SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
OR
[ ] TRANSITION REPORT SUBJECT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: 0-25777
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3476656
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
1983 Marcus Avenue, Lake Success, NY 11042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 358-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-
affiliates of the registrant based on the closing price of such
stock on May 22, 2000, was $1,145,752.
The number of shares of Common Stock outstanding on May 22, 2000
was 11,809,653.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. BUSINESS
General
Tender Loving Care Health Care Services, Inc. ("TLCS" or the
"Company") is a leading provider of home health care services with
94 locations in 22 states and the District of Columbia. TLCS is a
Delaware corporation which was formed in February 1999 as a wholly-
owned subsidiary of Staff Builders, Inc. ("SBLI"). TLCS
subsequently became an independent publicly traded company in
connection with the spin-off transaction described below. The
Company owns and directly operates 60 of its offices and 34 of its
offices are operated by 22 different licensees. The Company
provides a full range of licensed professional and paraprofessional
health care personnel services, which include services rendered by
registered nurses, licensed practical nurses, home health aides,
nurses aides and personal care aides. Its licensed personnel
provide skilled nursing services, including cardiac care,
pulmonary management, wound care, maternal care, behavioral health
care, infusion therapy, hospice support and extensive patient and
family health care counselling. The Company's paraprofessional
services include home health aide services and other unlicensed
personnel services to assist with activities of daily living.
Spin-off Transaction
On October 20, 1999 ("the spin-off date"), TLCS began
operations as an independent, publicly traded company resulting
from the spin-off of the home health care operations previously
owned by SBLI ("the spin-off"). The spin-off was accomplished by
TLCS acquiring 100% of the outstanding capital stock of the SBLI
subsidiaries engaged in the home health care business with a pro
rata distribution made to SBLI stockholders of all of the shares of
TLCS common stock owned by SBLI ("the Distribution"). The
Distribution was made by issuing one share of TLCS common stock for
every two shares of SBLI Class A and Class B common stock which
were outstanding on October 12, 1999 ("the Record Date"). Based
upon the 23,619,388 shares of SBLI common stock which were
outstanding on the Record Date, 11,809,694 shares of TLCS common
stock were distributed to holders of SBLI Class A and Class B
common stock. All references to shares outstanding prior to the
spin-off date have been retroactively adjusted for the spin-off.
Since the spin-off date, TLCS and SBLI have been separate, stand-
alone companies, with TLCS operating the home health care business
segment and SBLI operating the supplemental staffing business
segment. TLCS' common stock is listed on the OTC Bulletin Board
System under the symbol "TLCS." References to the "Company"
indicate the home health care operations operated by TLCS
subsequent to the spin-off date or operated by SBLI prior thereto.
The spin-off was reported as a reverse spin-off for financial
statement purposes because a greater proportion of the former
assets and operations of SBLI are held by TLCS after the spin-off.
Therefore, the spin-off has been reflected for financial statement
purposes as if TLCS was the continuing company and the stock of
-2-
SBLI was distributed as a dividend to TLCS stockholders.
Accordingly, the TLCS financial statements reflect the financial
position and results of operations of the home health care segment
as continuing operations and the financial position and results of
operations of the supplemental staffing segment now owned by SBLI
as discontinued operations.
The financial information contained in the accompanying
financial statements reflect fiscal years ended on February 28/29,
consistent with prior years reported by SBLI prior to the spin-off
transaction. The financial information for prior periods contained
in these financial statements was obtained from the home health
care operations segment of the SBLI audited financial statements.
Operations
Home health care service revenues were $254.9 million, $310.3
million and $451.1 million in the fiscal year ended February 29,
2000 ("fiscal 2000"), the fiscal year ended February 28, 1999
("fiscal 1999") and the fiscal year ended February 28, 1998
("fiscal 1998"), respectively. The Company has reduced its number
of operating locations to 94 locations as of February 29, 2000 as
compared to 125 locations as of February 28, 1999 and 198 locations
as of February 28, 1998 by focusing its attention on key geographic
areas. Approximately 51% of the Company's service revenues in
fiscal 2000 were generated by licensees as compared to 69% in
fiscal 1999 and 84% in fiscal 1998.
Clients' requests for home health care are typically received
at a local office and skilled home health care services are
provided pursuant to the orders of the patient's physician.
Generally, after a referral is received, local office personnel
will schedule a physical assessment in order to identify the
patient's care needs.
During the intake process, the Company contacts third-party
payors to confirm the extent of Medicare or Medicaid eligibility or
insurance coverage. The primary payment sources for home health
care are Medicare, Medicaid, insurance, individuals, and other
state and local government health programs.
In two 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. Hospice care is appropriate for patients who are expected
to live less than six months.
The quality and reputation of the Company's health care
personnel and operations are critical to the Company's success.
The Company maintains quality assurance programs, 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.
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The Company's clinical staff conduct periodic on-site reviews to
determine compliance with appropriate 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 Healthcare Organizations
("JCAHO"). Currently, the Company has 70 offices which have been
accredited by JCAHO, of which 25 were accredited with
commendation.
The Company has developed a number of proprietary
disease-specific programs designed to be used in the home. These
programs are designed to ensure that high-quality, efficient care
is provided on a consistent basis, company-wide. The programs
address the areas of asthma, cardiac care, diabetes, hospice,
maternity, behavioral health, rehabilitative services, pain
management and wound care.
The Company offers its home health care services on a national
and local basis. Although the Company is national, 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 range 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. During fiscal 2000, no single patient or group
contract accounted for ten percent or more of the Company's
revenues.
The Company's information systems provide for the input of
information at the branch offices (including payroll, billing and
other administrative functions) which connect directly to the
Company's corporate headquarters in Lake Success, New York.
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Generally, bills are rendered, payroll is processed and collections
are received at the corporate headquarters.
Reimbursement
Revenues generated from the Company's home health care
services are paid by insurance carriers, health maintenance
organizations, individuals, Medicare, Medicaid and other state and
local government health insurance programs. During fiscal 2000,
approximately 17% of the Company's service revenues represented
reimbursement from insurance carriers, health maintenance and other
health organizations and individuals; 46% came from Medicare; and
37% came from Medicaid and other local government health programs.
Medicare is a federally funded program available to persons with
certain disabilities and persons of age 65 or older. Medicaid, a
program jointly funded by Federal and state governments and other
local government health care programs, is designed to pay for
certain health care and medical services provided to low income
individuals without regard to age.
The Company has 74 offices in 22 states and the District of
Columbia 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 Balanced
Budget Act of 1997 (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 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 ("PPS") scheduled to be effective for
all home health care agencies on October 1, 2000. 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. Currently, most of the Company's locations are
operating under the Federal Health Care Financing Administration's
("HCFA's") maximum reimbursement rates ("cost caps"). Under PPS,
home health care providers may have an opportunity to generate
profits if costs are contained under the per-episode reimbursement
amounts. However, the final per-episode reimbursement amounts have
not yet been promulgated by HCFA. As a result of the Company's cost
containment steps taken in fiscal 2000, the Company was under the
cost caps by a net, aggregate amount of approximately $11 million.
As of February 29, 2000, the Company has 40 offices which
participate in Medicare's periodic interim payments ("PIP")
program. 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
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all home health care agencies effective October 1, 2000. 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 75 locations in 22 states and the
District of Columbia which are approved to provide services to
Medicaid recipients. Medicaid reimbursement procedures vary from
state to state.
Government Regulation
The Company is subject to extensive and frequently changing
home health care regulations by Federal, state and local
authorities. These regulations include 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 includes 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 many of the states in which the Company presently
operates, maintain CON legislation requiring an office to file an
application that must be approved by the appropriate state
authority before certain health care services can be provided in an
area. Approval depends upon, among other things, good character
and competence, financial capability and a demonstration that the
need exists for such services. In states having a CON requirement,
HCFA will grant Medicare certification to an office (so that the
office may provide services covered by Medicare) only if the office
has obtained a CON.
New York State requires the approval by the Public Health
Council of the New York State Department of Health ("NYPHC") of any
change in the "controlling person" of an operator of a licensed
health care services agency (a "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
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NYPHC, such person may not exercise control over the LHCSA. The
Company has seven offices in New York State which are LHCSAs. Such
offices accounted for approximately 15% of the Company's service
revenues in fiscal 2000. If any person should become the owner or
holder, or acquire control, of the right to vote 10% or more of the
common stock of the Company, such person could not exercise control
of the Company's LHCSAs until such ownership, control or holding
has been approved by the NYPHC.
The Company's service revenues generated from Medicare,
Medicaid and other local government programs were $212 million,
$247 million and $376 million in fiscal 2000, 1999 and 1998,
respectively.
Franchise Program
The Company utilizes 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 94 field
offices, 34 are operated by 22 licensees pursuant to the terms of
a franchise agreement with the Company. The franchise program has
afforded the Company with the ability to operate certain locations
by employees who are hired and supervised by licensees who are most
familiar with the needs and characteristics of their respective
geographic areas.
The Company is subject to a number of state laws that regulate
certain substantive aspects of the licensor-licensee relationship.
The Company owns all necessary health care related permits and
licenses and, where required, CON's for operation of its licensee
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. In prior years, the Company developed an international
home health care franchise program. Effective March 1, 2000, the
rights and continuing obligations under the international franchise
program were assigned to SBLI. TLCS will provide certain home
health care consulting services to the international franchisees
for which it will continue to receive 50% of all royalties received
by SBLI, on a quarterly basis.
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The Company pays a distribution or commission to its home
health care 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, reimbursement
of allowable Medicare costs and for the collectibility of accounts
receivable. For fiscal 2000, 1999 and 1998, total licensee
distributions of approximately $24.9 million, $38.3 million and
$84.1 million, respectively, were included in the Company's general
and administrative expenses.
The Company is currently not offering any 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. 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.
Personnel; Recruiting and Training
The Company has approximately 10,000 individuals who render
home health care services and employs approximately 1,300 full time
administrative and management personnel. Approximately 1,000 of
the Company's administrative employees are located at the branch
offices, 250 are located at its corporate headquarters in Lake
Success, New York and 50 are regional employees.
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.
The Company and its licensees recruit home health care
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.
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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. The Company has an in-service
training program for its personnel which satisfies the requirements
for certification required by certain states.
In addition to health care 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
maintains medical professional and general liability insurance
providing for coverage in a maximum amount of up to $26 million per
claim, subject to a limitation of $26 million for all claims in any
single year. Also, the Company maintains errors and omissions and
professional liability insurance. In addition, licensees are
required to maintain general liability insurance providing for
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
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. Many of the Company's competitors have ceased doing
business which the Company believes is one result of the enactment
of the BBA. The Company expects that it will continue to compete
with the national organizations as well as 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 while experiencing
competition from other companies in recruiting. Generally, there
is a shortage of qualified health care personnel and, as a result,
the Company, from time to time, has experienced difficulties in
obtaining health care personnel to meet demands for services.
The Company believes that prompt service, price, quality and
range of services offered are the principal competitive factors
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which enable it to compete effectively. The Company believes that
its rate structure is competitive with others in the industry.
Service Marks
The Company believes that its service mark, Tender Loving
Care, as well as the service marks of Staff Builders and the
stick figure logo which it licenses from SBLI, have significant
value and are important to the marketing of its home health care
services. These names and marks are registered as service marks
with the United States Patent and Trademark Office. The
registration of the Staff Builders service mark will remain in
effect through February 14, 2009, with respect to home care and
hospital staff relief, and through June 28, 2006 with respect to
temporary personnel for business and industry. The registration of
the stick figure logo service mark will remain in effect through
August 16, 2008. The registration of the Tender Loving Care
service mark will remain in effect through January 8, 2005. Each
of these marks are renewable for additional ten-year periods,
provided the Company continues to use them in the ordinary course
of business. The Company also owns other federally registered
marks for names used in connection with its business.
Item 2. 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. 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 all of its branch office locations from
landlords unaffiliated with the Company or any of its executive
officers or directors. Most of these are for a specified term
although several of them are month-to-month leases. There are
currently 94 locations including 60 operated by the Company and 34
operated by 22 different licensees. One of these licensee offices
subleases the office space from the Company and the remaining
licensed 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
leases which are scheduled to expire in the next twelve months at
comparable costs.
ITEM 3. LEGAL PROCEEDINGS
On September 20, 1995, the United States Attorney for the
Eastern District of Pennsylvania alleged that between 1987 and
1989, a corporation, substantially all assets and liabilities of
which were acquired by a subsidiary of the Company in 1993,
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submitted false claims to Medicare. The alleged false claims 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 a
settlement of the outstanding claims for approximately $600
thousand, the conclusion of which is pending final government
approval of the payment and other settlement items.
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 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 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 and Second Amended Complaint in the
Central District on January 8, 1999 and September 1, 1999,
respectively, 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 claimed by the Company on its cost report
for consulting services. The case was dismissed pursuant to the
Company's motion and Mr. Waris appealed. The appeal has been
stayed by the Court pending finalization of a proposed settlement,
whereby the cost report issues will be settled directly with the
United States Government in exchange for the withdrawal of Mr.
Waris' lawsuit.
On April 30, 1999, Nursing Services of Iowa, Inc., Helen
Kelly, Geri-Care Home Health, Inc. and Jacquelyn Klooster, two
former home health 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
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 the RICO,
claiming a series of deliberate and illegal actions designed to
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defraud Staff Builders' licensees, 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. Pursuant to the Company's motion, all of the RICO counts
except for one count were dismissed by the Court on February 22,
2000.
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
of approximately $2.4 million as of February 29, 2000 for the
aggregate, estimated amount to resolve or litigate such matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
(A) Market Information
Subsequent to the Distribution, the Company's common
stock began trading in the over-the-counter market and is listed on
the OTC Bulletin Board System under the symbol "TLCS". The
following table sets forth, for the indicated periods, the high and
low sale prices for the common stock, as reported on the OTC
Bulletin Board System.
High Low
Fiscal Period Ended February 29, 2000
October 20, 1999 to November 30, 1999 $1.00 $ .03
Quarter ended February 29, 2000 .50 .13
(B) Holders
As of May 22, 2000, there were approximately 727 holders
of record of common stock (including brokerage firms holding stock
in "street name" and other nominees).
(C) Dividends
Since its organization, the Company has not paid any
dividends on its shares of common stock. Management anticipates
that for the foreseeable future all earnings will be retained for
use in its business and, accordingly, it does not intend to pay
cash dividends.
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ITEM 6.
