AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1997
REGISTRATION NO. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXTENDED FAMILY CARE CORPORATION
(Exact name of Registrant as specified in its charter)
One Old Country Road
Suite 335
Carle Place, New York 11514
(516) 248-2273
(Address, including zip code, telephone number and
area code of Registrant's principal executive offices)
NEW YORK 22-2210547 7361
(State or other (I.R.S. Employer (Primary Standard Industrial
jurisdiction of Identification Number) Classification Code Number)
incorporation or organization)
------------------------
MR. JOSEPH HELLER
VICE PRESIDENT
EXTENDED FAMILY CARE CORPORATION
One Old Country Road
Suite 335
Carle Place, New York 11514
(516) 832-7412
(Name, address including zip code, and telephone
number, including area code of agent for service)
Copies to:
RICHARD A. LIPPE, ESQ.
ALLAN GRAUBERD, ESQ.
MELTZER, LIPPE, GOLDSTEIN, WOLF
& SCHLISSEL, P.C.
190 WILLIS AVENUE
MINEOLA, NEW YORK 11501
-------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box.
<PAGE>
CALCULATION OF REGISTRATION FEE
TITLE OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED AMOUNT OF
SECURITIES REGISTERED(1) OFFERING MAXIMUM REGISTRATION
TO BE PRICE (2) AGGREGATE FEE
REGISTERED OFFERING PRICE(2)
Common Stock, par 5,602,000 .510999 $894,248 $270.95(3)
value $.01 per shares
share.........
(1) This Registration Statement relates to the Common Stock of the Registrant
issuable to holders of Common Stock of TPC Home Care Services, Inc.
("TPC"), a New York corporation ("TPC"), in the proposed merger of TPC with
the Registrant and the related transactions described herein.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
the book value of the TPC Common Stock to be exchanged in the merger, which
is $894,248 or $.510999 per share of TPC Common Stock computed
in accordance with Rule 457(f)(2).
(3) $50.50 of the registration fee was previously paid with the preliminary
proxy statement/prospectus filings made by the Registrant and TPC pursuant
to Rule 457(b).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
EXTENDED FAMILY CARE CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
JOINT PROXY STATEMENT/PROSPECTUS PURSUANT TO ITEM
501(b) OF REGULATION S-K.
<TABLE>
<CAPTION>
ITEM
NO FORM S-4 CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
- --- ---------------- -------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Facing Page of Registration Statement; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover Page; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information......................... Summary; Summary Historical Consolidated
Financial Data; Comparative Per Share Data;
Risk Factors; The EFCC Meeting; The TPC Meeting;
The TPC Merger
4. Terms of the Transaction..................... Summary; The TPC Merger; The TPC Merger Agreement;
Comparison of Rights of Holders of EFCC Common Stock
and TPC Common Stock
5. Pro Forma Financial Information.............. Summary; Summary Unaudited Pro Forma Condensed
Combined Financial Data; Unaudited Pro Forma
Condensed Combined Financial Statements
6. Material Contacts with the Company Being
Acquired..................................... The TPC Merger
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to Be
Underwriters................................. *
8. Interests of Named Experts and Counsel....... Legal Matters; Legal Matters; Experts
</TABLE>
<PAGE>
EXTENDED FAMILY CARE CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
JOINT PROXY STATEMENT/PROSPECTUS PURSUANT TO ITEM
501(b) OF REGULATION S-K.
(Cont'd)
<TABLE>
<CAPTION>
ITEM
NO. FORM S-4 CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
- --- ---------------- -------------------------------------------
<S> <C> <C>
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................... *
10. Information With Respect to S-3 Registrants.. *
11. Incorporation of Certain Information by
Reference.................................... *
12. Information With Respect to S-2 or S-3
Registrants.................................. *
13. Incorporation of Certain Information by
Reference.................................... *
14. Information With Respect to Registrants Other
Than S-3 or S-2 Registrants.................. Summary; Summary Historical Consolidated Financial
Data;Comparative Per Share Data; Comparative Market
Data; Business of EFCC and TPC; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Security Ownership of Certain
Beneficial Owners and Management; Management; Executive
Compensation for EFCC and TPC; Certain Relationships
and Related Transactions; Unaudited Pro Forma
Condensed Combined Financial Statements; Financial
Statements
15. Information With Respect to S-3 Companies.... *
16. Information With Respect to S-2 or S-3
Companies.................................... *
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies.................... Summary; Summary Historical Consolidated
Financial Data; Comparative Per Share Data;
Comparative Market Data; Business of EFCC and
TPC; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Ownership of Certain
</TABLE>
<PAGE>
EXTENDED FAMILY CARE CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
JOINT PROXY STATEMENT/PROSPECTUS PURSUANT TO ITEM
501(b) OF REGULATION S-K.
(Cont'd)
<TABLE>
<CAPTION>
ITEM
NO. FORM S-4 CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
- --- ---------------- -------------------------------------------
<S> <C> <C>
Beneficial Owners and Management; Executive
Officers; Certain Relationships and Related
Transactions; Unaudited Pro Forma Condensed
Combined Financial Statements; EFCC Financial
Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited.......... Outside Front Cover Page; Summary; The
Meetings; The Merger
19. Information if Proxies, Consents, or
Authorizations are not to be Solicited or
in an Exchange Offer......................... *
</TABLE>
- --------------
* Indicates that Item is not applicable or answer is in the negative.
<PAGE>
EXTENDED FAMILY CARE CORPORATION
ONE OLD COUNTRY ROAD
SUITE 335
CARLE PLACE, N.Y. 11514
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 8, 1997
To the Shareholders of
Extended Family Care Corporation:
A Special Meeting of Shareholders (the "EFCC Meeting") of Extended
Family Care Corporation, a New York corporation ("EFCC"), will be held at the
office of Arbor Home Health Care Holdings, LLC, 333 Earle Ovington Blvd.,
Uniondale, NY 11553 at 10:00 a.m., local time, on August 8, 1997, to consider
and act upon:
1. A proposal to approve and adopt the Agreement and Plan of
Merger dated as of March 18, 1997 (the "TPC Merger Agreement"),
between TPC Home Care Services, Inc. ("TPC") and EFCC, providing
for the merger (the "TPC Merger") of TPC with and into EFCC and
the transactions contemplated thereby; and
2. To transact such other business as may properly come
before the EFCC Meeting and any adjournments or postponements
thereof.
