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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE
AMENDMENT NO. 3
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)
<TABLE>
<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>
<CAPTION>
ITEM ITEM CAPTION LOCATION IN INFORMATION STATEMENT
NO. ------------ ---------------------------------
<C> <S> <C>
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.
OCTOBER 6, 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. 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
"TLCQ."
If you are a holder of record of Staff Builders Class A or Class B common
stock at the close of business on October 12, 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 October 21, 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 October 12,
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 are approximately issued and outstanding
23,619,388 shares of TLC Common Stock, all of which are held by Staff Builders.
The date of the Distribution (the "Distribution Date") is scheduled to be
on or about October 21, 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 "TLCQ." 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 OCTOBER 6, 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.................................................... 30
STAFF BUILDERS.............................................. 37
MANAGEMENT.................................................. 38
EXECUTIVE COMPENSATION...................................... 41
CERTAIN TRANSACTIONS........................................ 48
OWNERSHIP OF SECURITIES BY CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS.......................... 50
DESCRIPTION OF CAPITAL STOCK................................ 51
LIMITED LIABILITY AND INDEMNIFICATION....................... 55
CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... F-35
</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 107 offices located in 25 states and the District of Columbia, as
well as master franchise licenses in Japan, Spain and Brazil. TLC owns and
operates 61 of these offices and 46 of these offices are operated by 29
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 three months ended May 31, 1999 and for the fiscal year ended
February 28, 1999, the home health care service revenues of the Company were
approximately $70 million and $310 million, respectively.
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 11,809,694 shares of TLC Common
Stock, based on the approximately 23,619,388 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
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
1
<PAGE> 8
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 there be Two Classes
of
TLC Common Stock?........ No. Whether you own Staff Builders Class A or Class
B common stock, you will receive one share of TLC
Common Stock for every two shares of Staff Builders
Common Stock owned by you. Class B stockholders
currently have an approximate 11.6% voting interest
in Staff Builders. After the Distribution, such
stockholders will have an approximate 1.3% voting
interest in TLC.
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 2,006,000 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 October 12, 1999, the Record Date, you will be
eligible to participate in the Distribution.
2
<PAGE> 9
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
October 21, 1999, the expected Distribution Date.
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 "TLCQ." 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 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. The interim financial information for the three
months ended May 31, 1999 and 1998 have been derived from the unaudited
condensed consolidated financial statements included in this Information
Statement and include, in the opinion of management, all necessary adjustments
for the fair presentation of such information. Interim results may not
necessarily be indicative of results of operations for a full year. 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-35.
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THREE MONTHS
ENDED
MAY 31, FISCAL YEARS ENDED FEBRUARY 28/29,
------------------- ----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
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STAFF BUILDERS CONSOLIDATED HISTORICAL
OPERATIONS DATA
Revenues........................................ $107,485 $111,278 $437,588 $526,673 $480,355 $410,160 $325,111
Net income (loss)............................... (2,107) (99) (73,086) (21,632) 3,761 2,014 4,735
Income (loss) per common share:
Basic......................................... $ (0.09) $ (0.00) $ (3.16) $ (0.90) $ 0.16 $ 0.09 $ 0.21
Diluted....................................... $ (0.09) $ (0.00) $ (3.16) $ (0.90) $ 0.15 $ 0.08 $ 0.20
STAFF BUILDERS CONSOLIDATED HISTORICAL BALANCE
SHEET DATA
Total assets.................................... 147,261 $146,505 $158,701 $156,172 $120,527 $103,486
Working capital (deficiency).................... (47,113) (39,826) 16,085 27,245 12,007 22,038
Current portion of long-term debt............... 45,812 43,460 10,664 5,071 1,655 1,208
Long-term debt and other liabilities............ 55,070 59,082 40,508 37,998 9,611 9,186
Total liabilities............................... 188,804 185,864 120,332 96,706 65,217 51,135
Stockholders' equity (deficiency in assets)..... (41,543) (39,359) 38,369 59,466 55,310 52,351
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MAY 31, 1999 FEBRUARY 28, 1999
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TLC CONSOLIDATED PRO FORMA OPERATIONS DATA
Revenues.................................................... $ 70,094 $312,531
Net (Loss).................................................. (2,959) (72,100)
(Loss) per common share:
Basic..................................................... (0.25) (6.23)
Diluted................................................... (0.25) (6.23)
TLC CONSOLIDATED PRO FORMA BALANCE SHEET DATA
Total assets................................................ $ 88,711
Working capital (deficiency)................................ (47,120)
Current portion of long-term debt........................... 20,779
Long-term debt and other liabilities........................ 55,045
Total liabilities........................................... 153,174
Stockholders' equity (deficiency in assets)................. (64,463)
</TABLE>
Certain prior period amounts have been reclassified to conform with the
presentation as of May 31 and February 28, 1999 and for the three months and
fiscal year periods then ended. Additionally, the financial statements for the
year ended February 28, 1998 and the three months ended May 31, 1999 and May 31,
1998 have been restated (see Note 1 to the consolidated financial statements
included elsewhere herein).
4
<PAGE> 11
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 $2,107,000, $73,086,000 and $21,632,000 for the three months ended
May 31, 1999 and for the fiscal years ended February 28, 1999 and 1998,
respectively. Staff Builders had a deficiency in assets of $41,466,000 at May
31, 1999 and $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 losses of the Company were $2,882,000 for the three
months ended May 31, 1999 and $72,100,000 for the fiscal year ended February 28,
1999. The deficiency in assets of the Company was $64,386,000 at May 31, 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. The
fiscal year 1999 and 1998 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 $47,113,000 as of May 31, 1999 and $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 $47,120,000 as of May 31, 1999. On September 24,
1999, the Company and the subsidiaries of Staff Builders comprising the
supplemental staffing business each entered into loan agreements with Mellon
Bank whereby the Bank has agreed to provide new separate credit facilities with
respect to each line of business. The Company will be in default under this new
facility if it does not produce a revised payment plan with The Health Care
Finance Administration of the Department of Health and Human Services ("HCFA")
satisfactory to the bank with respect to the repayment of Medicare overpayments
by October 29, 1999. Although the Company anticipates obtaining such a payment
plan, we cannot assure you that it will be obtained by October 29, 1999 or at
all. We have also 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 and an event of default may
occur under this new facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
5
<PAGE> 12
3. Credit Facility. The Company and the subsidiaries of Staff Builders
comprising the supplemental staffing business have each received new separate
credit facilities from their existing bank with respect to each line of
business. These facilities expire on February 29, 2000. The Company's loan
agreement provides for the home health care business to borrow up to a maximum
of $17 million which will be reduced to $16 million in December 1999. Although
the Company is currently seeking new financing, we cannot assure you that we
will be able to obtain new financing by February 29, 2000. Further, if cash
provided from operations is not adequate to cover the scheduled reductions in
borrowing capability under our credit facility, we may be unable to pay our
debts as they become due. In addition, the Distribution requires the consent of
Staff Builders' current bank and if such consent is not obtained the
Distribution will not be made. 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 October 1999.
Although we believe that the approval should be granted in October 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
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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 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
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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."
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 2,006,000 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
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<PAGE> 15
"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 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 September 29, 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." After the Distribution,
there will not be two classes of TLC Common Stock, with different voting rights,
as there is with the Staff Builders Common Stock. Holders of Staff Builders
Class B common stock currently have an approximate 11.6% voting interest in
Staff Builders. After the Distribution, such stockholders will have an
approximate 1.3% voting interest in TLC. 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
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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. 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
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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 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 "TLCQ." 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 September 29, 1999, TLC is expected to have approximately 728
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
13
<PAGE> 20
Rule 144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied.
After the Distribution, of the estimated 11,809,694 shares of TLC Common
Stock issued and outstanding, approximately 2,651,695 shares will be held by
affiliates and subject to the resale requirements of Rule 144 of the Securities
Act. Such affiliates are Stephen Savitsky, Chairman of the Board and Chief
Executive Officer of the Company, David Savitsky, Director and Vice
Chairman -- Government Relations of the Company, Bernard J. Firestone, Director
of the Company, Sandra Parshall, Senior Vice President of Operations of a
principal subsidiary of the Company, 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. S Squared Technology
Corp. may also be deemed an affiliate; it will own 1,161,000 shares of TLC
Common Stock. See "Ownership of Securities by Certain Beneficial Owners,
Directors and Executive Officers."
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 2,006,000 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
14
<PAGE> 21
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.
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
15
<PAGE> 22
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 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. The interim financial information for
the three months ended May 31, 1999 and 1998 have been derived from the
unaudited condensed consolidated financial statements included in this
Information Statement and include, in the opinion of management, all necessary
adjustments (consisting of only normal and recurring accruals) for the fair
presentation of such information. Interim results may not necessarily be
indicative of Staff Builders' or the Company's results of operations for a full
year. 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-35.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MAY 31, YEARS ENDED FEBRUARY 28/29,
------------------- ----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STAFF BUILDERS CONSOLIDATED HISTORICAL
OPERATIONS DATA:
Revenues........................................ $107,665 $111,278 $437,588 $526,673 $480,355 $410,160 $325,111
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Operating costs............................... 73,850 76,383 299,057 338,225 301,508 256,719 201,365
General and administrative expenses........... 34,408 34,027 150,169 177,761 170,290 146,382 113,893
Medicare and Medicaid audit adjustments....... -- -- 29,000 -- -- -- --
Amortization of intangible assets............. 301 312 1,314 2,807 2,623 1,823 1,237
Interest expense.............................. 1,243 1,052 4,233 3,706 1,601 948 1,237
Interest income............................... (98) (348) (1,061) (1,358) (896) (976) (796)
Other (income) expense, net................... (14) 27 464 (419) (1,487) 1,791 (22)
Restructuring costs........................... -- -- 20,464 33,447 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses................ 109,690 111,453 503,640 554,169 473,639 406,687 316,914
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes............... (2,025) (175) (66,052) (27,496) 6,716 3,473 8,197
Provision (benefit) for income taxes............ 159 (76) 7,034 (5,864) 2,955 1,459 3,462
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................... $ (2,184) $ (99) $(73,086) $(21,632) $ 3,761 $ 2,014 $ 4,735
======== ======== ======== ======== ======== ======== ========
Income (loss) per common share:
Basic......................................... $ (.09) $ (.00) $ (3.16) $ (.90) $ .16 $ .09 $ .21
======== ======== ======== ======== ======== ======== ========
Diluted....................................... $ (.09) $ (.00) $ (3.16) $ (.90) $ .15 $ .08 $ .20
======== ======== ======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic......................................... 23,619 23,647 23,162 23,939 23,668 23,598 22,389
======== ======== ======== ======== ======== ======== ========
Diluted....................................... 23,619 23,647 23,162 23,939 24,577 25,504 24,053
======== ======== ======== ======== ======== ======== ========
STAFF BUILDERS CONSOLIDATED HISTORICAL BALANCE
SHEET DATA:
Total assets.................................... $147,261 $146,505 $158,701 $156,172 $120,527 $103,486
Working capital (deficiency).................... (47,113) (39,826) 16,085 27,245 12,007 22,038
Current portion of long-term debt............... 45,812 43,460 10,664 5,071 1,655 1,208
Long-term debt and other liabilities............ 55,070 59,082 40,508 37,998 9,611 9,186
Total liabilities............................... 188,804 185,864 120,332 96,706 65,217 51,135
Stockholders' equity (deficiency in assets)..... (41,543) (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 May 31 and February 28, 1999 and for the three months and
fiscal year periods then ended. Additionally, the financial
17
<PAGE> 24
statements for the year ended February 28, 1998 and the three months ended May
31, 1999 and May 31, 1998 have been restated (see Note 1 to the consolidated
financial statements included elsewhere herein).
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 May 31, 1999 and their results of operations
as if the Distribution had occurred on the first day of the respective periods
(in thousands).
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED YEAR ENDED
MAY 31, 1999 FEBRUARY 28, 1999
------------------ -----------------
<S> <C> <C>
TLC CONSOLIDATED PRO FORMA OPERATIONS DATA
Total revenues.............................................. $70,094 $312,531
------- --------
Operating costs............................................. 44,485 200,009
General and administrative expenses......................... 28,266 127,559
Amortization of intangible assets........................... 128 618
Interest expense............................................ 395 1,446
Interest (income)........................................... (95) (986)
Other (income) expense, net................................. (151) 126
Medicaid and Medicare audit adjustments..................... -- 29,000
Restructuring costs......................................... -- 20,334
------- --------
Total costs and expenses.................................... 73,028 378,106
------- --------
(Loss) before income taxes.................................. (2,934) (65,575)
Provision (benefit) for income taxes........................ 25 6,525
------- --------
Net (loss).................................................. $(2,959) $(72,100)
======= ========
(Loss) per common share
Basic..................................................... $ (0.25) $ (6.23)
======= ========
Diluted................................................... $ (0.25) $ (6.23)
======= ========
Cash dividends per common share............................. -- --
Weighted average common shares outstanding:
Basic..................................................... 11,810 11,581
======= ========
Diluted................................................... 11,810 11,581
======= ========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1999
------------
<S> <C> <C>
TLC CONSOLIDATED PRO FORMA BALANCE SHEET DATA
Total assets................................................ $ 88,711
Working capital (deficiency)................................ (47,120)
Current portion of long-term debt........................... 20,779
Long-term debt and other liabilities........................ 55,045
Total liabilities........................................... 153,174
Stockholders' equity (deficiency in assets)................. (64,463)
</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 and the three months ended May 31, 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
Three Months Ended May 31, 1999 and 1998
Revenues for the three months ended May 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
---------------
1999 1998
------ ------
($ IN MILLIONS)
<S> <C> <C>
Home health care and other.................................. $ 69.9 $ 83.6
Supplemental staffing....................................... 37.6 27.3
------ ------
Total services revenues..................................... 107.5 110.9
Sales of licensees and fees................................. 0.2 0.4
------ ------
Total revenues.................................... $107.7 $111.3
====== ======
</TABLE>
Total revenues decreased by $3.6 million or 3.2% for the three months ended
May 31, 1999 ("the 1999 period") to $107.7 million from $111.3 million for the
three months ended May 31, 1998 ("the 1998 period"). The decrease in total
revenues was due to a decrease in the home health care division service revenues
of $13.7 million, or 16.4%, to $69.9 million in the 1999 period from $83.6
million in the 1998 period. This decrease was partially offset by an increase in
the supplemental staffing division service revenues of $10.3 million, or 37.8%,
to $37.6 million in the 1999 period from $27.3 million in the 1998 period.
The decrease in Staff Builders' home health care division service revenues
was primarily due to a decrease in Medicare revenues. This decrease resulted
from the negative impact of the Medicare Interim Payment System ("IPS") enacted
under the Balance Budget Act of 1997 ("BBA"). While the resultant regulatory
changes became effective for Staff Builders on March 1, 1998, the decrease in
revenues in the 1999 period as compared to the 1998 period reflects a decrease
in the number of home health care locations to 125 locations as of May 31, 1999
as compared to 198 locations as of March 1, 1998.
19
<PAGE> 26
The following are Staff Builders' home health care service revenues by
payment source:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Medicare.................................................... 43.1% 47.9%
Medicaid and other local government programs................ 37.8 30.7
Insurance and individuals................................... 18.4 19.6
Other....................................................... 0.7 1.8
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>
The increase in Staff Builders' supplemental staffing division service
revenues was primarily due to the increase in the number of staffing offices to
58 locations as of May 31, 1999 as compared to 46 locations as of March 1, 1998.
Included in these revenues is an increase in Staff Builders' information
technology staffing revenues generated by Chelsea Computer Consultants, Inc.
("Chelsea"), a subsidiary in which Staff Builders owns a majority interest.
Chelsea's revenues increased by $1.9 million, or 28.2%, to $8.5 million in the
1999 period from $6.6 million in the 1998 period.
Operating costs were 68.7% and 68.9% of service revenues for the 1999 and
1998 periods, respectively. The decrease in operating costs as a percentage of
service revenues was primarily due to a decrease in operating costs as a
percentage of service revenue in the home health care division. Partially
offsetting this decrease is an increase in operating costs resulting from the
increased revenues of the supplemental staffing division which has higher direct
operating costs as a percentage of service revenues as compared to home health
care revenues.
General and administrative expenses were $34.4 million and $34.0 million in
the 1999 and 1998 periods, respectively. The supplemental staffing division
general and administrative expenses increased by $1.8 million, or 40.1%, in the
1999 period over the 1998 period due to expansion of that division. This
increase was partially offset by the decrease in the home health care division's
general and administrative expenses of $1.4 million, or 4.7%, in the 1999 period
as compared to the 1998 period primarily resulting from the closure of many
operating locations. The increase in general and administrative expenses as a
percentage of service revenues is primarily due to the decrease in Staff
Builders' home health care service revenues. These costs, expressed as a
percentage of service revenues, were 32.0% and 30.7% for the 1999 and 1998
periods, respectively.
Interest expense was $1.2 million and $1.1 million in the 1999 and 1998
periods, respectively. The increase in interest expense is primarily due to
increased borrowings under Staff Builders' secured revolving line of credit,
together with higher interest rates on such borrowings.
The provision for income taxes of $159 thousand in the 1999 period
primarily consists of state income taxes attributable to the supplemental
staffing division operations. The benefit for income taxes of $(76) thousand in
the 1998 period was subsequently reversed in the fiscal year ended February 28,
1999 upon recording of a valuation allowance of $28.8 million. Such valuation
allowance was recorded because management does not believe that the utilization
of the tax benefits from operating losses and other temporary differences are
"more likely than not" to be realized, as required by Statement of Financial
Accounting Standards No. 109. There has been no change to this determination
relative to the 1999 period.
20
<PAGE> 27
Years Ended February 28, 1999 ("fiscal 1999"), February 28, 1998 ("fiscal
1998") and February 28, 1997 ("fiscal 1997")
Revenues. Staff Builders' revenues consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28,
------------------------
1999 1998 1997
------ ------ ------
($ 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 IPS enacted under the 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 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
21
<PAGE> 28
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 $4.5 million resulting from the September 1997 acquisition of a
provider of travel nursing services, whereby nursing professionals render
services in long-term assignments, away from the professional's permanent
domicile.
Operating Costs. Operating costs were 68.7%, 64.4%, and 62.9% of service
revenues in fiscal 1999, 1998 and 1997, respectively. Operating costs represent
the direct costs of providing services to patients or clients, including wages,
payroll taxes, travel costs, insurance costs, medical supplies and the cost of
contracted services. The increases in operating costs as a percentage of service
revenues were primarily due to the increase in supplemental staffing revenues
which have higher direct operating costs as a percentage of service revenues as
compared to home health care revenues.
The payroll fringe costs, consisting primarily of payroll taxes and workers
compensation insurance, represents 15.3%, 16.0%, and 15.9% of direct service
wages in fiscal 1999, 1998 and 1997, respectively. These payroll fringe costs as
a percentage of direct service wages for the home health care division were
16.9%, 16.8% and 16.3% and for the supplemental staffing division were 12.4%,
12.5% and 13.2%, respectively.
The cost of contracted services represents 6.6%, 6.5% and 8.1% of related
service revenues in fiscal 1999, 1998 and 1997, respectively. Contracted
services consist primarily of physical therapy, occupational therapy, speech
therapy and medical social services utilized in the home health care division.
The service revenues, operating costs and resultant gross margins generated
by Staff Builders' licensee and Staff Builders-owned locations are as follows ($
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 -- Staff Builders-Owned.............. 96 72 81
---- ---- ----
Total service revenues...................................... $310 $451 $437
==== ==== ====
Operating costs -- Licensee................................. $136 $234 $216
Operating costs -- Staff Builders-Owned..................... 64 46 53
---- ---- ----
Operating costs............................................. $200 $280 $269
==== ==== ====
Gross margin -- Licensee.................................... $ 78 $145 $140
Gross margin -- Staff Builders-Owned........................ 32 26 28
---- ---- ----
Gross margin................................................ $110 $171 $168
==== ==== ====
</TABLE>
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<PAGE> 29
<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 -- Staff Builders-Owned.............. 35 9 41
---- --- ---
Total service revenues...................................... $125 $74 $42
==== === ===
Operating costs -- Licensee................................. $ 70 $51 $ 1
Operating costs -- Staff Builders-Owned..................... 29 7 32
---- --- ---
Operating costs............................................. $ 99 $58 $33
==== === ===
Gross margin -- Licensee.................................... $ 20 $14 $--
Gross margin -- Staff Builders-Owned........................ 6 2 9
---- --- ---
Gross margin................................................ $ 26 $16 $ 9
==== === ===
</TABLE>
The number of licensee locations in operation and Staff Builders-owned
locations in operation are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Home Health Care
Number of licensee locations (as of each fiscal year end)... 54 163 179
Number of Staff Builders-owned locations (as of each fiscal
year end)................................................. 71 35 49
Supplemental Staffing
Number of licensee locations (as of each fiscal year end)... 54 41 35
Number of Staff Builders-owned locations (as of each fiscal
year end)................................................. 4 5 1
</TABLE>
General and Administrative Expenses. General and administrative expenses
decreased by $27.6 million, or 15.5%, in fiscal 1999 to $150.2 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 34.5%, 33.9% and 35.5% in
fiscal 1999, 1998 and 1997, respectively.
The decrease of $27.6 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 $37.1 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. Also included in general and administrative
expenses in fiscal 1999 is approximately $1.0 million for the reserve for
uncollectible notes receivable and $527 thousand for the write-off of obsolete
fixed assets.
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 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.
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<PAGE> 30
Staff Builders is in the process of replacing its existing, separate
billing and accounts receivable systems with new systems which will integrate
payroll/billing, scheduling and clinical management. The new systems, which are
designed to be Year 2000 compliant, require the input of necessary billing
support to generate complete transaction information. Staff Builders anticipates
that bad debt expense relative to billing issues will be reduced as a result of
the enhancements of new systems and procedures. In fiscal 1999, the supplemental
staffing division allowance for doubtful accounts increased as a percentage of
related revenue due to sales to certain new customers in fiscal 1999 which
proved uncollectible. Based upon the curtailment of business with these
customers and improvements in the division's credit policies, the resultant bad
debt expense is deemed to be non-recurring and therefore a reduced provision for
bad debts may be attainable. However, there can be no assurance that the
foregoing reductions in bad debt expense can be realized.
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 $464 thousand in fiscal 1999
primarily consists of approximately $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,
24
<PAGE> 31
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
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 thousand
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 $38.3 million for Federal and
state audit adjustments as of February 28, 1999 which includes $27.3 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
25
<PAGE> 32
$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 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. This amount is included in total
fiscal 1999 restructuring costs of $20.5 million, as discussed further below.
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 used in operating activities was $521 thousand for the 1999 period
which consisted primarily of the loss from operations requiring cash payments of
$666 thousand, net of non-cash charges of $1.4 million for the depreciation and
amortization of fixed assets as well as for the amortization of intangibles and
goodwill,
26
<PAGE> 33
and payments of Medicare and Medicaid liabilities of approximately $1.1 million
offset by an increase in accounts payable and accrued expenses of approximately
$1.2 million. Net cash used in investing activities for the 1999 period
consisted primarily of additions to fixed assets for the development and
implementation of Staff Builders' new payroll and billing systems. Net cash
provided from financing activities in the 1999 period of approximately $2.5
million resulted from an increase in Staff Builders' borrowings under its
secured credit facility of approximately $3.0 million offset by payments of
long-term debt of $500 thousand, consisting primarily of payments on capital
leases.
