Balance, December 31, 2001 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 $3,350,000 $(5,370,000)$3,911,000
========== ========== ========= =========== ==========
The accompanying notes are an integral part of these consolidated financial statements
F-4
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Year ended October 23, 2000
ended September 30, December 31, (Inception) to
2002 2001 2001 December 31, 2000
---- ---- ---- ----------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (107,000) $ 143,000 $ 181,000 $(41,000)
Adjustments to reconcile net income to cash
used in operating activities:
Provision for bad debts 91,000 48,000 56,000 1,000
Depreciation 12,000 6,000 9,000 -
Stock option compensation 120,000 - - -
Interest paid with common stock 25,000 - - -
Changes in operating assets and liabilities, net
of acquisition:
Accounts receivable (276,000) (350,000) (409,000) -
Inventory 32,000 (48,000) (55,000) -
Prepaid expenses (18,000 15,000 4,000 (21,000)
Security deposits (21,000) - - -
Accounts payable 60,000 61,000 67,000 36,000
Accrued expenses and other current liabilities 91,000 12,000 21,000 -
------- -------- -------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,000 (113,000) (126,000) (25,000)
--------- --------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition (380,000) - - -
Purchase of property and equipment (5,000) (28,000) (28,000) (18,000)
--------- --------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES (385,000) (28,000) (28,000) (18,000)
--------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - - - 2,000
(Payment of)/Proceeds from long-term debt (5,000) 24,000 22,000 -
Increase in due to affiliate - 70,000 83,000 12,000
Proceeds from notes payable 501,000 60,000 - -
(Payment of) Proceeds from loans
payable - shareholders (35,000) - 64,000 33,000
Payment of Notes payable - acquisitions (50,000) - - -
-------- ------- ------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 411,000 154,000 169,000 47,000
------- ------- ------- ------
NET INCREASE IN CASH 35,000 13,000 15,000 4,000
CASH, BEGINNING OF PERIOD 19,000 4,000 4,000 -0-
-------- ------- ------- ------
CASH, END OF PERIOD $ 54,000 $ 17,000 $ 19,000 $ 4,000
======== ======== ========= ========
Supplementary information:
Cash paid for interest $ 1,000 $ - $ 1,000 $ -0-
========== ======== ========= ========
Non-cash investing and financing activities
Issuance of stock for asset acquisition $ 3,500,000 $ - $ - $ -0-
========== ======== ========== ========
The accompanying notes are an integral part of these consolidated financial statements
F-5
CRITICAL HOME CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months ended September 30, 2002
And the Year ended December 31, 2001
1. DESCRIPTION OF BUSINESS AND CHANGE OF FISCAL YEAR
Critical Home Care, Inc. and subsidiaries (collectively, the "Company") is
incorporated in Nevada and based on 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 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, HMO's, 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 for the fiscal year (nine months)
ended September 30, 2002 for both reporting and tax purposes.
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 items have been eliminated in consolidation.
Use of estimates in the preparation of financial statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue recognition - Revenues are recognized on an accrual basis in the
period in which services and related products are provided to customers and
patients and are recorded at net realizable amounts estimated to be received
from customers, patients and third party payors. If the payment amount received
differs from the net realizable amount, an adjustment is made to the net
realizable amount in the period that these payment differences are 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 adjusted. The Company
estimates bad debt expense and the allowance for uncollectible accounts.
F-6
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration of credit risk - The Company primarily provides health care
services, medical need related equipment and customized devices and is primarily
reimbursed by the patient's third-party insurers or governmentally funded health
care insurance programs. The Company performs ongoing credit evaluations of its
private pay customer patients and open account customers. Accounts receivable
are not collateralized. 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.
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 and such review is performed at least once a
year. For purposes of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows estimated to
be generated by the asset.
Property and equipment - Property and equipment is recorded at cost and
depreciation is calculated on the straight-line method over the estimated useful
lives of the 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
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 short term nature, their fair values approximate their carrying values,
unless otherwise noted.