The Merger and other related matters are more fully described in the
accompanying Joint Proxy Statement/Prospectus and the appendices thereto, which
form a part of this Notice.
The Board of Directors of EFCC has fixed the close of business on July
7, 1997 as the record date (the "EFCC Record Date") for the determination of
shareholders entitled to notice of and to vote at the EFCC Meeting or any
adjournments or postponements thereof. Only shareholders of record at the close
of business on the EFCC Record Date are entitled to notice of and to vote at the
EFCC Meeting and any adjournments or postponements thereof. A list of
shareholders will be available for inspection at the offices of EFCC located at
One Old Country Road, Suite 335, Carle Place, New York 11514, at least 10 days
prior to the EFCC meeting.
AFTER CAREFUL CONSIDERATION, THE EFCC BOARD OF DIRECTORS HAS APPROVED
THE TPC MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE EFCC
BOARD BELIEVES THAT THE TERMS OF THE TPC MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE SHAREHOLDERS OF EFCC AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE
IN FAVOR OF THE TPC MERGER AT THE EFCC MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE EFCC MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED FORM OF PROXY. A RETURN ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE AND REQUIRES NO POSTAGE FOR MAILING IN THE UNITED
STATES.
By Order of the Board of Directors,
/s/ Robert Kohlmeyer
---------------------------
Robert Kohlmeyer, Secretary
<PAGE>
TPC HOME CARE SERVICES
ONE OLD COUNTRY ROAD
SUITE 335
CARLE PLACE, NEW YORK 11514
NOTICE OF A SPECIAL MEETING OF
SHAREHOLDERS To Be Held on August 8, 1997
To the Shareholders of
TPC Home Care Services, Inc.:
You are hereby notified that a Special Meeting of Shareholders (the
"TPC Meeting") of TPC Home Care Services, Inc., a New York corporation ("TPC"),
will be held at the offices of Arbor Home Health Care Holdings, LLC, 333 Earle
Ovington Blvd., Uniondale, NY 11553 at 10:00 a.m., local time, on August 8,
1997, to consider and act upon:
1. A proposal to approve and adopt the Agreement and Plan of
Merger dated as of March 18, 1997 (the "Merger Agreement"),
between TPC and Extended Family Care Corporation, a New York
corporation ("EFCC"), providing for the merger (the "TPC Merger")
of TPC with and into EFCC and the transactions contemplated
thereby; and
2. Such other business as properly may come before the TPC
Meeting or any adjournments or postponements thereof.
The Merger and other related matters are more fully described in the
accompanying Joint Proxy Statement/Prospectus and the appendices thereto, which
form a part of this notice.
The Board of Directors of TPC has fixed the close of business on July
7, 1997 as the record date (the "TPC Record Date") for the determination of
shareholders entitled to notice of and to vote at the TPC Meeting or any
adjournments or postponements thereof. Only shareholders of record at the close
of business on the TPC Record Date are entitled to notice of and to vote at the
TPC Meeting and any adjournments or postponements thereof. A list of such
shareholders will be available for inspection at the offices of TPC located at
One Old Country Road, Suite 335, Carle Place, New York 11514, at least ten days
prior to the TPC Meeting.
AFTER CAREFUL CONSIDERATION, THE TPC BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE TPC MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
TPC BOARD BELIEVES THAT THE TERMS OF THE TPC MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE SHAREHOLDERS OF TPC AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE
IN FAVOR OF APPROVING THE TPC MERGER AGREEMENT AT THE TPC MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE TPC MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED FORM OF PROXY. A RETURN ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE AND REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
/s/Robert Kohlmeyer
---------------------------
Robert Kohlmeyer, Secretary
<PAGE>
TPC HOME CARE SERVICES, INC.
EXTENDED FAMILY CARE CORPORATION
Joint Proxy Statement
For Meetings of Shareholders
To Be Held on August 8, 1997
---------------------------
EXTENDED FAMILY CARE CORPORATION
PROSPECTUS
--------------------------
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of TPC HOME CARE SERVICES, INC., a New York corporation ("TPC"),
and to the shareholders of EXTENDED FAMILY CARE CORPORATION, a New York
corporation ("EFCC"), in connection with the solicitation of proxies by their
respective Boards of Directors to be used at a Special Meeting of Shareholders
of TPC (the "TPC Meeting") and a Special Meeting of Shareholders of EFCC (the
"EFCC Meeting"), each of which is to be held on August 8, 1997, and at any
adjournments or postponements thereof.
At each of the TPC Meeting and EFCC Meeting, the respective shareholders of
EFCC and TPC will be asked to consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger dated as of March 18, 1997 (the "TPC
Merger Agreement"), between EFCC and TPC, providing for the merger (the "TPC
Merger") of TPC with and into EFCC, with EFCC as the surviving corporation. Upon
consummation of the TPC Merger, each share of Common Stock, par value, $.01 per
share, of TPC (the "TPC Common Stock") outstanding immediately prior to the
consummation of the TPC Merger, other than TPC Common Stock owned by EFCC, will
be converted into the right to receive 18.745545 shares (the "TPC Exchange
Ratio") of Common Stock, par value $.01 per share of EFCC (the "EFCC Common
Stock"). TPC Common Stock owned by EFCC (which, as of July 28, 1997, owned
approximately 83% of the outstanding TPC Common Stock) will be cancelled as a
result of the TPC Merger and no EFCC Common Stock will be issued to EFCC in
respect thereof. Certificates representing TPC Common Stock previously issued to
TPC shareholders do not give effect to a 1:4 Reverse Stock Split which occurred
in 1985. See the "TPC MERGER AGREEMENT - Conversion of Securities." Thus,
shareholders of TPC actually own only one share of TPC Common Stock for every
four shares for which they possess a TPC share certificate. Since all TPC
shareholders are similarly situated, there is no substantive effect from this
discrepancy. See "COMPARISON OF RIGHTS OF HOLDERS OF EFCC COMMON STOCK AND TPC
COMMON STOCK - TPC Common Stock." A copy of the TPC Merger Agreement is attached
as Appendix A to this Joint Proxy Statement/Prospectus and is incorporated
herein by reference.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE TPC MERGER DESCRIBED HEREIN
AND THE SECURITIES OFFERED HEREBY.