SELECTED FINANCIAL DATA (in thousands, except per share data)
The following selected consolidated financial data has been derived from
the audited financial statements of the Company and should be read in
conjunction with the financial statements and notes thereto included
elsewhere in this annual report on Form 10-K. Additionally, the selected
financial data should be read in conjunction with "Description of Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended
February February February February February
29, 2000 28, 1999 28, 1998 28, 1997 29, 1996
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA:
Revenues $255,689 $312,531 $452,217 $437,586 $379,451
Operating expenses:
Service costs 157,273 200,009 280,089 268,634 233,578
General and administrative expenses 101,949 123,817 160,973 159,231 137,002
Total operating expenses 259,222 323,826 441,062 427,865 370,580
Income (loss) from operations (3,533) (11,295) 11,155 9,721 8,871
INTEREST AND OTHER EXPENSES:
Interest expense 6,605 1,446 2,410 1,402 719
Interest income (785) (986) (1,347) (839) (953)
Depreciation and amortization 4,612 4,360 5,783 4,821 3,452
Other (income) expense, net 2,411 126 (492) (1,486) 1,958
Medicare and Medicaid audit adjustments - 29,000 - - -
Restructuring costs - 20,334 30,269 - -
Total interest and other expenses 12,843 54,280 36,623 3,898 5,176
Income (loss) from continuing operations
before income taxes (16,376) (65,575) (25,468) 5,823 3,695
Provision (benefit) for income taxes 100 6,111 (5,298) 2,491 1,451
Net income (loss) from continuing operations (16,476) (71,686) (20,170) 3,332 2,244
Income (loss) from discontinued
operations (net of income taxes) 1,430 (1,400) (1,462) 429 (230)
Net (loss) $(15,046) $(73,086) $(21,632) $ 3,761 $ 2,014
Income (loss) per common share - basic:
Income (loss) from continuing operations $ (1.39) $ (6.19) $ (1.69) $ 0.28 $ 0.19
Income (loss) from discontinued operations 0.12 (0.12) (0.12) 0.04 (0.02)
Net (loss) $ (1.27) $ (6.31) $ (1.81) $ 0.32 $ 0.17
Income (loss) per common share - diluted:
Income (loss) from continuing operations $ (1.39) $ (6.19) $ (1.69) $ 0.27 $ 0.18
Income (loss) from discontinued operations 0.12 (0.12) (0.12) 0.04 (0.02)
Net (loss) $ (1.27) $ (6.31) $ (1.81) $ 0.31 $ 0.16
Weighted average common shares
outstanding:
Basic 11,810 11,581 11,970 11,834 11,799
Diluted 11,810 11,581 11,970 12,289 12,752
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 93,511 $ 96,116 $105,695 $134,162 $107,891
Working capital (deficiency) 4,523 (30,172) 3,438 17,489 8,029
Current portion of long-term debt 5,872 10,475 4,921 4,603 2,356
Long-term debt and other liabilities 100,449 52,477 15,591 28,141 6,926
Total liabilities 163,502 135,475 78,925 83,992 61,018
Stockholders' equity (deficit) (69,991) (39,359) 26,770 50,170 46,873
<FN>
The Company did not pay any cash dividends on its common stock since its inception on October 20, 1999.
Certain prior period amounts have been reclassified to conform with the fiscal 2000 presentation.
</FN>
</TABLE>
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information
which the Company's management believes is relevant to an
assessment and understanding of the Company's results of operations
and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
Results of Operations
Years Ended February 29, 2000 ("Fiscal 2000"), February 28, 1999
("Fiscal 1999") and February 28, 1998 ("Fiscal 1998")
Revenues. Total revenues decreased by approximately $56.8 million
or 18.2% to $255.7 million in fiscal 2000 from $312.5 million in
fiscal 1999. Approximately $36.2 million of this decrease is due
to the closure or sale of approximately 60 locations and the
consolidation of approximately 40 locations during fiscal 2000 and
1999. The decrease of approximately $19.2 million in revenues in
existing offices was primarily due to a decrease in Medicaid and
other local government program revenues which traditionally
generate lower gross margins. The primary reason for the decrease
in revenues of $139.7 million, or 30.9%, in fiscal 1999 from $452.2
million in fiscal 1998, was a decrease in Medicare revenues. Such
decrease resulted from the negative impact of the Medicare Interim
Payment System ("IPS")enacted under the Balanced Budget Act of 1997
("BBA"). The IPS reduced the limits for the amount of costs which
are reimbursable under the Medicare program. Further, there was a
decrease of approximately $1.4 million in the sales of licensees
and fees to $800 thousand in fiscal 2000 from $2.2 million in
fiscal 1999.
The Company receives payment for its home health care services from
several sources. The following are the Company's revenues by
payment source:
<TABLE>
<CAPTION>
Years Ended
February 29/28,
2000 1999 1998
<S> <C> <C> <C>
Medicare 46.2% 43.4% 60.1%
Medicaid and other local
government programs 37.0 36.2 23.1
Insurance and individuals 16.0 19.3 15.1
Other 0.8 1.1 1.7
Total 100.0% 100.0% 100.0%
</TABLE>
The Company has 94 locations as of May 1, 2000 as compared to
125 and 198 locations as of February 28, 1999 and 1998,
respectively. Included in these locations are 34, 54 and 160
offices which were operated by 22, 31 and 64 licensees,
respectively. The percentage of revenues attributable to licensees
-15-
was 51%, 69% and 84% in fiscal 2000, 1999 and 1998, respectively.
The decrease in the number of licensees and their respective share
of business is consistent with the industry as a whole which has
experienced a significant reduction in the number of providers as
a result of the BBA.
Operating Costs. Operating costs were 61.7%, 64.5% and 62.1%
of service revenues in fiscal 2000, 1999 and 1998, respectively.
Operating costs represent the direct costs of providing services to
patients, including wages, payroll taxes, travel costs, insurance
costs, medical supplies and the cost of contracted services. The
decrease in operating costs as a percentage of service revenues was
primarily due to the sale or closure of those locations with
relatively high operating costs as well as a change in revenue mix.
The service revenues, operating costs and resultant gross
margins generated by the Company's licensee and company-owned
locations are as follows ($ in millions):
<TABLE>
<CAPTION>
Years Ended
February 29/28,
2000 1999 1998
<S> <C> <C> <C>
Total service revenues - Licensee $129 $214 $379
Total service revenues -
Company-Owned 126 96 72
Total service revenues $255 $310 $451
Operating costs - Licensee $ 77 $136 $234
Operating costs - Company-Owned 80 64 46
Operating costs $157 $200 $280
Gross margin - Licensee $ 52 $ 78 $145
Gross margin - Company-Owned 46 32 26
Gross margin $ 98 $110 $171
</TABLE>
General and Administrative Expenses. General and
administrative expenses decreased by $21.9 million, or 17.7%, in
fiscal 2000 to $101.9 million as compared to $123.8 million in
fiscal 1999 and decreased by $37.2 million, or 23.1%, in fiscal
1999 as compared to $161.0 million in fiscal 1998. These costs
expressed as a percentage of service revenues were 40.0%, 39.9% and
35.7% in fiscal 2000, 1999 and 1998, respectively.
Included in general and administrative expenses is the
Company's provision for doubtful accounts of $2.8 million, $5.7
million and $2.5 million in fiscal 2000, 1999 and 1998,
respectively.
The decreases in the general and administrative expenses
were a result of a reduced number of operating locations and
management's efforts to address the revenue reductions associated
-16-
with IPS. Such decreases were partially offset by re-engineering
costs incurred in connection with meeting the demands of IPS,
including implementation of new systems in virtually all areas of
the business operations of the Company's patient billing,
scheduling and accounts receivable functions and implementing other
operating efficiencies.
Depreciation and Amortization. Depreciation expense was
approximately $4.0 million, $3.7 million and $3.6 million in fiscal
2000, 1999 and 1998, respectively. Such expense primarily consists
of the depreciation of the Company's computer equipment and
software.
Amortization expense was approximately $0.6 million, $0.6
million and $2.2 million in fiscal 2000, 1999 and 1998,
respectively. Such expense relates to the amortization of goodwill
arising from the acquisitions of home health care businesses made
in prior years. The decrease in amortization expense primarily
results from the write-offs of goodwill in the fourth quarters
ended February 28, 1999 and 1998.
Interest Expense. Interest expense was approximately $6.6
million, $1.4 million and $2.4 million in fiscal 2000, 1999 and
1998, respectively. The increase in interest expense in fiscal
2000 over fiscal 1999 was primarily due to an increase in the level
of borrowings under the Company's current secured financing
facility and its prior secured credit facility as well as an
increase in interest expense incurred related to the Company's
Medicare liabilities which are being paid pursuant to a five-year
repayment plan.
Interest Income. Interest income primarily includes interest
on franchise notes receivable and earned interest from funds on
deposit for workers compensation premiums.
Other (Income) Expense, Net. Other expense of $2.4 million in
fiscal 2000 primarily consists of the loss on disposal of computer
equipment retired of approximately $2.8 million. Such equipment
was replaced by new computer equipment and year 2000 compliant
software which was implemented in virtually all areas of the
Company's operations and placed into service in November 1999.
Additionally, other (income) expense includes approximately $700
thousand of legal and other professional costs associated with the
spin-off transaction. Offsetting the foregoing amounts is income
of approximately $1.1 million related to the sale of certain
operating locations and other investments. Other (income) expense
in fiscal 1999 and 1998 primarily consists of income from the sale
of several operating locations.
Medicare and Medicaid Audit Adjustments. As of February 29,
2000, the Company has anticipated aggregate liabilities to Medicare
and Medicaid of approximately $54.3 million, including $46.1
-17-
million and $8.2 million of liabilities to Medicare and Medicaid,
respectively. The Medicare liabilities include assessments to date
of approximately $32.0 million. The Medicare assessed amounts are
payable under the terms of a five-year payment plan which includes
cumulative excess PIP amounts received of approximately $18.6
million, audit liabilities for completed audits of approximately
$12.1 million and an estimate of $1.3 million for the fiscal 1998
home office audit which is not yet completed (see Note 12). The
completed audits consist of fiscal 1998 branch operating location
audits of $5.7 million, the fiscal year ended February 1997
("fiscal 1997") branch operating location and home office audits
aggregating $2.4 million, and home office audits for the fiscal
years ended February 1996 and 1994 aggregating $4.0 million. All
years prior to fiscal 1997 are closed relative to substantially all
field operating location audits. The remaining Medicare
liabilities of approximately $14.1 million relate to periods for
which audits are in process or are not yet conducted.
As of February 29, 2000, the Company's Medicaid liabilities of
approximately $8.2 million consist of third party liability ("TPL")
to state Medicaid agencies which have claimed that the Company did
not follow proper billing procedures in certain 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 years prior
to fiscal 1998 for which the Company has been paid. The Company
has reached a settlement for a portion of its TPL and is continuing
to negotiate to resolve amounts payable to these state agencies. In
fiscal 2000, total payments of $3.6 million were made, offset by
$0.9 million of increased liabilities, to these state Medicaid
agencies.
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
interpretations of those costs for which reimbursement will be
allowed to such providers. In recent years, 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 Company
recorded aggregate expense of $29.0 million based upon its
assessment of the scope of audits then being performed by the
fiscal intermediary, the issues raised for such periods, the effect
of those issues on periods not yet then audited and the balance of
liabilities previously provided. The provision of $29.0 million
included $18.0 million for Medicare audit liabilities and $11.0
million for Medicaid audit liabilities. Subsequent to November
1998, the Company has reduced revenues by its estimate of the
amount of net adjustments which should ultimately be assessed
-18-
against current, estimated reimbursement rates used to record
Medicare and Medicaid revenues. Adjustments, if any, are being
recorded to these estimates in the period during which they arise.
The home office cost report audit has not yet been performed
for fiscal 2000 or for fiscal 1999 and no field audits have been
conducted to date for fiscal 2000. The Company has been notified
that audits relative to fiscal 1999 will consist of nine audits to
be conducted on site at branch operating locations, of which three
such audits began in April 2000. The fiscal 1998 home office audit
is in progress. Home office cost report audits for the fiscal
years ended February 1995 and 1993 remain open. Based upon the
results of those audits conducted for prior years, the Company
believes that the reserve provided for the open audit periods is
adequate.
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 and is
unable to predict the ultimate outcome of matters for all open
audit periods. Based upon the results of audit findings to date,
no adjustment is needed to the aggregate amount of Medicare and
Medicaid liabilities in the accompanying consolidated financial
statements.
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 provided
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 ("PPS") scheduled to
be effective for all home health care agencies on October 1, 2000.
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. Data compiled by the Congressional
Budget Office shows that Medicare spending on home health care
decreased 45% in the last two years to $9.7 billion in 1999 from
$14.9 billion in 1998 and $17.5 billion in 1997. The Company believes
This decline reflects changes resulting from the enactment of the
BBA in 1997. 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.
Additionally, the Company is currently conducting an
operational readiness program to facilitate an orderly transition
-19-
from IPS to PPS. This program is designed to assist branch
operating locations, together with regional management, to prepare
for new procedures required by the October 1, 2000 scheduled
effective date for PPS. Incorporation of new PPS operational
procedures with the Company's new billing, scheduling and payroll
systems are addressed under this program.
During the fourth quarter of fiscal 1998, management prepared
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 $30.3 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 had written off
or reserved approximately $4.5 million.
In fiscal 1999, management further evaluated the carrying
value of the Company's goodwill and intangible assets in light of
current home health care industry conditions and its impact on the
Company's operations. Such valuation 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, the Company 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 health care payor sources. The Company reacted by
closing certain branches and has converted 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, the Company continued to
experience operating difficulties like many other companies in the
home health care industry. Accordingly, there was a decline in the
value of such businesses. Based upon the foregoing factors, in the
fourth quarter ended February 28, 1999, the Company evaluated the
net carrying value of goodwill based upon the net present value of
future cash flows in accordance with the requirements of SFAS No.
121. As a result, a write-down in goodwill of approximately $15.3
million was recorded in the fourth quarter of fiscal 1999. The net
carrying value of goodwill as of February 29, 2000 and February 28,
1999 was approximately $4.5 million and $5.1 million, respectively.
The Company's actions to increase operational efficiencies, close
unprofitable locations and terminate certain licensee locations,
represented a furtherance of a restructuring plan necessitated out
of continuing losses and a deteriorating business climate within
the home health care industry. The Company's (loss) from
operations, before interest, depreciation, amortization and income
taxes, was approximately ($3.5) million and ($60.6) million for
-20-
fiscal 2000 and 1999, respectively, and was approximately $(19.1)
million for fiscal 1998 prior to the effectiveness of IPS.
In addition to the write-off of goodwill in fiscal 1999, the
Company then recorded other restructuring costs aggregating $5.0
million. These costs included $0.8 million for the closure and
reduction in size of some of the Company's operating locations
including the write-off of fixed assets and the accrual for
employee severance payments. Further, restructuring costs included
$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 the Company's
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 (0.6%), (9.3%) and
20.8% in fiscal 2000, 1999 and 1998, respectively.
The provision for income taxes in fiscal 1999 consists of a
valuation allowance of $26.9 million offset by potential tax
benefits of $19.1 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. In fiscal 1999
the Company recorded an income tax receivable of $1.7 million,
resulting from the carryback of net operating losses, which was
received in fiscal 2000.
Net Income (Loss). Net (loss) for fiscal 2000 was $(15.0)
million, or $(1.27) per share, compared to a net (loss) in fiscal
1999 of $(73.1) million, or $(6.31) per share, and a net (loss) of
$(21.6) million, or $(1.81) per share in fiscal 1998. Net (loss)
from continuing operations was ($16.5) million, ($71.7) million and
($20.2) million in fiscal 2000, 1999 and 1998, respectively. The
fiscal 1999 net (loss) included $29.0 million of Medicare and
Medicaid audit adjustments. The fiscal 1999 and 1998 net (losses)
included restructuring costs of $20.3 million and $30.3 million,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
On December 13, 1999, the Company obtained new financing for
its operations to replace its then existing line of credit
facility. The new financing is an accounts receivable purchase
program with an entity which provides health care accounts
receivable financing. Under the program, the Company may sell to
an affiliate of such entity up to $60 million of the Company's
-21-
eligible receivables. The Company has obtained net funding of
$38.4 million from the sale of receivables approximating $40.7
million through February 29, 2000. Of the amount realized,
approximately $18.1 million was paid to the Company's prior senior
lending institution and the balance is being used to make payments
on other indebtedness and for working capital purposes.
The financing arrangement provides for the Company's sale of
accounts receivable pursuant to a sale and subservicing agreement.
Under the terms of the agreement, the Company continues to bill
customers, collect receipts and process the related accounts
receivable. The sale of such accounts receivable has been
reflected as a secured financing transaction in the Company's
financial statements. Such sale, if challenged, may or may not put
such receivables beyond the reach of the Company. The Company has
a repurchase obligation in accordance with the terms of the
agreement.