Net cash provided by operating activities for the 1998 period of $11.6
million consisted primarily of periodic interim payments received from the
Federal government. Net cash used in investing activities for the 1998 period of
$700 thousand consisted primarily of cash paid for acquisitions of approximately
$600 thousand. Cash used in financing activities for the 1998 period of
approximately $9.8 million consisted primarily of $5.7 million used to reduce
the level of borrowings under Staff Builders' secured credit facility and $2.3
million for the purchase and retirement of common stock.
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 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 under which Staff Builders is permitted to borrow amounts based
upon certain percentages of eligible receivables, up to the
27
<PAGE> 34
maximum amount of the credit facility. As of February 28, 1999, Staff Builders
also had an acquisition line of credit which was paid off on September 17, 1999.
At February 28, 1999 and 1998, Staff Builders had borrowed $35.4 million and
$29.4 million, respectively, under its then existing credit facility. Staff
Builders classified its outstanding borrowings as a current liability as of
February 28, 1999 because the bank had the option to declare all borrowings
under the then existing credit facility to become immediately due and payable.
On September 24, 1999, the home health care business of Staff Builders
("TLC") entered into an amended and restated loan and security agreement which
expires on February 29, 2000. The TLC loan agreement provides for the home
health care business to borrow up to a maximum of $17.0 million which will be
reduced to (i) $16.75 million on the earlier of: (A) October 29, 1999, or (B)
the Distribution, (ii) $16.25 million thirty days after the date of the
reduction set forth in clause (i) above, and (iii) $16.0 million thirty days
after the date of the reduction set forth in clause (ii) above. TLC is permitted
to borrow up to 80% of eligible accounts receivable, up to the maximum amount of
the credit facility. Further, availability is reduced by a separate reserve in
the amount of $750 thousand until such time that a more favorable payment plan
has been agreed upon in writing between TLC and HCFA, under terms and conditions
acceptable to the bank. As of September 24, 1999, TLC had borrowed an aggregate
of $14.8 million under its new facility.
The TLC loan bears interest at 2.0% over the prevailing prime lending rate
(such rate being 8.25% as of September 29, 1999), a monthly collateral
management fee of $8 thousand, and an unused fee of .375% per annum of the daily
unused portion of the credit facility. Based on the outstanding borrowings at
September 24, 1999, an increase of 1% in the prime rate would have the effect of
increasing aggregate, annual interest expense by approximately $150 thousand.
TLC paid bank fees of $170 thousand in connection with the execution of the loan
agreement. Subsequently, TLC is required to pay facility fees of .875% of its
then maximum revolving credit amount on November 30, 1999 and on December 30,
1999 and .5% in a facility fee of its then maximum revolving credit amount on
January 31, 2000. If the loan is fully paid on a date prior to any of the
foregoing dates, then TLC will not be required to make any of the payments on
dates subsequent to the loan pay off date.
On September 17, 1999, Staff Builders sold its entire interest in Chelsea
for total consideration of $17.5 million, subject to a post-closing net asset
book value adjustment. Such consideration included $14.5 million received in
cash and $3.0 million to be paid in cash upon completion of the Distribution,
$500 thousand of which is payable to a former principal of Chelsea. The proceeds
received of $14.5 million were used to pay off $8.4 million of borrowings under
Staff Builders' acquisition line of credit and $6.1 million was used to pay down
the revolving line of credit, of which $4.6 million and $1.5 million paid down
the home health care and ATC supplemental staffing division portions of the
revolving line of credit, respectively. Staff Builders expects that there will
be no material gain or loss from this transaction.
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 constituted an oral agreement which required 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 were made
28
<PAGE> 35
as such oral agreement was not formalized pending a reconciliation of the
related amounts by the fiscal intermediary. Based upon the subsequent written
payment schedule received later in June 1999, Staff Builders is required to pay
24 equal monthly installments commencing June 25, 1999 of approximately $1.3
million, including principal and interest. Staff Builders has paid the first of
these installments in July 1999, upon reconciliation of the related amounts. In
August 1999, Staff Builders entered into a revised payment agreement which
required a payment of $350 thousand in August 1999, monthly installments of
approximately $1.1 million in September 1999 through August 2000, monthly
installments of approximately $1.0 million from September 2000 through April
2001, and approximately $650 thousand per month thereafter through March 2002.
The August and September 1999 payments have been made as required. Staff
Builders continues to negotiate more favorable payment terms. No penalties have
been assessed in connection with the revised schedule, which enabled payments to
commence after the original required date of May 1999. 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 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 implementa-
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tion. 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 107 offices located in 25 states and the District of
Columbia, as well as master franchise licenses in Japan, Spain and Brazil. Of
these offices, 61 are owned and operated by the Company and 46 are operated by
29 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 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.
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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
87 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.
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
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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 75 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. 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 40 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 78 offices in 23 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; 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.
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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 107 field offices, 46 are operated by 29 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. Amounts due to licensees are typically paid within 45 days after
each month based upon an average rate of 60% of gross margin. The amount of
monthly gross margin includes the adjustment for cost limitations and
reimbursement of allowable Medicare costs.
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 master
license fee of $1.2 million under the terms of this agreement. The terms of the
master license agreement specify that the master license fee must be paid in
full by September 30, 1999, at which time such fee is deemed fully earned
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and non-refundable. The Company's continuing obligations under the license
agreement with the Japanese company include the delivery of advisory assistance
and providing confidential operating manuals for the operation of franchise home
health care centers, initial training programs including materials which cover
home health care administration and clinical operations and the provision of one
Company representative to visit the licensee's territory for an aggregate of 35
to 50 days within the first 270 days of the agreement and from one to four times
annually thereafter for a maximum of ten days during each visit. 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
Medicare program's reductions in cost limits and establishment of per
beneficiary limits. The Company
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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 107 offices including 61 operated by
the Company and 46 operated by 29 licensees; three of these franchise offices
sublease the office space from the Company and
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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 Court granted the
Company's motion to dismiss the RICO claims and other claims which allege
violation of business law in New York, including the claim for money damages of
$25 million, treble damages and all of the claims against the named executive
officers of the Company. The Court allowed to stand certain claims which allege
violation of the Ohio business opportunities statute relating to disclosure
requirements. The Court also denied Plaintiffs' motion attempting to dismiss all
of defendants' counter-claims and denied third party defendant's motion to
dismiss the Company's third party complaint. 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
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amended filing for which was served on March 31, 1999. The Company has filed 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 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 licensees (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").
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.
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.
ATC has 56 offices in 27 states of which four are owned and operated by
Staff Builders and 52 are operated by 40 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.
37
<PAGE> 44
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..................... 54 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>
38
<PAGE> 45
<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...................... 43 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...................... 44 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>
39
<PAGE> 46
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.
40
<PAGE> 47
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.
41
<PAGE> 48
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.
42
<PAGE> 49
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.
43
<PAGE> 50
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
44
<PAGE> 51
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.
45
<PAGE> 52
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. Pursuant to the terms of the Company's new credit facility,
Mr. Savitsky's salary has been reduced by 20% for the term of such facility.
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
46
<PAGE> 53
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.
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
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<PAGE> 54
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 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. Pursuant to the terms of the Company's new credit facility, Mr.
Savitsky's salary has be reduced by 20% for the term of such facility.
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. Pursuant to
the terms of Staff Builders' new credit facility, Mr. Savitsky's salary has been
reduced by 20% for the term of such facility.
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.
Pursuant to the terms of Staff Builders' new credit facility, Mr. Savitsky's
salary has been reduced by 20% for the term of such facility.
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.
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<PAGE> 55
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 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
quarter ended May 31, 1999, the Company retained $12,430 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 $634,523
at May 31, 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 quarter ended May 31, 1999, the Company paid BCC $62,560 under
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<PAGE> 56
the terms of its franchise agreement, representing a 60% gross margin of
$272,990 less $12,430 and $10,500 of interest and principal, respectively,
withheld on the BCC Note and $187,500 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 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 September 29, 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)......................................... 1,330,369(3) 11.3%
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)............................... 1,161,000 9.8%
Dimensional Fund Advisors, Inc.(7).......................... 686,230 5.8%
All executive officers and directors as a group (8
persons).................................................. 2,651,695 22.4%
</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.
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(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 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 two classes of Staff Builders
common stock and the number of authorized shares of capital stock. TLC will have
only one class of stock, the TLC Common Stock. Holders of Staff Builders Class B
common stock have ten votes for each share owned. After the Distribution, such
stockholders will hold TLC Common Stock which have one vote per share. Holders
of Staff Builders Class B common stock currently have an approximate 11.6%
voting interest in Staff Builders. After the Distribution, such stockholders
will have an approximate 1.3% voting interest in TLC.
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
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<PAGE> 58
outstanding, held of record by approximately 728 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 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.
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<PAGE> 59
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.
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
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<PAGE> 60
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 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.
54
<PAGE> 61
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 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
55
<PAGE> 62
(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 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.
56
<PAGE> 63
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 schedules
listed in the Table of Contents. These financial statements and the financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedules 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, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present 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.
As discussed in Note 1, the accompanying consolidated financial statements
for the year ended February 28, 1998 have been restated.
/s/ DELOITTE & TOUCHE, LLP
------------------------------------
Jericho, New York
May 25, 1999 (August 30, 1999 as to the effects of
the restatement described in Note 1)
F-1
<PAGE> 64
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------
1998
MAY 31, (RESTATED --
1999 1999 SEE NOTE 1)
------------ --------- ------------
(UNAUDITED
RESTATED --
SEE NOTE 1)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 1,676 $ 2,007 $ 2,757
Accounts receivable, net of allowance for doubtful
accounts of $6,090, $7,000 and $3,660,
respectively....................................... 79,764 79,662 85,123
Deferred income taxes................................. -- -- 3,176
Income tax refund receivable.......................... 1,733 1,733 --
Prepaid expenses and other current assets............. 3,448 3,554 4,853
--------- --------- --------
Total current assets.......................... 86,621 86,956 95,909
FIXED ASSETS, net....................................... 29,110 27,987 11,622
INTANGIBLE ASSETS, net.................................. 27,110 27,091 40,295
OTHER ASSETS............................................ 4,420 4,471 10,875
--------- --------- --------
TOTAL......................................... $ 147,261 $ 146,505 $158,701
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 22,391 $ 20,379 $ 17,107
Accrued expenses...................................... 13,530 14,520 11,976
Accrued payroll and payroll related expenses.......... 26,105 25,750 28,152
Current portion of Medicare and Medicaid
liabilities........................................ 25,896 22,673 11,925
Current portion of long-term debt..................... 45,812 43,460 10,664
--------- --------- --------
Total current liabilities..................... 133,734 126,782 79,824
--------- --------- --------
LONG-TERM DEBT.......................................... 19,627 19,749 36,508
--------- --------- --------
LONG-TERM MEDICARE AND MEDICAID LIABILITIES............. 30,301 34,608 --
--------- --------- --------
OTHER LIABILITIES....................................... 5,142 4,725 4,000
--------- --------- --------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock --
Class A Common Stock -- $.01 par value; 50,000,000
shares authorized; 23,311,035, 23,307,129 and
23,009,247 outstanding at May 31, 1999, February
28, 1999 and 1998, respectively.................. 233 233 230
Class B Common Stock -- $.01 par value; 1,554,936
shares authorized; 308,353, 312,251 and 1,056,356
outstanding at May 31, 1999, February 28, 1999
and 1998, respectively........................... 3 3 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 69,055 73,692
Accumulated deficit................................... (110,834) (108,650) (35,564)
--------- --------- --------
Total stockholders' equity (deficit).......... (41,543) (39,359) 38,369
--------- --------- --------
TOTAL......................................... $ 147,261 $ 146,505 $158,701
========= ========= ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 65
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
THREE MONTHS ENDED FEBRUARY 28,
-------------------------- 1998
MAY 31, MAY 31, FEBRUARY 28, (RESTATED -- FEBRUARY 28,
1999 1998 1999 SEE NOTE 1) 1997
------------ ----------- ------------ ------------ ------------
(UNAUDITED (UNAUDITED
RESTATED -- RESTATED --
SEE NOTE 1) SEE NOTE 1)
<S> <C> <C> <C> <C> <C>
REVENUES:
Service revenues:
Home health care.................... $ 69,927 $ 83,607 $310,297 $451,098 $436,599
Supplemental staffing............... 37,558 27,256 124,867 74,300 42,430
-------- -------- -------- -------- --------
Total service revenues.............. 107,485 110,863 435,164 525,398 479,029
Sales of licensees and fees, net.... 180 415 2,424 1,275 1,326
-------- -------- -------- -------- --------
Total revenues.............. 107,665 111,278 437,588 526,673 480,355
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Operating costs..................... 73,850 76,383 299,057 338,225 301,508
General and administrative
expenses......................... 34,408 34,027 150,169 177,761 170,290
Amortization of intangible assets... 301 312 1,314 2,807 2,623
Interest expense.................... 1,243 1,052 4,233 3,706 1,601
Interest income..................... (98) (348) (1,061) (1,358) (896)
Other (income) expense, net......... (14) 27 464 (419) (1,487)
Medicare and Medicaid audit
adjustments...................... -- -- 29,000 -- --
Restructuring costs................. -- -- 20,464 33,447 --
-------- -------- -------- -------- --------
Total costs and expenses.... 109,690 111,453 503,640 554,169 473,639
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES..... (2,025) (175) (66,052) (27,496) 6,716
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 159 (76) 7,034 (5,864) 2,955
-------- -------- -------- -------- --------
NET INCOME (LOSS)..................... $ (2,184) (99) $(73,086) $(21,632) $ 3,761
======== ======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic............................... $ (.09) $ (.00) $ (3.16) $ (.90) $ .16
======== ======== ======== ======== ========
Diluted............................. $ (.09) $ (.00) $ (3.16) $ (.90) $ .15
======== ======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic............................... 23,619 23,647 23,162 23,939 23,668
======== ======== ======== ======== ========
Diluted............................. 23,619 23,647 23,162 23,939 24,577
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 66
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)
Net (Loss) (unaudited
restated -- see Note 1)....... (2,184) (2,184)
---------- ---- --- ------- --------- --------
Balances, May 31, 1999 (unaudited
restated -- see Note 1).......... 23,619,380 $236 $69,055 $(110,834) $(41,543)
========== ==== === ======= ========= ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 67
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
THREE MONTHS ENDED FEBRUARY 28,
-------------------------- 1998
MAY 31, MAY 31, FEBRUARY 28, (RESTATED -- FEBRUARY 28,
1999 1998 1999 SEE NOTE 1) 1997
------------ ----------- ------------ ------------ ------------
(UNAUDITED (UNAUDITED
RESTATED -- RESTATED --
SEE NOTE 1) SEE NOTE 1)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $(2,184) $ (99) $(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..................................... 1,217 1,001 3,991 3,805 2,757
Amortization of intangibles and other
assets..................................... 301 312 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................................ 40 79 5,100 424 (758)
Allowance for doubtful accounts.............. (910) 100 3,340 800 600
Deferred income taxes........................ -- (3) 8,540 (7,101) 548
Gain on sale of assets....................... (65) -- (1,148) (290) (1,247)
Change in operating assets and liabilities:
Accounts receivable.......................... 808 8,819 1,972 (6,391) (23,718)
Prepaid expenses and other current assets.... 106 (1,011) (1,216) 415 (1,193)
Accounts payable............................. 2,012 (549) 3,271 2,646 4,977
Accrued expenses............................. (813) (7,920) (918) 7,719 (6,525)
Increase in Medicare and Medicaid audit
liabilities................................ (1,084) 11,671 28,092 -- --
Increase in periodic interim payment
liability.................................. -- -- 14,364 4,320 275
Other assets................................. 51 (758) 451 211 (1,529)
------- ------- -------- -------- --------
Net cash provided by (used in) operating
activities................................. (521) 11,642 13,029 13,471 (19,429)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired............. -- (627) (2,876) (16,226) (10,327)
Purchase of fixed assets....................... (2,341) (101) (5,020) (1,029) (2,334)
Proceeds from disposal of assets............... 65 -- 576 855 775
------- ------- -------- -------- --------
Net cash used in investing activities........ (2,276) (728) (7,320) (16,400) (11,886)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan..... -- 108 292 524 581
Proceeds from exercise of stock options........ -- 35 35 11 29
Proceeds from exercise of warrants............. -- -- -- -- 195
Purchase and retirement of common stock........ -- (2,345) (4,770) -- (410)
Increase (decrease) in borrowings under
revolving line of credit..................... 3,001 (5,653) 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.................................. (535) (1,987) (11,110) (6,083) (3,076)
------- ------- -------- -------- --------
Net cash provided by (used in) financing
activities................................. 2,466 (9,842) (6,459) 3,680 24,611
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (331) 1,072 (750) 751 (6,704)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 2,007 2,757 2,757 2,006 8,710
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ 1,676 $ 3,829 $ 2,007 $ 2,757 $ 2,006
======= ======= ======== ======== ========
SUPPLEMENTAL DATA:
Cash paid for:
Interest..................................... $ 982 $ 979 $ 3,963 $ 3,449 $ 1,081
======= ======= ======== ======== ========
Income taxes, net............................ $ 397 $ 470 $ 2,287 $ 2,344 $ 1,867
======= ======= ======== ======== ========
Fixed assets purchased through capital lease
agreements..................................... $ -- $ 821 $ 16,323 $ 2,351 $ 4,770
======= ======= ======== ======== ========
Acquisition of businesses through issuance of
notes payable.................................. $ 310 $ 275 $ 760 $ -- $ 3,113
======= ======= ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 68
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")
AND THE THREE MONTH PERIODS ENDED MAY 31, 1999 AND 1998 (UNAUDITED)
(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 August 20, 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.
In the opinion of the Company, the unaudited financial statements contain
all adjustments (consisting only of normal and recurring accruals) necessary to
present fairly the financial position of the Company and its subsidiaries as of
May 31, 1999 and the results of operations and cash flows for the three months
ended May 31, 1999 and 1998. Interim results may not necessarily be indicative
of results of operations for an entire year.
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
F-6
<PAGE> 69
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Amounts due to licensees are typically paid within 45 days after each
month based upon an average rate of 60% of gross margin. The amount of monthly
gross margin includes the adjustment for cost limitations and reimbursement of
allowable Medicare costs.
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 owned 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 had intended to retain its investment in
Chelsea by combining the Chelsea operations with its existing supplemental
staffing business (See Note 20). The accounts of Chelsea were originally
accounted for on the equity basis in the Company's financial statements for the
year ended February 28, 1998 based on management's intent to dispose of its
investment in Chelsea. Because of management's intent to retain its investment
in Chelsea during 1999, the accounts of Chelsea were fully consolidated in the
Company's financial statements for the year ended February 28, 1999 and the 1998
financial statements were restated from amounts previously reported to properly
consolidate the accounts of Chelsea for 1998. This change in presentation was
originally disclosed as a reclassification. Subsequent to the issuance of the
Company's fiscal 1999 financial statements, the Company's management determined
that because the conditions that gave rise to temporary control were based on
voluntary actions on the Company's part, it should have originally consolidated
the accounts of Chelsea in its fiscal 1998 financial statements and disclosed
the effects of this change as a correction of an error. As a result, current
assets, total assets, current liabilities, and total liabilities have been
increased by $5.3 million, $3.7 million, $3.5 million, and $3.7 million,
respectively as of February 28, 1998 and total revenues and total expenses by
$7.0 million each for the year then ended from the amounts originally reported
in the Company's financial statements. Stockholders' equity (deficit), net loss,
and basic and diluted loss per share were not affected. 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.
F-7
<PAGE> 70
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The weighted average life of remaining goodwill and
intangible assets was 39.9 years as of February 28, 1999 and 1998. The weighted
average life of remaining goodwill and intangible assets related to the home
health care division was 39.6 years and 40.0 years as of February 28, 1999 and
1998, respectively. The weighted average life of remaining goodwill and
intangible assets related to the supplemental staffing division was 39.9 years
and 39.4 years as of February 28, 1999 and 1998, respectively.
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).
As a result of the factors related to the home health care industry including
industry consolidation, changing third-party reimbursement requirements and an
uncertain regulatory environment, Staff Builders has determined that the useful
life of goodwill and other intangibles should have been reduced from forty years
to twenty years, effective March 1, 1999. As a result, the accompanying
unaudited consolidated financial statements as of May 31, 1999 and for the three
months then ended have been restated to give effect to this change. The effect
of the change is to reduce goodwill and total assets by $77 and to increase net
loss and accumulated deficit by $77 from the amounts previously reported. Basic
and diluted loss per share were not affected. Based upon the remaining net book
value of the home health care goodwill and intangible assets as of February 28,
1999, the increase in annual amortization expense will approximate $300.
Indicators which reflect the existence of impairment to the carrying value
of goodwill include adverse regulatory and reimbursement developments, cash flow
deficits, a decrease in historic and anticipated revenue and operating results
and a decrease in the fair value of some or all assets. As such negative
indicators have been present, the carrying value of goodwill and other
long-lived assets were reviewed to determine if the assets will be recoverable,
based on undiscounted estimated cash flows. Since the goodwill was not
recoverable based on undiscounted estimated cash flows, the carrying value of
the goodwill has been reduced to estimated fair value as required by FAS 121.
Accordingly, Staff Builders has reduced the carrying value of its goodwill by
approximately 75% over the last two fiscal years to reflect these impairment
indicators.
REVENUE RECOGNITION
Staff Builders' home health care division recognizes revenue on the accrual
basis as the related services are provided to customers and when the customer is
obligated to pay for such completed services. Staff Builders' home health care
earnings process is completed as each hour of service or home care visit is
rendered. Revenues are recorded net of contractual allowances or other
allowances to which its home health care customers are entitled.
Staff Builders' supplemental staffing division recognizes revenue on the
accrual basis as the related services are provided to customers and when the
customer is obligated to pay for such completed services.
F-8
<PAGE> 71
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Staff Builders' supplemental staffing earnings process is completed as each hour
of service or staffing shift is rendered. Revenues are recorded net of
contractual allowances or other allowances to which its supplemental staffing
customers are entitled.
Employees assigned to particular home health care customers or supplemental
staffing customers may be changed at the customer's request or at Staff
Builders' initiation.
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-9
<PAGE> 72
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 Company does not believe that adoption of
SOP No. 98-5 will 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. Staff Builders'
valuation considered, among other factors, the additional operating losses
generated during the third and fourth quarters of fiscal 1999. During the third
quarter ended November 30, 1998, Staff Builders experienced losses in some
locations as a result of not being able to reduce the number of visits required
by its patients and to contain the related costs as mandated by the restrictive
guidelines of the IPS enacted in connection with the BBA and reductions in home
care payments by other home care payor sources. Staff Builders reacted by
closing selected branches and converting many licensee operated locations to
company-owned locations. Upon the closure or sale of locations, the goodwill
associated with those locations was written off. Subsequent to November 30, 1998
and through the date of filing Staff Builders' financial statements for the year
ended February 28, 1999, Staff Builders continued to experience operating
difficulties like many other companies in the home health care industry.
