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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
DELAWARE 11-3476656
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
1983 MARCUS AVENUE
LAKE SUCCESS, NEW YORK 11042
(Address of Principal Executive Offices) (Zip Code)
(516) 358-1000
(Telephone Number)
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE PER SHARE
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
Floyd I. Wittlin, Esq. Renee J. Silver, Esq.
Richards & O'Neil, LLP Vice President and General Counsel
885 Third Avenue Tender Loving Care Health Care Services, Inc.
New York, New York 10022 1983 Marcus Avenue
(212) 207-1200 Lake Success, New York 11042
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
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ITEM ITEM CAPTION LOCATION IN INFORMATION STATEMENT
NO. ------------ ---------------------------------
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1. Business................................... "Summary;" "The Distribution;"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations;" and "Business."
2. Financial Information...................... "Selected Financial Data;" "Risk Factors;"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations;" and "Financial Statements."
3. Properties................................. "Business."
4. Security Ownership of Certain Beneficial
Owners and Management...................... "Management" and "Securities Ownership of
Certain Beneficial Owners and Management."
5. Directors and Executive Officers........... "Risk Factors;" "Management;" and
"Executive Compensation."
6. Executive Compensation..................... "Management;" and "Executive Compensation."
7. Certain Relationships and Related
Transactions............................... "Certain Transactions;" and "The
Distribution."
8. Legal Proceedings.......................... "Business."
9. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................ "Summary;" "Risk Factors;" and "The
Distribution."
10. Recent Sales of Unregistered Securities.... None.
11. Description of Registrant's Securities to
be Registered.............................. "Description of Capital Stock."
12. Indemnification of Directors and
Officers................................... "Limited Liability and Indemnification."
13. Financial Statements and Supplementary
Data....................................... "Summary;" "Selected Financial Data;"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations;" and "Financial Statements."
14. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. None.
15. Financial Statements and Exhibits.......... "Financial Statements" and Index to
Exhibits.
</TABLE>
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[STAFF BUILDERS, INC. LETTERHEAD]
[ ], 1999
Dear Stockholder:
The Board of Directors of Staff Builders, Inc. has approved a plan by which
our home health care business will become a separate independent
company -- Tender Loving Care Health Care Services, Inc. -- while the remainder
of Staff Builders will engage exclusively in supplemental staffing in the health
care industry and providing information technology staffing in the financial,
communications, manufacturing, consulting and other industries. We will
implement our plan through a special dividend of all of the common stock of
Tender Loving Care Health Care Services, Inc. ("TLC") owned by Staff Builders to
holders of Staff Builders Class A and Class B common stock.
The Board of Directors of Staff Builders believes that this spin-off is in
the best interests of Staff Builders and its stockholders. The spin-off will
permit each company to more sharply focus on its own business, customers and
opportunities. Staff Builders will be able to focus on its supplemental staffing
business free from the web of regulation applicable to the home health care
business. TLC will be able to establish a clean identity as a home health care
provider. Financial analysts and institutional investors should be able to
better understand and recognize the merits of the two businesses and this
recognition should enhance the abilities of both companies to raise capital. The
common stock of Staff Builders will continue to be listed on the OTC Bulletin
Board. TLC expects that a market maker will apply to have the shares of TLC
common stock approved for quotation on the OTC Bulletin Board under the symbol
[ ].
If you are a holder of record of Staff Builders Class A or Class B common
stock at the close of business on [ ], 1999 you will receive as a
dividend one share of TLC common stock for every two shares of Staff Builders
Class A or Class B common stock you hold. The spin-off is scheduled to occur on
or about [ ], 1999. We expect to mail the TLC common stock certificates
shortly thereafter. Stockholders of Staff Builders on the record date must
retain their Staff Builders stock certificates which will continue to represent
shares of Staff Builders common stock.
The enclosed Information Statement contains information about the spin-off
and about TLC. We urge you to read it carefully. Holders of Staff Builders Class
A and Class B common stock are not required to take any action to participate in
the spin-off. A stockholder vote is not required in connection with this matter
and, accordingly, your proxy is not being sought.
We are optimistic about the prospects for Staff Builders and TLC and
appreciate your continued support.
Sincerely,
Stephen Savitsky
Chairman of the Board and Chief
Executive Officer
Staff Builders, Inc.
<PAGE> 4
INFORMATION STATEMENT
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
DISTRIBUTION OF COMMON STOCK
We are furnishing you with this Information Statement ("Information
Statement") in connection with the distribution (the "Distribution") to holders
of record of Class A common stock, par value $.01 per share, and Class B common
stock, $.01 par value per share (collectively "Staff Builders Common Stock"), of
Staff Builders, Inc., a Delaware corporation ("Staff Builders"), on
[ ], 1999 (the "Record Date"), of one share of common stock, par value
$.01 per share ("TLC Common Stock"), of its wholly-owned subsidiary, Tender
Loving Care Health Care Services, Inc., a Delaware corporation ("TLC" or the
"Company"), for every two shares of Staff Builders Common Stock owned on the
Record Date (the "Distribution Ratio"). TLC was recently organized for the
purpose of effecting the Distribution and assuming the operations of the home
health care business of Staff Builders. TLC has no prior operating history as an
independent business. See "Business."
As of the Record Date, there were issued and outstanding [ ]
shares of TLC Common Stock, all of which were held by Staff Builders.
The date of the Distribution (the "Distribution Date") is scheduled to be
on or about [ ], 1999. No consideration will be paid by holders of
Staff Builders Common Stock for shares of TLC Common Stock. See "The
Distribution -- Manner of Effecting the Distribution."
There is no current trading market for the TLC Common Stock. The Company
expects that a market maker will apply to have the shares of TLC Common Stock
approved for quotation on the OTC Bulletin Board under the symbol [ ].
See "The Distribution -- Trading of TLC Common Stock."
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "RISK FACTORS" beginning at page 5.
---------------------
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT
ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
---------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. CHANGES MAY OCCUR AFTER THE DATE
OF THIS INFORMATION STATEMENT AND NEITHER THE COMPANY NOR STAFF BUILDERS WILL
UPDATE THE INFORMATION CONTAINED HEREIN EXCEPT IN THE NORMAL COURSE OF THEIR
RESPECTIVE PUBLIC DISCLOSURES.
---------------------
Stockholders of Staff Builders with inquiries related to the Distribution
should contact Dale R. Clift, Executive Vice President, Chief Operating Officer
and Chief Financial Officer of Staff Builders, or Staff Builders' stock transfer
agent, American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005. American Stock Transfer & Trust Company is also acting as
distribution agent for the Distribution.
---------------------
THE DATE OF THIS INFORMATION STATEMENT IS [ ], 1999.
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INFORMATION STATEMENT
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... (iii)
SUMMARY..................................................... 1
THE COMPANY................................................. 1
THE DISTRIBUTION............................................ 1
SUMMARY FINANCIAL DATA...................................... 4
FORWARD LOOKING STATEMENTS.................................. 5
RISK FACTORS................................................ 5
THE DISTRIBUTION............................................ 10
SELECTED FINANCIAL DATA..................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 19
BUSINESS.................................................... 27
STAFF BUILDERS.............................................. 34
MANAGEMENT.................................................. 35
EXECUTIVE COMPENSATION...................................... 38
CERTAIN TRANSACTIONS........................................ 45
OWNERSHIP OF SECURITIES BY CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS.......................... 47
DESCRIPTION OF CAPITAL STOCK................................ 48
LIMITED LIABILITY AND INDEMNIFICATION....................... 51
CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... F-31
</TABLE>
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AVAILABLE INFORMATION
TLC has filed a Registration Statement on Form 10 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the TLC Common Stock. This Information Statement does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information, reference is made hereby to the
Registration Statement and such exhibits and schedules. Statements contained
herein concerning any documents are not necessarily complete and, in each
instance, reference is made to the copies of such documents filed as exhibits to
the Registration Statement. Each such statement is qualified in its entirety by
such reference. Copies of these documents may be inspected without charge at the
principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained from the Commission upon payment of the charges prescribed by the
Commission by writing to the Commission, Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of this material also should be
available through the Internet by using the SEC EDGAR Archive, the address of
which is http:www.sec.gov.
Following the Distribution, the Company will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. The Company also will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
annual reports containing audited financial statements to its stockholders in
connection with its annual meetings of stockholders. After the Distribution,
such reports, proxy statement and other information will be available to be
inspected and copied at the public reference facilities of the Commission or
obtained by mail or over the Internet from the Commission, as described above.
NO PERSON IS AUTHORIZED BY STAFF BUILDERS OR THE COMPANY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
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SUMMARY
This Summary highlights selected information from this Information
Statement, but does not contain all details concerning the Distribution,
including information that may be important to you. To better understand the
Distribution and the Company, you should carefully review this entire document.
Unless otherwise indicated, references in this document to "we", "us", "our",
the "Company" or "TLC" means TLC and its subsidiaries. References in this
document to "Staff Builders" mean Staff Builders and its subsidiaries.
THE COMPANY
The Board of Directors and management of Staff Builders have concluded that
it is in the best interest of Staff Builders and its stockholders to focus
exclusively on its supplemental staffing business and to create a separate,
independent company, TLC, to focus solely on the home health care business. TLC
is a leading national provider of home health care services. Currently, the
Company has 125 offices located in 26 states and the District of Columbia, as
well as master franchise licenses in Japan, Spain and Brazil. TLC owns and
operates 71 of these offices and 54 of these offices are operated by 31
licensees.
TLC, a Delaware corporation and a wholly-owned subsidiary of Staff
Builders, was formed in February 1999 to acquire 100% of the outstanding capital
stock of those subsidiaries of Staff Builders which are engaged in the home
health care business. After the Distribution, the Company will operate as an
independent, publicly traded company and will own the home health care business
previously owned by Staff Builders. See "The Distribution" and "Business"
The Company provides a wide range of home health care services. Its
licensed personnel provide skilled nursing services, including cardiac care,
pulmonary management, wound management, maternal health, behavioral health care,
infusion therapy administration, hospice support, and extensive patient and
family education. Additional professional services include physical therapy,
occupational therapy, speech therapy and medical social services. The Company
also provides paraprofessional home health aide services and other unlicensed
personnel services to assist patients with activities of daily living.
For the fiscal year ended February 28, 1999, the home health care service
revenues of the Company were approximately $310 million.
The Company's principal office is located at 1983 Marcus Avenue, Lake
Success, New York 11042 and its telephone number is (516) 358-1000.
THE DISTRIBUTION
The following sets forth general questions and answers about the
Distribution. We encourage you to read the entire document.
What is the
Distribution?.............. On the Distribution Date, Staff Builders will
distribute to the stockholders of Staff Builders
approximately [ ] million shares of TLC
Common Stock, based on the approximately
[ ] million shares of Staff Builders
Common Stock outstanding on the Record Date. The
shares of TLC Common Stock to be distributed
constitute all of the TLC Common Stock outstanding
on the Record Date. Immediately after the
Distribution, Staff Builders will own no shares of
TLC Common Stock. See "The Distribution -- Manner
of Effecting the Distribution."
What are the Reasons for
the Distribution?.......... The Board of Directors of Staff Builders believes
that the Distribution is in the best interests of
Staff Builders and Staff Builders' stockholders. In
its view, the Distribution, among other things,
will permit Staff Builders and TLC to focus their
respective managerial and financial resources on
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<PAGE> 8
the growth and development of their core businesses
without regard to the corporate objectives and
policies of the other. It will also create separate
and distinct identities for Staff Builders and TLC.
This will allow financial analysts and
institutional investors to better understand the
merits of the two businesses. It also will enhance
the ability of TLC to raise capital and Staff
Builders to raise capital outside the environment
of tighter government regulation of the home health
care industry and reduced government reimbursement
for home health care services. Further, the
Distribution will enable the Company to establish
equity-based incentive compensation arrangements
which will more effectively attract, retain and
motivate employees by offering benefits that are
more directly associated with the employees'
efforts to improve the long-term performance of the
Company. See "The Distribution -- Background of the
Distribution."
What do I have to do to
Participate in the
Distribution?............ You will not be required to make any payment or to
take any other action to receive TLC Common Stock.
On or shortly after the Distribution Date, the
Distribution Agent will begin distributing stock
certificates representing TLC Common Stock to the
stockholders of Staff Builders. See "The
Distribution -- Manner of Effecting the
Distribution."
What is the Distribution
Ratio?................... We will distribute one share of TLC Common Stock to
you in the Distribution for every two shares of
Staff Builders Common Stock you own. See "The
Distribution -- Manner of Effecting the
Distribution."
Will Fractional Shares be
Issued?.................. No certificates representing fractional shares of
TLC Common Stock will be issued. If you are
entitled to receive less than a full share of TLC
Common Stock, you will receive cash in lieu of such
fractional share. See "The Distribution -- Manner
of Effecting the Distribution."
Will there be any other
Shares of TLC Common Stock
issued in connection with
the Distribution?........ No. However, the Company has reserved a total of
2,750,000 shares of TLC Common Stock for issuance
under its stock option plan. On the Distribution
Date, the Company will grant options under this
plan to purchase 2,024,000 shares of TLC Common
Stock to certain employees of Staff Builders who
will become employees of the Company after the
Distribution. The exercise price for these options
will be the average of the closing bid and asked
price of the TLC Common Stock on the Distribution
Date.
How do I know if I am
Eligible to Participate in
the Distribution?........ If you were a Staff Builders' stockholder of record
on [ ], 1999, the Record Date, you will be
eligible to participate in the Distribution.
When will the TLC Common
Stock Certificates be
Issued?.................. The stock certificates representing your shares of
TLC Common Stock will be sent to you on or about
[ ], 1999, the expected Distribution Date.
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<PAGE> 9
Who will Distribute the
Stock Certificates
Representing the TLC
Common Stock?............ The Company's Distribution Agent is American Stock
Transfer & Trust Company. It will distribute the
certificates representing the TLC Common Stock.
Where will the TLC Common
Stock be Quoted?......... We expect that a market marker will apply to have
the TLC Common Stock approved for quotation on the
OTC Bulletin Board under the symbol [ ].
There is no current public trading market for TLC
Common Stock. See "The Distribution -- Trading of
TLC Common Stock."
What are my Tax
Consequences in Obtaining
Shares of TLC Common
Stock in the
Distribution?............ Staff Builders has not requested nor does it intend
to request a ruling from the Internal Revenue
Service as to the federal income tax consequences
of the Distribution. However, on the Distribution
Date, Staff Builders will receive an opinion of
counsel to the effect that there appears to be
substantial authority for viewing the transaction
as a "tax free" spin-off under Sections 355 and
368(a)(l)(D)of the Internal Revenue Code of 1986,
as amended, and that your receipt of shares of TLC
Common Stock will not result in the recognition of
income, gain or loss to you for federal income tax
purposes. Any cash payment received by you (in lieu
of fractional shares) will not be tax-free to you.
See "The Distribution -- Federal Income Tax
Consequences of the Distribution."
What will be the
Relationship Between Staff
Builders and TLC after
the Distribution?........ As a result of the Distribution, the Company will
cease to be a subsidiary of or otherwise affiliated
with Staff Builders and will thereafter operate as
an independent, publicly held company. Four
directors of the Company will also remain directors
of Staff Builders after the Distribution and one
executive officer of the Company will remain an
executive officer of Staff Builders after the
Distribution. In connection with the Distribution,
Staff Builders and the Company have entered into or
will enter into certain agreements to ensure a
smooth transition. See "The Distribution --
Arrangements Between Staff Builders and TLC
Relating to the Distribution."
Will TLC pay Dividends on
its TLC Common Stock?...... The Company currently does not intend to pay cash
dividends on the TLC Common Stock and is restricted
from doing so by its line of credit with its bank.
Are there any Risks to
Owning TLC Common Stock?... The shares of TLC Common Stock to be issued in the
Distribution involve a high degree of risk. You
should carefully consider the matters discussed
under the section entitled "Risk Factors."
3
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth a summary of historical financial data of
Staff Builders and pro forma financial data of the Company that reflect the
Distribution. Since after the Distribution TLC will own a majority of the
operations, employees and assets of the historical business of Staff Builders,
the Distribution will be treated as a "reverse spin-off" for financial reporting
purposes under U.S. Generally Accepted Accounting Principles ("GAAP"). The pro
forma information, which follows the historical data, may not necessarily be
indicative of the results of operations or financial position that would have
been obtained if TLC had been a separate, independent company during the periods
shown or of TLC's future performance as an independent company. The historical
summary financial data for the three years ended February 28, 1999 have been
derived from the consolidated financial statements included in this Information
Statement. The historical financial statements for the two years ended February
29, 1996 have been derived from audited consolidated financial statements not
included separately herein. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements beginning at page F-1 and the Unaudited Pro
Forma Consolidated Financial Statements beginning at page F-31.
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<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29,
----------------------------------------------------
1999 1998 1997 1996 1995
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STAFF BUILDERS CONSOLIDATED HISTORICAL OPERATIONS DATA
Revenues.................................................... $437,588 $526,673 $480,355 $410,160 $325,111
Net income (loss)........................................... (73,086) (21,632) 3,761 2,014 4,735
Income (loss) per common share:
Basic..................................................... $ (3.16) $ (0.90) $ 0.16 $ 0.09 $ 0.21
Diluted................................................... $ (3.16) $ (0.90) $ 0.15 $ 0.08 $ 0.20
STAFF BUILDERS CONSOLIDATED HISTORICAL BALANCE SHEET DATA
Total assets................................................ $146,505 $158,701 $156,172 $120,527 $103,486
Working capital (deficiency)................................ (39,826) 16,085 27,245 12,007 22,038
Current portion of long-term debt........................... 43,460 10,664 5,071 1,655 1,208
Long-term debt and other liabilities........................ 59,082 40,508 37,998 9,611 9,186
Total liabilities........................................... 185,864 120,332 96,706 65,217 51,135
Stockholders' equity (deficiency in assets)................. (39,359) 38,369 59,466 55,310 52,351
</TABLE>
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<CAPTION>
YEAR ENDED FEBRUARY 28, 1999
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TLC CONSOLIDATED PRO FORMA OPERATIONS DATA (UNAUDITED)
Revenues.................................................... $312,831
Net (Loss).................................................. (72,420)
(Loss) per common share:
Basic..................................................... (6.25)
Diluted................................................... (6.25)
TLC CONSOLIDATED PRO FORMA BALANCE SHEET DATA (UNAUDITED)
Total assets................................................ $ 89,324
Working capital (deficiency)................................ (39,657)
Current portion of long-term debt........................... 19,154
Long-term debt and other liabilities........................ 59,026
Total liabilities........................................... 151,509
Stockholders' equity (deficiency in assets)................. (62,185)
</TABLE>
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FORWARD LOOKING STATEMENTS
Certain statements in this Information Statement constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by the
inclusion of phrases such as "the Company anticipates," "the Company believes"
and other phrases of similar meaning. These forward looking statements are based
on our current expectations. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The potential risks and uncertainties which could
cause actual results to differ materially from our expectations include: the
impact of further changes in the Medicare reimbursement system, including any
changes to the current interim payment system and/or the ultimate implementation
of a prospective payment system; government regulation; health care reform;
pricing pressures from third-party payors, including managed care organizations;
retroactive Medicare audit adjustments; and changes in laws and interpretations
of laws or regulations relating to the health care industry.
RISK FACTORS
1. Recent Losses; Accumulated Deficit; Future Prospects. Staff Builders had
net losses of $73,086,000 and $21,632,000 for the fiscal years ended February
28, 1999 and 1998, respectively. Staff Builders had a deficiency in assets of
$39,359,000 at February 28, 1999 as compared to stockholders' equity of
$38,369,000 as of February 28, 1998. On a pro forma basis to reflect the
Distribution, the net loss of the Company was $72,420,000 for the fiscal year
ended February 28, 1999. The deficiency in assets of the Company was $62,185,000
at February 28, 1999 on this pro forma basis. The operating losses for fiscal
1999 and fiscal 1998 include restructuring costs of $20,464,000 and $33,447,000,
respectively. Our recent losses resulted primarily from Medicare and Medicaid
audit adjustments and reserves for ongoing audits for prior years which may
result in future repayment obligations and for liabilities to government
agencies due to changes in the Medicare reimbursement system. Because of our
recent operating losses, our working capital deficiency, the possibility that
our bank will accelerate our obligation to pay its loans to us, our questionable
ability to obtain new financing on satisfactory terms, if at all, and the
uncertainty of if or when there will be increases in allowable rates for
Medicare-reimbursed services, it is questionable whether the Company will be
able to return to profitability in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
2. Liquidity; Working Capital Deficiency. Staff Builders had a working
capital deficiency of $39,826,000 as of February 28, 1999 and had working
capital of $16,085,000 as of February 28, 1998. On a pro forma basis to reflect
the Distribution, the working capital deficiency of the Company was $39,657,000
as of February 28, 1999. Also, in January 1999, our bank notified us that, in
its opinion, our non-compliance with certain financial covenants constituted an
event of default under our credit facility. Since then, we have negotiated
deferred payment terms for certain of our Medicare and Medicaid audit
liabilities and have made or are in the process of making arrangements with many
of our other creditors to either reduce our liability to them, defer or extend
payment of the liability or a combination of all. We cannot assure you that any
or enough such arrangements can be worked out. In such event, or if our revenues
do not meet expectations or our costs escalate, we may be unable to pay our
debts as they become due. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3. New Credit Facility. The Distribution is prohibited under the terms of
Staff Builders' existing credit facility with its bank. Staff Builders, the
Company and the bank are currently negotiating a new credit facility. The bank
has advised us that it is willing to consider, among other things, separate
advances to the home health care business and the supplemental staffing business
on a day to day basis, with the supplemental staffing and home health care
subsidiaries being subject to maximum revolving credit limits of approximately
$15,500,000 and $16,100,000, respectively. The aggregate limitation on
borrowings remains at $40,000,000. The bank's consent is required to proceed
with the Distribution and we cannot assure you that the terms of any new
facility will permit the Distribution or that a new facility on the above terms
or any terms will be available. Further, if the borrowing limits under the terms
of the new facility are too restrictive and our
5
<PAGE> 12
revenues do not meet our expectations or our costs escalate, we may be unable to
pay our debts as they become due. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
4. Government Regulation of Home Health Care. As a home health care
provider, we are subject to extensive and changing state and Federal regulations
relating to the licensing and certification of our offices and the sale and
delivery of our products and services. The Federal government and Medicare
fiscal intermediaries have become more vigilant in their review of Medicare
reimbursements to home health care providers generally, and are becoming more
restrictive in their interpretation of those costs for which reimbursement will
be allowed to such providers. The Balanced Budget Act of 1997 ("BBA"), resulted
in significant changes to cost based reimbursement for Medicare home health care
providers. Although a cost based reimbursement system remains, the BBA reduced
the cost limits and created new per-beneficiary limits for home health care
providers. We cannot quantify the full effect of the BBA on our future
performance because certain components of health care reform legislation, such
as the per-beneficiary limit, require annual data which will not be known until
a final assessment by Medicare and/or its fiscal intermediary is completed for
each annual period. See "Business -- Reimbursement."
As Congress and state reimbursement entities assess alternative health care
delivery systems and payment methodologies, we cannot predict which additional
reforms may be adopted or what impact they may have on the Company.
Additionally, uncertainties relating to the nature and outcomes of health care
reforms have also generated numerous realignments, combinations and
consolidations in the health care industry which may also have an adverse impact
on our business strategy and results of operations. See "Business -- Government
Regulation" and "Business -- Reimbursement."
5. Third-Party Reimbursement and Managed Care. Because the Company is
reimbursed for its services primarily by the Medicare/Medicaid programs,
insurance companies, managed care companies and other third-party payors, the
implementation of alternative payment methodologies by any of these payors could
have an adverse impact on revenues and profit margins. Generally, managed care
companies have sought to contain costs by reducing payments to providers.
Continued cost reduction efforts by managed care companies could adversely
affect our results of operations. See "Business -- Reimbursement."
6. Absence of New York State Approval. The change in ownership of certain
subsidiaries of Staff Builders as a result of the Distribution requires the
approval of the Public Health Council of the New York State Department of
Health. The earliest that the Company can obtain such approval is September
1999. Although we believe that the approval should be granted in September 1999,
we cannot assure you that the approval will be granted at such time or at all.
If the Public Health Council does not grant approval, an enforcement action
could be brought against the Company, which, if successful, could result in the
Company not being permitted to conduct business in New York State. Approximately
15% of the Company's service revenues are derived from its business in New York
State. Accordingly, if we are unable to conduct our business in New York, it
could have a material adverse effect on our consolidated financial position and
results of operations.
7. Tax Treatment of the Distribution. Staff Builders has not obtained and
does not intend to obtain a tax ruling from the Internal Revenue Service (the
"IRS") concerning the United States Federal income tax consequences of the
Distribution. However, on the Distribution Date, Staff Builders will receive an
opinion of counsel to the effect that there appears to be substantial authority
for viewing the Distribution as a tax-free transaction to Staff Builders'
stockholders and to Staff Builders. Accordingly, there can be no assurance that
the IRS will treat the Distribution as tax-free. For example, even though Staff
Builders and TLC will make a representation to counsel rendering the opinion
that, among other things, both companies will continue the active conduct of
their respective businesses after the Distribution either directly or through
their controlled subsidiaries, the Report of Independent Auditors for Staff
Builders for the fiscal year ended February 28, 1999 stated that Staff Builders'
losses from operations, working capital deficiency and non-compliance with the
terms of its secured credit facility raise substantial doubt about Staff
Builders' ability as a consolidated group to continue as a going concern. If, in
fact, TLC were unable to continue its respective business after the
Distribution, the IRS might assert that the Distribution was taxable, in which
case both Staff Builders and its
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stockholders could be subject to tax on the Distribution, which tax could be
material. Staff Builders and TLC will enter into a tax allocation agreement
which will provide that if Staff Builders is subject to any tax attributable to
the Distribution, Staff Builders will be responsible for such tax. Any such
obligation of Staff Builders would have a material adverse effect on Staff
Builders. See "The Distribution -- Arrangements Between Staff Builders and TLC
Relating to the Distribution" and "The Distribution -- Certain Federal Income
Tax Consequences."
8. Market Uncertainties with Respect to TLC Common Stock. There is no
existing market for TLC Common Stock. Although a market maker is likely to cause
the TLC Common Stock to be authorized for quotation on the OTC Bulletin Board,
we cannot assure you that the application for quotation will be approved. We
cannot predict, estimate or give assurances about the trading prices for TLC
Common Stock after the Distribution Date. Until the TLC Common Stock is fully
distributed and an orderly market develops, the trading prices for TLC Common
Stock may fluctuate significantly. Prices for the TLC Common Stock will be
determined in the trading markets and may be influenced by many factors,
including the depth and liquidity of the market for TLC Common Stock, investor
perceptions of TLC and its business, changes in interest rates, TLC's results,
TLC's dividend policy, and general economic and market conditions. TLC Common
Stock distributed to Staff Builders stockholders in the Distribution generally
will be freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), and the sale of a substantial number of shares of TLC Common
Stock after the Distribution could adversely affect the market price of the TLC
Common Stock. See "The Distribution -- Trading of TLC Common Stock."
9. Litigation. The Company is a defendant in an action by the United States
government alleging submission of false claims and false statements to Medicare,
an action commenced by a principal of a home health agency purchased by the
Company alleging false claims to Medicare (in which the Federal government
elected not to intervene), and three lawsuits by former franchisees whose
franchise agreements were terminated by the Company. In the opinion of
management, the outcome of these actions will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
However, unfavorable resolutions of these actions could have an adverse impact
on liquidity.
The Company is also a defendant in several civil actions which are
incidental to its business. Some of these proceedings seek the recovery of
damages in substantial or unspecified amounts. The Company is contesting the
allegations of the complaints in these matters. Although it is impossible to
predict the outcome of these suits, the Company believes they will not have a
material adverse effect on its consolidated financial condition. However, a
partially or completely uninsured claim, if successfully asserted, and of
sufficient magnitude, could have a material adverse effect on the Company and
its financial condition. Moreover, regardless of the ultimate outcome of
litigation, the costs and disruption to business operations (including those
resulting from impositions on management time) caused by litigation could have a
negative impact on the Company's business. See "Business -- Legal Proceedings."
10. Competition. Although there are national home health care companies,
the health care personnel market is highly fragmented and competitors are often
localized in particular geographical markets. The Company expects that it will
continue to compete with the national providers as well as regional and local
health care service providers. Some of the entities with which we compete have
substantially greater financial and other resources. In addition, our operations
depend, to a significant degree, on our ability to recruit qualified health care
personnel and we face competition from other companies in recruiting qualified
health care personnel. There can be no assurance that qualified personnel will
be available to us in the future. Our failure to recruit qualified personnel
could have a material adverse effect on our operations. See "Business --
Recruiting and Training" and "Business -- Competition."
11. Attraction and Retention of Franchisees and Employees. Maintaining
quality franchisees, managers and branch administrators will play a significant
part in the future success of the Company. Our professional nurses and other
health care personnel are also key to the continued provision of quality care to
our patients. The possible inability to attract and retain qualified
franchisees, skilled management and sufficient numbers of credentialed health
care professionals and para-professionals could adversely affect our operations
and quality of service. See "Business -- Recruiting and Training."
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12. Liability for Services; Insurance. The Company's employees make
decisions which can have significant medical consequences to the patients in
their care. As a result, we are exposed to substantial liability in the event of
negligence or wrongful acts of our personnel. The Company expects to be able to
maintain medical professional and general liability insurance providing for
coverage in a maximum amount of $26 million per claim, subject to a limitation
of $26 million for all claims in any single year. There can be no assurance,
however, that we will be able to maintain our existing insurance at an
acceptable cost or obtain additional insurance in the future as required.
Although, to date, we have not incurred any significant liability relating to
our services, there can be no assurance that our insurance will be sufficient to
cover liabilities that we may incur in the future. See "Business -- Insurance."
13. Franchise Regulation. We are subject to Federal and state laws, rules
and regulations governing the offer and sale of franchises. We are subject to a
number of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. Although we are currently not offering any
franchises, if we offer franchises again in the future, and if we fail to comply
with the franchise laws, rules and regulations of a particular state relating to
offers and sales of franchises, we will be unable to engage in offering or
selling franchises in or from such state. The Company will be required to update
its offering disclosure document to reflect the occurrence of recent, as well as
subsequent, material events. The occurrence of any such events may from time to
time require us to stop offering and selling franchises until the document is so
updated. There can be no assurance that we will be registered in certain states,
that we will be permitted to offer and sell franchises or that we will be able
to comply with existing or future franchise regulations in any particular state.
See "Business -- Franchise Program" and "Business -- Government Regulation."
14. Holding Company Structure; No Dividends on Common Stock. TLC is a
recently formed holding company that conducts no operations of its own. After
the Distribution, the assets of TLC will consist exclusively of its equity
interest in its home health care subsidiaries. TLC will rely on cash dividends
and other permitted payments from the home health care subsidiaries to pay cash
dividends, if any, to the holders of TLC Common Stock. However, we do not expect
to declare or pay any dividends on TLC Common Stock in the foreseeable future.
The Company is restricted from paying dividends under the terms of its credit
facility. We intend to retain all earnings, if any, for use in our business
operations.
15. Service Marks. The Company believes that its service marks have
significant value and are important to the marketing of its services. We cannot
be sure, however, that the Company's marks do not or will not violate the
proprietary rights of others, that our marks would be upheld if challenged or
that we would not be prevented from using our marks. In addition, we cannot be
sure that we will have the financial resources necessary to enforce or defend
our service marks. See "Business -- Service Marks" and "The Distribution --
Arrangements Between Staff Builders and TLC Relating to the
Distribution -- Trademark License Agreement."
16. Dilutive Effect of Options. The Company has reserved a total of
2,750,000 shares of TLC Common Stock for issuance under its stock option plan.
In connection with the Distribution, certain employees of the Company who were
previously employed by Staff Builders will receive options under this plan to
purchase 2,024,000 shares of TLC Common Stock. To the extent any such options
are exercised, the ownership interests of the Company's stockholders will be
diluted. Moreover, the terms upon which the Company may be able to obtain
additional equity capital may be adversely affected because the holders of
options can be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided by the terms of such options. See "Executive
Compensation -- 1999 TLC Stock Option Plan" and "The Distribution -- Treatment
of Employee Options in the Distribution."
17. Anti-Takeover Provisions. The certificate of incorporation and by-laws
of the Company contain various provisions which may discourage future takeover
attempts which the Company's stockholders would support and may perpetuate the
Company's existing management. Among other things, such provisions: (i) provide
the Board of Directors with broad discretion to issue preferred stock; (ii)
provide for three year terms for the directors of the Company and the election
of such directors on a staggered basis; (iii) prohibit certain business
combinations without the affirmative vote of the holders of at least 80% of the
then
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<PAGE> 15
outstanding shares of TLC Common Stock and at least 66% of each series of
preferred stock then outstanding; and (iv) require the approval of 80% of all
shares eligible to vote for any proposed amendment to the Company's certificate
of incorporation or by-laws that seeks to modify or remove the foregoing
provisions. In addition, in certain circumstances, Delaware law requires the
approval of two-thirds of all shares eligible to vote for certain business
combinations involving a stockholder owning 15% or more of the Company's voting
securities, excluding the voting power held by such stockholder. In addition to
the potential impact on future takeover attempts and the possible perpetuation
of management, the existence of all of the above provisions could have an
adverse effect on the market price of TLC Common Stock. See "Management" and
"Description of Capital Stock."
18. Control by Management. Upon the consummation of the Distribution,
Stephen Savitsky and David Savitsky will own, or have the right to vote,
approximately 22% of the outstanding shares of TLC Common Stock. Due to their
stockholdings, Stephen Savitsky being an executive officer and director of the
Company and David Savitsky being a director of the Company, may have the ability
to elect the entire Board of Directors, dissolve, merge or sell the assets of
the Company and, generally, direct the affairs of the Company. See "Ownership of
Securities by Certain Beneficial Owners, Directors and Executive Officers" and
"Description of Capital Stock."
19. Dependence Upon Key Management Personnel. The success of the Company is
largely dependent on the personal efforts of Stephen Savitsky and Dale Clift and
other key personnel of the Company. Although the Company has entered into
five-year employment agreements with Stephen Savitsky and Dale Clift, the loss
of the services of either of them or of certain other key employees would have a
material adverse effect on the Company's business and prospects. The loss of the
services of Stephen Savitsky or David Savitsky would constitute an event of
default under the current credit facility. See "Management."
20. Year 2000 Compliance. Many existing computer systems and applications,
and other control devices, use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century. As
a result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the Year 2000. The
Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and payroll modules), customer services,
networks and telecommunications equipment and products. We also rely, directly
and indirectly, on external systems of business enterprises such as customers,
suppliers, creditors, financial organizations, and of governmental entities,
both domestic and international, for accurate exchange of data. Even if the
internal systems of the Company are not materially affected by the Year 2000
issue, we could be affected by disruptions in the operation of the enterprises
with which we interact or Year 2000 disruptions that affect our customers.
Despite our efforts to address the Year 2000 impact on our internal systems and
business operations, we cannot assure you that such impact will not result in a
material disruption of our business or have a material adverse effect on our
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
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THE DISTRIBUTION
BACKGROUND OF THE DISTRIBUTION
The home health care business of Staff Builders is subject to extensive
Federal and state regulation and is heavily dependent upon reimbursement from
government agencies under the Medicare and Medicaid programs. Reductions in the
limits for the amount of costs that Medicare will reimburse providers, coupled
with more vigilant review of Medicare reimbursement of home health care
providers by the Federal government and Medicare fiscal intermediaries, has
placed great pressures on the operations of all home health care agencies,
including the Company's. In addition, a spate of high profile government
investigations focusing on fraud and abuse in the home health care industry, and
the increase in bankruptcy filings by home health care providers, have reduced
financial analysts' expectations for the home health care industry and
discouraged lenders from lending and other market participants from investing in
home health care companies.
In deciding how to address the negative effect of these factors on the
value of Staff Builders Common Stock, in February 1999, the management of Staff
Builders concluded that Staff Builders should separate its home health care
business from its supplemental staffing business. On February 22, 1999,
management recommended to the Board of Directors that the home health care
business and the supplemental staffing business be separated by means of a
spin-off. On such date, the Board of Directors authorized management to proceed
with its investigation of the separation of its business units and continue
discussions with Staff Builders' bank with respect to its willingness to provide
credit facilities to both businesses and the terms of such financing. On March
22, 1999, the Board of Directors of Staff Builders concluded that it is in the
best interest of Staff Builders and its stockholders to focus exclusively on its
supplemental staffing business and to create a separate, independent company to
focus solely on providing home health care services. To accomplish this
separation of its businesses, the Board of Directors decided to establish TLC
and cause TLC to acquire 100% of the outstanding capital stock of the Staff
Builders subsidiaries engaged in the home health care business.
The decision of the Board of Directors to separate the home health care
business from the supplemental staffing business was made for several reasons.
Staff Builders and the Company believe that the Distribution will enable the
management of each company to focus its managerial and financial resources on
the growth and development of its core business operations without regard to the
corporate objectives, policies and investment standards of the other, and to
develop appropriate operational, marketing and financial strategies.
Furthermore, each company's management will have greater flexibility to respond
more quickly to the competitive environment of its own industry.
The Boards of Directors of both companies also believe that if their two
businesses are operated as separate public companies, financial market
participants will recognize the separate performance of the unregulated
supplemental staffing business and those sources of capital that are reluctant
to provide financing to home health care companies in the current environment
will be more likely to provide the financing necessary to expand the
supplemental staffing business. The supplemental staffing business and the home
health care business are currently operated as distinct, separate businesses.