The new financing is for an initial term of three years ending
December 31, 2002. Under the terms of the new financing, the
Company sells its eligible trade accounts receivable for which the
Company receives in cash approximately 80% of eligible receivables,
less certain fees and reserves. As cash is collected from trade
customers, the remaining 20% of the sale price of accounts
receivable are paid to the Company. Eligible receivables are
defined as certain trade accounts receivable which have been
outstanding for less than 180 days. In connection with the closing
of the new financing, the Company has paid approximately $1.1
million in non-refundable fees and granted to its financing source,
to the extent permitted by law, a security interest in
substantially all of the Company's trade accounts receivable. The
financing agreement contains certain financial covenants which,
among other things, provide for a maximum level of allowable net
loss before income taxes. The Company obtained an amendment from
the financing facility to provide adequate relief from the maximum
net loss covenant for the year ended February 29, 2000. The
Company pays a program fee of 11.5% per annum on the outstanding
amount of eligible receivables.
Net cash used in operating activities was $21.2 million in
fiscal 2000 which consisted primarily of the loss from operations
requiring cash payments of approximately $6.1 million, an increase
in accounts receivable of $8.2 million, aggregate payments for
other liabilities of $1.6 million and a net decrease in Medicare
and Medicaid liabilities of $2.9 million. The net decrease in
Medicare and Medicaid liabilities include payments of $4.3 million
and $3.6 million, respectively. These payments include principal
and interest and are offset by $5.0 million of additional,
aggregate liabilities added during fiscal 2000. The fiscal 2000
net loss from operations of $15.0 million included non-cash items
consisting primarily of depreciation and amortization expense
aggregating $4.6 million, the write-off of fixed assets, goodwill
-22-
and other assets aggregating $3.5 million and a net increase to the
allowance for doubtful accounts of $0.8 million.
Net cash used in investing activities of $3.3 million
consisted of the purchase of fixed assets of $4.4 million to
complete the Company's installation of new computer equipment and
software, offset by $1.1 million of proceeds from the sale of
eleven home health care locations, including four locations sold to
prior licensees.
Net cash provided by financing activities of $32.4 million
included the proceeds from the new financing arrangement
established in December 1999 of $38.4 million offset by $18.1
million of such proceeds used to pay off the balance of the
outstanding borrowings under the Company's prior secured revolving
line of credit facility. Additionally, there was an increase in
amounts borrowed under the prior facility of $14.7 million.
Offsetting these increases in cash provided by financing activities
was the payment of notes payable and other long term liabilities
aggregating $2.5 million including the pay off of $1.7 million
remaining on a term loan, payments on lease obligations of $400
thousand and payments of $200 thousand on notes payable in
connection with prior years' acquisitions of businesses.
Net cash provided by operating activities was $15.6 million in
fiscal 1999, which consisted primarily of periodic interim payments
received from Medicare of $14.4 million and a decrease in accounts
receivable of $10.0 million, offset by the loss from operations
requiring cash payments of $7.8 million. The fiscal 1999 net loss
from operations of $(73.1) million included non-cash items
consisting primarily of the write-off of goodwill, deferred income
taxes and other assets aggregating $25.9 million; depreciation,
amortization and a net increase to the allowance for doubtful
accounts aggregating $6.2 million; an increase in Medicare and
Medicaid audit liabilities of $28.1 million; and, an increase in
other liabilities of $5.1 million. Net cash used in investing
activities was $6.7 million in fiscal 1999, which consisted of the
purchase of fixed assets of $4.6 million and $2.7 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 $8.6 million in fiscal 1999
included the payment of notes payable and other long-term
liabilities of $5.3 million. Additionally, the Company purchased
and retired 5.1 million shares of its common stock at a cost of
$4.8 million. Offsetting these items was $1.2 million of cash
provided for the Company's revolving line of credit.
Net cash provided by operating activities was $6.0 million in
fiscal 1998, which consisted primarily of a decrease in accounts
receivable of $1.6 million and periodic interim payments ("PIP")
received from Medicare of $4.3 million. Net cash used in investing
activities of $4.0 million in fiscal 1998 consisted primarily of
the purchase of fixed assets of $3.1 million and cash used for
-23-
business acquisitions of $1.7 million offset by $0.8 million of
proceeds from the disposal of assets. Net cash used in financing
activities of $2.4 million primarily results from the payment of
notes payable and other long-term liabilities of $4.8 million
offset by an increase in borrowings of $1.9 million under the
Company's secured revolving line of credit. The payment of notes
payable and long-term liabilities primarily include $2.3 million of
capital lease payments and a reduction of $1.8 million in a term
loan.
The Company's primary sensitivity to changes in interest rates
relates primarily to its financing arrangement which provides for
the Company's working capital. Based on the outstanding amount
financed at February 29, 2000, an increase of 1% in the Company's
borrowing rate would have the effect of increasing annual interest
expense by approximately $425 thousand. At February 29, 2000, there
was approximately $42.4 million of financing payable under the
financing arrangement, offset by $4.0 million of deposits on hand
at the Company's financing institution.
The Company's working capital was $4.5 million at February 29,
2000. Current liabilities at February 29, 2000 include $10.4
million for Medicare and Medicaid liabilities, $23.0 million of
payroll and payroll related costs and $5.9 million for the current
portion of other debt obligations.
In December 1999, the Company reached an agreement with HCFA
for a five year plan for repayment of certain Medicare liabilities.
The repayment plan will be in effect through September 2004. As a
result of obtaining this repayment plan, the Company has reduced
the current portion of its Medicare liabilities. The current
principal portion of Medicare and Medicaid liabilities was $10.4
million and $22.7 million at February 29, 2000 and February 28,
1999, respectively. Under this repayment agreement, the Company is
repaying excess PIP received as well as certain Medicare audit
liabilities. Under PIP, the Company receives regular bi-weekly
payments based on past Medicare activity of participating offices.
As of February 29, 2000, the Company has received approximately
$18.6 million in excess PIP. The Medicare repayment plan covers
excess quarterly PIP amounts received through August 31, 1999,
audit liabilities for which assessments have been made to date and
assessments which will be made in future periods through April
2001. Any overpayments or audit liabilities that are successfully
appealed by the Company will be subtracted from the total amount
owed under the repayment plan. Interest is accrued from the date
of each assessment at the government rate of interest, as revised
from time to time (currently at 13.50% per annum) on all Medicare
liabilities except for the PIP related liability for which interest
accrues beginning one year after the date of the respective
assessment, less any payments made. Under the repayment plan, the
Company is required to pay principal and interest aggregating $500
thousand per month for the six months ended March 2000, $750
-24-
thousand per month for the six months ending September 2000 and
$1.0 million per month thereafter through March 2001. All
remaining liabilities as of April 2001 for periods covered by this
repayment plan including accrued interest, will then be paid in
equal monthly installments over the remaining 42 months of the
repayment plan through September 2004. UGS collects amounts due
under the repayment plan by offsetting against current remittances
due to the Company. UGS has offset $3.8 million through May 22,
2000 under the repayment plan. If no Medicare accounts receivable
are available for offset under the repayment plan, then all
remaining amounts owed pursuant to the repayment plan may become
immediately due and payable.
HCFA has scheduled a new prospective payment system ("PPS") to
become effective October 1, 2000. While PPS is scheduled to be
effective on October 1, 2000, there can be no assurance that it
will be implemented at such time. Further, HCFA has provided
notification that PIP will cease effective October 1, 2000
regardless of whether or not PPS is then implemented.
Additionally, third-party payors have generally sought to contain
costs by reducing payments to providers. Continued cost reduction
efforts by third-party payors could adversely affect the Company's
cash flow and results of operations.
Based upon the Company's losses from operations, uncertainties
regarding changes in third-party reimbursement and related
regulatory constraints, as well as uncertainties as to the
continuation of credit extensions by vendors, such conditions raise
doubt about the ability of the Company to continue as a going
concern.
As a result, management continues to pursue various
strategies, including but not limited to, obtaining additional
financing, cost reductions, change in revenue mix and negotiating
with new and existing payor sources to render additional services
at optimum reimbursement rates. Additionally, while the Company
has obtained a new financing arrangement under which the Company
sells its trade accounts receivable, the financing facility is not
obligated to continually purchase such receivables. Further, the
Company has obtained favorable extended payment terms with some of
its trade creditors and is continuing to negotiate extended payment
terms with other vendors. There can be no assurance that the
Company's creditors will not demand immediate payment for amounts
in arrears or that they will continue to extend additional credit
to the Company. Additionally, there can be no assurance that the
Company's 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.
-25-
YEAR 2000
The Company has made upgrades to substantially all of its
computer systems and equipment. The installation of these upgrades
was completed in all material respects as of October 31, 1999. Such
upgrades served to satisfy the anticipated impacts of the so-called
Year 2000 issue on our information technology ("IT") systems. As
of May 15, 2000, the Company has not experienced any materially
important business disruptions or system failures as a result of
Year 2000 issues, nor is it aware of any Year 2000 issues that have
impacted its payor sources, suppliers or other significant third
parties to an extent significant to the Company. However, Year
2000 compliance has many elements and potential consequences, some
of which may not be foreseeable or may be realized in future
periods. Consequently, there can be no assurance that unforeseen
circumstances may not arise, or that the Company will not in the
future identify equipment or systems which are not Year 2000
compliant.
As of February 29, 2000, the Company's total costs incurred
for its new IT systems approximated $14.3 million. Approximately
$8.5 million of these costs are being funded through a six year
lease agreement for which the aggregate amount of scheduled
payments through December 2004 approximate $15.0 million, of which
$1.6 million has been paid through February 29, 2000. The other
$5.8 million of costs have been funded through operating cash flow.
For further information regarding Year 2000 matters, refer to
disclosures under Forward-Looking Statements in the Management's
Discussion and Analysis section.
EFFECT OF INFLATION
The rate of inflation was immaterial during fiscal 2000. In
the past, the effects of inflation on salaries and operating
expenses have been offset by the Company's ability to increase its
charges for services rendered. The Company 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. The
Company continually reviews its costs in relation to the pricing of
its services.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, 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.
-26-
FORWARD LOOKING STATEMENTS
Certain statements in this report on Form 10-K 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 the
Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance or achievements of
the Company 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 the Company's
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; year 2000
failures; changes in laws and interpretations of laws or
regulations relating to the health care industry; and inability to
obtain additional financing, as needed, on satisfactory terms.
GOVERNMENT REGULATION. 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 are becoming more restrictive in
their interpretation of those costs for which reimbursement will be
allowed to such providers. State and Federal enforcement officials
also have increased their scrutiny of providers and are applying an
increasingly expansive view of activities they believe to be
fraudulent or abusive. Changes in the law and regulations as well
as new interpretations enforced by the relevant regulatory agencies
could have a material adverse effect on the Company's operations
and the cost of doing business.
It is anticipated that aggressive auditing of Medicare
reimbursement will continue as substantial Federal monies continue
to be allocated to audit and anti-fraud programs. In addition, it
is anticipated that with the implementation of the Prospective
Payment System for home health agencies, scheduled to be effective
October 1, 2000, new risk areas will be identified by fiscal
intermediary auditors and fraud investigators.
Additionally, third-party payors have generally sought to
contain costs by reducing payments and/or deferring payments to
providers. Continued cost reduction efforts by third-party
-27-
payors could adversely affect the Company's cash flow and results
of operations.
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 for any of these payors could have an impact on
revenues and profit margins. Generally, third-party payors have
sought to contain costs by reducing payments to providers.
Continued cost reduction efforts by third-party payors could
adversely affect the Company's cash flow and results of operations.
HEALTH CARE REFORM. The BBA resulted in significant changes to cost
based reimbursement for Medicare home health care providers. The
BBA retained a cost based reimbursement system, reduced the cost
limits and implemented a per-beneficiary limit. The BBA provided
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 ("PPS") which is
scheduled to be effective for all home health care agencies after
October 1, 2000. 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. Home health care
providers have an opportunity to generate profits under PPS if
costs are contained under the per-episode reimbursement amounts.
However, unforeseen changes in health care reimbursement
regulations could adversely affect the Company's ability to
generate a profit under PPS. While PPS is scheduled to be
effective on October 1, 2000, there can be no assurance that it
will be implemented at such time. Further, HCFA has provided
notification that PIP will cease effective October 1, 2000
regardless of whether or not PPS is then implemented.
Data compiled by the Congressional Budget Office indicates
that Medicare spending on home health care dropped 45% in the last
two years to $9.7 billion in 1999 from $14.9 billion in 1998 and
$17.5 billion in 1997. The Company believes this decline reflects
changes resulting from the enactment of the BBA in 1997. If
Congress takes no further action, Medicare payments for home health
care will be automatically cut by an additional 15% beginning
October 1, 2000. Under PPS, home health care agencies would get a
fixed amount of money for each 60-day "episode of care", with
payments adjusted to reflect the severity of a person's illness.
The Company believes that payments may still be inadequate to cover
the costs incurred by home health agencies in the care of certain
Medicare beneficiaries, especially in the cases of the most
severely ill patients.
As Congress and state reimbursement entities assess
alternative health care delivery systems and payment methodologies,
the Company cannot predict which additional reforms may be adopted
-28-
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 the Company's business strategy and results of
operations. The Company expects that in addition to industry
consolidation generally, there may be consolidations within the
Company's company-owned and licensed locations, as evidenced by the
reduction in the number of the Company's operating locations.
BUSINESS CONDITIONS. The Company must continue to establish and
maintain close working relationships with physicians and physician
groups, managed care organizations, hospitals, clinics, nursing
homes, social service agencies and other health care providers.
There can be no assurance that the Company will continue to
establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the
increasing market demand for the type of services offered.
ATTRACTION AND RETENTION OF LICENSEES AND EMPLOYEES. Maintaining
quality licensees, managers and branch administrators will play a
significant part in the future success of the Company. The
Company's professional nurses and other health care personnel are
also key to the continued provision of quality care to the
Company's patients. Additionally, cost containment efforts applied
by many of the Company's payor sources serve to reduce payments to
health care providers. As a result, the Company has restricted
ability to increase the wages and/or benefits paid to its health
care personnel. The possible inability to attract and retain
qualified nursing management and sufficient numbers of credentialed
health care professionals and para-professionals as well as office
management and information technology personnel could adversely
affect the Company's operations and quality of service.
SATISFACTORY FINANCING. Proceeds from the Company's new financing
program provided some working capital and the ability to pay
portions of certain accumulated indebtedness. The Company has
negotiated deferred payment terms for certain of its Medicare and
Medicaid liabilities and has made or is in the process of making
arrangements with many of its other creditors to either reduce its
liability to them, defer and/or extend payment of the liability, or
a combination of all. Management cannot provide assurance that any
or a sufficient number of such arrangements can be attained or that
the Company's vendors will continue to extend credit. In such
event, or if the Company's revenues do not meet expectations or its
costs escalate, the Company may be unable to pay its debts as they
become due. Pursuant to the Company's agreement with HCFA to repay
accumulated Medicare liabilities, the Company will be required to
pay excess periodic interim payments received as well as certain
Medicare liabilities on a monthly basis through September 2004.
UGS collects amounts due under the repayment plan by offsetting
against current remittances due to the Company. If no Medicare
-29-
accounts receivable are available for offset as amounts become due
under the repayment plan, then all amounts owed pursuant to this
repayment plan may become immediately due and payable.
YEAR 2000. The Company has made upgrades to substantially all of
its computer systems and equipment. The installation of these
upgrades was completed in all material respects as of October 31,
1999. Such upgrades served to satisfy the anticipated impacts of
the so-called Year 2000 issue on our information technology ("IT")
systems. As of May 15, 2000, the Company has not experienced any
materially important business disruptions or system failures as a
result of Year 2000 issues, nor is it aware of any Year 2000 issues
that have impacted its payor sources, suppliers or other
significant third parties to an extent significant to the Company.
However, Year 2000 compliance has many elements and potential
consequences, some of which may not be foreseeable or may be
realized in future periods. Consequently, there can be no
assurance that unforeseen circumstances may not arise, or that the
Company will not in the future identify equipment or systems which
are not Year 2000 compliant.