Accordingly, the value of such businesses experienced a further decline. Based
upon the foregoing factors, in the fourth quarter ended February 28, 1999, Staff
Builders evaluated the net carrying value of goodwill and intangible assets
based upon the net present value of future cash flows in accordance with the
requirements of SFAS No. 121. As a result, Staff Builders recorded a write-down
in goodwill of approximately $15.3 million, leaving a remaining net carrying
value of goodwill and intangible assets as of February 28, 1999 of $5.1 million
in Staff Builders' home health
F-10
<PAGE> 73
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
care business segment. Staff Builders' actions to increase operational
efficiencies, close unprofitable locations and to terminate certain licensee
locations, represented a furtherance of a restructuring plan necessitated out of
continuing losses and a current, deteriorating business climate within the home
health care industry. 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.
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. This aggregate liability of $9.5 million includes
$4.3 million which was provided as part of the $29.0 million provided during the
quarter ended November 30, 1998, as discussed below.
During the fourth quarter of fiscal 1999, approximately $2.7 million of the
$9.5 million was offset against current receivables from Medicare to result in a
remaining balance of $6.8 million at February 28, 1999 related to fiscal 1997
audits. Fiscal 1997 audits have been completed for the home office cost reports
and for substantially all branch operating locations, for which Staff Builders
has received a Notice of Provider Reimbursement to indicate completion of these
audits. All years prior to fiscal 1997 are closed relative to substantially all
field operating location audits. Fiscal 1996, 1995 and 1993 remain open for home
office cost report audits. Fiscal 1999 and 1998 are open for all audits.
However, Staff Builders continues to appeal various audit findings dating back
to fiscal 1992 and has discussed some of these issues at an August 1999
mediation hearing with United Government Services representatives.
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
F-11
<PAGE> 74
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 provision of $29.0 million includes $18.0 million for Medicare audit
liabilities and $11.0 million for Medicaid audit liabilities. The Medicare audit
liabilities include $6.0 million, $8.0 million and $4.0 million for additional
accruals required for home office cost report issues, field operating location
audits and clinical audits, respectively. The fiscal 1997 Medicare audits
commenced in January 1998 and were completed by November 1998, for which there
was an aggregate liability of $9.5 million, including $8.2 million and $1.3
million for field operating locations and the home office cost reports,
respectively. The results of the fiscal 1997 audits provided a basis for
determining an estimated accrual for the probable amounts to be asserted for
similar issues subject to audit which existed at some points in the open audit
periods of fiscal 1999, 1998, 1996 and 1995. Although United Government Services
auditors have completed substantially all of their field audits for fiscal 1997
and prior years, they have not completed the home office audits which they began
for fiscal 1996 and fiscal 1995. The fiscal 1996 and fiscal 1995 home office
audits commenced in mid-calendar year 1997 and mid-calendar year 1996,
respectively. Based upon the results of the fiscal 1997 audits, Staff Builders
provided additional accruals of $4.3 million for fiscal 1997 to total the
aggregate amount of $9.5 million. Additionally, Staff Builders provided $1.5
million and $5.0 million for audits not yet commenced for fiscal 1999 and 1998,
respectively. Further, based upon the results of the fiscal 1997 home office
audit, Staff Builders provided additional accruals of $2.2 million and $1.0
million for home office audits for fiscal 1996 and 1995, respectively. The
extent of the increased audit scope and detailed documentation requirements
represented significant changes from historical experience in prior audits which
could not be anticipated by Staff Builders prior to performance of the fiscal
1997 audits. Additionally, Staff Builders provided $4.0 million based upon
clinical audits conducted in fiscal 1999.
The nature of the adjustments made as a result of audits conducted were
primarily due to an inadequate level of detail in documentation to support costs
incurred for actual services rendered.
The Medicaid audit liabilities of $11.0 million reflect amounts for third
party liability issues which cover several years dating back to 1988. While the
respective state agencies have conducted on-going reviews of claims, they
pursued an aggressive audit process beginning in fiscal 1999 to review claims
paid over several prior years for which these agencies are currently demanding
documentation for such claims. As part of Staff Builders' response to these
audits, Staff Builders conducted an internal review of this issue resulting in
the assessment of its open liability for repayment to the state agencies.
The resultant liabilities for Medicare and Medicaid audit adjustments,
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 $38.3 million as of February 28, 1999 for Federal and state audit
adjustments which includes $27.3 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. Staff Builders does not believe
that it is reasonably possible that the outcome of open Medicare and Medicaid
matters may result in a liability exceeding the amounts accrued and, as such, an
accrual for additional loss amounts is not required.
F-12
<PAGE> 75
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 million 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 constituted an oral agreement which required 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 were made as such
oral agreement was not formalized pending a reconciliation of the related
amounts by the fiscal intermediary. Based upon the subsequent written payment
schedule received later in June 1999, Staff Builders is required to pay 24 equal
monthly installments commencing June 25, 1999 of approximately $1.3 million,
including principal and interest. Staff Builders has paid the first of these
installments in July 1999, upon reconciliation of the related amounts. In August
1999, Staff Builders has paid approximately $350 thousand pursuant to a further
reduced payment agreement, as Staff Builders continues to negotiate more
favorable payment terms. No penalties have been assessed in connection with the
revised schedule, which enabled payments to commence after the original required
date of May 1999. 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
F-13
<PAGE> 76
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 tables set forth the selected results of operations by
business segment (in millions of dollars):
<TABLE>
<CAPTION>
HOME HEALTH CARE
-----------------------------------------------------------------------
THREE MONTHS ENDED YEARS ENDED
-------------------------- ------------------------------------------
MAY 31, MAY 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998 1997
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenues....................... $69.9 $ 83.6 $310.3 $451.1 $436.6
Sales of licensees and fees, net....... 0.2 0.3 2.2 1.1 1.0
----- ------ ------ ------ ------
Total revenues............... 70.1 83.9 312.5 452.2 437.6
----- ------ ------ ------ ------
Gross margin........................... 25.6 28.8 112.5 172.1 169.0
General & administrative expenses...... 27.2 28.7 123.6 161.0 159.2
Interest expense....................... 0.4 0.7 2.6 2.8 1.4
Depreciation and amortization
expense.............................. 1.1 1.2 4.9 6.1 5.1
Other (income) expense................. (0.2) (0.3) 48.5 28.4 (2.3)
----- ------ ------ ------ ------
Income (loss) before income taxes...... (2.9) (1.5) (67.1) (26.2) 5.6
Provision (benefit) for income taxes... -- (0.6) 6.6 (5.3) 2.5
----- ------ ------ ------ ------
Net income (loss)............ $(2.9) $ (0.9) $(73.7) $(20.9) $ 3.1
===== ====== ====== ====== ======
Total assets................. $88.8 $ 89.3 $122.1 $134.1
===== ====== ====== ======
</TABLE>
F-14
<PAGE> 77
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL STAFFING
----------------------------------------------------------------------
THREE MONTHS ENDED YEARS ENDED
------------------------- ------------------------------------------
MAY 31, MAY 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenues................... $37.6 $27.3 $124.9 $74.3 $42.4
Sales of licensees and fees, net... -- 0.1 0.2 0.2 0.4
----- ----- ------ ----- -----
Total revenues........... 37.6 27.4 125.1 74.5 42.8
----- ----- ------ ----- -----
Gross margin....................... 8.2 6.1 26.0 16.3 9.9
General & administrative
expenses......................... 6.1 4.3 22.6 13.0 8.4
Interest expense................... 0.8 0.4 1.6 0.9 0.2
Depreciation and amortization
expense.......................... 0.2 0.1 0.4 0.5 0.3
Other (income) expense............. 0.1 0.0 0.4 3.2 (0.1)
----- ----- ------ ----- -----
Income (loss) before income
taxes............................ 1.0 1.3 1.0 (1.3) 1.1
Provision (benefit) for income
taxes............................ 0.2 0.5 0.4 (0.6) 0.4
----- ----- ------ ----- -----
Net income (loss)........ $ 0.8 $ 0.8 $ 0.6 $(0.7) $ 0.7
===== ===== ====== ===== =====
Total assets............. $58.5 $ 57.2 $36.6 $22.1
===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
----------------------------------------------------------------------
THREE MONTHS ENDED YEARS ENDED
------------------------- ------------------------------------------
MAY 31, MAY 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenues................... $107.5 $110.9 $435.2 $525.4 $479.0
Sales of licensees and fees, net... 0.2 0.4 2.4 1.3 1.4
------ ------ ------ ------ ------
Total revenues........... 107.7 111.3 437.6 526.7 480.4
------ ------ ------ ------ ------
Gross margin....................... 33.8 34.9 138.5 188.4 178.9
General & administrative
expenses......................... 33.3 33.0 146.2 174.0 167.6
Interest expense................... 1.2 1.1 4.2 3.7 1.6
Depreciation and amortization
expense.......................... 1.3 1.3 5.3 6.6 5.4
Other (income) expense............. (0.1) (0.3) 48.9 31.6 (2.4)
------ ------ ------ ------ ------
Income (loss) before income
taxes............................ (1.9) (0.2) (66.1) (27.5) 6.7
Provision (benefit) for income
taxes............................ 0.2 (0.1) 7.0 (5.9) 2.9
------ ------ ------ ------ ------
Net income (loss)........ $ (2.1) $ (0.1) $(73.1) $(21.6) $ 3.8
====== ====== ====== ====== ======
Total assets............. $147.3 $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.
F-15
<PAGE> 78
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. The terms of the master license agreement specify
that the master license fee must be paid in full by September 30, 1999, at which
time such fee is deemed fully earned and non-refundable. Staff Builders'
continuing obligations under the license agreement with the Japanese company
include the delivery of advisory assistance and providing confidential operating
manuals for the operation of franchise home health care centers, initial
training programs including materials which cover home health care
administration and clinical operations and the provision of one Company
representative to visit the licensee's territory for an aggregate of 35 to 50
days within the first 270 days of the agreement and from one to four times
annually thereafter for a maximum of ten days during each visit. 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.
F-16
<PAGE> 79
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Included in the write-down of goodwill in the fourth quarter of fiscal 1999 (see
Note 2), was $2.7 million related to businesses acquired during fiscal 1999,
consisting primarily of the purchase of the rights to operate locations
previously operated by licensees.
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, 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.
F-17
<PAGE> 80
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Staff Builders wrote off fixed assets of $911. This
amount included assets related to closed locations of $384 and obsolete computer
equipment of $527 which is included in restructuring costs and general and
administrative expenses, respectively. 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>
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.
F-18
<PAGE> 81
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Beginning in January 1999, Staff Builders maintained most of its health
insurance coverage under a self-insured policy. Health insurance consists of
coverage for medical and prescription drug costs. Stop-loss coverage is
maintained under specific excess loss insurance with a deductible of $100 per
family and a specific reimbursement maximum of $900 per covered person.
Essentially, Staff Builders is responsible for the first $100 in claims per
covered family, and then each family member is covered for the balance of claims
up to $1.0 million.
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. These audits consist of the
fiscal 1997 audits of $6.8 million and the fiscal 1994 home office audit
of $3.4 million.
(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.
F-19
<PAGE> 82
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) The Company has obtained payment terms which require repayment equal to
25% of current remittances.
(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.
F-20
<PAGE> 83
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 (See Note 20).
(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-21
<PAGE> 84
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-22
<PAGE> 85
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-23
<PAGE> 86
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 Court granted the Company's
motion to dismiss the RICO claims and other claims which allege violation of
business law in New York, including the claim for money damages of $25 million,
treble damages and all of the claims against the
F-24
<PAGE> 87
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
named executive officers of the Company. The Court allowed to stand certain
claims which allege violation of the Ohio business opportunities statute
relating to disclosure requirements. The Court also denied Plaintiffs' motion
attempting to dismiss all of defendants' counter-claims and denied third party
defendant's motion to dismiss the Company's third party complaint. 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 has filed 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' licensees (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. See Note 3 for a discussion
of Staff Builders' accruals and contingencies with respect to Medicare and
Medicaid liabilities.
F-25
<PAGE> 88
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
F-26
<PAGE> 89
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("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, 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-27
<PAGE> 90
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-28
<PAGE> 91
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-29
<PAGE> 92
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-30
<PAGE> 93
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
------------ ------------ ------------ ------------
(RESTATED -- (RESTATED -- (RESTATED -- (RESTATED --
SEE NOTE 1) SEE NOTE 1) SEE NOTE 1) SEE NOTE 1)
<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-31
<PAGE> 94
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------------ ------------
(RESTATED -- (RESTATED --
SEE NOTE 1) SEE NOTE 1)
<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.
20. SUBSEQUENT EVENTS (UNAUDITED)
On September 17, 1999, Staff Builders sold its entire interest in Chelsea
for total consideration of $17.5 million, subject to a post-closing net asset
book value adjustment. Such consideration included $14.5 million received in
cash and $3.0 million to be paid in cash upon completion of the Distribution,
$500 of which is payable to a former principal of Chelsea. The proceeds received
of $14.5 million were used to pay off $8.4 million of borrowings under Staff
Builders' acquisition line of credit and $6.1 million was used to pay down the
revolving line of credit, of which $4.6 million and $1.5 million paid down the
home health care and ATC supplemental staffing division portions of the
revolving line of credit, respectively. Staff Builders expects that there will
be no material gain or loss from this transaction.
On September 24, 1999, the home health care business of Staff Builders
("TLC") entered into an amended and restated loan and security agreement which
expires on February 29, 2000. The TLC loan agreement provides for the home
health care business to borrow up to a maximum of $17.0 million which shall be
reduced to (i) $16.75 million on the earlier of: (A) October 29, 1999, or (B)
the Distribution, (ii) $16.25 million thirty days after the date of the
reduction set forth in clause (i) above, and (iii) $16.0 million thirty days
after the date of the reduction set forth in clause (ii) above. TLC is permitted
to borrow up to 80% of eligible accounts receivable, up to the maximum amount of
the credit facility. Further, availability is reduced by a separate reserve in
the amount of $750 until such time that a more favorable payment plan has been
agreed upon in writing between TLC and HCFA, under terms and conditions
acceptable to the bank. As of September 24, 1999, Staff Builders had borrowed an
aggregate of $14.8 million under its TLC loan.
The TLC loan bears interest at 2.0% over the prevailing prime lending rate
(such rate being 8.25% as of September 27, 1999), a monthly collateral
management fee of $8 and an unused fee of .375% per annum of the daily unused
portion of the credit facility. Based on the outstanding borrowings at September
24, 1999, an increase of 1% in the prime rate would have the effect of
increasing annual interest expense by approximately $150 thousand. TLC paid bank
fees of $170 in connection with the execution of the loan agreement.
Subsequently, TLC is required to pay facility fees of .875% of its then maximum
revolving credit amount on November 30, 1999 and on December 30, 1999 and .5% in
a facility fee of its then maximum
F-32
<PAGE> 95
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revolving credit amount on January 31, 2000. If the loan is fully paid on a date
prior to any of the foregoing dates, then TLC will not be required to make any
of the payments on dates subsequent to the loan pay off date.
F-33
<PAGE> 96
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-34
<PAGE> 97
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of May 31,
1999 and unaudited pro forma consolidated statements of operations of the
Company for the three months ended May 31, 1999 and 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 May 31, 1999 and the pro forma
consolidated statements of operations give effect to the Distribution as if it
occurred on the first day of each respective period. The unaudited historical
financial statements as of May 31, 1999 and for the three months then ended have
been restated. See Note 1 to the Consolidated Financial Statements.
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-35
<PAGE> 98
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAFF BUILDERS TLC PRO FORMA TLC PRO FORMA
HISTORICAL ADJUSTMENTS(A) CONSOLIDATED
-------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 1,676 $ (874)(B) $ 802
Accounts receivable, net......................... 79,764 (32,792)(B) 46,972
Income tax refund receivable..................... 1,733 1,733
Prepaid expenses and other current assets........ 3,448 (1,946)(B) 1,502
--------- -------- ---------
Total current assets..................... 86,621 (35,612) 51,009
FIXED ASSETS, net.................................. 29,110 (842)(B) 28,268
INTANGIBLE ASSETS, net............................. 27,110 (21,797)(B) 5,313
OTHER ASSETS....................................... 4,420 (299)(B) 4,121
--------- -------- ---------
TOTAL ASSETS....................................... $ 147,261 $(58,550) $ 88,711
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses............ $ 35,921 $ (7,037)(B) $ 28,884
Accrued payroll and payroll related expenses..... 26,105 (3,535)(B) 22,570
Current portion of Medicare and Medicaid
liabilities................................... 25,896 0 25,896
Current portion of long-term debt................ 45,812 (25,033)(B) 20,779
--------- -------- ---------
Total current liabilities................ 133,734 (35,605) 98,129
--------- -------- ---------
LONG-TERM DEBT..................................... 19,627 19,627
--------- ---------
LONG-TERM MEDICARE AND MEDICAID LIABILITIES........ 30,301 30,301
--------- ---------
OTHER LIABILITIES.................................. 5,142 (25)(B) 5,117
--------- -------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock............................. 233 (115)(E) 118
Class B common stock............................. 3 (3) --
Additional paid-in capital....................... 69,055 (21,772)(E) 47,283
Accumulated deficit.............................. (110,834) (1,030)(B) (111,864)
--------- -------- ---------
Total stockholders' equity (deficit)..... (41,543) (22,920) (64,463)
--------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $ 147,261 $(58,550) $ 88,711
========= ======== =========
</TABLE>
See notes to pro forma consolidated financial statements
F-36
<PAGE> 99
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STAFF BUILDERS TLC PRO FORMA TLC PRO FORMA
HISTORICAL ADJUSTMENTS(A) CONSOLIDATED
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES
Home health care................................. $ 69,927 $ -- $69,927
Supplemental staffing............................ 37,558 (37,558)(B) 0
-------- -------- -------
Total service revenues........................... 107,485 (37,558) 69,927
-------- -------- -------
Sales of licensees and fees, net................. 180 (13)(B) 167
-------- -------- -------
Total revenues........................... 107,665 (37,571) 70,094
-------- -------- -------
COSTS AND EXPENSES:
Operating costs.................................. 73,850 (29,365)(B) 44,485
General and administrative expenses.............. 34,408 (6,142)(B) 28,266
Amortization of intangible assets................ 301 (173)(B) 128
Interest expense................................. 1,243 (848)(B) 395
Interest (income)................................ (98) 3(B) (95)
Other (income) expense, net...................... (14) (137)(B) (151)
-------- -------- -------
Total costs and expenses................. 109,690 (36,662) 73,028
-------- -------- -------
(LOSS) BEFORE INCOME TAXES......................... (2,025) 909 (2,934)
PROVISION FOR INCOME TAXES......................... 159 (134)(C) 25
-------- -------- -------
NET INCOME (LOSS).................................. $ (2,184) $ (775) $(2,959)
======== ======== =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic............................................ $ (0.09) $ -- $ (0.25)
======== ======== =======
Diluted.......................................... $ (0.09) $ -- $ (0.25)
======== ======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic............................................ 23,619 (11,810)(D) 11,810
======== ======== =======
Diluted.......................................... 23,619 (11,810)(D) 11,810
======== ======== =======
</TABLE>
See notes to pro forma consolidated financial statements
F-37
<PAGE> 100
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STAFF BUILDERS TLC PRO FORMA TLC PRO FORMA
HISTORICAL ADJUSTMENTS(A) CONSOLIDATED
-------------- -------------- -------------
<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 licenses 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.............. 150,169 (22,610)(B) 127,559
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...................... 464 (338)(B) 126
Medicare and Medicaid audit adjustments.......... 29,000 29,000
Restructuring costs.............................. 20,464 (130)(B) 20,334
-------- -------- --------
Total costs and expenses................. 503,640 (125,534) 378,106
INCOME (LOSS) BEFORE INCOME TAXES.................. (66,052) 477 (65,575)
PROVISION FOR INCOME TAXES......................... 7,034 (509)(C) 6,525
-------- -------- --------
NET INCOME (LOSS).................................. $(73,086) $ 986 $(72,100)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic............................................ $ (3.16) $ -- $ (6.23)
======== ======== ========
Diluted.......................................... $ (3.16) $ -- $ (6.23)
======== ======== ========
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-38
<PAGE> 101
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-39
<PAGE> 102
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. 3 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/ DALE R. CLIFT
----------------------------------
Dale R. Clift
President and Chief Operating
Officer
Dated: October 1, 1999
<PAGE> 103
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> 104
<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)
10.39 -- Second Amended and Restated Loan and Security Agreement,
dated as of September 24, 1999, between the Company and
Mellon Bank, N.A.
21 -- Subsidiaries of the Company.+
27 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
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 4.1
<TABLE>
<S> <C> <C>
NUMBER TENDER LOVING CARE HEALTH SHARES
CARE SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 88032R 10 7
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES, $.01 PAR VALUE, OF THE COMMON STOCK OF
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
transferable on the books of the Corporation by the holder hereof in person or by duly attorney upon
surrender of this certificate properly endorsed. This certificate and the shares represented hereby
are issued and shall be subject to all of the provisions of the Certificate of Incorporation, as
amended, of the Corporation (a copy of which is on file at the office of the Corporation) to all of
which the holder of this certificate by acceptance hereof, asserts. This certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized
officers.
Dated:
(SIGNATURE TO COME) (SIGNATURE TO COME)
SECRETARY PRESIDENT
[SEAL]
COUNTERSIGNED AND REGISTERED.
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
BY TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian _____________
(Cust) (Minor)
TEN ENT - as tenants by the entireties
under Uniform Gifts to Minors
JT TEN - as joint tenants with right
of survivorship and not as Act _____________________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, AND RELATIVE, PARTICIPATING
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE CORPORATION OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS WILL BE FURNISHED BY THE CORPORATION, WITHOUT CHARGE,
TO EACH STOCKHOLDER WHO SO REQUESTS, UPON APPLICATION TO THE TRANSFER AGENT OR
TO THE SECRETARY OF THE CORPORATION.
For value received, _________________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
_________________________________________________________________________Shares
of the capital stock represented by this Certificate, and do hereby irrevocably
constitute and appoint ________________________________________________________
_______________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------
X
-------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with
the names as written upon the face of the Certificate
in every particular, without alteration or
enlargement or any change whatever.