EFCC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on
Form S-4 under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the EFCC Common Stock to be issued pursuant to the
Merger Agreement. This Joint Proxy Statement/Prospectus constitutes the
Prospectus of EFCC (hereinafter, the "Joint Proxy/Prospectus") filed as
part of the Registration Statement. All information contained herein with
respect to EFCC has been furnished by EFCC. All information contained
herein with respect to TPC has been furnished by TPC. All information
contained herein with respect to STAR (as defined below) has been furnished
by STAR. EFCC, which owns approximately 83% of the voting stock of TPC, and
persons holding approximately 80% of the voting stock of EFCC, will vote
their respective shares in favor of the TPC Merger. These percentages
exceed the requirements of the New York Business Corporation Law for
approval of the TPC Merger by the shareholders of EFCC and TPC.
Accordingly, approval and adoption of the TPC Merger Agreement by the
shareholders of EFCC and TPC is assured.
<PAGE>
The EFCC Common Stock is quoted in the over-the-counter market on the
NASDAQ Bulletin Board and on the "Pink Sheets," as reported by the National
Quotations Bureau, Inc. On July 22, 1997, the high and low bid prices for a
share of EFCC Common Stock are $.08 and $.08, respectively. Based on the average
of such high and low bid prices, the maximum aggregate value of the transactions
contemplated by the Merger Agreement is $448,160.
Based on the TPC Exchange Ratio and based upon the average of the high
and low bid prices of EFCC Common Stock on July 22, 1997, the dollar
value of the EFCC Common Stock to be received for each share of TPC Common Stock
exchanged is $1.499645. See also "Summary - The Star Merger".
Accompanying this Joint Proxy/Prospectus is a Joint Proxy
Statement/Prospectus (the "STAR Proxy/Prospectus") of Star Multi Care Services,
Inc., a New York corporation ("STAR"). EFCC and STAR are parties to a Merger
Agreement dated January 3, 1997 (the "STAR Merger Agreement"), pursuant to which
EFCC will be merged with and into an acquisition subsidiary of STAR (the "STAR
Merger"). See the "TPC MERGER AGREEMENT - The STAR Merger". Those shareholders
of TPC who do not validly perfect dissenter's rights with respect to the TPC
Merger ("Participating TPC Shareholders") will become shareholders of EFCC by
virtue of the TPC Merger. All persons who are or become shareholders of EFCC as
of the record date for approval of the STAR Merger by shareholders of EFCC (the
"STAR Record Date") will be entitled, as set forth in the STAR Proxy/Prospectus,
to vote their shares in favor of, or to dissent from, the STAR Merger. See "THE
TPC MERGER AGREEMENT - The STAR Merger." Any shareholder of TPC who validly
perfects and does not withdraw dissenter's rights with respect to the TPC
Merger, will not be entitled to receive consideration payable to EFCC
Shareholders in the STAR Merger. See "APPRAISAL RIGHTS OF DISSENTING
SHAREHOLDERS." Persons holding approximately 68% of the voting stock of EFCC,
after giving effect to the TPC Merger, have already committed to vote their
respective shares of EFCC in favor of the STAR Merger, which exceeds the
requirements of the New York Business Corporation Law with respect to approval
of the EFCC shareholders of the STAR Merger. Thus, approval by the shareholders
of EFCC of the STAR Merger is assured. To EFCC's knowledge, sufficient votes of
the STAR shareholders to approve the STAR Merger have not yet committed to such
approval; however, Stephen Sternbach, who currently owns 863,262 shares of STAR
Common Stock, or 20.77% of STAR's outstanding voting stock, has given EFCC his
proxy to vote such shares in favor of the STAR Merger.
After giving effect to both the TPC Merger and the STAR Merger, each
share of TPC common stock will be exchanged for a combination of STAR stock and
cash, with a value of approximately $3.614141 per share of TPC common stock,
which is equivalent to $.1928 per share of EFCC common stock exchanged in the
STAR Merger. TPC stock certificates do not give effect to a 1:4 reverse stock
split, so the amount of consideration payable pursuant to the STAR Merger per
share of TPC common stock as represented by a TPC stock certificate is 25% of
the $3.614141 specified above, or $.903532.
THE SECURITIES ISSUABLE PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF
PROXY ARE FIRST BEING MAILED OR DELIVERED TO THE SHAREHOLDERS OF EFCC AND TPC ON
OR ABOUT JULY 29, 1997.