-30-
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
February 29, 2000 and February 28, 1999 F-2
Consolidated Statements of Operations
for the Years ended February 29, 2000,
February 28, 1999 and February 28, 1998 F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years ended February 29, 2000,
February 28, 1999 and February 28, 1998 F-4
Consolidated Statements of Cash Flows
for the Years ended February 29, 2000,
February 28, 1999 and February 28, 1998 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
FEBRUARY 29, 2000, FEBRUARY 28, 1999
AND FEBRUARY 28, 1998
II - Valuation and Qualifying Accounts F-31
All other schedules were omitted because they are not required,
not applicable or the information is otherwise shown in the
financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Tender Loving Care Health Care Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Tender Loving Care Health Care Services, Inc. and subsidiaries (the
"Company") as of February 29, 2000 and February 28, 1999, and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period
ended February 29, 2000. Our audits also included the financial
statement schedule listed in the Table of Contents. These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Tender
Loving Care Health Care Services, Inc. and subsidiaries at February
29, 2000 and February 28, 1999, and the results of their operations
and their cash flows for each of the three years in the period
ended February 29, 2000 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying consolidated financial statements for the year
ended February 29, 2000 and February 28, 1999 have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 5 to the consolidated financial statements, the
Company's continued losses from operations, uncertainties regarding
changes in third-party reimbursement and uncertainties as to the
continuation of credit extensions by vendors raise substantial
doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in
Note 5. The consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
/s/ Deloitte & Touche, LLP
Jericho, New York
May 23, 2000
F-1
<TABLE>
<CAPTION>
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
February February
ASSETS 29, 2000 28, 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,299 $ 1,323
Accounts receivable, net of allowance
for doubtful accounts of $5,900
and $5,084, respectively 55,221 47,884
Income tax refund receivable - 1,733
Prepaid expenses and other current assets 3,056 1,886
Total current assets 67,576 52,826
FIXED ASSETS, net 18,243 20,719
INTANGIBLE ASSETS, net 4,489 5,126
OTHER ASSETS 3,203 4,129
NET ASSETS OF DISCONTINUED OPERATIONS - 13,316
TOTAL $ 93,511 $ 96,116
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,055 $ 17,645
Accrued expenses 7,729 9,980
Accrued payroll and payroll related expenses 22,996 22,225
Current portion of Medicare and Medicaid liabilities 10,401 22,673
Current portion of long-term debt 5,872 10,475
Total current liabilities 63,053 82,998
LONG-TERM DEBT 53,351 13,169
LONG-TERM MEDICARE AND MEDICAID LIABILITIES 43,936 34,608
OTHER LIABILITIES 3,162 4,700
TOTAL LIABILITIES 163,502 135,475
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock - $.01 par value; 50,000,000
shares authorized; 11,809,653 outstanding
at February 29, 2000 and 11,809,690
outstanding at February 28, 1999 118 118
Additional paid-in capital 50,921 69,173
Accumulated deficit (121,030) (108,650)
Total stockholders' equity (deficit) (69,991) (39,359)
TOTAL $ 93,511 $ 96,116
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
F-2
<TABLE>
<CAPTION>
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended
February February February
29, 2000 28, 1999 28, 1998
<S> <C> <C> <C>
CONTINUING OPERATIONS:
REVENUES:
Service revenues $254,878 $310,297 $451,098
Sales of licensees and fees, net 811 2,234 1,119
Total revenues 255,689 312,531 452,217
OPERATING EXPENSES:
Service costs 157,273 200,009 280,089
General and administrative costs 101,949 123,817 160,973
Medicare and Medicaid audit adjustments - 29,000 -
Restructuring costs - 20,334 30,269
Total Operating Expenses 259,222 373,160 471,331
Income (loss) before interest, depreciation,
amortization and income taxes (3,533) (60,629) (19,114)
INTEREST AND OTHER EXPENSES:
Interest expense 6,605 1,446 2,410
Interest (income) (785) (986) (1,347)
Depreciation and amortization 4,612 4,360 5,783
Other (income) expense, net 2,411 126 (492)
Total interest and other expenses 12,843 4,946 6,354
(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (16,376) (65,575) (25,468)
PROVISION (BENEFIT) FOR INCOME TAXES 100 6,111 (5,298)
NET (LOSS) FROM CONTINUING OPERATIONS (16,476) (71,686) (20,170)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(NET OF INCOME TAXES) 1,430 (1,400) (1,462)
NET (LOSS) $(15,046) $(73,086) $(21,632)
INCOME (LOSS) PER COMMON SHARE - BASIC:
Income (loss) from continuing operations $ (1.39) $ (6.19) $ (1.69)
Income (loss) from discontinued operations 0.12 (0.12) (0.12)
Net (loss) $ (1.27) $ (6.31) $ (1.81)
INCOME (LOSS) PER COMMON SHARE - DILUTED:
Income (loss) from continuing operations $ (1.39) $ (6.19) $ (1.69)
Income (loss) from discontinued operations 0.12 (0.12) (0.12)
Net (loss) $ (1.27) $ (6.31) $ (1.81)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,810 11,581 11,970
Diluted 11,810 11,581 11,970
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
F-3
<TABLE>
<CAPTION>
<PAGE>
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Preferred Additional
Common Stock Stock Paid-In Accumulated
Shares Amount Class A Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balances, March 1, 1997 11,903,166 $ 119 $1 $73,278 $ (13,932) $ 59,466
Additional common stock in
connection with a 1987 acquisition-SBLI 86 - -
Exercise of common stock warrants-SBLI 2,500 - 11 11
Common stock issued-employee
stock purchase plan-SBLI 127,050 1 523 524
Net (Loss) (21,632) (21,632)
Balances, February 28, 1998 12,032,802 120 1 73,812 (35,564) 38,369
Additional common stock in
connection with a 1987 acquisition-SBLI 13,468 - - -
Exercise of stock options-SBLI 10,000 - 35 35
Purchase and retirement of
common stock-SBLI (2,544,030) (25) (4,745) (4,770)
Conversion of preferred
stock into common stock-SBLI 2,134,910 21 (1) (219) (199)
Common stock issued-employee
stock purchase plan-SBLI 162,540 2 290 292
Net (Loss) (73,086) (73,086)
Balances, February 28, 1999 11,809,690 118 - 69,173 (108,650) (39,359)
Distribution of net assets
of discontinued operations - (18,252) 2,666 (15,586)
Fractional shares paid in cash (37) -
Net (Loss) (15,046) (15,046)
Balances, February 29, 2000 11,809,653 $ 118 $- $ 50,921 $(121,030) $(69,991)
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
F-4
<TABLE>
<CAPTION>
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
February February February
29, 2000 28, 1999 28, 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(15,046) $(73,086) $(21,632)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operations:
Depreciation and amortization of fixed assets 4,057 3,742 3,607
Amortization of intangibles and other assets 555 618 2,176
(Income) loss from discontinued operations (1,430) 1,400 1,462
Write-off of goodwill and intangible assets 392 16,327 21,540
Write-off of investments and other assets 320 1,724 1,198
Write-off of fixed assets 2,814 911 136
Increase (decrease) in other long term liabilities (2,253) 5,100 2,787
Allowance for doubtful accounts 816 1,849 800
Income tax refund received 1,733 - -
Deferred income taxes - 6,952 (5,607)
Gain on sale of assets (1,162) (1,148) (290)
Change in operating assets and liabilities:
Accounts receivable (8,153) 10,005 1,596
Prepaid expenses and other current assets (1,495) (183) 684
Accounts payable 2,821 1,567 1,839
Accrued expenses (2,191) (2,799) (8,764)
Increase (decrease) in Medicare and Medicaid
audit liabilities (2,635) 28,092 -
Increase (decrease) in periodic interim payment liability (309) 14,364 4,320
Other assets (19) 126 177
Net cash provided by (used in)
operating activities (21,185) 15,561 6,029
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,395) (4,554) (3,149)
Proceeds from disposal of assets 1,127 576 855
Acquisitions, net of cash acquired - (2,728) (1,737)
Net cash used in investing activities (3,268) (6,706) (4,031)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan - 292 524
Proceeds from exercise of stock options - 35 11
Payoff of revolving line of credit (18,147) - -
Purchase and retirement of common stock - (4,770) -
Increase (decrease) in borrowings
under revolving line of credit 14,685 1,154 1,915
Proceeds from new credit facility 38,377 - -
Proceeds from other notes payable - - -
Payment of notes payable and other
long-term liabilities (2,486) (5,282) (4,827)
Net cash provided by (used in) financing
activities 32,429 (8,571) (2,377)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,976 284 (379)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,323 1,039 1,418
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,299 $ 1,323 $ 1,039
SUPPLEMENTAL DATA:
Cash paid for:
Interest $ 5,132 $ 891 $ 2,268
Income taxes, net $ (1,901) $ 2,287 $ 2,344
Fixed assets purchased through
capital lease agreements $ - $ 9,800 $ 2,351
Acquisition of businesses through
issuance of notes payable $ 310 $ 760 $ -
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
F-5
<PAGE>
TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 ("Fiscal 2000"), FEBRUARY 28, 1999
("Fiscal 1999") AND FEBRUARY 28, 1998 ("Fiscal 1998")
(Dollars in Thousands, Except Where Indicated Otherwise and, for Per
Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Tender Loving Care Health Care Services, Inc. ("TLCS" or
the "Company") is a leading provider of home health care services. The
Company provides a full range of licensed professional and
paraprofessional health care personnel services, which include
services rendered by registered nurses, licensed practical nurses,
home health aides, nurses aides and personal care aide services. Its
licensed personnel provide skilled nursing services, including cardiac
care, pulmonary management, wound care, maternal care, behavioral
health care, infusion therapy, hospice support and extensive patient
and family health care counselling. The Company's paraprofessional
services include home health aide services and other unlicensed
personnel services to assist with activities of daily living.
Spin-off Transaction
On October 20, 1999 ("the spin-off date"), TLCS began
operations as an independent, publicly traded company resulting from
the spin-off of the home health care operations previously owned by
Staff Builders, Inc. ("SBLI")("the spin-off"). The spin-off was
accomplished by TLCS acquiring 100% of the outstanding capital stock
of the SBLI subsidiaries engaged in the home health care business with
a pro rata distribution made to SBLI stockholders of all of the shares
of TLCS common stock owned by SBLI ("the Distribution"). The
Distribution was made by issuing one share of TLCS common stock for
every two shares of SBLI Class A and Class B common stock which were
outstanding on October 12, 1999 ("the Record Date"). Based upon the
23,619,388 shares of SBLI common stock which were outstanding on the
Record Date, 11,809,694 shares of TLCS common stock were distributed
to holders of SBLI Class A and Class B common stock. All references
to shares outstanding prior to the spin-off date have been
retroactively adjusted for the spin-off. Since the spin-off date,
TLCS and SBLI have been separate, stand-alone companies with TLCS
operating the home health care business segment and SBLI operating the
supplemental staffing business segment. TLCS' common stock is listed
on the OTC Bulletin Board System under the symbol "TLCS". References
to the "Company" may indicate the home health care operations operated
by TLCS subsequent to the spin-off date or operated by SBLI prior
thereto.
The spin-off was reported as a reverse spin-off for
financial statement purposes because a greater proportion of the
F-6
former assets and operations of SBLI are held by TLCS after the spin-
off. Therefore, the spin-off has been reflected for financial
statement purposes as if TLCS was the continuing company and the stock
of SBLI was distributed as a dividend to TLCS stockholders. The TLCS
financial statements reflect the financial position and results of
operations of the home health care segment as continuing operations
and the financial position and results of operations of the
supplemental staffing segment now owned by SBLI as discontinued
operations.
For the purpose of governing certain ongoing relationships
between SBLI and TLCS after the spin-off and to provide a mechanism
for an orderly transition, SBLI and TLCS have entered into a
transitional services agreement. As of February 29, 2000,
approximately $200 thousand is receivable from SBLI.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of TLCS and its wholly-owned subsidiaries. The financial
information contained in the accompanying financial statements reflect
fiscal years ended on February 28/29. All material intercompany
accounts and transactions have been eliminated. Certain prior period
amounts have been reclassified to conform with the fiscal 2000
presentation.
A substantial portion of the Company's service revenues are
derived under a unique form of franchising pursuant to a license
agreement under which independent companies or contractors represent
the Company within a designated territory. These licensees assign
Company personnel including registered nurses, therapists and home
health aides to service the Company's clients using the Company's
trade names and service marks. The Company pays and distributes the
payroll for the direct service personnel who are all employees of the
Company, administers all payroll withholdings and payments, bills the
customers and receives and processes the accounts receivable. The
licensees are responsible for providing an office and paying related
expenses for administration including rent, utilities and costs for
administrative personnel.
The Company owns all necessary health care related permits
and licenses and, where required, certificates of need for operation
of licensee offices. The revenues generated by the licensees along
with the related accounts receivable belong to the Company. The
revenues and related direct costs are included in the Company's
consolidated service revenues and operating costs.
The Company pays a 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
F-7
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.
For fiscal 2000, 1999 and 1998, total distributions or
commissions paid to licensees of approximately $24.9 million, $38.3
million and $84.1 million, respectively, were included in the
Company's general and administrative expenses.
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 consist of highly liquid
investments with original maturities of three months or less.
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 ten years.
Goodwill
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 their estimated
useful lives.
The Company continually reviews long-lived assets for
impairment and, if impaired, remeasures the assets at fair value,
whenever events or changes in business circumstances indicate that the
carrying value of such assets may not be recoverable. 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. Where negative indicators were 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 Company's goodwill was not recoverable based on
undiscounted estimated cash flows, the carrying value of the goodwill
had been reduced to estimated fair value as required by FAS 121.
F-8
Accordingly, the Company reduced the carrying value of goodwill by
approximately 75% over the two fiscal years ended February 28, 1999
to reflect these impairment indicators. In the fourth quarter of
fiscal 1999 and 1998, the Company wrote off $15.3 million and $21.5
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 3).
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,
the Company reduced the useful life of goodwill from forty years to
twenty years, effective March 1, 1999. Amortization expense increased
by approximately $300 thousand in fiscal 2000 as a result of the
decrease in useful lives, offset by a decrease of $300 thousand
resulting from the fiscal 1999 write-off of goodwill.
Revenue Recognition
The Company 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. The Company's earnings
process is completed as each hour of service or home care visit is
rendered. Revenues are recorded net of contractual or other
allowances to which customers are entitled. Employees assigned to
particular customers may be changed at the customer's request or at
the Company's initiation. In addition, for financial reporting
purposes, a provision for uncollectible and doubtful accounts is
provided for amounts billed to customers which may ultimately be
uncollectible due to billing errors, documentation disputes or the
customer's inability to pay.
Revenues generated from the sales of licensees and initial
licensee fees are recognized upon signing of the licensee agreement,
if collectibility of such amounts is reasonably assured, since the
Company has performed substantially all of its obligations under its
licensee agreements by such date. In circumstances where a reasonable
basis does not exist for estimating collectibility of the proceeds of
the sales of licensees 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
F-9
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
approximate fair value.
Disclosures about Segments of an Enterprise
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") provides standards which require publicly held companies
to report about operating segments in annual financial statements. All
of the Company's operating locations offer home health care services
and, for financial reporting purposes, such operations are aggregated
in one reportable segment. Consequently, SFAS No. 131 had no effect
on the Company's consolidated financial statement disclosure.
New Accounting Pronouncements
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. DISCONTINUED OPERATIONS
Discontinued operations represent the supplemental staffing
services business of SBLI (see Note 1). Substantially all of the
revenues and expenses related to the discontinued operations have been
historically segregated on a specifically identified basis. However,
certain allocations of assets, liabilities and expense have been made
related to discontinued operations. In the opinion of management,
F-10
such allocations have been made to the discontinued operations in a
reasonable and consistent basis using management's estimate of
services provided to the discontinued operations by TLCS.