Signature(s) Guaranteed:
- -----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST,
STOLEN, MUTILATED OR DESTROYED, THE CORPORATION
WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 10.39
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
--------------
Mellon Bank, N.A.
as lender
--------------
Tender Loving Care Health Care Services, Inc.
and
Related Affiliates
as borrowers
--------------
September 24, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 - DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . . . Page 1
1.1 Terms Defined . . . . . . . . . . . . . . . . . . . . . . . Page 1
1.2 Accounting Principles . . . . . . . . . . . . . . . . . . . Page 6
SECTION 2 - THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6
2.1 Revolving Credit - Description . . . . . . . . . . . . . . . Page 6
2.2 Revolving Credit - Borrowing Base . . . . . . . . . . . . . Page 7
2.3 Revolving Credit - Termination by Borrowers . . . . . . . . Page 7
2.4 Collections, Disbursements and Borrowing Availability . . . Page 7
2.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . Page 8
2.6 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 8
2.7 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . Page 9
2.8 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . Page 9
2.9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . Page 10
2.10 Nature of Liability . . . . . . . . . . . . . . . . . . . . Page 10
SECTION 3 - COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . Page 10
3.1 Description . . . . . . . . . . . . . . . . . . . . . . . . Page 10
3.2 Lien Documents . . . . . . . . . . . . . . . . . . . . . . . Page 11
3.3 Other Actions . . . . . . . . . . . . . . . . . . . . . . . Page 11
3.4 Searches . . . . . . . . . . . . . . . . . . . . . . . . . . Page 11
3.5 Landlord's Waivers . . . . . . . . . . . . . . . . . . . . . Page 11
3.6 Filing Security Agreement . . . . . . . . . . . . . . . . . Page 12
3.7 Power of Attorney . . . . . . . . . . . . . . . . . . . . . Page 12
3.8 Management Support Agreements and Fraud Guarantees . . . . . Page 12
3.9 Application of Collateral Proceeds . . . . . . . . . . . . . Page 12
3.10 Nature of Collateral . . . . . . . . . . . . . . . . . . . . Page 12
SECTION 4 - CLOSING AND CONDITIONS PRECEDENT TO ADVANCES . . . . . . . . . Page 12
4.1 Resolutions, Opinions, and Other Documents . . . . . . . . . Page 12
4.2 Absence of Certain Events . . . . . . . . . . . . . . . . . Page 13
4.3 Warranties and Representations at Closing . . . . . . . . . Page 13
4.4 Compliance with this Agreement . . . . . . . . . . . . . . . Page 13
4.5 Officer's Certificate . . . . . . . . . . . . . . . . . . . Page 13
4.6 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . Page 14
4.7 Waiver of Rights . . . . . . . . . . . . . . . . . . . . . . Page 14
SECTION 5 - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . Page 14
5.1 Corporate Organization and Validity . . . . . . . . . . . . Page 14
5.2 Place of Business . . . . . . . . . . . . . . . . . . . . . Page 14
5.3 Pending Litigation . . . . . . . . . . . . . . . . . . . . . Page 14
5.4 Title to Properties . . . . . . . . . . . . . . . . . . . . Page 15
5.5 Patents and Trademarks . . . . . . . . . . . . . . . . . . . Page 15
5.6 Governmental Consent . . . . . . . . . . . . . . . . . . . . Page 15
5.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 15
5.8 Financial Statements . . . . . . . . . . . . . . . . . . . . Page 15
5.9 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . Page 15
5.10 Subsidiaries and Affiliates . . . . . . . . . . . . . . . . Page 15
5.11 Guarantees, Contracts, etc. . . . . . . . . . . . . . . . . Page 15
5.12 Government Regulations, etc. . . . . . . . . . . . . . . . . Page 16
5.13 Business Interruptions . . . . . . . . . . . . . . . . . . . Page 17
5.14 Names . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 17
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
5.15 Other Associations . . . . . . . . . . . . . . . . . . . . . Page 17
5.16 Environmental Matters . . . . . . . . . . . . . . . . . . . Page 17
5.17 Regulation O . . . . . . . . . . . . . . . . . . . . . . . . Page 17
5.18 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . Page 17
5.19 Interrelationship of Borrowers . . . . . . . . . . . . . . . Page 18
5.20 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . Page 18
5.21 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . Page 18
5.22 Trade Creditors . . . . . . . . . . . . . . . . . . . . . . Page 18
SECTION 6 - BORROWERS' AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . Page 18
6.1 Payment of Taxes and Claims . . . . . . . . . . . . . . . . Page 18
6.2 Maintenance of Properties, Collateral and Corporate
Existence . . . . . . . . . . . . . . . . . . . . . . . . . Page 19
6.3 Places of Business . . . . . . . . . . . . . . . . . . . . . Page 20
6.4 Business Conducted . . . . . . . . . . . . . . . . . . . . . Page 20
6.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . Page 20
6.6 Issue Taxes . . . . . . . . . . . . . . . . . . . . . . . . Page 20
6.7 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . Page 20
6.8 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . Page 20
6.9 Submission of Collateral Documents . . . . . . . . . . . . . Page 21
6.10 Other Governmental Contracts . . . . . . . . . . . . . . . . Page 21
6.11 Warranties for Future Advances . . . . . . . . . . . . . . . Page 21
6.12 Financial Covenants . . . . . . . . . . . . . . . . . . . . Page 21
6.13 Financial and Business Information . . . . . . . . . . . . . Page 22
6.14 Officers' Certificates . . . . . . . . . . . . . . . . . . . Page 23
6.15 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . Page 23
6.16 Tax Returns and Reports . . . . . . . . . . . . . . . . . . Page 24
6.17 Information to Participant . . . . . . . . . . . . . . . . . Page 24
6.18 Material Adverse Developments . . . . . . . . . . . . . . . Page 24
6.19 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . Page 24
6.20 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . Page 24
6.21 Retention of Consultant . . . . . . . . . . . . . . . . . . Page 24
6.22 Reduction in Salaries . . . . . . . . . . . . . . . . . . . Page 25
6.23 Payment Plan . . . . . . . . . . . . . . . . . . . . . . . . Page 25
SECTION 7 - BORROWERS' NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . Page 25
7.1 Merger, Consolidation, Dissolution or Liquidation . . . . . Page 25
7.2 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . Page 25
7.3 Liens and Encumbrances: . . . . . . . . . . . . . . . . . . Page 25
7.4 Transactions With Affiliates or Subsidiaries . . . . . . . . Page 26
7.5 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . Page 26
7.6 Distributions, Redemptions and Other Indebtedness . . . . . Page 26
7.7 Loans and Investments . . . . . . . . . . . . . . . . . . . Page 26
7.8 Use of Lender's Name . . . . . . . . . . . . . . . . . . . . Page 26
7.9 Change in Capital Stock . . . . . . . . . . . . . . . . . . Page 26
7.10 Miscellaneous Covenants . . . . . . . . . . . . . . . . . . Page 27
7.11 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . Page 27
7.12 Transactions with Staff Builders and ATC Group . . . . . . . Page 27
SECTION 8 - DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 27
8.1 Events of Default . . . . . . . . . . . . . . . . . . . . . Page 27
8.2 Rights and Remedies on Default . . . . . . . . . . . . . . . Page 29
8.3 Nature of Remedies . . . . . . . . . . . . . . . . . . . . . Page 30
8.4 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . Page 31
8.5 Cross-Default and Cross-Collateralization . . . . . . . . . Page 31
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 9 - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . Page 32
9.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . Page 32
9.2 Integrated Agreement . . . . . . . . . . . . . . . . . . . . Page 33
9.3 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 33
9.4 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 33
9.5 Expenses of Lender . . . . . . . . . . . . . . . . . . . . . Page 33
9.6 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . Page 33
9.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . Page 34
9.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . Page 34
9.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . Page 34
9.10 Successors and Assigns . . . . . . . . . . . . . . . . . . . Page 35
9.11 Duplicate Originals . . . . . . . . . . . . . . . . . . . . Page 35
9.12 Modification . . . . . . . . . . . . . . . . . . . . . . . . Page 35
9.13 Signatories . . . . . . . . . . . . . . . . . . . . . . . . Page 35
9.14 Third Parties . . . . . . . . . . . . . . . . . . . . . . . Page 35
9.15 Discharge of Taxes, Borrowers's Obligations, Etc. . . . . . Page 35
9.16 Withholding and Other Tax Liabilities . . . . . . . . . . . Page 35
9.17 Consent to Jurisdiction . . . . . . . . . . . . . . . . . . Page 36
9.18 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . Page 36
9.19 Future Commitments . . . . . . . . . . . . . . . . . . . . . Page 36
</TABLE>
iii
<PAGE> 5
EXHIBIT LIST
Exhibit 4.1(h) Financial Projections of Borrowers
Exhibit 5.1 -- Jurisdictions of Foreign Qualification to do Business
Exhibit 5.2 -- Places of Business
Exhibit 5.3 -- Litigation
Exhibit 5.4 -- Existing Liens and Claims
Exhibit 5.5 -- Patents, Copyrights, Trademarks, Licenses, Franchises,
etc.
Exhibit 5.8 -- Tax Identification Numbers
Exhibit 5.10 -- Subsidiaries and Affiliates
Exhibit 5.11 -- Existing Guaranties, Investments and Borrowings
Exhibit 5.12(b) -- Employee Benefit Plans
Exhibit 5.12(c) -- Certificates of Need, Qualified Payor Contracts, and
Provider Numbers
Exhibit 5.13 -- Business Interruptions
Exhibit 5.14 -- Names
Exhibit 5.15 -- Other Associations
Exhibit 5.16 -- Environmental Matters
Exhibit 5.18 -- Capital Stock; Warrants; Options
Exhibit 7.4(a) -- Transactions with Affiliates or Subsidiaries
Exhibit 7.6 -- Distributions, Redemptions and other Indebtedness
Exhibit 7.12 -- Transactions with Staff Builders and ATC Group
iv
<PAGE> 6
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Second Amended and Restated Loan and Security Agreement ("Agreement"),
dated September 24, 1999, is entered into by and among each of the corporations
referred to as a Borrower on the signatures pages attached hereto (each of the
foregoing individually, a "Borrower" and collectively, "Borrowers"), and Mellon
Bank, N.A. ("Lender").
Background
A. Borrowers (except for TLC (as defined below)), each member of the ATC
Group (as defined below) and Staff Builders (as defined below) (collectively,
"Original Borrowers"), and Lender entered into a certain Amended and Restated
Loan and Security Agreement, dated January 8, 1997 ("Existing Loan Agreement"),
and related instruments, agreements, and documents with Lender to reflect
certain financing arrangements between the parties. The terms and conditions of
the financing arrangements reflected by the Existing Loan Agreement were
modified as a result of various letters and amendment documents ("Amendment
Documents") exchanged among the parties. The Existing Loan Agreement, as
amended, and all other instruments, documents, and agreements related thereto or
executed in connection therewith, are sometimes referred to herein collectively
as the "Existing Loan Documents."
B. Although Staff Builders and each member of the ATC Group have been and
remain liable for all obligations and liabilities of Borrowers under the
Existing Loan Documents and under this Agreement, the members of the ATC Group
(as a result of the Amendment Documents) and Staff Builders (as a result of the
execution of this Agreement and other agreements between Staff Builders and
Lender) are no longer designated and considered Borrowers under the Existing
Loan Documents or under this Agreement, and have obtained direct financing from
Lender pursuant to separate agreements among such parties (collectively, the
"ATC Loan Documents").
C. Original Borrowers have notified Lender that a plan has been approved by
the Board of Directors of Staff Builders to separate its home healthcare
business from its supplemental staffing business and to create two separate,
publically-traded companies, one engaged exclusively in providing home
healthcare services and the other engaged exclusively in providing supplemental
staffing services (the "Spin-Off"). After consummation of Spin-Off, the
publically-traded company engaged exclusively in home healthcare services shall
be TLC and the publically-traded company engaged exclusively in providing
supplemental staffing services shall be Staff Builders.
D. At Borrowers' request, prior to the proposed Spin-Off, Lender and
Borrowers desire to modify the terms and conditions of the Existing Loan
Agreement as more fully set forth herein.
Terms and Conditions.
NOW, THEREFORE, with the foregoing background hereinafter deemed
incorporated by reference herein and made a part hereof, the parties hereto,
intending to be legally bound hereby, promise and agree as follows:
SECTION 1 - DEFINITIONS AND INTERPRETATION
1.1 Terms Defined: As used in this Agreement, the following terms shall
have the following respective meanings:
<PAGE> 7
Account - Any right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance.
Advance(s) - Any monies advanced or credit extended to Borrowers by
Lender under the Revolving Credit.
Affiliate - Any entity (other than a Subsidiary), which directly or
indirectly through one or more intermediates controls or is controlled by or is
under common control with any Borrower. Control may be by ownership, contract,
or otherwise.
ATC Group - ATC Healthcare Services, Inc., a Georgia corporation and
ATC Staffing Services, Inc., a Delaware corporation.
Book Net Worth - For any period, the amount by which all assets of
Borrowers exceed all of Borrowers' Liabilities, as would be shown on a
consolidated balance sheet of Borrowers prepared as of such date in accordance
with GAAP.
Borrower's Cash Collateral Account - Section 2.4(a).
Borrower's Lockbox - Section 2.4(a).
Business Day - Any day other than a Saturday, Sunday or legal holiday
on which Lender is not open for business in Philadelphia, PA.
Closing - Section 4.6.
Closing Date - Section 4.6.
Collateral - Section 3.1.
Collateral Management Fee - Section 2.6(b).
Contract Term - Section 2.1(c).
Distribution -
(1) Dividends or other distributions on capital stock of any of the
Borrowers; and
(2) The redemption, repurchase or acquisition of such stock or of
warrants, rights or other options to purchase such stock other than for
securities of any Borrower.
EBITDA - For any period, the aggregate amount of Borrowers' combined
net income (or loss), plus interest expense plus tax expense plus depreciation
expense plus amortization expense, all as determined in accordance with GAAP.
ERISA - The Employee Retirement Income Security Act of 1974, as the
same may be amended, from time to time.
Event of Default - Section 8.1.
Excess Borrowing Availability - An amount equal to the Revolving
Credit Borrowing Base less the sum of: (i) the amount of Loans then outstanding
and requested to be made as of the date of calculation thereof, plus (ii) any
reserves against the borrowing availability formula under Subsection 2.2(i) and
the line limit under Subsection 2.2(ii), or both.
2
<PAGE> 8
Excess Formula Availability - An amount equal to (i) an amount equal
to the lesser of (A) eighty percent (80%) of Qualified Accounts or (B) the
Maximum Revolving Credit Amount less (ii) the amount of Loans then outstanding
and requested to be made as of the date of calculation thereof.
Expenses - Section 9.5.
Facility Fee - Section 2.6(c).
GAAP - Generally accepted accounting principles applied in a manner
consistent with the most recent audited consolidated financial statements of
Borrowers furnished to Lender under Section 5 herein.
Hazardous Substance - Section 5.16.
HCFA - The Health Care Finance Administration of the Department of
Health and Human Services.
Lender's Cash Collateral Account - Section 2.4(a).
Lender's Lockbox - Section 2.4(a).
Liabilities - All liabilities of every kind of Borrowers as would be
shown on a consolidated balance sheet of Borrowers prepared in accordance with
GAAP.
Lien - Any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including, but not limited
to, the security interest or lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting Property other than
those which would not materially interfere with Borrowers' use of the Property
or would not materially detract from the value of the Property. For the purposes
of this Agreement, Borrowers shall be deemed to be the owners of any Property
which they have acquired or hold subject to a conditional sale agreement or
other arrangement pursuant to which title to the Property has been retained by
or vested in some other Person for security purposes.
Loan Documents - This Agreement, the Revolving Credit Note, the Stock
Pledge Agreements, the Surety Agreements, the Lockbox Agreement, the Trademark
Security Agreement, and each other document, instrument or agreement required to
be executed and/or delivered hereby, as amended from time to time.
Loan Satisfaction Date - Section 2.6(c).
Loans - All advances and extensions of credit under the Revolving
Credit.
Lockbox Agreement - Section 2.4(a).
Material Adverse Effect - A material adverse effect on the business,
Property, financial condition or results of operations of any Borrower, or the
ability of any Borrower to perform under this Agreement.
Maximum Revolving Credit Amount - Section 2.1(a).
3
<PAGE> 9
MSXI - MSX International Engineering Services, Inc.
Obligations - All existing and future liabilities of Borrowers to
Lender, including, without limitation, indebtedness evidenced under the
Revolving Credit Note issued pursuant hereto, the Loans, repayment of cash
advances, all existing and future obligations of Borrowers as sureties for the
obligations of the ATC Group and Staff Builders to Lender, all fees and charges
owing by Borrowers, and all other liabilities and obligations of every kind or
nature whatsoever of Borrowers to Lender, whether hereunder or otherwise,
whether now existing or hereafter incurred, joint or several, matured or
unmatured, direct or indirect, primary or secondary, related or unrelated, due
or to become due, including, without limitation, any extensions, modifications,
substitutions, increases and renewals thereof, and substitutions therefor; the
payment of all amounts advanced by Lender to preserve, protect, defend, and
enforce its rights hereunder and in the Collateral in accordance with the terms
of this Agreement; and the payment of all Expenses.
Person - An individual, partnership, corporation, trust,
unincorporated association or organization, joint venture or any other entity.
Prime Rate - That per annum rate designated or announced by Lender at
its principal office from time to time as its prime rate of interest, which may
be greater or less than other interest rates charged by Lender to other
borrowers and is not solely based or dependent upon the interest rate which
Lender may charge any particular borrower or class of borrowers.
Property - Any interest of any Borrower in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
Qualified Accounts - All Accounts of a Borrower meeting all the
following specifications as determined by Lender in its sole discretion: (i) the
Account is lawfully and solely owned by any Borrower and subject to no Lien
(other than the Liens of Lender), or other assignment, and such Borrower has the
right of assignment thereof and the power to grant a security interest therein;
(ii) the Account is valid and enforceable, arising from the rendition of health
care services actually rendered by a Borrower in the ordinary course of its
business; (iii) the Account is due and owing from a Qualified Payor that has
been approved by Lender under a Qualified Payor Contract acceptable to Lender
(or in the case of home health care or private duty services provided to an
individual where the contract is with the individual and not the Qualified
Payor, the Account is due and owing from such individual but is subject to
reimbursement by a Qualified Payor) and is not outstanding more than one-hundred
twenty (120) days from the Friday of the week in which the services are
performed; (iv) the Account is not subject to any defense, set-off,
counterclaim, deduction, discount, credit, chargeback, allowance or adjustment
of any kind (provided that only the portion of the Account which is subject to
any such defense, set-off, counterclaim, deduction, discount, credit,
chargeback, allowance or adjustment shall not be deemed a Qualified Account);
(v) the Account is not subject to any limitations which would make payment by a
Qualified Payor conditional; (vi) the Qualified Payor is not a Subsidiary or
Affiliate of any Borrower; (vii) no notice of the bankruptcy, receivership,
reorganization or insolvency of the Qualified Payor has been received by any
Borrower; (viii) the Account is not from a Qualified Payor having its principal
place of business or executive office outside the United States; (ix) no
Borrower has received any note, trade acceptance, draft or other instrument with
respect to or in payment of the Account; (x) there has been no material adverse
change in the Qualified Payor's financial condition since the date of Lender's
approval of such Qualified Payor; (xi) not more than fifty (50%) percent of the
aggregate Accounts from the Qualified Payor obligated on the Account are
outstanding more than one hundred and twenty (120) days past their invoice date;
(xii) the aggregate of Accounts from the Qualified Payor does not exceed such
percentage of Borrowers' total Accounts as may be established by Lender from
time to time; (xiii) the Account meets such other specifications and
requirements as may be established by Lender from time to time. Under no
circumstances will
4
<PAGE> 10
Lender advance against any Account or portion of any Account to the extent such
Account or portion thereof is payable by an individual recipient of services
unless such obligation is subject to reimbursement by a Qualified Payor. No
Account arising from services provided by any Borrower as part of a joint
venture between such Borrower and any Person shall be a Qualified Account. In
the event of any dispute concerning the foregoing criteria as to whether an
Account is, or has ceased to be, a Qualified Account, the decision of Lender in
the exercise of its sole discretion, shall control.
Qualified Payor - Any of the following Persons obligated on any
Account: (i) any federal, state or county government entity administering any
Medicaid program except for (A) any such Account which originated in the States
of Connecticut and Massachusetts or (B) any such Account which originated in a
State which notifies Borrowers that an overpayment has allegedly been made to
any Borrower, which claim cannot be resolved within the customary time period
established pursuant to such State's administrative procedure; (ii) any
commercial payor acceptable to Lender in Lender's sole discretion; and (iii) any
hospital, other managed care payor or Person (excluding individuals) acceptable
to Lender in Lender's sole discretion.
Qualified Payor Contract - Any written agreement, between any Borrower
and any Qualified Payor, who agrees to pay for health care services rendered on
behalf of such Borrower.
Restructuring Fee - Section 2.6(d).
Revolving Credit - Section 2.1(a).
Revolving Credit Borrowing Base - Section 2.2.
Revolving Credit Maturity Date - February 29, 2000.
Revolving Credit Note - Section 2.1(b).
Revolving Credit Prime Based Rate - Prime Rate plus two percent
(2.0%).
Staff Builders - Staff Builders, Inc., a Delaware corporation.
Stock Pledge Agreements - Section 3.2(b).
Subsidiary - Any corporation more than fifty percent (50%) of whose
voting stock is legally and beneficially owned by any of the Borrowers or owned
by a corporation more than fifty percent (50%) of whose voting stock is legally
and beneficially owned by any of the Borrowers.
Support Agreements - Section 3.8.
Surety Agreements - Section 4.1(n).
TLC - Tender Loving Care Health Care Services, Inc., a Delaware
corporation.
Trademark Security Agreement - Section 4.1(n).
UCC - Uniform Commercial Code.
Unfunded Capital Expenditures - Any expenditure that would be
classified as a capital expenditure on a consolidated statement of cash flows of
Borrowers prepared in accordance with GAAP.
5
<PAGE> 11
Usage Fee - Section 2.6(a).
1.2 Accounting Principles: Where the character or amount of any asset or
liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with GAAP, to the
extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
SECTION 2 - THE LOANS
2.1 Revolving Credit - Description:
(a) Lender hereby establishes for the benefit of Borrowers a Revolving
Line of Credit ("Revolving Credit") which shall include cash sums advanced and
other credit extended by Lender to or for the benefit of Borrowers from time to
time hereunder up to the maximum principal sum of Seventeen Million Dollars
($17,000,000) which shall be automatically reduced to: (i) Sixteen Million Seven
Hundred Fifty Thousand Dollars ($16,750,000) on the earlier of: (A) October 29,
1999, or (B) the date of the Spin-Off, (ii) Sixteen Million Two Hundred Fifty
Thousand Dollars ($16,250,000), thirty (30) days after the date of the automatic
reduction set forth in clause (i) above, and (iii) Sixteen Million Dollars
($16,000,000), thirty (30) days after the date of the automatic reduction set
forth in clause (ii) above ("Maximum Revolving Credit Amount") at any one time
outstanding, depending upon the requests of Borrowers, and the availability of
Borrowers' Qualified Accounts and, based upon the Revolving Credit Borrowing
Base, or on such other basis as Lender may determine in its sole discretion. On
the date of any such automatic reduction, any and all principal amounts
outstanding in excess of the then current Maximum Revolving Credit Amount shall
be immediately due and payable in full. The outstanding balance under the
Revolving Credit may fluctuate from time to time, to be reduced by repayments
made by Borrowers, and to be increased by future advances and extensions of
credit which may be made by Lender to or for the benefit of Borrowers. For the
purposes of this Agreement, any determination as to whether there is
availability within the Revolving Credit Borrowing Base for advances or
extensions of credit shall be determined by Lender in accordance with the
provisions of Section 2.2 hereof and shall be final and binding upon Borrowers.
Subject to availability under the Revolving Credit Borrowing Base, the
fulfillment of any other conditions to borrowing contained in this Agreement and
the absence of a continuing Event of Default or any event which with the giving
of notice or passage of time or both would become an Event of Default, Borrowers
may borrow, repay and reborrow from time to time during the Contract Term.