They have separate offices, separate computer systems, separate marketing
programs and separate back office personnel. However, because of the domination
of the home health care sector of Staff Builders' business (during the fiscal
year ended February 28, 1999, over approximately 71% of the revenues of Staff
Builders was attributable to its home health care operations), it has been
difficult for the supplemental staffing business of Staff Builders to establish
a separate identity.
In addition, by separating the home health care business into an
independent publicly traded company, the Company will be able to establish
incentive compensation arrangements which will enable the Company to more
effectively attract, retain and motivate employees by offering benefits which
are more directly associated with the employees' efforts to improve the
performance of the Company. See "Executive Compensation -- 1999 TLC Stock Option
Plan."
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MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution will be set
forth in the Distribution Agreement, the Tax Allocation Agreement, the Sublease,
the Trademark License Agreement, the Transitional Services Agreement, and the
Employee Benefits Agreement. See "The Distribution -- Arrangements between Staff
Builders and TLC Relating to the Distribution."
Staff Builders will effect the Distribution on the Distribution Date by
providing for the delivery of the TLC Common Stock held by Staff Builders to the
Distribution Agent for distribution to the owners of record of Staff Builders
Common Stock on the Record Date. The Distribution will be made on the basis of
one share of TLC Common Stock for every two shares of Staff Builders Common
Stock outstanding on the Record Date. The actual number of shares of TLC Common
Stock will depend on the number of shares of Staff Builders Common Stock
outstanding on the Record Date. Based upon the approximately 23,619,388 shares
of Staff Builders Common Stock outstanding on May 28, 1999, the Company
estimates that 11,809,694 shares of TLC Common Stock will be distributed to
holders of Staff Builders Common Stock. The shares of TLC Common Stock will be
fully paid and nonassessable, and the owners thereof will not be entitled to
preemptive rights. See "Description of Capital Stock." Stock certificates
representing TLC Common Stock will be mailed to Staff Builders' stockholders by
the Distribution Agent on the Distribution Date or as soon thereafter as
practicable.
No certificates or scrip representing fractional shares of TLC Common Stock
will be issued to Staff Builders' stockholders as part of the Distribution. The
Distribution Agent will aggregate fractional shares into whole shares and sell
them in the open market at then prevailing prices on behalf of stockholders who
otherwise would be entitled to receive fractional shares, and such stockholders
will receive instead a cash payment in the amount of their pro rata share of the
total proceeds, net of selling expenses. See "The Distribution -- Federal Income
Tax Consequences of the Distribution." Such sales are expected to be made as
soon as practicable after the Record Date.
After the Distribution, holders of Staff Builders Common Stock will
continue to hold their shares of Staff Builders Common Stock and, if such
stockholders were stockholders of record on the Record Date, they will have also
received shares of TLC Common Stock. No holder of Staff Builders Common Stock
will be required to pay any cash or other consideration for the shares of TLC
Common Stock received in the Distribution or to surrender or exchange shares of
Staff Builders Common Stock in order to receive shares of TLC Common Stock. The
Distribution will not affect the number of, or the rights attached to,
outstanding shares of Staff Builders Common Stock.
After the Distribution, Staff Builders will own no shares of TLC Common
Stock and TLC will operate as an independent, publicly-owned corporation.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Staff Builders has not requested nor will it seek a ruling from the IRS as
to the Federal income tax consequences of the Distribution. However, on the
Distribution Date, Staff Builders will receive an opinion from Richards &
O'Neil, LLP to the effect that it appears that there is substantial authority
for viewing the Distribution as a "tax free" spin-off under Sections 355 and
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). This
opinion will represent only the best judgment of Richards & O'Neil, LLP, and
will not be binding on the IRS. Additionally, the opinion of Richards & O'Neil,
LLP will be limited insofar as it will speak only to the existence of
"substantial authority" for viewing the Distribution as nontaxable under
Sections 355 and 368(a)(1)(D) of the Code. An opinion as to "substantial
authority" is determined by an objective analysis of current tax law and an
application of such law to the facts. In its opinion, Richards & O'Neil, LLP
will indicate that, according to regulations promulgated under the Code, this
standard is less stringent than a "more likely than not" standard, which
requires that there be a greater than fifty percent likelihood of a position
being upheld, but more stringent than a "reasonable basis" standard, which, if
satisfied, will generally prevent imposition of penalties if a position is
determined to be incorrect. The opinion of Richards & O'Neil, LLP will be
qualified by the "substantial authority" standard, and there can be no reliance
upon the opinion expressed by Richards & O'Neil, LLP other than as limited by
such standard.
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Accordingly, if the Distribution qualifies as a tax-free spin-off under Section
355 and 368(a)(1)(D) of the Code, then:
1. No gain or loss will be recognized by or be includable in the income of
a holder of Staff Builders Common Stock solely as a result of the receipt of TLC
Common Stock in the Distribution.
2. No gain or loss will be recognized by Staff Builders or its subsidiaries
upon the Distribution.
3. The aggregate tax basis of the Staff Builders Common Stock and the TLC
Common Stock held by a stockholder immediately after the Distribution will be
the same as the tax basis of Staff Builders Common Stock held by such
stockholder immediately prior to the Distribution and will be allocated (based
upon relative market values on the Distribution Date) between such Staff
Builders Common Stock and the TLC Common Stock received by such stockholder in
the Distribution.
4. Assuming that Staff Builders Common Stock is held as a capital asset,
the holding period for the TLC Common Stock received in the Distribution by a
holder of Staff Builders Common Stock will include the period during which such
Staff Builders Common Stock was held.
5. A holder of Staff Builders Common Stock who receives cash in lieu of a
fractional share of TLC Common Stock will be treated as if such fractional share
had been received by the stockholder as part of the Distribution and then
redeemed from the stockholder by the Company. Such stockholder will recognize
gain or loss equal to the difference between the cash so received and the
portion of the tax basis in the Staff Builders Common Stock that is allocable to
such fractional share. Such gain or loss will be capital gain or loss, provided
that such fractional share was held by the stockholder as a capital asset at the
time of the Distribution.
If the Distribution were not to qualify as a tax-free spin-off under
Sections 355 and 368(a)(1)(D) of the Code, then:
(i) Staff Builders would recognize capital gain equal to the excess of
(x) the fair market value of the TLC Common Stock on the Distribution Date,
over (y) Staff Builders' adjusted tax basis in the TLC Common Stock on such
date.
(ii) Each holder of Staff Builders Common Stock who receives TLC
Common Stock in the Distribution would be treated as receiving a taxable
distribution in an amount equal to the fair market value of such TLC Common
Stock on the Distribution Date, taxed first as a dividend to the extent of
such holder's pro rata share of Staff Builders' current and accumulated
earnings and profits, and then as a nontaxable return of capital to the
extent of such holder's basis in the Staff Builders Common Stock, with any
remaining amount being taxed as capital gain.
Even if the Distribution qualifies as a tax-free spin-off under Sections
355 and 368(a)(1)(D) of the Code, Staff Builders (but not Staff Builders'
stockholders) also would recognize taxable gain on the Distribution (determined
as if Staff Builders had sold all the TLC Common Stock for fair market value on
the Distribution Date) if (a) 50% or more of the outstanding stock of TLC or
Staff Builders were acquired (or deemed to be acquired pursuant to certain
transactions involving the stock or assets of Staff Builders, TLC, or their
subsidiaries), and (b) the Distribution and such acquisition were treated as
part of a plan or series of related transactions. For that purpose, any
acquisition of stock of Staff Builders or TLC within the period beginning two
years prior to the Distribution Date and ending two years after the Distribution
Date would be presumed to be part of such a plan or series of related
transactions, although Staff Builders or TLC, as the case may be, may be able to
rebut such presumption.
This opinion of counsel will be subject to certain assumptions and the
accuracy of certain factual representations made by Staff Builders and TLC to
Richards & O'Neil, LLP. Neither Staff Builders nor TLC is aware of any present
facts or circumstances that would cause such assumptions or representations to
be untrue. If it were subsequently determined that those assumptions or
representations were inaccurate or incomplete, the conclusion of the tax opinion
could not be relied upon. As will be reflected in the tax opinion, the
applicability of Sections 355 and 368(a)(1)(D) of the Code to the Distribution
is complex and may be subject to differing interpretations. Accordingly, there
can be no assurance that the IRS will not successfully challenge the
applicability of Sections 355 and 368(a)(1)(D) of the Code to the Distribution,
or assert that the Distribution fails the requirements of Sections 355 and
368(a)(1)(D) of the Code on the basis of facts
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either existing on the Distribution Date or that may arise after the
Distribution Date. In particular, the tax opinion of Richards & O'Neil, LLP is
based upon, among other things, a representation from Staff Builders and TLC
that both companies will continue the active conduct of their respective
businesses after the Distribution either directly or through their controlled
subsidiaries as is required under Section 355 of the Code. It should be noted,
however, that the Report of Independent Auditors for Staff Builders for the
fiscal year ended February 28, 1999 stated that Staff Builders' losses from
operations, working capital deficiency and non-compliance with the terms of its
secured credit facility raise substantial doubt about Staff Builders' ability as
a consolidated group to continue as a going concern. If, in fact, TLC were
unable to continue its respective business after the Distribution, the IRS may
successfully assert that the Distribution was not tax-free but was taxable to
both Staff Builders and its stockholders.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL
INFORMATION ONLY AND DOES NOT PURPORT TO COVER ALL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY APPLY TO ALL CATEGORIES OF STOCKHOLDERS. ALL STOCKHOLDERS
SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
FOREIGN LAWS.
TRADING OF TLC COMMON STOCK
The Company will use its reasonable efforts to cause a market maker to
cause the TLC Common Stock to be approved for quotation on the OTC Bulletin
Board under the symbol [ ]. There is currently no public trading for
TLC Common Stock. The Company cannot predict prices at which TLC Common Stock
may trade after the Distribution. In particular, until the TLC Common Stock is
fully distributed and an orderly market develops, the prices at which trading in
such stock occurs may fluctuate significantly and may be higher or lower than
the price that would be expected for a fully distributed issue. The prices at
which TLC Common Stock trades will be determined by the market and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for TLC Common Stock, investor perception of the Company and the home
health care industry, changes in the regulation of the home health care
industry, and general economic and market conditions. Such prices may also be
affected by the anti-takeover provisions in the certificate of incorporation of
TLC and the TLC bylaws. See "Description of Capital Stock."
As a result of the Distribution, the trading price of Staff Builders Common
Stock may be lower immediately following the Distribution as compared to the
trading price of Staff Builders Common Stock immediately prior to the Record
Date, although the receipt of shares of TLC Common Stock is likely to offset
some or all of such effect. The aggregate market values of Staff Builders Common
Stock and TLC Common Stock after the Distribution may be less than, equal to or
greater than the market value of Staff Builders Common Stock prior to the
Distribution. Based on the number of holders of record of Staff Builders Common
Stock as of May 28, 1999, TLC is expected to have approximately 775 stockholders
of record on the Distribution Date. The Distribution Agent, transfer agent and
registrar for the TLC Common Stock will be American Stock Transfer & Trust
Company.
Shares of TLC Common Stock distributed to Staff Builders stockholders will
be freely transferable except for shares received by persons who may be deemed
to be "affiliates" of TLC under the Securities Act. Persons who may be deemed to
be affiliates of TLC after the Distribution generally include individuals or
entities that control, are controlled by, or are under common control with TLC,
and include the directors and executive officers of TLC. All shares of TLC
Common Stock held by affiliates of TLC may generally only be resold (i) in
compliance with the applicable provisions of Rule 144 under the Securities Act,
(ii) under an effective registration statement under the Securities Act, or
(iii) pursuant to an exemption from the registration requirements of the
Securities Act. Under Rule 144, an affiliate is entitled to sell, within any
three-month period, a number of shares of TLC Common Stock that does not exceed
the greater of 1% of the then outstanding shares of TLC Common Stock or the
average weekly trading volume of the TLC Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied.
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After the Distribution, of the estimated 11,809,694 shares of TLC Common
Stock issued and outstanding, approximately 2,599,688 shares will be held by
affiliates and subject to the resale requirements of Rule 144 of the Securities
Act.
EXPENSES OF THE DISTRIBUTION
50% of all costs and expenses of the Distribution incurred on or prior to
the Distribution Date will be paid by Staff Builders and 50% will be paid by
TLC. Except as otherwise provided in the Distribution Agreement or in any other
agreement entered into in connection with the Distribution, Staff Builders and
the Company will each bear its own costs and expenses after the Distribution
Date. See "Arrangements between Staff Builders and TLC Relating to the
Distribution."
TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION
Options granted under the Staff Builders 1993 and 1998 Stock Option Plans
and the Staff Builders 1994 Performance -- Based Stock Option Plan to employees
who, after the Distribution Date, will not continue as employees of or
consultants to Staff Builders after the Distribution Date will terminate three
months after the Distribution Date. All holders of such options who remain
employees of or consultants to Staff Builders after the Distribution Date will
retain their options, without any change to the exercise price or other terms.
Stephen Savitsky, Chairman of the Board and Chief Executive Officer of the
Company, Dale R. Clift, President and Chief Operating Officer of the Company,
and David Savitsky, a director of the Company, are expected to remain as
employees of Staff Builders after the Distribution Date. Willard T. Derr, Chief
Financial Officer, Senior Vice President and Corporate Controller of the
Company, and Renee J. Silver, Vice President and General Counsel of the Company,
are expected to remain as consultants to Staff Builders for one year after the
Distribution Date. Each of these executive officers and directors of the Company
will retain his or her Staff Builders options after the Distribution Date. See
"Executive Compensation -- Employment Agreements" and "Certain Transactions."
Under the Employee Benefits Agreement, certain employees holding Staff
Builders options on the Distribution Date who will be employees of or
consultants to the Company after the Distribution Date will be granted options
to purchase a total of 2,024,000 shares of TLC Common Stock under the TLC 1999
Stock Option Plan. The per share exercise price of these options will be equal
to the average of the closing bid and asked prices of TLC Common Stock on the
Distribution Date, as quoted on the OTC Bulletin Board. Of these options,
400,000 will be granted to Stephen Savitsky, Chairman of the Board and Chief
Executive Officer of the Company, 500,000 will be granted to Dale R. Clift,
President and Chief Operating Officer of the Company, 75,000 will be issued to
Willard T. Derr, Chief Financial Officer, Senior Vice President and Corporate
Controller of the Company, 50,000 will be issued to Renee J. Silver, Vice
President and General Counsel of the Company, and 100,000 will be granted to
Sandra Parshall, Senior Vice President of Operations of a principal subsidiary
of the Company. See "Arrangements between Staff Builders and TLC Relating to the
Distribution -- Employee Benefits Agreement", "Executive Compensation -- TLC
1999 Stock Option Plan and Employment Agreements" and "Certain Transactions."
ARRANGEMENTS BETWEEN STAFF BUILDERS AND TLC RELATING TO THE DISTRIBUTION
Prior to the Distribution, Staff Builders and TLC will enter into certain
agreements to define their ongoing relationship after the Distribution. These
agreements are summarized below and have been filed as exhibits to the
Registration Statement filed by TLC with the Commission under the Exchange Act.
The following descriptions include a summary of all material terms of these
agreements but do not purport to be complete and are qualified in their entirety
by reference to the filed agreements.
Distribution Agreement
Staff Builders and TLC will enter into a distribution agreement (the
"Distribution Agreement") which will provide for, among other things, mechanics
of the Distribution, cooperation regarding past matters and the allocation of
responsibility for past obligations and certain obligations that may arise in
the future.
14
<PAGE> 21
The Distribution Agreement provides that each of Staff Builders and TLC
will indemnify the other party and its affiliates from and against any and all
damage, loss, liability and expense arising out of or due to the failure of the
indemnitor or any of its subsidiaries to pay, perform or otherwise discharge any
of the liabilities or obligations for which it is responsible under the terms of
the Distribution Agreement, which include, subject to certain exceptions, all
liabilities and obligations arising out of the conduct or operation of their
respective business before, on or after the Distribution Date. 50% of all costs
and expenses of the Distribution incurred on or prior to the Distribution Date
will be paid by Staff Builders and 50% will be paid by TLC. Except as otherwise
provided in the Distribution Agreement or in any other agreement entered into in
connection with the Distribution, Staff Builders and the Company will each bear
its own costs and expenses after the Distribution Date. The Distribution
Agreement includes procedures for notice and payment of indemnification claims
and provides that the indemnifying party may assume the defense of the claim or
suit brought by a third party.
Tax Allocation Agreement
Staff Builders and TLC will enter into a tax allocation agreement (the "Tax
Allocation Agreement") to allocate certain tax liabilities between Staff
Builders and TLC and their respective subsidiaries and to allocate
responsibilities with respect to tax returns. Under the Tax Allocation
Agreement, Staff Builders and TLC will each be responsible for the taxes
allocated between the respective parties based on the legal entity on which the
tax is imposed.
The Tax Allocation Agreement provides that if Staff Builders is subject to
any tax attributable to the Distribution, including by reason of the
Distribution's failure to qualify under Section 355 of the Code as a tax-free
distribution, then Staff Builders shall be responsible for any such tax. Any
such obligation of Staff Builders could have a material adverse effect on Staff
Builders. In the Tax Allocation Agreement, TLC also will represent that it has
no plan or intention to take certain specified actions which might adversely
affect the tax-free status of the Distribution which include: (a) no plan or
intention to liquidate, merge with another corporation or sell or otherwise
dispose of its assets subsequent to the Distribution except in the ordinary
course of business; (b) no plan involving the issuance or transfer of equity
interests in TLC following the Distribution other than issuances to employees
and consultants of TLC upon the exercise of stock options under its option plan;
and (c) no plan or intention for the transfer or cessation of a substantial
portion of the business of TLC or other substantial change in the business of
TLC following the Distribution.
Transitional Services Agreement
Staff Builders and TLC will enter into an agreement pursuant to which TLC
will furnish various administrative services to Staff Builders. The initial term
of the agreement will be one year. The agreement will automatically renew at the
end of the initial term or any renewal term for successive three-month terms
until terminated by either party upon written notice to the other party at least
90 days prior to the expiration of the applicable term. Fees payable by Staff
Builders to TLC for such services are expected to be at the rate of 110% of the
costs actually incurred, determined and payable no less frequently than
quarterly.
Employee Benefits Agreement
Staff Builders and TLC will enter into an employee benefits agreement (the
"Employee Benefits Agreement") which will set forth the employee benefit plan
arrangements that will apply to certain employees of the Staff Builders
controlled group who are expected to become employees of TLC as of the
Distribution Date, and any other employees who are hired by TLC prior to the
Distribution Date ("TLC Employees"). The Employee Benefits Agreement provides
that TLC will establish a 401(k) savings plan, welfare plans and stock purchase
and option plans which are substantially the same in all respects to the
corresponding plans maintained by Staff Builders prior to the Distribution Date.
TLC Employees will receive credit for time employed with Staff Builders with
respect to vacation time, sick pay and other benefits.
TLC Employees will participate in the TLC 401(k) plan to the extent that
they were eligible to participate in the Staff Builders 401(k) plan immediately
prior to the Distribution Date, and will receive credit
15
<PAGE> 22
for eligibility, vesting, and benefit accrual for all service credited for such
purposes under the Staff Builders 401(k) plan. In addition, TLC will assume,
with certain exceptions, all liability and responsibility for providing
continuation of health care coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") to any TLC Employee, and any former
employee of the Staff Builders controlled group. The Employee Benefits Agreement
will also provide for certain cross-indemnities with respect to the TLC 401(k)
plan and the Staff Builders 401(k) plan.
Approximately 13,200 current employees of Staff Builders are expected to
become employees of the Company. Of this total, approximately 11,600 are
caregivers and 1,600 are full-time administrative and management personnel.
Approximately 1,200 of these administrative employees are located at the branch
operating locations, 335 are located at the Lake Success, New York headquarters
and 65 are regional employees.
Sublease
A subsidiary of Staff Builders and TLC will enter into a sublease (the
"Sublease") pursuant to which the Company will sublet to Staff Builders'
subsidiary approximately 2,030 square feet of office space in Lake Success, New
York. The initial term of the Sublease will be for one month and will
automatically renew at the end of the initial term or any renewal term for an
additional one-month term until terminated by either party upon written notice
to the other at least 30 days prior to the expiration of the applicable term.
Staff Builders' subsidiary will pay the Company a monthly rent of $4,017. See
"Business -- Properties."
Trademark License Agreement
Staff Builders and the Company will enter into a license agreement pursuant
to which Staff Builders will license to the Company the right to use the service
marks Staff Builders(R) and the Stick Figure Logo in connection with home health
care services. Such license will be royalty-free and will continue for so long
as the Company uses such marks in connection with home health care services.
Both parties will have a right of termination upon 30 days' prior written notice
to the other party if such other party materially breaches the agreement. See
"Business -- Service Marks."
16
<PAGE> 23
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of Staff Builders
and related pro forma financial data of the Company that reflect the
Distribution. Since after the Distribution TLC will own a majority of the
operations, employees and assets of the historical businesses of Staff Builders,
the Distribution will be accounted for as a "reverse spin-off" under GAAP.
Accordingly, the selected historical financial information reflects the selected
consolidated results of Staff Builders. The pro forma information may not
necessarily be indicative of the results of operations or financial position
that would have resulted if TLC had been a separate, independent company. The
historical summary financial data for the three years ended February 28, 1999
have been derived from the consolidated financial statements included in this
Information Statement. The historical financial statements for the two years
ended February 29, 1996 have been derived from audited consolidated financial
statements not included separately herein. Also, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations", the Consolidated
Financial Statements beginning at page F-1, and the Unaudited Pro Forma
Consolidated Financial Statements beginning at page F-31.
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28/29,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STAFF BUILDERS CONSOLIDATED HISTORICAL OPERATIONS
DATA:
Revenues.......................................... $437,588 $526,673 $480,355 $410,160 $325,111
-------- -------- -------- -------- --------
Costs and expenses:
Operating costs................................. 299,057 338,225 301,508 256,719 201,365
General and administrative expenses............. 148,642 177,761 170,290 146,382 113,893
Medicare and Medicaid audit adjustments......... 29,000 -- -- -- --
Amortization of intangible assets............... 1,314 2,807 2,623 1,823 1,237
Interest expense................................ 4,233 3,706 1,601 948 1,237
Interest income................................. (1,061) (1,358) (896) (976) (796)
Other (income) expense, net..................... 1,991 (419) (1,487) 1,791 (22)
Restructuring costs............................. 20,464 33,447 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses................. 503,640 554,169 473,639 406,687 316,914
-------- -------- -------- -------- --------
Income (loss) before income taxes................. (66,052) (27,496) 6,716 3,473 8,197
Provision (benefit) for income taxes.............. 7,034 (5,864) 2,955 1,459 3,462
-------- -------- -------- -------- --------
Net income (loss)................................. $(73,086) $(21,632) $ 3,761 $ 2,014 $ 4,735
======== ======== ======== ======== ========
Income (loss) per common share:
Basic........................................... $ (3.16) $ (.90) $ .16 $ .09 $ .21
======== ======== ======== ======== ========
Diluted......................................... $ (3.16) $ (.90) $ .15 $ .08 $ .20
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic........................................... 23,162 23,939 23,668 23,598 22,389
======== ======== ======== ======== ========
Diluted......................................... 23,162 23,939 24,577 25,504 24,053
======== ======== ======== ======== ========
STAFF BUILDERS CONSOLIDATED HISTORICAL BALANCE
SHEET DATA:
Total assets...................................... $146,505 $158,701 $156,172 $120,527 $103,486
Working capital (deficiency)...................... (39,826) 16,085 27,245 12,007 22,038
Current portion of long-term debt................. 43,460 10,664 5,071 1,655 1,208
Long-term debt and other liabilities.............. 59,082 40,508 37,998 9,611 9,186
Total liabilities................................. 185,864 120,332 96,706 65,217 51,135
Stockholders' equity (deficiency in assets)....... (39,359) 38,369 59,466 55,310 52,351
</TABLE>
Staff Builders did not pay any cash dividends on its common stock during any of
the periods set forth in the table above.
Certain prior period amounts have been reclassified to conform with the
presentation as of February 28, 1999 and for the year then ended.
17
<PAGE> 24
The following unaudited pro forma information has been prepared to reflect
the financial position of the home health care operations of Staff Builders as
if the Distribution had occurred on February 28, 1999 and their results of
operations as if the Distribution had occurred on the first day of the
respective periods (in thousands).
TLC CONSOLIDATED PRO FORMA OPERATIONS DATA
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
FEBRUARY 28, 1999
-----------------
<S> <C>
Total revenues.............................................. $312,531
--------
Operating costs............................................. 200,009
General and administrative expenses......................... 126,032
Amortization of intangible assets........................... 618
Interest expense............................................ 1,446
Interest (income)........................................... (986)
Other (income) expense, net................................. 1,973
Medicaid and Medicare audit adjustments..................... 29,000
Restructuring costs......................................... 20,334
--------
Total costs and expenses.................................... 378,426
--------
(Loss) before income taxes.................................. (65,895)
Provision (benefit) for income taxes........................ 6,525
--------
Net (loss).................................................. $(72,420)
========
(Loss) per common share
Basic..................................................... $ (6.25)
========
Diluted................................................... $ (6.25)
========
Cash dividends per common share............................. --
Weighted average common shares outstanding:
Basic..................................................... 11,581
========
Diluted................................................... 11,581
========
</TABLE>
TLC CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
-----------------
<S> <C>
Total assets................................................ $ 89,324
Working capital (deficiency)................................ (39,657)
Current portion of long-term debt........................... 19,154
Long-term debt and other liabilities........................ 59,026
Total liabilities........................................... 151,509
Stockholders' equity (deficiency in assets)................. (62,185)
</TABLE>
18
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Distribution will be treated as a "reverse spin-off" for financial
reporting purposes under GAAP. Therefore, although the Company will be engaged
exclusively in the home health care business, and not in the supplemental
staffing business, the historical consolidated financial statements and the
historical selected financial data contained in this Information Statement
include the financial position and results of operations of both the home health
care business and the supplemental staffing business previously conducted by
Staff Builders. Consistent with this presentation, the following discussion and
analysis provides information which management believes is relevant to an
assessment and understanding of Staff Builders' results of operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Information Statement. Management believes that the unaudited pro forma
consolidated financial statements of the Company for the year ended February 28,
1999 are a better reflection of the performance of the Company's home health
care business for those periods than the consolidated financial statements of
Staff Builders for the same periods. Nonetheless, such pro forma statements do
not represent what the Company's financial position and results of operations
would have been if the Distribution had occurred prior to the periods discussed
below, nor should they be considered projections of the future financial
performance of the Company.
RESULTS OF OPERATIONS
Years Ended February 28, 1999 ("Fiscal 1999"), February 28, 1998 ("Fiscal
1998") and February 28, 1997 ("Fiscal 1997")
Revenues. Staff Builders' revenues consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28,
------------------------
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Home health care and other................................. $310.3 $451.1 $436.6
Supplemental staffing...................................... 124.9 74.3 42.4
------ ------ ------
Total service revenues..................................... 435.2 525.4 479.0
------ ------ ------
Sales of licensees and fees................................ 2.4 1.3 1.4
------ ------ ------
Total revenues................................... $437.6 $526.7 $480.4
====== ====== ======
</TABLE>
Total revenues decreased to $437.6 million in fiscal 1999 compared to
$526.7 million in fiscal 1998. This decrease of $89.1 million, or 16.9%, was a
result of a decrease in Staff Builders' home health care division service
revenues of $140.8 million to $310.3 million in fiscal 1999 from $451.1 million
in fiscal 1998. This decrease was partially offset by a 68.0% increase in Staff
Builders' staffing division service revenues of $50.6 million from $74.3 million
in fiscal 1998 to $124.8 million in fiscal 1999.
Total revenues increased by $46.3 million to $526.7 million in fiscal 1998
from $480.4 million in fiscal 1997. This increase included an increase of $14.5
million or 3.3% in Staff Builders' home health care service revenues from $436.6
million in fiscal 1997 to $451.1 million in fiscal 1998. Additionally, Staff
Builders' supplemental staffing division service revenues increased by $31.9
million or 75.2% from $42.4 million in fiscal 1997 to $74.3 million in fiscal
1998.
Home Health Care Revenues. The primary reason for the decrease of $140.8
million in the home health care service revenues in fiscal 1999 over fiscal 1998
was a decrease in Medicare revenues. This decrease resulted from the negative
impact of the Medicare Interim Payment System ("IPS") enacted under the Balanced
Budget Act of 1997 ("BBA"). The IPS reduced the limits for the amount of costs
which are reimbursable under the Medicare program. See Note 2 to the
consolidated financial statements.
The increase in home health care revenues of $14.5 million in fiscal 1998
over fiscal 1997 included $28.4 million primarily due to acquisitions made
during fiscal 1997 which were included in the full fiscal 1998
19
<PAGE> 26
period offset by a decrease in revenues of $13.9 million resulting from the
closing or sale of approximately 30 locations during fiscal 1998. Included in
Staff Builders' fiscal 1998 revenues under sales of licensees and fees, net, is
$502 thousand for license fees earned in connection with a master license
agreement with a home health care company based in Tokyo, Japan. Under the
agreement, Staff Builders granted rights to develop home health care agencies
throughout Japan using Staff Builders' home health expertise and licensee model.
Staff Builders receives payment for its home health care services from
several sources. The following are Staff Builders' home health care division
revenues by payment source:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Medicare.................................................... 43.4% 60.1% 61.0%
Medicaid and other local government programs................ 36.2 23.1 21.7
Insurance and individuals................................... 19.3 15.1 15.4
Other....................................................... 1.1 1.7 1.9
----- ----- -----
Total............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The home health care division has 125 locations as of May 31, 1999 as
compared to 198 and 228 locations as of February 28, 1998 and 1997,
respectively. Included in these locations are 54, 160 and 179 offices which were
operated by 31, 64 and 72 licensees, respectively. The percentage of home health
care division revenues attributable to licensees was 69%, 84% and 82% in fiscal
1999, 1998 and 1997, respectively. The decrease in the number of licensees and
their respective share of business is consistent with the industry as a whole
which has experienced a significant reduction in the number of providers as a
result of the BBA.
Supplemental Staffing Revenues. Revenues for the supplemental staffing
division grew to $124.9 million in fiscal 1999 compared to $74.3 million in
fiscal 1998. This increase of $50.6 million, or 68.0% was primarily due to the
increase in the number of staffing office locations from 46 at February 28, 1998
to 58 locations at February 28, 1999, including an increase in the number of
licensees which increased from 35 to 41, respectively. Also, fiscal 1999 was the
first full year in which Chelsea Computer Consultants, Inc. ("Chelsea") was
included in Staff Builders' consolidated results of operations. Chelsea is Staff
Builders' information technology staffing subsidiary in which Staff Builders
acquired a majority interest on October 30, 1997. Chelsea's revenues were $31.1
million in fiscal 1999 and were $7.0 million from October 30, 1997 through
February 28, 1998.
The increase in supplemental staffing revenues of $31.9 million in fiscal
1998 over fiscal 1997 included $9.0 million resulting from the September 1996
acquisition of a provider in the metropolitan New York area which generated
revenues of $17.5 million and $8.5 million in fiscal 1998 and fiscal 1997,
respectively. Additionally, the increase in supplemental staffing revenues
included $4.5 million resulting from the September 1997 acquisition of a
provider of travel nursing services, whereby nursing professionals render
services in long-term assignments, away from the professional's permanent
domicile.
Operating Costs. Operating costs were 68.7%, 64.4%, and 62.9% of service
revenues in fiscal 1999, 1998 and 1997, respectively. Operating costs represent
the direct costs of providing services to patients or clients, including wages,
payroll taxes, travel costs, insurance costs, medical supplies and the cost of
contracted services. The increases in operating costs as a percentage of service
revenues were primarily due to the increase in supplemental staffing revenues
which have higher direct operating costs as a percentage of service revenues as
compared to home health care revenues.
The payroll fringe costs, consisting primarily of payroll taxes and workers
compensation insurance, represents 15.3%, 16.0%, and 15.9% of direct service
wages in fiscal 1999, 1998 and 1997, respectively. These payroll fringe costs as
a percentage of direct service wages for the home health care division were
16.9%, 16.8% and 16.3% and for the supplemental staffing division were 12.4%,
12.5% and 13.2%, respectively.
20
<PAGE> 27
The cost of contracted services represents 6.6%, 6.5% and 8.1% of related
service revenues in fiscal 1999, 1998 and 1997, respectively. Contracted
services consist primarily of physical therapy, occupational therapy, speech
therapy and medical social services utilized in the home health care division.
The service revenues, operating costs and resultant gross margins generated
by Staff Builders' licensee and company-owned locations are as follows ($ in
millions):
<TABLE>
<CAPTION>
HOME HEALTH CARE
YEARS ENDED
FEBRUARY 28,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total service revenues -- Licensee.......................... $214 $379 $356
Total service revenues -- Company-Owned..................... 96 72 81
---- ---- ----
Total service revenues...................................... $310 $451 $437
==== ==== ====
Operating costs -- Licensee................................. $136 $234 $216
Operating costs -- Company-Owned............................ 64 46 53
---- ---- ----
Operating costs............................................. $200 $280 $269
==== ==== ====
Gross margin -- Licensee.................................... $ 78 $145 $140
Gross margin -- Company-Owned............................... 32 26 28
---- ---- ----
Gross margin................................................ $110 $171 $168
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL STAFFING
YEARS ENDED
FEBRUARY 28,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Total service revenues -- Licensee.......................... $ 90 $65 $ 1
Total service revenues -- Company-Owned..................... 35 9 41
---- --- ---
Total service revenues...................................... $125 $74 $42
==== === ===
Operating costs -- Licensee................................. $ 70 $51 $ 1
Operating costs -- Company-Owned............................ 29 7 32
---- --- ---
Operating costs............................................. $ 99 $58 $33
==== === ===
Gross margin -- Licensee.................................... $ 20 $14 $--
Gross margin -- Company-Owned............................... 6 2 9
---- --- ---
Gross margin................................................ $ 26 $16 $ 9
==== === ===
</TABLE>
General and Administrative Expenses. General and administrative expenses
decreased by $29.2 million, or 16.4%, in fiscal 1999 to $148.6 million as
compared to $177.8 million in fiscal 1998 and increased by $7.6 million, or
4.5%, in fiscal 1998 as compared to $170.3 million in fiscal 1997. These costs
expressed as a percentage of service revenues were 34.2%, 33.9% and 35.5% in
fiscal 1999, 1998 and 1997, respectively.
The decrease of $29.2 million in fiscal 1999 as compared to fiscal 1998 was
the result of a decrease in the general and administrative expenses of the home
health care division of $38.7 million which was partially offset by a $9.5
million increase in such expenses in the supplemental staffing division.
Included in general and administrative expenses is Staff Builders' provision for
doubtful accounts which increased by $5.7 million in fiscal 1999 over fiscal
1998. The provision for doubtful accounts was $5.6 million and $2.5 million in
fiscal 1999 and fiscal 1998 for the home care business segment and $2.8 million
and $0.2 million in fiscal 1999 and fiscal 1998 for the supplemental staffing
business segment, respectively.
The decrease in the general and administrative expenses of the home health
care division was a result of a reduced number of operating locations and
management's efforts to address the revenue reductions associated with IPS. This
decrease was partially offset by re-engineering costs incurred in connection
with meeting the demands of IPS, including improvement of the home care
division's patient billing, scheduling and accounts
21
<PAGE> 28
receivable functions and implementing other operating efficiencies. The
resultant balance in the allowance for doubtful accounts was $7.0 million, or
8.1%, of gross accounts receivable at February 28, 1999 as compared to $3.7
million, or 4.1%, of gross receivables at February 28, 1998. These increases are
primarily due to the following factors: higher standards of documentation to
evidence the nature of services provided required by home health care payor
sources; an increased rate of rejected billings by payors; a reduced number of
licensees which would normally bear part of the cost of uncollectible
receivables against distributions paid; and increased supplemental staffing
business volume.
The general and administrative expenses of the supplemental staffing
division increased from $13.3 million in fiscal 1998 to $22.8 million in fiscal
1999 due to an increase in the number of supplemental staffing licensees and the
increased expenses associated with the first full year of operation of Chelsea.
The increase in general and administrative expenses of $7.6 million in
fiscal 1998 over fiscal 1997 was primarily due to the increase in supplemental
staffing expenses of approximately $4.8 million, including $1.1 million
attributable to the consolidation of Chelsea's general and administrative
expenses from October 30, 1997 to February 28, 1998. The increase in the
supplemental staffing expenses is due to the expansion of that division. The
increase in these general and administrative expenses includes approximately
$900 thousand resulting from the September 1996 acquisition of a provider in the
metropolitan New York area and approximately $500 thousand resulting from the
September 1997 acquisition of a provider of travel nurse services. Additionally,
there was an increase in corporate and regional home health care expenses of
$2.4 million, or 6.2% over the prior year, due to increased support for
expansion of Staff Builders' home health care services, primarily resulting from
acquisitions made in fiscal 1997 which were included in the full fiscal 1998
period.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $1.3 million in fiscal 1999 as compared to $2.8 million in fiscal
1998 and $2.6 million in fiscal 1997. The reduction of $1.5 million in fiscal
year 1999 compared to fiscal year 1998 was primarily the result of the write-off
of goodwill recorded in fiscal year 1998. The home health care division
amortization expense was $1.2 million, $2.5 million and $2.5 million and the
supplemental staffing division amortization expense was $100 thousand, $300
thousand and $100 thousand in fiscal 1999, 1998 and 1997, respectively.
Interest Expense. Interest expense was approximately $4.2 million in fiscal
1999 as compared to $3.7 million in fiscal 1998 and $1.6 million in fiscal 1997.