F-7
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine months ended September 30, 2002
and the Year ended December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 per share - The Company follows SFAS No. 128, Earnings per Share,
for computing and presenting earnings per share, which requires, among other
things, dual presentation of basic and diluted earnings per share on the face of
the statement of operations. Basic EPS is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities, options or warrants were exercised or converted into
common shares or resulted in the issuance of common shares that then shared in
the earnings of the entity.
Stock-based compensation - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but does not
require, companies to record compensation expense for stock-based employee
compensation plans at fair value. The Company has elected to account for its
stock-based compensation plans 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 disclosures required by
FAS 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 employee must pay
to acquire the stock.
Income taxes - As part of the process of preparing the consolidated
financial statements, the Company is required to estimate income taxes in each
of the jurisdictions in which it operates. This process involves estimating the
actual current tax liability together with assessing temporary differences in
recognition of income for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in the Company's
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent it believes that recovery is not likely, it must establish a valuation
allowance against the deferred tax asset. An expense must be included within the
tax provision in the statement of operations for any increase in the valuation
allowance for a given period. The Company will file a consolidated Federal
income tax return including the operations of all wholly owned subsidiaries.
F-8
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
In the event that the Company was to determine that it would not be able to
realize all or part of its net deferred tax assets in the future, an increase to
the valuation allowance would be charged to income in the period such
determination was made. Likewise, should the Company determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, a decrease to the valuation allowance would increase income in
the period such determination was made.
Intangible assets - In June 2001, The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("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. Other intangible assets
consists of a five (5) year non-compete agreement related to the All Care Asset
acquisition and is being amortized over its life. The adoption of SFAS No. 141
and 142 did not have a material effect on the Company's consolidated financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This statement removes goodwill from the scope of
SFAS No. 121, and requires long-lived assets to be tested for recoverability
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The adoption of SFAS No. 144 did not have a material
effect on the Company's financial position or results of operations.
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 Company does not expect that
the implementation of this statement will have a material impact on its
consolidated financial position or results of operations. In December 2002, the
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
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used 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. The adoption of SFAS No. 148 is not
expected to have a material impact on the Company's financial statements.
Reclassification - Certain prior year amounts have been reclassified to conform
to current year presentation.
F-9
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 and December 31, 2001
consist of the following:
Net Book Value
Accumulated September 30, December 31,
Cost Depreciation 2002 2001
------ ------------ ---- ----
Delivery vehicles $ 56,000 $ 9,000 $ 47,000 $ 20,000
Leasehold improvements 140,000 1,000 139,000 -
Office equipment and
furniture and fixtures 136,000 8,000 128,000 6,000
Computer equipment 30,000 4,000 26,000 10,000
Rental equipment 141,000 - 141,000 -
--------- --------- --------- ---------
$ 503,000 $ 22,000 $ 481,000 $ 36,000
========= ========= ========= =========
4. CONCENTRATION OF RISK
The Company maintains cash balances in two financial institutions. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. From time to time the Company's balance may exceed this limit. At
September 30, 2002, uninsured cash balances were approximately $24,000. The
Company believes it is not exposed to any significant credit risk on cash.
5. NOTES PAYABLE
Notes payable, asset acquisitions at September 30, 2002 consist of:
Notes payable, issued August 8, 2002 pursuant to the
Homecare Alliance asset acquisition agreement, bearing
interest at 8% per annum payable $50,000 on October
1, 2002 and $100,000 on November 1, 2002. $ 150,000
Notes payable, issued September 13, 2002 pursuant to
the All Care asset acquisition agreement, bearing
interest at 7% per annum payable $275,000 on March 1, 2003
and $107,000 on August 15, 2003. 382,000
-------
$ 532,000
=========
Notes payable, other at September 30, 2002 consist of:
Notes payable issued between July 1, 2002 and September
19, 2002 pursuant to working capital loans provided by
certain persons bearing interest at 8% to 12% per annum
payable March 1, 2003 through September 30, 2003. These notes
are secured by certain assets of the Company. $ 394,000
Note payable, issued September 13, 2002 relative to a non-
compete agreement with the prior All Care senior executive,
bearing interest at 7% per annum payable August 15, 2003. 50,000
---------
$444,000
=========
F-10
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
6. 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.