Lender shall have the right to establish reserves against the Revolving Credit
Borrowing Base in such amounts and with respect to such matters as Lender in its
sole discretion, deems appropriate. Without limiting the generality of the
foregoing, the parties have agreed that (x) a reserve is hereby established and
shall remain in effect until the occurrence of the Spin-Off against the
Revolving Credit Borrowing Base (against the borrowing availability formula
under Subsection 2.2(i) and the line limit under Subsection 2.2(ii)) in an
amount not to exceed Two Million Dollars ($2,000,000), provided that such
reserve shall be equal to, on a daily basis, the dollar for dollar amount
outstanding under the Permitted Overadvance under the ATC Loan Documents, and
(y) a separate reserve in the amount of Seven Hundred Fifty Thousand Dollars
($750,000) is hereby established against the borrowing availability formula
under Subsection 2.2(i) until such time as Lender has received evidence that a
payment plan has been agreed upon in writing between Borrowers and HCFA in
connection with the repayment of PIP overpayments and the audit adjustments for
Medicare cost reports, under terms and conditions acceptable to Lender.
Borrowers and Lender have agreed that the initial outstanding indebtedness under
the Revolving Credit shall be $14,796,923.89, such amounts representing the
principal obligations outstanding directly attributable to Borrowers under the
revolving credit facility established under the Existing Loan Agreement, all
such accounts due and owing to Lender without any deduction, defense, setoff,
claim or counterclaim, of any nature. No such existing indebtedness is deemed
satisfied, novated, discharged or extinguished by reason of the execution
hereof.
6
<PAGE> 12
(b) At Closing, Borrowers shall execute and deliver a promissory note
to Lender in form and substance acceptable to Lender ("Revolving Credit Note")
to evidence its joint and several unconditional obligation to repay Lender for
loans, advances, and extensions of credit made under the Revolving Credit, with
interest as herein and therein provided. Each borrowing and extension of credit
under the Revolving Credit shall be deemed evidenced by the Revolving Credit
Note, which is deemed incorporated herein by reference and made part hereof. The
Revolving Credit Note shall amend and restate in part (but does not novate,
discharge or extinguish the absolute and unconditional obligation of Borrowers
to repay the entire indebtedness evidenced by) that certain Amended and Restated
Revolving Credit Note, dated January 8, 1997, executed by Original Borrowers to
Lender, as amended, supplemented, or modified from time to time.
(c) The term ("Contract Term") of the Revolving Credit shall expire on
the Revolving Credit Maturity Date. On such date, all Obligations of Borrowers
to Lender of every kind whatsoever in connection with the Revolving Credit,
unless sooner accelerated by Lender in accordance with Section 8 below, shall be
due and payable in full and after which date no further advances or extensions
of credit shall be available from Lender.
2.2 Revolving Credit - Borrowing Base: Subject to the terms and conditions
of this Agreement, Advances to Borrowers under the Revolving Credit shall be
considered against and shall at no time exceed up to the lesser of (i) eighty
percent (80%) of Qualified Accounts, or (ii) the Maximum Revolving Credit Amount
("Revolving Credit Borrowing Base").
2.3 Revolving Credit - Termination by Borrowers: Borrowers may, at any time
prior to the last day of the Contract Term and on not less than ten (10) days
prior written notice to Lender, terminate the Revolving Credit; provided
however, that on such termination date Borrowers satisfy all outstanding
Obligations (including, without limitation, the balance of any Facility Fee to
which Lender is entitled pursuant to Section 2.6(c) below).
2.4 Collections, Disbursements and Borrowing Availability:
(a) Borrowers shall maintain a lockbox account(s) ("Lender's Lockbox")
with Lender and a depository account(s) ("Lender's Cash Collateral Account")
with Lender subject to the provisions of this subparagraph, and shall execute a
lockbox agreement ("Lockbox Agreement") in form and substance acceptable to
Lender, and such other agreements related thereto as Lender may require. Unless
otherwise prohibited by applicable law, all collections of Accounts shall be
paid directly from Qualified Payors into Lender's Lockbox from which funds shall
be transferred to Lender's Cash Collateral Account, and from which funds shall
be applied by Lender, daily, to reduce the outstanding indebtedness under the
Revolving Credit with future advances and extensions of credit to be made by
Lender under the conditions set forth in this Section 2. Those collections
which, by applicable law, must be paid directly to Borrowers, shall be sent to a
lockbox exclusively under Borrowers' control ("Borrowers' Lockbox"). Such
remittances shall be deposited by Borrowers, if not prohibited by applicable
law, directly into Lender's Cash Collateral Account or, if so prohibited then
into a depository account ("Borrowers' Cash Collateral Account") established
with Lender. Such remittances made by wire transfer shall be wired directly into
Borrowers' Cash Collateral Account. All proceeds in Borrowers' Cash Collateral
Account shall be automatically transferred, at the direction of Borrowers, on a
daily basis, to Lenders' Cash Collateral Account. In the event that proceeds of
other Collateral are received by Borrowers, such collections shall be held in
trust for the benefit of Lender and remitted, in the form received, to Lender
for deposit in Lender's Cash Collateral Account immediately upon receipt by
Borrowers. All funds transferred from Lender's Cash Collateral Account shall,
upon application to Borrowers' indebtedness to Lender, reduce the Revolving
Credit loan balance, but for the purpose of calculating interest, shall be
subject to a one (1) day clearance period. Interest shall be calculated to
reflect such clearance period on the last
7
<PAGE> 13
day of the month based on the average daily cleared collections in Lender's Cash
Collateral Account for such month. Borrower shall have no right of access to or
withdrawal from the Lender's Lockbox or Lender's Cash Collateral Account.
(b) Advances made by Lender under the Revolving Credit shall be made
available to Borrowers by crediting such proceeds to the operating account with
Lender of a Borrower as designated by Borrowers, or to any other operating
account with Lender as Borrowers and Lender may agree in writing. Any Advances
requested by any Borrower and all Advances credited to the foregoing account
shall be deemed binding on and create obligations on behalf of all Borrowers.
Advances will be made available to Borrowers on any Business Day after a
telephonic request on behalf of any Borrower to Lender (made before 11:00 A.M.
Philadelphia time) on such Business Day. If requested by Lender, at its option,
Borrowers will confirm such request, in writing, within one (1) Business Day of
any such telephonic request. Lender reserves its right to require Borrowers to
provide a borrowing base certificate contemporaneously with each loan request.
Lender may rely upon any and all telephonic and written requests purported to be
made by any of the Borrowers through any of its authorized officers which have
been authorized in writing by such Borrower for such purpose to Lender.
(c) Lender may, in its sole discretion, charge the operating account
of any or all of the Borrowers with Lender for all of Borrowers' Obligations to
Lender as they become due from time to time under this Agreement including
without limitation, interest, principal, fees and reimbursement of Expenses.
Lender may further charge the Revolving Credit, at Lender's option, for any and
all of Borrowers' Obligations to Lender as they become due from time to time.
2.5 Interest:
(a) Revolving Credit - The unpaid principal balance of Advances under
the Revolving Credit shall bear interest, subject to the terms hereof, at the
Revolving Credit Prime Based Rate. Interest shall be payable monthly, in
arrears, on the first day of each calendar month.
(b) Calculation of Interest - Interest shall be computed daily for the
actual number of days elapsed, but calculated on the basis of a year of 360
days. Changes in the Prime Based Rate shall become effective on the same day as
Lender announces a change in its Prime Rate.
(c) Default Rate - After the occurrence and during the continuance of
an Event of Default hereunder, interest shall accrue on the outstanding
principal balance of the Loans at a per annum rate equal to two percent (2%) in
excess of the contract rate.
(d) Post Judgment Interest - Despite the entry of a judgment or
judgments against any Borrower with respect to any of the Obligations, such
Obligations will continue to earn interest at the applicable rate as set forth
in this Section 2.5.
(e) Applicable Interest Limitations - In no contingency or event
whatsoever shall the aggregate of all amounts deemed interest hereunder and
charged and collected pursuant to the terms of the Agreement exceed the highest
rate permissible under any law which a court of competent jurisdiction shall, in
a final determination, deem applicable hereto. In the event that such court
determines Lender has charged or received interest hereunder in excess of the
highest applicable rate, Lender shall promptly refund such excess interest to
the Borrowers and such rate shall automatically be reduced to the maximum rate
permitted by law.
2.6 Fees:
(a) Usage Fee - So long as the Revolving Credit is outstanding and has
not been terminated, and the Obligations are not satisfied in full, Borrowers
shall unconditionally pay to
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<PAGE> 14
Lender a fee ("Usage Fee") equal to Three Hundred Seventy-Five Thousandths
percent (0.375%) per annum of the daily unused portion of the Revolving Credit,
which fee shall be computed on a monthly basis in arrears and shall be due and
payable on the first day of each month commencing on the first day of the first
full month after Closing.
(b) Collateral Management Fee - So long as the Revolving Credit has
not been terminated pursuant to the terms hereof, and the Obligations are not
satisfied in full, Borrowers shall unconditionally pay to Lender a
non-refundable monthly collateral management fee ("Collateral Management Fee")
of Eight Thousand Dollars ($8,000), payable monthly, in advance, beginning on
the Closing Date and thereafter, on the first day of each successive month.
(c) Facility Fee - Subject to the provisions of Section 2.3, Borrowers
shall pay Lender a facility fee ("Facility Fee") on the dates and in the amounts
designated on the following schedule:
<TABLE>
<CAPTION>
Date of Payment Amount of Payment
--------------- -----------------
<S> <C>
On the date hereof $85,000
November 30, 1999 0.875% of the then current
Maximum Revolving Credit Amount
December 30, 1999 0.875% of the then current
Maximum Revolving Credit Amount
January 31, 2000 0.5% of the then current
Maximum Revolving Credit Amount
</TABLE>
The above-described payments, upon being made, shall be non-refundable. The
Facility Fee is deemed fully earned as of the date hereof; provided however,
that if the Revolving Credit is terminated and all Obligations are satisfied in
full on a date ("Loan Satisfaction Date") prior to any of the following dates:
(i) November 30, 1999, (ii) December 30, 1999, or (iii) January 31, 2000, then
Borrowers shall not be required to make any of the payments designated in the
above schedule to be paid on a date subsequent to the Loan Satisfaction Date.
(d) Restructuring Fee. Contemporaneously with the execution of this
Agreement, Borrowers shall unconditionally pay to Lender a non-refundable
restructuring fee ("Restructuring Fee") of Eighty Five Thousand Dollars
($85,000).
2.7 Capital Adequacy: If any present or future law, governmental rule,
regulation, policy, guideline, directive or similar requirement (whether or not
having the force of law) imposes, modifies, or deems applicable any additional
capital adequacy, capital maintenance or similar requirement which affects the
manner in which Lender allocates capital resources to its commitments (including
any commitments hereunder), and as a result thereof, in the opinion of Lender,
the rate of return on Lender's capital with regard to the Revolving Credit is
reduced to a level below that which Lender could have achieved but for such
circumstances, then in such case and upon notice from Lender to Borrowers, from
time to time, Borrowers shall pay Lender on demand such additional amount or
amounts as shall compensate Lender for such reduction in Lender's rate of
return. Such notice shall contain the statement of Lender with regard to any
such amount or amounts which shall, in the absence of manifest error, be binding
upon Borrowers. In determining such amount, Lender may use any method of
averaging and attribution that it deems applicable, in its sole discretion.
2.8 Payments: Except to the extent otherwise set forth in this Agreement,
or as may be otherwise designated by Lender in writing, all payments of
principal and of interest on the Revolving Credit, the Collateral Management
Fee, the Usage Fee, the Facility Fee, all other
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<PAGE> 15
charges and any other obligations of Borrowers hereunder, shall be made to
Lender at Mellon Bank Center, 1735 Market Street, 6th Floor, Philadelphia,
Pennsylvania, in lawful currency of the United States and in immediately
available funds. Any and all payments received by Lender may be applied to the
Obligations in such order as Lender may determine.
2.9 Use of Proceeds: The extension of credit hereunder and proceeds of the
Loans shall be used to refinance Borrowers' existing borrowed indebtedness and
to provide working capital.
2.10 Nature of Liability: All Obligations of Borrowers are expressly agreed
by each of them to be joint and several.
SECTION 3 - COLLATERAL
3.1 Description: As security for the payment of the Obligations of
Borrowers and satisfaction by Borrowers of all covenants and undertakings
contained in this Agreement and the other Loan Documents (and without impairing
or limiting the validity, enforceability or priority of any existing lien or
security interest of Lender in any Property of any Borrower),
(a) each Borrower hereby assigns and grants to Lender a continuing
first (other than as described in Section 5.4 hereof) lien on and security
interest in, upon and to the following Property ("Collateral"):
(i) Accounts, Contract Rights, Etc. - All of such Borrower's now
owned and hereafter acquired or arising accounts, accounts receivable, notes
receivable, contract rights, chattel paper, documents (including documents of
title), instruments, invoices;
(ii) Inventory - All of such Borrower's now owned or hereafter
acquired inventory of every nature and kind, wherever located;
(iii) General Intangibles - All of such Borrower's now owned and
hereafter acquired or arising general intangibles of every kind and description,
including, but not limited, to all existing and future customer lists, choses in
action, claims, books, records, patents and patent applications, copyrights,
trademarks, trade names, trade styles, trademark applications, blueprints,
drawings, designs and plans, trade secrets, contracts, licenses, license
agreements, franchises, franchise agreements, formulae, tax and any other types
of refunds, returned and unearned insurance premiums, rights and claims under
insurance policies including without limitation, credit insurance policies, and
computer information, software, records, data;
(iv) Equipment - All of such Borrower's now owned and hereafter
acquired equipment, including without limitation, machinery, vehicles, furniture
and fixtures, wherever located, and all replacements, parts, accessories,
substitutions and additions thereto;
(v) Deposit Accounts - All of such Borrower's now existing and
hereafter acquired or arising deposit accounts of every nature, wherever
located, and all documents and records associated therewith;
(vi) Property in Lender's Possession - All Property of such
Borrower, now or hereafter in Lender's possession;
(vii) Investment Property - All Investment Property of such
Borrower now existing or hereafter acquired; and
(viii) Proceeds - The proceeds (including, without limitation,
insurance proceeds) of all of the foregoing.
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<PAGE> 16
(b) Lender shall receive and have at all times a pledge of all of the
issued and outstanding capital stock in each Borrower (subject to Section 8.5(c)
below), and in all distributions, and proceeds with respect to each such pledge
of capital stock.
3.2 Lien Documents: At Closing and thereafter as Lender reasonably deems
necessary, Borrowers shall execute and deliver to Lender, or have executed and
delivered (all in form and substance satisfactory to Lender):
(a) Financing Statements - Financing statements pursuant to the UCC,
which Lender may file in any jurisdiction where any Collateral is or may be
located and in any other jurisdiction that Lender deems appropriate; and
(b) Stock Pledge Agreements with Stock Certificates and Blank Stock
Powers - Stock pledge agreements ("Stock Pledge Agreements") covering the stock
described in Section 3.1 above accompanied by delivery of original stock
certificates representing all stock of every kind and nature of each Borrower,
together with stock powers, duly executed in blank by the owner thereof for the
stock of any Borrower which it owns.
(c) Other Agreements - Any other agreements, documents, instruments
and writings required to evidence, continue, perfect or protect Lender's lien
and security interest in the Collateral required hereunder or as Lender may
reasonably request from time to time.
3.3 Other Actions: In addition to the foregoing, Borrowers shall do
anything further that may be lawfully and reasonably required by Lender to
secure Lender and effectuate the intentions and objects of this Agreement,
including, but not limited to, the execution and delivery of lockbox agreements,
continuation statements, amendments to financing statements, security
agreements, contracts and any other documents required hereunder. At Lender's
request, Borrowers shall also immediately deliver to Lender all items for which
Lender must receive possession to obtain a perfected security interest,
including without limitation, all notes, stock certificates, other certificates
and documents of title, chattel paper, warehouse receipts, instruments, and any
other similar instruments constituting Collateral.
3.4 Searches: Lender shall, prior to or at Closing, and thereafter as
Lender may determine from time to time at Borrowers' expense, obtain the
following searches (the results of which are to be consistent with the
warranties made by Borrowers in this Agreement):
(a) UCC searches with the Secretary of State and local filing office
of each state where any Borrower maintains its executive offices, a place of
business, or assets;
(b) Judgment, federal tax lien and corporate tax lien searches, in
each county of each state searched under subparagraph (a) above.
Borrowers shall, prior to or at Closing and at their expense, obtain
and deliver to Lender good standing certificates showing each Borrower to be in
good standing in its state of incorporation and in each other state in which it
is doing and presently intends to do business for which qualification is
required, except where the failure to be so qualified or in good standing does
not have a Material Adverse Effect.
3.5 Landlord's Waivers: Borrowers shall use its good faith efforts to cause
the owner of the premises occupied by or to be occupied by each Borrower to
execute and deliver to Lender an instrument, in form and substance satisfactory
to Lender, under which such owner(s) agrees to allow Lender to remain on such
premises to dispose of or deal with any Collateral located thereon.
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<PAGE> 17
3.6 Filing Security Agreement: A carbon, photographic or other reproduction
or other copy of this Agreement or of a financing statement is sufficient as and
may be filed in lieu of a financing statement.
3.7 Power of Attorney: Each of the officers of Lender is hereby irrevocably
made, constituted and appointed the true and lawful attorney for each of the
Borrowers (without requiring any of them to act as such) with full power of
substitution to do the following: (1) endorse the name of any Borrower upon any
and all checks, drafts, money orders and other instruments for the payment of
monies that are payable to any Borrower and constitute collections on such
Borrowers' Accounts; (2) execute in the name of any Borrower any financing
statements, schedules, assignments, instruments, documents and statements that
any Borrower is obligated to give Lender hereunder; and (3) do such other and
further acts and deeds in the name of Borrowers that Lender may reasonably deem
necessary or desirable to enforce any Account or other Collateral or perfect
Lender's security interest or lien in the Collateral.
3.8 Management Support Agreements and Fraud Guarantees: A management
support agreement and fraud guarantee ("Support Agreement"), each in favor of
and in form and substance acceptable to Lender, shall be executed and delivered
to Lender by Stephen Savitsky, David Savitsky, Dale Clift and Willard Derr.
3.9 Application of Collateral Proceeds. Except to the extent otherwise
agreed by Lender in writing, all collections and proceeds of Collateral at any
time and from time to time generated from the Collateral which may at any time
be received by any Borrower are to be held in trust for Lender and immediately
paid to Lender for application to the Obligations.
3.10 Nature of Collateral: Borrowers confirm and agree that all security
interests and liens granted to Lender hereunder shall be deemed continuing
unimpaired and in full force and effect until all Obligations hereunder are
satisfied in full.
SECTION 4 - CLOSING AND CONDITIONS PRECEDENT TO ADVANCES
Closing is subject to the following conditions precedent (all documents to
be in form and substance satisfactory to Lender and Lender's counsel):
4.1 Resolutions, Opinions, and Other Documents: Borrowers shall have
delivered to Lender the following:
(a) this Agreement and the Revolving Credit Note all properly executed
by each Borrower;
(b) each Loan Document including, without limitation, the Stock Pledge
Agreements, required to be executed by Borrowers or by any other Person under
any provision of this Agreement or any related agreement;
(c) certified copies of (i) resolutions of the board of directors of
each Borrower, Staff Builders, and each member of the ATC Group authorizing the
execution and performance of each of the Loan Documents to which each is a party
which is required to be delivered by any Section hereof and (ii) the certificate
or articles of incorporation and bylaws of each Borrower, Staff Builders, and
each member of the ATC Group;
(d) an incumbency certificate for each Borrower;
(e) a good standing certificate for each Borrower;
(f) a written opinion of Borrowers' general counsel addressed to
Lender;
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<PAGE> 18
(g) such financial statements, reports, certifications and other
operational information required to be delivered hereunder, including, without
limitation, an initial borrowing base certificate calculating the Revolving
Credit Borrowing Base, and consolidated and consolidating income and cash flow
statements of Borrowers for the period beginning March 1, 1999, through July 31,
1999;
(h) complete financial projections for Borrowers, on a monthly and
consolidated basis, for the period beginning September 1, 1999, through February
29, 2000, including profit and loss statements, income cash flow statements,
balance sheets, borrowing availability calculations and negotiated payment
plans, with supporting documentation and assumptions, all of which are
satisfactory in form and substance to Lender in all respects, attached hereto
and made part hereof as Exhibit "4.1(h)";
(i) pro-forma balance sheets of Borrowers reflecting the sale of
Chelsea Computer Consultants, Inc. by Staff Builders to MSXI and its effect on
the profit and loss statements of Borrowers, with adjusting entries and
explanations; and
(j) certification by the chief financial officer of each Borrower that
there has not occurred any material adverse change, since July 31, 1999, in the
operations, condition (financial or otherwise) and business prospects of such
Borrower as a whole;
(k) payment of the Collateral Management Fee and Facility Fee;
(l) all documents and agreements required with respect to the
Collateral, including without limitation, financing statements;
(m) executed Support Agreements;
(n) surety agreements ("Surety Agreements"), in form and substance
satisfactory to Lender, executed by Staff Builders and each member of the ATC
Group in favor of Lender;
(o) trademark security agreement ("Trademark Security Agreement"), in
form and substance satisfactory to Lender, executed by Borrowers in favor of
Lender; and
(p) evidence that Borrowers have a minimum Excess Borrowing
Availability of Two Million Dollars ($2,000,000) under the Revolving Credit
Borrowing Base, which shall be calculated in a manner acceptable to Lender, in
its sole discretion.
4.2 Absence of Certain Events: At the Closing Date, no Event of Default
hereunder shall have occurred and be continuing, and no event shall have
occurred and be continuing which, with the passage of time, or the giving of
notice, or both, would constitute an Event of Default hereunder.
4.3 Warranties and Representations at Closing: The warranties and
representations contained in Section 5 as well as any other Section of this
Agreement shall be true and correct on the Closing Date with the same effect as
though made on and as of that date.
4.4 Compliance with this Agreement: Borrowers shall have performed and
complied with all agreements, covenants and conditions contained herein which
are required to be performed or complied with by Borrowers before or at the
Closing Date, including, without limitation, the provisions of Section 6 hereof.
4.5 Officer's Certificate: Each Borrower shall provide Lender with an
officer's certificate signed by its chief executive officer certifying that all
conditions to Closing contained in this Agreement have been fulfilled.
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<PAGE> 19
4.6 Closing: Subject to the conditions of this Section, the Loans shall be
made available on such date ("Closing Date") and at such time as may be mutually
agreeable to the parties contemporaneously with the execution hereof ("Closing")
at such place as may be requested by Lender.
4.7 Waiver of Rights: By completing the Closing hereunder, or by making
advances hereunder, Lender does not thereby waive a breach of any warranty or
representation made by Borrowers hereunder or any agreement, document, or
instrument delivered to Lender or otherwise referred to herein, and all of
Lender's claims and rights resulting from any breach or misrepresentation by
Borrowers are specifically reserved by Lender.