The increases in interest expense in fiscal 1999 over fiscal 1998 and over
fiscal 1997 was primarily due to an increase in the level of borrowings under
Staff Builders' secured credit facility. On October 30, 1997, the Company
borrowed $12.6 million under the acquisition line of credit to purchase an
additional 60.9% of the outstanding common stock of Chelsea.
Interest Income. Interest income includes interest on franchise notes
receivable of $225 thousand, $481 thousand and $527 thousand in fiscal 1999,
1998 and 1997, respectively. Interest earned on franchise notes receivable is
generally at the prime rate plus three percent. Additionally, Staff Builders
earned interest from funds on deposit for workers compensation premiums of $520
thousand, $564 thousand and $243 thousand in fiscal 1999, 1998 and 1997,
respectively.
Other (Income) Expense, Net. Other expense of $2.0 million in fiscal 1999
primarily consists of approximately $1.0 million for the reserve for
uncollectible notes receivable, $600 thousand for the write-off of obsolete
fixed assets and $300 thousand to record minority interest expense incurred by
Chelsea. Other (income) expense, net in fiscal 1998 primarily includes
approximately $300 thousand of income from Staff Builders' gain on the sale of
several offices. Fiscal 1997 income includes approximately $1.2 million
resulting from the sale of a Staff Builders' division.
Medicare and Medicaid Audit Adjustments. In the third quarter of fiscal
1999, Staff Builders recorded a charge of $29.0 million to reflect audit
adjustments from both Medicare and Medicaid. Medicare and Medicaid audit
adjustments recorded in fiscal 1999 include Federal and state audit liabilities
arising from some completed audit examinations as well as estimated liabilities
for open audit periods through February 28, 1999. As a home health care
provider, Staff Builders is subject to extensive and changing state and Federal
regulations relating to the licensing and certification of its offices and the
sale and delivery of its products and
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services. The Federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare reimbursements to home health care
providers generally, and have become more restrictive in their interpretation of
those costs for which reimbursement will be allowed to such providers. These
regulatory agencies have increased the number of audits performed and have
applied a more intensive degree of scrutiny in the conduct of these audits.
During the quarter ended November 30, 1998, the Medicare fiscal
intermediary completed and issued the results of 88 audits for the fiscal year
ended February 28, 1997, including 25 audits conducted on site at branch
operating locations. These results together with the results of the home office
audit for the year ended February 28, 1997, indicated an aggregate liability of
approximately $9.5 million.
Additionally, Staff Builders has recorded an accrual for third party
liability ("TPL") to state Medicaid agencies which have claimed that Staff
Builders did not follow proper billing procedures in several locations. These
state Medicaid agencies have challenged the eligibility of individuals for whom
services were provided. The related claims are being reviewed by the state
agencies encompassing several prior years for which Staff Builders has been
paid. Staff Builders has reached a settlement for a portion of its TPL liability
and is continuing to negotiate to resolve amounts payable to these state
agencies. While Staff Builders believes that it will ultimately prevail in many
of these cases, it has accrued for the anticipated losses for those cases in
which it will not prevail. To date, Staff Builders has reached settlement on
$4.6 million of the $11.0 million of TPL provided for in the quarter ended
November 30, 1998. This amount is payable monthly at approximately $250 per
month. The other $6.4 million is a general reserve based upon preliminary
discussions with several states.
Staff Builders continues to appeal many audit issues and has engaged
outside professional advisors to support its positions on these issues. Staff
Builders anticipates that any resolution of these appeals may require up to
several years. The settlement of Medicare and Medicaid liabilities for specific
periods provides a basis for reasonably estimating the liability that may exist
for periods not yet examined or where the examination is in process. Staff
Builders was able to consider the scope of audits being performed by the fiscal
intermediary and the issues raised for such periods, and then use this
information as a basis to estimate the accrual required for audits not yet
performed, or not yet completed. The $29.0 million charge to operations in the
quarter ended November 30, 1998, together with the balance of liabilities
previously established, less amounts expended during the fourth quarter of
fiscal 1999, results in an aggregate liability of $28.1 million for Federal and
state audit adjustments as of February 28, 1999 which includes $17.1 million and
$11.0 million for Federal and state liabilities, respectively.
HEALTH CARE REFORM AND RELATED RESTRUCTURING COSTS
The BBA resulted in significant changes to cost based reimbursement for
Medicare home health care providers. Although a cost based reimbursement system
remains, the BBA reduced the cost limits and created new per-beneficiary limits.
The BBA provides for IPS which became applicable for Staff Builders on March 1,
1998 and will remain in effect until the adoption of a prospective payment
system scheduled to be effective for all home health care agencies beginning on
October 1, 2000. The Federal Health Care Financing Administration committed to
the revised schedule in a report presented to Congress dated February 4, 1999.
The effect of the changes under IPS is to reduce the limits for the amount of
costs that are reimbursable to home health care providers under the Medicare
program. Accordingly, Staff Builders together with many of its licensees have
modified their operations as needed to meet the demands of IPS, including taking
steps to reduce costs and maximize operational efficiencies within the
constraints of IPS.
During the fourth quarter of fiscal 1998, management prepared the home
health care business segment of Staff Builders for the impact of IPS and for
long-term growth. As a result, Staff Builders implemented a corporate-wide
restructuring and cost reduction program. These actions, together with Staff
Builders' assessment of the impact of health care reform legislation, resulted
in a pre-tax charge in the fourth quarter of fiscal 1998 of $33.4 million.
Included in this pre-tax charge was the write-off of goodwill of $24.5 million
and $8.9 million of other restructuring costs. Other restructuring costs
included expenses related to the closing or conversion of many licensee-operated
locations to company-owned locations, as well as severance payments
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for terminated employees. Approximately 60 administrative employees received
severance payouts, of which approximately 50 were terminated at February 28,
1999 and represented 90% of the severance pay costs. These terminations occurred
in 14 locations, and included certain regional operations personnel.
Additionally, by the end of the first quarter of fiscal 1999, Staff Builders had
closed 13 locations, including 10 closed by February 28, 1999, and converted ten
licensee operated locations to Staff Builders-owned locations. During the
quarter ended November 30, 1998, as a result of Staff Builders' further
operating modifications, including the additional closure and conversion of many
locations from licensed to company-owned operations, Staff Builders has written
off or reserved approximately $4.5 million.
In fiscal 1999, management further evaluated the carrying value of Staff
Builders' goodwill and intangible assets in light of current home health care
industry conditions and its impact on Staff Builders' operations. Such valuation
resulted in an additional write-off of home health care goodwill of $15.3
million leaving a remaining net carrying value of goodwill and intangible assets
as of February 28, 1999 of $5.1 million in its home health care business
segment. The fiscal 1998 write-off of goodwill and intangible assets included
$21.5 million for the home health care segment and $3.0 million for the
supplemental staffing segment. The write-off of goodwill and intangible assets
is required under SFAS No. 121.
In addition to the fiscal 1999 write-off of goodwill, Staff Builders
recorded other home health care restructuring costs aggregating $5.2 million.
These costs included $0.9 million for the closure and reduction in size of some
of Staff Builders' operating locations including the write-off of fixed assets
and the accrual for employee severance payments. Further, restructuring costs
include $2.2 million of litigation related costs, $1.1 million for the write-off
of receivables from converted licensee locations and $0.9 million for the
write-off of home care related investments and receivables. These restructuring
costs reflect Staff Builders' operating modifications in order to meet the
demands of IPS as well as its assessment of the carrying value of goodwill and
intangible assets in light of the deterioration within the home health care
industry and the resultant effect on reduced profitability.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes reflects an effective rate of (10.6%), 21.3% and 44.0% in fiscal 1999,
1998 and 1997, respectively.
The provision for income taxes in fiscal 1999 consists of a valuation
allowance of $28.9 million offset by potential tax benefits of $20.2 million
resulting from losses incurred in that period. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits from operating losses and other temporary differences are "more likely
than not" to be realized, as required by SFAS 109. Because of Staff Builders'
recent operating losses, its working capital deficiency, the possibility that
its bank will accelerate Staff Builders' obligation to pay the banks' loans to
Staff Builders, Staff Builders' questionable ability to obtain new financing on
satisfactory terms, if at all, and the uncertainty of if or when there will be
increases in allowable rates for Medicare-reimbursed services, it is
questionable whether Staff Builders will be able to return to profitability in
the foreseeable future. While Staff Builders intends to return to profitability,
its conclusion that it is "more likely than not" that the deferred tax assets
will not be realized is based upon significant doubt as to if or when there may
be any favorable changes to the uncertainties noted above. Staff Builders has
recorded an income tax receivable of $1.7 million resulting from the carryback
of net operating losses.
Net Income (Loss). Net (loss) for fiscal 1999 was $(73.1) million, or
$(3.16) per share, compared to net (loss) in fiscal 1998 of $(21.6) million, or
$(.90) per share, and net income of $3.7 million, or $.16 per share, in fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.0 million for the fiscal
year ended February 28, 1999 which consisted primarily of periodic interim
payments received from Medicare of $14.4 million, a net increase in accounts
payable and accrued expenses of $2.4 million and a decrease in trade accounts
receivable of $2.0 million. Offsetting these sources of cash was the loss from
operations requiring cash payments of $5.8 million. The fiscal 1999 loss of
$(73.1) million included non-cash items consisting primarily of the write-off of
goodwill, deferred income taxes and other assets aggregating $27.5 million;
depreciation, amortization
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and a net increase to the allowance for doubtful accounts aggregating $8.6
million; an increase in Medicare and Medicaid audit liabilities of $29.0 million
and an increase in accrued litigation costs of $2.2 million.
Net cash used in investing activities was $7.3 million in fiscal 1999,
which consisted of the purchase of fixed assets of $5.0 million and $2.9 million
of cash used to acquire businesses, offset by $0.6 million of proceeds from the
sale of five home health care franchise businesses.
Net cash used in financing activities of $6.5 million in fiscal 1999
included the payment of notes payable and other long-term liabilities of $11.1
million which consisted primarily of $3.1 million paid on Staff Builders'
acquisition line of credit under its secured credit facility, $2.9 million of
capital lease payments, a net reduction of $1.0 million in the line of credit
under which Chelsea borrowed on its accounts receivable and a reduction of $1.9
million in a term loan which matures in December 1999. Additionally, Staff
Builders purchased and retired 5.1 million shares of its common stock at a cost
of $4.8 million. Offsetting these items was $9.1 million of cash provided from
Staff Builders' revolving line of credit.
Net cash provided by operating activities was $13.5 million for the fiscal
year ended February 28, 1998, which consisted primarily of an increase in
accounts payable and accrued expenses of $10.4 million and periodic interim
payments received from Medicare of $4.3 million. Net cash used in investing
activities of $16.4 million in fiscal 1998 consisted primarily of cash used for
business acquisitions of $16.2 million, including $12.7 million for the purchase
of 60.9% of the outstanding common stock of Chelsea. Net cash provided by
financing activities of $3.7 million in fiscal 1998 includes proceeds of $12.6
million from the acquisition line of credit, less $4.0 million of a decrease in
borrowings under Staff Builders' revolving line of credit and $6.1 million for
the payment of notes payable and other long-term liabilities. These payments
include $2.3 million of capital lease payments, a reduction of $1.8 million in a
term loan and $0.8 million of repayments of the acquisition line of credit.
Net cash used in operating activities was $19.4 million for the fiscal year
ended February 28, 1997, which consisted primarily of an increase in trade
accounts receivable of $23.8 million offset by net income of $3.8 million. Net
cash used in investing activities of $11.9 million in fiscal 1997 consisted
primarily of cash used for business acquisitions of $10.3 million, including
$2.1 million for the purchase of 20.9% of the outstanding common stock of
Chelsea. Net cash provided by financing activities in fiscal 1997 was $24.6
million, which consisted primarily of an increase in the level of borrowings
under Staff Builders' revolving line of credit of $21.6 million and proceeds
from a term loan of $5.7 million, offset by the payment of notes payable and
other long-term liabilities of $3.1 million.
Staff Builders has a secured credit facility which consists of a revolving
line of credit, an acquisition line of credit and a standby letter of credit
facility. On January 14, 1999, the bank provided Staff Builders with written
notification that, in its opinion, Staff Builders' non-compliance with certain
financial covenants constitutes an event of default under the terms of the
credit facility agreement. Those covenants require Staff Builders to maintain a
minimum level of net worth and a maximum ratio of senior debt to net worth,
failures of which resulted from losses incurred for the three and nine months
ended November 30, 1998. At the time that the bank declared its opinion as to an
event of default, Staff Builders had borrowed $39.4 million under the credit
facility, including $29.7 million and $9.7 million under the revolving line of
credit and the acquisition line of credit, respectively. The bank has advised
Staff Builders that while it has no obligation to provide additional advances as
a result of the non-compliance with certain financial covenants, it is willing
to consider making additional advances to Staff Builders under such conditions
as it may determine. As of May 28, 1999, the Company had borrowed $38.9 million
under the credit facility, including $30.5 million and $8.4 million under the
revolving line of credit and the acquisition line of credit, respectively.
In connection with the bank's notice of default, the maximum aggregate
amount which can be borrowed under the credit facility was reduced from $50
million to $40 million. Additionally, the bank increased the rate of interest on
all borrowings to 2.0% over the prevailing prime lending rate on its revolving
line of credit and 2.75% over the prevailing prime lending rate on its
acquisition line of credit (such prime lending rate being 7.75% as of February
28, 1999). Staff Builders' primary sensitivity to changes in interest rates
results from its secured credit facility. Based on outstanding borrowings at
February 28, 1999, an increase of 1% in the prime rate would have the effect of
increasing annual interest expense by approximately $400 thousand. Staff
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Builders has classified its outstanding borrowings as a current liability as of
February 28, 1999 because the bank has the option to declare all borrowings
under the credit facility to become immediately due and payable. At February 28,
1999 and 1998, Staff Builders borrowed $35.4 million and $29.4 million,
respectively, under the credit facility.
Staff Builders' working capital deficiency was $(39.8) million at February
28, 1999. Current liabilities at February 28, 1999 include $22.7 million for
Medicare and Medicaid liabilities, $35.4 million of outstanding borrowings under
the secured credit facility and $8.1 million for the current portion of other
debt obligations. While Staff Builders cannot accurately determine the required
payment dates for its total Medicare and Medicaid audit liabilities, it has
included $34.6 million of such liabilities in other long term liabilities based
upon its current estimate of when payments would likely become due. In order to
pay its current liabilities in the normal course of business as well as to pay
its liabilities to the Medicare and Medicaid agencies as they become due, Staff
Builders is investigating alternative sources of funding.
The above conditions raise substantial doubt about the ability of Staff
Builders to continue as a going concern. As a result, management of Staff
Builders is pursuing various strategies, including but not limited to,
negotiating with alternative lending sources, deferred payment terms for
Medicare and Medicaid audit liabilities as well as for any repayments of
Medicare periodic interim payment(s) ("PIP") and deferred payment terms for
other creditors. Further, management is implementing an intensified collection
effort and has obtained a deferred payment schedule for the repayment of $19.0
million of excess PIP payments made to Staff Builders by the Federal government
as well as for $6.8 million of audit liabilities assessed to date. Such payment
schedule requires these amounts to be paid in 24 equal monthly installments of
approximately $1.1 million beginning in May 1999. As of June 1, 1999, no
payments have been made pursuant to this schedule. Additionally, Staff Builders
has obtained favorable extended payment terms with some of its trade creditors
and is continuing to negotiate extended payment terms with other vendors.
However, there can be no assurance that these actions will be successful to
provide adequate funds for Staff Builders' current level of operations and to
pay Staff Builders' past-due obligations.
From March 6, 1998 through October 16, 1998, Staff Builders purchased and
retired a total of 5,088,060 shares of its common stock at a cost of
approximately $4.8 million. No repurchases have been made since October 16,
1998.
YEAR 2000
Many computer systems, applications, information technologies and equipment
containing computer related components (generally "computer systems and
equipment") are unable to differentiate between the year 2000 and the year 1900
because they were programmed with two-digit, rather than four digit, date
fields. Accordingly, older computer systems that have time-sensitive
applications may not properly recognize the year 2000 and beyond ("Year 2000
issue"). This could cause system or equipment shut downs, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including, among other things, inaccurate processing of financial
information and/or temporary inabilities to process transactions, manufacture
products, or engage in similar normal business activities.
Staff Builders has made upgrades to its computer systems and equipment
controlling its general ledger, accounts payable, payroll and human resources
systems and believes that these systems are largely Year 2000 compliant. Staff
Builders is continuing its upgrades with respect to the front end systems, which
include clinical, scheduling and billing. Staff Builders expects to complete
such upgrades by October 31, 1999. Staff Builders believes that with these
upgrades, the Year 2000 issue will not pose significant operational problems for
its computer systems and equipment. However, if such upgrades are not made or
are not completed in a timely fashion, the Year 2000 issue might have an adverse
impact on the operations of Staff Builders, the precise degree of which cannot
be known at this time.
In addition to risks associated with Staff Builders' own computer systems
and equipment, Staff Builders has relationships with, and is to varying degrees
dependent upon, a large number of third party vendors that provide information,
goods and services to Staff Builders and third party customers to which Staff
Builders provides its services. These include financial institutions, companies
in industry, and Federal and state
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government agencies. If significant numbers of these third parties experience
failures in their computer systems or equipment due to the Year 2000 issue and
if, in particular, the Federal government is not Year 2000 compliant these
failures could adversely affect Staff Builders' ability to process transactions
or engage in similar normal business activities. While some of these risks are
outside of Staff Builders' control, it has instituted programs, including
internal records review to identify key third parties, assess their level of
Year 2000 compliance, update contracts and address any non-compliance issues.
The total cost of the Year 2000 systems assessment and upgrades is funded
through operating cash flows and leases and Staff Builders is expensing certain
items and capitalizing others. The estimated cost to replace existing software
applications consisting of Lawson software and HBO Corporation systems,
including modifications to accommodate the Year 2000, is approximately $25
million, including the cost of implementation. The actual cost could, however,
exceed this estimate. Staff Builders has not established a contingency plan to
deal with major year 2000 failures, if any, and does not intend to establish a
contingency plan because it is comfortable with progress made to date.
EFFECT OF INFLATION
The rate of inflation was immaterial during fiscal 1999. In the past, the
effects of inflation on salaries and operating expenses have been offset by
Staff Builders' ability to increase its charges for services rendered. Staff
Builders anticipates that it will be able to continue to do so in the future,
subject to applicable restrictions with respect to services provided to clients
eligible for Medicare and Medicaid reimbursement. Staff Builders continually
reviews its costs in relation to the pricing of its services.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, FASB adopted Statement of Position No. 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP No. 98-5") which requires that costs
previously capitalized as start-up costs will be expensed as incurred. SOP No.
98-5 becomes effective for fiscal years beginning after December 15, 1998, with
earlier application encouraged. The adoption of SOP No. 98-5 will not have a
material effect on Staff Builders' consolidated financial statements.
During 1998, FASB issued Statement of Financial Accounting Standards SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". Staff
Builders does not expect the adoption of this new accounting pronouncement to
have a material effect, if any, on its financial condition or results of
operations.
BUSINESS
GENERAL
The Company is a leading national provider of home health care services.
The Company currently has 125 offices located in 26 states and the District of
Columbia, as well as master franchise licenses in Japan, Spain and Brazil. Of
these offices, 71 are owned and operated by the Company and 54 are operated by
31 licensees, through which services are provided by approximately 30,000
caregivers. Of the licensees, nine also operate a separate Staff Builders
supplemental staffing franchise.
TLC, a Delaware corporation and a wholly-owned subsidiary of Staff
Builders, was formed in February 1999 to acquire 100% of the outstanding capital
stock of those Staff Builders' subsidiaries which are engaged in the home health
care business. After the Distribution, the Company will operate as an
independent, publicly traded company and will own the home health care
businesses previously owned by Staff Builders.
OPERATIONS
The Company provides a wide range of home health care services. Its
licensed personnel provide skilled nursing services including cardiac care,
pulmonary management, wound management, maternal health, behavioral health care,
infusion therapy administration, hospice support, and extensive patient and
family education. Additional professional services include physical therapy,
occupational therapy, speech therapy and
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medical social services. The Company also provides para-professional home health
aide services and other unlicensed personnel services, assisting patients with
activities of daily living. Approximately 60% of the Company's home health care
service revenues are generated by licensees.
Clients' requests for home health care are typically received at a local
office and all skilled home health care services are provided pursuant to the
orders of the patient's physician. Generally, after a referral is received, the
director of clinical services will schedule a physical assessment to identify
the patient's care needs. Home care services are rendered in accordance with the
plan of care as prescribed by a physician.
During the intake process, the Company contacts third-party payors to
confirm the extent of Medicare eligibility or insurance coverage. The primary
payment sources for home health care are Medicare, Medicaid, insurance,
individuals, and state and local government health programs.
In five locations, the Company operates hospices in accordance with the
Federal Medicare program. Hospice services include a full range of medical and
nursing services as well as spiritual and emotional support, specialized pain
management and bereavement counseling with interdisciplinary support for
patients and their families, where patients are expected to live less than six
months.
The quality and reputation of the Company's personnel and operations is
critical to the Company's success. The Company maintains uniform quality
assurance programs for its home health care operations, including its consumer
hotline and service evaluation system in which patients are asked by the Company
to rate the quality of care provided. These programs are administered at the
national and local levels. The Company's clinical staff conducts periodic
on-site reviews to determine compliance with all regulations.
In addition to the on-site reviews conducted by Company personnel, the
Company seeks to maintain and improve the quality of its home health care
operations by seeking accreditation from the Joint Commission on Accreditation
of Health Care Organizations ("JCAHO"). Currently, the Company has approximately
100 offices which have been accredited by JCAHO, approximately 31 of which were
accredited with commendation.
The Company has developed the Staff Builders Clinical Outcomes and Resource
Evaluation System ("SCORES"(TM)). SCORES(TM) is a clinical management process
that identifies and analyzes patient potential for variances upon admission to
home care, customizes a transdisciplinary plan of care and quantifies clinical
outcomes and resource utilization.
The Company has developed a number of proprietary disease-specific programs
designed to be used in the home. These programs include the areas of asthma,
cardiac care, diabetes, hospice, maternity, behavioral health, rehabilitative
services, pain management and wound care.
The Company offers its services on a national and local basis. Each office
seeks to retain strong local identification in order to best respond to
prevailing market conditions and cultivate local referrals. The Company provides
support including brochures, training seminars and materials to assist in
developing patient care programs as needed within each community.
Local efforts principally involve communicating with hospital discharge
planners, nursing management, physicians and other individuals at hospitals,
nursing homes and other health care facilities to advise them of the array of
services available from the Company.
Due to changes in health care reimbursement, insurance companies and health
maintenance organizations have become more involved in directing services for
those to whom they provide coverage. The Company has sought to adapt to the
increased role of these organizations in patient referrals. The Company provides
services to members of health maintenance organizations or policy holders of
insurance companies at negotiated rates. The Company believes that some of these
organizations, as a result of their strict guidelines, centralized
administration and geographic diversity, retain the Company because of its
ability to consistently offer quality services on a national basis. Moreover,
the Company believes that its ability to offer patients a wide variety of home
health care services will provide it with a competitive edge in obtaining
additional business from these organizations.
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The Company's information systems provide for the input of information at
the branch office (including payroll, billing and other administrative
functions) which connects directly to its corporate headquarters in Lake
Success, New York. Generally, bills are rendered, payroll is processed and
collections are received at the corporate headquarters or at lock-boxes.
REIMBURSEMENT
Revenues generated from the Company's services are paid by insurance
carriers, health maintenance organizations, individuals, Medicare, Medicaid and
other state and local government health insurance programs. Approximately 19.4%
of the Company's revenues represent reimbursement from insurance carriers,
health maintenance organizations and individuals; 47.6% come from Medicare; and
31.7% come from Medicaid and other local government health programs. Medicare is
a Federally funded program available to persons with certain disabilities and
persons of age 65 or older. Medicaid, a program jointly funded by Federal and
state governments, and other local government health care programs is designed
to pay for certain health care and medical services provided to low income
individuals without regard to age.
The Company has 87 locations which are certified to provide home health
care services to Medicare patients. Medicare reimburses the Company for covered
items and services at the lower of the Company's cost, as determined by Medicare
regulations, or cost limits established by the Federal government. The Company
submits all Medicare claims to a single insurance company acting as a fiscal
intermediary which processes claims on behalf of the Federal government. The BBA
resulted in significant changes to cost based reimbursement for Medicare home
health care providers. Although the BBA retains a cost based reimbursement
system, the cost limits were reduced and new per-beneficiary limits were set for
home health care providers. The BBA provides for IPS which became applicable to
the Company on March 1, 1998 and will remain in effect until the adoption of a
prospective payment system scheduled to be effective for all home health care
agencies beginning on October 1, 2000. The Health Care Financing Administration
("HCFA") committed to this revised schedule in a report presented to Congress
dated February 4, 1999. The effect of the changes under IPS is to reduce the
limits for the amount of costs that are reimbursable to home health care
providers under the Medicare program. Recently, management moved proactively to
prepare the Company for the impact of IPS and for long-term growth. As a result,
the Company implemented a corporate-wide restructuring and cost reduction
program.
The Company has approximately 50 offices which participate in the Periodic
Interim Payment program ("PIP"). Under PIP, the Company receives regular
bi-weekly payments based on past Medicare activity of participating offices,
which are adjusted quarterly for actual levels of activity. As presently amended
by the BBA, the PIP program will terminate for home health care providers
effective for fiscal years beginning on or after October 1, 1999. Offices which
are not participating in the PIP program receive payment for services upon
submission of individual claims.
The Company is also reimbursed for covered items by Medicaid. The Company
has approximately 85 offices in 22 states and the District of Columbia which are
approved to provide services to Medicaid recipients. Medicaid reimbursement
procedures vary from state to state.
GOVERNMENT REGULATION
The Company's business is subject to extensive and frequently changing
regulation by Federal, state and local authorities. This regulation includes
state licensing, obtaining a Certificate of Need ("CON") in certain states, and
Federal and state eligibility standards for certification as a Medicare and
Medicaid provider. The imposition of more stringent regulatory requirements or
the denial or revocation of any license or permit necessary for the Company to
operate in a particular market could have a material adverse effect on the
Company's operations.
The Federal government and all states in which the Company currently
operates regulate various aspects of the Company's business. HCFA must certify
home health agencies that seek to receive reimbursement for services from
Medicare. As conditions of participation in the Medicare program, HCFA requires
a home health agency, among other things, to satisfy certain standards with
respect to: personnel and their supervision;
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services and the documentation thereof; and the establishment of a professional
advisory group that must include at least one physician, one registered nurse
and other representatives from related disciplines or consumer groups.
Certain states require a provider of home health care services to obtain a
license before rendering services. Some states, including certain states in
which the Company presently operates, maintain CON legislation requiring an
office to file an application that must be approved by the appropriate state
authority before certain health care services can be provided in an area.
Approval depends upon, among other things, good character and competence,
financial capability and a demonstration that the need exists for such services.
In states having a CON requirement, HCFA will grant Medicare certification to an
office (so that the office may provide services covered by Medicare) only if the
office has obtained a CON.
New York State requires the approval by the Public Health Council of the
New York State Department of Health ("NYPHC") of any change in the "controlling
person" of an operator of a licensed health care services agency (an "LHCSA").
Control of an entity is presumed to exist if any person owns, controls or holds
the power to vote 10% or more of the voting securities of such entity. A person
seeking approval as a controlling person of an operator of a LHCSA must file an
application for NYPHC approval within 30 days of becoming a controlling person,
and pending a decision by the NYPHC, such person may not exercise control over
the LHCSA. The Company has 10 offices in New York State which are LHCSAs. Such
offices account for approximately 15% of the Company's revenues. If any person
should become the owner or holder, or acquire control, of the right to vote 10%
or more of TLC Common Stock, such person could not exercise control of the
Company's LHCSAs until such ownership, control or holding has been approved by
the NYPHC.
FRANCHISE PROGRAM
The Company has utilized a unique form of franchising whereby it licenses
independent companies or contractors ("licensees") to represent the Company
within a designated territory using the Company's trade names and service marks.
Of the Company's 125 field offices, 54 are operated by 31 licensees pursuant to
the terms of a franchise agreement with the Company. The Company's franchise
program has permitted it to quickly penetrate new markets and realize economies
of scale. The program also has enabled the Company to maintain stable local
management by reducing personnel turnover.
The Company is subject to a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship. The Company owns
all necessary health care related permits and licenses and, where required,
CON's for operation of franchise offices. The Company employs all direct service
employees. The licensees recruit direct service personnel for the Company,
solicit orders and assign Company personnel, including registered nurses,
therapists and home health aides, to service the Company's clients. The Company
pays and distributes the payroll for the Company's direct service personnel,
administers all payroll withholdings and payments, bills the customers and
receives and processes the accounts receivable. The licensees are responsible
for providing an office and paying related expenses for administration including
rent, utilities and costs for administrative personnel. The Company includes all
revenues and related direct costs in its consolidated service revenues and
operating costs.
Generally, the Company grants a ten-year initial franchise term. A licensee
has the option to extend for an additional five-year term, subject to the
licensee adhering to the operating procedures and quality control standards
established by the Company. The initial franchise fee is currently $29,500. When
converting independently owned agencies into franchises, the Company negotiates
the terms of the conversion on a transaction-by-transaction basis depending on
the size of the agency, the nature of the agency's business and the location of
the agency. The Company is currently not offering any home health care
franchises.
The Company pays a monthly distribution or commission to its domestic
licensees based upon a defined formula of gross profit generated. Generally, the
Company pays the licensee 60% of the gross profit attributable to the
non-Medicare operations of the franchise. The Company adjusts the payment to the
licensees related to Medicare operations for cost limitations and reimbursement
of allowable Medicare costs. There is no payment to the licensees based solely
on revenues.
30
<PAGE> 37
The Company has an international franchise program using the Staff Builders
name and service marks. The Company has a master license agreement with
licensees in Japan and Brazil under which royalties are paid to the Company by
the licensee for certain services provided by the Company pertaining to the
transfer of home health care technology from the Company to the licensee. The
term of the Japanese master license agreement is five years with a five-year
additional term which may be exercised by the Company. The existing agreement in
Japan will expire on October 27, 2002. The Company received an initial license
fee of $1.2 million under the terms of this agreement. The Brazilian master
license agreement has a 25-year term with an additional ten-year renewal term
exercisable by the licensee. The Company received a master license fee of
$80,000 from its Brazilian licensee.
The Company is currently not offering any home health care franchises.
However, if in the future the Company should offer and sell franchises, such
offers and sales will be subject to Federal and certain state franchise laws. If
the Company fails to comply with the franchise laws, rules and regulations of a
particular state relating to offers and sales of franchises, the Company will be
unable to engage in offering or selling franchises in or from such state. To
offer and sell franchises, the Federal Trade Commission requires the Company to
furnish to prospective licensees a current franchise offering disclosure
document. The Company has used a Uniform Franchise Offering Circular ("UFOC") to
satisfy this disclosure obligation. The Company must update its UFOC annually or
upon the occurrence of certain material events. If a material event occurs, the
Company must stop offering and selling franchises until the UFOC is updated. In
addition, certain states require the Company to register or file its UFOC with
such states and to provide prescribed disclosures.
RECRUITING AND TRAINING
The Company and its franchisees recruit personnel principally through
referrals from other personnel, newspaper advertisements and direct mail
solicitations to nursing, paramedical and other recruiting sources. A large
percentage of these personnel are employed only when needed, and are paid for
the actual number of hours worked or visits made.
The Company has standardized procedures for recruiting, interviewing,
testing and reference checking prospective personnel. All nurses and therapists
must be licensed by the appropriate licensing authorities. Substantially all
unlicensed health care personnel must be certified either through a
state-approved certification program or must have had previous experience in
providing direct patient care in a hospital, nursing home or in the home. After
selection, applicants receive instruction in the Company's procedures and
policies. Subsequently, they are included on a list of personnel eligible for
placement. The Company has an in-service training program for its personnel
which satisfies the requirements for certification required by 26 states and the
District of Columbia.
In addition to personnel recruited and trained by the Company, the Company
contracts with third parties to meet its personnel requirements. These
contracted personnel must meet the same qualifications required of Company
personnel.
INSURANCE
The Company's employees make decisions which can have significant medical
consequences to the patients in their care. As a result, the Company is exposed
to substantial liability in the event of negligence or wrongful acts of its
personnel. The Company expects to be able to maintain medical professional and
general liability insurance providing for coverage in a maximum amount of $26
million per claim, subject to a limitation of $26 million for all claims in any
single year. In addition, franchisees must maintain general liability insurance
with coverage of at least $1 million.
COMPETITION
Although there are national home health care companies, the industry is
highly fragmented and competitors are often localized in particular geographical
markets. In general, there has been a trend toward consolidation in the health
care industry which is expected to continue, especially in light of the Federal
31
<PAGE> 38
Medicare program's reductions in cost limits and establishment of per
beneficiary limits. The Company expects that it will continue to compete with
the national organizations as well as regional and local providers including
home health care providers owned or otherwise controlled by hospitals. Some of
the entities with which the Company competes have substantially greater
resources. In addition, the Company's operations depend, to a significant
degree, on its ability to recruit qualified health care personnel. Generally,
there is a shortage of qualified health care personnel and the Company faces
competition from other companies in recruiting. As a result, from time to time,
it has been difficult for the Company to hire personnel to meet demands for
services.
The Company believes that prompt service, price, quality and range of
services offered are the principal competitive factors which enable it to
compete effectively. The Company believes that its rate structure is competitive
with others in the industry. No single client or group contract accounts for ten
percent or more of the Company's consolidated revenues.
SERVICE MARKS
The Company believes that its service mark, Tender Loving Care(R), and the
service marks for which it has a license from Staff Builders, Staff Builders(R),
Staffline(R) and the Stick Figure Logo, have significant value and are important
to the marketing of its services. These names and marks are registered as
service marks with the United States Patent and Trademark Office. The
registration of the Staff Builders(R) service mark will remain in effect through
February 14, 2009, with respect to home care. The registration of the
Staffline(R) service mark will remain in effect through August 1, 2009. The
registration of the Stick Figure Logo service mark will remain in effect through
August 16, 2008. The registration of the Tender Loving Care(R) service mark will
remain in effect through January 8, 2005. Each of these marks is renewable for
additional ten-year periods, provided they continue to be used in the ordinary
course of business. The Company also owns other federally registered marks for
names used in connection with its business.
PERSONNEL AND EMPLOYEES
The Company has approximately 30,000 individuals who render home health
care services and the Company employs approximately 1,600 full-time
administrative and management personnel.
The Company screens caregivers to ensure that they meet all licensing
requirements and the Company's eligibility standards. This screening process
includes skills testing, reference checking, professional license verification,
personal interviews and a physical examination. In addition, new employees
receive an orientation on the Company's policies and procedures prior to their
initial assignment. The Company is not a party to any collective bargaining
agreement and considers its relationship with its employees to be satisfactory.
Approximately 1,200 of the Company's administrative employees are located
at the Company's branch offices, 335 are located at its corporate headquarters
in Lake Success, New York and 65 are regional employees.
PROPERTIES
The Company's corporate headquarters consists of approximately 65,000
square feet of leased office space and 8,100 square feet of storage space in
Lake Success, New York. The lease for the corporate headquarters expires on
September 30, 2005 and provides for current annual rent of approximately $1.5
million, which increases annually by three percent. Approximately 2,030 square
feet of this space will be sublet monthly to a subsidiary of Staff Builders
beginning on the Distribution Date at a monthly rent of $4,017. See "The
Distribution -- Arrangements between Staff Builders and TLC Relating to the
Distribution -- Sublease."
The Company believes that its headquarters office space is sufficient for
its immediate needs and that it will be able to obtain additional space as
needed in the future.
The Company leases substantially all of its branch office locations from
landlords unaffiliated with the Company or any of its executive officers or
directors. Most of these leases are for a specified term, although several of
them are month-to-month leases. There are 125 offices including 71 operated by
the Company and
32
<PAGE> 39
54 operated by 31 licensees; three of these franchise offices sublease the
office space from the Company and the remaining franchise offices are owned by
licensees or are leased by the licensee from third-party landlords. The Company
believes that it will be able to renew or find adequate replacement offices for
all leases which are scheduled to expire in the next twelve months at comparable
costs.
LEGAL PROCEEDINGS
On September 20, 1995, the United States Attorney for the Eastern District
of Pennsylvania alleged that (i) between 1987 and 1989, a corporation,
substantially all the assets and liabilities of which were acquired by a
subsidiary of the Company in 1993, submitted false claims to Medicare totaling
approximately $1.5 million and (ii) officers and employees of that corporation
submitted false statements in support of such claims, and made a pre-complaint
civil settlement demand of approximately $4.5 million. The alleged false claims
and false statements were made before the Company acquired that corporation in
1993. There have been significant discussions with the office of the United
States Attorney which the Company believes are likely to lead to an arbitration
within specified parameters.
On June 18, 1998, 6100 Cleveland, Inc., Orsinger Enterprises, Inc., and
First Choice Medical Staffing, Inc., three former home care and staffing
licensees (franchisees) of the Company in Ohio, commenced an action in the
United States District Court for the Northern District of Ohio, Eastern Division
against the Company's subsidiary, Staff Builders International, Inc. The action
sought to recover damages and other relief alleging unpaid royalties, wrongful
termination by the Company of the Franchise Agreement between the Company and
the Plaintiffs, breach of contract and other damages. The Company answered the
complaint and moved for a change of venue. On December 1, 1998, Plaintiffs,
without the required permission of the Court, filed a Second Amended Complaint
alleging, in addition to the allegations contained in the prior Complaint,
claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
claiming a series of deliberate and illegal actions designed to put certain
Staff Builders franchisees out of business, as well as claims arising under New
York and Ohio loss of business opportunity statutes. The Second Amended
Complaint seeks money damages in excess of $25 million and a claim for treble
damages on the RICO claim. The Second Amended Complaint added as defendants
Staff Builders Services, Inc., and certain executive officers of the Company.