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, net - 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., formerly known as Mojave
Southern, Inc., ("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 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 by the issuance of 7,373,000 common shares of stock.
F-11
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
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 and include the effect of the reverse acquisition as if it
had been consummated on October 23, 2000, Classic's date of inception. Classic
was a Sub Chapter S corporation through the date of its acquisition on July 12,
2002, and all tax effects have therefore been shown on a pro-forma basis.
The acquisition of Alliance was not considered material for purposes of
including a pro-forma condensed combined statement of operations in this Form
10-KSB, but the acquisition of All Care was. Therefore, the pro-forma 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 each fiscal period shown.
Year Ended
Nine Months Ended September 30, December 31,
2002 2001 2001
---- ---- ----
Sales $ 4,172,000 $ 3,652,000 $ 5,020,000
Cost of sales 1,353,000 1,263,000 1,772,000
---------- ---------- ----------
Gross profit 2,819,000 2,389,000 3,248,000
Operating expenses 2,767,000 1,930,000 2,615,000
---------- ----------- -----------
Operating income 52,000 459,000 633,000
Other income 3,000 27,000 27,000
----------- ----------- ----------
Income before taxes $ 55,000 $486,000 $ 660,000
============ ============ =========
F-12
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
7. RELATED PARTY TRANSACTIONS
Effective October 23, 2000, the Company leased office space from RVC Realty
Corp., 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 and $62,000 during the year ended December 31, 2001. The lease was
terminated on December 31, 2002 and the operations of that location were
consolidated into another facility.
The amount due to affiliate of $95,000 as of December 31, 2001 represented
amounts due under the above mentioned lease for rent and real estate taxes. Such
amounts due were non-interest bearing and were settled and paid in full, through
the issuance of 254,000 shares of the Company's common stock on July 12, 2002.
Loans payable - shareholders as of December 31, 2001 in the amount of
$97,000, represents non-interest bearing working capital advances to the Company
by its two senior executives. The balance due of $61,000 at July 12, 2002 was
contributed to capital in connection with the acquisition of Classic.
8. LONG-TERM DEBT
Long-term debt at September 30, 2002 and December 31, 2001 consisted of a
note payable in monthly installments of $558 per month including interest at
6.9% and maturing in April 2005 and secured by a delivery vehicle.
September 30, December 31,
2002 2001
---- ----
Total amount due $18,000 $23,000
Less: Current portion 7,000 7,000
------ ------
11,000 16,000
======= =======
9. INCOME TAXES
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 will be included in the Company's tax returns.
F-13
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
10. QUARTERLY FINANCIAL INFORMATION (unaudited)
The following is a summary of quarterly financial results for the nine
months ended September 30, 2002 and for the year ended December 31, 2001:
FIRST SECOND THIRD FOURTH
2002: QUARTER QUARTER QUARTER QUARTER
----- ------- ------- ------- -------
Net revenues $ 307,000 $ 323,000 $ 656,000 -
Gross profit 220,000 223,000 459,000
Operating income (loss) 49,000 (24,000) (200,000) -
Net income (loss) 29,000 (14,000) (79,000) -
Net income (loss) per
common share:
Basic and diluted $ 0.0018 $ (0.0009) $ (0.0050) -
2001:
-----
Net revenues $ 101,000 $ 319,000 $ 294,000 $ 299,000
Gross profit 71,000 223,000 206,000 203,000
Operating (loss) income (8,000) 71,000 56,000 40,000
Net income 8,000 43,000 33,000 23,000
Net income per common share:
Basic and diluted $ 0.0005 $ 0.0027 $ 0.0021 $ 0.0014
11. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
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 granted options to purchase 100,000 and 75,000 shares of
common stock, respectively. All such options vest 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.