SECTION 5 - REPRESENTATIONS AND WARRANTIES
Borrowers warrant and represent to Lender that:
5.1 Corporate Organization and Validity:
(a) Except as set forth on Exhibit "5.1" attached hereto and made part
hereof, each of the Borrowers is a corporation duly organized and is validly
existing under the laws of its state of incorporation, is duly qualified, is in
good standing and has lawful power and authority to engage in business in each
state where the nature and extent of its business requires qualification, except
where the failure to be so qualified or in good standing does not have a
Material Adverse Effect. A list of all states and other jurisdictions where
Borrowers are qualified to do business is attached hereto as Exhibit "5.1" and
made a part hereof.
(b) The making and performance of this Agreement and each Loan
Document required by any section hereof will not violate any law, government
rule or regulation, or the charter, minutes or bylaw provisions of any of the
Borrowers or violate or result in a default (immediately or with the passage of
time) under any contract, agreement or instrument to which any of the Borrowers
is a party, or by which they are bound, except for violations or defaults which
would not have a Material Adverse Effect. None of the Borrowers is in violation
of any term of any agreement or instrument to which it is a party or by which it
may be bound or of its charter, minutes or its bylaws, except for violations
which would not have a Material Adverse Effect.
(c) Each of the Borrowers has all requisite corporate power and
authority to enter into and perform this Agreement and to incur the obligations
herein provided for, and has taken all proper and necessary corporate action to
authorize the execution, delivery and performance of this Agreement, and the
other Loan Documents.
(d) This Agreement, the Revolving Credit Note to be issued hereunder,
and all other Loan Documents, when delivered, will be valid and binding upon
Borrowers and enforceable in accordance with their respective terms.
5.2 Place of Business: The only places of business of each of the
Borrowers, and the place where they keep and intend to keep their Property and
records concerning their Property, are at the addresses listed in Exhibit "5.2"
attached hereto and made part hereof.
5.3 Pending Litigation: Except as set forth on Exhibit "5.3" attached
hereto and made part hereof, there are no judgments or judicial or
administrative orders or proceedings pending, or to the knowledge of any of the
Borrowers, affecting any of the Borrowers in any court or before any
governmental authority or arbitration board or tribunal. None of the Borrowers
is in default with respect to any order of any court, governmental authority,
regulatory agency or arbitration board or tribunal.
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<PAGE> 20
5.4 Title to Properties: Each Borrower has exclusive title to all Property
it purports to own in fee simple (or its equivalent under applicable law) free
from Liens and free from the claims of any other Person, except for (i) those
Liens set forth on Exhibit "5.4" attached hereto and made part hereof, (ii)
Liens of the type permitted in section 7.3, and (iii) Liens to be released or
discharged contemporaneously with the Closing.
5.5 Patents and Trademarks: Each Borrower owns or has the unconditional
right to use all the patents, patent applications, trademarks, trademark
applications, service marks, trade names, and copyrights, that are material for
the present and planned future conduct of its business, without any known
conflict with the rights of others. A list of all such patents, patent
applications, trademarks, trademark applications and copyrights owned or
otherwise possessed by Borrowers (indicating the nature of each Borrower's
interest) is attached hereto as Exhibit "5.5", and made a part hereof. No
Borrower is in default of any obligation or undertaking with respect to such
Property or rights.
5.6 Governmental Consent: Neither the nature of any Borrower or of its
business or Property, nor any relationship between any or all Borrowers and any
other Person, nor any circumstance affecting each Borrower in connection with
the issuance or delivery of the Revolving Credit Note, is such as to require a
consent, approval or authorization of, or filing (other than filing of UCC-1
financing statements), registration or qualification with, any governmental
authority on the part of Borrowers in conjunction with the execution and
delivery of this Agreement or the issuance or delivery of the Revolving Credit
Note, or other Loan Documents.
5.7 Taxes: To Borrowers' knowledge, all tax returns required to be filed by
any Borrower in any jurisdiction have in fact been filed, and all taxes,
assessments, fees and other governmental charges upon Borrowers, or upon any of
its Property, income or franchises, which are due and payable have been paid,
except for those taxes being contested in good faith with due diligence by
appropriate proceedings for which appropriate reserves have been maintained
under GAAP. To Borrowers' knowledge, none of the Borrowers are aware of any
proposed additional tax assessment or tax to be assessed against or applicable
to any of the Borrowers.
5.8 Financial Statements: The fiscal year of each of the Borrowers ends on
the last day of February. Each Borrower's federal tax identification number is
listed on Exhibit "5.8" attached hereto and made a part hereof.
5.9 Full Disclosure: Neither the financial statements referred to in
Section 5.8, nor this Agreement or related agreements and documents or any
written statement furnished by Borrowers to Lender in connection with the
negotiation of the Loans and contained in any financial statements or documents
relating to the Collateral contain any untrue statement of a material fact or
omit a material fact necessary to make the statements contained therein or
herein not misleading. There is no fact known to any officer of any of the
Borrowers which any of the Borrowers have not disclosed to Lender in writing,
which materially affects adversely or may materially affect adversely all or any
of the Borrowers' Property, business or financial condition or the ability of
Borrowers to perform this Agreement.
5.10 Subsidiaries and Affiliates: All Subsidiaries and Affiliates of
Borrowers are listed on Exhibit "5.10" attached hereto and made part hereof.
5.11 Guarantees, Contracts, etc.:
(a) None of the Borrowers owns or holds any equity or long term debt
investments in, have any outstanding advances to, have any outstanding
guarantees for the obligations of, or have any outstanding borrowings from, any
Person other than a Borrower or
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<PAGE> 21
a Subsidiary of a Borrower, except as described in Exhibit "5.11" attached
hereto and made part hereof.
(b) No Borrower is a party to any contract or agreement, or subject to
any charter or other corporate restriction, which has a Material Adverse Effect.
(c) Except as otherwise specifically provided in this Agreement, none
of the Borrowers has agreed or consented to cause or permit any of its Property
whether now owned or hereafter acquired to be subject in the future (upon the
happening of a contingency or otherwise) to a Lien not permitted by this
Agreement, other than Liens that are being released or discharged
contemporaneously with the Closing.
5.12 Government Regulations, etc.:
(a) The use of the proceeds of the Loans and Borrowers' issuance of
the Revolving Credit Note, will not directly or indirectly violate or result in
a violation of the Securities Act of 1933 or the Securities Exchange Act of
1934, as amended, or any regulations issued pursuant thereto, including, without
limitation, Regulations U, T, G and X of the Board of Governors of the Federal
Reserve System, 12 C.F.R., Chapter II. No Borrower owns or intends to carry or
purchase any "margin security" within the meaning of said Regulations.
(b) To the best of Borrowers' knowledge, except as disclosed on
Exhibit "5.12(b)" attached hereto and made part hereof, (i) each Employee
Benefit Plan, as defined in Section 3(3) of ERISA, (other than a multi-employer
plan described in Section 3(37) of ERISA) maintained by a Borrower or in which
any Borrower is a participating employer has been maintained in all material
respects in accordance with its terms and with applicable law, and (ii) each
such Employee Benefit Plan which is intended to be tax-qualified currently
satisfies to the extent required by applicable law, and for all years subsequent
to the establishment of such Plan and with respect to which Borrowers' income
tax returns are open to audit, has satisfied, the requirements of Section 401(a)
of the Code, except that if any such requirement has not been satisfied, the
failure to satisfy such requirements has not had, and in the future will not
have, a Material Adverse Effect (assuming the continued conduct of the
Borrowers' business is substantially consistent with past practice), (iii) no
such Employee Benefit Plan has engaged in or been involved in a non-exempt
Prohibited Transaction (as defined in ERISA) under ERISA or the Internal Revenue
Code, and (iv) no such Employee Benefit Plan has been terminated, which
termination would have a Material Adverse Effect. Borrowers or any member of a
Controlled Group (as defined in ERISA) including Borrowers, have not received
notice of a claim asserted against Borrowers or other members of the Controlled
Group for withdrawal liability (as defined in the Multiemployer Pension Plan
Amendments Act of 1980, as amended) with respect to any multiemployer pension
plan. Borrowers have timely made all contributions when due with respect to any
multiemployer pension plan in which any of them participate and, no event has
occurred triggering a claim against Borrowers or any member of a Controlled
Group including Borrowers for withdrawal liability with respect to any
multi-employer pension plan. All Employee Benefit Plans maintained by and
multi-employer plans contributed to by any Borrower are listed on Exhibit
5.12(b) attached hereto and made a part hereof.
(c) No Borrower is in violation of any applicable material statute,
regulation or ordinance of the United States of America, or of any state, city,
town, municipality, county or of any other jurisdiction, or of any agency
thereof, (including without limitation, environmental laws and regulations) and
all Borrowers possess all material licenses, permits and governmental approvals
needed to operate their business, except where such violation or failure to
possess would not have a Material Adverse Effect. Each Borrower has obtained and
currently has all certificates of need and Medicare and Medicaid provider
numbers as are necessary to operate its business. A list of each Borrower's
certificates of need, Qualified Payor Contracts, and provider numbers are listed
on Exhibit "5.12(c)" attached hereto and made part hereof. All cost reports
required to be filed with Qualified Payors have been filed.
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<PAGE> 22
(d) Borrowers are current with all reports and documents required to
be filed with any state or federal securities commission or similar agency and
is in full compliance in all material respects with all applicable rules and
regulations of such commissions.
5.13 Business Interruptions: Within one (1) year prior to the date hereof,
neither the business, Property or operations of any of the Borrowers have been
materially and adversely affected in any way by any casualty, strike, lockout,
combination of workers, order of the United States of America, or any state or
local government, or any political subdivision or agency thereof, directed
against any of the Borrowers. There are no pending or, to the Borrowers'
knowledge, threatened labor disputes, strikes, lockouts or similar occurrences
or grievances against the business being operated by any of the Borrowers, other
than disputes with individual employees, except as set forth on Exhibit "5.13"
attached hereto and made part hereof.
5.14 Names: Except as provided in Exhibit "5.14" attached hereto and made
part hereof, none of the Borrowers have conducted business under or used any
other names (whether corporate or assumed) except for their present corporate
names. Each Borrower is the sole owner of its name, and any and all business
done and all invoices represent sales and business of each respective Borrower
conducted in such Borrowers' name.
5.15 Other Associations: None of the Borrowers is engaged in any joint
venture or partnership with any other Person or is a party to any franchise
agreement or other arrangement except as listed on Exhibit "5.15" attached
hereto and made part hereof.
5.16 Environmental Matters: None of the Borrowers has knowledge, except as
disclosed on Exhibit "5.16" attached hereto and made part hereof:
(a) of the presence of any Hazardous Substances on any of the real
property on which the Collateral is located, or
(b) of any on-site spills, releases, discharges, disposal or storage
of Hazardous Substances that have occurred or are presently occurring on any of
such real property, or
(c) of any spills, releases, discharges or disposal of Hazardous
Substances that have occurred, are presently occurring off such real properties
or as a result of the activities of any of the Borrowers, or
(d) of any notice, summons, citation or other communication sent to
any Borrower from any state or federal agency concerning any intentional or
unintentional action or conduct, inaction or omission, past or present which is
or may be in violation of any state or federal environmental law, rule or
regulation.
As used herein, the term "Hazardous Substances" means any substances defined or
designated as hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance or similar term, by any environmental statute, rule or
regulation of any governmental entity presently in effect and applicable to such
real property.
5.17 Regulation O: No director, executive officer or principal shareholder
of any of the Borrowers is a director, executive officer or principal
shareholder of Lender. For the purposes hereof the terms "director" (when used
with reference to Lender), "executive officer" and "principal shareholder" have
the respective meanings assigned thereto in Regulation O issued by the Board of
Governors of the Federal Reserve System.
5.18 Capital Stock: The authorized and outstanding capital stock of each of
the Borrowers is as set forth on Exhibit "5.18" attached hereto and made part
hereof. To the best of
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Borrowers' knowledge, all of the capital stock of each of the Borrowers has been
duly and validly authorized and issued and is fully paid and nonassessable and
has been sold and delivered to the holders thereof in compliance with, or under
valid exemption from, all Federal and state laws and the rules and regulations
of all regulatory bodies thereof governing the sale and delivery of securities.
Except as provided in Exhibit 5.18, there are no subscriptions warrants,
options, calls, commitments, rights or agreements by which any of the Borrowers
or any of the shareholders of any of the Borrowers are bound relating to the
issuance, transfer, voting or redemption of shares of its capital stock or any
pre-emptive rights held by any Person with respect to the pre-emptive rights
held by any party with respect to the shares of capital stock of any Borrower.
Except as provided in Schedule 5.18, no Borrower has issued and currently has
outstanding any securities convertible into or exchangeable for shares of its
capital stock or any options, warrants or other rights to acquire such shares or
securities convertible into or exchangeable for such shares.
5.19 Interrelationship of Borrowers: Borrowers have common corporate
purposes and interrelated business operations which compliment each other. The
creation and implementation of the Revolving Credit will provide direct and
indirect benefit, economic and otherwise, to all Borrowers regardless of which
particular Borrower may receive from time to time advances from Lender under the
Revolving Credit.
5.20 Solvency: Each Borrower is able to pay its debts as they become due,
has sufficient capital to carry on its business operations, and presently owns
property having a fair salable value which is greater than the amount required
to pay all of such Borrower's debts as they become due.
5.21 Year 2000 Compliance: Each Borrower has reviewed the areas within its
business and operations which could be adversely affected by, and have developed
or is developing a program to address on a timely basis, the risk that certain
computer applications used by such Borrower may be unable to recognize and
perform properly sensitive functions prior to and after December 31, 1999 ("Year
2000 Problem"). The Year 2000 Problem is not reasonably expected to result in
any Material Adverse Effect.
5.22 Trade Creditors: Borrowers' projections attached hereto as Exhibit
"4.1(h)", have been prepared by Borrowers (in consultation with their outside
consultants) based on Borrower's diligent good faith analysis of their accounts
payable and the timing of payments which will need to be made by them to
continue their normal business operations at the sales levels shown in the
projections and their relationship with their vendors.
SECTION 6 - BORROWERS' AFFIRMATIVE COVENANTS
Borrowers covenant that until all of Borrowers' Obligations to Lender are
paid and satisfied in full and the Revolving Credit has been terminated:
6.1 Payment of Taxes and Claims: Borrowers shall pay, before they become
delinquent,
(a) all taxes, assessments and governmental charges or levies imposed
upon any of them or upon the Collateral, and
(b) all claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like Persons, which, if unpaid, might result
in the imposition of a Lien upon its Property;
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Provided, however, that Borrowers shall not be required to pay any such tax,
assessment, charge, levy, claim or demand if the amount, applicability or
validity thereof shall at the time be contested in good faith and by appropriate
proceedings by Borrowers, and if Borrowers shall have set aside on its books
adequate reserves in respect thereof, if so required in accordance with GAAP;
which deferment of payment is permissible so long as Borrowers' title to, and
its right to use, the Collateral are not materially adversely affected thereby
and Lender's lien and priority on the Collateral are not materially and
adversely affected, altered or impaired thereby.
6.2 Maintenance of Properties, Collateral and Corporate Existence:
(a) Property - Each of the Borrowers shall maintain its Property in
good condition in all material respects and make all renewals, replacements,
additions, betterments and improvements thereto in the ordinary course of such
Borrowers' business, as Borrowers deem reasonably necessary in good faith in the
exercise of its business judgment, and will pay and discharge when due the cost
of repairs and maintenance to its Property.
(b) Insurance - Borrowers shall maintain insurance on all insurable
tangible Collateral against fire, flood, casualty and such other hazards as may
be reasonably acceptable to Lender in such amounts, with such deductibles and
with such insurers as may be acceptable to Lender in its reasonable judgment.
The policies of all such casualty insurance shall contain standard Lender's Loss
Payable Clauses issued in favor of Lender under which all losses thereunder
shall be paid to Lender as Lender's interest may appear. Such policies shall
expressly provide that the requisite insurance cannot be altered or canceled
without thirty (30) days prior written notice to Lender and shall insure Lender
notwithstanding the act or neglect of Borrowers. At or prior to Closing,
Borrowers shall furnish Lender with duplicate original policies of insurance or
such other evidence of insurance as Lender may reasonably require. In the event
Borrowers fail to procure or cause to be procured any such insurance or to
timely pay or cause to be paid the premium(s) on any such insurance, Lender may
do so for Borrowers, but Borrowers shall continue to be liable for the same.
Each of the Borrowers hereby appoints Lender as such Borrowers'
attorney-in-fact, exercisable at Lender's option, upon the occurrence and
continuation of an Event of Default to endorse any check which may be payable to
Borrowers in order to collect the proceeds of such insurance and any amount or
amounts collected by Lender pursuant to the provisions of this paragraph may be
applied by Lender to any liabilities owing by Borrowers to Lender or to repair,
reconstruct or replace the loss of or damage to Collateral as Lender in its sole
judgment may from time to time determine.
(c) Public and Products Liability Insurance - Borrowers shall
maintain, and upon Lender's request, shall deliver to Lender evidence of,
general liability and professional liability insurance in such amounts as is
customary for companies in the same or similar businesses located in the same or
similar area.
(d) Financial Records - Borrowers shall keep current and accurate
books of records and accounts in which full and correct entries will be made of
all of its business transactions, and will reflect in their consolidated
financial statements adequate accruals and appropriations to reserves, all in
accordance with GAAP. Borrowers shall backup its records of accounts daily, and
its entire computer system weekly, and shall store such weekly information at a
secure off-site facility acceptable to Lender.
(e) Corporate Existence and Rights - Borrowers shall do (or cause to
be done) all things necessary to preserve and keep in full force and effect
their existence, good standing, rights and franchises, provided however, that
any Borrower or Subsidiary of any Borrower may merge into another Borrower or
dissolve and distribute its assets to another Borrower.
(f) Compliance with Law - No Borrower shall be in violation of any
laws, ordinances, governmental rules and regulations to which it is subject, and
will not fail to obtain
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any licenses, permits, franchises or other governmental authorizations,
necessary to the ownership of its Property or to the conduct of its businesses,
which violation or failure to obtain would have a Material Adverse Effect on the
business, prospects, Property or financial condition of Borrowers collectively
or the ability of Borrowers as a whole to perform under this Agreement.
(g) Updated Qualified Payor Information: The certificates of need,
provider numbers and Qualified Payor Contracts listed on Exhibit "5.12(c)"
attached hereto and made part hereof shall not be amended, altered, suspended,
terminated, or made provisional, in any material way, without prior written
notice to Lender. Borrowers shall immediately notify Lender in writing of any
Borrower's application for any new certificates of need, and any new provider
numbers and Qualified Payor Contracts as well as the termination of any
certificates of need or Qualified Payor Contracts.
(h) Collection of Accounts - Each of the Borrowers shall continue to
collect their Accounts in the ordinary course of their business subject to the
provisions hereof.
6.3 Places of Business: Each of the Borrowers shall give thirty (30) days
prior written notice to Lender of any change in the location of any of their
respective places of business (other than a move of any office other than the
corporate office to a location within the same county), of the places where
their records concerning their Accounts are kept, of the places where the
Collateral is kept, or of the establishment of any new, or the discontinuance of
any, existing places of businesses.
6.4 Business Conducted: Each of the Borrowers shall continue in the
business presently operated by them using their best efforts to maintain their
customers and goodwill, provided however, that any Borrower or a Subsidiary of
any Borrower may merge into another Borrower or dissolve and distribute its
assets to another Borrower. None of the Borrowers shall engage, directly or
indirectly, in any line of business substantially different from the business
conducted by it immediately prior to the Closing Date, or engage in business or
lines of business which are not reasonably related thereto. No Subsidiary which
is not a Borrower shall conduct any business.
6.5 Litigation: Borrowers shall give prompt written notice to Lender of any
litigation pending, or to their knowledge threatened or affecting Borrowers or
any of them if the amount claimed is more than $50,000 unless fully covered by
insurance less a deductible not to exceed $50,000.
6.6 Issue Taxes: Borrowers shall pay all taxes (other than taxes based upon
or measured by Lender's income or revenues or any personal property tax), if
any, in connection with the issuance of the Revolving Credit Note, and the
recording of any Lien documents. The obligations of Borrowers under this Section
6.6 shall survive the payment of Borrowers' indebtedness hereunder and the
termination of this Agreement.
6.7 Bank Accounts: Each of the Borrowers shall maintain their major
depository and disbursement account(s) with Lender and shall notify Lender, in
writing, prior to opening any account(s) subsequent to the Closing Date at any
bank or financial institution other than Lender.
6.8 Employee Benefit Plans: Each Borrower will (a) fund all its Employee
Benefit Plans in a manner that will satisfy the minimum funding standards of
Section 302 of ERISA, or will promptly satisfy any accumulated funding
deficiency that arises under Section 302 of ERISA, (b) furnish Lender, promptly
after the filing of the same, with copies of all annual reports (Form 5500) or
other material statements filed with the United States Department of Labor, the
Pension Benefit Guaranty Corporation ("PBGC") or the Internal Revenue Service
("IRS") with respect to all Employee Benefit Plans that are defined benefit
plans, or which any of the Borrowers, or any material notices, any member of a
Controlled Group, may receive from the United States
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Department of Labor, the Pension Benefit Guaranty Corporation ("PBGC") or the
Internal Revenue Service ("IRS") with respect to all Employee Benefit Plans that
are defined benefit plans, or which any of the Borrowers, or any material
notices, any member of a Controlled Group, may receive from the United States
Department of Labor, the IRS or the PBGC, with respect to all such Employee
Benefit Plans, and (c) promptly advise Lender of the occurrence of any
Reportable Event (as defined in Section 4043 of ERISA other than the type of
event with respect to which the PBGC has waived the 30-day notice requirement of
Section 4043 of ERISA) or non-exempt Prohibited Transaction with respect to any
such Employee Benefit Plan(s) and the action which Borrowers proposes to take
with respect thereto. Borrowers will make all contributions when due with
respect to any multi-employer pension plan in which any of them participates and
will promptly advise Lender (i) upon its receipt of notice of the assertion
against any of the Borrowers of a claim for withdrawal liability, (ii) upon the
occurrence of any event which, to the best of Borrowers' knowledge, would
trigger the assertion of a claim for withdrawal liability against Borrowers, and
(iii) upon the occurrence of any event which, to the best of Borrowers'
knowledge, would place Borrowers in a Controlled Group (other than those
Controlled Groups in which any of the Borrowers is a member as of the Closing
Date) as a result of which any member (including any of the Borrowers) thereof
may be subject to a claim for withdrawal liability, whether liquidated or
contingent which would result in a Material Adverse Effect.
6.9 Submission of Collateral Documents: Borrowers will, on demand of
Lender, make available to Lender copies of proof of the satisfactory performance
of services that gave rise to an Account, a copy of the invoice for each Account
and copies of any written contract or order from which an Account arose.
Borrowers shall promptly notify Lender if an Account becomes evidenced or
secured by an instrument or chattel paper and upon request of Lender, will
promptly deliver any such instrument or chattel paper to Lender.
6.10 Other Governmental Contracts: Borrowers will immediately notify Lender
if any Account arises out of contracts with the United States or any department,
agency or instrumentality thereof other than HCFA, and to the extent permitted
under applicable law will execute any instruments and take any steps required by
Lender so that all monies due and to become due under such contract shall be
assigned to Lender and notice thereof given to and acknowledged by the
appropriate government agency or authority under the Federal Assignment of
Claims Act.