The date of this Joint Proxy Statement/Prospectus is July 29, 1997.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
AVAILABLE INFORMATION....................................................... 4
SUMMARY..................................................................... 5
General..................................................................... 5
EFCC AND TPC................................................................ 5
STAR........................................................................ 7
The Meetings................................................................ 9
The EFCC Meeting............................................................ 9
The TPC Meeting ............................................................ 10
The TPC Merger.............................................................. 10
Conversion of Securities.................................................... 10
Recommendations of the Boards of Directors.................................. 11
Opinion of Financial Advisor................................................ 12
Effective Time of the TPC Merger............................................ 12
Conditions of the Merger; Termination...................................... 12
Surrender of TPC Share Certificates......................................... 12
Certain Federal Income Tax Consequences................................... 12
Accounting Treatment of EFCC/TPC Merger..................................... 13
Continuation of Indemnification Provisions.................................. 13
Dissenters'Rights........................................................... 13
Committed Votes to Approve TPC Merger Agreement............................. 13
Resales of EFCC Common Stock................................................ 13
Risk Factors................................................................ 13
The STAR Merger............................................................. 14
Summary Historical Consolidated Financial Data............................ 14
EFCC Summary Historical Consolidated Financial Data......................... 15
STAR Summary Historical Consolidated Financial Data......................... 16
Summary Unaudited Pro Forma Condensed Combined Financial Data............... 17
RISK FACTORS................................................................ 18
Risks Relating to an Investment in EFCC..................................... 18
Health Care Reform.......................................................... 18
Regulatory Environment; Dependence on Medicaid Reimbursement.............. 18
Competition................................................................. 19
Shortage of Qualified Personnel............................................ 20
Third Party Payors.......................................................... 20
Payment of the Special Dividend--Possible Need For Additional Financing..... 20
Liability for Services; Liability Insurance................................ 20
No Cash Dividends........................................................... 21
Risks Relating to the Merger................................................ 21
Substantial Influence by Arbor.............................................. 21
Past Non-Compliance with Securities Laws.................................... 21
No Update of the Telesis Opinion............................................ 21
Fixed TPC Exchange Ratio.................................................... 22
Federal Income Taxes........................................................ 22
Dilution.................................................................... 22
<PAGE>
TABLE OF CONTENTS (Cont'd)
--------------------------
Page
----
Possible Adverse Impact if STAR Merger is not Consummated.............. 22
Interests of Certain Persons in the TPC Merger;
Possible Conflict of Interest.................................... 22
COMPARATIVE PER SHARE DATA.................................................. 23
COMPARATIVE MARKET DATA..................................................... 24
THE TPC MEETING............................................................. 25
General............................................................ 25
Matters to Be Considered at the TPC Meeting....................... 25
TPC Record Date.................................................... 25
Proxies............................................................ 25
Quorum............................................................. 26
Vote Required...................................................... 26
THE EFCC MEETING............................................................ 27
General............................................................ 27
Matters to be Considered at the EFCC Meeting....................... 27
EFCC Record Date................................................... 27
Proxies............................................................ 27
Quorum............................................................. 28
Vote Required...................................................... 28
THE TPC MERGER.............................................................. 29
Background of the TPC Merger....................................... 29
Background of the STAR Merger...................................... 29
EFCC's Reasons for the STAR Merger; Recommendation of the
EFCC Board................................................... 32
Financial Advisor; Fairness Opinion for the STAR Merger............ 34
Consideration of the TPC Merger.................................... 38
TPC's Reasons for the TPC Merger; Recommendation of the TPC Board.. 38
EFCC's Reasons for the TPC Merger; Recommendation of the EFCC Board 39
Fairness Opinion for the TPC Merger................................ 39
Certain Federal Income Tax Consequences............................ 40
Accounting Treatment of EFCC/TPC Merger............................ 41
Regulatory Approvals............................................... 41
Resale Restrictions................................................ 41
THE TPC MERGER AGREEMENT.................................................... 42
The Merger......................................................... 42
Effective Time of the TPC Merger................................... 42
Conversion of Securities........................................... 42
Dissenters Rights.................................................. 43
Exchange of Certificates........................................... 43
Management after the Merger........................................ 44
Conditions of the Merger........................................... 44
Termination and Amendment.......................................... 45
The STAR Merger.................................................... 45
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS................................. 46
COMPARISON OF RIGHTS OF HOLDERS OF EFCC COMMON STOCK AND TPC COMMON STOCK... 50
General............................................................ 50
EFCC Capital Stock................................................. 50
TPC Common Stock................................................... 51
<PAGE>
TABLE OF CONTENTS (Cont'd)
--------------------------
Page
----
Voting Rights...................................................... 51
Generally.......................................................... 51
Election of Directors.............................................. 51
Other Transactions................................................. 51
Amendments to Certificate of Incorporation......................... 52
Special Meetings................................................... 52
Shareholders' Action Without a Meeting............................. 52
Preemptive Rights.................................................. 52
Dividends.......................................................... 52
Issuance of Rights or Options to Purchase Shares
to Directors, Officers and Employees.......................... 53
Loan to Directors.................................................. 53
Classification of the Board of Directors........................... 53
Duties of Directors................................................ 53
Interested Director Transactions................................... 53
Limitations on Directors' Liability................................ 54
Potential Issuances of Preferred Stock............................. 54
Indemnification of Directors and Officers.......................... 55
Removal of Directors............................................... 55
BUSINESS OF EFCC AND TPC.................................................... 55
Consulting Agreement............................................... 57
Management Agreement............................................... 57
Home Care Services................................................. 58
Procedure for a Typical Home Care Placement........................ 58
Care Givers........................................................ 58
ORGANIZATIONAL STRUCTURE.................................................... 59
Branch Description................................................. 59
Customers.......................................................... 59
Percent of Total TPC Revenues by Type of Customer.................. 60
Percent of Total TPC Revenues by State............................. 60
TPC Medicaid Revenues as Percentages of Total State Revenues....... 60
Governmental Regulation and Licensing.............................. 60
Competitive Conditions............................................. 61
Marketing and Sales................................................ 62
Liability Insurance................................................ 62
Employees.......................................................... 62
Securities Filings................................................. 62
Forward Looking Statements - Cautionary Factors.................... 63
Description of Property............................................ 63
Bankruptcy Proceedings............................................. 63
The Special Dividend............................................... 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................... 64
Overview........................................................... 64
Industry Information............................................... 64
<PAGE>
TABLE OF CONTENTS (Cont'd)
--------------------------
Page
----
Results of Operations.............................................. 65
Liquidity and Capital Resources.................................... 65
Overview........................................................... 66
Results of Operations.............................................. 66
Inflation and Seasonality.......................................... 67
Liquidity and Capital Resources.................................... 67
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 67
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS............. 68
Current Directors and Officers..................................... 68
Former Directors and Officers...................................... 68
EXECUTIVE COMPENSATION FOR EFCC AND TPC..................................... 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 72
LEGAL MATTERS............................................................... 75
PROPOSALS FOR ANNUAL MEETING................................................ 75
EXPERTS..................................................................... 75
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................. 77
INDEX TO FINANCIAL STATEMENTS............................................... 86
APPENDIX A - Merger Agreement between EFCC and TPC
APPENDIX B - Opinion of Telesis Mergers & Acquisitions, Inc.