The Company has moved to dismiss the Second Amended Complaint challenging the
legal sufficiency of the RICO claims and other claims which allege a loss of
business opportunities under New York and Ohio laws. A companion case, 6100
Columbus, Inc. v. Staff Builders International, Inc. was recently filed alleging
breach of contract only. This case will probably be consolidated with the
previous case.
On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc.,
E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care
Services, Inc., former home care licensees (franchisees) of the Company for the
territory comprising certain counties in and around Los Angeles, California and
their holding company, instituted an action against the Company's subsidiaries,
Staff Builders, Inc., Staff Builders International, Inc., Staff Builders
Services, Inc., and certain executive officers of the Company in the Superior
Court for the State of California, County of Los Angeles. The action was removed
to United States District Court for the Central District of California on
December 22, 1998. Plaintiffs filed a First Amended Complaint in the Central
District on January 8, 1999 to challenge the termination of the four franchise
agreements between the Company and certain of the named plaintiffs, seeking
damages for violations of California franchise law, breach of contract, fraud
and deceit, unfair trade practices, claims under the RICO, negligence,
intentional interference with contractual rights, declaratory and injunctive
relief and a request for an accounting. Plaintiffs seek an unspecified amount of
damages. Discovery is currently in process.
On July 17, 1998, the Federal government ordered that a complaint filed by
Ali Waris, the former owner of a home health care agency purchased by the
Company in 1993, be unsealed and served upon Staff Builders, Inc. and Targa
Group, Inc., a former licensee (franchisee) of the Company. The government has
elected not to intervene in the action, in which Mr. Waris claimed damages for
alleged violations of the False Claims Act by the Company in connection with
payments made by the Company for consulting services. Following a motion to
dismiss, on March 4, 1999, the Court granted Mr. Waris leave to amend the
Complaint, the amended filing for which was served on March 31, 1999. The
Company intends to file a motion to dismiss the Amended Complaint.
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<PAGE> 40
On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly, Geri-Care
Home Health, Inc. and Jacquelyn Klooster, two former home care licensees
(franchisees) of the Company and their principals in Des Moines and Sioux City,
Iowa, respectively, commenced an action in the United States District Court for
the Southern District of Iowa, Central Division, against the Company's
subsidiaries, Staff Builders International, Inc., Staff Builders Services, Inc.,
and Staff Builders, Inc., and certain executive officers of the Company. The
action alleges claims under RICO, claiming a series of deliberate and illegal
actions designed to defraud the Company's franchisees, as well as claims for
negligence, breach of fiduciary duty, breach of contract, fraudulent
misrepresentation and violation of the Iowa franchise law. The complaint seeks
unspecified money damages, a claim for treble damages on the RICO claims and
punitive and exemplary damages.
The Company is a defendant in several civil actions which are routine and
incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent.
Although the Company cannot estimate the ultimate cost of its open legal
matters with precision, it has an accrued loss contingency at February 28, 1999
for the aggregate, estimated amount to resolve such matters. In the opinion of
management, the outcome of pending litigation will not have a material adverse
effect on the Company's consolidated financial position or results of
operations. However, unfavorable resolutions of these actions could have an
adverse impact on liquidity.
STAFF BUILDERS
After the Distribution Date, Staff Builders will provide supplemental
staffing to health care institutions, through its subsidiary, ATC Healthcare
Services, Inc. ("ATC") and to financial service, communications, manufacturing
and consulting clients through its subsidiary, Chelsea Computer Consultants,
Inc. ("Chelsea").
ATC provides its clients with registered nurses, licensed practical nurses,
medical technicians and other personnel, including "travel nurses" who take on
long-term arrangements far away from their homes. Health care institutions use
supplemental staffing to cover for peak periods, vacations, emergencies and
permanent positions for which they have openings. Chelsea provides highly
skilled information technology professionals on a contract basis.
ATC operates its own information systems network (including payroll,
billing and other administrative functions) for its operations which connects
its field offices with its corporate headquarters in Atlanta, Georgia. Chelsea
operates from its headquarters in New York City and a recruiting office in the
Philippines.
ATC and Chelsea together have 58 offices in 27 states of which four are
owned and operated by Staff Builders and 54 are operated by 41 licensees. Local
offices are generally familiar with the operations, procedures and policies of
the institutions in their service areas and use this knowledge in providing the
training and orientation to their personnel. Accordingly, the supplemental
staffing personnel provided are able to assume responsibility quickly and work
effectively with the client's permanent staff members. Employees assigned to
particular clients may be changed at the client's request or at Staff Builders'
initiation.
34
<PAGE> 41
MANAGEMENT
The following table sets forth information as to each director and each
executive officer of the Company as of the Distribution Date:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
THE PAST FIVE YEARS; OFFICE
NAME AGE TO BE HELD IN THE COMPANY
- ---- --- ---------------------------
<S> <C> <C>
Stephen Savitsky..................... 53 A founder of Staff Builders, Mr. Savitsky has
served as Chairman of the Board, Chief
Executive Officer and a Director of Staff
Builders since 1983 (and of its predecessor
from 1978 to 1983), and as President of Staff
Builders from November 1991 until November 30,
1998. Commencing on the Distribution Date, Mr.
Savitsky will be a Director and Chairman of the
Board and Chief Executive Officer of the
Company and will remain a Director, Chairman of
the Board and Chief Executive Officer of Staff
Builders. Mr. Savitsky is the brother of David
Savitsky.
Dale R. Clift........................ 48 Mr. Clift has been Executive Vice President of
Finance and Chief Financial Officer of Staff
Builders since February 1998. In addition,
since December 1, 1998, he has been Chief
Operating Officer of Staff Builders. From
January 1996 through February 1998, Mr. Clift
provided consulting services to a number of
companies, including several in the health care
industry. From April 1994 through January 1996,
Mr. Clift was Executive Vice President of Rock
Bottom Restaurants, Inc., a restaurant
operator. Commencing on the Distribution Date,
Mr. Clift will serve as a Director, President,
and Chief Operating Officer of the Company. As
of the Distribution Date, Mr. Clift will cease
to serve as Executive Vice President of
Finance, Chief Financial Officer and Chief
Operating Officer of Staff Builders and will
serve as Senior Vice President, Financial
Strategy of Staff Builders.
David Savitsky....................... 51 A founder of Staff Builders, Mr. Savitsky has
served as Secretary, Treasurer and a Director
of Staff Builders since 1983 (and of its
predecessor from 1978 to 1983), as Executive
Vice President from December 1987 until
November 30, 1998 and as Chief Operating
Officer from April 1991 until November 30,
1998. On December 1, 1998, Mr. Savitsky became
President of Staff Builders. Commencing on the
Distribution Date, Mr. Savitsky will serve as a
Director and Vice-Chairman, Government
Relations of the Company. As of the
Distribution Date, Mr. Savitsky will cease to
be the Secretary and Treasurer of Staff
Builders and will remain a Director and
President of Staff Builders. Mr. Savitsky is
the brother of Stephen Savitsky.
</TABLE>
35
<PAGE> 42
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
THE PAST FIVE YEARS; OFFICE
NAME AGE TO BE HELD IN THE COMPANY
- ---- --- ---------------------------
<S> <C> <C>
Jonathan J. Halpert, Ph.D............ 54 Dr. Halpert has served as a Director of Staff
Builders since 1987. He previously served as a
Director of Staff Builders from May 1983 until
he resigned from the Board in February 1985.
Dr. Halpert is a consultant in the area of
deinstitutionalization of the mentally retarded
and Chief Executive Officer of the Camelot
Community Residence Program. Commencing on the
Distribution Date, Mr. Halpert will serve as a
Director of the Company and will remain a
Director of Staff Builders.
Bernard J. Firestone, Ph.D........... 50 Dr. Firestone has served as a Director of Staff
Builders since 1987. He is the dean of the
College of Liberal Arts and Sciences and
professor of political science at Hofstra
University, where he has been teaching for 23
years. Commencing on the Distribution Date, Dr.
Firestone will serve as a Director of the
Company and will remain a Director of Staff
Builders.
Willard T. Derr...................... 42 Mr. Derr has been Senior Vice President and
Corporate Controller of Staff Builders since
March 1998. From February 1993 to March 1998,
Mr. Derr served as Vice President and
Controller of a principal subsidiary of Staff
Builders. Commencing on the Distribution Date,
Mr. Derr will serve as Chief Financial Officer,
Senior Vice President and Corporate Controller
of the Company and will cease to serve as
Senior Vice President and Corporate Controller
of Staff Builders.
Sandra Parshall...................... 51 Ms. Parshall has been Senior Vice President of
Operations of a principal subsidiary of Staff
Builders since March 1998. From September 1996
through March 1998, Ms. Parshall served as the
Vice President of Operations of a principal
subsidiary of Staff Builders. From June 1995 to
September 1996, Ms. Parshall served as a
regional director of operations of a principal
subsidiary of Staff Builders. From 1993 to
1995, Ms. Parshall was a Divisional Vice
President of Nursefinders, Inc., a home health
care and medical staffing company. As of the
Distribution Date, Ms. Parshall will continue
to serve as Senior Vice President of Operations
of a principal subsidiary of the Company.
Renee J. Silver...................... 43 Ms. Silver has been Vice President and General
Counsel of Staff Builders since November 1994.
From December 1990 to November 1994, Ms. Silver
was Vice President and General Counsel of
Career Horizons, Inc., a staffing and home
health care company. Commencing on the
Distribution Date, Ms. Silver will serve as
Vice President and General Counsel of the
Company and will cease to serve as Vice
President and General Counsel of Staff
Builders.
</TABLE>
36
<PAGE> 43
OPERATION OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the overall affairs of the
Company. To assist it in carrying out its duties, certain authority will be
delegated to standing committees of the Board. Each director who is not an
officer or employee of the Company will receive a fee of $7,500 per annum for
service on the Company's Board of Directors. Directors who are officers or
employees of the Company will receive no fees for service on the Board.
COMMITTEES OF THE BOARD
Effective as of the Distribution Date, the Board of Directors of the
Company will have an Executive, Audit and Compensation and Stock Option
Committee comprised as follows:
<TABLE>
<CAPTION>
COMPENSATION AND
EXECUTIVE STOCK OPTION
COMMITTEE AUDIT COMMITTEE COMMITTEE
--------- --------------- ----------------
<S> <C> <C>
Stephen Savitsky Bernard J. Firestone Bernard J. Firestone
Dale R. Clift Jonathan J. Halpert Jonathan J. Halpert
David Savitsky
</TABLE>
The Executive Committee will be authorized to exercise all powers of the
Board when the Board is not in session, except as to matters upon which action
by the Board itself is required.
The Audit Committee generally will assist the Board with respect to
accounting, auditing and reporting practices.
The Compensation and Stock Option Committee will determine the cash and
other incentive compensation, if any, to be paid to the Company's executive
officers and other key employees. In addition, it will administer any option
plans of the Company. None of the members of the Compensation and Stock Option
Committee will be an employee of the Company.
37
<PAGE> 44
EXECUTIVE COMPENSATION
STAFF BUILDERS SUMMARY COMPENSATION TABLE
The Company was recently formed. None of the Company's executive officers
has received compensation from or on behalf of the Company since its formation.
The following sets forth the information for the last three fiscal years
concerning the compensation paid by Staff Builders to the chief executive
officer of the Company and the other individuals who are expected to be the four
other most highly compensated executive officers of the Company (the "Named
Executive Officers"). The compensation described in this table was provided by
Staff Builders. The individuals who rendered services to Staff Builders were, in
some cases, serving in capacities different from those in which they will be
providing services to TLC, and the table does not reflect the compensation to be
paid to executive officers of the Company in the future.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
SECURITIES
BONUS UNDERLYING
NAME AND PRINCIPAL POSITION WITH STAFF BUILDERS FISCAL YEAR SALARY COMPENSATION OPTIONS(#)
- ----------------------------------------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Stephen Savitsky.............................. 1999 $594,991 -- 1,383,691
Chairman and Chief Executive 1998 $520,571 -- 580,691
Officer 1997 $474,704 -- --
Dale R. Clift................................. 1999 $244,781 $143,665(1) 700,000
Executive Vice President, Finance 1998 $ 13,599 $ 18,000(2) --
and Chief Operating Officer 1997 -- -- --
Sandra Parshall............................... 1999 $170,654 -- 75,000
Senior Vice President of 1998 $148,105 $ 25,000 --
Operations of a Principal 1997 $118,640 $ 14,250 25,000
Subsidiary
Willard T. Derr............................... 1999 $139,476 -- 50,000
Chief Financial Officer, 1998 $116,224 -- --
Senior Vice President and 1997 $116,226 -- --
Corporate Controller
Renee J. Silver............................... 1999 $161,398 -- 40,000
Vice President and General Counsel 1998 $150,456 -- --
1997 $139,231 -- --
</TABLE>
- ---------------
(1) Bonus was paid to compensate for additional cost of living in the New York
metropolitan area as part of relocation.
(2) Sign on-bonus.
38
<PAGE> 45
STAFF BUILDERS OPTION GRANTS TABLE
The following table sets forth information with respect to the Named
Executive Officers concerning the grant of stock options to purchase Staff
Builders Common Stock during the fiscal year ended February 28, 1999. Staff
Builders did not have during such fiscal year, and currently does not have, any
plans providing for the grant of stock appreciation rights ("SARs").
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR BASE PRICE DATE PRESENT VALUE(1)
- ---- ---------- ------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Stephen Savitsky................. 397,000(2) 7.6% $.55 12/01/03 $166,740
Stephen Savitsky................. 1,383,691(3) 26.4% .59 12/01/08 636,498
Dale R. Clift.................... 333,333(4) 6.4% .50 12/01/08 153,333
Dale R. Clift.................... 366,667(3) 7.0% .53 12/01/08 168,667
Sandra Parshall.................. 25,000(2) 0.5% .50 12/01/08 11,500
Sandra Parshall.................. 50,000(3) 1.0% .53 12/01/08 23,000
Willard T. Derr.................. 40,000(3) 0.8% .53 12/01/08 18,400
Willard T. Derr.................. 10,000(4) 0.2% .50 12/01/08 4,600
Renee J. Silver.................. 25,000(4) 0.5% .50 12/01/08 11,500
Renee J. Silver.................. 15,000(2) 0.3% .50 12/01/08 6,900
</TABLE>
- ---------------
(1) The values shown were calculated utilizing the Black-Scholes option pricing
model and are presented solely for the purpose of comparative disclosure in
accordance with certain regulations of the Commission. This model is a
mathematical formula used to value traded stock price volatility. The actual
value that an executive officer may realize, if any, is dependent on the
amount by which the stock price at the time of exercise exceeds the exercise
price. There is no assurance that the value realized by an executive officer
will be at or near the value estimated by the Black-Scholes model. In
calculating the grant date present values, Staff Builders used the following
assumptions: (a) expected volatility of approximately 142%; (b) risk-free
rate of return of approximately 5.5%; (c) no dividends payable during the
relevant period; and (d) exercise at the end of a 10 year period from the
date of grant.
(2) Issued under the Staff Builders 1993 Stock Option Plan. Effective December
1, 1998, all options previously issued to the Named Executive Officers under
the Staff Builders 1993 Stock Option Plan were rescinded and new options
issued. Options become exercisable pursuant to the terms of the individual
option agreements. A total of 19,584 options are currently exercisable.
(3) Issued under the Staff Builders 1994 Performance-Based Stock Option Plan. On
March 19, 1998 options to purchase 500,000 shares issued to Stephen Savitsky
under the 1994 Performance-Based Stock Option Plan were rescinded and new
options issued. Effective December 1, 1998, all options previously issued to
the Named Executive Officers under the 1994 Performance-Based Stock Option
Plan were rescinded and new options issued. A percentage of options may
become exercisable in each of the four years following the grant date if
certain stock price targets are achieved. All options automatically become
exercisable on December 1, 2004. No options are currently exercisable.
(4) Issued under the Staff Builders 1998 Stock Option Plan. Options become
exercisable pursuant to the terms of the individual option agreements. A
total of 111,111 options are currently exercisable.
39
<PAGE> 46
STAFF BUILDERS AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUE TABLE
The following table provides information concerning the number and value of
stock options to purchase Staff Builders Common Stock exercised during the
fiscal year ended February 28, 1999, and held at the end of such fiscal year, by
the Named Executive Officers. No SARs were exercised during such fiscal year,
and no SARs are held by any Named Executive Officer, because Staff Builders does
not have any plans providing for SARs.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS
ACQUIRED AT FEBRUARY 28, 1999 AT FEBRUARY 28, 1999
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- --------------------- --------------------
<S> <C> <C> <C> <C>
Stephen Savitsky...................... -- -- 334,000/1,780,691 0/0
Dale R. Clift......................... -- -- 0/700,000 0/0
Sandra Parshall....................... -- -- 8,334/66,666 0/0
Willard T. Derr....................... -- -- 0/50,000 0/0
Renee J. Silver....................... -- -- 11,250/28,750 0/0
</TABLE>
TLC OPTION GRANTS TABLE
The following table provides certain information concerning the stock
options which the Company expects to grant to its Named Executive Officers as of
the Distribution Date. The Company does not expect to grant any SARs as of such
date.
INDIVIDUAL OPTION GRANTS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO
NAME GRANTED(1) EMPLOYEES
- ---- ------------------ --------------------
<S> <C> <C>
Stephen Savitsky......................................... 400,000 19.7%
Dale R. Clift............................................ 500,000 24.6%
Sandra Parshall.......................................... 100,000 4.9%
Willard T. Derr.......................................... 75,000 3.7%
Renee J. Silver.......................................... 50,000 2.5%
</TABLE>
- ---------------
(1) All options are issued under the TLC 1999 Stock Option Plan (described
below). The exercise price for all options will be the average of the
closing bid and asked price of the TLC Common Stock on the Distribution
Date. Options granted to Stephen Savitsky will expire five years after the
Distribution Date. All other options will expire ten years after the
Distribution Date.
TLC 1999 STOCK OPTION PLAN
General
Prior to the Distribution Date, the Company will adopt the TLC 1999 Stock
Option Plan (the "TLC Stock Option Plan"). The primary purpose of the TLC Stock
Option Plan is to attract and retain capable key employees, directors and
consultants by offering such persons a greater personal interest in the
Company's business through stock ownership. Directors of the Company, key
employees and consultants of the Company and its subsidiaries deemed eligible by
the Compensation and Stock Option Committee are eligible for grants of stock
options under the TLC Stock Option Plan. The number of shares of TLC Common
Stock which are reserved for issuance upon the exercise of options granted under
the TLC Stock Option Plan is 2,750,000 shares. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of TLC Common Stock reserved for issuance under the TLC Stock Option
Plan. The TLC Stock Option Plan will terminate on the tenth anniversary of the
date it is approved by Staff Builders, as sole stockholder, unless terminated
earlier by the Board of Directors.
40
<PAGE> 47
The TLC Stock Option Plan will be administered by the Compensation and
Stock Option Committee. The Compensation and Stock Option Committee, in its sole
discretion, has the authority, among other things, to prescribe the form of the
agreement embodying awards of options made under the TLC Stock Option Plan, to
construe the terms of the TLC Stock Option Plan, to determine all questions
arising thereunder and to adopt and amend such rules and regulations for the
administration of the TLC Stock Option Plan as it may deem desirable; provided,
however, the terms, provisions and conditions of the agreement embodying awards
of options made under the TLC Stock Option Plan will include, but not be limited
to, such terms, provisions and conditions as may be necessary to provide the
Company with a compensation deduction if the optionee is required to recognize
ordinary income from the exercise or any disposition of the option or underlying
stock. Decisions of the Compensation and Stock Option Committee will be final,
conclusive and binding upon all parties.
Any options will become exercisable in such amounts, at such intervals and
upon such terms and conditions as the Compensation and Stock Option Committee
will provide, except that optionees must hold options granted to them under the
TLC Stock Option Plan for at least six months prior to exercise.
Generally, optionees may exercise options while they are employees of, or
providing services to, the Company or a subsidiary, or within a period of three
months thereafter. If the Company or a subsidiary has terminated the optionee
for cause, all unexercised options will automatically lapse. In the event of the
death of the optionee, the option must be exercised within nine months of the
date of the optionee's death unless the option otherwise expires prior to the
end of such nine-month period.
Options granted under the TLC Stock Option Plan are exercisable until the
earlier of (i) a date set by the Compensation and Stock Option Committee at the
time of grant, or (ii) ten years from their respective dates of grant. An
incentive stock option granted to an individual who owns, at the time of grant,
stock possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or a subsidiary (a "Ten Percent Shareholder") is
exercisable for up to five years after the date of grant unless a shorter period
is designated by the Compensation and Stock Option Committee.
The aggregate fair market value (determined at the time an option is
granted) of stock with respect to which incentive stock options are exercisable
for the first time by an optionee during any calendar year (under all such plans
of the Company or its subsidiaries) will not exceed $100,000. The maximum number
of shares which may be subject to options granted under the TLC Stock Option
Plan to any individual in any fiscal year of the Company shall not exceed
500,000.
The exercise price of non-statutory stock options granted under the TLC
Stock Option Plan shall be determined by the Compensation and Stock Option
Committee. In no event, however, may the exercise price be less than the fair
market value of the shares covered by non-statutory stock options on the date of
grant. The exercise price of incentive stock options will not be less than the
fair market value of the shares covered by the options on the date of grant. In
the case of an incentive stock option granted to a Ten Percent Shareholder, the
exercise price cannot be less than 110% of such fair market value on the date of
grant. The Compensation and Stock Option Committee will determine the exercise
price of each option and the manner in which it may be exercised.
Payment for shares of TLC Common Stock purchased upon exercise of an option
granted under the TLC Stock Option Plan must be made in full at the time of
exercise. Upon the exercise of any option, the optionee will be required to pay
to the Company all Federal, state and local withholding taxes applicable to the
exercise of the option.
No award of options, or any right or interest therein, is assignable or
transferable except by will or the laws of descent and distribution. During the
lifetime of the optionee, options are exercisable only by the optionee or his
guardian or legal representative.
Subject to any required action by the Company's stockholders, the aggregate
number of shares of TLC Common Stock which may be purchased pursuant to options
granted under the TLC Stock Option Plan, the number of shares of TLC Common
Stock covered by each outstanding option and the per share option exercise price
will be adjusted by the Compensation and Stock Option Committee for any increase
or decrease
41
<PAGE> 48
in the number of outstanding shares of TLC Common Stock if there is a change in
the capital structure of the Company. Upon a sale of all or substantially all of
the assets of the Company, the discontinuance of business operations, the
dissolution or liquidation of the Company or a merger or consolidation in which
the Company is not the surviving corporation, the Company's Board of Directors
may amend or adjust the TLC Stock Option Plan and the outstanding options
thereunder so as to terminate the TLC Stock Option Plan, or to continue the TLC
Stock Option Plan with respect to the exercise of options which were exercisable
at the date the Board of Directors adopted the plan of sale, merger,
consolidation or liquidation or may take other actions as it deems desirable and
appropriate. In any such case, however, each optionee will be given either (i) a
reasonable time in which to exercise his options (to the extent possible under
the options' terms) before the effectiveness of the sale and discontinuation,
merger, consolidation or liquidation, or (ii) the right to obtain, upon payment
of the option price, an equivalent amount of any securities such optionee would
have been entitled to obtain in consequence of that event, had the optionee
exercised the options (to the extent possible under the options' terms)
immediately before the plan of sale and discontinuation, merger, consolidation
or liquidation was adopted.
The Compensation and Stock Option Committee or the Board of Directors may
from time to time amend, and the Board of Directors may terminate, the TLC Stock
Option Plan at any time without the approval of stockholders, provided that no
such action shall adversely affect options already granted thereunder without
the consent of the optionees and, provided further, that no amendment may be
made without the approval of the Company's stockholders if such stockholder
approval of the amendment is in order to comply with applicable law.
Federal Income Tax Considerations
The following is a summary of the federal income tax consequences of the
issuance and exercise of non-statutory stock options and incentive stock options
under the TLC Stock Option Plan to optionees and to the Company under the Code.
THE FOLLOWING DISCUSSION DOES NOT PURPORT TO BE COMPLETE AND DOES NOT COVER,
AMONG OTHER THINGS, STATE AND LOCAL TAX TREATMENT OF PARTICIPATION IN THE TLC
STOCK OPTION PLAN. FURTHERMORE, DIFFERENCES IN OPTIONEES' FINANCIAL SITUATIONS
MAY CAUSE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATION IN THE TLC
STOCK OPTION PLAN TO VARY. THEREFORE, EACH OPTIONEE IN THE TLC STOCK OPTION PLAN
IS URGED TO CONSULT HIS OWN ACCOUNTANT, LEGAL COUNSEL OR OTHER FINANCIAL ADVISOR
REGARDING THE PARTICULAR TAX CONSEQUENCES TO HIM OF PARTICIPATION IN THE TLC
STOCK OPTION PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE OR LOCAL
TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
Non-statutory Stock Options. The grant of a non-statutory stock option will
not result in the recognition of taxable income to the optionee for federal
income tax purposes or in deduction to the Company. Upon the exercise of a
non-statutory stock option, the optionee will recognize ordinary income for
federal income tax purposes in an amount equal to the excess of the fair market
value of the shares of TLC Common Stock over the option exercise price. Such
amount may be deductible by the Company if it complies with applicable
withholding requirements and the non-statutory stock option qualifies, if
necessary, as "performance-based" compensation under Section 162(m) of the Code
as discussed below.
If an optionee disposes of any shares of TLC Common Stock received upon the
exercise of a non-statutory stock option, such optionee will recognize a capital
gain or loss for federal income tax purposes equal to the difference between the
amount realized on the disposition of such shares and the fair market value of
such shares at the time the option was exercised. The gain or loss will be
either long-term or short-term, depending on the holding period. The Company
will not be entitled to any tax deduction in connection with such disposition of
shares.
Incentive Stock Options. In general no income will be recognized, for
federal income tax purposes, by the optionee and no deduction will be allowed to
the Company at the time of the grant or the time of exercise of an incentive
stock option.
42
<PAGE> 49
When the shares of TLC Common Stock received upon the exercise of an
incentive stock option are sold, the optionee will recognize long-term capital
gain or loss for federal income tax purposes equal to the difference between the
amount realized and the option exercise price of the incentive stock option
relating to such shares, provided that the shares are not sold earlier than two
years from the date of grant of the option and one year from the date the shares
are transferred to the optionee. If the above-mentioned holding period
requirements of the Code are not met, the subsequent sale of the shares of TLC
Common Stock received upon the exercise of an incentive stock option is a
"disqualifying disposition." In general, an optionee will recognize taxable
income for federal income tax purposes at the time of a disqualifying
disposition as follows: (i) ordinary income in an amount equal to the difference
between the option exercise price and the lesser of (a) the fair market value of
the shares of TLC Common Stock on the date the incentive stock option was
exercised and (b) the amount realized on such disqualifying disposition and (ii)
capital gain or loss to the extent of any difference between the amount realized
on such disqualifying disposition and the fair market value of the shares of TLC
Common Stock on the date the incentive stock option was exercised. Any capital
gain or loss will be long-term or short-term depending upon the holding period
of the shares that are sold. Under these circumstances, the Company may be
entitled to claim a deduction at the time of the disqualifying disposition equal
to the amount taxable to the optionee as ordinary income.
The difference between the option exercise price and the fair market value
of the shares of TLC Common Stock on the date the option is exercised will
constitute an adjustment to taxable income for the year of exercise for purposes
of the alternative minimum tax imposed under the Code. In computing alternative
minimum taxable income in the year of disposition of the shares acquired through
the exercise of an incentive stock option, the tax basis of such shares will be
the fair market value on the date of exercise.
In general, under Section 162(m) of the Code, compensation expense
deductions of publicly-held corporations may be limited to the extent total
compensation (including base salary, annual bonus, stock option exercises and
non-qualified benefits paid) for certain executive officers exceeds $1 million
in any one year. However, under Section 162(m), the deduction limit does not
apply to certain "performance-based compensation" established by an independent
compensation committee which is adequately disclosed to, and approved by, the
Company's stockholders.
The Company has attempted to structure the TLC Stock Option Plan in such a
manner that, subject to obtaining stockholder approval of the TLC Stock Option
Plan, the remuneration attributable to such plan which meet the other
requirements of Section 162(m) will not be subject to the $1,000,000 limitation.
The Company has not, however, requested a ruling from the IRS or an opinion of
counsel regarding this issue.
EMPLOYMENT AGREEMENTS
Effective as of the Distribution Date, the Company will enter into a
five-year employment agreement with Stephen Savitsky under which Mr. Savitsky,
as Chairman and Chief Executive Officer of the Company, will receive an initial
base salary of $295,374 per year, plus annual cost of living increases. Mr.
Savitsky's employment agreement will be automatically extended at the end of
each year for an additional year and is terminable by the Company upon five
years' notice. Mr. Savitsky's employment agreement will provide that, upon a
"change of control" of the Company and his termination of employment (other than
for his conviction of a felony) within 12 months thereafter, he will be entitled
to receive a lump sum severance payment equal to 2.99 times his average annual
compensation for the five calendar years prior to termination. Mr. Savitsky will
be required to devote approximately one-half of his business time to the affairs
of the Company and his employment agreement will provide that during the term of
his employment and for a period of six months thereafter he will not compete
with the Company.
As of the Distribution Date, the Company will enter into a five-year
employment agreement with Dale R. Clift to serve as President and Chief
Operating Officer of the Company. The employment agreement will provide for a
base salary of $400,000 per annum, plus annual cost of living increases. Under
his employment agreement, Mr. Clift is required to devote his full business time
to the affairs of the Company, subject to his limited duties as an employee of
Staff Builders. The remainder of Mr. Clift's employment agreement is
substantially similar to Stephen Savitsky's employment agreement with the
Company.
43
<PAGE> 50
As of the Distribution Date, the Company will enter into a three-year
employment agreement with Willard T. Derr to serve as Chief Financial Officer,
Senior Vice President and Corporate Controller of the Company. The employment
agreement will provide for a base salary of $160,000 per annum. In addition, the
Company will lease an automobile for Mr. Derr's use until October 1999 and
thereafter Mr. Derr will receive an automobile allowance of $300 per month. If
within 12 months after a "change of control" Mr. Derr's employment is terminated
other than for "cause," he will be entitled to receive a lump sum severance
payment equal to 2.99 times his average annual compensation for the five
calendar years prior to termination. A termination is for "cause" if Mr. Derr is
insubordinate, materially breaches the terms of his employment agreement,
engages in willful misconduct, acts in bad faith, commits a felony or
perpetrates a fraud against the Company. Under his employment agreement, Mr.
Derr is obligated to devote his full business time to the affairs of the
Company, subject to his limited consulting duties to Staff Builders, and he is
prevented from competing with the Company during his employment with the Company
and for six months thereafter and from soliciting any employees or customers of
the Company during the term of his employment and for 12 months thereafter.
Effective as of the Distribution Date, Mr. Derr's current employment agreement
with Staff Builders will be terminated and Mr. Derr will enter into a one-year
consulting agreement with Staff Builders where he will provide his services in
connection with the transition of the business for $1,000 per month.
As of the Distribution Date, the Company will enter into a three-year
employment agreement with Renee J. Silver to serve as Vice President and General
Counsel of the Company. The employment agreement will provide for a base salary
of $170,000 per annum. If within 12 months after a "change of control" Ms.
Silver's employment is terminated other than for "cause", she will be entitled
to receive a lump sum severance payment equal to 2.99 times her average annual
compensation for the five calendar years prior to termination. A termination is
for "cause" if Ms. Silver is insubordinate, materially breaches the terms of her
employment agreement, engages in willful misconduct, acts in bad faith, commits
a felony or perpetrates a fraud against the Company. Ms. Silver is obligated to
devote her full business time to the Company, subject to her limited consulting
duties for Staff Builders, and she is prevented from competing with the Company
during her employment with the Company and for six months thereafter and from
soliciting any employees or customers of the Company during the term of her
employment and for 12 months thereafter. Effective as of the Distribution Date,
Ms. Silver's current employment agreement with Staff Builders will be terminated
and Ms. Silver will enter into a one-year consulting agreement with Staff
Builders where she will provide her services in connection with the transition
of the business for $1,000 per month.
A principal subsidiary of the Company has entered into a three-year
employment agreement with Sandra Parshall to serve as its Vice President of
Operations until February 28, 2002. The employment agreement provides for an
annual base salary of $204,000. In addition, the Company leases an automobile
for Ms. Parshall's use at an annual cost of approximately $6,400. If within 12
months after a "change of control" Ms. Parshall's employment is terminated other
than for "cause", she will be entitled to receive a lump sum severance payment
equal to 2.99 times her average annual compensation for the five calendar years
prior to termination. A termination is for "cause" if Ms. Parshall is
insubordinate, materially breaches the terms of her employment agreement,
engages in willful misconduct, acts in bad faith, commits a felony or
perpetrates a fraud against the Company. The employment agreement requires Ms.
Parshall to devote her full business time to the affairs of the Company and
prevents her from competing with the Company during her employment with the
Company and for six months thereafter and from soliciting any employees or
customers of the Company during the term of her employment and for 12 months
thereafter.
If after the Distribution Date, but prior to the next anniversary date of
the respective employment agreements of the officers described above, a "change
of control" were to occur and such officers' employment relationships with the
Company were to terminate for reasons triggering the severance payments noted
above, then the Company would be obligated to make lump sum payments to Stephen
Savitsky, Dale R. Clift, Willard T. Derr, Renee J. Silver and Sandra Parshall in
the amounts of $883,168, $1,196,000, $478,400, $508,300, and $609,960,
respectively. The severance payments payable would change as a result of changes
in such individuals' compensation. The term "change of control" as used in the
employment agreements with the Company's executive officers refers to an event
in which a person, corporation, partnership, association or
44
<PAGE> 51
entity (i) acquires a majority of the Company's outstanding voting securities,
(ii) acquires securities of the Company bearing a majority of voting power with
respect to election of directors of the Company, or (iii) acquires all or
substantially all of the Company's assets.
CERTAIN TRANSACTIONS
As of the Distribution Date, four of the Company's directors will also be
directors of Staff Builders and two of the Company's directors will be executive
officers of Staff Builders. Also as of the Distribution Date, two executive
officers of TLC will be employed by Staff Builders and two executive officers of
TLC will serve as consultants to Staff Builders.
Effective as of the Distribution Date, the Company will enter into a
five-year employment agreement with David Savitsky under which Mr. Savitsky, as
Vice Chairman, Government Relations of the Company, will receive an initial base
salary of $110,000 per year, plus annual cost of living increases. Mr.
Savitsky's employment agreement will be automatically extended at the end of
each year for an additional year and is terminable by the Company upon five
years' notice. Mr. Savitsky's employment agreement will provide that, upon a
"change of control" of the Company and his termination of employment (other than
for his conviction of a felony) within 12 months thereafter, he will be entitled
to receive a lump sum severance payment equal to 2.99 times his average annual
compensation for the five years prior to termination. Mr. Savitsky will be
required to devote approximately 20% of his business time to the affairs of the
Company and his employment agreement will provide that during the term of his
employment and for a period of six months thereafter he will not compete with
the Company.
Stephen Savitsky and Staff Builders are party to a five-year employment
agreement dated June 1, 1987, under which Mr. Savitsky currently receives a base
salary of $590,747 per year, plus annual cost of living increases. Mr.
Savitsky's employment agreement automatically extends at the end of each year
for an additional year and is terminable by the Company upon five years' notice.
If within 12 months after a "change of control" Mr. Savitsky's employment is
terminated (other than for his conviction of a felony), Mr. Savitsky is entitled
to receive a lump sum severance payment equal to 2.99 times his average annual
compensation for the five years prior to termination. Mr. Savitsky's employment
agreement provides that during the term of his employment and for a period of
six months thereafter he will not compete with Staff Builders. The employment
agreement between Mr. Savitsky and Staff Builders will remain in effect after
the Distribution Date, but will be amended to reduce his base salary to
$295,373, plus annual cost of living increases, and to eliminate his annual
post-termination consulting fee and his annual 10% salary increase.
David Savitsky and Staff Builders are party to an employment agreement
dated June 1, 1987 under which Mr. Savitsky currently receives a base salary of
$467,080 per year, plus annual cost of living increases. The remainder of the
terms of Mr. Savitsky's employment agreement with Staff Builders are
substantially similar to Stephen Savitsky's employment agreement terms. The
employment agreement between Mr. Savitsky and Staff Builders will remain in
effect after the Distribution Date, but will be amended to reduce his base
salary to $357,080, plus annual cost of living increases, and to eliminate his
annual post-termination consulting fee and his annual 10% salary increase.
Dale R. Clift and Staff Builders are party to a four-year employment
agreement dated February 9, 1998 under which Mr. Clift currently receives a base
salary of $300,000 per year. The employment agreement between Mr. Clift and
Staff Builders will remain in effect after the Distribution Date, but will be
amended to reduce his annual base salary to $24,000, to change his position to
Senior Vice President, Financial Strategy and change his duties accordingly, and
to eliminate his severance payment and certain benefits.
Effective April 1, 1992, the Company approved the sale by CTR Management
Corp. ("CTR") of a home care franchise for Nassau County, New York to Bayit Care
Corp. ("BCC"). The stockholders, officers and directors of BCC are Stuart
Savitsky, son of Stephen Savitsky, Samuel Schreier, the son-in-law of Stephen
Savitsky, and Julie Schreier, the daughter of Stephen Savitsky. The terms and
conditions of the franchise agreement between the Company and BCC, entered into
at the time of the sale, are substantially similar to those for other licensees
of the Company, including the term of ten years with a five year renewal option.