6.11 Warranties for Future Advances: Each request by any of the Borrowers
for an advance under the Revolving Credit in any form following the Closing Date
shall constitute an automatic representation and warranty by Borrowers to the
effect that:
(a) No Event of Default, or event or condition which with the giving
of notice or passage of time, or both, would constitute an Event of Default,
then exists;
(b) Each advance is within and complies with the terms and conditions
of this Agreement; and
(c) Each representation and warranty set forth in Section 5 of this
Agreement is then true and correct in all material respects, as though made on
the funding date for such advance, except for changes otherwise permitted by
this Agreement or which are consented to by Lender in writing.
6.12 Financial Covenants: Borrowers shall comply with the following
financial covenants:
(a) Unfunded Capital Expenditures - Borrowers shall not expend, on a
consolidated basis, sums for Unfunded Capital Expenditures in excess of the
following amounts during the following respective periods, all determined on a
non-cumulative basis:
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Period Amount
August 1, 1999 through September 30, 1999 $320,000
October 1, 1999 through November 30, 1999 $320,000
December 1, 1999 through January 31, 2000 $385,000
February 1, 2000 through February 29, 2000 $225,000
(b) EBITDA - Borrowers shall have achieved, on a consolidated basis,
EBITDA of not less than the following amounts for the following respective
periods:
Period Amount
October 1, 1999 through October 31, 1999 $45,000
November 1, 1999 through November 30, 1999 $331,000
December 1, 1999 through December 31, 1999 $377,000
January 1, 2000 through January 31, 2000 $556,000
February 1, 2000 through February 29, 2000 $405,000
(c) Book Net Worth - Borrowers shall have a Book Net Worth of not
less than ($68,250,000) as of September 30, 1999.
(d) Excess Formula Availability - Borrowers shall have and maintain,
at all times, on a consolidated basis, measured at 4:00 p.m. on Friday of each
week, an Excess Formula Availability of not less than $1,500,000 for the period
commencing October 1, 1999, and ending on February 25, 2000; provided however,
that for the period from October 1, 1999 through December 11, 1999 (solely for
the purposes of this covenant), clause (i) of the definition of Excess Formula
Availability shall mean "an amount equal to eighty percent (80%) of Qualified
Accounts."
6.13 Financial and Business Information: So long as Borrowers are indebted
to Lender and the Revolving Credit has not been terminated, Borrowers shall
deliver to Lender the following:
(a) Financial Statements and Collateral Reports - in addition to such
other data, reports, statements and information, financial or otherwise, as are
already prepared in the ordinary course of Borrowers' business, as Lender may
request, Borrowers shall provide the following: (i) a borrowing base certificate
in a form acceptable to Lender no less than once a week, or more frequently as
Lender may request, which shall include, but not be limited to, a report of
sales, credits issued and collections received; (ii) reports of sales,
collections, adjustments and all other information pertaining to Accounts, no
less than once a week; (iii) monthly accounts receivable and payable aging
schedules within twenty (20) days of the end of each calendar month, including
reports of sales, credits issued, and collections received; and (iv) internally
prepared monthly financial statements for Borrowers on a consolidated basis,
certified by each Borrower's chief financial officer within forty-five (45) days
of the end of each calendar month; (v) annual projections which shall include
profit and loss statements, balance sheets and cash flow reports on a
consolidated basis (presented on a monthly basis) for the succeeding fiscal year
within thirty (30) days before the end of each of Borrowers' fiscal years; (vi)
annual certified financial statements for Borrowers from their independent
certified public accountants on a consolidated basis, acceptable to Lender
within ninety (90) days after the end of each of Borrowers' fiscal years; and
(vii) an annual management letter prepared by Borrowers' independent certified
public accountants and acceptable to Lender, within ninety (90) days after the
end of each of Borrowers' fiscal years. Annual statements shall set forth in
comparative form figures for the corresponding
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periods in the prior fiscal year. All financial statements shall include a
consolidated balance sheet and statement of consolidated operations and
consolidated cash flows and shall be prepared in accordance with GAAP;
(b) Medicare and Medicaid Audit - promptly upon receipt, Borrowers'
medicare and medicaid audit which shall be in substance satisfactory to Lender
in Lender's sole discretion;
(c) Notice of Event of Default - promptly upon becoming aware of the
existence of any condition or event which constitutes an Event of Default under
this Agreement, or which with the passage of time or the giving of notice, or
both, would become an Event of Default hereunder, a written notice specifying
the nature and period of existence thereof and what action Borrowers is taking
(and proposes to take) with respect thereto;
(d) Notice of Claimed Default - promptly upon receipt by Borrowers, a
copy of any notice of default given to Borrowers by any creditor for borrowed
money of Borrowers other than Lender; and
(e) Securities and Other Reports - promptly upon its becoming
available, one copy of each financial statement, report, notice or proxy
statement sent by Borrowers to stockholders, and, a copy of each regular or
periodic report, (including without limitation all 10-K and 10-Q reports),
registration statement, or prospectus in respect thereof filed by Borrowers with
any securities exchange or with any federal or state securities and exchange
commissions or any successor agency.
6.14 Officers' Certificates: Within forty-five (45) days of the end of each
month and along with the set of financial statements delivered to Lender at the
end of each fiscal year pursuant to Section 6.13(a) hereof, Borrowers shall
deliver to Lender a certificate from Borrowers, executed by each Borrower's
Chief Financial Officer in form and substance reasonably satisfactory to Lender
setting forth:
(a) Covenant Compliance - the information (including detailed
calculations) required in order to establish whether Borrowers are in compliance
with the requirements of Sections 6 and 7 as of the end of the period covered by
the financial statements then being furnished and any exhibits appended to such
financial statements under Section 6.13; and
(b) Event of Default - that the signer has reviewed the relevant
terms of this Agreement, and has made (or caused to be made under his
supervision) a review of the transactions and conditions of Borrowers from the
beginning of the accounting period covered by the income statements being
delivered therewith to the date of the certificate, and that such review has not
disclosed the existence during such period of any condition or event which
constitutes an Event of Default or which is then, or with the passage of time or
giving of notice, or both, would become an Event of Default hereunder, and if
any such condition or event existed during such period or now exists, specifying
the nature and period of existence thereof and what action Borrowers have taken
or proposes to take with respect thereto.
6.15 Inspection: So long as Borrowers are indebted to Lender, each of the
Borrowers will permit any of Lender's officers or other representatives to visit
and inspect any of the Collateral of Borrowers, to examine and audit all of
Borrowers' books of account, records, reports and other papers, to make copies
and extracts therefrom and to discuss its affairs, finances and accounts with
its officers, employees and independent public accountants. Upon Lender's
request, Borrowers shall request all such accountants and auditors to exhibit
and deliver to Lender copies of any and all of any Borrower's financial
statements or other accounting records of any sort in the accountant's or
auditor's possession. If an Event of Default is outstanding at the time of such
inspection, such inspection shall be at Borrowers' expense (in addition to the
Collateral
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Management Fee) at the rate of $650 per person per day plus out-of-pocket costs
and expenses for such activities.
6.16 Tax Returns and Reports: At Lender's request from time to time,
Borrowers shall promptly furnish Lender with copies of the annual federal and
state income tax returns of Borrowers. Borrowers further agree that if requested
by Lender, it shall promptly furnish Lender with copies of all reports filed
with any federal, state or local governmental authority or agency, board or
commission.
6.17 Information to Participant: Lender may divulge to any participant or
unless prohibited by applicable law, prospective participant it may obtain in
the Loans, or any portion thereof, all information in its possession concerning
Borrowers, their Property and financial condition, and furnish to such
participant copies of reports, financial statements, projections, certificates,
and documents obtained under any provision of this Agreement, or related
agreements and documents.
6.18 Material Adverse Developments: Each of the Borrowers agree that
promptly upon becoming aware of any development or other information outside the
ordinary course of business (excluding matters of a general economic, financial
or political nature) which would have a Material Adverse Effect, or of Lender's
failure to perform any of its obligations to Borrowers under this Agreement it
shall give to Lender telephonic or telegraphic notice specifying the nature of
such development or information and such anticipated effect. In addition, such
verbal communication shall be confirmed by written notice thereof to Lender on
the same day such verbal communication is made.
6.19 Year 2000 Compliance: Each Borrower hereby agrees to take all action
necessary to assure that all times the computer-based systems utilized by such
Borrower and each of its Subsidiaries, if any, are able to effectively
interpret, process and manipulate data, including dates before, on and after
December 31, 1999. At Lender's request, each Borrower shall provide to Lender
assurance satisfactory to Lender that the computer-based systems utilized by
such Borrower and each of its Subsidiaries, if any, are able to recognize and
perform without error functions involving dates before, on and after December
31, 1999.
6.20 Accounts: Each Borrower agrees and covenants that such Borrower shall
apply all future credits against the applicable Account(s) of such Borrower in a
timely manner. At no time shall the aggregate of all Accounts (except for those
Accounts due and owing from HCFA administering the Federal Medicare program) of
all Borrowers outstanding and unpaid for more than one hundred and twenty (120)
days past their respective original invoice dates exceed twenty percent (20%) of
the total aggregate outstanding Accounts of all Borrowers. If a breach of the
foregoing covenant continues for more than thirty (30) days, and in addition to
(and without impairing, waiving, affecting or delaying any right to exercise)
any other right, option, or remedy available to Lender, then Borrowers shall, at
Lender's request, promptly retain for the remaining period of the Contract Term
a collection agency to be selected by Borrower but acceptable to Lender, in its
sole discretion, to provide assistance in the collection of past due Accounts of
Borrowers.
6.21 Retention of Consultant:
(a) Borrowers shall continue to retain for the remaining period of
the Contract Term a consultant to be selected by Borrower but acceptable to
Lender, in its sole discretion, to provide financial and strategic advise, to
validate Borrowers' projections, and to analyze, inter alia, the viability of
each Borrower's business, profitability, ability to meet its current and long
term obligations to the federal and state governments, on capital lease
obligations and with respect to notes payable, the effect on the business,
properties, assets, financial condition, results of operations or prospects of
each Borrower of any monetary or non-monetary obligations resulting from the
Year 2000 Problem, and the effect on each Borrower of the scheduled bank
amortization
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under the terms of the proposed Spin-Off. Upon receipt by Borrowers of any
written reports by such consultant, Borrowers shall promptly deliver a copy of
such report to Lender.
(b) Lender shall have the right to engage a consultant or investment
banker at any time to assist Lender in its analysis and evaluation of Borrowers'
finances and operations and Collateral, and for such purpose, Borrowers shall
permit any such advisor to Lender to have access to Borrowers' books and records
and Property. Prior to occurrence of an Event of Default, the expense of any
such advisory services shall be borne by Lender.
6.22 Reduction in Salaries: Borrowers shall continue to impose for the
remaining period of the Contract Term, a twenty percent (20%) reduction on the
salaries of Stephen Savitsky and David Savitsky.
6.23 Payment Plan: Borrowers shall deliver to Lender prior to October 29,
1999, evidence that a payment plan has been agreed upon in writing between
Borrower and HCFA in connection with the repayment of PIP overpayments and the
audit adjustments for Medicare cost reports, such plan to be under terms and
conditions acceptable to Lender.
SECTION 7 - BORROWERS' NEGATIVE COVENANTS
Borrowers covenant that until all of Borrowers' liabilities and obligations
to Lender are paid and satisfied in full and the Revolving Credit has been
terminated, that without Lender's prior consent:
7.1 Merger, Consolidation, Dissolution or Liquidation:
(a) None of the Borrowers shall sell, lease, license, transfer or
otherwise dispose of its Property, other than (i) inventory sold in the ordinary
course of such Borrower's business, (ii) obsolete equipment office furniture or
vehicles, (iii) to another Borrower, (iv) equipment or office furniture or
vehicles with a value of less than $5,000 and (v) the sublease of office space,
and the sale of a franchise consistent with Borrowers' current business
practices.
(b) None of the Borrowers shall merge or consolidate with any other
Person, or commence a dissolution or liquidation, provided, however, that any
Borrower or Subsidiary of any Borrower may merge into another Borrower or
dissolve and distribute its assets to another Borrower.
(c) None of the Borrowers shall permit their names to be changed
without at least thirty (30) days prior written notice to Lender.
7.2 Acquisitions: Neither Borrowers nor any Subsidiaries shall acquire all
or a material portion of the stock, securities or assets of any Person in any
transaction or in any series of related transactions or enter into any sale or
leaseback transaction without prior written approval of Lender.
7.3 Liens and Encumbrances: None of the Borrowers or Subsidiaries shall
(i) cause or permit or (ii) agree or consent to cause or permit in the future
(upon the happening of a contingency or otherwise), its Property (including,
without limitation, the Collateral), whether now owned or hereafter acquired, to
be subject to a Lien except:
(a) Liens securing taxes, assessments or governmental charges or
levies or the claims or demands of materialmen, repairmen, mechanics, carriers,
warehousemen, landlords, and other like persons, provided the payment thereof is
not at the time required by Section 6.1;
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(b) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance,
social security and other like laws and in connection with leases or trade
contracts; and
(c) Existing liens described in Section 5.4 and on Exhibit "5.4"
hereto.
7.4 Transactions With Affiliates or Subsidiaries:
(a) Subject to the provisions of Section 7.12 in respect of
transactions with the ATC Group or Staff Builders, none of the Borrowers shall
enter into any transaction, including, without limitation, the purchase, sale,
or exchange of Property, or the loaning or giving of funds (including, without
limitation, the payment of management fees) to or with any Subsidiary or
Affiliate (including, without limitation, any other Borrower), except for
transactions with another Borrower in the ordinary course of and pursuant to the
reasonable requirements of such Borrower's business.
(b) None of the Borrowers shall create or acquire any Subsidiary
without Lender's prior written consent (except by merger with an existing
Subsidiary).
7.5 Guarantees: Excepting the endorsement in the ordinary course of
business of negotiable instruments for deposit or collection, none of the
Borrowers or Subsidiaries shall become or be liable, directly or indirectly,
primary or secondary, matured or contingent, in any manner, whether as
guarantor, surety, accommodation maker, or otherwise, for the existing or future
indebtedness of any kind of any Person except existing guarantees.
7.6 Distributions, Redemptions and Other Indebtedness: None of the
Borrowers shall other than in connection with the Closing:
(a) declare, pay or make any forms of Distribution to its
shareholders, their successors and assigns;
(b) make any payments on any existing or future indebtedness for
borrowed money to any Person other than a Borrower (including subordinated
indebtedness) except for payments to the holders of the indebtedness listed on
Exhibit "7.6" attached hereto and made part hereof in accordance with the
existing terms of such indebtedness; or
(c) hereafter borrow money from any Person other than Lender or, if
in the ordinary course, another Borrower.
7.7 Loans and Investments: None of the Borrowers shall make or have
outstanding loans, advances, or extensions of credit to, or capital
contributions or investments in, any Person other than another Borrower in the
ordinary course of such Borrower's business, or ownership of an inactive
Subsidiary, including without limitation, any officers and directors of any
Borrower.
7.8 Use of Lender's Name: Borrowers shall not use Lender's name (or the
name of any of Lender's affiliates) in connection with any of their business
operations, provided that Borrowers may disclose to third parties that Borrowers
have a deposit and borrowing relationship with Lender. Nothing herein contained
is intended to permit or authorize Borrowers to make any contract on behalf of
Lender.
7.9 Change in Capital Stock: There shall occur no change in the ownership
of any of the capital stock of any of the Borrowers, except with respect to (a)
any merger by any Borrower or a Subsidiary of any Borrower into another
Borrower, (b) the dissolution and distribution of the assets of any Borrower or
Subsidiary of any Borrower to a Borrower, (c) the
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transfer of the capital stock of TLC from Staff Builders to the shareholders of
Staff Builders in connection with the Spin-Off, or (d) the transfer of capital
stock of each Borrower (other than TLC) from Staff Builders to TLC in connection
with the Spin-Off.
7.10 Miscellaneous Covenants:
(a) None of the Borrowers shall become or be a party to any contract
or agreement which would breach this Agreement, or breach, any other instrument,
agreement or document to which any of the Borrowers are a party or by which they
are or may be bound which breach would have a Material Adverse Effect.
(b) None of the Borrowers shall carry or purchase any "margin
security" within the meaning of Regulations U, G, T or X of the Board of
Governors of the Federal Reserve System, 12 C.F.R., Chapter II.
7.11 Publicity: Lender (or Agent, if it is a syndicated deal), in and using
its reasonable discretion, may disclose the existence of the credit facilities
under this Agreement to a public forum, including, without limitation,
"tombstone" announcements in the print media; provided however, Lender shall
provide Borrowers with at least five (5) days notice of such disclosure, and, at
Borrower's request, shall provide Borrowers with a copy of such disclosure.
7.12 Transactions with Staff Builders and ATC Group: Notwithstanding any
other provisions contained herein to the contrary, none of the Borrowers shall
at any time (a) enter into the purchase, sale, or exchange of Property with; (b)
make or have loans, advances, or extensions of credit to; (c) make capital
contributions or investments in; (d) obtain or have borrowings from; or (e)
become or be liable, directly or indirectly, primary or secondary, matured or
contingent, in any manner, whether as guarantor, surety, accommodation maker, or
otherwise, for the existing or future indebtedness of, Staff Builders or any
member of the ATC Group (whether or not any such Person is an Affiliate of any
Borrower), except for those transactions set forth on Exhibit "7.12" attached
hereto and made part hereof.
SECTION 8 - DEFAULT
8.1 Events of Default: Each of the following events shall constitute an
event of default ("Event of Default") and Lender shall thereupon have the option
to declare Borrowers in default under this Agreement, and all other existing and
future agreements of any kind (related or unrelated) with Lender, and declare
all Obligations of Borrowers to Lender, whether joint or several, matured or
contingent, related or unrelated, due or to become due, (including, without
limitation, liabilities on the Revolving Credit) immediately due and payable
including, but not limited to, accrued and unpaid interest, outstanding
principal, Expenses, advances to protect Lender's position and all of Lender's
rights hereunder and thereunder, all without demand, notice, presentment or
protest or further action of any kind (it also being understood that the
occurrence of any of the Events of Default set forth in subparagraphs (j), (k)
or (l) shall automatically place Borrowers in default and cause an acceleration
of Borrowers' indebtedness to Lender):
(a) Payments -
(i) if any of the Borrowers fails to make any payment of
principal or interest under the Loans when such payment is due and payable, or
(ii) if at any time the outstanding principal balance of the
Revolving Credit exceeds the Revolving Credit Borrowing Base; or
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(b) Other Charges - if any of the Borrowers fails to pay any other
charges, fees or other monetary obligations owing to Lender arising out of or
incurred in connection with this Agreement within five (5) days after the date
when such payment is due and payable; or
(c) Particular Covenant Defaults - if any of the Borrowers fails to
perform or observe any covenant, condition or undertaking contained in this
Agreement and such failure, with respect to sections 6.2(a), 6.2(e), 6.2(g) and
6.6 only, continues for more than thirty (30) days after an executive officer of
Borrowers obtains knowledge thereof; or
(d) Financial Information - if any statement, report, financial
statement, or certificate made or delivered by any of the Borrowers or any of
its officers, employees or agents, to Lender is not true and correct, in all
material respects when made; or
(e) Uninsured Loss - if there shall occur any uninsured damage to or
loss, theft, or destruction of a material portion of the Collateral; or
(f) Warranties or Representations - if any warranty, representation
or other statement by or on behalf of any of the Borrowers contained in this
Agreement, or in any other Loan Document, or in any other existing or future
agreement between any of the Borrowers and Lender, is false, erroneous, or
misleading in any material respect when made; or
(g) Agreements with Others - if any of the Borrowers shall default
beyond any grace period under any agreement with any other creditor for borrowed
money (including the subordinated indebtedness) of any of the Borrowers, if as a
result of such default the holder of such Borrowers' obligations declares or is
permitted to declare any such obligation of such Borrower to become due prior to
its maturity date or prior to its regularly scheduled date of payment; or
(h) Other Agreements with Lender - if any of the Borrowers breaches
or violates any material term of, or if a default or an Event of Default, occurs
under, any other existing or future agreement (related or unrelated) between any
of the Borrowers and Lender (subject to any applicable grace or cure period
which may be contained in any such other agreement); or
(i) Judgments - if any final judgment or judgments (in the aggregate)
for the payment of money in excess of $50,000 shall be rendered by any court of
record against any of the Borrowers unless satisfied or discharged within
forty-five (45) days thereof; or
(j) Assignment for Benefit of Creditors, etc. - if any of the
Borrowers makes an assignment for the benefit of creditors generally, offers a
composition or extension to creditors, or makes or sends notice of an intended
bulk sale of any business or assets now or hereafter conducted by any of the
Borrowers; or
(k) Bankruptcy, Dissolution, etc. - upon the commencement of any
action for the dissolution or liquidation of any of the Borrowers, or the
commencement of any proceeding to avoid any transaction entered into by any of
the Borrowers, or the commencement of any case or proceeding for reorganization
or liquidation of any of the Borrowers' debts under the Bankruptcy Code or any
other state or federal law, now or hereafter enacted for the relief of debtors,
whether instituted by or against any of the Borrowers; provided however, that
Borrowers shall have forty-five (45) days to obtain the dismissal or discharge
of an involuntary proceeding filed against any Borrower; it being understood
that during such forty-five (45) day period, Lender shall not be obligated to
make Advances hereunder and Lender may seek adequate protection in any
bankruptcy proceeding; or
(l) Receiver - upon the appointment of a receiver, liquidator,
custodian, trustee or similar official or fiduciary for any of the Borrowers or
for any of the Borrowers' Property; or
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(m) Execution Process, etc. - the issuance of any execution or
distraint process against any of the Borrowers, or any of their Property; or
(n) Tax Liens - if a notice of a Lien, levy or assessment is filed of
record with respect to any or all of any Borrower's assets by the United States
government, or any department, agency or instrumentality thereof, or by any
state, county, municipal or other government agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any or all of any Borrower's assets except
with respect to liens for state, county and municipal taxes only, which do not
exceed $5,000 in the aggregate with all other such liens; or
(o) Termination of Business - if any Borrower is enjoined, restrained
or in any way prevented by court order or administrative proceeding from
continuing to conduct, or any Borrower otherwise ceases to conduct, all or a
material part of its business affairs except as permitted hereunder the results
of which would have a Material Adverse Effect; or
(p) Pension Benefits, etc. - if any of the Borrowers fails to comply
with ERISA, with the result that grounds exist for the PBGC to commence
proceedings to appoint a trustee under ERISA to administer Borrowers' employee
benefit plans or to allow the Pension Benefit Guaranty Corporation to institute
proceedings to appoint a trustee to administer such plan(s), or to permit the
entry of a Lien to secure any deficiency or claim; or
(q) Support Agreements - if any Support Agreement shall for any
reason cease to be in full force and effect and if the reason is due to the
death, disability or termination of employment of one of the parties to such
Support Agreement after ninety (90) days has elapsed and Lender has sent
Borrower notice of such event, or a default shall otherwise occur under such
Support Agreement; or
(r) Sale of Stock - if the stock of any of the Borrowers is sold or
otherwise transferred other than in connection with a permitted merger; or
(s) Investigations - any indication or evidence received by Lender
that any of the Borrowers may have directly or indirectly been engaged in any
type of activity which, in Lender's reasonable discretion may result in the
forfeiture of any material Property to any governmental entity, federal, state
or local; or
(t) Change in Management - if any of Stephen Savitsky, David
Savitsky, Dale Clift, or Willard Derr shall cease to have an active role in the
management of Borrowers or such individuals collectively shall cease to exercise
management control over Borrowers provided however, if any one or more of such
individuals cease to be active in management or participation in exercising
management control, then Borrowers shall have forty-five (45) days to replace
such individual with a replacement reasonably acceptable to Lender; or
(u) Payment of Pre-Dividend Property - if Borrowers fail to pay to
Lender by October 29, 1999, the Pre-Dividend Property (as defined by that
certain Escrow Agreement, dated as of September 17, 1999, by MSXI and Staff
Builders) in an amount of Two Million Five Hundred Thousand Dollars
($2,500,000); or
(v) Occurrence of Spin-Off - if the Spin-Off shall not have occurred
by October 29, 1999, pursuant to terms and conditions acceptable to Lender.