The assets and liabilities of the supplemental staffing
business are classified on the balance sheet as of February 28, 1999
as "Net assets of discontinued operations" and consist of the
following:
<TABLE>
<CAPTION>
February
28, 1999
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 684
Accounts receivable 31,778
Other current assets 1,668
Total current assets 34,130
Fixed assets, net 744
Goodwill and intangible assets, net 21,965
Other assets 341
Total assets from discontinued operations 57,180
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses 7,274
Accrued payroll and payroll related expenses 3,525
Current portion of long-term debt 32,985
Total current liabilities 43,784
Other liabilities 80
Total liabilities from discontinued operations 43,864
NET ASSETS FROM DISCONTINUED OPERATIONS $13,316
</TABLE>
As of the spin-off date of October 20, 1999, TLCS
distributed the net assets of the discontinued operations
aggregating $15.6 million. Such amount includes the net assets of
the discontinued operations as of February 28, 1999 of $13.3
million, the net income from discontinued operations of $1.4
million for the period March 1, 1999 to October 20, 1999 and $0.9
million of expenses incurred by the Company on behalf of the
discontinued operations, prior to the spin-off, for which the
related debt was forgiven. Subsequent to the spin-off date, the
Company has incurred expenses on behalf of SBLI of approximately
$400 thousand of which $200 thousand is unpaid as of February 29,
2000.
F-11
The results of operations of the SBLI supplemental
staffing business are included in the statements of operations as
"Income (loss) from discontinued operations" and are summarized as
follows:
<TABLE>
<CAPTION>
February 29/28,
2000 1999 1998
(a)
<S> <C> <C> <C>
Net revenues $96,250 $126,025 $75,330
Service costs 74,252 99,803 59,010
General and administrative
expenses 18,086 22,614 13,114
Operating profit 3,912 3,608 3,206
Interest expense, net 117 2,712 1,179
Depreciation and amortization 415 906 805
Other (income) expense, net 1,066 468 3,251
Income (loss) before
income taxes 2,314 (478) (2,029)
Income tax provision (benefit) 884 922 (567)
Net income (loss) $ 1,430 $ (1,400) $(1,462)
<FN>
(a) Includes the results of discontinued operations through the
spin-off date of October 20, 1999.
</FN>
</TABLE>
3. 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 provided 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 ("PPS") which is scheduled to be effective for all home health
care agencies on October 1, 2000. 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 $30.3 million. During the quarter
ended November 30, 1998, as a result of the Company's further
F-12
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 the effect of such
conditions on the Company's operations. Such 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, the Company 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 health care payor sources. The Company reacted by closing
certain branches and has converted 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, the Company continued to experience operating
difficulties like many other companies in the home health care
industry. Accordingly, there was a decline in the value of such
businesses. Based upon the foregoing factors, in the fourth quarter
ended February 28, 1999, the Company evaluated the net carrying value
of goodwill based upon the net present value of future cash flows in
accordance with the requirements of SFAS No. 121. As a result, a
write-down in goodwill of approximately $15.3 million was recorded in
the fourth quarter of fiscal 1999. The net carrying value of goodwill
as of February 29, 2000 and February 28, 1999 was approximately $4.5
million and $5.1 million, respectively. The Company's 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
deteriorating business climate within the home health care industry.
The Company's loss from operations, before interest, depreciation,
amortization and income taxes, was approximately ($3.5) million and
($60.6) million for fiscal 2000 and fiscal 1999, respectively, and was
approximately $(19.1) million for fiscal 1998 which was prior to the
effectiveness of IPS. The fiscal 1999 net (loss) included $29.0
million of Medicare and Medicaid audit adjustments. The fiscal 1999
and 1998 net (losses) included restructuring costs of $20.3 million
and $30.3 million, respectively.
F-13
A summary of the fiscal 1999 and 1998 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 $21.5
Employee severance and
reduction in size 0.8 1.0
Write-down of home health care
related investments and receivables 0.9 6.3
Accrued litigation related costs 2.2 1.1
Receivables from converted
licensee locations 1.1 -
Other - 0.4
Total restructuring costs $20.3 $30.3
</TABLE>
As of February 29, 2000, all amounts provided have either
been recorded as direct write-downs of assets or expended from the
reserves, except for a portion of the remaining accrued litigation
related costs described in Note 14.
4. REFINANCING
On December 13, 1999, the Company obtained new financing
for its operations to replace its then existing line of credit
facility which was due to expire on February 29, 2000. The new
financing is an accounts receivable purchase program with an entity
which provides health care accounts receivable financing under which
the Company may sell to an affiliate of such entity up to $60 million
of the Company's eligible receivables. The proceeds from the new
financing include $18.1 million which was used to pay off the
aggregate amount of borrowings under its prior line of credit facility
and the balance is being used to make payments on other outstanding
indebtedness and for working capital purposes. See Note 13 for
further description of the Company's financing payable.
5. GOING CONCERN MATTERS
The Company's continued losses from operations,
uncertainties regarding changes in third-party reimbursement and
uncertainties as to the continuation of credit extensions by vendors,
raise doubt about the ability of the Company to continue as a going
concern. As a result, management continues to pursue various
strategies, including but not limited to, obtaining additional
financing, cost reductions, change in revenue mix and negotiating with
new and existing payor sources to render additional services at
optimum reimbursement rates. Additionally, while the Company has
obtained a new financing arrangement under which the Company sells its
trade accounts receivable (see Notes 4 and 13), the financing facility
is not obligated to continually purchase such receivables. Further,
the Company 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 the
F-14
Company's creditors will not demand immediate payment for amounts in
arrears or that they will continue to extend additional credit to the
Company. There can be no assurance that the Company's actions will
be successful to provide adequate funds for its current level of
operations and to pay the Company's past-due obligations.
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 29, 2000 and February 28, 1999 amounted to $626
and $663, net of deferred income reflected as a valuation reserve for
financial reporting purposes of $1,546 and $2,182, respectively. The
net balances of these notes at February 29, 2000 and February 28, 1999
include $114 and $95 in Prepaid Expenses and Other Current Assets and
$512 and $568 in Other Assets, respectively. The decrease in the
foregoing balances reflect a reduction in the number of licensees
during fiscal 2000 and 1999.
Sales of licensees and fees, net were $811, $2,234 and
$1,119 for fiscal 2000, 1999 and 1998, respectively.
Sales of licensees and fees, net for fiscal 2000, 1999
and 1998 include $387, $1,223 and $97, respectively, from the sale of
home health care franchise businesses. Additionally, sales of
licenses and fees, net include the collection of notes receivable
previously not recognized as income and the receipt of initial
franchise fees. During fiscal 2000, the Company did not sell any new
franchise rights, and accordingly, there were no initial franchise
fees.
The Company has performed substantially all of its
obligations as required under the terms of its franchise agreements.
Interest income on franchise notes receivable is included in other
income.
In 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 $606
remains outstanding at February 29, 2000. The note bears interest at
the prevailing prime lending rate and matures in 2009.
7. ACQUISITIONS
During fiscal 1999 and 1998, 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. There were no significant acquisitions made
during fiscal 2000.
F-15
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 thousand and the write-off of
notes receivable of $800 thousand. Additionally, the Company acquired
ten home health care businesses for aggregate consideration of
approximately $800 thousand, including cash paid of $600 thousand and
liabilities assumed of $200 thousand.
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.
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.
In connection with the fiscal 1999 acquisitions, assets
acquired and consideration paid was as follows:
1999
Fair value of assets acquired, net $ 4,498
Net cash paid for acquired
assets and stock (2,724)
Liabilities assumed and notes
payable issued for acquisitions $ 1,774
The fair value of assets acquired is net of the write-off of notes
receivable from ex-licensees of approximately $800 thousand.
8. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Computer equipment and
software $21,276 $27,351
Office equipment, furniture
and fixtures 1,780 2,256
Leasehold improvements 1,135 1,248
Land and buildings 106 106
Total, at cost 24,297 30,961
Less accumulated depreciation
an amortization 6,054 10,242
Fixed assets, net $18,243 $20,719
</TABLE>
Computer equipment and software includes approximately $14.3
million for year 2000 compliant software and computer equipment
purchased during fiscal 2000 and 1999 which was placed in service in
November 1999. Approximately $8.5 million of this cost is pursuant
to a six-year lease agreement which requires payments aggregating
F-16
$15.0 million through December 2004 (see Note 13). The Company wrote-
off the net book value of approximately $2.8 million for equipment
which was replaced by the new software and equipment.
During fiscal 1999, the Company wrote off fixed assets relating to
closed locations and obsolete computer equipment which is included in
restructuring costs. During fiscal 2000, 1999 and 1998, the Company
wrote off fully depreciated fixed assets of approximately $1.7
million, $1.4 million and $1.7 million, respectively. During fiscal
2000, the write off of fixed assets relating to closed or sold
locations was immaterial.
9. GOODWILL
<TABLE>
<CAPTION>
Goodwill consists of the following:
February 29/28,
2000 1999
<S> <C> <C>
Gross cost $13,472 $14,052
Accumulated amortization (8,983) (8,926)
Net $ 4,489 $ 5,126
</TABLE>
The above amounts are net of write-offs of goodwill and
intangibles of approximately $400 thousand, $15.3 million and $21.5
million, in fiscal 2000, 1999 and 1998, respectively.
The write-off of goodwill in fiscal 2000 was related to the sale
of eight locations. The related amounts were recorded as a reduction
of the gain on sale of assets, included in Other (Income) Expense,
net. The write-offs of goodwill and intangible assets in fiscal 1999
and 1998 resulted from the Company's assessment of the adverse changes
in health care reform for which relevant indicators reflected the
existence of impairment to the carrying values of long-lived assets.
During fiscal 2000, the Company wrote off fully amortized
goodwill and intangible assets of approximately $497 thousand.
10. ACCRUED EXPENSES
Accrued expenses include $1,603 and $2,761 at February 29, 2000
and February 28, 1999, respectively, of accrued distributions payable
to licensees.
11. ACCRUED PAYROLL AND PAYROLL RELATED EXPENSES
Accrued payroll and payroll related expenses consist of the
following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Accrued payroll $ 5,718 $ 5,407
Accrued insurance 14,906 12,476
Accrued payroll taxes 1,470 2,913
Other 902 1,429
Total $22,996 $22,225
</TABLE>
F-17
Beginning in January 1999, TLCS maintained most of its health
insurance coverage under a self-insured policy with stop-loss
coverage. 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 thousand per covered
person. Essentially, TLCS 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 (See Note 3). These amounts consist of the following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Medicare:
Periodic interim payment
liability ("PIP")(a) $18,649 $18,959
Completed audits (b) 12,143 10,220
Audits in process or
net yet conducted (c) 15,308 17,155
46,100 46,334
Medicaid (d):
Completed assessments (e) 4,600 4,600
Assessments in process or
not yet conducted (f) 3,637 6,347
8,237 10,947
Total 54,337 57,281
Less current portion (10,401) (22,673)
Long term Medicare and
Medicaid liabilities $43,936 $34,608
</TABLE>
(a) PIP liability represents amounts received from Medicare in
excess of current volume of business. Under PIP, the Company
receives regular bi-weekly payments based on past Medicare
activity of participating offices
(b) The fiscal intermediary has completed audits for which the
Company has received a Notice of Provider Reimbursement. These
audits consist of fiscal 1998 branch operating location audits
of $5.7 million, the fiscal year ended February 1997 ("fiscal
1997") branch operating location and home office audits
aggregating $2.4 million, and home office audits for the fiscal
years ended February 1996 and 1994 aggregating $4.0 million. All
years prior to fiscal 1997 are closed relative to substantially
all field operating location audits.
(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. The home office cost report
F-18
audit has not yet been performed for fiscal 2000 or for fiscal
1999 and no field audits have been conducted to date for fiscal
2000. The Company has been notified that audits relative to
fiscal 1999 will consist of nine audits to be conducted on site
at branch operating locations, of which three such audits began
in April 2000. The fiscal 1998 home office audit is in progress.
Home office cost report audits for the fiscal years ended
February 1995 and 1993 remain open. Based upon the results of
those audits conducted for prior years, the Company believes that
the reserve provided for the open audit periods is adequate.
(d) Medicaid liabilities consist of third party liability
("TPL") to state Medicaid agencies which have claimed that the
Company did not follow proper billing procedures in certain
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 encompassing years
prior to fiscal 1998 for which the Company has been paid. The
Company has reached a settlement for a portion of its TPL and is
continuing to negotiate to resolve amounts payable to these state
agencies. In fiscal 2000, total payments of $3.6 million were
made, offset by $0.9 million of increased liabilities to these
state Medicaid agencies.
(e) The Company has obtained payment terms which require
repayment equal to 25% of current remittances.
(f) 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. Based upon the results of those
audits conducted for prior years, the Company believes that the
reserve provided for the open audit periods is adequate.
In December 1999, the Company reached an agreement with HCFA for
a five year plan for repayment of certain Medicare liabilities. The
repayment plan will be in effect through September 2004. As a result
of obtaining this repayment plan, the Company has reduced the current
portion of its Medicare liabilities. The current principal portion of
Medicare and Medicaid liabilities was $10.4 million and $22.7 million
at February 29, 2000 and February 28, 1999, respectively. Under this
repayment agreement, the Company is repaying excess periodic interim
payments ("PIP") received as well as certain Medicare audit
liabilities.
The Medicare repayment plan covers excess quarterly PIP amounts
received through August 31, 1999, audit liabilities for which
assessments have been made to date and assessments which will be made
in future periods through April 2001. Any overpayments or audit
liabilities that are successfully appealed by the Company will be
subtracted from the total amount owed under the repayment plan.
Interest is accrued from the date of each assessment at the government
rate of interest, as revised from time to time (currently at 13.50%
per annum) on all Medicare liabilities except for the PIP related
liability for which interest accrues beginning one year after the date
of the respective assessment, less any payments made. Under the
F-19
repayment plan, the Company is required to pay principal and interest
aggregating $500 thousand per month for the six months ended March
2000, $750 thousand per month for the six months ending September 2000
and $1.0 million per month thereafter through March 2001. All
remaining liabilities as of April 2001 for periods covered by this
repayment plan including accrued interest, will then be paid in equal
monthly installments over the remaining 42 months of the repayment
plan through September 2004. UGS collects amounts due under the
repayment plan by offsetting against current remittances due to the
Company. UGS has offset $3.8 million through May 22, 2000 under the
repayment plan. If no Medicare accounts receivable are available for
offset as amounts become due under the repayment plan, then all
remaining amounts owed pursuant to the repayment plan may become
immediately due and payable.
The current and long-term portions of the Company's Medicare
liabilities have been allocated based upon the terms of the Medicare
repayment agreement. The current and long-term portions of the
Company's Medicaid liabilities have been classified as current
liabilities except where the Company has obtained payment terms. In
fiscal 2000, total payments of $4.3 million were made to Medicare
including principal and interest of $3.4 million and $0.9 million,
respectively. Offsetting these payments were additional PIP
liabilities of $2.5 million and liabilities provided of $0.7 million.
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 make take up to several years and is unable to predict the
ultimate outcome of matters for all open audit periods. Based upon
the results of audit findings to date, no adjustment is needed to the
aggregate amount of Medicare and Medicaid liabilities in the
accompanying consolidated financial statements.
13. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Borrowings under credit facilities(a) $38,377 $ 3,462
Obligations under capital leases(b) 9,794 13,475
Notes payable and other liabilities
related acquisitions (c) 3,323 5,000
Other notes payable (d) 3,318 1,707
Notes payable - trade vendors (e) 4,411 -
Total 59,223 23,644
Less current portion 5,872 10,475
Long-term debt(f) $53,351 $13,169
</TABLE>
(a) On December 13, 1999, the Company obtained new financing for its
operations to replace its then existing line of credit facility. The
F-20
new financing is an accounts receivable purchase program with an
entity which provides health care accounts receivable financing. Under
the program, the Company may sell to an affiliate of such entity up
to $60 million of the Company's eligible receivables. The Company has
obtained net funding of $38.4 million from the sale of receivables
approximating $40.7 million through February 29, 2000. Of the amount
realized, approximately $18.1 million was paid to the Company's prior
senior lending institution and the balance is being used to make
payments on other indebtedness and for working capital purposes.
The financing arrangement provides for the Company's sale of
accounts receivable pursuant to a sale and subservicing agreement.
Under the terms of the agreement, the Company continues to bill
customers, collect receipts and process the related accounts
receivable. The sale of such accounts receivable has been reflected
as a secured financing transaction in the Company's financial
statements. Such sale, if challenged, may or may not put such
receivables beyond the reach of the Company. The Company has a
repurchase obligation in accordance with the terms of the agreement.
The new financing is for an initial term of three years ending
December 31, 2002. Under the terms of the new financing, the Company
sells its eligible trade accounts receivable for which the Company
receives in cash approximately 80% of eligible receivables, less
certain fees and reserves. As cash is collected from trade customers,
the remaining 20% of the sale price of accounts receivable are paid
to the Company. Eligible receivables are defined as certain trade
accounts receivable which have been outstanding for less than 180
days. In connection with the closing of the new financing, the
Company has paid approximately $1.1 million in non-refundable fees and
granted to its financing source, to the extent permitted by law, a
security interest in substantially all of the Company's trade accounts
receivable. The financing agreement contains certain financial
covenants which, among other things, provide for a maximum level of
allowable net loss before income taxes. The Company obtained an
amendment from the financing facility to provide adequate relief from
the maximum net loss covenant for the year ended February 29, 2000.
The Company pays a program fee of 11.5% per annum on the outstanding
amount of eligible receivables.
At February 28, 1999, the Company had a secured credit facility
with its prior senior lending institution under which total
outstanding borrowings included $3.5 million and $31.9 million related
to its continuing and discontinued operations, respectively. The
amount of borrowings allocated to discontinued operations at February
29, 1999 consist of outstanding borrowings under an acquisition line
of credit of $8.7 million and intercompany debt payable to the
continuing operations of $23.2 million. Outstanding borrowings at
February 28, 1999 were classified as current because the lender
declared an event of default whereby it could demand full payment of
all borrowings at any time.
(b) At February 29, 2000, the Company had capital lease agreements
for computers and other equipment through December 2004. The Company's
F-21
capital lease obligations includes a six-year lease agreement in the
amount of $13.7 million which requires average monthly installments
of $239 through December 2003 and $183 per month, thereafter. The net
aggregate carrying value of the assets under capital leases and a
secured term loan (see d. below) was approximately $10.2 million and
$13.2 million at February 29, 2000 and February 28, 1999,
respectively, and such amounts are included in Fixed Assets.
(c) At February 29, 2000, the Company had a balance of notes payable
related to acquisitions of $3.3 million. The notes payable bear
annual interest from zero to 10.50% and have maturity dates through
September 2010.
(d) The Company obtained a three-year term loan of approximately $3.3
million which bears annual interest at 10.0% and requires monthly
payments of $84 thousand from May 1, 2000 to April 1, 2001 and monthly
payments of $120 thousand from May 1, 2001 through April 1, 2003. The
term loan was obtained to refinance a series of equipment leases and
is secured by certain computer equipment previously provided as
collateral under the leases with the same lending institution. Such
leases had interest rates which varied from 7.28% to 9.0% per annum
with maturity dates from March 1999 to July 2002. The refinancing of
these leases, which had an aggregate remaining principal balance of
approximately $3.4 million, into a term loan was pursuant to a
settlement agreement under the leases. The balance of a separate term
loan of $1.7 million at February 28, 1999 was fully repaid in fiscal
2000.
(e) During fiscal 2000, the Company signed separate, unsecured
promissory notes payable to approximately 25 trade vendors in the
aggregate amount of approximately $4.9 million, of which the balance
remaining at February 29, 2000 was approximately $4.4 million. These
notes were signed to obtain extended payment terms. These notes have
interest rates ranging from zero to 13% (weighted average rate of
8.9%) with maturity dates through March 2002.
(f) Repayments of long-term debt at February 29, 2000 are due as
follows:
<TABLE>
<CAPTION>
Obligations
Under
Capital Other
Years Ending February Leases Debt Total
<S> <C> <C> <C>
2001 $ 3,278 $ 2,594 $ 5,872
2002 2,177 4,238 6,415
2003 1,861 40,090 41,951
2004 1,606 379 1,985
2005 872 203 1,075
Thereafter - 1,925 1,925
Total $ 9,794 $49,429 $59,223
</TABLE>
F-22
14. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Accrued litigation (a) $2,431 $3,105
Rent escalation liability (b) 631 751
Other 100 844
Total $3,162 $4,700
<FN>
(a) Loss accrual for the aggregate, estimated amount to settle or
litigate open legal matters.
(b) 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 $822 and $883 at February 29, 2000 and February 28,
1999 of which $191 and $132, respectively, was included in accrued
expenses.
</FN>
</TABLE>
15. INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
Years Ended
February February February
29, 2000 28, 1999 28, 1998
<S> <C> <C> <C>
Current:
Federal $ - $(1,733) $ 539
State 100 139 176
Deferred - 7,705 (6,013)
Total $ 100 $ 6,111 $(5,298)
</TABLE>
The provision for income taxes in fiscal 1999 consists of a
valuation allowance of $26.9 million offset by potential tax
benefits of $19.1 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. In
fiscal 1999 the Company recorded an income tax receivable of $1.7
million, resulting from the carryback of net operating losses,
which was received in fiscal 2000. As of February 29, 2000, the
Company has a Federal net operating loss of approximately $12.7
million which if unused will expire in 2019 and 2020.
F-23
The deferred tax assets (liabilities) at February 29, 2000
and February 28, 1999 are comprised of the following:
<TABLE>
<CAPTION>
February 29/28,
2000 1999
<S> <C> <C>
Current:
Allowance for doubtful
accounts receivable $ 2,175 $1,833
Accruals not currently
deductible 5,137 8,250
7,312 10,083
Valuation allowance (7,312) (10,083)
Current 0 0
Non-Current:
Goodwill and intangible assets 6,260 6,857
Revenue recognition 360 315
Accelerated depreciation (770) (856)
Accruals not currently deductible 13,941 8,474
Other assets (liabilities) 21 35
Net operating loss carryforward 4,471 1,975
24,283 16,800
Valuation allowance (24,283) (16,800)
Non-current 0 0
Total $ 0 $ 0
</TABLE>
The following is a reconciliation of the effective income tax
rate to the Federal statutory rate:
<TABLE>
<CAPTION>
Years Ended
February February February
29, 2000 28, 1999 28, 1998
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State and local income taxes,
net of Federal income
tax benefit (2.8) 1.6 3.6
Write-off of goodwill and
intangible assets (0.4) (3.7) (14.4)
Non-deductible spin-off costs (1.5) - -
Goodwill amortization (0.8) (0.2) (0.9)
Reversal of prior year
accrual - - (1.5)
Valuation allowance (28.8) (41.0) -
Other (0.3) - -
Effective rate (0.6)% (9.3)% 20.8%
</TABLE>
F-24
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:
Years Ending
February
2001 $ 4,077
2002 3,234
2003 2,556
2004 2,244
2005 2,102
Thereafter 1,166
Total $15,379
Certain leases require additional payments based upon property
tax and maintenance expense escalations.
Aggregate rental expense for fiscal 2000, 1999 and 1998
approximated $6,032, $6,215 and $4,781, respectively.
The Company has entered into employment agreements with
several officers which require minimum aggregate payments of
approximately $2,260, $1,518, $1,120, $949 and $997 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.
In July 1999, a former licensee of the Company in Port St.
Lucie, Florida pleaded guilty to several counts of Medicare fraud.
The Federal government has sought to hold the Company liable for
losses to the government arising from the former licensee's
conduct. The Federal government and the Company have agreed in
principle to settle all financial issues arising out of the former
licensee's illegal conduct for approximately $1.4 million, amounts
deemed inappropriately reimbursed during the period of time that
the licensee operated the business. In connection with the criminal
investigation of the former licensee of the Company, the United
States Health Care Financing Administration has already recouped
approximately $1.5 million through May 15, 2000 through Medicare
hold-backs against current remittances. The Company intends to
negotiate terms mutually favorable to facilitate the completion of
the proposed settlement agreement.
On September 20, 1995, the United States Attorney for the
Eastern District of Pennsylvania alleged that between 1987 and
1989, a corporation, substantially all assets and liabilities of
F-25
which were acquired by a subsidiary of the Company in 1993,
submitted false claims to Medicare. The alleged false claims 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 a
settlement of the outstanding claims for approximately $600
thousand, the conclusion of which is pending final government
approval of the payment and other settlement items.
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 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 and Second Amended Complaint in the
Central District on January 8, 1999 and September 1, 1999,
respectively, 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 claimed by the Company on its cost report
for consulting services. The case was dismissed pursuant to the
Company's motion and Mr. Waris appealed. The appeal has been
stayed by the Court pending finalization of a proposed settlement,
whereby the cost report issues will be settled directly with the
United States Government in exchange for the withdrawal of Mr.
Waris' lawsuit.
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
F-26
officers of the Company. The action alleges claims under the RICO,
claiming a series of deliberate and illegal actions designed to
defraud Staff Builders' franchisees, as well as claims for
negligence, breach of fiduciary duty, breach of contract,
fraudulent misrepresentation and violation of the Iowa franchise
law. The complaint seeks unspecified money damages, a claim for
treble damages on the RICO claims and punitive and exemplary
damages. Pursuant to the Company's motion, all of the RICO counts
except for one count were dismissed by the Court.
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 29, 2000 and February 28, 1999 for the aggregate,
estimated amount to litigate or resolve such matters. In the
opinion of management, the outcome of pending litigation will not
have a material adverse effect on the Company's consolidated
financial position or results of operations. However, unfavorable
resolutions of these actions could have an adverse impact on
liquidity.
17. STOCKHOLDERS' EQUITY
Common Stock
Each holder of the Company's Common Stock is entitled to one
vote for each share of common stock held by such person on the
record date for a meeting of stockholders.
Stock Options
During fiscal 2000, the Company adopted a stock option plan
(the "1999 Stock Option Plan") under which an aggregate of two
million seven hundred fifty thousand shares (2,750,000) 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. Options are granted at not less than the fair market
value of the common stock at the date of grant.
A total of 1,888,750 ISO's were granted under the 1999 Stock
Option Plan, at a price of $.10, all of which remain outstanding at
February 29, 2000. No options were exercisable at February 29,
2000. There have been no options exercised or terminated under
this plan. The options outstanding at February 29, 2000 all had
exercise prices of $.10 per share with a weighted average remaining
contractual life of 7.8 years.
F-27
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.
Information with respect to the stock options plans reflects the
TLCS stock option plan for fiscal 2000 and the SBLI stock option
plans for fiscal 1999 and 1998. 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 2000, 1999 and
1998 consistent with the provisions of SFAS 123, the Company's net
(loss) and net (loss) per share would have reflected the following
pro forma amounts:
<TABLE>
<CAPTION>
February 29/28,
2000 1999 1998
<S> <C> <C> <C>
Net (loss)
-as reported $(15,046) $(73,086) $(21,632)
Net income (loss)
-pro forma (15,490) (73,099) (22,075)
Basic earnings (loss)
per share - as reported (1.27) (6.31) (1.81)
Basic earnings (loss)
per share - pro forma (1.31) (6.31) (1.84)
Diluted earnings (loss)
per share - as reported (1.27) (6.31) (1.81)
Diluted earnings (loss)
per share - pro forma (1.31) (6.31) (1.84)
</TABLE>
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 2000, 1999 and 1998, respectively: expected volatility of
80%, 142% and 56%; risk-free interest rate averaging 6.0%, 5.5% and
5.8%; and expected lives of 10 years for all.
Common Shares Reserved
The following represents common shares reserved and available
for issuance, at February 29, 2000, for options granted:
Available
Reserved for Issuance
1999 Stock Option Plan 1,888,750 861,250
F-28
18. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for
fiscal 2000 and 1999 are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Fiscal 2000
Service revenues $ 69,927 $ 65,370 $ 61,551 $ 58,030
Income (loss) from
continuing operations $ (2,959) $ (4,042) $ (5,296)(2) $ (4,179)
Income (loss) from discontinued
operations (1) 775 1,476 (821) -
Net (loss) $ (2,184) $ (2,566) $ (6,117) $ (4,179)
Net income (loss)
per common share-basic:
Income (loss) from
continuing operations $ (0.25) $ (0.34) $ (0.45) $ (0.35)
Income (loss) from discontinued
operations 0.07 0.12 (0.07) -
Net (loss) $ (0.18) $ (0.22) $ (0.52) $ (0.35)
Net income (loss) per
common share-diluted:
Income (loss) from
continuing operations $ (0.25) $ (0.34) $ (0.45) $ (0.35)
Income (loss) from
discontinued operations 0.07 0.12 (0.07) -
Net (loss) $ (0.18) $ (0.22) $ (0.52) $ (0.35)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1999
Service revenues $ 83,607 $ 79,539 $ 73,976 $ 73,175
Income (loss) from
continuing operations $ (403) $ (330) $(45,775)(3) $(25,178)(4)
Income (loss) from discontinued
operations 304 465 441 (2,610)
Net (loss) $ (99) $ 135 $(45,334) $(27,788)
Net income (loss)
per common share-basic:
Income (loss) from
continuing operations $ (0.03) $ (0.03) $ (3.95) $ (2.18)
Income (loss) from discontinued
operations 0.03 0.04 0.03 (0.22)
Net (loss) $ (0.00) $ 0.01 $ (3.92) $ (2.40)
Net income (loss) per
common share-diluted:
Income (loss) from
continuing operations $ (0.03) $ (0.03) $ (3.95) $ (2.18)
Income (loss) from
discontinued operations 0.03 0.04 0.03 (0.22)
Net (loss) $ (0.00) $ 0.01 $ (3.92) $ (2.40)
<FN>
(1) The results of operations of the discontinued
operations reflect the period from March 1, 1999
through the spin-off date of October 20, 1999.
(2) Includes spin-off transaction related costs of
$700 and a net loss from the disposal of fixed
assets of $1.6 million.
F-29
(3) Includes $29.0 million for Medicare and Medicaid audit
adjustments and $4.5 million for restructuring costs.
(4) Includes the write-off of goodwill and intangible assets
aggregating $15.3 million and other restructuring costs
of $0.5 million.
</FN>
</TABLE>
F-30
SCHEDULE II
<TABLE>
<CAPTION>
TENDER LOVING CARE HEALTH CARE SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Years Ended
February February February
29, 2000 28, 1999 28, 1998
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period $ 5,084 $ 3,235 $ 2,435
Charged to costs and expenses 2,843 6,350 2,520
Deductions (2,027) (4,501) (1,720)
Balance, end of period $ 5,900 $ 5,084 $ 3,235
ACCUMULATED AMORTIZATION OF
INTANGIBLE ASSETS:
Balance, beginning of period $ 8,926 $ 9,064 $ 8,094
Charged to costs and expenses 554 618 2,176
Write-off of fully
amortized assets (497) (756) (1,206)
Balance, end of period $ 8,983 $ 8,926 $ 9,064
DEFERRED INCOME (NETTED AGAINST
FRANCHISE NOTES RECEIVABLE):
Balance, beginning of period $ 2,182 $ 4,086 $ 5,317
Charged to notes receivable 141 502 21
Deductions (777) (2,406) (1,252)
Balance, end of period $ 1,546 $ 2,182 $ 4,086
</TABLE>
F-31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no such changes or disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as to each director and each
executive officer of the Company: (1) such person's name; (2) the
year in which such person was first elected (or designated) a
director of the Company; (3) biographical information for the last
five years; (4) certain other directorships, if any, held by such
person; and (5) such person's age.