In
45
<PAGE> 52
connection with the acquisition of its franchise, CTR purchased certain assets
of an existing branch office of the Company for $911,000. The purchase price was
evidenced by a promissory note, dated August 30, 1989. BCC purchased the
franchise from CTR by assuming this promissory note which, at the time of BCC's
purchase of the franchise, had an outstanding principal balance of $844,573 (the
"BCC Note"). The terms of the BCC Note originally provided for repayment of the
outstanding principal amount in 120 consecutive monthly installments of $7,038
each, commencing May 1, 1994, together with interest at 3% over the prime rate,
payable monthly. Effective June 1, 1994, the BCC Note was amended and restated
to (i) provide for the repayment of the outstanding principal amount over a
fifteen (15) year period, and (ii) reduce the interest rate to the prime rate.
The amended principal payment schedule requires fixed monthly principal payments
of $3,500 each with all unpaid principal due at the end of the fifteen (15) year
period or earlier upon the termination of the franchise agreement for such
franchise. The BCC Note is secured by all of the licensee's assets. The Company
restructured the BCC Note because it found the additional monthly expense
associated with the start of the principal repayment schedule in May 1994 to
have a clear negative impact on the licensee's ability to operate the franchise.
As described in greater detail below, during the fiscal year ended February 28,
1999, the Company retained $55,144 from the amount otherwise due to BCC under
the terms of its franchise agreement as interest payments on the BCC Note. The
outstanding balance of the BCC Note was $645,023 at February 28, 1999.
During the period from March 1, 1998 through February 1, 1999, Boro Care
Corp. ("Boro") operated a home care franchise for Bronx, Kings, New York and
Queens counties in New York. Stuart Savitsky and Samuel Schreier each own 45% of
the capital stock of Boro. To acquire the franchise, Boro agreed to pay a
$29,500 franchise fee, payable in 12 consecutive monthly payments of $2,458
commencing March 1, 1998. As part of the franchise transaction, Boro purchased
certain assets for $50,000 and issued a $50,000 promissory note (the "First Boro
Note") to the Company with respect to such purchase. Boro also received a
$200,000 line of credit and issued a $200,000 promissory note (the "Second Boro
Note") to the Company with respect to such line of credit. The terms of the
First Boro Note required repayment of the $50,000 in 108 consecutive monthly
payments of principal plus interest, computed at 3% over prime, commencing March
1, 1999. The terms of the Second Boro Note required monthly payments of
interest, computed at 3% over prime, commencing 30 days after the first
withdrawal of funds on the available line of credit. Monthly principal payments
are required commencing 24 months after the first withdrawal of funds on the
available line of credit, through the expiration date of the line of credit on
March 1, 2006. The terms and conditions of the franchise agreement between the
Company and Boro are substantially similar to those for other licensees of the
Company, except that the Boro franchise agreement provides the franchise with
two additional five-year renewal options. Effective February 1, 1999, the
Company repurchased the franchise territories from Boro and the franchise
agreement was terminated in an arm's length transaction. The purchase price paid
by the Company was $1.00 plus the forgiveness of $286,548 in debt owed by Boro
to the Company, including amounts owed as of February 1, 1999 pursuant to the
First Boro Note and Second Boro Note noted above. The terms of the termination
agreement, including the forgiveness of debt, are substantially similar to those
for other recently terminated licensees.
Under the Company's franchise program, the Company processes and pays the
payroll to the field employees who service clients and invoices the clients for
such services. Each month the Company pays the licensee 60% of the gross margin
dollars (in general, the difference between the amount so invoiced and the
payroll and related expenses for such field employees) from the licensee's
business for the prior month's activity. Licensees are responsible for their
general and administrative expenses, including office payroll. If the licensee
elects, the Company will process payment of the licensee's office payroll and
some or all of the licensee's other administrative expenses, and withhold the
amount so expended from the 60% gross margin otherwise due the licensee. During
the fiscal year ended February 28, 1999, the Company paid BCC $162,301 under the
terms of its franchise agreement, representing a 60% gross margin of $1,236,575
less $55,144 and $42,000 of interest and principal, respectively, withheld on
the BCC Note and $977,130 withheld for administrative expenses.
In order to facilitate the acquisition of a franchise by a willing
prospective licensee, the Company will frequently accept a promissory note as
consideration for the purchase from the Company of an existing branch
46
<PAGE> 53
location and will occasionally advance expenses to a licensee. The Company's
transactions with BCC and Boro described above are consistent with this business
purpose and with accommodations which have been granted to other, unaffiliated
licensees.
Although the Company has no formal policy regarding transactions with
affiliates, it does not intend to enter into a transaction with any affiliate on
terms less favorable to the Company than those it would receive in an arm's
length transaction with an unaffiliated party.
OWNERSHIP OF SECURITIES BY CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND EXECUTIVE OFFICERS
Prior to the Distribution, 100% of the issued and outstanding shares of TLC
Common Stock is owned by Staff Builders. Based on the number of outstanding
shares of Staff Builders Common Stock on May 28, 1999, the following table sets
forth the number of shares of TLC Common Stock and the approximate percent
expected to be beneficially owned immediately following the Distribution by (i)
each person expected to own more than 5% of any class of voting securities of
the Company, (ii) each director of the Company, (iii) the Company's Named
Executive Officers, and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
---------------------------------
NUMBER OF PERCENTAGE OF
NAME OF SHARES OF OUTSTANDING SHARES
BENEFICIAL OWNER COMMON STOCK OF COMMON STOCK
- ---------------- ------------ ------------------
<S> <C> <C>
Stephen Savitsky(2)......................................... 1,285,369(3) 10.9%
Dale R. Clift(2)............................................ -- --
David Savitsky(2)........................................... 1,313,268(4) 11.1%
Bernard J. Firestone(2)..................................... 1,050(5) *
Jonathan J. Halpert(2)...................................... -- --
Sandra Parshall(2).......................................... 2,033 *
Willard T. Derr(2).......................................... 2,000 *
Renee J. Silver(2).......................................... 2,975 *
S Squared Technology Corp.(6)............................... 1,307,250 11.1%
Dimensional Fund Advisors, Inc.(7).......................... 686,230 5.8%
All executive officers and directors as a group (8
persons).................................................. 2,606,695 22.0%
</TABLE>
- ---------------
* Less than one percent
(1) "Beneficial ownership" is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. In general, a person is treated
as the "beneficial owner" of stock under Rule 13d-3 if such person has (or
shares) (i) either investment power or voting power over such stock (which
may be by means of a contract, arrangement, understanding, relationship or
otherwise), or (ii) the right to acquire such stock within 60 days,
including by means of the exercise of an option or the conversion of a
convertible security. Each beneficial owner's percentage of ownership and
percentage of votes is determined by assuming that options that are held by
such person (but not those held by any other person) and which are
exercisable within 60 days of the date of this table have been exercised.
Except as indicated in the footnotes that follow, shares listed in the table
are held with sole voting and investment power.
(2) The address of each of these persons is c/o Staff Builders, Inc., 1983
Marcus Avenue, Lake Success, New York 11042. Each of these persons has sole
power with respect to the voting and investment of the shares which he owns.
(3) Includes 30,000 shares of TLC Common Stock held by Mr. Savitsky's wife as
trustee for the benefit of one of their children. Mr. Savitsky disclaims
beneficial ownership of these shares.
(4) Includes 3,725 shares of TLC Common Stock held by Mr. Savitsky's wife, 500
shares of TLC Common Stock held by his wife as trustee for the benefit of
their three children, 100,000 shares of TLC Common
47
<PAGE> 54
Stock held by his wife as trustee for the benefit of two of their children,
800 shares of TLC Common Stock held by his wife as trustee for the benefit
of one of their children, and 50,600 shares of TLC Common Stock held by one
of his children. Mr. Savitsky disclaims beneficial ownership of these
shares.
(5) Includes 500 shares of TLC Common Stock held by Dr. Firestone's wife. Dr.
Firestone disclaims beneficial ownership of these shares.
(6) S Squared Technology Corp. ("S Squared"), a registered investment adviser,
is located at 515 Madison Avenue, New York, New York 10022. Includes
1,201,250 shares of TLC Common Stock for which S Squared has sole voting and
sole investment power and 106,000 shares of TLC Common Stock for which S
Squared has shared voting and shared investment power. The shares are owned
by limited partnerships for which S Squared is the sole general partner, by
advisory clients of S Squared, and by Seymour Goldblatt, the principal of S
Squared, and members of his family.
(7) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is located at 1299 Ocean Avenue, Santa Monica, California 90401.
Dimensional is deemed to have beneficial ownership of 686,230 shares of TLC
Common Stock, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment vehicles
for qualified employee benefit plans, all of which Dimensional Fund Advisors
Inc. serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
DESCRIPTION OF CAPITAL STOCK
COMPARISON OF RIGHTS OF STOCKHOLDERS
TLC is incorporated under the laws of the State of Delaware. The
Certificate of Incorporation and By-laws of TLC are identical to those of Staff
Builders in all material respects, except for the number of authorized shares of
capital stock. As a result, there are no significant differences between the
rights of holders of shares of Staff Builders Common Stock and the rights of
holders of TLC Common Stock.
TLC COMMON STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of common stock, par value $.01 per share. Holders of shares of TLC Common Stock
are entitled to one vote per share on all matters to be voted upon by the
stockholders and are not entitled to cumulate votes for the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of shares of TLC Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by TLC's
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of shares of
TLC Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. Holders of TLC Common Stock have no preemptive,
conversion or other subscription rights and there are no redemption or sinking
fund provisions applicable to TLC Common Stock. After the completion of the
Distribution, there are expected to be approximately 11,809,694 shares of TLC
Common Stock outstanding, held of record by approximately 775 persons, excluding
shares of TLC Common Stock issuable upon the exercise of TLC's stock options
expected to be granted pursuant to the TLC Stock Option Plan.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
5,000,000 shares of preferred stock. The Company's Board of Directors has the
authority to issue preferred stock in one or more series and to fix for each
such series the voting powers, full, limited or none, and the designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereon, and the number of shares
constituting any series and the designations of such series, without any further
vote or action by the stockholders of the Company. Because the terms of the
preferred stock may be fixed by the
48
<PAGE> 55
Company's Board of Directors without stockholder action, the preferred stock
could be issued quickly with terms calculated to defeat a proposed takeover of
the Company or to make the removal of management of the Company more difficult.
Under certain circumstances, this could have the effect of decreasing the market
price of TLC Common Stock. The Company has not issued and does not presently
intend to issue any shares of preferred stock.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of the Company authorized at the time of
the Distribution will have any preemptive right to subscribe for or purchase any
kind or class of securities of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the TLC Common Stock is American Stock
Transfer and Trust Company.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates and associates, owns (or, in certain
cases, within three years prior, did own) 15% or more of the corporation's
voting stock. These restrictions do not apply where:
(i) the business combination or the transaction in which the
stockholder becomes interested is approved by the corporation's board of
directors prior to the time the interested stockholder acquired its shares;
(ii) the interested stockholder acquired at least 85% of the
outstanding voting stock of the corporation in the transaction in which the
stockholder became an interested stockholder excluding, for purposes of
determining the number of shares outstanding, shares owned by persons who
are directors as well as officers and by employee stock plans in which
participants do not have the right to determine confidentiality whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
(iii) the business combination is approved (not by written consent) by
the board of directors and the affirmative vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder at an
annual or special meeting.
The business combinations provisions of Section 203 of the DGCL may have
the effect of deterring merger proposals, tender offers or other attempts to
effect changes in control of the Company that are not negotiated with and
approved by the Company's Board of Directors.
Certain provisions of the Company's Certificate of Incorporation and the
By-laws may have the effect, either alone or in combination with each other, of
making more difficult or discouraging a tender offer, takeover attempt or change
in control that is opposed by the Company's Board of Directors but that a
stockholder might consider to be in the Company's best interest. The Company
believes that such provisions are necessary to enable the Company to develop its
business in a manner that will foster its long-term growth without the
disruption caused by the threat of a takeover not deemed by the Company's Board
of Directors to be in the best interests of the Company and its stockholders.
These provisions are summarized in the following paragraphs.
49
<PAGE> 56
Classified Board of Directors
The Company's Certificate of Incorporation and By-laws provide that the
Company's Board of Directors will be divided into three classes of directors,
with the classes to be as nearly equal in number as possible. The Board of
Directors consists of the persons referred to in "Management." One-third of the
Board of Directors will continue to serve until the 2000 Annual Meeting of
Stockholders; one-third will continue to serve until the 2001 Annual Meeting of
Stockholders; and one-third will continue to serve until the 2002 Annual Meeting
of Stockholders. Of the initial directors, Mr. Stephen Savitsky will serve until
the 2000 Annual Meeting of Stockholders; Messrs. David Savitsky and Jonathan J.
Halpert will serve until the 2001 Annual Meeting of Stockholders; and Messrs.
Dale R. Clift and Bernard J. Firestone will serve until the 2002 Annual Meeting
of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one
class of directors will be elected each year for a three-year term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Company's Board of
Directors. At least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in a majority of the Board of
Directors. Such a delay may help ensure that the Company's directors, if
confronted by a holder attempting to force a proxy contest, a tender or exchange
offer, or an extraordinary corporate transaction would have sufficient time to
review the proposal as well as any available alternatives to the proposal and to
act in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, regardless
of whether a change in the composition of the Board of Directors would be
beneficial to the Company and its stockholders and whether or not a majority of
the Company's stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. The classification of the
Board of Directors could thus increase the likelihood that incumbent directors
will retain their positions. In addition, because the classification provisions
may discourage accumulations of large blocks of TLC Common Stock by purchasers
whose objective is to take control of the Company and remove a majority of the
Board of Directors, the classification of the Board of Directors could tend to
reduce the likelihood of fluctuations in the market price of TLC Common Stock
that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain opportunities to sell
their shares of TLC Common Stock at a higher market price than might otherwise
be the case.
Number of Directors; Removal of Directors; Vacancies
As of the Distribution Date, the number of directors of the Company will be
five. The By-laws provide that the number of directors (as well as the number of
each class of directors) may be increased or decreased by a resolution adopted
by the vote of the majority of the entire Board of Directors then in office. The
Company's Certificate of Incorporation and By-laws also provides that, subject
to the rights of holders of any preferred stock then outstanding, a director or
the entire Board of Directors may be removed only for cause by the affirmative
vote of the holders of at least 80% of the outstanding shares of the Company
then entitled to vote generally in the election of directors, voting as a single
class (without a separate vote of the holders of the preferred stock). Subject
to the rights of holders of any outstanding preferred stock then outstanding,
vacancies on the Board of Directors may be filled only by a majority of the
members of the Board of Directors then in office, whether or not they constitute
a quorum of directors. The affirmative vote of the holders of at least 80% of
the voting power of the outstanding TLC Common Stock is required to amend, alter
or repeal the foregoing provisions.
Special Meeting of Stockholders; No Stockholder Action by Written Consent;
Stockholder Action at Meetings
The Certificate of Incorporation and By-laws provide that special meetings
of the stockholders may only be called by the Board of Directors. Any action
required or permitted to be taken by the stockholders must be
50
<PAGE> 57
effected at a duly called annual or special meeting and may not be effected by
any consent in writing by such stockholders. The affirmative vote of the holders
of at least 80% of the voting power of the outstanding TLC Common Stock is
required to amend, alter or repeal the foregoing provisions.
Supermajority Voting in Change of Control Transactions
The Certificate of Incorporation provides that the affirmative votes of the
holders of at least (i) 80% of the then outstanding shares of TLC Common Stock
entitled to vote generally in the election of directors, and (ii) 66% of the
then outstanding shares of each series of preferred stock then issued and
outstanding are required before an Interested Stockholder can consummate certain
business combinations with the Company if such transactions are not approved by
a majority of the Continuing Directors. A "Continuing Director" means any member
of the Company's Board of Directors who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors prior to the time that
the Interested Stockholder became an Interested Stockholder, and any successor
of a Continuing Director who is unaffiliated with the Interested Stockholder and
is recommended to succeed a Continuing Director by a majority of Continuing
Directors then on the Board of Directors. According to the Company's Certificate
of Incorporation, an "Interested Stockholder" means any person (other than the
Company or any subsidiary) who or which: (i) is the beneficial owner, directly
or indirectly, of more than 10% of the voting power of the outstanding voting
stock; or (ii) is an affiliate of the Company and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding voting stock; or (iii) is an assignee of or has otherwise succeeded
to any shares of voting stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in the course
of a transaction or series of transactions not involving a public offering
within the meaning of the Securities Act. The affirmative vote of the holders of
at least 80% of the voting power of the shares of TLC Common Stock is required
to amend, repeal or adopt any provision inconsistent with the foregoing
provision.
Although no stockholder rights plan (or, as such plans are commonly called,
"poison pill") has been adopted, the Company's Certificate of Incorporation
affirms that the Company's Board of Directors may contest or oppose any unfair,
abusive or otherwise undesirable transaction which may result in a change in
control of the Company, including, without limitation, by the adoption of such
plans or the issuance of such rights, options, stock, evidences or indebtedness
or other securities of the Company which (i) may be exchangeable for or
convertible into cash or other securities and (ii) may provide for the treatment
of any holder or class of holders thereof designated by the Company Board of
Directors which is different from, and unequal to, the terms, conditions,
provisions and rights applicable to all other holders thereof. Such provisions
are not included in Staff Builders' Certificate of Incorporation.
LIMITED LIABILITY AND INDEMNIFICATION
Indemnification Agreements
The Company will enter into indemnification agreements (the
"Indemnification Agreements") with its directors, officers, employees, agents
and fiduciaries (each, an "Indemnitee"). An Indemnitee is specifically
indemnified and held harmless under the Indemnification Agreements by reason of
the fact that he or she is or was a director, officer, employee, agent or
fiduciary of the Company or any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person is or was
serving at the request of the Company ("Corporate Status").
Pursuant to the Indemnification Agreements, the Company will indemnify the
Indemnitee (i) when he or she is, or is threatened to be made a party to any
threatened, pending or complete Proceeding, other than a Proceeding by or in the
right of the Company; (ii) when he or she is, or is threatened to be made a
party to any threatened, pending or completed Proceeding brought by or in the
right of the Company to procure a judgment in its favor; (iii) to the extent the
Indemnitee is a party to, and wholly or partly successful, on the merits or
otherwise, in any Proceeding; or (iv) to the extent he or she is, by reason of
his or her Corporate
51
<PAGE> 58
Status, a witness in any Proceeding. The extent the Company indemnifies the
Indemnitee is subject to the cause which gives rise to the need for
indemnification. An Indemnitee seeking indemnification under clause (i) is
indemnified against Expenses, judgments, penalties, fines and amounts paid in
settlement actually or reasonably incurred by the Indemnitee or on the
Indemnitee's behalf in connection with a Proceeding. An Indemnitee seeking
indemnification pursuant to clause (ii) is indemnified against Expenses actually
and reasonably incurred by the Indemnitee or on the Indemnitee's behalf in
connection with a proceeding. An Indemnitee seeking indemnification pursuant to
clause (iii) is indemnified against all Expenses actually and reasonably
incurred by the Indemnitee or on the Indemnitee's behalf in connection with each
successfully resolved claim, issue or matter. An Indemnitee seeking
indemnification pursuant to clause (iv) is indemnified against all expenses
actually and reasonably incurred by the Indemnitee or on behalf of the
Indemnitee. A "Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding whether civil or criminal, administrative or investigative except one
initiated by the Indemnitee to enforce his rights under the Indemnification
Agreement. "Expenses" include all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplication costs, printing and binding costs, telephone charges, postage
delivery fees, and all other disbursements and expenses of the type customarily
incurred in connection with prosecuting, defending, preparing to prosecute or
defend, investigating, or being or preparing to be a witness in a Proceeding.
Under the Indemnification Agreements, the Company will advance Expenses
incurred by or on behalf of the Indemnitee whether prior to or after final
disposition of a Proceeding if the Indemnitee or someone on behalf of the
Indemnitee undertakes to repay the amounts advanced if it is ultimately
determined that he or she is not entitled to be indemnified by the Company. The
indemnification provisions and provisions for advancing expenses in the
Indemnification Agreements are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any applicable law, the
Company's Certificate of Incorporation or By-laws, any agreement, vote of
stockholders or directors or otherwise.
Certificate of Incorporation
The Company's Certificate of Incorporation eliminates to the fullest extent
now or hereafter permitted by Delaware law, liability of a director to the
Company or its stockholders for monetary damages for any action taken, or
failure to take any action, as a director, except for liability:
(i) for any breach of the director's duty of loyalty to the Company or
its stockholders;
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the DGCL, relating to prohibited dividends,
distributions and repurchases or redemptions of stock; or
(iv) for any transaction for which the director derives an improper
personal benefit.
Section 145 of the DGCL ("Section 145") permits indemnification of
directors, officers, agents and controlling persons of a corporation under
certain conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer or agent of the corporation or
another enterprise if serving at the request of the corporation. Depending on
the character of the proceeding, a corporation may indemnify against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner such
person reasonably believed to be in or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of
an action by or in the right of the Company, no indemnification may be made with
respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Company unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine that despite the adjudication of
52
<PAGE> 59
liability such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Section 145 further provides that to
the extent a director or officer of the Company has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
The Company's Certificate of Incorporation contains provisions for
indemnification of directors, officers, employees and agents to the fullest
extent permitted by Section 145 and Delaware law which, in general, presently
requires that the individual act in good faith and in a manner he or she
reasonably believed to be in or not opposed to the Company's best interests and,
in the case of any criminal proceedings, that the individual has no reasonable
cause to believe his or her conduct was unlawful.
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<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Staff Builders, Inc.:
We have audited the accompanying consolidated balance sheets of Staff
Builders, Inc. and subsidiaries (the "Company") as of February 28, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
February 28, 1999. Our audits also included the financial statement schedule
listed in the Table of Contents. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Staff Builders, Inc. and
subsidiaries at February 28, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended February
28, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
The accompanying consolidated financial statements for the year ended
February 28, 1999 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 4 to the consolidated financial
statements, the Company's losses from operations, working capital deficiency and
non-compliance with the terms of its secured credit facility raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 4. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE, LLP
------------------------------------
Jericho, New York
May 25, 1999
F-1
<PAGE> 61
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,007 $ 2,757
Accounts receivable, net of allowance for doubtful
accounts of $7,000 and $3,660, respectively............ 79,662 85,123
Deferred income taxes..................................... -- 3,176
Income tax refund receivable.............................. 1,733 --
Prepaid expenses and other current assets................. 3,554 4,853
--------- --------
Total current assets.............................. 86,956 95,909
FIXED ASSETS, net........................................... 27,987 11,622
INTANGIBLE ASSETS, net...................................... 27,091 40,295
OTHER ASSETS................................................ 4,471 10,875
--------- --------
TOTAL............................................. $ 146,505 $158,701
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 20,379 $ 17,107
Accrued expenses.......................................... 14,520 11,976
Accrued payroll and payroll related expenses.............. 25,750 28,152
Current portion of Medicare and Medicaid liabilities...... 22,673 11,925
Current portion of long-term debt......................... 43,460 10,664
--------- --------
Total current liabilities......................... 126,782 79,824
--------- --------
LONG-TERM DEBT.............................................. 19,749 36,508
--------- --------
LONG-TERM MEDICARE AND MEDICAID LIABILITIES................. 34,608 --
--------- --------
OTHER LIABILITIES........................................... 4,725 4,000
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock --
Class A Common Stock -- $.01 par value; 50,000,000
shares authorized; 23,307,129 and 23,009,247
outstanding at February 28, 1999 and 1998,
respectively.......................................... 236 230
Class B Common Stock -- $.01 par value; 1,554,936
shares authorized; 312,251 and 1,056,356 outstanding
at February 28, 1999 and 1998, respectively........... -- 10
Preferred stock, 10,000 shares authorized; Class
A -- $1.00 par value; 666 2/3 shares outstanding at
February 28, 1998...................................... -- 1
Additional paid-in capital................................ 69,055 73,692
Accumulated deficit....................................... (108,650) (35,564)
--------- --------
Total stockholders' equity (deficit).............. (39,359) 38,369
--------- --------
TOTAL............................................. $ 146,505 $158,701
========= ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 62
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Service revenues:
Home health care....................................... $310,297 $451,098 $436,599
Supplemental staffing.................................. 124,867 74,300 42,430
-------- -------- --------
Total service revenues................................. 435,164 525,398 479,029
Sales of licensees and fees, net....................... 2,424 1,275 1,326
-------- -------- --------
Total revenues................................. 437,588 526,673 480,355
-------- -------- --------
COSTS AND EXPENSES:
Operating costs........................................ 299,057 338,225 301,508
General and administrative expenses.................... 148,642 177,761 170,290
Amortization of intangible assets...................... 1,314 2,807 2,623
Interest expense....................................... 4,233 3,706 1,601
Interest income........................................ (1,061) (1,358) (896)
Other (income) expense, net............................ 1,991 (419) (1,487)
Medicare and Medicaid audit adjustments................ 29,000 -- --
Restructuring costs.................................... 20,464 33,447 --
-------- -------- --------
Total costs and expenses....................... 503,640 554,169 473,639
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................ (66,052) (27,496) 6,716
PROVISION (BENEFIT) FOR INCOME TAXES..................... 7,034 (5,864) 2,955
-------- -------- --------
NET INCOME (LOSS)........................................ $(73,086) $(21,632) $ 3,761
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic.................................................. $ (3.16) $ (.90) $ .16
======== ======== ========
Diluted................................................ $ (3.16) $ (.90) $ .15
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic.................................................. 23,162 23,939 23,668
======== ======== ========
Diluted................................................ 23,162 23,939 24,577
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 63
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED ADDITIONAL
------------------- STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CLASS A CAPITAL DEFICIT TOTAL
---------- ------ --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 1, 1996............ 23,537,320 $235 $ 1 $72,767 $ (17,693) $ 55,310
Additional common stock in
connection with a 1987
acquisition................... 4,870 -- -- --
Common stock issued -- exercise
of stock options, net of
15,232 shares used to pay for
shares........................ 23,768 -- 29 29
Exercise of common stock
warrants...................... 160,680 2 193 195
Common stock issued -- employee
stock purchase plan........... 234,693 2 579 581
Purchase and retirement of common
stock......................... (155,000) (1) (409) (410)
Net Income....................... 3,761 3,761
---------- ---- --- ------- --------- --------
Balances, February 28, 1997........ 23,806,331 238 1 73,159 (13,932) 59,466
Additional common stock in
connection with a 1987
acquisition................... 171 -- --
Exercise of common stock
warrants...................... 5,000 -- 11 11
Common stock issued -- employee
stock purchase plan........... 254,101 2 522 524
Net (Loss)....................... (21,632) (21,632)
---------- ---- --- ------- --------- --------
Balances, February 28, 1998........ 24,065,603 240 1 73,692 (35,564) 38,369
Additional common stock in
connection with a 1987
acquisition................... 26,935 -- -- --
Exercise of stock options........ 20,000 -- 35 35
Purchase and retirement of common
stock......................... (5,088,060) (50) (4,719) (4,769)
Conversion of preferred stock
into common stock............. 4,269,820 43 (1) (242) (200)
Common stock issued -- employee
stock purchase plan........... 325,082 3 289 292
Net (Loss)....................... (73,086) (73,086)
---------- ---- --- ------- --------- --------
Balances, February 28, 1999........ 23,619,380 $236 $-- $69,055 $(108,650) $(39,359)
========== ==== === ======= ========= ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 64
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(73,086) $(21,632) $ 3,761
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization of fixed assets........... 3,991 3,805 2,757
Amortization of intangibles and other assets............ 1,314 2,807 2,623
Write-off of goodwill and intangible assets............. 16,327 24,540 --
Write-off of investments and other assets............... 1,724 1,198 --
Write-off of fixed assets............................... 911 -- --
Increase (decrease) in other long term liabilities...... 5,100 424 (758)
Allowance for doubtful accounts......................... 3,340 800 600
Deferred income taxes................................... 8,540 (7,101) 548
Gain on sale of assets.................................. (1,148) (290) (1,247)
Change in operating assets and liabilities:
Accounts receivable..................................... 1,972 (6,391) (23,718)
Prepaid expenses and other current assets............... (1,216) 415 (1,193)
Accounts payable........................................ 3,271 2,646 4,977
Accrued expenses........................................ (918) 7,719 (6,525)
Increase in Medicare and Medicaid audit liabilities..... 28,092 -- --
Increase in periodic interim payment liability.......... 14,364 4,320 275
Other assets............................................ 451 211 (1,529)
-------- -------- --------
Net cash provided by (used in) operating activities..... 13,029 13,471 (19,429)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (2,876) (16,226) (10,327)
Purchase of fixed assets.................................. (5,020) (1,029) (2,334)
Proceeds from disposal of assets.......................... 576 855 775
-------- -------- --------
Net cash used in investing activities................... (7,320) (16,400) (11,886)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan................ 292 524 581
Proceeds from exercise of stock options................... 35 11 29
Proceeds from exercise of warrants........................ -- -- 195
Purchase and retirement of common stock................... (4,770) -- (410)
Increase (decrease) in borrowings under revolving line of
credit.................................................. 9,094 (3,978) 21,565
Proceeds from acquisition line of credit.................. -- 12,625 --
Proceeds from other notes payable......................... -- 581 5,727
Payment of notes payable and other long-term
liabilities............................................. (11,110) (6,083) (3,076)
-------- -------- --------
Net cash provided by (used in) financing activities..... (6,459) 3,680 24,611
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (750) 751 (6,704)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,757 2,006 8,710
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,007 $ 2,757 $ 2,006
======== ======== ========
SUPPLEMENTAL DATA:
Cash paid for:
Interest................................................ $ 3,963 $ 3,449 $ 1,081
======== ======== ========
Income taxes, net....................................... $ 2,287 $ 2,344 $ 1,867
======== ======== ========
Fixed assets purchased through capital lease agreements..... $ 16,323 $ 2,351 $ 4,770
======== ======== ========
Acquisition of businesses through issuance of notes
payable................................................... $ 760 $ -- $ 3,113
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 65
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1999 ("FISCAL 1999"), FEBRUARY 28, 1998 ("FISCAL 1998")
AND FEBRUARY 28, 1997 ("FISCAL 1997")
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED OTHERWISE AND, FOR PER SHARE
AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Staff Builders, Inc. ("Staff Builders" or the "Company") is a national
provider of home health care services and supplemental staffing, including
medical services provided through its wholly-owned subsidiary, ATC Healthcare
Services, Inc. ("ATC") and information technology services provided through its
81.8% owned subsidiary, Chelsea Computer Consultants, Inc. ("Chelsea").
On March 22, 1999, the Company's Board of Directors approved a plan to
separate its home health care business from its supplemental staffing business
and to create a separate, publicly-traded company engaged exclusively in
providing home health care services. To accomplish this separation of its
businesses, the Company's Board of Directors established a new, wholly-owned
subsidiary, Tender Loving Care Health Care Services, Inc. ("TLC") which will
acquire 100% of the outstanding capital stock of the Staff Builders subsidiaries
engaged in the home health care business. The spin-off will be effected through
a pro rata distribution to Staff Builders' stockholders of all the shares of
common stock of TLC owned by Staff Builders. The distribution will be made by
issuing one share of TLC common stock for every two shares of Staff Builders
common stock outstanding on the record date of the spin-off. Based upon the
23,619,388 shares of Staff Builders common stock outstanding on May 28, 1999,
the Company estimates that 11,809,694 shares of TLC common stock will be
distributed to holders of Staff Builders common stock. Staff Builders'
supplemental staffing business will remain with Staff Builders. The completion
of the spin-off is subject to the satisfaction of certain conditions, including
obtaining certain regulatory approvals and bank financing for each of the home
health care company and the supplemental staffing company.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Staff Builders, its wholly-owned subsidiaries and its majority owned subsidiary.
The Company maintains its records on a fiscal year ending the last day in
February. All material intercompany accounts and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform with
the fiscal 1999 presentation.
A substantial portion of the Company's service revenues are derived under a
unique form of franchising which is a license agreement under which independent
companies or contractors represent the Company within a designated territory.
These licensees assign Company personnel including registered nurses, therapists
and home health aides to service the Company's clients using the Company's trade
names and service marks. The Company pays and distributes the payroll for the
direct service personnel who are all employees of the Company, administers all
payroll withholdings and payments, bills the customers and receives and
processes the accounts receivable. The licensees are responsible for providing
an office and paying related expenses for administration including rent,
utilities and costs for administrative personnel.
The Company owns all necessary health care related permits and licenses
and, where required, certificates of need for operation of licensee offices. The
revenues generated by the licensees along with the related accounts receivable
belong to the Company. The revenues and related direct costs are included in the
Company's consolidated service revenues and operating costs.
The Company pays a monthly distribution or commission to the licensees
based on a defined formula of gross profit generated. Generally, the Company
pays the licensees 60% of the gross profit attributable to the non-Medicare
operations of the licensee. The payment to the Company's licensees related to
Medicare operations is adjusted for cost limitations and reimbursement of
allowable Medicare costs. There is no payment to the licensees based solely on
revenues.
F-6
<PAGE> 66
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For fiscal 1999, 1998 and 1997, total distributions or commissions paid to
licensees of approximately $50.6 million, $92.9 million and $88.6 million,
respectively, were included in the Company's general and administrative
expenses. These amounts consist of $38.3 million, $84.1 million and $82.4
million for home health care licensees and $12.3 million, $8.8 million and $6.2
million for supplemental staffing licensees, respectively.
In October 1997, the Company purchased 60.9% of the outstanding common
stock of Chelsea. Together with the 20.9% of the common stock of Chelsea
purchased in September 1996, the Company owns 81.8% of the outstanding common
stock of Chelsea. In connection with the Company's plans to spin-off its home
health care business, management has decided to retain its investment in Chelsea
by combining the Chelsea operations with its existing supplemental staffing
business. Accordingly, the accounts of Chelsea, which were previously accounted
for on the equity basis, are now included in the Company's consolidated
financial statements within the supplemental staffing business segment, with
prior years reclassified on a consistent basis. Earnings attributable to the
minority interest in Chelsea, the amounts of which are not significant, are
included in other (income) expense in the accompanying statements of operations
and accrued expenses in the accompanying balance sheets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses as well as the disclosure of contingent assets and liabilities in
the financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit and commercial
paper purchased with a maturity of less than three months.
FIXED ASSETS
Fixed assets, consisting of equipment (primarily computer hardware and
software), furniture and fixtures, and leasehold improvements, are stated at
cost and depreciated from the date placed into service over the estimated useful
lives of the assets using the straight-line method. The estimated useful lives
of the related assets are generally five to seven years.
GOODWILL AND INTANGIBLE ASSETS
The excess of the purchase price and related acquisition costs over the
fair market value of the net assets of the businesses acquired is amortized on a
straight-line basis over periods ranging from five to forty years. Intangible
assets include customer lists, which are being amortized over five years on a
straight-line basis.
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." This Statement requires that
certain assets be reviewed for impairment and, if impaired, remeasured at fair
value, whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. In the fourth quarter of fiscal 1999
and 1998, the Company wrote off $15.3 million and $24.5 million, respectively,
of goodwill and intangible assets. These amounts primarily resulted from the
Company's assessment of the adverse change in health care reform (See Note 2).
F-7
<PAGE> 67
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue on the accrual basis as the related services
are provided to customers. Revenues are recorded net of contractual or other
allowances to which customers are entitled. Employees assigned to particular
customers may be changed at the customer's request or at the Company's
initiation. In addition, for financial reporting purposes, a provision for
uncollectible and doubtful accounts is provided for amounts billed to customers
which may ultimately be uncollectible due to billing errors, documentation
disputes or the customer's inability to pay.
Revenues generated from the sales of licensees and initial licensee fees
are recognized upon signing of the domestic license agreement, if collectibility
of such amounts is reasonably assured, since the Company has performed
substantially all of its obligations under its license agreements by such date.
In circumstances where a reasonable basis does not exist for estimating
collectibility of the proceeds of the sales of license and initial license fees,
such amounts are deferred and recognized as collections are made, utilizing the
cost recovery method (see Note 6), or until such time that collectibility is
reasonably assured.
Medicare reimburses the Company for covered items and services at the lower
of the Company's cost as determined by Medicare, cost limits established by the
Federal government, or the amount charged by the Company. Revenues generated
from Medicare services are recorded when services are provided at an estimated
reimbursement rate. Certain factors used to develop these rates are subject to
review and adjustment by the appropriate governmental authorities and may result
in additional amounts due to or due from the Company. Management reduces
revenues by its estimate of the amount of net adjustments which should
ultimately occur. Adjustments, if any, are recorded to these estimates in the
period during which they arise.
INCOME TAXES
Deferred income taxes result from timing differences between financial and
income tax reporting which primarily include the deductibility of certain
expenses in different periods for financial reporting and income tax purposes. A
valuation allowance is provided against net deferred tax assets unless, in
management's judgment, it is more likely than not that such deferred tax asset
will be realized.
EARNINGS (LOSS) PER SHARE
The basic net earnings (loss) per share is computed using weighted average
number of common shares outstanding for the applicable period. The diluted
earnings (loss) per share is computed using the weighted average number of
common shares plus common equivalent shares outstanding, except if the effect on
the per share amounts of including equivalents would be anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, notes receivable from
licensees, long-term debt and other liabilities related to acquisitions
approximate fair value.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 provides standards which require publicly
held companies to report about operating segments in annual financial statements
together with related disclosures about products and services, major customers
and geographic areas (see Note 5).
F-8
<PAGE> 68
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the FASB adopted Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP No. 98-5") which requires that costs
previously capitalized as start-up costs will be expensed as incurred. SOP No.