8.2 Rights and Remedies on Default:
(a) In addition to all other rights, options and remedies granted to
Lender
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under this Agreement, Lender may, upon or at any time after the occurrence of an
Event of Default, terminate the Revolving Credit, cease making advances or
extensions of credit thereunder, and exercise all other rights granted to it
hereunder and all rights under the UCC and any other applicable law or in
equity, and under all Loan Documents permitted to be exercised after the
occurrence of an Event of Default, including the following rights and remedies
(which list is given by way of example and is not intended to be an exhaustive
list of all such rights and remedies):
(i) the right to take possession of, send notices regarding and
collect directly, the Collateral, with or without judicial process (including
without limitation the right to notify the United States postal authorities to
redirect mail addressed to any Borrower to an address designated by Lender);
(ii) by its own means or with judicial assistance, enter any of
the Borrowers' premises and take possession of the Collateral, or render it
unusable, or dispose of the Collateral on such premises in compliance with
subsection (b), below, without any liability for rent, storage, utilities or
other sums, and Borrowers shall not resist or interfere with such action;
(iii) require any of the Borrowers at Borrowers' expense to
assemble all or any part of the Collateral (other than real estate or fixtures)
and make it available to Lender at any place designated by Lender;
(iv) the right to reduce the Maximum Revolving Credit Amount,
modify the Revolving Credit Borrowing Base or any portion thereof or the advance
rates or to modify the terms and conditions upon which Lender is willing to
consider making advances under the Revolving Credit or to take additional
reserves in the Revolving Credit Borrowing Base for any reason; and
(b) Each of the Borrowers acknowledge that any Borrower's failure to cause
all collections of Accounts to be paid directly to a lockbox and/or deposited
into a cash collateral account as specified herein in Section 2.4, will result
in the dissipation of Lender's Collateral and other irreparable harm to Lender
for which money damages could not adequately compensate Lender. In the event of
such a breach, Lender shall be entitled, in addition to all other rights and
remedies which Lender may have at law or equity, to have an injunction issued by
any court of Lender's choosing, enjoining and restraining Borrowers and any
agents and employees thereof, from continuing such breach.
(c) Each of the Borrowers hereby agrees that a notice received by it at
least seven (7) days before the time of any intended public sale or of the time
after which any private sale or other disposition of the Collateral is to be
made after the occurrence of an Event of Default hereunder, shall be deemed to
be reasonable notice of such sale or other disposition. If permitted by
applicable law, any perishable inventory or Collateral which threatens to
speedily decline in value or which is sold on a recognized market may be sold
immediately by Lender without prior notice to Borrowers after the occurrence of
an Event of Default hereunder. Borrowers covenant and agree not to interfere
with or impose any obstacle to Lender's exercise of its rights and remedies with
respect to the Collateral, after the occurrence of an Event of Default
hereunder.
8.3 Nature of Remedies: After the occurrence of an Event of Default Lender
shall have the right to proceed against all or any portion of the Collateral in
any order and may apply such Collateral to the liabilities and obligations of
Borrowers to Lender in any order. All rights and remedies granted Lender
hereunder and under any agreement referred to herein, or otherwise available at
law or in equity, shall be deemed concurrent and cumulative, and not alternative
remedies, and Lender may proceed with any number of remedies at the same time
until the Loans, and all other existing and future liabilities and obligations
of Borrowers to Lender, are satisfied in full. The exercise of any one right or
remedy shall not be deemed a waiver or release of any other right or remedy, and
Lender, upon the occurrence of an Event of Default, may proceed
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against Borrowers, and/or the Collateral, at any time, under any agreement, with
any available remedy and in any order. Notwithstanding the foregoing, Lender
may, at any time in its sole discretion, relinquish or abandon any Collateral,
interest therein, or portion thereof, for any reason whatsoever.
8.4 Set-Off: If any bank account of any of the Borrowers with Lender or
with any participant is attached or otherwise liened or levied upon by any third
party, Lender (and any participant) need not await the running of any applicable
grace period hereunder, but Lender (and such participant as agent for Lender)
shall have and be deemed to have the immediate right of set-off and may apply
the funds or amount thus set-off against any of the Borrowers' liabilities
hereunder.
8.5 Cross-Default and Cross-Collateralization:
(a) The parties acknowledge and agree that (i) an Event of Default
under the ATC Loan Documents presently constitutes an Event of Default
hereunder, (ii) an Event of Default hereunder presently constitutes an Event of
Default under the ATC Loan Documents, (iii) the collateral of Staff Builders and
each member of the ATC Group presently secures all Obligations hereunder, and
(iv) the Collateral of Borrowers presently secures all obligations and
liabilities of Staff Builders and each member of the ATC Group under the ATC
Loan Documents.
(b) The parties hereby agree that if:
(i) Lender shall have received prior to October 29, 1999, the
Pre-Dividend Property (as defined by that certain Escrow Agreement, dated as of
September 17, 1999, by MSXI and Staff Builders) in the amount of Two Million
Five Hundred Thousand Dollars ($2,500,000) from Staff Builders which shall be
applied against the obligations of Staff Builders and the ATC Group;
(ii) the Spin-Off shall have occurred prior to October 29, 1999
pursuant to terms and conditions acceptable to Lender;
(iii) Lender shall have received on the earlier of: (A) October
22, 1999, or (B) three (3) Business days before the occurrence of the Spin-Off,
pro-forma balance sheets of Borrowers, Staff Builders and the ATC Group
reflecting the proposed status of each after the occurrence of the Spin-Off,
with adjusting entries with explanations, all of which shall be in form and
substance satisfactory to Lender;
(iv) Lender shall have received prior to October 29, 1999
evidence that, after giving effect to the payment described in subsection (i)
above, Staff Builders and the ATC Group have a minimum Excess Borrowing
Availability (as defined in the ATC Loan Documents) of One Million Two Hundred
Thousand Dollars ($1,200,000); and
(v) Lender shall have received prior to October 29, 1999
evidence that, after giving effect to the payment described in subsection (i)
above, Borrowers have a minimum Excess Borrowing Availability of Two Million
Dollars ($2,000,000),
(vi) no Event of Default shall have occurred under Subsections
8.1(a)-(d), (f), (h), (j)-(o), (q) and (r) of the Loan Agreement and be
continuing and no event shall have occurred which with the passage of time, the
giving of notice or both would constitute an Event of Default under such
subsections of the Loan Agreement;
(vii) no Event of Default shall have occurred under Subsections
8.1(a)-(d), (f), (h), (j)-(o), (q) and (r) of the ATC Loan Agreement and be
continuing and no event shall have occurred which with the passage of time, the
giving of notice or both would constitute an Event of Default under such
subsections of the ATC Loan Agreement;
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(viii) Lender shall have received on the date of the Spin-Off, a
certificate from Borrowers, executed by each Borrower's Chief Financial
Officer, certifying that the signer has reviewed the relevant terms of this
Agreement, and has made (or caused to be made under his supervision) a
review of the transactions and conditions of Borrowers from the date of
Closing to the date of the Spin-Off, and that such review has not disclosed
the existence during such period of any condition or event which
constitutes an Event of Default hereunder or under the ATC Loan Agreement
or which is then, or with the passage of time or giving of notice, or both,
would become an Event of Default hereunder of under the ATC Loan Agreement,
then
(A) an Event of Default hereunder shall thereafter not
constitute an Event of Default under the ATC Loan Documents;
(B) an Event of Default under the ATC Loan Documents shall
thereafter not constitute an Event of Default hereunder;
(C) each Borrower shall no longer serve as a surety for all
obligations of Staff Builders and the ATC Group under the ATC Loan
Documents;
(D) Staff Builders and the ATC Group shall no longer serve
as sureties for all Obligations of Borrowers under the Loan Documents;
(E) any and all collateral of Staff Builders and the ATC
Group shall no longer secure the Obligations of Borrowers;
(F) any and all Collateral of Borrowers shall no longer
secure the obligations of Staff Builders and the ATC Group under the ATC
Loan Documents; and
(G) Dale Clift and Willard Derr shall no longer be subject
to or bound by the terms and conditions set forth in those certain
Management Support Agreements and Fraud Guarantees, each dated June 25,
1999, executed by each respectively in favor of Lender in conjunction with
the execution of the ATC Loan Documents; and
(H) David Savitsky shall no longer be subject to or bound
by the terms and conditions set forth in that certain Management Support
Agreement and Fraud Guarantee, of even date herewith, executed by David
Savitsky in favor of Lender in conjunction with the execution of this
Agreement.
(c) The parties agree and acknowledge that in order to effectuate the
Spin-Off and upon fulfillment of the conditions set forth in Subsection (b)
above, (i) Lender shall deliver a certificate to Borrowers or, if requested
by Borrowers, to MSXI, certifying that all conditions set forth in
Subsection (b) above have been fulfilled, (ii) Lender shall release its
lien on and security interest in the stock of TLC, (iii) Lender shall
deliver to Staff Builders the pledged stock of each Borrower in exchange
for delivery to Lender of replacement certificates as described in clause
(v) below, (iv) TLC shall execute and deliver to Lender a new stock pledge
agreement covering the stock described in Subsection (iii) above, and (v)
TLC shall deliver to Lender the original replacement stock certificates
representing the stock of TLC in each Borrower (except for TLC), together
with stock powers executed in blank by TLC. Nothing contained herein shall
impair, limit, or affect the continuing validity, enforceability and
priority of Lender's lien and security interest, and the priority thereof,
in the stock of the Borrowers.
SECTION 9 - MISCELLANEOUS
9.1 Governing Law: This Agreement, and all related agreements and
documents shall
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be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to its otherwise applicable principles of conflicts
of laws. The provisions of this Agreement and other agreements and documents
referred to herein are to be deemed severable, and the invalidity or
unenforceability of any provision shall not affect or impair the remaining
provisions which shall continue in full force and effect.
9.2 Integrated Agreement: The Revolving Credit Note, this Agreement, and
all other Loan Documents shall be construed as integrated and complementary of
each other, and as augmenting and not restricting Lender's rights, remedies and
security. If, after applying the foregoing, an inconsistency still exists, the
provisions of this Agreement shall constitute an amendment thereto and shall
control.
9.3 Waiver:
(a) No omission or delay by Lender in exercising any right or power
under this Agreement or any other Loan Document will impair such right or power
or be construed to be a waiver of any default, or Event of Default or an
acquiescence therein, and any single or partial exercise of any such right or
power will not preclude other or further exercise thereof or the exercise of any
other right, and no waiver of Lender's rights hereunder will be valid unless in
writing and signed by Lender, and then only to the extent specified.
(b) Borrowers release Lender, its officers, employees and agents, of
and from any claims for loss or damage resulting from acts or conduct of any or
all of them arising through the date hereof, unless caused by wilful misconduct
or gross negligence.
9.4 Time:
(a) Whenever Borrowers shall be required to make any payment, or
perform any act on a Saturday, Sunday or a legal holiday under the Laws of the
Commonwealth of Pennsylvania or such other jurisdiction where Borrowers may be
required to make any payment or perform any act, such payment may be made, or
such act may be performed, on the next succeeding Business Day.
(b) Time is of the essence in Borrowers' performance under all
provisions of this Agreement and all other Loan Documents.
9.5 Expenses of Lender:
(a) At Closing and from time to time thereafter, Borrowers will pay,
on demand, all accrued and unpaid expenses (including the reasonable fees and
expenses of legal counsel for Lender) relating to this Agreement, and all
related agreements and documents, including, without limitation, expenses
incurred in the analysis, negotiation, preparation, closing, administration,
audit and enforcement of this Agreement, and all related agreements and
documents, the enforcement, protection and defense of the rights of Lender in
connection with the Revolving Credit, the Collateral or otherwise hereunder,
including the right to take possession of any Collateral and the proceeds
thereof and to hold, collect, prepare for sale, sell and dispose of any
Collateral, and any reasonable expenses relating to extensions, amendments,
waivers or consents pursuant to the provisions hereof, or any related agreements
and documents or relating to agreements with other creditors, or termination of
this Agreement (collectively, the "Expenses").
(b) Expenses shall also include but not be limited to (i) cost of
reproducing this Agreement and related agreements and documents; (ii) filing and
recording fees; and (iii) searches.
9.6 Brokerage: Except as otherwise provided herein, this transaction was
brought about and entered into by Lender and Borrowers acting as principals and
without any brokers,
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agents or finders being the effective procuring cause hereof. Borrowers
represent that they have not committed Lender to the payment of any brokerage
fee, commission or charge in connection with this transaction. If any such claim
is made on Lender by any broker, finder or agent or other person, Borrowers will
indemnify, defend and save Lender harmless against such claim and further will
defend any action or actions to recover on such claim, at Borrowers' own cost
and expense, including Lender's counsel fees. Borrowers further agree that until
any such claim or demand is adjudicated in Lender's favor, the amount demanded
shall be deemed a liability of Borrowers under this Agreement, secured by the
Collateral.
9.7 Notices:
(a) Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed given if delivered in person, or sent by
nationally recognized overnight courier service, or sent by certified or
registered mail postage prepaid, return receipt requested, as follows, unless
such address is changed by written notice hereunder:
If to Lender to: Mellon Business Credit
Mellon Bank Center
1735 Market Street, 6th Floor
Philadelphia, PA 19103
Attn.: Jeffrey Saperstein
with copies to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn.: Harvey I. Forman, Esquire
If to Borrowers: Tender Loving Care Health Care Services, Inc.
1983 Marcus Avenue
Lake Success, NY 11042
Attn.: Stephen Savitsky
with copies to: Richards and O'Neill
885 Third Avenue
New York, NY 10022-4873
Attn.: Floyd Wittlin, Esquire
(b) All notices sent by Lender or Borrowers shall be deemed to be
given when so received.
(c) All notices and deliveries received by Lender from TLC shall be
deemed to have been received from all Borrowers and all notices received by TLC
shall be deemed to have been received by all Borrowers.
9.8 Headings: The headings of any paragraph or Section of this Agreement
are for convenience only and shall not be used to interpret any provision of
this Agreement.
9.9 Survival: All warranties, representations, and covenants made by
Borrowers herein, or in any other Loan Document or on any certificate, document
or other instrument delivered by it or on its behalf under this Agreement, shall
be considered to have been relied upon by Lender, and shall survive the delivery
to Lender of the Revolving Credit Note, regardless of any investigation made by
Lender or on its behalf. All statements made by Borrower in any Loan Document
such certificate or other instrument prepared and/or delivered for the benefit
of Lender shall constitute warranties and representations by Borrowers
hereunder. Except as otherwise expressly provided herein, all covenants made by
Borrowers hereunder or under any other agreement or instrument shall be deemed
continuing until all liabilities and obligations of Borrowers to Lender are
satisfied in full.
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9.10 Successors and Assigns: This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties.
Lender may participate any or all of its rights or obligations hereunder with
notice to, but without consent of Borrowers to any commercial lender, financial
institution, or other entity not engaged in the same business as Borrowers.
Except as expressly provided herein, Borrowers may not transfer, assign or
delegate any of its duties or obligations hereunder. Lender may assign the
Revolving Note, this Agreement and other Loan Documents to another financial
institution as Lender in its discretion may determine.
9.11 Duplicate Originals: Two or more duplicate originals of this Agreement
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
9.12 Modification: No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed on behalf of
the party against whom enforcement is sought.
9.13 Signatories: Each individual signatory hereto represents and warrants
that he is duly authorized to execute this Agreement on behalf of his principal
and that he executes the Agreement in such capacity and not as a party.
9.14 Third Parties: No rights are intended to be created hereunder, or
under any related agreements or documents for the benefit of any third party
donee, creditor or incidental beneficiary of Borrowers. Nothing contained in
this Agreement shall be construed as a delegation to Lender of Borrowers' duty
of performance, including, without limitation Borrowers' duties under any
account or contract in which Lender has a security interest.
9.15 Discharge of Taxes, Borrowers's Obligations, Etc.: Lender, in its
discretion, shall have the right at any time, and from time to time, if
Borrowers fail to do so, after reasonable notice, to (a) obtain insurance
covering any of the Collateral as required hereunder (b) pay for the performance
of any of Borrowers' obligations hereunder, (c) discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on any of the
Collateral in violation of this Agreement unless Borrowers are in good faith
with due diligence by appropriate proceedings contesting such taxes, liens,
etc., and (d) pay for the maintenance and preservation of any of the Collateral.
Expenses and advances by Lender under this paragraph shall be deemed advances
under the Revolving Credit, bear interest at the same rate applied to the
Revolving Credit, until reimbursed to Lender and shall be secured by the
Collateral. Such payments and advances made by Lender shall not be construed as
a waiver by Lender of an Event of Default under this Agreement.
9.16 Withholding and Other Tax Liabilities: Lender shall have the right to
refuse to make any advances from time to time unless Borrowers shall, at
Lender's request, have given to Lender evidence, reasonably satisfactory to
Lender, that Borrowers have properly deposited or paid, as required by
applicable law, all withholding taxes and all federal, state, city, county or
other taxes due up to and including the date of the loan. Until all of
Borrowers' liabilities and obligations to Lender have been paid in full, Lender
shall be entitled to continue to hold any and all of the Collateral until
Borrowers have given to Lender evidence, reasonably satisfactory to Lender, that
Borrowers have properly deposited or paid, as required by law, all federal
withholding taxes due up to and including the date of such expiration or
termination. Copies of deposit slips showing payment shall likewise constitute
satisfactory evidence for such purpose. In the event that any lien, assessment
or tax liability against Borrowers shall arise in favor of any taxing authority,
whether or not notice thereof shall be filed or recorded as may be required by
law, Lender shall have the right (but shall not be obligated, nor shall Lender
hereby assume the duty)
35
<PAGE> 41
upon reasonable prior notice to Borrowers to pay any such lien, assessment or
tax liability by virtue of which such charge shall have arisen; provided,
however, that Lender shall not pay any such tax, assessment or lien if the
amount, applicability or validity thereof is being contested in good faith and
by appropriate proceedings by Borrowers and further provided that by Borrowers'
title to and its right to use, the Collateral are not materially adversely
affected and Lender's lien and priority in the Collateral are not adversely
affected, altered or impaired thereby. In order to pay any such lien, assessment
or tax liability, Lender shall not be obliged to wait until said lien,
assessment or tax liability is filed before taking such action as hereinabove
set forth. Any sum or sums which Lender shall have paid for the discharge of any
such lien shall be added to the Revolving Credit and shall be paid by Borrowers
to Lender with interest thereon, upon demand, and Lender shall be subrogated to
all rights of such taxing authority against Borrowers.
9.17 Consent to Jurisdiction: Each of the Borrowers irrevocably consents to
the jurisdiction of the Courts of Common Pleas of Philadelphia, Commonwealth of
Pennsylvania or the United States District Court for the Eastern District of
Pennsylvania in any and all actions and proceedings whether arising hereunder or
under any other agreement or undertaking and irrevocably agrees to service of
process as set forth in Section 9.7 hereof, to the address of Borrowers set
forth herein.
9.18 WAIVER OF JURY TRIAL: EACH OF THE BORROWERS HEREBY WAIVES ANY AND ALL
RIGHTS IT MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION COMMENCED
BY OR AGAINST LENDER WITH RESPECT TO RIGHTS AND OBLIGATIONS OF THE PARTIES
HERETO.
9.19 Future Commitments: Except as expressly set forth in this Agreement,
Lender has made no agreement or commitment to lend money or extend credit to
Borrowers, or any of them, and has made no agreement or commitment to Borrowers,
or any of them, to modify or consider any modification of any nature whatsoever
of the terms of this Agreement.
[remainder of page intentionally left blank]
36
<PAGE> 42
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first written above.
LENDER:
Mellon Bank, N.A.
By: /s/ Jeffrey Saperstein
----------------------------
Name: Jeffrey Saperstein
Title: Vice President
BORROWERS:
Albert Gallatin Home Care, Inc.,
a Delaware corporation
Albert Gallatin Services Corporation,
a Pennsylvania corporation
Careco, Inc.,
a Massachusetts corporation
Ethicare Certified Services, Inc.,
a New York corporation
Home Health Care, Inc.,
a Maryland corporation
Medvisit, Inc.,
a North Carolina corporation
Personnel Industries, Inc.
a Maryland corporation
Professional Detail Services, Inc.,
a New York corporation
A Reliable Homemaker of Martin - St.
Lucie County, Inc.,
a Florida corporation
S.B. Assured Home Care, Inc.,
a Delaware corporation
S.B.H.F., Inc.,
a New York corporation
S.B.P.P., Inc.,
a Delaware corporation
37
<PAGE> 43
Staff Builders, Inc.,
a New York corporation
Staff Builders Home Health Care, Inc.,
a Delaware corporation
Staff Builders International, Inc.,
a New York corporation
Staff Builders Prescription Services, Inc.,
a Colorado corporation
Staff Builders Prescription Services, Inc.,
a Florida corporation
Staff Builders Services, Inc.,
a New York corporation
St. Lucie Home Health Agency, Inc.,
a Florida corporation
T.L.C. Home Health Care, Inc.,
a Florida corporation
T.L.C. Medicare Services of Broward, Inc.,
a Florida corporation
T.L.C. Medicare Services of Dade, Inc.,
a Florida corporation
T.L.C. Midwest, Inc.,
a Delaware corporation
Tender Loving Care Health Care Services,
Inc.,
a Connecticut corporation
Tender Loving Care Health Care Services,
Inc.,
a Delaware corporation
Tender Loving Care Home Care Services,
Inc.,
a New York corporation
Tender Loving Care Private Patient
Company, Inc.,
a Florida corporation
U.S. Ethicare Corporation,
a Delaware corporation
U.S. Ethicare Albany Corporation,
a New York corporation
U.S. Ethicare Chautauqua Corporation,
a New York Corporation
U.S. Ethicare Erie Corporation,
a New York Corporation
U.S. Ethicare Niagara Corporation,
a New York corporation
U.S. Ethicare Onondaga Corporation,
a New York corporation
38
<PAGE> 44
By: /s/ Dale R. Clift
---------------------------------------
Name: Dale R. Clift
Title: On behalf of and as Executive Vice
President of each of the foregoing
corporations
Attest: /s/ Renee Silver
-----------------------------------
Name: Renee Silver
Title: Assistant Secretary, of each of
the foregoing corporations
39
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<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
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0
0
<COMMON> 236
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