<TABLE>
<CAPTION>
Principal Occupation During the
Past Five Years, Any Office Year First
Held in the Elected
Company and Any Other as a
Name Age Directorships Director
<S> <C> <C> <C>
Stephen Savitsky 54 Mr. Savitsky has served as 1999
Chairman of the Board, Chief
Executive Officer and a
Director of the Company since
October 1999. Simultaneously,
Mr. Savitsky serves as Chairman
of the Board and Chief
Executive Officer and Director
of Staff Builders, Inc., a
supplemental staffing company,
since October 1999. From 1983
to the present, Mr. Savitsky
has served as Chairman of the
Board, Chief Executive Officer
and a Director of Staff
Builders, Inc. Mr. Savitsky
also served as President of
Staff Builders, Inc. from
November 1991 until November
30, 1998. Mr. Savitsky is the
brother of David Savitsky.
-31-
Dale R. Clift 49 Mr. Clift has served as 1999
President, Chief Operating
Officer and a Director of the
Company since October 1999.
From February 1998 to October
1999, Mr. Clift was the
Executive Vice President and
Chief Financial Officer of
Staff Builders, Inc. In
addition, from December 1998 to
October 1999, Mr. Clift was the
Chief Operating Officer of
Staff Builders, Inc. Mr. Clift
has served as Senior Vice
President, Financial Strategy
of Staff Builders, Inc. since
October 1999. 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.
David Savitsky 52 Mr. Savitsky has served as Vice 1999
Chairman, Government Relations
and a Director of the Company
since October 1999 for which he
spends approximately 25% of his
business time. From 1983 to
the present, Mr. Savitsky has
served as Secretary, Treasurer
and a Director of Staff
Builders, Inc. and as President
of Staff Builders, Inc. from
December 1, 1998 to the
present. In addition, Mr.
Savitsky served as Executive
Vice President of Staff
Builders, Inc. from December
1987 through November 1998 and
as Chief Operating Officer of
Staff Builders, Inc. from April
1991 through November 1998.
Mr. Savitsky is the brother of
Stephen Savitsky.
-32-
Jonathan J. Halpert, 55 Dr. Halpert has served as a 1999
Ph.D. Director of the Company since
October 1999. He is a
consultant in the area of
deinstitutionalization of the
mentally retarded and Chief
Executive Officer of the
Camelot Community Residence
Program. Dr. Halpert has
served as a Director of Staff
Builders, Inc., since August
1987.
Bernard J. Firestone, 51 Dr. Firestone has served as a 1999
Ph.D. Director of the Company since
October 1999. He is an
associate dean for curriculum
and personnel in the College of
Liberal Arts and Sciences and
professor of political science
at Hofstra University where he
has been teaching for 25 years.
Dr. Firestone has served as a
Director of Staff Builders,
Inc., since August 1987.
Willard T. Derr 43 Mr. Derr has served as Senior Not
Vice President, Chief Financial Applicable
Officer, Corporate Controller
and Treasurer of the Company
since October 1999. From March
1998 to October 1999, Mr. Derr
was the Senior Vice President
and Corporate Controller of
Staff Builders, Inc. From
February 1993 to March 1998,
Mr. Derr was the Vice President
and Controller of a principal
subsidiary of Staff Builders,
Inc. Mr. Derr currently
provides consulting services to
Staff Builders, Inc. on a
limited basis.
-33-
Sandra Parshall 52 Ms. Parshall has served as Not
Senior Vice President of Applicable
National Field Operations of a
principal subsidiary of the
Company since October, 1999.
From March 1998 to October
1999, Ms. Parshall was the
Senior Vice President of
Operations of a principal
subsidiary of Staff Builders,
Inc. From June 1995 to
September 1996, Ms. Parshall
served as a regional director
of operations of a principal
subsidiary of Staff Builders,
Inc.
Renee J. Silver 44 Ms. Silver has served as Vice Not
President and General Counsel Applicable
of the Company since October
1999. From November 1994 to
October 1999, Ms. Silver was
the Vice President and General
Counsel of Staff Builders, Inc.
Ms. Silver currently provides
consulting services to Staff
Builders, Inc. on a limited
basis.
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Company's Compensation and Stock Option Committee is
composed of Bernard J. Firestone and Jonathan J. Halpert.
No member of the Compensation Committee of the Board of
Directors of the Company was, during the fiscal year ended
February 29, 2000, an officer or employee of the Company or any
of its subsidiaries, or was formerly an officer of the Company or
any of its subsidiaries, or had any relationship requiring
disclosure pursuant to applicable rules and regulations of the
Securities and Exchange Commission. During the fiscal year ended
February 29, 2000, no executive officer of the Company served as
(i) a member of the compensation committee (or other board
committee performing equivalent functions) of another entity, one
of whose executive officers served on the Compensation Committee
of the Company, (ii) a director of another entity, one of whose
executive officers served on the Compensation Committee of the
Company, or (iii) a member of the compensation committee (or
other board committee performing equivalent functions) of
-34-
another entity, one of whose executive officers served as a
director of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers and persons who own
beneficially more than ten percent of the Common Stock to file with
the Securities and Exchange Commission initial reports of
beneficial ownership and reports of changes in beneficial ownership
of the Common Stock. Officers, directors and persons owning more
than ten percent of the Company's Common Stock, are required to
furnish the Company with copies of all such reports. To the
Company's knowledge, based on a review of copies of such reports
furnished to the Company and written representations from its
officers and directors that no other reports were required, during
the fiscal year ended February 29, 2000, all Section 16(a) filing
requirements applicable to its executive officers, directors and
persons owning beneficially more than ten percent of the Common
Stock were complied with on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
None of the Company's executive officers received compensation
from or on behalf of the Company prior to the Spin-off Date. The
following table sets forth the information for the last fiscal year
concerning the compensation paid by both the Company and Staff
Builders, Inc., combined, and the compensation paid solely by Staff
Builders, Inc. for the prior two fiscal years, to the Company's
Chief Executive Officer and four other executive officers of the
Company (the "Named Executive Officers"). The Named Executive
Officers who rendered services to Staff Builders, Inc. were, in
some cases, serving in capacities different from those in which
they currently provide services to the Company.
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<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Securities
Name and Principal Bonus Underlying
Position Year Salary Compensation Options(#)
<S> <C> <C> <C> <C>
Stephen Savitsky 2000 $494,277(1) --- 400,000(2)
Chairman and Chief 1999 $594,991 --- 1,383,691(5)
Executive Officer 1998 $520,571 --- 580,681(5)
Dale R. Clift 2000 $330,769(3) $100,000(4) 500,000(2)
President and Chief 1999 $244,781 $143,665 700,000(5)
Operating Officer 1998 $ 13,599 $ 18,000 ---
Sandra Parshall 2000 $203,346(6) $ 20,000(4) 100,000(2)
Sr. Vice President, 1999 $170,654 --- 75,000(5)
Operations of a 1998 $148,105 $ 25,000 ---
Principal Subsidiary
Willard T. Derr 2000 $160,000(7) $ 22,500(4) 75,000(2)
Chief Financial 1999 $139,476 --- 50,000(5)
Officer, Sr. Vice 1998 $116,224 --- ---
President, Corporate
Controller and
Treasurer
Renee J. Silver 2000 $171,000(8) --- 50,000(2)
Vice President and 1999 $161,398 --- 40,000(5)
General Counsel 1998 $150,456 --- ---
<FN>
(1) From March 1, 1999 to October 20, 1999, $393,441 was paid
by Staff Builders, Inc. and from October 21, 1999 to
February 29, 2000, $100,836 was paid by the Company. See
"Executive Compensation - Employment Agreements" and
"Certain Relationships and Related Transactions".
(2) Represents options to purchase shares of the Company's
Common Stock.
(3) From March 1, 1999 to October 20, 1999, $190,384 was paid
by Staff Builders, Inc. and from October 21, 1999 to
February 29, 2000, $140,385 was paid by the Company. See
"Executive Compensation - Employment Agreements".
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(4) Bonus paid by the Company.
(5) Represents options to purchase shares of Staff Builders,
Inc. Class A common stock. However, Ms. Parshall's rights
to exercise Staff Builders, Inc. options have expired.
(6) From March 1, 1999 to October 20, 1999, $128,807 was paid
by Staff Builders, Inc. and from October 21, 1999 to
February 29, 2000, $74,539 was paid by the Company. See
"Executive Compensation - Employment Agreements".
(7) From March 1, 1999 to October 20, 1999, $101,538 was paid
by Staff Builders, Inc. and from October 21, 1999 to
February 29, 2000, $58,462 was paid by the Company. See
"Executive Compensation - Employment Agreements".
(8) From March 1, 1999 to October 20, 1999, $107,885 was paid
by Staff Builders, Inc. and from October 21, 1999 to
February 29, 2000, $63,115 was paid by the Company. See
"Executive Compensation - Employment Agreements".
</FN>
</TABLE>
Option Grants Table
The following table sets forth information with respect to
the Named Executive Officers concerning the grant of stock options by
the Company during the fiscal year ended February 29, 2000. The
Company did not have during such fiscal year, and currently does not
have, any plans providing for the grant of stock appreciation rights
("SARs").
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
$ of Total
Number of Options Grant
Securities Granted to Exercise Date
Underlying Employees in or Expiration Present
Name Options Granted Fiscal Year Base Price Date Value(1)
<S> <C> <C> <C> <C> <C>
Stephen Savitsky 400,000(2) 21.2% $.10 10/20/04 $ 94,121
Dale R. Clift 500,000(2) 26.5% $.10 10/20/09 117,652
Sandra Parshall 100,000(2) 5.3% $.10 10/20/09 23,530
Willard T. Derr 75,000(2) 4.0% $.10 10/20/09 17,648
Renee J. Silver 50,000(2) 2.7% $.10 10/20/09 11,765
<FN>
(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
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with certain regulations of the Securities and Exchange
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, the Company used the following
assumptions: (a) expected volatility of approximately
80%; (b) risk-free rate of return of approximately
6.0%; (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 1999 Stock Option Plan. No options
were exercisable as of February 29, 2000.
</FN>
</TABLE>
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 exercised during the fiscal
year ended February 29, 2000, 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 the Company 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 2/29/00 At 2/29/00
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Stephen Savitsky --- --- 0/400,000 0/$48,000
Dale R. Clift --- --- 0/500,000 0/$60,000
Sandra Parshall --- --- 0/100,000 0/$12,000
Willard T. Derr --- --- 0/75,000 0/$9,000
Renee J. Silver --- --- 0/50,000 0/$6,000
</TABLE>
Employment Agreements
On October 20, 1999, the Company entered into a five-year
employment agreement with Stephen Savitsky under which Mr.
Savitsky as Chairman of the Board and Chief Executive Officer,
receives a base salary of $295,374 per year, plus annual cost
of living increases. Mr. Savitsky's employment agreement is
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
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provides that, upon a "change of control" of the Company and
his termination of employment other than for his conviction of
a felony, 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 is required to devote approximately one-half of his
business time to the affairs of the Company and his employment
agreement provides that during the term of his employment and
for a period of six months thereafter he will not compete with
the Company.
On October 20, 1999, the Company entered into a five-year
employment agreement with Dale R. Clift under which Mr. Clift,
as President and Chief Operating Officer of the Company,
receives a base salary of $400,000 per year. Mr. Clift is
required to devote all of his business time to the affairs of
the Company, subject to his limited duties as an employee of
Staff Builders, Inc. The remainder of Mr. Clift's employment
agreement is substantially similar to Mr. Savitsky's
employment agreement with the Company.
On October 20, 1999, the Company entered into a three-
year employment agreement with Willard T. Derr to serve as
Chief Financial Officer, Senior Vice President, Corporate
Controller and Treasurer of the Company. The employment
agreement provides for a base salary of $160,000 per annum and
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,
Inc. and he is prevented from competing with the Company
during the term of his employment and for six months
thereafter and from soliciting any employees or customers of
the Company during the term of his employment and for twelve
months thereafter.
On October 20, 1999, the Company entered into a three-
year employment agreement with Renee J. Silver to serve as
Vice President and General Counsel of the Company. The
employment agreement provides for a base salary of $170,000
per annum. The remainder of Ms. Silver's employment agreement
is substantially similar to Mr. Derr's employment agreement
with the Company.
On October 20, 1999, a principal subsidiary of the
Company entered into a 28 month employment agreement with
Sandra Parshall to serve as its Senior Vice President of
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Operations until February 28, 2002. The employment agreement
provides for a 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. The remainder of Ms.
Parshall's employment agreement is substantially similar to
Mr. Derr's and Ms. Silver's employment agreements with the
Company.
If a "change of control" were to occur prior to the next
anniversary date of the respective employment agreements of
Stephen Savitsky, Dale R. Clift, Willard T. Derr, Renee J.
Silver and Sandra Parshall 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 them
in the approximate amounts of $883,168, $1,196,000, $478,400,
$508,300 and $609,960, respectively. The lump sum severance
payments payable after the end of the calendar year or the
anniversary dates of the respective employment agreements, as
the case may be, would change as a result of changes in such
individuals' compensation. The term "change of control" as
used in the employment agreements with the Company's executive
officers refers to an event in which a person, corporation,
partnership, association or entity (i) acquires a majority of
the Company's outstanding voting securities, (ii) acquires
securities of the Company bearing a majority of voiting power
with respect to election of directors of the Company, or (iii)
acquires all or substantially all of the Company's assets.
Director Compensation
Each director who is not an officer or employee of the
Company receives 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 receive no fees for service on the
Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of May 22,
2000 with respect to the beneficial ownership of the Company's
Common Stock by (i) each person known to the Company who
beneficially owns more than 5% of any class of voting securities
of the Company, (ii) each director of the Company, (iii) the
Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.
-40-
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership(1)
Percentage of
Number of Outstanding
Name of Shares of Shares of
Beneficial Owner Common Stock Common Stock
<S> <C> <C>
Stephen Savitsky(2) 1,430,369(3)(4) 12.1
Dale R. Clift(2) 125,000(5) 1.1
David Savitsky(2) 1,388,268(6)(7) 11.8
Bernard J. Firestone (2) 1,050(8) *
Jonathan J. Halpert (2) - -
Sandra Parshall(2) 27,033(9) *
Willard T. Derr (2) 20,750(10) *
Renee J. Silver (2) 15,475(11) *
S Squared Technology Corp.(12) 1,086,750 9.2
Dimensional Fund Advisors, Inc. (13) 686,230 5.8
All executive officers and
directors as a group (8 persons) 3,007,945 25.0
<FN>
* Less than one percent
</FN>
</TABLE>
(1) "Beneficial ownership" is determined in accordance with
Rule 13-d-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
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 coversion of a convertible security.
Each beneficial owner's percentage of ownership and
percentage of votes is determined by assuming that
options that are held by such person (but not those
held by any other person) and which are exercisable
within 60 days of the date of this table have been
exercised. Except as indicated in the footnotes that
follow, shares listed in the table are held with sole
voting and investment power.
(2) The address of each of these persons is c/o Tender
Loving Care Health Care Services, Inc., 1983 Marcus
Avenue, Lake Success, New York 10042. 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 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.
-41-
(4) Includes options to purchase 100,000 shares of Common Stock
under the 1999 Stock Option Plan.
(5) Includes options to purchase 125,000 shares of Common Stock
under the 1999 Stock Option Plan.
(6) Includes 3,725 shares of Common Stock held by Mr. Savitsky's
wife, 161,300 shares of Common Stock held in various trusts,
with his wife as trustee, for the benefit of their three
children, and 80,600 shares of Common Stock held by one of
his children. Mr. Savitsky disclaims beneficial ownership of
these shares.