(1) in connection with the TPC Merger
(2) in connection with the STAR Merger
APPENDIX C - Section 623 and Section 910 of The New York Business Corporation
Law
<PAGE>
AVAILABLE INFORMATION
---------------------
EFCC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as reports, proxy statements and
other information filed by EFCC can be inspected and copied at the Commission's
Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the public reference facilities maintained by the
Commission at its regional offices located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained from
the Commission at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic
registration statements filed through the Commission's Electronic Data
Gathering, Analysis and Retrieval system are publicly available through the
Commission's Website (http://www.sec.gov).
EFCC has filed the Registration Statement with the Commission covering
the EFCC Common Stock to be issued pursuant to the TPC Merger Agreement. As
permitted by the rules and regulations of the Commission, this Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. For further information, please
refer to the Registration Statement, including the exhibits thereto. Statements
contained in this Joint Proxy Statement/Prospectus relating to the contents of
any contract or other document referred to herein are not necessarily complete,
and reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
All information concerning EFCC and TPC contained in this Joint Proxy
Statement/Prospectus has been furnished by EFCC. All information concerning STAR
contained in this Joint Proxy Statement/Prospectus has been furnished by STAR.
No person is authorized to provide any information or to make any representation
with respect to the matters described in this Joint Proxy Statement/Prospectus
other than those contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized by EFCC, TPC,
STAR or any other person. This Joint Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of any offer to purchase, any
securities, or a solicitation of a proxy, in any jurisdiction in which, or to or
from any person to or from whom, it is unlawful to make such an offer or
solicitation. Neither the delivery of this Joint Proxy Statement/Prospectus nor
any distribution of securities hereunder shall under any circumstances be deemed
to imply that there has been no change in the assets, properties or affairs of
EFCC, TPC or STAR since the date hereof or that the information set forth herein
is correct as of any time subsequent to the date hereof.
<PAGE>
SUMMARY
-------
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained
elsewhere in this Joint Proxy Statement/Prospectus and the appendices hereto.
All shareholders are urged to read this Joint Proxy Statement/Prospectus and its
appendices before voting on the matters discussed herein. As used herein, the
term "EFCC" refers to EXTENDED FAMILY CARE CORPORATION, the term "TPC" refers to
TPC HOME CARE SERVICES, INC. and the term "STAR" refers to STAR MULTI CARE
SERVICES, INC. References to EFCC and STAR include, unless the context otherwise
requires, their respective subsidiaries.
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of EFCC in connection with the solicitation of proxies by the Board
of Directors of EFCC, for use at a Special Meeting of Shareholders of EFCC (the
"EFCC Meeting") which is scheduled to be held on August 8, 1997. This
Joint Proxy Statement/Prospectus is also being furnished to shareholders of TPC
in connection with the solicitation of proxies by the Board of Directors of TPC
for use at a Special Meeting of Shareholders of TPC (the "TPC Meeting") which is
also scheduled to be held on August 8, 1997 immediately prior to the EFCC
Meeting. At the TPC Meeting and the EFCC Meeting, the shareholders of TPC and
the shareholders of EFCC will be asked to consider and vote upon the proposed
merger (the "TPC Merger") of TPC with and into EFCC, pursuant to the terms of
the Agreement and Plan of Merger dated March 18, 1997 between TPC and EFCC (the
"TPC Merger Agreement"). The TPC Merger Agreement is included in this Joint
Proxy Statement/Prospectus as Appendix A. In connection with the TPC Merger, all
of the outstanding shares of Common Stock, $.01 par value per share of TPC (the
"TPC Common Stock"), other than those shares owned by EFCC, will be exchanged
for shares of Common Stock, $.01 par value per share, of EFCC (the "EFCC Common
Stock") at the rate of 18.745545 shares of EFCC Common Stock (the "TPC Exchange
Ratio") for each share of TPC Common Stock. TPC Common Stock owned by EFCC will
be cancelled as a result of the TPC Merger and no EFCC Common Stock will be
issued to EFCC in respect thereof.
EFCC AND TPC
Extended Family Care Corporation ("EFCC") is in the business of
providing home health care services, principally personal hygiene, homemaking,
general patient safety, and to a lesser extent nursing services ("Home Care"),
primarily through contracts with government agencies under the Medicaid program.
EFCC is a holding company which derives 100 percent of its revenues from the
operation of TPC Home Care Services, Inc. ("TPC"), an 83 percent owned
subsidiary.
EFCC was incorporated in New York on May 10, 1978 under the name M.A.E.
Enterprises, Inc. In 1980, the name of this corporation was changed to Cosmetic
Sciences, Inc.; which was changed again in 1996 to Extended Family Care
Corporation, its current name.
In 1980, EFCC completed its initial public offering of 1.5 million
shares of common stock, raising gross proceeds of $1.5 million. Between 1980 and
1985, EFCC engaged in research, development, marketing and distribution of
medical devices and cosmetics. These products never proved to be commercially
viable, and by the mid-1980's the development of these products were
discontinued and the subsidiaries through which these businesses were operated
were dissolved.
In August 1984, EFCC entered the Home Care industry by acquiring all of
the outstanding shares of TPC, which at the time was providing Home Care
services in New York and New Jersey. In December 1984, the then shareholders of
EFCC received as a dividend approximately 17 percent of the outstanding common
stock of TPC (the "TPC Dividend"), leaving TPC as an approximately 83 percent
owned subsidiary of EFCC.