F-14
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2001
11. STOCK OPTION PLAN (continued)
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 all of
which options 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. In the event of a buyout of the Company, their
remaining future options shall be granted and will vest immediately.
The following table illustrates the Company's issuances of stock options
and outstanding stock option balances since the Company adopted the Plan:
Outstanding Weighted-Average
Options Exercise Price
------- --------------
Fiscal 2002:
Granted 325,000 $1.23
Exercised -0-
Expired -0-
-------- -----
Balance at September 30, 2002 325,000 $1.23
======= =====
Additional information pertaining to outstanding options at September 30, 2002:
Exercise Remaining Average Average
Price Outstanding Life Exercise Exercisable Exercise
Range Options (Years) Price Options Price
----- ------- ------- ----- ------- -----
$1.50 150,000 4.99 $1.50 150,000 $1.50
$1.00 175,000 4.99 $1.00 -0- N.A.
----- ------- ---- ----- -
325,000 4.99 $1.23 150,000 $1.50
======= ==== ===== ======= =====
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 disclosures 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 employee must pay to acquire the stock. The Company
recorded $120,000 of stock option compensation in the nine months ended
September 30, 2002.
Black-Scholes is an acceptable and recognized stock option valuation model.
Had compensation cost for the options been determined using the methodology
prescribed under the Black-Scholes option pricing model, the Company's net loss
would have been $339,000.
Assumptions used for the Black-Scholes calculation were:
Expected dividend yield 0.00%
Risk free interest rate 2.75%
Expected life 5 years
Expected volatility 0.435
F-15
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2002
12. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space under noncancellable
operating leases. 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, 2002:
2003 $ 442,000
2004 462,000
2005 475,000
2006 481,000
2007 385,000
Thereafter 247,000
Rent expense for the nine months ended September 30, 2002, the year ended
December 31, 2001 and the period from inception to December 31, 2000 was
$86,000, $62,000 and $12,000, respectively.
On September 26, 2002, the Company 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, 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, which shall vest quarterly commencing on December 31, 2002
and be exercisable at a price equal to $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.
On September 26, 2002, the Company 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 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 of the Company, which shall
vest quarterly commencing on December 31, 2002 and be exercisable at a price
equal to $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.
13. SUBSEQUENT EVENTS
On October 25, 2002, the Company consummated an initial closing of gross
proceeds of $550,000 pursuant to an ongoing private placement pursuant to Rule
506 of Regulation D under the Securities Act of 1933, as amended. The placement
is for up to a maximum of $2,000,000 of convertible promissory notes (the
"notes") that were originally due on December 31, 2002 and can be automatically
converted 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. The offering is ongoing and the offering period and due date of
the notes have been extended through February 28, 2003 pursuant to the extension
terms of the private placement offering document. Through February 18, 2003, the
Company received an additional $115,858 and the respective notes were converted
into a total of 115,858 shares.
On November 15, 2002, the Company and Rockwell Capital Partners, LLC
("Rockwell") entered into a three year consulting agreement whereby Rockwell
will provide certain consulting services, and guidance in the areas of strategic
planning, product development and general business and financial matters.
Rockwell will be paid $30,000, $32,000 and $35,000 respectively for the three
years of rendering services to the Company and will be reimbursed for related
out of pocket expenses.