98-5 becomes effective for fiscal years beginning after December 15, 1998, with
earlier application encouraged. The adoption of SOP No. 98-5 will not have a
material effect on the Company's consolidated financial statements.
During 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities".
The Company does not expect the adoption of this new accounting pronouncement to
have a material effect, if any, on its financial condition or results of
operations.
2. HEALTH CARE REFORM AND RELATED RESTRUCTURING COSTS
The Federal Balanced Budget Act of 1997 ("BBA") resulted in significant
changes to cost based reimbursement for Medicare home health care providers.
Although a cost based reimbursement system remains, the BBA reduced the cost
limits and created new per-beneficiary limits. The BBA provides for an interim
payment system ("IPS") which became applicable for the Company on March 1, 1998
and will remain in effect until the adoption of a new prospective payment system
which is scheduled to be effective for all home health care agencies on October
1, 2000. The Federal Health Care Financing Administration committed to the
revised schedule in a report presented to Congress dated February 4, 1999. The
effect of the changes under IPS is to reduce the limits for the amount of costs
that are reimbursable to home health care providers under the Medicare program.
Accordingly, the Company together with many of its licensees have modified their
operations as needed to meet the demands of IPS, including taking steps to
reduce costs and maximize operational efficiencies within the constraints of the
IPS.
During the fourth quarter of fiscal 1998, management prepared the home
health care business segment of the Company for the impact of IPS and for long
term growth. As a result, the Company implemented a corporate-wide restructuring
and cost reduction program. These actions, together with the Company's
assessment of the impact of health care reform legislation, resulted in a
pre-tax charge in the fourth quarter of fiscal 1998 of $33.4 million. During the
quarter ended November 30, 1998, as a result of the Company's further operating
modifications, including the additional closure and conversion of many locations
from licensed to company-owned operations, the Company wrote off or reserved
approximately $4.5 million.
In fiscal 1999, management further evaluated the carrying value of the
Company's goodwill and intangible assets in light of current home health care
industry conditions and its impact on the Company's operations. Such valuation
resulted in an additional write-off of home health care goodwill of $15.3
million leaving a remaining net carrying value of goodwill and intangible assets
as of February 28, 1999 of $5.1 million in the Company's home health care
business segment. The fiscal 1998 write-off of goodwill and intangible assets
included $21.5 million for the home health care segment and $3.0 million for the
supplemental staffing segment. The write-off of goodwill and intangible assets
is required under SFAS No. 121.
F-9
<PAGE> 69
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of restructuring costs is as follows (in millions of dollars):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28,
-------------
1999 1998
----- -----
<S> <C> <C>
Write-off of goodwill and intangible assets................. $15.3 $24.5
Employee severance and reduction in size.................... 0.9 1.0
Write-down of home health care related investments and
receivables............................................... 0.9 6.3
Accrued litigation related costs............................ 2.2 1.2
Receivables from converted licensee locations............... 1.1 --
Other....................................................... 0.1 0.4
----- -----
Total restructuring costs......................... $20.5 $33.4
===== =====
</TABLE>
As of February 28, 1999, all amounts provided have either been recorded as
direct write-downs of assets or expended from the reserves, except for the
remaining accrued litigation related costs described in Note 16.
3. MEDICARE AND MEDICAID AUDIT ADJUSTMENTS
As a home health care provider, the Company is subject to extensive and
changing state and Federal regulations relating to the licensing and
certification of its offices and the sale and delivery of its products and
services. The Federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare reimbursements to home health care
providers generally, and have become more restrictive in their interpretation of
those costs for which reimbursement will be allowed to such providers. These
regulatory agencies have increased the number of audits performed and have
applied a more intensive degree of scrutiny in the conduct of these audits.
During the quarter ended November 30, 1998, the Medicare fiscal
intermediary completed and issued the results of 88 audits for the fiscal year
ended February 28, 1997, including 25 audits conducted on site at branch
operating locations. These results together with the results of the home office
audit for the year ended February 28, 1997, indicated an aggregate liability of
approximately $9.5 million.
Additionally, the Company has recorded an accrual for third party liability
("TPL") to state Medicaid agencies which have claimed that the Company did not
follow proper billing procedures in several locations. These state Medicaid
agencies have challenged the eligibility of individuals for whom services were
provided. The related claims are being reviewed by the state agencies
encompassing several prior years for which the Company has been paid. The
Company has reached a settlement for a portion of its TPL liability and is
continuing to negotiate to resolve amounts payable to these state agencies.
While the Company believes that it will ultimately prevail in many of these
cases, it has accrued for the anticipated losses for those cases in which it
will not prevail. Based upon the Company's consideration of the scope of audits
being performed by the fiscal intermediary, the issues raised for such periods,
the effect of the these issues on periods yet to be audited, and the balance of
liabilities previously provided, the company recorded aggregate expense of $29.0
million in the quarter ended November 30, 1998. The resultant liability together
with the balance of liabilities previously established, less amounts expended
during the fourth quarter of fiscal 1999, results in an aggregate audit
liability of $28.1 million as of February 28, 1999 for Federal and state audit
adjustments which includes $17.1 million and $11.0 million for Federal and state
liabilities, respectively. (See Note 12). The Company continues to appeal many
audit issues and has engaged outside professional advisors to support the
Company's positions on these issues. The Company anticipates that any resolution
of the appeals may take up to several years.
F-10
<PAGE> 70
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BANK DEFAULT AND GOING CONCERN MATTERS
As described more fully in Note 13, the Company has a secured credit
facility with a bank. On January 14, 1999, the bank provided the Company with
written notification that, in its opinion, the Company's non-compliance with
certain financial covenants as of November 30, 1998 constitutes an event of
default under the terms of the credit facility agreement. Those covenants
require the Company to maintain a minimum level of net worth and a maximum ratio
of senior debt to net worth, failures of which resulted from losses incurred in
connection with the recording of Medicare and Medicaid audit adjustments (Note
3). At the time that the bank declared its opinion as to an event of default,
the Company had borrowed $39.4 million under the credit facility, including
$29.7 million and $9.7 million under the revolving line of credit and the
acquisition line of credit, respectively. The bank has advised the Company that
while it has no obligation to provide additional advances as a result of the
non-compliance with certain financial covenants, it is willing to consider
making additional advances to the Company under such conditions as it may
determine.
In connection with the bank's notice of default, the maximum aggregate
amount which can be borrowed under the credit facility was reduced from $50
million to $40 million. Additionally, the bank increased the rate of interest on
all borrowings to 2.0% over the prevailing prime lending rate on its revolving
line of credit and 2.75% over the prevailing prime lending rate on its
acquisition line of credit (such prime lending rate being 7.75% as of February
28, 1999). The Company has classified its outstanding borrowings as a current
liability as of February 28, 1999 because the bank has the option to declare all
borrowings under the credit facility to become immediately due and payable. At
February 28, 1999 and 1998, the Company borrowed $35.4 million and $29.4
million, respectively, under the credit facility. A commitment fee on the unused
portion of the credit facility is payable at the rate of .375% per annum,
together with an annual collateral management fee of $85. The Company's working
capital deficiency was $(39.8) million at February 28, 1999. Current liabilities
at February 28, 1999 include $22.7 million for Medicare and Medicaid audit
liabilities, $35.4 of outstanding borrowings under the secured credit facility
and $8.1 million for the current portion of other debt obligations. While the
Company cannot accurately determine the required payment dates for its total
Medicare and Medicaid audit liabilities, it has included $34.6 million thereof
in other long-term liabilities based upon its current estimate of when payments
would likely become due. In order to pay its current liabilities in the normal
course of business as well as to pay its liabilities to the Medicare and
Medicaid agencies as they become due, the Company is investigating alternative
sources of funding.
The above conditions raise substantial doubt about the ability of the
Company to continue as a going concern. As a result, management of the Company
is pursuing various strategies, including but not limited to, negotiating with
alternative lending sources, deferred payment terms for Medicare and Medicaid
audit liabilities as well as for any repayments of Medicare periodic interim
payment(s) ("PIP") and deferred payment terms for other creditors. Further,
management is implementing an intensified collection effort and has obtained a
deferred payment schedule for the repayment of excess PIP payments made to the
Company by the Federal government as well as for audit liabilities assessed to
date. Such payment schedule requires these amounts to be paid in 24 equal
monthly installments beginning in May 1999. As of June 1, 1999 no payments have
been made pursuant to this schedule. As of February 28, 1999, the total amount
of excess PIP amounts received and settled Medicare audit liabilities were
approximately $19.0 million and $6.8 million, respectively. Additionally, Staff
Builders has obtained favorable extended payment terms with some of its trade
creditors and is continuing to negotiate extended payment terms with other
vendors. Further, the spin-off described in Note 1 will be completed only if the
bank or another lender creates separate credit facilities for the home health
care business under TLC and the supplemental staffing business retained by Staff
Builders, and allocates the aggregate pre-spin-off debt between those two
entities. However, there can be no assurance that these actions will be
successful to provide adequate funds for the Company's current level of
operations and to pay the Company's past-due obligations.
F-11
<PAGE> 71
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SEGMENT REPORTING
The Company operates in two reportable business segments, home health care
and supplemental staffing. Reportable segments have been identified based upon
how management has organized the business, the planned spin-off of the home
health care business, and the criteria in SFAS #131, "Disclosures about Segments
of an Enterprise and Related Information." Segment revenue consists of only
sales to outside customers. Segment gross margin consists of segment revenues
reduced by the direct costs of generating such revenues. Segment operating
profit consists of segment gross margin less general and administrative
expenses. General and administrative expenses incurred at the corporate level
have been allocated to segments based on the utilization of such services by
each segment.
The following table sets forth the selected results of operations by
business segment (in millions of dollars):
<TABLE>
<CAPTION>
HOME HEALTH CARE
------------------------
YEAR ENDING FEBRUARY 28,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service revenues........................................... $310.3 $451.1 $436.6
Sales of licensees and fees, net........................... 2.2 1.1 1.0
------ ------ ------
Total revenues................................... 312.5 452.2 437.6
------ ------ ------
Gross margin............................................... 112.5 172.1 169.0
General & administrative expenses.......................... 122.1 161.0 159.2
Interest expense........................................... 2.6 2.8 1.4
Depreciation and amortization expense...................... 4.9 6.1 5.1
Other (income) expense..................................... 50.0 28.4 (2.3)
------ ------ ------
Income (loss) before income taxes.......................... (67.1) (26.2) 5.6
Provision (benefit) for income taxes....................... 6.6 (5.3) 2.5
------ ------ ------
Net income (loss)................................ $(73.7) $(20.9) $ 3.1
====== ====== ======
Total assets..................................... $ 89.3 $122.1 $134.1
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL STAFFING
-------------------------
YEAR ENDING FEBRUARY 28,
-------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Service revenues............................................ $124.9 $74.3 $42.4
Sales of licensees and fees, net............................ 0.2 0.2 0.4
------ ----- -----
Total revenues.................................... 125.1 74.5 42.8
------ ----- -----
Gross margin................................................ 26.0 16.3 9.9
General & administrative expenses........................... 22.6 13.0 8.4
Interest expense............................................ 1.6 0.9 0.2
Depreciation and amortization expense....................... 0.4 0.5 0.3
Other (income) expense...................................... 0.4 3.2 (0.1)
------ ----- -----
Income (loss) before income taxes........................... 1.0 (1.3) 1.1
Provision (benefit) for income taxes........................ 0.4 (0.6) 0.4
------ ----- -----
Net income (loss)................................. $ 0.6 $(0.7) $ 0.7
====== ===== =====
Total assets...................................... $ 57.2 $36.6 $22.1
====== ===== =====
</TABLE>
F-12
<PAGE> 72
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATED
------------------------
YEAR ENDING FEBRUARY 28,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service revenues........................................... $435.2 $525.4 $479.0
Sales of licensees and fees, net........................... 2.4 1.3 1.4
------ ------ ------
Total revenues................................... 437.6 526.7 480.4
------ ------ ------
Gross margin............................................... 138.5 188.4 178.9
General & administrative expenses.......................... 144.7 174.0 167.6
Interest expense........................................... 4.2 3.7 1.6
Depreciation and amortization expense...................... 5.3 6.6 5.4
Other (income) expense..................................... 50.4 31.6 (2.4)
------ ------ ------
Income (loss) before income taxes.......................... (66.1) (27.5) 6.7
Provision (benefit) for income taxes....................... 7.0 (5.9) 2.9
------ ------ ------
Net income (loss)................................ $(73.1) $(21.6) $ 3.8
====== ====== ======
Total assets..................................... $146.5 $158.7 $156.2
====== ====== ======
</TABLE>
6. LICENSEE OPERATIONS
Notes receivable from licensees generally bear interest at the prevailing
prime lending rate plus three percent and are generally payable over a term of
ten years. The balance of these notes receivable at February 28, 1999 and
February 28, 1998 amounted to $726 and $1,734, net of deferred income reflected
as a valuation reserve for financial reporting purposes of $2,482 and $4,387,
respectively. The net balances of these notes at February 28, 1999 and February
28, 1998 include $118 and $306 in Prepaid Expenses and Other Current Assets and
$608 and $1,428 in Other Assets, respectively.
The decrease in the foregoing balances reflect a reduction in the number of
licensees during fiscal 1999. The Company acquired the rights to operate 34 home
health care locations and sold or closed 38 other home health care locations
previously operated by licensees. Licensee notes receivable from acquired
locations had been substantially offset by valuation allowances and therefore no
charge to operations was required as a result of the transactions. Additional
consideration, if any, paid to acquire licensee operations is included in the
acquisitions described in Note 7.
The remaining balance of notes receivable from licensees related to the
home health care and supplemental staffing business segments are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, 1999 FEBRUARY 28, 1998
-------------------------------- --------------------------------
HOME HOME
HEALTH SUPPLEMENTAL HEALTH SUPPLEMENTAL
CARE STAFFING TOTAL CARE STAFFING TOTAL
------- ------------ ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Notes receivable.............. $ 2,845 $ 363 $ 3,208 $ 5,800 $ 321 $ 6,121
Deferred income............... (2,182) (300) (2,482) (4,086) (301) (4,387)
------- ----- ------- ------- ----- -------
Net................. $ 663 $ 63 726 $ 1,714 $ 20 1,734
======= ===== ======= =====
Less current portion.......... (118) (306)
------- -------
Long term notes receivable.... $ 608 $ 1,428
======= =======
</TABLE>
Sales of licensees and fees, net were $2,424, $1,275 and $1,326 for fiscal
1999, 1998 and 1997, respectively. The home health care portion of these amounts
were $2,234, $1,119 and $987, for fiscal 1999, 1998 and 1997, and the
supplemental staffing portion of these amounts were $190, $156 and $339,
respectively.
F-13
<PAGE> 73
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1999, fiscal 1998 and fiscal 1997, $228, $473 and $444,
respectively, of home health care notes receivable previously not recognized as
income were collected and included in revenues. Additionally, the initial
franchise fees received in fiscal 1999, 1998 and 1997 for home health care
franchises were $182, $135 and $488, respectively. Sales of licensees and fees,
net for the fiscal 1999 period includes $1,223 from the sale of five home health
care franchise businesses. Further, license fees generated from the Company's
international franchise program were $601 and $512 in fiscal 1999 and fiscal
1998, respectively. Included in the international fees were initial franchise
fees of $441 and $502 for fiscal 1999 and 1998, respectively, from the Company's
master license agreement with a home health care company based in Tokyo, Japan.
As of March 1998, the Company received the entire balance of the master license
fee totalling $1.2 million and is recording the related income as it is earned
through September 30, 1999. Under its revised agreement which expires in October
2002 with a five-year renewable term, the Company will receive periodic royalty
payments based upon the Japanese company's service revenues. Also included in
the fiscal 1999 international franchise fees is $101 of such periodic royalties.
Although the contract life has changed to expire in October 2002, the $1.2
million franchise fee has not changed. Also included in the fiscal 1999
international franchise fees was $59 pursuant to a master license fee agreement
with a Brazilian company.
The Company has performed substantially all of its obligations as required
under the terms of its franchise agreements. Interest income on franchise notes
receivable is included in other income.
In September 1996, in connection with the acquisition of a supplemental
staffing business, a corporation acquired the rights to operate this business as
a franchise and paid a fee of $75 to the Company. A majority of the stock of
this corporation is owned by two family members of one of the Company's
executive officers.
In April 1992, one of the Company's franchises was acquired by a
corporation owned by a family member of one of the Company's executive officers.
The purchase price for the franchise included the assumption of a note payable
to the Company of $845 of which $645 remains outstanding at February 28, 1999.
The note bears interest at the prevailing prime lending rate and matures in
2009.
7. ACQUISITIONS
During fiscal 1999, 1998 and 1997, the Company made numerous acquisitions
for which consideration was paid in cash, the issuance of notes payable and the
assumption of certain liabilities. The transactions were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
are included in the accompanying consolidated financial statements from their
respective dates of acquisition.
In fiscal 1999, the Company acquired the rights to 18 home health care
locations previously operated by licensees for aggregate consideration of $3.7
million which included cash paid of $2.1 million, liabilities assumed of $800
and the write-off of notes receivable of $800. Additionally, the Company
acquired ten home health care businesses for aggregate consideration of
approximately $800, including cash paid of $600 and liabilities assumed of $200.
In fiscal 1998, the Company acquired the assets of nine businesses,
consisting of seven home health care and two supplemental staffing operations,
which added six locations. The aggregate consideration included cash paid of
approximately $3.7 million and liabilities assumed of approximately $1.3
million.
In fiscal 1997, the Company acquired the assets of 19 businesses,
consisting of 17 home health care and two supplemental staffing operations,
which added 33 locations. The aggregate consideration included net cash paid of
$8.2 million, the issuance of notes payable of $3.1 million and liabilities
assumed of $1.0 million.
The effect of the fiscal 1999 and 1998 acquisitions on revenue, net loss
and net loss per share on an unaudited pro forma basis for fiscal 1999 and 1998
is not material. Revenues, net income and earnings per share, on an unaudited
pro forma basis for the year ended February 28, 1997, if the fiscal 1998 and
fiscal 1997 acquisitions had occurred on March 1, 1996, would have approximated
$500 million, $4.9 million and $.20,
F-14
<PAGE> 74
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Revenues, net income and earnings per share on an unaudited pro
forma basis for the year ended February 29, 1996, if the fiscal 1997 and 1996
acquisitions had occurred on March 1, 1995, would have approximated $448
million, $2.6 million and $.10, respectively.
In connection with the fiscal 1999 and fiscal 1998 acquisitions, assets
acquired and consideration paid was as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Fair value of assets acquired, net.......................... $ 4,498 $ 4,904
Net cash paid for acquired assets and stock................. (2,844) (3,724)
------- -------
Liabilities assumed and notes payable issued for
acquisitions.............................................. $ 1,654 $ 1,180
======= =======
</TABLE>
The fair value of assets acquired is net of the write-off of notes
receivable from ex-licensees of approximately $800.
8. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------
1999 1998
------- -------
<S> <C> <C>
Computer equipment and software (see Note 13)............... $23,897 $11,196
Office equipment, furniture and fixtures.................... 12,177 7,490
Leasehold improvements...................................... 1,303 1,106
Land and buildings.......................................... 106 106
------- -------
Total, at cost.................................... 37,483 19,898
Less accumulated depreciation and amortization.............. 9,496 8,276
------- -------
Fixed assets, net................................. $27,987 $11,622
======= =======
</TABLE>
Computer equipment and software includes $13.7 million for computer
equipment and year 2000 compliant software. Such amount is pursuant to a
six-year lease agreement which requires payments through December 2004 (See Note
13). Additionally, office equipment includes the cost of year 2000 compliant
systems in other areas aggregating $3.2 million. The combined cost of these
systems will be amortized over the life of the software from the dates placed
into service.
During fiscal 1999, the Company wrote off fixed assets relating to closed
locations and obsolete computer equipment which is included in restructuring
costs. During fiscal 1999 and fiscal 1998, the Company wrote off fully
depreciated fixed assets of approximately $1.4 million and $1.7 million,
respectively.
9. INTANGIBLE ASSETS, NET
Intangible assets consist of the following amounts by business segment:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
------- ------------ ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Home health care....... $14,052 $ (8,926) $ 5,126 $27,648 $ (9,064) $18,584
------- -------- ------- ------- -------- -------
Supplemental
staffing............. 24,141 (2,176) 21,965 23,168 (1,457) 21,711
------- -------- ------- ------- -------- -------
Intangible assets...... $38,193 $(11,102) $27,091 $50,816 $(10,521) $40,295
======= ======== ======= ======= ======== =======
</TABLE>
F-15
<PAGE> 75
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above amounts are net of the cumulative write-offs of goodwill and
intangibles which were approximately $39.8 million and $24.5 million at February
28, 1999 and February 28, 1998, respectively.
10. ACCRUED EXPENSES
Accrued expenses include $4,384 and $6,877 at February 28, 1999 and
February 28, 1998, respectively, of accrued distributions payable to licensees.
11. ACCRUED PAYROLL AND PAYROLL RELATED EXPENSES
Accrued payroll and payroll related expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------
1999 1998
------- -------
<S> <C> <C>
Accrued payroll............................................. $ 7,602 $ 9,006
Accrued insurance........................................... 12,503 11,807
Accrued payroll taxes....................................... 4,072 5,882
Other....................................................... 1,573 1,457
------- -------
Total............................................. $25,750 $28,152
======= =======
</TABLE>
12. MEDICARE AND MEDICAID LIABILITIES
Medicare and Medicaid liabilities include amounts payable or estimated to
be payable to Federal or state government agencies as a result of the Company's
participation in Medicare and Medicaid programs. These amounts consist of the
following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Medicare:
Periodic interim payment liability ("PIP")(a)............. $ 18,959 $ 4,595
Completed audits(b)....................................... 10,220 --
Audits in process or net yet conducted(c)................. 17,155 7,330
-------- --------
46,334 11,925
Medicaid:
Completed assessments(d).................................. 4,600 --
Assessments in process or not yet conducted(e)............ 6,347 --
-------- --------
10,947 --
-------- --------
Total............................................. 57,281 --
Less current portion........................................ (22,673) (11,925)
-------- --------
Long term Medicare and Medicaid liabilities....... $ 34,608 $ --
======== ========
</TABLE>
- ---------------
(a) PIP liability represents amounts received from Medicare in excess of
current volume of business which are scheduled to be repaid in 24 equal
monthly installments beginning in May 1999.
(b) The fiscal intermediary has completed audits for which the Company has
received a Notice of Provider Reimbursement.
(c) The fiscal intermediary has not yet commenced an audit or is currently
conducting audits for which no Notice of Provider Reimbursement has been
received.
(d) The Company has obtained payment terms which require repayment equal to
25% of current remittances.
F-16
<PAGE> 76
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) The state Medicaid agencies have not yet commenced an audit or are
currently conducting audits for which no notice of repayment has yet been
received.
The above amounts have been classified as current liabilities unless a
formal or informal agreement has been reached to defer certain payments beyond
February 29, 2000 or, based upon audit timetables, management does not expect
that the audit will be completed and a request for payment received until after
February 29, 2000.
13. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------
1999 1998
------- -------
<S> <C> <C>
Borrowings under a secured revolving line of credit(a)...... $26,681 $17,587
Borrowings under acquisition line of credit(a).............. 8,680 11,836
Obligations under capital leases(b)......................... 20,000 6,606
Notes payable and other liabilities related to
acquisitions(c)........................................... 5,043 5,225
Other note payable(d)....................................... 1,707 3,635
Chelsea notes payable(e).................................... 1,098 2,283
------- -------
Total............................................. 63,209 47,172
Less current portion........................................ 43,460 10,664
------- -------
Long-term debt(f)................................. $19,749 $36,508
======= =======
</TABLE>
- ---------------
As described in Note 4, the bank has advised the Company that in its
opinion the Company is presently in default of its bank agreement.
Accordingly, at February 28, 1999 such bank debt is shown as a current
liability. The following information provides relevant detail about the
specific terms of the outstanding debt.
(a) The Company has a secured credit facility which consists of a revolving
line of credit, an acquisition line of credit and a standby letter of
credit facility, under which the Company can borrow up to an aggregate
amount of $40 million. Amounts borrowed under the revolving line of credit
are collateralized by a pledge of all the stock of the Company's
subsidiaries, by all accounts receivable and by liens on substantially all
other assets of the Company and its subsidiaries. The agreement contains
certain financial covenants which, among other things, (i) require the
maintenance of a specified minimum defined level of book net worth, a
minimum ratio of net income before depreciation and amortization to the
sum of payments made for long term debt, unfunded capital expenditures,
stock repurchases and permitted acquisitions, and a maximum ratio of
senior debt to book net worth, (ii) limit the amount of unfunded capital
expenditures, and (iii) prohibit the declaration or payment of cash
dividends. Based upon the non-recurring charge recorded in the fourth
quarter of fiscal 1998 which primarily consisted of the write-down of
goodwill (See Note 2), the Company obtained an amendment with its bank to
provide some relief from the terms of those covenants which required a
specified level of net worth and net income before depreciation and
amortization.
At February 28, 1999 and 1998, the amounts available for borrowing under
the credit facility were $2.3 million and $18.6 million, respectively. The
maximum amounts borrowed under the credit facility for fiscal 1999 and
1998 were $40.1 million and $37.0 million, respectively. The maximum
amount outstanding under the revolving line of credit portion of the
facility was $30.4 million and $28.1 million in fiscal 1999 and 1998,
respectively.
The Company is permitted to borrow up to 75% of eligible accounts
receivable, up to the maximum amount of the credit facility less amounts
outstanding under the acquisition line of credit and any
F-17
<PAGE> 77
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding letters of credit. No additional borrowings are permitted
under the acquisition line of credit.
Effective March 25, 1999, the bank established a separate and distinct
borrowing base calculation which limited the maximum amount of borrowings
for each of the home health care operations and the supplemental staffing
operations to approximately $16.1 million and $15.5 million, respectively.
Together with the current outstanding balance of $8.4 million under the
acquisition line of credit, the aggregate maximum level of borrowings
permitted remains at $40 million. From February 28, 1999 through May 28,
1999, the average outstanding balance under the secured credit facility
was $38.1 million.
(b) At February 28, 1999, the Company had capital lease agreements for
computers and other equipment through December 2004. The Company's capital
lease obligations includes a six-year lease agreement in the amount of
$13.7 million which requires monthly installments through December 2004.
The net carrying value of the assets under capital leases was
approximately $19.7 million and $7.1 million at February 28, 1999 and
February 28, 1998, respectively, and such amounts are included in Fixed
Assets.
(c) At February 28, 1999, the Company had a balance of notes payable related
to acquisitions of $5.0 million. The notes payable bear annual interest
from zero to 10.50% and have maturity dates through September 2010.
(d) The Company has a secured term loan which bears annual interest at 6.69%
and requires monthly payments of $176 through December 1999.
(e) The Chelsea notes payable consists of two types of debt instruments, one
of which is a secured financing arrangement and two unsecured loans. The
secured financing arrangement provides for borrowings on lines of credit
up to 90% of Chelsea's eligible accounts receivable, not to exceed a
maximum line of credit of $4 million. This financing arrangement bears
interest at the prevailing prime lending rate plus two percent and
includes an annual facility fee of $30. The balance outstanding was $333
at February 28, 1999. Such lines of credit are collateralized by a
security interest in Chelsea's trade accounts receivable.
The unsecured loans consist of certain related party transactions within
Chelsea. In January 1998, Chelsea borrowed $500 from its Chief Executive
Officer. This demand note bears interest at 15% with payments of interest
only beginning February 15, 1998. In November 1997, Chelsea borrowed $500
from its Chief Operating Officer which loan bears annual interest at 10%
and is payable in ten quarterly installments of $57 beginning February 15,
1998. The aggregate balance of these unsecured loans outstanding was $765
at February 28, 1999.
(f) Repayments of long-term debt at February 28, 1999 are due as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL OTHER
YEARS ENDING FEBRUARY LEASES DEBT TOTAL
- --------------------- ----------- ------- -------
<S> <C> <C> <C>
2000........................................... $ 4,686 $38,774 $43,460
2001........................................... 4,689 370 5,059
2002........................................... 3,632 419 4,051
2003........................................... 2,996 386 3,382
2004........................................... 2,506 320 2,826
Thereafter..................................... 1,491 2,940 4,431
------- ------- -------
Total................................ $20,000 $43,209 $63,209
======= ======= =======
</TABLE>
F-18
<PAGE> 78
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------
1999 1998
------ ------
<S> <C> <C>
Accrued litigation(a)....................................... $3,105 $1,168
Accrued acquisition cost(b)................................. -- 700
Rent escalation liability(c)................................ 751 883
Other....................................................... 869 1,249
------ ------
Total............................................. $4,725 $4,000
====== ======
</TABLE>
- ---------------
(a) At February 28, 1999, the Company has recorded a loss accrual for the
aggregate, estimated amount to settle or litigate open legal matters.
(b) In connection with the Company's supplemental staffing division's September
1997 acquisition of a provider of travel nurse services, the Company is
liable to pay additional amounts based upon the attainment of certain gross
margin levels. As of February 28, 1999, the remaining amount payable was
$1,005 which is included in accrued expenses. The Company's estimate of
such amounts at February 28, 1998 was $1,124, of which $424 was included in
accrued expenses.
(c) The lease on the Company's corporate headquarters requires scheduled rent
increases through September 30, 2005. A rent escalation liability is
recorded for the amounts required to record the expense of this lease on a
straight-line basis over the life of the lease, in excess of payments made.
The balance of this liability was $883 and $982 at February 28, 1999 and
1998 of which $132 and $99, respectively, was included in accrued expenses.
15. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal......................................... $(1,733) $ 1,051 $1,709
State........................................... 554 377 558
Deferred.......................................... 8,213 (7,292) 688
------- ------- ------
Total................................... $ 7,034 $(5,864) $2,955
======= ======= ======
</TABLE>
The provision for income taxes in fiscal 1999 consists of a valuation
allowance of $28.9 million offset by potential tax benefits of $20.2 million
resulting from losses incurred in that period. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits resulting from operating losses and other temporary differences are
"more likely than not" to be realized, as required by SFAS 109. The Company has
recorded an income tax receivable of $1.7 million resulting from the carryback
of net operating losses.
F-19
<PAGE> 79
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets (liabilities) at February 28, 1999 and February 28,
1998 are comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------
1999 1998
-------- ------
<S> <C> <C>
Current:
Allowance for doubtful accounts receivable................ $ 2,595 $1,215
Accruals not currently deductible......................... 8,492 1,961
-------- ------
11,087 3,176
Valuation allowance....................................... (11,087) --
-------- ------
Current................................................ 0 3,176
-------- ------
Non-Current:
Goodwill and intangible assets............................ 7,905 5,696
Revenue recognition....................................... 324 409
Accelerated depreciation.................................. (888) (972)
Accruals not currently deductible......................... 8,474 225
Other assets (liabilities)................................ 35 7
Net operating loss carryforward........................... 1,975 --
-------- ------
17,825 5,365
Valuation allowance....................................... (17,825) --
-------- ------
Non-current............................................ 0 5,365
-------- ------
Total............................................. $ 0 $8,541
======== ======
</TABLE>
The non-current deferred tax assets are included in Other Assets on the
accompanying balance sheet at February 28, 1998.
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory rate............................... 34.0% 34.0% 34.0%
State and local income taxes, net of Federal income
tax benefit........................................ 3.4 3.8 7.6
Write-off of goodwill and intangible assets.......... (3.9) (12.3) (0.2)
Tax credits.......................................... -- -- (0.4)
Goodwill amortization................................ (0.3) (1.1) 4.6
Reversal of prior year accrual....................... -- (1.8) (2.3)
Valuation allowance.................................. (43.8) -- --
Other................................................ -- (1.3) 0.7
----- ----- ----
Effective rate............................. (10.6)% 21.3% 44.0%
===== ===== ====
</TABLE>
The Company has a Federal net operating loss carryover of $4,550 which will
expire in 2019.
F-20
<PAGE> 80
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
Approximate minimum annual rental commitments for the remaining terms of
the Company's noncancellable operating leases relating to office space and
equipment rentals are as follows:
<TABLE>
<CAPTION>
HOME HEALTH SUPPLEMENTAL
YEARS ENDING FEBRUARY CARE STAFFING TOTAL
- --------------------- ----------- ------------ -------
<S> <C> <C> <C>
2000............................................... $ 4,532 $388 $ 4,920
2001............................................... 3,365 192 3,557
2002............................................... 2,433 17 2,450
2003............................................... 2,168 4 2,172
2004............................................... 2,023 -- 2,023
Thereafter......................................... 2,918 -- 2,918
------- ---- -------
Total.................................... $17,439 $601 $18,040
======= ==== =======
</TABLE>
Certain leases require additional payments based upon property tax and
maintenance expense escalations.
Aggregate rental expense for fiscal 1999, 1998 and 1997 approximated
$5,899, $4,862 and $3,967, respectively. These rent expense amounts include home
health care of $5,519, $4,598 and $3,789 and supplemental staffing of $380, $264
and $178 for fiscal 1999, 1998 and 1997, respectively.
The Company has entered into employment or consulting agreements with
several officers and other individuals which require minimum aggregate payments
of approximately $3,510, $2,924, $2,031, $1,466 and $1,582 over the next five
fiscal years. Agreements with two executives provide, in the event of their
death, for the continued payment of their compensation to their beneficiaries
for the duration of their agreements. Additionally, certain officers have
entered into agreements which provide that in the event of change in control of,
and the discontinuance of such employee's employment, the Company will pay a
lump sum amount of 2.99 times the average annual compensation paid to the
employee during the five-year period immediately preceding the date of the
discontinuance of employment.
On September 20, 1995, the United States Attorney for the Eastern District
of Pennsylvania alleged that (i) between 1987 and 1989, a corporation,
substantially all assets and liabilities of which were acquired by a subsidiary
of the Company in 1993, submitted false claims to Medicare totaling
approximately $1.5 million and (ii) officers and employees of that corporation
submitted false statements in support of such claims, and made a pre-complaint
civil settlement demand of approximately $4.5 million. The alleged false claims
and false statements were made before the Company acquired that corporation in
1993. There have been significant discussions with the office of the United
States Attorney which the Company believes are likely to lead to an arbitration
within specified parameters.
On June 18, 1998, 6100 Cleveland, Inc., Orsinger Enterprises,Inc., and
First Choice Medical Staffing, Inc., three former home care and staffing
licensees (franchisees) of the Company in Ohio, commenced an action in the
United States District Court for the Northern District of Ohio, Eastern Division
against the Company's subsidiary, Staff Builders International, Inc. The action
sought to recover damages and other relief alleging unpaid royalties, wrongful
termination by the Company of the Franchise Agreement between the Company and
the Plaintiffs, breach of contract and other damages. The Company answered the
complaint and moved for a change of venue. On December 1, 1998, Plaintiffs
without the required permission of the Court, filed a Second Amended Complaint
alleging in addition to the allegations contained in the prior Complaint, claims
under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), claiming
a series of deliberate and illegal actions designed to put certain Staff
Builders franchisees out of business, as well as claims arising under New York
and Ohio loss of business opportunity statutes. The Second Amended Complaint
seeks money damages in excess of $25 million and a claim for treble damages on
the RICO claim. The Second Amended Complaint added as defendants Staff Builders
Services, Inc., and certain executive
F-21
<PAGE> 81
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
officers of the Company. The Company has moved to dismiss the Second Amended
Complaint challenging the legal sufficiency of the RICO claims and other claims
which allege a loss of business opportunities under New York and Ohio laws. A
companion case, 6100 Columbus, Inc. v. Staff Builders International, Inc. was
recently filed alleging breach of contract only. This case will probably be
consolidated with the previous case.
On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc.,
E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care
Services, Inc., former home care licensees (franchisees) of the Company for the
territory comprising certain counties in and around Los Angeles, California and
their holding company, instituted an action against the Company's subsidiaries,
Staff Builders, Inc., Staff Builders International, Inc. and Staff Builders
Services, Inc., and certain executive officers of the Company in the Superior
Court for the State of California, County of Los Angeles. The action was removed
to United States District Court for the Central District of California on
December 22, 1998. Plaintiffs filed a First Amended Complaint in the Central
District on January 8, 1999 to challenge the termination of the four franchise
agreements between the Company and certain of the named plaintiffs, seeking
damages for violations of California franchise law, breach of contract, fraud
and deceit, unfair trade practices, claims under the RICO, negligence,
intentional interference with contractual rights, declaratory and injunctive
relief and a request for an accounting. Plaintiffs seek an unspecified amount of
damages. Discovery is currently in process.
On July 17, 1998, the Federal government ordered that a complaint filed by
Ali Waris, the former owner of a home health care agency purchased by the
Company in 1993, be unsealed and served upon Staff Builders, Inc. and Targa
Group, Inc., a former licensee (franchisee) of the Company. The government has
elected not to intervene in the action, in which Mr. Waris claimed damages for
alleged violations of the False Claims Act by the Company in connection with
payments made by the Company for consulting services. Following a motion to
dismiss, on March 4, 1999, the Court granted Mr. Waris leave to amend the
Complaint, the amended filing for which was served on the Company on March 31,
1999. The Company intends to file a motion to dismiss the Amended Complaint.
On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly, Geri-Care
Home Health, Inc. and Jacquelyn Klooster, two former home health care
franchisees of the Company and their principals in Des Moines and Sioux City,
Iowa, respectively, commenced an action in the United States District Court for
the Southern District of Iowa, Central Division against the Company's
subsidiaries Staff Builders International, Inc., Staff Builders Services, Inc.,
Staff Builders, Inc., and certain executive officers of the Company. The action
alleges claims under the RICO claiming a series of deliberate and illegal
actions designed to defraud Staff Builders' franchisees, as well as claims for
negligence, breach of fiduciary duty, breach of contract, fraudulent
misrepresentation and violation of the Iowa franchise law. The complaint seeks
unspecified money damages, a claim for treble damages on the RICO claims and
punitive and exemplary damages.