On April 25, 1985, TPC entered into an agreement to acquire all of the
outstanding stock of A-Round the Clock Nursing Services, Inc. ("A-Round the
Clock"), a home health care company doing business in New Jersey. In December
1985, a Registration Statement was declared effective in anticipation of an
initial public offering by TPC. Proceeds from this offering were to provide the
funding for the acquisition of A-Round the Clock. However, the underwriter
terminated the offering, and TPC was unable to find another underwriter to
complete the offering. TPC was forced to borrow the funds required to consummate
the acquisition of A-Round the Clock. The burden of the additional debt service,
coupled with the increased demand for working capital, further reduced cash
flow. Facing bank foreclosure of liens upon TPC's accounts receivable,
significant tax arrears and cash shortfalls, EFCC and TPC filed a petition under
Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court, Southern
District, New York, in August 1986.
<PAGE>
Following the filing of the bankruptcy petition, TPC continued to
operate its Home Care business as a debtor in possession. In July 1987, a
secured lender foreclosed its lien on the common stock of A-Round the Clock, and
took possession and control of the business of A-Round the Clock. TPC continued
to provide Home Care services with operating branches in Hempstead, New York and
Hackensack, New Jersey.
In 1992, the Company's headquarters were moved from Hempstead, New York
to Carle Place, New York. In March 1994, TPC opened a branch office in
Irvington, New Jersey, which moved in March 1996 to East Orange. In February
1995, a satellite office of the Hackensack branch office was opened in Paterson,
New Jersey, which relocated to Clifton, New Jersey on or about April 15, 1996.
In August 1995, a TPC satellite office was opened in Jersey City, New Jersey,
which office was sold in December, 1996. In March 1996, a satellite office was
opened in Elizabeth, New Jersey, which office was closed in September, 1996. In
May 1996, a branch office was opened in Allentown, Pennsylvania. In the first
quarter of 1997, the staff and patient files of TPC's East Orange office and
Hempstead office were moved into existing facilities of STAR; and the Hackensack
office was closed and integrated into EFCC's Clifton office.
In October 1993, and in connection with EFCC's Amended Plan of
Reorganization adopted in 1992, an investment group, COSS Holding Corp.
("Coss"), invested cash of $250,000 in EFCC and thereby became the holder of
approximately 66 percent (at that time), or 12,749,658 shares, of EFCC's Common
Stock. See "Bankruptcy Proceedings."
On October 31, 1995, EFCC, TPC and Coss entered into an agreement with
Arbor Home Healthcare Holdings, LLC. ("Arbor"), pursuant to which EFCC granted
Arbor the option to purchase 13 million newly issued shares of its common stock
for $1.3 million ($.10 per share). Mr. Ivan Kaufman ("Kaufman") owns 99% of the
membership interest in Arbor. Arbor exercised this option in two installments,
on August 21, 1996 and October 31, 1996, thus becoming the owner of
approximately 40% of EFCC's outstanding stock. In addition, in June 1996, Coss
placed its holdings of EFCC's common stock in a voting trust, providing Arbor
the right to direct the voting of such shares and to thus elect a majority of
the board of directors of EFCC. EFCC, Coss and Arbor have also entered into
various agreements relating to Coss' holdings of EFCC's common stock, but these
agreements, as well as the voting trust arrangement as to Coss' shares, will
terminate upon the completion of the STAR Merger. See "THE TPC MERGER AGREEMENT
- - The STAR Merger" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
On October 31, 1995, EFCC entered into an agreement with Arbor
Management, LLC (in which Kaufman owns a 99% interest), for a two year term
pursuant to which EFCC will pay $7,500 a month to Arbor Management, LLC for
management services, including accounting, finance, human resources and
marketing, rendered to EFCC. This agreement will also terminate as of the
completion of the STAR Merger.
On January 3, 1997, EFCC entered into the STAR Merger Agreement. See
"THE TPC MERGER AGREEMENT - The STAR Merger." Pursuant to the STAR Merger
Agreement, EFCC and STAR also entered into the Consulting Agreement and
Management Agreement. Pursuant to these agreements, EFCC has permitted STAR to
administer certain of its operations. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Consulting Agreement and Management Agreement."
On January 21, 1997, EFCC paid a special dividend to its shareholders
of record as of January 13, 1997. The Special Dividend was paid in connection
with the STAR Merger transaction. See "RISK FACTORS - Payment of Special
Dividend -- Possible Need for Additional Financing" and "BUSINESS OF EFCC AND
TPC - The Special Dividend."
EFCC's and TPC's current officers and directors are as follows:
<TABLE>
EFCC TPC
---- ---
<S> <C> <C>
Paul Elenio Director Director
Joseph Heller Director\Vice-President\Acting Director\Acting Chief
Chief Executive Officer\ Executive Officer
Principal Financial Officer\
Controller
Robert Kohlmeyer Director\Secretary\Treasurer Director\Secretary\Treasurer
</TABLE>
<PAGE>
Messrs. Heller and Elenio are affiliated with Arbor and Mr. Kohlmeyer
is a stockholder and director of Coss. See "DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
STAR
----
The description of STAR which follows is provided herein because
Participating TPC Shareholders and all EFCC Shareholders, after the TPC Meeting
and EFCC Meeting, and assuming the TPC Merger is approved by the respective
shareholders of EFCC and TPC and is otherwise completed in accordance with law,
will be entitled to participate in a meeting of EFCC shareholders to vote on a
merger of EFCC with and into an acquisition subsidiary of STAR. See "THE TPC
MERGER AGREEMENT - The STAR Merger." See also, generally, the "STAR
Proxy/Prospectus."
STAR is in the business of providing placement services of registered
and licensed nurses and home health aides to patients for care at home and to a
lesser extent temporary health care personnel recruiting to hospitals and
nursing homes ("Hospital Staffing"). In addition, STAR maintains registries of
registered nurses, licensed practical nurses, nurses' aides, certified home
health aides and certified personal care workers from which personnel are
recruited on a per diem basis to meet the requirements of STAR's clients.
Prior to its acquisition by present management in 1987, STAR's business
related primarily to providing private duty nurses to patients in hospitals and
staffing to hospitals. Under its current management, STAR expanded its Hospital
Staffing arrangements to nursing homes and additional hospitals to provide
licensed nurses on a per diem basis for general staff. In 1988, STAR further
extended its Hospital Staffing business to include providing licensed practical
nurses and nurses' aides. In 1989, STAR began providing Home Care services in
New York City pursuant to a license from the New York State Health Department.