F-16
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nine Months ended September 30, 2002
and the Year ended December 31, 2002
On February 18, 2003, the Company and Health Care Business Credit
Corporation signed a financing commitment letter covering an asset based credit
facility of up to $5,000,000 for a period of three years and a commitment fee of
$75,000 was charged to the Company. Management anticipates that a definitive
loan agreement will be executed on or before February 28, 2003 and that the
initial funding will approximate $500,000 net of related expenses. Advances will
be available of up to 85% of eligible receivables, as defined, and the basic
terms of the loan agreement are expected to include, among others, a prepayment
penalty, an interest rate of Prime plus 2 percent, an annual unused line fee of
1/2 % on the unused portion of the facility and compliance with certain
covenants related to debt service coverage. The lender will have a perfected
first priority valid and enforceable lien and security interest on all of the
Company's accounts receivable and its related tangible assets. In the event that
the transaction described above does not close, the Company will have to obtain
alternate sources of working capital. The Company has been negotiating loans of
$250,000 and $125,000, respectively, with two different potential investors. The
current proposed structure includes a term of 14 months pursuant to promissory
notes, an interest rate of Prime, as defined, plus 1% and certain stock options.
There can be no assurance that any of these proposed transactions will occur.
On November 14, 2002, the Company and Ocean Breeze Infusion Care of
Farmingdale, Inc. ("Ocean Breeze") signed a 60 day non-binding letter of intent
relating to a proposed acquisition of certain assets of Ocean Breeze by the
Company. The parties discussed and negotiated possible transaction structures
throughout the term of the letter of intent but were unable to reach a mutually
acceptable agreement. Nonetheless, management of the Company and Ocean Breeze
continue to explore the possibility of a transaction; however no assurance can
be given that any such transaction will be consummated.
F-17
CRITICAL HOME CARE INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Nine Months ended September 30, 2002 and
the Year ended December 31, 2001
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(unaudited)
Nine Months ended September 30, 2002 and the Year Ended December 31, 2001
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:
December 31, 2000 $ - $ - $ - $ - $ -
December 31, 2001 - 56,000 - - 56,000
September 30, 2002 56,000 156,000 175,000 322,000
406,000 A
(233,000) B 495,000
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
F-18
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
Date: February 18, 2003
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 18, 2003
---------------- -----------------
David Bensol
Chief Executive Officer, (Principal Executive Officer)
President and Chairman of the Board
/s/ David M. Barnes February 18, 2003
------------------- -----------------
David M. Barnes
Acting Chief Financial Officer
(Principal Financial Officer)
/s/ Bradley Smith February 18, 2003
----------------- -----------------
Bradley Smith
Executive Vice President,
Secretary and a Director
/s/ Mitchell Cooper February 18, 2003
------------------- -----------------
Mitchell Cooper
Director
/s/ Barbara Levine February 18, 2003
------------------ -----------------
Barbara Levine
Director
/s/ Delbert Spurlock, Jr. February 18, 2003
------------------------- -----------------
Delbert Spurlock, Jr.
Director
CERTIFICATION
In connection with the Annual Report of Critical Home Care, Inc. (the
"Company") on Form 10-KSB for the year (nine months) ended September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David S. Bensol, the President and Chief Executive Officer
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects the financial condition and results of the Company.
Date: February 18, 2003
By: /s/ David S. Bensol
--------------------------
David S. Bensol, President and Chief
Executive Officer
CERTIFICATION
In connection with the Annual Report of Critical Home Care, Inc. (the
"Company") on Form 10-KSB for the year (nine months) ended September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David M. Barnes, the Acting Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects the financial condition and results of the Company.
Date: February 18, 2003
/s/ David M. Barnes
----------------------------
David M. Barnes
Acting Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO THE
SARBANES-OXLEY ACT
I, David S. Bensol, the Chief Executive Officer of Critical Home Care,
Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of Critical Home Care,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 18, 2003 /s/ David S. Bensol
-----------------------------
David S. Bensol, Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO THE
SARBANES-OXLEY ACT
I, David M. Barnes, the Acting Chief Financial Officer of Critical Home
Care, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of Critical Home Care, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 18, 2003 /s/ David M. Barnes
-----------------------------
David M. Barnes,
Acting Chief Financial Officer
EXHIBIT 21 - List of Subsidiaries
Critical Home Care, Incorporated
Classic Health Care Solutions, Inc.