(7) Includes options to purchase 75,000 shares of Common
Stock under the 1999 Stock Option Plan.
(8) Includes 500 shares of Common Stock held by Dr.
Firestone's wife. Dr. Firestone disclaims beneficial
ownership of these shares.
(9) Includes options to purchase 25,000 shares of Common Stock
under the 1999 Stock Option Plan.
(10) Includes options to purchase 18,750 shares of Common Stock
under the 1999 Stock Option Plan.
(11) Includes options to purchase 12,500 shares of Common Stock
under the 1999 Stock Option Plan.
(12) S Squared Technology Corp. ("S Squared"), a registered
investment adviser, is located at 515 Madison Avenue, New
York, New York 10022. Includes 980,750 shares of Common
Stock for which S Squared has sole voting and sole
investment power and 106,000 shares of 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.
(13) 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
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.
-42-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stephen Savitsky and David Savitsky, who together own
approximately 20% of the Company's common stock, also own
approximately 20% of Staff Builders, Inc. Class A common
stock. Also, four of the Company's directors are also
directors of Staff Builders, Inc. and two of the Company's
directors are executive officers of Staff Builders, Inc. In
addition, two executive officers of the Company are employed
by Staff Builders, Inc. and two executive officers of the
Company are serving as consultants to Staff Builders, Inc.
Distribution Agreement
The Company and Staff Builders, Inc. have entered into a
distribution agreement (the "Distribution Agreement") which
provides 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 the
Company and Staff Builders, Inc. 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
TLCS. During the fiscal year ended February 29, 2000, the
Company incurred approximately $706,946 of distribution
expenses.
Tax Allocation Agreement
The Company and Staff Builders, Inc. have entered into a
tax allocation agreement (the "Tax Allocation Agreement") to
allocate certain tax liabilities between Staff Builders, Inc.
and the Company and their respective subsidiaries and to
allocate responsibilities with respect to tax returns. Under
the Tax Allocation Agreement, Staff Builders, Inc. and the
Company 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, Inc. 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, Inc. shall be responsible
for any such tax. In the Tax Allocation Agreement, the
-43-
Company represented 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 or equity interests in
TLCS following the Distribution other than issuances to
employees and consultants of TLCS 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 TLCS or other substantial change in the business
of TLCS following the Distribution.
Transitional Services Agreement
The Company and Staff Builders, Inc. have entered into an
agreement pursuant to which the Company furnishes various
administrative services to Staff Builders. The initial term
of the agreement is for 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, Inc. to TLCS for such services
are expected to be at the rate of 110% of the costs actually
incurred. During the period October 20, 1999 to February 29,
2000, the Company charged Staff Builders, Inc. approximately
$400,000 for services rendered pursuant to this agreement.
Employee Benefits Agreement
The Company and Staff Builders, Inc. have entered into an
employee benefits agreement (the "Employee Benefits
Agreement") which sets forth the employee benefit plan
arrangements that apply to those employees who became
employees of the Company as of the Distribution Date. The
Employee Benefits Agreement requires that the Company
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, Inc. prior to the Distribution Date. The Company
has assumed, 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 the Company's employees and any
former employee of the home health care business prior to the
Distribution. The Employee Benefits Agreement also provides
for certain cross-indemnities with respect to the TLSC 401 (k)
plan and the Staff Builder, Inc. 401 (k) plan.
Trademark License Agreement
The Company and Staff Builders, Inc. have entered into a
license agreement pursuant to which Staff Builders, Inc. will
license to the Company the right to use the service marks
-44-
Staff Builders and the Stick Figure Logo in connection with
home health care services. The license is 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 party materially breaches the
agreement. See "Business - Service Marks."
On October 20, 1999 the Company entered into a five-year
employment agreement with David Savitsky under which Mr.
Savitsky, as Vice Chairman, Government Relations of the
Company, receives an initial base salary of $110,000 per year,
plus annual cost of living increases. Mr. Savitsky's
employment agreement is 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 provides 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 is required to devote
approximately 20% of his business time to the affairs of the
Company and his employment agreement provides that during the
term of his employment and for a period of six months
thereafter he will not compete with the Company.
Stephen Savitsky and Staff Builders, Inc., are party to
a five-year employment agreement dated June 1, 1987, under
which Mr. Savitsky, as Chairman of the Board and Chief
Executive Officer of Staff Builders, Inc., receives a base
salary of $295,373 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 is required to devote approximately 50% of his
business time to the affairs of Staff Builders, Inc. The
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, Inc.
David Savitsky and Staff Builders, Inc. are party to an
employment agreement dated June 1, 1987 under which Mr.
Savitsky, as President of Staff Builders, Inc., receives a
base salary of $357,080 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
except that Mr. Savitsky is required to devote approximately
80% of his business time to the affairs of Staff Builders,
Inc.
-45-
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
shareholders, 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 fiscal year ended February 29, 2000,
the Company retained $46,132 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 $606,573 at February 29, 2000.
Effective August 23, 1993, Home Care Plus, Inc. ("Home
Care") acquired a home care franchise from the Company for
Bristol and Barnstable counties in Massachusetts. Edward
Teixeira, a current executive officer of the Staff Builders,
Inc. supplemental staffing operations and a former executive
officer of Staff Builders, Inc. prior to the Spin-off Date,
and his wife each owned 25% of the outstanding capital stock
of Home Care. In purchasing the franchise, Home Care paid a
$23,000 franchise fee, received a commitment to advance up to
$75,000 for expenses from the Company, issued a $75,000
promissory note (the "Home Care Note") to the Company with
respect to such advance, and entered into a franchise
agreement with the Company. The terms of the Home Care Note
required repayment of the $75,000 in 60 consecutive monthly
payments of principal and interest, computed at 3% over prime,
-46-
through August 1999. Effective April 1, 1998, the Home Care
Note was amended to provide for a three month payment deferral
through June 1998 and monthly principal and interest payments
of $1,280 from July 1998 through November 1999. The terms and
conditions of the franchise agreement between the Company and
Home Care were substantially similar to those for other
licensees of the Company, including the term of ten years with
a five-year renewal option.
Effective February 6, 1995, Home Care Plus Two, Inc.
("Home Care Two") acquired a home care franchise from the
Company for Worcester, Hampden and Franklin counties in
Massachusetts. Edward Teixeira, a current executive officer
of the Staff Builders, Inc. supplemental staffing operations
and a former executive officer of Staff Builders, Inc. prior
to the Spin-off Date, and his wife each owned 25% of the
outstanding capital stock of Home Care Two. During fiscal
1996, Home Care Two paid $29,500 for the purchase of this
franchise. The terms and conditions of the franchise
agreement between the Company and Home Care Two were
substantially similar to those for other licensees of the
Company, including the term of ten years with a five-year
renewal option. On November 27, 1996, Home Care Two received
a $50,000 advance for expenses for which a promissory note was
issued to the Company (the "Home Care Two Note"). The terms
of the Home Care Two Note required repayment of the $50,000 in
36 consecutive monthly payments of principal and interest,
computed at 3% over prime, through December 1999. Effective
April 1, 1998, the Home Care Two Note was amended to provide
for a three month payment deferral through June 1998 and
monthly principal and interest payments of $1,425 from July
1998 through March 2000. Mr. Teixeira guaranteed payment of
all amounts due under the Home Care Two Note.
Effective March 1, 1999, the Company repurchased the
franchise territories from Home Care and Home Care Two and the
franchise agreements were terminated in an arm's length
transaction. The purchase price paid by the Company was
$495,605, which included the assumption by the Company of
certain liabilities totaling $25,000, the forgiveness of
$160,605 in debt owed by Home Care and Home Care Two to the
Company and the issuance by the Company of two $155,000
promissory notes. Each promissory note bears interest at 8%
per annum and provides for 60 monthly payments of $3,142.84
commencing on April 1, 1999 and terminating on March 1, 2004.
The terms of the termination agreement are substantially
similar to those for other recently terminated franchises.
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. Franchisees are responsible for their
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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
franchisee. During the fiscal year ended February 29, 2000,
the Company paid (i) BCC $287,613 under the terms of its
franchise agreement, representing a 60% gross margin of
$1,200,460 less $46,132 and $38,500 of interest and principal,
respectively, withheld on the BCC Note and $828,215 withheld
for administrative expenses.
In order to facilitate the acquisition of a franchise by
a willing prospective franchisee, 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 franchisee. The Company's
transactions with BCC, Home Care and Home Care Two described
above are consistent with this business purpose and with
accommodations which have been granted to other, unaffiliated
franchisees.
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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) Financial Statements and Financial Statement Schedules
The financial statements, including the supporting schedules, filed
as part of the report, are listed in the Table of Contents to the
Consolidated Financial Statements.
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant for the quarter
ended February 29, 2000.
(C) EXHIBITS
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation
of the Company, filed with the Secretary of State
of Delaware on October 14, 1999. (A)
3.2 Amended and Restated By-laws of the Company. (A)
4.1 Specimen Common Stock Certificate. (B)
10.1 Distribution Agreement, dated as of October 20,
1999, between the Company and Staff Builders,
Inc., a Delaware corporation. (A)
10.2 Tax Allocation Agreement, dated as of October 20,
1999, between the Company and Staff Builders,
Inc., a Delaware corporation. (A)
10.3 Transitional Services Agreement, dated as of
October 20, 1999, between the Company and Staff
Builders, Inc., a Delaware corporation. (A)
10.4 Trademark License Agreement, dated as of October
20, 1999, between the Company and Staff Builders,
Inc., a Delaware corporation. (A)
10.5 Employee Benefits Agreement, dated as of October
20, 1999 between the Company and Staff Builders,
Inc., a Delaware corporation. (A)
10.6 Employment Agreement, dated as of October 20,
1999, between the Company and Stephen Savitsky. (A)
--------------------
See Notes to Exhibits
10.7 Employment Agreement, dated as of October 20,
1999, between the Company and David Savitsky. (A)
10.8 Employment Agreement, dated as of October 20,
1999, between the Company and Dale R. Clift. (A)
10.9 Employment Agreement, dated as of October 20,
1999, between the Company and Sandra Parshall. (A)
10.10 Employment Agreement, dated as of October 20,
1999, between the Company and Willard T. Derr. (A)
10.11 Employment Agreement, dated as of October 20,
1999, between the Company and Renee J. Silver. (A)
10.12 1999 Stock Option Plan. (B)
10.13 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and Stephen Savitsky.
10.14 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and David Savitsky.
10.15 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and Dale R. Clift.
10.16 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and Sandra Parshall.
10.17 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and Willard T. Derr.
10.18 Stock Option Agreement, dated as of October 20,
1999, under the Company's 1999 Stock Option Plan,
between the Company and Renee J. Silver.
10.19 Indemnification Agreement, dated as of October
20, 1999, between the Company and
Stephen Savitsky. (A)
10.20 Indemnification Agreement, dated as of October
20, 1999, between the Company and
David Savitsky. (A)
___________________
See Notes To Exhibits
10.21 Indemnification Agreement, dated as of October
20, 1999, between the Company and
Bernard J. Firestone. (A)
10.22 Indemnification Agreement, dated as of October
20, 1999, between the Company and
Jonathan J. Halpert. (A)
10.23 Indemnification Agreement, dated as of October 20,
1999, between the Company and Dale R. Clift. (A)
10.24 Indemnification Agreement, dated as of October 20,
1999, between the Company and Willard T. Derr. (A)
10.25 Indemnification Agreement, dated as of October 20,
1999, between the Company and Renee J. Silver. (A)
10.26 Executive Deferred Compensation Plan, effective
as of March 1, 1994. (B)
10.27 Master Lease Agreement, dated as of December 4,
1996, between the Company and Chase Equipment
Leasing, Inc. (C)
10.28 Forbearance and Acknowledgment Agreement, dated
as of February 22, 2000, between the Company's
subsidiaries, Staff Builders, Inc., a Delaware
corporation and Chase Equipment Leasing, Inc.
10.29 Stipulation and Settlement, dated January 14,
2000, between certain subsidiaries of the Company,
ATC Healthcare Services, Inc. and Banc One Leasing
Corporation.
10.30 Agreement of Lease, dated as of October 1, 1993,
between Staff Builders, Inc. (NY) and Triad III
Associates.
10.31 First Lease Amendment, dated October 28, 1998,
between Matterhorn USA, Inc. and Staff Builders,
Inc. (NY). (B)
10.32 License Agreement, dated as of December 16,1998,
between Matterhorn USA, Inc. and Staff Builders,
Inc. (NY). (B)
10.33 Guaranty agreement made by and between the
Company and Matterhorn USA, Inc. dated December 21,
1999. (D)
_____________________
See Notes To Exhibits
10.34 Sale and Subservicing Agreement by and between
Tender Loving Care Health Care Services, Inc. and
NPF XII, Inc., and National Premier Financial
Services, Inc. dated December 8, 1999. (D)
10.35 Asset Purchase Agreement, dated as of June 22,
1993, between Albert Gallatin Home Care, Inc. and
Albert Gallatin Visiting Nurse Association. (E)
10.36 Stock Purchase Agreement, dated as of August 30,
1995, between Staff Builders Services, Inc.,
Medvisit, Inc., and Roger Jack Pleasant. (F)
10.37 Confession of Judgment, dated January 27, 2000,
granted by a subsidiary of the Company and Staff
Builders, Inc., a Delaware corporation, to Roger
Jack Pleasant.
10.38 Asset Purchase and Sale Agreement, dated as of
September 1, 1995, between Staff Builders
Services, Inc. and Accredicare, Inc. (F)
10.39 Stock Redemption Agreement, dated as of March 18,
1997, between the Company and American HomeCare
Management Corp. (C)
10.40 Agreement and Release, dated February 28, 1997,
between Larry Campbell and Staff Builders, Inc.
(NY). (C)
10.41 Form of Home Health Care Services Franchise
Agreement. (G)
21 Subsidiaries of the Company.
24 Power of Attorney.
27 Financial Data Schedule.
______________________
See Notes To Exhibits
NOTES TO EXHIBITS
(A) Incorporated by reference to the Company's Form
10-Q for the quarterly period ended August 31,
1999 (File No. 0-25777), filed with the
Commission on October 20, 1999.
(B) Incorporated by reference to the Company's
Information Statement on Form 10 (File No. 0-
25777) filed with the Commission on October 13,
1999.
(C) 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.
(D) Incorporated by reference to the Company's Form
10-Q for the quarterly period ended November 30,
1999 (File No. 0-25777), filed with the
Commission on January 19, 2000.
(E) 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.
(F) 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.
(G) Incorporated by reference to Staff Builders,
Inc.'s Registration Statement on Form S-1 (File
No. 33-43728), dated January 29, 1992.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TENDER LOVING CARE HEALTH
CARE SERVICES, INC.
By: /S/ STEPHEN SAVITSKY
Stephen Savitsky
Chairman of the Board
and Chief Executive
Officer
Dated: June 2, 2000
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/S/ STEPHEN SAVITSKY Chairman of the Board June 2, 2000
Stephen Savitsky and Chief Executive
Officer (Principal
Executive Officer) and
Director
/S/ DALE R. CLIFT President and Chief June 2, 2000
Dale R. Clift Operating Officer
/S/ WILLARD T. DERR Chief Financial Officer, June 2, 2000
Willard T. Derr Sr. Vice President,
Corporate Controller,
and Treasurer
(Principal Financial and
Accounting Officer)
* Director June 2, 2000
David Savitsky
* Director June 2, 2000
Bernard J. Firestone,
Ph.D.
* Director June 2, 2000
Jonathan Halpert,
Ph.D.
* By: /S/ STEPHEN SAVITSKY
(Stephen Savitsky,
Attorney-in-Fact)
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