In 1990, STAR expanded its Home Care services to include transportation of
patients from hospital to home in ambulettes, arrangements to purchase and
supply equipment and pharmaceuticals as prescribed by the patient's physicians,
and home infusion care. In 1991, STAR was licensed by the New York State
Department of Health to operate an office in Nassau County, New York.
In 1992, STAR expanded its existing Home Care business through the
acquisition of certain assets from Unity Healthcare Holding Company, Inc. and
its subsidiaries ("Unity"), including contract rights to provide Home Care
services through various hospitals, community agencies and other institutional
health care providers. These contract rights complemented the existing home
health care businesses of STAR in geographic areas such as New Jersey and New
York where STAR already operated. In addition, in these locations, STAR obtained
from Unity client referral lists to further expand existing operations.
In addition to expanding STAR's existing regional business, the Unity
acquisition added new operations to STAR in new geographic locations. STAR
acquired Unity's Florida operations, which included certification to receive
reimbursement from Medicare and Medicaid in Broward and Dade Counties. Most of
such Medicare and Medicaid reimbursed operations are located in Dade County.
STAR also acquired the assets representing Unity's operations in Florida that do
not have Medicare and Medicaid certification, but which operate under state
license.
In 1993, STAR further expanded its existing Home Care business through
the acquisition of certain assets of DSI Health Care Services, Inc. ("DSI"),
including contract rights to provide Home Care services through various
hospitals, community agencies and other institutional health care providers.
These contract rights complemented the existing Home Care business of STAR in
the Long Island, New York area.
In May 1995, STAR acquired certain assets of Long Island Nursing
Registry, Inc. ("LINR") thereby further expanding its Home Care business. LINR
provided nursing and other skilled health care services with both Medicaid and
Non-Medicaid reimbursement eligibility compatible with the business of STAR.
LINR maintains offices and does business under the STAR name in the Long Island
area and as "Comprehensive Care America" in the Syracuse area. The acquired
assets included all of the fixed assets, certain of the contract and
intellectual property rights and all of the records, lists, files and books
(including certain customer and personnel lists) with respect to or in
connection with the health care business conducted by LINR. The acquisition
expanded STAR's market area into Suffolk County, augmented its presence in
Nassau County and gave it significant market share in central New York.
<PAGE>
On August 23, 1996, STAR and AMSERV HEALTHCARE INC. ("Amserv")
consummated a merger whereby STAR acquired control of Amserv and Amserv became a
wholly owned subsidiary of STAR. Amserv operates in a one-industry segment as a
health care service company. Amserv provides Home Care services to individuals
from its six branch offices in New Jersey and Ohio. Home Care services provided
by Amserv include personal care, such as assistance with the activities of daily
living (e.g., eating, walking and grooming), and skilled nursing services, such
as wound care and assistance with medications, injections and patient education.
Historically, a greater portion of STAR's revenues have been derived
from Home Care services and a lesser portion of such revenues have been derived
from Hospital Staffing. STAR believes that this is a result of changing social
and economic attitudes toward the de-institutionalization of patients as well as
STAR's changing customer base.
STAR's principal executive offices are located at 99 Railroad Station
Plaza, Hicksville, New York 11801, and its telephone number is (516) 938-2016.
THE MEETINGS
THE EFCC MEETING
The EFCC Meeting will be held on August 8, 1997 at 10:00 a.m., local
time, at the offices of Arbor Home Healthcare Holdings, LLC, 333 Earle Ovington
Blvd., 9th floor, Uniondale, New York 11553. At the EFCC Meeting, including any
adjournments or postponements thereof, the shareholders of EFCC will consider
and vote on (i) a proposal to approve and adopt the TPC Merger Agreement and the
transactions contemplated thereby and (ii) such other business as properly may
come before the EFCC Meeting.
The close of business on July 7, 1997, has been fixed as the record
date (the "EFCC Record Date") for the determination of the shareholders of EFCC
entitled to notice of and to vote at the EFCC Meeting. Holders of EFCC Common
Stock are entitled to one vote for each share of EFCC Common Stock held by them.
The holders of a majority of the outstanding shares of EFCC Common Stock,
present either in person or by properly executed proxies, will constitute a
quorum at the EFCC Meeting.
The affirmative vote of holders of two-thirds of the outstanding shares
of EFCC Common Stock entitled to vote thereon is required to approve and adopt
the TPC Merger Agreement. As of the EFCC Record Date, 32,000,226 shares of EFCC
Common Stock were issued and outstanding, of which approximately 80.5% (before
giving effect to the TPC Merger) and 68% (after giving effect to the TPC Merger)
are beneficially owned by Arbor, which has the power to vote or direct the
voting as to all of such shares, and which intends to vote FOR the approval and
adoption of the TPC Merger Agreement and the transactions contemplated thereby.
This percentage is sufficient under New York law to approve the TPC Merger
Agreement and the transactions contemplated thereby on behalf of the
shareholders of EFCC. See "THE EFCC MEETING - Vote Required."
THE TPC MEETING
The TPC Meeting will be held on August 8, 1997 at 10:00 a.m., local
time, at the offices of Arbor Home Healthcare Holdings, LLC, 333 Earle Ovington
Blvd., 9th floor, Uniondale, New York 11553. At the TPC Meeting, including any
adjournments or postponements thereof, the shareholders of TPC will consider and
vote on a proposal to approve and adopt the TPC Merger Agreement and the
transactions contemplated thereby, and such other business as properly may come
before the TPC Meeting.
The close of business on July 7, 1997, has been fixed as the record
date (the "TPC Record Date") for the determination of the shareholders of TPC
entitled to notice of and to vote at the TPC Meeting. Holders of TPC Common
Stock are entitled to one vote for each share of TPC Common Stock held by them.
The holders of a majority of outstanding TPC Common Stock, present either in
person or by properly executed proxies, will constitute a quorum at the TPC
Meeting.