The Company is a defendant in several civil actions which are routine and
incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent.
Although the Company cannot estimate the ultimate cost of its open legal
matters with precision, it has recorded a loss accrual at February 28, 1999 and
February 28, 1998 for the aggregate, estimated amount to litigate or resolve
such matters. In the opinion of management, the outcome of pending litigation
will not have a material adverse effect on the Company's consolidated financial
position or results of operations. However, unfavorable resolutions of these
actions could have an adverse impact on liquidity.
17. STOCKHOLDERS' EQUITY
COMMON STOCK -- RECAPITALIZATION AND VOTING RIGHTS
During fiscal 1996, the shareholders approved a plan of recapitalization by
which the existing Common Stock, $.01 par value, was reclassified and converted
into either Class A Common Stock, $.01 par value per share, or Class B Common
Stock, $.01 par value per share. Prior to the recapitalization, shares of common
F-22
<PAGE> 82
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock that were held by the beneficial owner for at least 48 consecutive months
were considered long-term shares, and, were entitled to ten votes for each share
of stock. Pursuant to the recapitalization, long-term shares were converted into
Class B Common Stock and short-term shares (beneficially owned for less than 48
months) were converted into Class A Common Stock. As a result of the
recapitalization, 1,554,936 shares of Class B common stock were issued.
A holder of Class B Common Stock is entitled to ten votes for each share
and each share is convertible into one share of Class A Common Stock (and will
automatically convert into one share of Class A Common Stock upon any transfer
subject to certain limited exceptions). Except as otherwise required by the
Delaware General Corporation Law, all shares of common stock vote as a single
class on all matters submitted to a vote by the stockholders.
The recapitalization included all outstanding options and warrants to
purchase shares of common stock which were converted automatically into options
and warrants, to purchase an equal number of shares of Class A Common Stock.
STOCK OPTIONS
The Company has adopted the disclosure provisions of the Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). Accordingly, no compensation expense has been recognized for the
stock option plans. Had the Company recorded compensation expense for the stock
options based on the fair value at the grant date for awards in fiscal years
ended 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the
Company's net income (loss) and net income (loss) per share would have reflected
the following pro forma amounts:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) -- as reported.................. $(73,086) $(21,632) $3,761
Net income (loss) -- pro forma.................... (73,099) (22,075) 3,708
Basic earnings (loss) per share as reported....... (3.16) (0.90) .16
Basic earnings (loss) per share pro forma......... (3.16) (0.92) .16
Diluted earnings (loss) per share as reported..... (3.16) (0.90) .15
Diluted earnings (loss) per share pro forma....... (3.16) (0.92) .15
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to March 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal years 1999, 1998 and 1997, respectively:
expected volatility of 142%, 56% and 48%; risk-free interest rate averaging
5.5%, 5.8% and 7.1%; and expected lives of 10 years for all.
During the year ended February 28, 1994 ("fiscal 1994"), the Company
adopted a stock option plan (the "1993 Stock Option Plan") under which an
aggregate of one million shares of common stock are reserved for issuance upon
exercise of options thereunder. Options granted under this plan may be incentive
stock options ("ISO's") or non-qualified options ("NQSO's"). This plan replaces
the 1986 NonQualified Plan ("1986 NQSO Plan") and the 1983 Incentive Stock
Option Plan ("1983 ISO Plan") which terminated in 1993 except as to options then
outstanding. Employees, officers, directors and consultants are eligible to
participate in the plan. Options are granted at not less than the fair market
value of the common stock at the date of grant.
A total of 2,227,750 stock options were granted under the 1993 Stock Option
Plan, at prices ranging from $.50 to $3.87, of which 924,750 remain outstanding
at February 28, 1999. Effective December 1, 1998,
F-23
<PAGE> 83
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
914,750 of these options issued to certain employees under the 1993 Stock Option
Plan were rescinded and the same number of new options at an option price of
$.50 reissued to these employees.
During the year ended February 28, 1999 ("fiscal 1999"), the Company
adopted a stock option plan ("the "1998 Stock Option Plan") under which an
aggregate of two million shares of common stock are reserved for issuance upon
exercise of options thereunder. Options granted under this plan may be incentive
stock options ("ISO's") or non-qualified options ("NQSO's"). Employees,
officers, directors and consultants are eligible to participate in the plan.
Stephen Savitsky and David Savitsky are not eligible to receive options under
the plan. Options are granted at not less than fair market value of the common
stock at the date of grant.
A total of 960,583 stock options were granted under the 1998 Stock Option
Plan, at a price of $.50, all of which remain outstanding at February 28, 1999.
Effective December 1, 1998, 117,550 options issued to certain employees under
the 1983 ISO Plan and 31,250 options issued to certain employees under the 1986
NQSO Plan were rescinded and 148,800 options at an option price of $.50 were
issued to these employees under the 1998 Stock Option Plan.
A summary of activity under the 1998 Stock Option Plan, the 1993 Stock
Option Plan, the 1986 NQSO Plan and the 1983 ISO Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS
FOR SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
Options outstanding at February 29, 1996................. 2,503,030 $1.63 to $6.38
Granted.................................................. 222,500 $2.50 to $3.19
Exercised................................................ (39,000) $2.27
Terminated............................................... (213,500) $2.19 to $6.38
----------
Options outstanding at February 28, 1997................. 2,473,030 $1.63 to $6.13
Granted.................................................. 414,000 $2.28 to $2.50
Exercised................................................ (5,000) $2.19
Terminated............................................... (392,750) $2.19 to $4.00
----------
Options outstanding at February 28, 1998................. 2,489,280 $1.63 to $6.13
Granted.................................................. 1,880,333 $ .50 to $2.06
Exercised................................................ (20,000) $1.75
Terminated............................................... (1,474,840) $1.75 to $6.13
----------
Options outstanding at February 28, 1999................. 2,874,773 $ .50 to $3.00
==========
</TABLE>
Included in the outstanding options are 148,169 ISO's and 900,440 NQSO's
which were exercisable at February 28, 1999. The remaining options to purchase
1,826,164 shares become exercisable at various dates through December 2004.
F-24
<PAGE> 84
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize information about stock options outstanding
at February 28, 1999:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE
- ------------------------ ----------- ---------------- --------
<S> <C> <C> <C>
$ .50 to $1.50................................... 1,875,333 7.6 $ .50
$1.51 to $2.50................................... 939,440 3.2 $1.84
$2.51 to $3.00................................... 60,000 3.2 $3.00
--------- --- -----
2,874,773 6.1 $ .99
========= === =====
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE (IN YEARS) PRICE
- ------------------------ ----------- ---------------- --------
<S> <C> <C> <C>
$ .50 to $1.50................................... 49,169 9.8 $ .50
$1.51 to $2.50................................... 939,440 3.2 $1.84
$2.51 to $3.00................................... 60,000 3.2 $3.00
--------- --- -----
1,048,609 3.5 $1.84
========= === =====
</TABLE>
During the year ended February 28, 1995, the Company adopted a stock option
plan (the "1994 Performance-Based Stock Option Plan") which provides for the
issuance of up to 3,400,000 shares of its common stock. Executive officers of
the Company and its wholly-owned subsidiaries are eligible for grants.
Performance-based stock options are granted for periods of up to ten years and
the exercise price is equal to the average of the closing price of the common
stock for the twenty consecutive trading days prior to the date on which the
option is granted. Vesting of performance based options is during the first four
years after the date of grant, and is dependent upon increases in the market
price of the common stock.
Since inception a total of 7,712,563 stock options were granted under the
1994 Performance-Based Stock Option Plan, at option prices ranging from $.53 to
$3.14, of which 3,396,849 remain outstanding at February 28, 1999. Effective
December 1, 1998, 3,150,714 of these options issued to certain employees under
the plan were rescinded and new options at option prices ranging from $.53 to
$.59 were issued to these employees. Of the 3,396,849 options outstanding as of
February 28, 1999, 30,000 options were terminated in March 1999, 25,000 options
are exercisable through September, 2004 and the remaining 3,341,849 options will
become exercisable on, or before, December 1, 2004.
F-25
<PAGE> 85
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity under the 1994 Performance-Based Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
OPTIONS
FOR SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
Options outstanding at February 28, 1996.................. 2,230,000 $3.14
Granted................................................... 0 --
Exercised................................................. 0 --
Terminated................................................ 0 --
----------
Options outstanding at February 28, 1997.................. 2,230,000 $3.14
Granted................................................... 1,100,714 $1.81 to $2.25
Exercised................................................. 0 --
Terminated................................................ (50,000) $3.14
----------
Options outstanding at February 28, 1998.................. 3,280,714 $1.81 to $3.14
Granted................................................... 4,381,849 $ .53 to $2.16
Exercised................................................. 0 --
Terminated................................................ (4,265,714) $1.81 to $3.14
----------
Options outstanding at February 28, 1999.................. 3,396,849 $ .53 to $3.14
==========
</TABLE>
The following tables summarize information about stock options issued under
the 1994 Performance-Based Stock Option Plan outstanding at February 28, 1999:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE
- ------------------------ ----------- ---------------- --------
<S> <C> <C> <C>
$ .53 to $ .59................................... 3,341,849 9.8 $ .58
$ .60 to $2.15................................... 0 -- --
$2.16 to $3.14................................... 55,000 6.5 $2.90
--------- --- -----
3,396,849 9.7 $ .62
========= === =====
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE (IN YEARS) PRICE
- ------------------------ ----------- ---------------- --------
<S> <C> <C> <C>
$ .53 to $ .59................................... 0 -- --
$ .60 to $2.15................................... 0 -- --
$2.16 to $3.14................................... 40,000 5.6 $3.10
--------- --- -----
40,000 5.6 $3.10
========= === =====
</TABLE>
During fiscal 1994, the Company adopted an employee stock purchase plan
(the "1993 Employee Stock Purchase Plan") which provided for the issuance of up
to one million shares of its common stock. The purchase price of the shares is
the lesser of 90 percent of the fair market value at the enrollment date, as
defined, or the exercise date. All one million shares have been issued and the
1993 Employee Stock Purchase Plan has been terminated.
F-26
<PAGE> 86
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1999, the Company adopted an employee stock purchase plan
(the "1998 Employee Stock Purchase Plan") which provides for the issuance of up
to one million shares of its common stock. This plan replaces the 1993 Employee
Stock Purchase Plan. The purchase price of the shares is the lesser of 90
percent of the fair market value at the enrollment date, as defined, or the
exercise date. Since inception of this plan, a total of 96,634 shares were
issued. The 1998 Employee Stock Purchase Plan has been indefinitely suspended
and no further shares will be issued during the suspension.
PREFERRED STOCK, CLASS A
During fiscal 1999, the holders of all issued and outstanding shares of
Class A Preferred Stock (the "Preferred Stock") exchanged their Preferred Stock
for 4,269,820 shares of Class A Common Stock. There are currently no outstanding
shares of Preferred Stock.
COMMON SHARES RESERVED
The following represents common shares reserved and available for issuance,
at February 28, 1999, for options granted and outstanding warrants and employee
stock purchases:
<TABLE>
<CAPTION>
AVAILABLE
FOR
RESERVED ISSUANCE
--------- ---------
<S> <C> <C>
1994 Performance-Based Stock Option Plan.................... 3,396,849 3,151
1998, 1993, 1986 and 1983 Stock Option Plans................ 2,874,773 1,039,417
1998 Employee Stock Purchase Plan........................... -- 903,366
Other....................................................... 12,894 --
--------- ---------
Total............................................. 6,284,516 1,945,934
========= =========
</TABLE>
PURCHASE AND RETIREMENT OF COMMON STOCK
From March 6, 1998 through October 16, 1998, the Company purchased and
retired a total of 5,088,060 shares of its common stock at a cost of $4.8
million. No repurchases have been made since October 16, 1998 and no repurchases
were made in fiscal 1998. During fiscal 1997, the Company purchased and retired
a total of 155,000 shares of its common stock at a cost of $410.
F-27
<PAGE> 87
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of the basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net income (loss)............................... $(73,086) $(21,632) $ 3,761
======== ======== =======
Denominator:
Share reconciliation:
Shares used for basic earnings (loss) per
share........................................ 23,162 23,939 23,668
Effect of dilutive items:
Stock options................................ -- -- 864
Other........................................ -- -- 45
-------- -------- -------
Shares used for dilutive earnings (loss) per
share........................................ 23,162 23,939 24,577
======== ======== =======
Earnings (loss) per share:
Basic........................................... $ (3.16) $ (0.90) $ 0.16
======== ======== =======
Diluted......................................... $ (3.16) $ (0.90) $ 0.15
======== ======== =======
</TABLE>
The number of antidilutive shares for the years ended February 28, 1999,
1998 and 1997 were 6,046, 5,812 and 2,702, respectively.
19. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for fiscal 1999 and 1998 are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues................................... $111,281 $111,670 $107,883 $106,754
Gross profit............................... $ 34,897 $ 37,484 $ 35,301 $ 30,849
Net income (loss).......................... $ (99) $ 135 $(45,370) $(27,752)
Income (loss) per common share:
Basic.................................... $ 0.00 $ .01 $ (1.99) $ (1.18)
Diluted.................................. $ 0.00 $ .01 $ (1.99) $ (1.18)
Weighted average number of common shares:
Basic.................................... 23,647 22,526 22,846 23,577
Diluted.................................. 23,647 22,563 22,846 23,577
</TABLE>
F-28
<PAGE> 88
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1998
Revenues................................... $130,501 $131,617 $133,075 $131,480
Gross profit............................... $ 46,525 $ 47,548 $ 47,494 $ 46,881
Net income................................. $ 849 $ 989 $ 975 $(24,445)
Income per common share:
Basic.................................... $ .04 $ .04 $ .04 $ (1.02)
Diluted.................................. $ .04 $ .04 $ .04 $ (1.02)
Weighted average number of common shares:
Basic.................................... 23,842 23,910 23,970 24,035
Diluted.................................. 24,080 24,246 24,388 24,035
</TABLE>
During the third quarter of fiscal 1999, the Company recorded pre-tax
charges including $29.0 million for Medicare and Medicaid audit adjustments and
$4.5 million for restructuring costs. During the fourth quarter of fiscal 1999,
the Company wrote-off goodwill and intangible assets aggregating $15.3 million
and recorded other restructuring costs of $0.7 million. During the fourth
quarter of fiscal 1998, the Company recorded a pre-tax non-recurring charge of
$33.4 million.
F-29
<PAGE> 89
SCHEDULE II
STAFF BUILDERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period............................ $ 3,660 $ 2,800 $ 2,200
Charged to costs and expenses........................... 9,109 4,800 2,740
Addition from consolidation of majority-owned
business............................................. -- 60 --
Deductions.............................................. (5,769) (4,000) (2,140)
------- ------- -------
Balance, end of period.................................. $ 7,000 $ 3,660 $ 2,800
======= ======= =======
ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS:
Balance, beginning of period............................ $10,521 $ 9,126 $ 7,282
Charged to costs and expenses........................... 581 2,601 2,503
Write-off of fully amortized assets..................... -- (1,206) (659)
------- ------- -------
Balance, end of period.................................. $11,102 $10,521 $ 9,126
======= ======= =======
DEFERRED INCOME (NETTED AGAINST FRANCHISE NOTES
RECEIVABLE):
Balance, beginning of period............................ $ 4,387 $ 5,600 $ 5,735
Charged to notes receivable............................. 428 89 341
Deductions.............................................. (2,333) (1,302) (476)
------- ------- -------
Balance, end of period.................................. $ 2,482 $ 4,387 $ 5,600
======= ======= =======
</TABLE>
F-30
<PAGE> 90
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of February
28, 1999 and unaudited pro forma consolidated statement of operations of the
Company for the fiscal year ended February 28, 1999 (collectively, the "Pro
Forma Statements") are based on the historical Consolidated Financial Statements
of Staff Builders included elsewhere in this Information Statement as adjusted
to give effect to the Distribution. Since after the Distribution TLC will own a
majority of the operations, employees and assets of the historical businesses of
Staff Builders, the Distribution will be treated as a "reverse spin off" for
financial reporting purposes under GAAP. See assumptions and adjustments in the
accompanying Notes to the Pro Forma Statements. The pro forma consolidated
balance sheet gives effect to the Distribution as if it occurred on February 28,
1999 and the pro forma consolidated statement of operations gives effect to the
Distribution as if it occurred on the first day of the period.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The Pro Forma Statements
do not purport to represent what the Company's financial position and result of
operations would actually have been had the Distribution occurred on such dates
or to project the Company's financial position or results of operations for any
future period.
F-31
<PAGE> 91
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
STAFF BUILDERS TLC PRO FORMA
HISTORICAL CONSOLIDATED
FEBRUARY 28, TLC PRO FORMA FEBRUARY 28,
1999 ADJUSTMENTS(A) 1999
-------------- -------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 2,007 $ (684)(B) $ 1,323
Accounts receivable, net......................... 79,662 (31,778)(B) 47,884
Income tax refund receivable..................... 1,733 1,733
Prepaid expenses and other current assets........ 3,554 (1,668)(B) 1,886
--------- -------- ---------
Total current assets..................... 86,956 (34,130) 52,826
FIXED ASSETS, net.................................. 27,987 (744)(B) 27,243
INTANGIBLE ASSETS, net............................. 27,091 (21,965)(B) 5,126
OTHER ASSETS....................................... 4,471 (342)(B) 4,129
--------- -------- ---------
TOTAL ASSETS....................................... $ 146,505 $(57,181) $ 89,324
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 20,379 $ (2,734)(B) $ 17,645
Accrued expenses................................. 14,520 (3,734)(B) 10,786
Accrued payroll and payroll related expenses..... 25,750 (3,525)(B) 22,225
Current portion of Medicare and Medicaid
liabilities................................... 22,673 0 22,673
Current portion of long-term debt................ 43,460 (24,306)(B) 19,154
--------- -------- ---------
Total current liabilities................ 126,782 (34,299) 92,483
LONG-TERM DEBT..................................... 19,749 (56)(B) 19,693
LONG-TERM MEDICARE AND MEDICAID LIABILITIES........ 34,608 34,608
OTHER LIABILITIES.................................. 4,725 4,725
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock............................. 236 (118) 118
Class B common stock............................. -- -- --
Additional paid-in capital....................... 69,055 (21,701)(E) 47,354
Accumulated deficit.............................. (108,650) (1,007)(B) (109,657)
--------- -------- ---------
Total stockholders' equity
(deficiency)........................... (39,359) (22,826) (62,185)
--------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 146,505 $(57,181) $ 89,324
========= ======== =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
F-32
<PAGE> 92
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
STAFF BUILDERS TLC PRO FORMA
HISTORICAL CONSOLIDATED
FEBRUARY 28, TLC PRO FORMA FEBRUARY 28,
1999 ADJUSTMENTS(A) 1999
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES
Home health care................................. $310,297 $ -- $310,297
Supplemental staffing............................ 124,867 (124,867)(B) 0
-------- --------- --------
Total service revenues........................... 435,164 (124,867) 310,297
-------- --------- --------
Sales of licensees and fees, net................. 2,424 (190)(B) 2,234
-------- --------- --------
Total revenues........................... 437,588 (125,057) 312,531
-------- --------- --------
COSTS AND EXPENSES:
Operating costs.................................. 299,057 (99,048)(B) 200,009
General and administrative expenses.............. 148,642 (22,610)(B) 126,032
Amortization of intangible assets................ 1,314 (696)(B) 618
Interest expense................................. 4,233 (2,787)(B) 1,446
Interest (income)................................ (1,061) 75(B) (986)
Other (income) expense, net...................... 1,991 (18)(B) 1,973
Medicare and Medicaid audit adjustments.......... 29,000 29,000
Restructuring costs.............................. 20,464 (130)(B) 20,334
-------- --------- --------
Total costs and expenses................. 503,640 (125,214) 378,426
-------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. (66,052) 157 (65,895)
PROVISION (BENEFIT) FOR INCOME TAXES............... 7,034 (509)(C) 6,525
-------- --------- --------
NET INCOME (LOSS).................................. $(73,086) $ 666 $(72,420)
======== ========= ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic............................................ $ (3.16) $ -- $ (6.25)
======== ========= ========
Diluted.......................................... $ (3.16) $ -- $ (6.25)
======== ========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic............................................ 23,162 (11,581)(D) 11,581
======== ========= ========
Diluted.......................................... 23,162 (11,581)(D) 11,581
======== ========= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
F-33
<PAGE> 93
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
(A) The following pro forma adjustments reflect the Distribution. Since
after the Distribution TLC will own a majority of the operations, employees and
assets of the historical businesses of Staff Builders, the Distribution will be
treated as a "reverse spin-off" for financial reporting purposes under GAAP.
(B) Pro forma adjustments to remove assets, liabilities, revenues and
expenses not part of the home health operations of Staff Builders. Bank
borrowings and related interest expense have been accounted for in the pro forma
financial data based on the historical allocation of such borrowings by Staff
Builders to its home health care and supplemental staffing businesses.
(C) Pro forma adjustments to give effect to the computation of income taxes
as if separate income tax returns were filed.
(D) Pro forma adjustment to reflect the average outstanding shares of Staff
Builders adjusted for the one share of TLC which will be issued for each
previously outstanding two shares of Staff Builders.
(E) Pro forma adjustment to reflect the capitalization of TLC.
F-34
<PAGE> 94
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. 1 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
TENDER LOVING CARE HEALTH CARE
SERVICES, INC
By: /s/ STEPHEN SAVITSKY
----------------------------------
Stephen Savitsky
Chairman of the Board
and Chief Executive Officer
Dated: June 18, 1999
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Form of Amended and Restated Certificate of Incorporation
of the Company.+
3.2 -- Form of Amended and Restated By-laws of the Company.+
4.1 -- Specimen Common Stock Certificate.*
10.1 -- Form of Distribution Agreement between Staff Builders and
TLC.+
10.2 -- Form of Tax Allocation Agreement between Staff Builders
and TLC.+
10.3 -- Form of Transitional Services Agreement between Staff
Builders and TLC.+
10.4 -- Form of Trademark License Agreement between Staff
Builders and Staff Builders International, Inc.
10.5 -- Form of Sublease between Staff Builders and TLC.
10.6 -- Form of Employee Benefits Agreement between Staff
Builders and TLC.
10.7 -- Form of Employment Agreement between the Company and
Stephen Savitsky.+
10.8 -- Form of Employment Agreement between the Company and
David Savitsky.+
10.9 -- Form of Employment Agreement between the Company and Dale
R. Clift.
10.10 -- Form of Employment Agreement between Staff Builders, Inc.
(NY) and Sandra Parshall.+
10.11 -- Form of Employment Agreement between the Company and
Willard T. Derr.
10.12 -- Form of Employment Agreement between the Company and
Renee J. Silver.+
10.13 -- Form of Indemnification Agreement between the Company and
Stephen Savitsky.+
10.14 -- Form of Indemnification Agreement between the Company and
David Savitsky.+
10.15 -- Form of Indemnification Agreement between the Company and
Bernard J. Firestone.+
10.16 -- Form of Indemnification Agreement between the Company and
Jonathan Halpert.+
10.17 -- Form of Indemnification Agreement between the Company and
Dale R. Clift.+
10.18 -- Form of Indemnification Agreement between the Company and
Willard T. Derr.+
10.19 -- Form of Indemnification Agreement between the Company and
Renee J. Silver.+
10.20 -- 1999 Stock Option Plan.+
10.21 -- Form of Stock Option Agreement.+
10.22 -- Form of Home Health Care Services Franchise Agreement.(A)
10.23 -- Executive Deferred Compensation Plan, effective as of
March 1, 1994.+
10.24 -- Form of Split-Dollar Life Insurance Agreement.+
10.25 -- Master Lease Agreement, dated as of December 4, 1996,
between the Company and Chase Equipment Leasing, Inc.(B)
10.26 -- Premium Finance Agreement, Disclosure Statement and
Security Agreement, dated as of December 26, 1996,
between the Company and A.I. Credit Corp.(B)
10.27 -- Agreement of Lease, dated as of October 1, 1993, between
Triad III Associates and Staff Builders, Inc. (NY).(C)
10.28 -- Supplemental Agreement, dated as of January 21, 1994,
between General Electric Capital Corporation, Triad III
Associates and Staff Builders, Inc. (NY)(C)
10.29 -- First Lease Amendment, dated October 28, 1998, between
Matterhorn USA, Inc. and Staff Builders, Inc. (NY)+
10.30 -- License Agreement, dated as of April 23, 1996, between
Matterhorn One, Ltd. and Staff Builders, Inc. (NY).(B)
10.31 -- License Agreement, dated as of December 16, 1998, between
Matterhorn USA, Inc. and Staff Builders, Inc. (NY).+
10.32 -- Lease Agreement, dated as of November 4, 1996, between
Airport Landing Center, L.L.C. and Staff Builders Home
Health Care, Inc.(B)
10.33 -- Asset Purchase Agreement dated as of June 22, 1993,
between Albert Gallatin Home Care, Inc and Albert
Gallatin Visiting Nurse Association, Inc.(D)
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.34 -- Stock Purchase Agreement, dated as of August 30, 1995,
between Staff Builders Services, Inc., MedVisit, Inc. and
Roger Jack Pleasant.(E)
10.35 -- Asset Purchase and Sale Agreement, dated as of September
1, 1995, between Staff Builders Services, Inc. and
Accredicare, Inc.(E)
10.36 -- Stock Redemption Agreement, dated as of March 18, 1997,
between the Company and American HomeCare Management
Corp.(B)
10.37 -- Agreement and Release, dated December 24, 1998, between
Cynthia Nye and Staff Builders, Inc. (NY).+
10.38 -- Agreement and Release, dated February 28, 1997, between
Larry Campbell and Staff Builders, Inc. (NY).(B)
21 -- Subsidiaries of the Company.+
27 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
* To be filed by amendment.
NOTES TO EXHIBITS
(A) Incorporated by reference to Staff Builders, Inc.'s Registration
Statement on Form S-1 (File No. 33-43728), dated January 29, 1992.
(B) Incorporated by reference to Staff Builders, Inc.'s exhibit booklet to
its Form 10-K for the fiscal year ended February 28, 1997 (File No.
0-11380), filed with the Commission on May 27, 1997.
(C) Incorporated by reference to Staff Builders, Inc.'s exhibit booklet to
its Form 10-K for the fiscal year ended February 28, 1995 (File No.
0-11380), filed with the Commission on May 5, 1995.
(D) Incorporated by reference to Staff Builders, Inc.'s exhibit booklet to
its Form 10-K for the fiscal year ended February 28, 1999 (File No.
0-11380), filed with the Commission on June 11, 1999.
(E) Incorporated by reference to Staff Builders, Inc.'s exhibit booklet to
its Form 10-K for the fiscal year ended February 28, 1996 (File No.
0-11380), filed with the Commission on May 13, 1996.
<PAGE> 1
EXHIBIT 10.4
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement (the "AGREEMENT") made and entered
into this [__] day of [_______], 199[_], by and between STAFF BUILDERS, INC., a
Delaware corporation ("LICENSOR"), and TENDER LOVING CARE HEALTH CARE SERVICES,
INC., a Delaware corporation ("LICENSEE").
W I T N E S S E T H:
WHEREAS, Licensee is the assignor of certain rights in the service
marks set forth on Schedule 1 hereto (collectively the "MARKS"); and
WHEREAS, Licensor is the assignee of the rights of Assignor in said
Marks by way of an Assignment executed contemporaneously herewith; and
WHEREAS, pursuant to the terms of the Distribution Agreement, by and
between Licensor and Licensee, dated [ ], 1999 (the "DISTRIBUTION AGREEMENT"),
Licensor will grant an exclusive license to Licensee to use the Marks in
connection with Licensee's home health care business (the "HOME HEALTH CARE
BUSINESS"), subject to the terms and conditions below.
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth herein and in the Distribution Agreement, and other good and
valuable consideration, receipt of which the parties acknowledge, the parties
agree as follows:
1. License Grant. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee an exclusive, royalty-free,
license to use the Marks worldwide solely in connection with Licensee's services
offered as part of its Home Health Care Business, including related advertising
and promotion. All rights, licenses and privileges not specifically granted
herein are excluded from this Agreement and reserved by Licensor. Licensor
hereby represents and warrants to Licensee that, except as set forth on Schedule
2 attached hereto, Licensor owns the Marks free and clear of any and all liens,
licenses or other encumbrances.
2. Sublicense. Licensee may sublicense its rights hereunder to
any of its subsidiaries in existence on the date hereof and, with the prior
written consent of Licensor, to any subsidiaries hereafter established or
acquired. No such sublicense shall relieve Licensee from any of its obligations
hereunder.
<PAGE> 2
3. Costs. Subject to Section 10 hereof, all registration and
maintenance costs of the Marks, insofar as such costs relate to the Home Health
Care Business, shall be born by Licensee.
4. Quality Standards.
(a) Licensee shall take such action as is reasonably necessary
to maintain the high-quality, value and integrity of the Marks and to refrain
from taking any action likely to diminish or detract from any Mark's value.
Licensee shall insure that its use of the Marks does not tarnish or bring into
dispute the Marks.
(b) Without limiting the foregoing, Licensee represents,
warrants, and agrees that it will, at all times, operate its business and sell,
offer, advertise, distribute or otherwise exploit the Marks in compliance with
all laws, rules and regulations, including without limitation any decision,
order or administrative action or guidance of any governmental or regulatory
authority.
5. Display. Licensee shall be free to display the Marks in
such forms or manners as Licensee may choose, provided that any such use shall
be of a kind and quality which does not materially detract from the value of the
Marks. Licensee shall cause to appear on all written materials on or in
connection with which the Marks are used, such legends, markings and notices as
Licensor may reasonable prescribe in order to give appropriate notices of any
trademark usage, registration or ownership rights.
6. Ownership. As between the parties, Licensor, or its
successors or assigns, shall own all right, title and interest, including the
goodwill related thereto, in and to the Marks. Licensee shall not acquire any
ownership interest in the Marks whatsoever and Licensee's use of the Marks shall
inure to Licensor's benefit. Licensee shall fully cooperate with Licensor in
connection with any matters pertaining to the protection or enforcement of
Licensor's rights in the Marks, including, without limitation, providing access
to and copies of any records, files or other information pertaining to the
exploitation of the Marks. Licensee shall promptly execute any documents
reasonably requested by Licensor to confirm or establish Licensor's ownership of
all rights in the Marks, failing which Licensor is hereby appointed as
Licensee's attorney-in-fact to execute such documents. Licensee agrees that it
shall not, register or attempt to register the Marks (or a logo, mark or other
design confusingly similar to the Marks) without the prior written consent of
Licensor. Licensee further agrees that it shall not contest or assist any other
party in contesting the validity of Licensor's ownership of the Marks anywhere
in the world.
7. Infringement Proceedings.
(a) Licensee shall promptly notify Licensor of any
infringement, imitation or unauthorized use of the Marks or any mark
substantially similar to a mark in connection with a
2
<PAGE> 3
business substantially similar to the Home Health Care Business which comes to
its attention. Licensor shall take such action as it deems advisable, and
Licensee shall fully cooperate with Licensor.
(b) If Licensor does not take such action to stop an
infringement, imitation or unauthorized use within 30 days of receipt of a
Licensee's initial notice regarding the same, then Licensee may take such
action, in which case Licensor shall cooperate with Licensee, but all expenses
shall be born by Licensee. In the event Licensee takes any action, Licensor
shall have the right to take control of such action upon notice to Licensee.
(c) The party prosecuting the action shall be entitled to the
proceeds from any settlement or damages award. If both parties prosecute such
action, then such settlement or award shall be shared equally, after first
deducting both parties' legal expenses.
8. Term and Termination.
(a) This Agreement shall automatically terminate in the event
Licensee ceases using the Marks in connection with the Home Health Care Business
for longer than one year. Without limiting the foregoing, this Agreement shall
be terminated as follows:
(i) upon 30 days' prior written notice to Licensee, if
Licensee commits a material breach of this Agreement which is not cured to the
reasonable satisfaction of Licensor within the 30-day period following delivery
of the notice. The notice must describe in reasonable detail the alleged breach;
or
(ii) upon 30 days' prior written notice to Licensor, if
Licensor commits a material breach of this Agreement which such breach is not
cured to the reasonable satisfaction of Licensee within the 30-day period
following delivery of the notice. The notice must describe in reasonable detail
the alleged breach.
(b) Upon termination of this Agreement, Licensee agrees to
cease any and all use of the Marks, and all rights granted to Licensee shall
revert to Licensor. Licensee shall cease exploiting, including without
limitation, printing, manufacturing, distributing or selling, any materials
bearing the Marks. Upon Licensor's request, Licensee shall destroy or efface any
materials bearing the Marks which are in the possession of Licensee. Licensee
shall provide Licensor with a certificate signed by an officer of Licensee
attesting to such destruction or effacement.
3
<PAGE> 4
9. Remedies. Licensee acknowledges that a breach of any of its
covenants, agreements or undertakings hereunder or its failure to cease all use
of the Marks upon the termination or expiration of this Agreement will cause
immediate and irreparable damage to Licensor and the rights of any subsequent
licensee of Licensor. Licensee acknowledges that no adequate remedy at law
exists for failure to cease such activities and Licensee agrees that in the
event of such failure, Licensor shall be entitled to injunctive relief and such
other relief as any court with jurisdiction may deem just and proper.
10. Indemnification.
(a) Licensee agrees to indemnify, hold harmless and defend
Licensor, its affiliates and its and their officers, directors and employees
from and against all suits, actions, claims, damages, liabilities, costs and
expenses (including but not limited to claims of infringement of any
intellectual property right, and including without limitation, settlement costs
and legal and accounting and other expenses incurred in connection therewith),
or other damages of any kind or nature arising out of or connected with (i) the
use of the Marks by Licensee or its sublicensees, (ii) the use of goods or
services bearing the Marks, including any advertising, promotion or distribution
of such goods or services, or (iii) any breach by Licensee of any covenant,
representation, warranty or other provision of this Agreement.
(b) Licensor agrees to indemnify, hold harmless and defend
Licensee, its affiliates and its and their officers, directors and employees
from and against all suits, actions, claims, damages, liabilities, costs and
expenses (including, without limitation, settlement costs and legal and
accounting and other expenses incurred in connection therewith), or other
damages of any kind or nature arising out of or connected with any breach by
Licensor of any covenant, representation, warranty or other provision of this
Agreement.
(c) If any party entitled to indemnification hereunder (an
"INDEMNITEE") shall receive notice or otherwise learn of the assertion of any
claim or of the commencement of any action (collectively, a "THIRD PARTY CLAIM")
with respect to which any party (an "INDEMNIFYING PARTY") may be obligated to
provide indemnification to such Indemnitee pursuant to Section 10(a) or 10(b),
the Indemnitee shall give such Indemnifying Party written notice thereof within
twenty (20) days after becoming aware of such Third Party Claim. Any such notice
shall describe the Third Party Claim in reasonable detail. Notwithstanding the
foregoing, the failure of any Indemnitee to give notice as provided in this
Section 10(c) shall not relieve the Indemnifying Party of its obligations under
this Section 10, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice.
(d) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an Indemnitee in accordance with Section 10(c)
(or sooner, if the nature of such Third Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether or not to
defend such Third Party Claim, which election shall specify any reservations or
exceptions. After notice from
4
<PAGE> 5
an Indemnifying Party to an Indemnitee of its election to assume the defense of
a Third Party Claim, such Indemnitee shall have the right to employ separate
counsel and to participate in (but not control) the defense, compromise, or
settlement thereof, but the fees and expenses of such counsel shall be the
expense of such Indemnitee except as set forth in Section 10(e).
(e) If an Indemnifying Party elects not to assume
responsibility for defending a Third Party Claim, or fails to notify an
Indemnitee of its election as provided in Section 10(d), such Indemnitee may
defend such Third Party Claim at the cost and expense (including allocated costs
of in-house counsel and other personnel) of the Indemnifying Party.
(f) An Indemnitee may not settle or compromise any Third Party
Claim without the consent of the Indemnifying Party (not to be unreasonably
withheld if the settlement or compromise relates to money damages only). Without
limiting the forgoing, an Indemnifying Party shall not consent to entry of any
judgment or enter into any settlement of the Third Party Claim without the
consent of the Indemnitee if the effect thereof is to permit any injunction,
declaratory judgment, other order or other nonmonetary relief to be entered,
directly or indirectly, against any Indemnitee.
(g) This Section 10 shall survive any termination of this
Agreement.
11. Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and permitted assigns.
Except as provided in Section 2 hereof, Licensee may not assign, transfer or
delegate any of its rights or obligations under this Agreement without the prior
written approval of Licensor. Any assignment, transfer or delegation, including
as a result of a change in control, stock transfer or merger, that occurs
without Licensor's prior written consent shall be void ab initio and deemed a
material breach of this Agreement.
12. Notices. Notices between the parties must be in writing. A
notice shall be deemed duly given upon receipt if it is sent by personal
delivery, prepaid certified or registered mail, by a nationally known overnight
courier service (e.g., Federal Express), or by facsimile with receipt confirmed
by written return facsimile to the parties at the following addresses (or at
such other address as shall be specified by like notice):
If to Licensor:
STAFF BUILDERS, INC.
1983 Marcus Avenue
Lake Success, NY 11042
Attention: David Savitsky, President
If to Licensee:
Tender Loving Care Health Care Services, Inc.
1983 Marcus Avenue
5
<PAGE> 6
Lake Success, NY 11042
Attention: Dole R. Clift, President
13. Waiver. The failure of either party to insist upon strict
compliance with any provision hereof shall not constitute a waiver or
modification of such provision or any other provision.
14. Severability. If any provision, in part or in whole, of
this Agreement is held to be void or unenforceable by a court of competent
jurisdiction, the remaining provisions and the remaining portion of any
provision held void or unenforceable in part will continue in full force and
effect.
15. Governing Law. This Agreement is governed by New York law.
United States state or Federal courts situated in New York, New York shall have
sole jurisdiction and venue for the resolution of all disputes arising hereunder
and the parties hereto irrevocably submit to such jurisdiction and venue. Each
party irrevocably waives any objection it may have to the venue or any action,
suit or proceeding brought in such courts or to the convenience of the forum or
the right to proceed in any other jurisdiction.
16. Entire Agreement. This Agreement constitutes the entire
agreement, and supersede all prior agreements (oral or written), between the
parties with respect to the use of the Marks by Licensee. This Agreement may
only be amended or modified by a writing signed by the party against whom
enforcement of the amendment or modification is sought.
17. Counterparts. This Agreement may be executed in
counterparts, all of which, taken together shall constitute one agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
STAFF BUILDERS, INC.
By:
-----------------------------------
Name:
Title:
TENDER LOVING CARE HEALTH CARE
SERVICES, INC.
By:
-----------------------------------
Name:
Title:
.
<PAGE> 8
SCHEDULE 1
REGISTERED TRADEMARKS
TRADEMARKS
<TABLE>
<CAPTION>
REGISTRATION DATE OF EXPIRATION
TRADEMARK OWNERSHIP NUMBER REGISTRATION DATE
- --------- --------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Staff Builders Staff Builders, Inc. #1,524,789 02/14/89 02/14/09
Outline of Human Figures Staff Builders, Inc. #849,595 08/16/88 08/16/08
</TABLE>
S-1-1
<PAGE> 9
SCHEDULE 2
LIENS
Pursuant to the terms of Licensor's current credit facility with Mellon
Bank, the bank holds a lien all assets of Licensor, including all rights and
interests in the Marks.
S-3-1
<PAGE> 1
EXHIBIT 10.5
SUBLEASE
This Sublease made the __th day of June, 1999, between Staff Builders,
Inc., a New York Corporation, hereinafter referred to as Sublandlord, and ATC
Healthcare Services, Inc., a Georgia Corporation, hereinafter referred to as
Subtenant.
WITNESSETH, that the Sublandlord leases to the Subtenant and the Subtenant
hereby takes from the Sublandlord, the following premises to wit:
1983 Marcus Avenue
Lake Success, NY 11042
Space located on the second floor consisting of 2,030 square feet
To be used in accordance with the terms of this Sublease and for no other
purpose for a term to commence on the 1st day of ___ 1999, and to continue on a
month to month basis thereafter at the rent as hereinafter provided, payable in
equal monthly installments in advance on the 1st day of each and every calendar
month during said term.
The said premises are a portion of same premises referred to in the Master
Lease dated October 1, 1993, as amended on October 28, 1998 (the "Master Lease")
between Matterhorn USA, Inc., as the Landlord and Staff Builders, Inc., a New
York corporation, as the Tenant. The terms, covenants, provisions and conditions
of said Master Lease are hereby incorporated herein and shall be binding upon
all parties with the exception of Section 6 of the Master Lease pertaining to
the payment of rent and additional rent. The Sublandlord represents that the
Master Lease is in full force and effect as of this date. The Subtenant
represents that the Subtenant has been provided a copy of the Master Lease and
agrees to its terms.
The total monthly rent payable hereunder shall be $4,016.67. Rent will be
due and payable on the first day of the month at the address of the SubLandlord
at the location indicated below.
All notices, demands, requests, consents and approvals shall be in writing
and sent by United States certified or registered mail, or via hand delivery,
to the following address:
If to Sublandlord: Staff Builders, Inc.
1983 Marcus Avenue CB7011
Lake Success, NY 11042-7701
If to Subtenant: ATC Healthcare Services, Inc.
2675 Paces Ferry Road, Suite 400
Atlanta, GA 30339
<PAGE> 2
If to Landlord: Matterhorn USA, Inc.
c/o BDG Management, Inc.
6800 Jericho Turnpike
Syosset, NY 11791
Except as specifically modified hereby, Subtenant shall have and enjoy all of
the rights of "Tenant" under the Master Lease.
IN WITNESS WHEREOF, the parties have executed this Sublease Agreement as of the
date first above written.
SUBLANDLORD:
Staff Builders, Inc., a New York Corporation
By:
------------------------------
Name:
Title:
SUBTENANT:
ATC Healthcare Services, Inc., a Georgia Corporation
By:
------------------------------
Name:
Title:
Landlord hereby consents to the terms of this Sublease.
AGREED AND ACCEPTED:
MATTERHORN USA, INC.
By:
------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.6
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT is made on [ ], 1999 (the "Effective
Date") between STAFF BUILDERS, INC., a Delaware corporation ("Staff Builders"),
and TENDER LOVING CARE HEALTH CARE SERVICES, INC., a Delaware corporation
("TLC").
RECITALS
WHEREAS, the Board of Directors of Staff Builders has determined that
it is in the best interest of Staff Builders and its shareholders to separate
its home health care business from the remainder of its business;
WHEREAS, to effect the separation of its home health care business,
Staff Builders intends as of a date certain (the "Distribution Date") to
distribute to its shareholders, in a pro-rata distribution of a dividend (the
"Distribution") all shares of TLC common stock held by Staff Builders;
WHEREAS, certain employees of the "controlled group" (as defined in
Section 414 of the Internal Revenue Code of 1986, as amended, the "Code") of
Staff Builders are expected to become employees of TLC as of the Distribution
Date;
WHEREAS, this Agreement sets forth the employment and employee benefit
plan arrangements that will apply to certain employees of the Staff Builders
controlled group who are expected to become employees of TLC as of the
Distribution Date, and any other employees who are hired by TLC prior to the
Distribution Date (all of such employees being referred to herein as the "TLC
Employees"); and
WHEREAS, this Agreement is entered into pursuant to the Distribution
Agreement dated as of [_____________], 1999 between Staff Builders and TLC (the
"Distribution Agreement");
NOW THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
<PAGE> 2
SECTION 1 - TERMINATION OF COVERAGE OF TLC
EMPLOYEES UNDER STAFF BUILDERS PLANS
1.1 Termination of Coverage of TLC Employees under Staff Builders Plans
Effective as of the Distribution Date, TLC Employees shall cease to be
eligible to actively participate in the following employee benefit plans offered
by the Staff Builders controlled group:
(a) Staff Builders welfare plans (consisting of health, basic life
insurance, accidental death and dismemberment insurance, supplemental life
insurance, long-term disability, supplemental disability, business travel
accident insurance, employee assistance plans and cafeteria plans, as set forth
in Exhibit 1 (the "Staff Builders Welfare Plans"); .
(b) the Staff Builders 401(k) savings plan (the "Staff Builders
401(k) Plan"); and
(c) the Staff Builders employee stock purchase and stock option
plans, as set forth in Exhibit 1 (the "Staff Builders Stock Plans").
As of the Distribution Date, Staff Builders will have no further obligation to
cover the TLC Employees under such plans (collectively, "Staff Builders Plans");
provided, however, that nothing in this Section 1.1 is intended to abrogate,
discontinue or terminate stop loss coverage under any policy maintained by Staff
Builders to the extent that it applies to medical claims and expenses resulting
from injury or illness to TLC employees incurred prior to the Distribution Date,
but for which no claim was filed, or is filed after such date.
1.2 Notice to Administrators and Insurers
To the extent required, Staff Builders agrees to inform, on or prior to
the Distribution Date, all relevant third party administrators and insurance
carriers, that coverage of the TLC Employees in the Staff Builders Plans ceases
as of the Distribution Date.
1.3 Amendment and Termination of Plans
Nothing in this Agreement, including without limitation, the agreement
of Staff Builders and TLC to maintain employee benefit plans or to make
contributions to such plans for any period, shall be construed as a limitation
of the right of Staff Builders or TLC to amend or terminate one or more of such
plans in accordance with the terms of this Agreement and applicable law.
2
<PAGE> 3
SECTION 2 - ESTABLISHMENT OF TLC EMPLOYEE BENEFIT PLANS
2.1 Establishment of TLC 401(k) Plan
(a) Effective as of the Distribution Date, TLC's subsidiaries will
cease to be participating Employers under the Staff Builders 401(k) Plan and TLC
Employees will cease to accrue any benefits under such plan. Effective on the
Distribution Date, TLC will establish a 401(k) savings plan (the "TLC 401(k)
Plan") substantially the same in all respects to the Staff Builders 401(k) Plan
as in effect on that date.
(b) As soon as practicable following the Distribution Date and the
establishment of the TLC 401(k) Plan, Staff Builders shall direct the trustee of
the Staff Builders 401(k) Plan to transfer to the trustee of the TLC 401(k) Plan
(which shall accept such transfer) all assets (including, but not limited to,
outstanding participant loans) and liabilities in the individual accounts of TLC
Employees in the Staff Builders 401(k) Plan ("Transfer of Account Balances").
(c) As of the date of the Transfer of Account Balances, TLC and the
TLC 401(k) Plan shall assume all liabilities for all accrued benefits under the
Staff Builders 401(k) Plan for the TLC Employees that are transferred to the TLC
401(k) Plan, and the Staff Builders 401(k) Plan shall be relieved of all
liabilities for all such transferred benefits.
(d) The TLC 401(k) Plan shall provide the following:
1. that TLC Employees shall participate in the TLC 401(k) Plan
to the extent that they were eligible to participate in the Staff Builders
401(k) Plan immediately prior to the Distribution Date, and shall receive credit
for eligibility, vesting, and benefit accrual for all service credited for such
purposes under the Staff Builders 401(k) Plan;
2. that the compensation paid by Staff Builders to the TLC
Employees that was recognized under the Staff Builders 401(k) Plan shall be
credited for all applicable purposes under the TLC 401(k) Plan; and
3. that with respect to any amounts transferred from the Staff
Builders 401(k) Plan, the TLC 401(k) Plan will preserve any benefits, rights and
features protected under Section 411(d)(6) of the Internal Revenue Code
("Code").
2.2 Establishment of TLC Welfare Plans
(a) Effective upon the Distribution Date, TLC shall adopt, or cause
to be adopted, welfare plans ("TLC Welfare Plans") substantially the same in all
material respects to the corresponding plans offered by Staff Builders as of the
Distribution Date, as set forth on Exhibit 1.
3
<PAGE> 4
2.3 COBRA
Effective as of the Distribution Date, TLC shall assume any and all
liability and responsibility for providing continuation of health care coverage
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to
any TLC Employee, and any former employee of Staff Builders, except former
employees of Chelsea Computer Consultants, Inc. and/or its subsidiaries
("Chelsea Employees") and ATC Healthcare Services, Inc. and/or its subsidiaries
("ATC Employees") and any qualified beneficiaries with respect to any such
employee (collectively "COBRA Eligible Employees"), whether or not such
continuation coverage obligations arose under any Staff Builders Welfare Plan,
and Staff Builders shall have no further liability or responsibility to provide
continuation of health care coverage to any COBRA Eligible Employee.
2.4 Establishment of TLC stock plans
(a) Effective upon the Distribution Date, TLC shall adopt, or cause
to be adopted a stock option plan ("TLC Stock Option Plan") substantially the
same in all material respects to the 1998 Staff Builders Stock Option Plan as in
effect on that date.
(b) On the day after the Distribution Date, TLC shall grant options
to purchase shares of TLC common stock under the TLC Stock Option Plan to each
of the individuals named on Exhibit 2 hereto. TLC shall grant to each such
individual options to purchase the number of shares of TLC common stock set
forth opposite such individual's name on Exhibit 2. All options so granted shall
be non-qualified and shall be exercisable during the period beginning six months
after the date of grant and ending ten years from the date of grant, subject to
early termination of the exercise period as provided in the TLC Stock Option
Plan. The per share exercise price of these options will be equal to the average
of the closing bid and asked prices of TLC common stock on the Distribution
Date, as quoted on the OTC Bulletin Board. Such options shall have such other
terms and conditions as are the same for the options granted by Staff Builders
under the 1998 Staff Builders Stock Option Plan.
(c) Staff Builders shall not make any adjustments, by reason of the
Distribution, to the number or exercise price of options held under any option
plan of Staff Builders in effect on the Distribution Date by individuals who
become employees of TLC on the Distribution Date.
2.5 Cooperation
Staff Builders and TLC agree to provide each other with all records and
information necessary or useful to carry out their obligations under this
Agreement, and to cooperate in the filing of documents required by the transfer
of assets and liabilities described herein and to take any other actions
necessary or advisable to meet any statutory, regulatory or contractual
requirements under this Agreement.
4
<PAGE> 5
SECTION 3 - INDEMNIFICATION
3.1 Indemnification
(a) TLC agrees to indemnify and hold harmless Staff Builders, its
subsidiaries and affiliates, their officers, directors, employees, agents, and
fiduciaries from and against any and all costs, damages, losses, expenses
(including reasonable attorneys fees and costs) and other liabilities arising
out of or related to the TLC Welfare Plans, the TLC 401(k) Plan, and the TLC
Stock Option Plan (collectively referred to as the "TLC Plans") with respect to
TLC Employees and/or COBRA Eligible Employees and from any liability relating to
any applicable taxes or penalties arising from the failure of the TLC 401(k)
Plan to be qualified under Section 401(a) of the Code at the time of the asset
transfer other than any failure attributable to the terms or operation of the
Staff Builders 401(k) Plan prior to the asset transfer.
(b) Staff Builders agrees to indemnify and hold harmless TLC and
its affiliates, their officers, directors, employees, agents, and fiduciaries
from and against any and all costs, damages, losses, expenses (including
reasonable attorneys fees and costs) and other liabilities arising out of or
related to the Staff Builders Plans; arising out of the determination of the
accrued benefits to be transferred to the TLC 401(k) Plan; the determination of
book reserves or salary deduction liabilities with respect to the TLC Employees
under and from the Staff Builders Plans; any claims under the Staff Builders
Plans which are not attributable to TLC Employees and/or assumed by TLC under
this Agreement; and any liability relating to the applicable taxes or penalties
arising from the failure of the TLC 401(k) Plan to be qualified under Section
401(a) of the Code due to the terms or operation of the Staff Builders 401(k)
Plan prior to the date the assets are transferred.
3.2 Health and Welfare Benefit Claims
Except as provided in Section 3.1, TLC agrees that it shall assume and
be solely responsible for all liabilities and obligations of Staff Builders in
connection with the claims for benefits brought by or on behalf of TLC Employees
under the Staff Builders Welfare Plans, and Staff Builders shall cease to have
any such liabilities or obligation related to such claims.
SECTION 4 - MISCELLANEOUS
4.1 Notices
Notices hereunder shall be effective if given in writing and delivered
or mailed, postage prepaid, by registered or certified mail to:
If to Staff Builders:
STAFF BUILDERS, INC.
1983 Marcus Avenue
Lake Success, NY 11042
Attention: David Savitsky, President
5
<PAGE> 6
If to TLC:
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
1983 Marcus Avenue
Lake Success, NY 11042
Attention: Dale R. Clift, President
4.2 Amendments; Waivers
This Agreement may be amended or modified only in writing executed on
behalf of Staff Builders and TLC. No waiver shall operate to waive any further
or future act and no failure to object or forbearance shall operate as a waiver.
4.3 No Third Party Beneficiary
This Agreement is solely between Staff Builders and TLC, and nothing
herein, whether expressed or implied, shall confer any rights or remedies on any
employee of Staff Builders or TLC, any former employee of Staff Builders, or any
other person.
4.4 Entire Agreement
This Agreement constitutes the sole and entire agreement and
understanding between the parties with respect to the matters covered hereby.
Any amendment, modification, or termination of this Agreement must be in writing
and must be signed by both parties.
4.5 Governing Law
This Agreement shall be governed by the laws of the State of New York,
except to the extent preempted by the Employee Retirement Income Security Act of
1974, as amended.
4.6 Successors and Assigns
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, provided that
this Agreement and the rights and obligations contained herein or in any exhibit
or schedule hereto shall not be assignable, in whole or in part, without the
prior written consent of the parties hereto and any attempt to effect any such
assignment without such consent shall be void.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their authorized representatives as of the Effective Date
STAFF BUILDERS, INC.
By:
------------------------------------
Title:
---------------------------------
TENDER LOVING CARE HEALTHCARE
SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
7
<PAGE> 8
EXHIBIT 1
STAFF BUILDERS WELFARE PLANS
Staff Builders Group Health Plan
MetLife DentalPrudential Dental
Aetna Life & AD&D
Aetna LTD
Staff Builders Cafeteria Plan
Cap District- Albany Medical Plan
Health Care Plan - Buffalo
Independent Health - Buffalo
Community Blue - Buffalo
North Americare - Buffalo
United Health Care - Syracuse
First Priority - Wilkes Barre
Personal Choice - Independence Blue Cross
Aetna-US Healthcare
United Health Care - Edwardsville
Regence Blue Cross - Washington
8
<PAGE> 9
EXHIBIT 2
THE OPTION GRANTS
<TABLE>
<CAPTION>
Name of Grantee Number of Options
- --------------- -----------------
<S> <C>
Dale R. Clift 500,000
Stephen Savitsky 400,000
David Savitsky 300,000
Sandra Parshall 100,000
Will Derr 75,000
Renee Silver 50,000
John McElligott 50,000
Laura Wilson 50,000
Lisa Aiello 50,000
Steve Schofield 50,000
Carolina Conn 40,000
David Frank 40,000
Don Ramsey 30,000
Michael Seago 20,000
Verna Carson 20,000
Paul Oettinger 20,000
Carlos Lugo 15,000
Lucille Saitta 15,000
Christia Falcone 15,000
Joe Casolla 10,000
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C>
Mary Brendel 10,000
Shirley Bardel 10,000
Leslie Hackett 10,000
Carol Bosbyshell 10,000
Doug Lindley 10,000
Jamie Hynes 10,000
Patti Ariel 10,000
Vera Rodriguez 10,000
Nancy Carlucci 10,000
Barbara Gorddard 7,500
Nita Davison 5,000
Marge Shakun 5,000
Peter McCabe 5,000
Nina Smith 5,000
Carolyn Scott 5,000
Gary Marcus 3,750
Mario Marchi 3,750
Jeff Pearlman 3,000
Lou Aurricchio 3,000
Paul Seitz 2,500
Chris Cute 2,500
Ed McNicholas 2,500
Chuck Zucaro 2,500
Billing Employee 1 2,500
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C>
Billing Employee 2 2,500
Billing Employee 3 2,500
Billing Employee 4 2,500
Jeannie Ascensio 1,500
Carol Bradman 3,000
Mau Mione 1,500
Kathleen Csialldone 1,000
Eliza Velicu 1,250
Sharon Wise 1,250
Veronica Barney 3,000
Elanine Belisle 1,000
Direne Kaufman 1,500
</TABLE>
11
<PAGE> 1
EXHIBIT 10.9
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
EMPLOYMENT AGREEMENT
WITH
DALE R. CLIFT
AGREEMENT as of the _____ day of ____, 1999, between Dale R.
Clift, residing at 38 The Hollows North, Muttontown, NY 11732 ("Executive"), and
TENDER LOVING CARE HEALTH CARE SERVICES, INC. ("Company"), a Delaware
corporation, having its principal place of business at 1983 Marcus Avenue, Lake
Success, New York 11042.
W I T N E S S E T H:
WHEREAS, the Company wishes to secure the services of
Executive on the terms and conditions set forth below; and
WHEREAS, the Executive is willing to accept employment with
TLC on such terms and conditions.
NOW, THEREFORE, in consideration of the premises and mutual
agreements hereinafter contained, the parties hereto do agree as follows:
1. Employment. The Company will employ the Executive as
President and Chief Operating Officer in accordance with all of the terms and
conditions set forth in this Agreement.
2. Term. The term of Executive's employment under this
Agreement shall commence effective as of the date hereof and subject to the
terms and conditions of this
<PAGE> 2
Agreement, shall continue for a period of sixty (60) consecutive months. This
Agreement shall be automatically renewed for the sixty (60) month period
following each anniversary date hereof (an "Anniversary Date") unless Executive
or the Company shall have filed an election to terminate, as hereinafter
provided, in which event Employee's employment shall terminate sixty (60) months
after the filing of such election. Such election to terminate shall be made by
either Executive or the Company by notice in writing to the other, on or before
the Anniversary Date of any year of employment, and in such case the effective
date of such election shall be deemed to be the Anniversary Date of such year of
employment.
3. Compensation.
(a) The Company shall pay to Executive, for all services
rendered by Executive under this Agreement, a base salary at the rate of
$400,000 per year ("Base Salary") payable in equal installments (not less
frequently than monthly) in accordance with the Company's regular payroll
practices.
(b) Notwithstanding the amounts set forth above, Executive may
be entitled to additional compensation, in the discretion of the Board of
Directors of the Company, for serving as a director and acting as a member and
attending meetings of the Board.
4. Duties. Executive is engaged to serve as President and
Chief Operating Officer of the Company and shall perform such duties and
functions as is compatible with that position as the Company from time-to-time
may determine. During the term of this Agreement, Executive shall devote all of
his business time to the affairs of the Company, subject to his limited duties
as an employee of Staff Builders, Inc., a Delaware corporation.
5. Expenses. Executive is authorized to incur expenses for
promoting the business of the Company which are reasonable and necessary in the
exercise of his duties, including reasonable expenses for entertainment, travel
and similar items. The Company shall
2
<PAGE> 3
reimburse Executive promptly for all such expenses upon presentation by
Executive, from time to time, of an itemized account of expenditures.
6. Vacation. The Executive is entitled to five (5) weeks
annual vacation. If the vacation time is not used within the annual period the
Executive will not be entitled to carry over the unused vacation time.
7. Death or Disability. In the event Executive becomes
disabled, the Employer's obligations hereunder, including Section 3, shall not
be affected thereby, and Executive's duties under Section 4 may be reduced only
if, and the event that, his disability prevents him from fully or completely
satisfying any duty thereunder. In the event of the death of the Executive, the
compensation at date of death, without further adjustment, shall be paid monthly
as a death benefit (through the end of the then-current sixty (60) month term)
to his estate, or if he so designates, his beneficiary.
8. Welfare Benefits. Executive shall be entitled to continue
to receive or participate in all benefits, such as life, health, medical and
disability plans, profit sharing plans, pension plans and the like ("Welfare
Plans"), which the Company may make generally available to its senior executive
employees. Executive shall be entitled to the above-described benefits so long
as Executive serves as an employee of the Company, or as otherwise provided by
the terms and conditions of the Welfare Plans.
9. Change of Control. In the event that at any time after a
Change of Control (as defined below) but prior to the end of twelve months after
such Change of Control Executive is discharged for any reason (other than the
conviction of a felony) or leaves for any reason Executive shall receive within
thirty (30) days after such discharge a lump sum severance payment equal to 2.99
times the "average annual base salary" paid to him. For the purposes of this
Section 9 "average annual base salary shall mean the average of Executive's
annual income in the nature of compensation payable by the Company and
includible in gross income over the five most recent taxable years ending before
the Change in Control.
3
<PAGE> 4
A "Change of Control" shall be deemed to occur when a person,
corporation, partnership, association or entity (x) acquires a majority of the
Company's outstanding voting securities, or (y) acquires securities of the
Company bearing a majority of voting power with respect to election of directors
of the Company, or (z) acquires all or substantially all of the Company's
assets.
10. Termination. It is specifically understood and
acknowledged that the only ground upon which the Company can terminate this
Agreement, except under paragraph 2 hereof, is if Executive is found guilty of a
crime resulting in his conviction as a felon in New York State. It is expressly
agreed and understood between the parties that in the event Executive shall
violate any provision of this Agreement, the sole remedy of the Company shall be
to institute and prosecute proceedings at law in accordance with Section 12, and
not termination of Executive's employment. Executive shall be under no
obligation to minimize or mitigate damages by seeking other employment or
otherwise in the event the Company breaches or does not fulfill its obligations
under this Agreement. It is further agreed that in the event of a default by the
Company of its obligations under this Agreement or of an unsuccessful action by
the Company against Executive for his alleged violation of this Agreement,
Executive shall be entitled to recover from the Company all his expenses of
enforcing or defending any action arising out of this Agreement, including his
reasonable legal fees and expenses.
11. Noncompetition by Executive.
(a) Upon termination of Executive's employment hereunder for
any reason, Executive agrees not to compete, in the manner described
hereinafter, with the business currently conducted by the Company in the United
States, for a period of six (6) months following such termination. Executive
agrees that, during such period, he will not be employed by, work for, advise,
consult with, serve or assist in any way, directly or indirectly, any party
whose activities or .business is similar to that of the Company. The foregoing
restrictions on competition by Executive shall be operative for the benefit of
the Company and of any business owned or controlled by the Company, or any
successor or assign of any of the foregoing.
4
<PAGE> 5
(b) If the period of time or geographical areas specified
under this section should be determined to be unreasonable in any judicial
proceeding, then the period of time and areas of the restriction shall be
reduced so that this Agreement may be enforced in such areas and during such
period of time as shall be determined to be reasonable.
12. Arbitration. The Executive and Company hereby agree that
if any dispute arises between them, such dispute shall be determined by
arbitration in the State of New York in accordance with the rules of the
American Arbitration Association then in effect. The award rendered by such
arbitration shall be final and binding upon the parties hereto, and a judgment
upon the award so rendered may be entered in any court of competent
jurisdiction.
13. Waiver. Failure to insist upon compliance with any of the
terms, covenants, or conditions hereof shall not be deemed a waiver of such
term, covenant, or condition, nor shall any waiver or relinquishment of any
right or power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
14. Severability. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision. The parties to this Agreement agree and intend that this
Agreement shall be enforced as fully as it may be enforced consistent with
applicable statutes and rules of law.
15. Benefit. Except as otherwise herein expressly provided,
this Agreement shall inure to the benefit of and be binding upon the Company,
its successors and assigns, including, without limitation, any corporation which
may acquire all or substantially all of the Company's assets or business or with
or into which the Company may be consolidated or merged, and to the benefit of,
and be binding upon, Executive, his heirs, executors, administrators and legal
representatives.
16. Entire Agreement. This Agreement constitutes the entire
understanding and agreement between the parties hereto, supersedes any and all
prior discussions, agreements
5
<PAGE> 6
and correspondence with regard to the subject matter hereof, and may not be
amended, modified or supplemented in any respect, except by a subsequent writing
executed by both parties hereto.
17. Applicable Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without giving effect to principles of conflicts of law.
18. Remedy for Breach. Any action to enforce, arising out of,
or relating in any way to, any of the provisions of this Agreement shall be an
action at law pursuant to the provisions of Section 12 of this Agreement.
19. Notices. All notices required hereby or given under this
Agreement shall be in writing and shall be served either personally or by
certified mail, return receipt requested, at the following addresses, or at such
other address as the parties may designate to one another in writing:
To the Company: Tender Loving Care Health Care Services, Inc.
1983 Marcus Avenue
Lake Success, New York 11042
To Executive: Dale R. Clift
38 The Hollows North
Muttontown, NY 11732
6
<PAGE> 7
All notices shall be deemed given when so received. All change of address
notices shall be given in the same manner as provided above.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the ____ day of ______, 1999.
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
By:
---------------------------------------------
Stephen Savitsky
---------------------------------------------
Dale R. Clift
7
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of ______, 1999 by and
between TENDER LOVING CARE HEALTH CARE SERVICES, INC., a Delaware Corporation
("TLC" or the "Corporation"), and Willard T. Derr who resides at 8 Shirley
Court, East Northport, NY 11731 ("Executive").
WHEREAS, TLC wishes to secure the services of the Executive on the
terms and conditions set forth below; and
WHEREAS, the Executive is willing to accept employment with TLC on such
terms and conditions.
NOW, THEREFORE, in consideration of their mutual promises and other
adequate consideration, TLC and the Executive do hereby agree as follows:
1. EMPLOYMENT. TLC will employ the Executive as Chief Financial
Officer, Senior Vice President and Corporate Controller, in
accordance with the terms and provisions of this Agreement.
2. DUTIES. The Executive shall report to the Chief Operating
Officer of TLC and shall be responsible to perform such duties
as shall be assigned to the Executive by the Chairman or Chief
Operating Officer of TLC or their designee. The Executive
shall devote his full business time, attention and skill such
as is required for the performance of his duties hereunder and
to the advancement of the business and interests of TLC,
subject to limited consulting duties to Staff Builders, Inc.
3. TERM. This Agreement shall be effective upon execution by TLC
and the Executive, and shall remain in effect until the third
anniversary date hereof, unless terminated earlier pursuant to
the terms hereof.
4. COMPENSATION.
(a) Salary. The Executive shall be paid a salary of $160,000 per
annum during the term hereof, payable in weekly installments.
The Executive's salary will be reviewed by TLC on March 1,
2000.
(b) Benefits. The Executive shall be eligible to receive and
participate in, in accordance with their terms, all health,
medical or other insurance benefits which TLC provides or
makes available to its employees.
<PAGE> 2
(c) Expenses. TLC shall reimburse the Executive for all reasonable
and necessary expenses upon submission by the Executive of
receipts, accounts or such other documents reasonably
requested by TLC.
(d) Car Allowance. The Executive shall have the use of a 1997
Toyota Camry VIN# 4T1BF22K8VU003368 for the balance of the
lease which expires on October 1999. Thereafter for the
balance of the term of this Agreement, Executive shall receive
a car allowance of $300 per month.
(e) Vacation. The Executive shall be entitled to four (4) weeks of
paid vacation during each twelve (12) month period of
employment during the term.
(f) Nothing in this Agreement is intended to cause a reduction in
the Executive's benefits under any TLC's policy or under any
benefit plan in which Executive is a participant at the time
of the execution of this Agreement.
5. TERMINATION; RIGHTS AND OBLIGATIONS UPON TERMINATION.
(a) If the Executive dies during the Term, then the Executive's
employment under this Agreement shall terminate. In such
event, the Executive's estate shall be entitled only to
compensation and expenses accrued and unpaid as at the date of
the Executive's death.
(b) If, as a result of the Executive's incapacity due to physical
or mental illness, whether or not job related, the Executive
is absent from his duties hereunder for 90 consecutive days,
or an aggregate of 120 days during the Term, the Executive's
employment hereunder and this Agreement shall terminate. In
such event, the Executive shall be entitled only to
compensation and expenses accrued and unpaid as at the date of
termination of the Executive's employment.
(c) The Corporation shall have the right to terminate the
Executive's employment under this Agreement for Cause. For
purposes of the Agreement, the Corporation shall have "Cause"
to terminate the Executive's employment if (i) the Executive
assigns, pledges, or otherwise disposes of his rights and
obligations under this Agreement, or attempts to do the same
without the prior written consent of the Corporation; or (ii)
the Executive has been insubordinate, has materially, breached
any of the terms or conditions hereof, has engaged in willful
misconduct or has acted in bad faith; or (iii) the Executive
has breached Section 7 of this Agreement; or (iv) the
Executive has committed a felony or perpetrated a fraud
against the Corporation. If the Corporation terminates this
Agreement for Cause, the Corporation's obligations hereunder
shall cease, except for the Corporation's obligation to pay
the Executive the compensation and expenses accrued and unpaid
as of the date of termination in accordance with the
provisions hereof.
-2-
<PAGE> 3
(d) In the event that at any time after a Change of Control (as
defined below) but prior to the end of twelve (12) months
after such Change of Control, the Executive is discharged for
any reason other than for Cause (as defined in (c) above) or
resigns for any reason (other than due to termination for
Cause), the Executive shall receive within thirty (30) days
after such discharge or resignation a lump-sum severance
payment equal to 2.99 times his average annual base salary.
For the purposes of this Section 5, "average annual base
salary" shall mean the average of Executive's annual income in
the nature of compensation payable by the Company and
includible in gross income over the five most recent taxable
years ending before the Change of Control. Anything contained
herein to the contrary notwithstanding, for a Change of
Control occurring before 2002, years considered in the base
period for calculating "average annual base salary" shall be
determined as follows:
<TABLE>
<CAPTION>
Years Considered in
Year of Change in Control Calculating Average Base Salary
------------------------- -------------------------------
<S> <C>
1999 1994-1998
2000 1995-1999
2001 1996-2000
</TABLE>
A "Change of Control" shall be deemed to occur when a person,
corporation, partnership, association or entity (i) acquires a
majority of the outstanding voting securities of TLC, Inc., a
Delaware corporation ("TLC") or (ii) acquires securities
bearing a majority of voting power with respect to election of
directors of TLC or (iii) acquires all or substantially all of
TLC's assets.
(e) Notwithstanding anything to the contrary contained herein, all
payments owed to the Executive upon termination of this
Agreement shall be subject to offset by the Corporation for
amounts owed to the corporation by the Executive hereunder.
(f) The obligations of the Corporation and the Executive pursuant
to this Section 5 shall survive the termination of this
Agreement.
6. NOTICES. Any written notice permitted or required under this
Agreement shall be deemed sufficient when hand delivered or
posted by certified or registered mail, postage prepaid, and
addressed to:
if to Tender Loving Care Health Care Services, Inc.:
-3-
<PAGE> 4
1983 Marcus Avenue
Lake Success, New York 11042
Attention: Dale R. Clift, COO
or
if to the Executive: Willard T. Derr
8 Shirley Court
East Northport, NY 11721
Either party may, in accordance with the provisions of this Section,
give written notice of a change of address, in which event all such notices and
requests shall thereafter be given as above provided at such changed address.
7. CONFIDENTIALITY OBLIGATIONS; NON-COMPETITION BY EXECUTIVE.
(a) The Executive acknowledges that in the course of performing
his duties hereunder, he will be made privy to confidential
and proprietary information. The Executive covenants and
agrees that during the term of this Agreement and at any time
after the termination of this Agreement, he will not directly
or indirectly, for his own account or as an employee, officer,
director, partner, joint venturer, shareholder, investor, or
otherwise, disclose to others or use for his own benefit or
cause or induce others to do the same, any proprietary or
confidential information or trade secrets of TLC.
(b) The Executive agrees that, while this Agreement is in effect,
and for six (6) months following termination of employment, he
will not, within the United States (A) compete, directly or
indirectly for his own account or as an employee, officer,
director, partner, joint venturer, shareholder, investor, or
otherwise, with the business conducted by TLC; or (B) while
this Agreement is in effect and for one (1) year following
termination of employment directly or indirectly solicit or
recruit any employee of TLC to leave the employ of TLC, or
solicit any client or customer of TLC to terminate or modify
its business relationship with TLC.
(c) The foregoing restrictions on the Executive set forth in this
Section 7 shall be operative for the benefit of TLC and of any
business owned or controlled by TLC, or any successor or
assign of any of the foregoing.
(d) Executive acknowledges that the restricted period of time and
geographical area specified in this Section 7 is reasonable,
in view of the nature of the business in which TLC in engaged
and the Executive's knowledge of TLC's business.
Notwithstanding anything herein to the contrary, if the period
of time or the
-4-
<PAGE> 5
geographical area specified in this Section 7 should be
determined to be unreasonable in a judicial proceeding, then
the period of time and territory of the restriction shall be
reduced so that this Agreement may be enforced in such area
and during such period of time as shall be determined to be
reasonable.
(e) The parties acknowledge that any breach of this Section 7 will
cause TLC irreparable harm for which there is no adequate
remedy at law, and as a result of this, TLC shall be entitled
to the issuance of an injunction, restraining order or other
equitable relief in favor of TLC restraining Executive from
committing or continuing any such violation. Any right to
obtain an injunction, restraining order or other equitable
relief hereunder shall not be deemed a waiver of any right to
assert any other remedy TLC may have at law or equity.
(f) For purposes of this Section 7, the term "TLC" shall refer to
the Corporation and all of its parents, subsidiaries and
affiliated corporations.
8. JURISDICTION. The Executive and TLC consent to the
jurisdiction of the New York Supreme Court for a determination
of any disputes as to any matters whatsoever arising out of or
in any way connected with this Agreement and authorize the
service of process on TLC or Executive by registered mail sent
to either party at the address set forth in Section 6 of this
Agreement.
9. HANDBOOK GROUP INSURANCE PROGRAM BOOKLET. The Executive
acknowledges receipt of the TLC Employee Handbook and Group
Insurance Program booklet (together, the "Handbook"). The
terms of the Handbook are incorporated herein by reference.
10. BINDING EFFECT. This Agreement shall bind and inure to the
benefit of TLC, its successors and assigns and shall inure to
the benefit of, and be binding upon, the Executive, his heirs,
executors and legal representatives.
11. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall in no way affect the
validity or enforceability of any other provision, or any part
thereof.
12. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New
York.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject
matter hereof and supersedes all prior and contemporaneous
agreements, understandings, negotiations, and discussions,
whether oral or written. of the parties.
-5-
<PAGE> 6
14. MODIFICATION, TERMINATION OR WAIVER. This Agreement may only
be amended or modified by a written instrument executed by the
parties hereto. The failure of any party at any time to
require performance of any provision of this Agreement shall
in no manner affect the right of such party at a later time to
enforce the same.
15. INDEMNIFICATION. TLC shall indemnify and hold Executive
harmless from any and all damages, costs, fees and expenses,
including but not limited to attorneys' fees, which he may
incur as a result of any claim against his arising out of his
performance of his duties under this Agreement provided that
he is not found to have committed intentional misconduct.
-6-
<PAGE> 7
IN WITNESS WHEREOF, TLC and the Executive have executed this Employment
Agreement as of the date first above written.
TENDER LOVING CARE HEALTH
CARE SERVICES, INC.
By:
------------------------------
Dale R. Clift, Chief Operating
Officer
---------------------------------
Willard T. Derr
-7-
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