The affirmative vote of holders of two-thirds of the outstanding shares
of TPC Common Stock entitled to vote at the TPC Meeting is required to approve
and adopt the TPC Merger Agreement. As of the TPC Record Date, 1,750,000 shares
of TPC Common Stock were issued and outstanding, of which approximately 83% were
owned by EFCC. EFCC intends to vote all of its shares of TPC FOR the approval of
the TPC Merger Agreement and the transactions contemplated thereby. This
percentage is sufficient under New York law to approve the TPC Merger Agreement
and the transactions contemplated thereby on behalf of the shareholders of TPC.
See "THE TPC MEETING - Vote Required."
<PAGE>
THE TPC MERGER
CONVERSION OF SECURITIES. Upon consummation of the transactions
contemplated by the TPC Merger Agreement (the "Effective Time"), TPC will be
merged with and into EFCC, with EFCC being the surviving corporation, and each
share of TPC Common Stock outstanding immediately prior to the consummation of
the TPC Merger will be converted, without any further action on the part of the
holder thereof and in accordance with the TPC Exchange Ratio, into the right to
receive 18.745545 shares of EFCC Common Stock ("TPC Merger Consideration"). TPC
Common Stock owned by EFCC will be cancelled as a result of the TPC Merger and
no EFCC Common Stock shall be issued to EFCC in respect thereof. EFCC Common
Stock is quoted on the "Pink Sheets," a service published by the National
Quotations Bureau, and is traded and quoted on the NASDAQ Bulletin Board under
the symbol "CXCS." See "COMPARATIVE MARKET DATA." No certificates or scrip
representing fractional shares of TPC Common Stock will be issued in the TPC
Merger, but cash will be paid to shareholders in lieu thereof. The cash paid
will be equal to the Market Price (as defined below) of one share of EFCC Common
Stock, otherwise issuable to a holder of TPC Common Stock pursuant to the TPC
Merger Agreement, such cash to be paid in lieu of any such fractional share of
EFCC Common Stock. Market Price shall be equal to the last quoted bid price of
EFCC Common Stock as supplied by the National Quotations Bureau, Inc. at the
Effective Time. Certificates for TPC Common Stock previously issued do not give
effect to a 1:4 reverse stock split which occurred in 1985. Thus, shareholders
of TPC actually own only one share of TPC Common Stock for every four shares for
which they possess a TPC Share certificate. Therefore, the TPC Merger
Consideration payable for each share represented on a certificate for TPC Common
Stock will be 25% of the TPC Exchange Ratio or 4.686386 shares of EFCC Common
Stock. See "THE TPC MERGER AGREEMENT - Conversion of Securities." Since all
shareholders of TPC are similarly situated, there is no substantive effect from
this discrepancy. See "COMPARISON OF RIGHTS OF HOLDERS OF EFCC COMMON STOCK AND
TPC COMMON STOCK - TPC Common Stock."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS. The EFCC Board of Directors
believes that the terms of the TPC Merger are fair to, and in the best interests
of, EFCC and its shareholders. Accordingly, the EFCC Board of Directors has
approved the TPC Merger Agreement and unanimously recommends a vote FOR approval
and adoption of the TPC Merger Agreement by the shareholders of EFCC. The EFCC
Board noted that the principal reasons for the TPC Merger were as follows: (i)
As TPC is EFCC's sole operating entity, matters requiring a vote of shareholders
generally require an additional vote of the shareholders of TPC. This
necessitates the expense of notifying TPC's approximately 1,100 shareholders of
the existence and subject matter of a meeting in accordance with the
requirements of the New York Business Corporation Law (the "NYBCL"), as well as
the expense of holding a shareholders' meeting; (ii) the existence of TPC as a
separate subsidiary has been an administrative burden with respect to the
duplicate efforts in maintaining separate financial and accounting records for
each of EFCC and TPC for transactional and bookkeeping purposes; (iii) there is
no compelling reason for TPC to remain in existence as a separate subsidiary;
and (iv) the completion of the TPC Merger is a condition precedent to the STAR
<PAGE>
Merger, although the completion of the TPC Merger is not conditioned upon the
completion of the STAR Merger.
The TPC Board of Directors believes that the terms of the TPC Merger
are fair to, and in the best interests of, TPC and its shareholders.
Accordingly, TPC's Board of Directors has approved the TPC Merger Agreement and
unanimously recommends a vote FOR approval and adoption of the TPC Merger
Agreement by the shareholders of TPC. The TPC Board noted that since the TPC
Dividend in 1984, and the failed attempt to conduct a public offering, TPC's
shareholders have not been able to trade their shares in any trading market. The
TPC Dividend was effected only because of the then management's intention to
conduct a public offering, which did not occur. As a result, the holders of TPC
shares can only trade their shares by entering into the TPC Merger and receiving
EFCC Common Stock which trades on the NASDAQ Bulletin Board. TPC management and
EFCC management believe it would not be cost effective to list TPC as a separate
entity on any trading market. The TPC Board also noted the absence of any
compelling factor justifying it remaining as a separate entity given EFCC's 83%
ownership of TPC and that TPC constitutes EFCC's sole operating business. The
TPC Board also considered the fairness of the valuation placed on EFCC as a
whole, pursuant to the STAR Merger Agreement, which formed the basis for the
valuation of the TPC Merger Consideration. The TPC Board received, in this
connection, a fairness opinion of Telesis Mergers & Acquisitions, Inc.,
described below. See "Opinion of Financial Adviser."
Since EFCC has already committed to the STAR Merger pursuant to the STAR
Merger Agreement and sufficient shareholder votes necessary for the approval and
adoption of the TPC Merger Agreement have already committed to vote in favor
thereof, TPC shareholders should understand that if the TPC Merger is completed,
then, unless the STAR Merger fails to occur for reasons not currently foreseen,
or unless they choose to participate in the TPC Merger but dissent from the STAR
Merger, they will receive their pro-rata portion of the consideration payable to
shareholders of EFCC in the STAR Merger. See "THE TPC MERGER AGREEMENT - The
STAR Merger." See the "STAR Proxy/Prospectus." As previously noted, persons
owning approximately 68% of EFCC Common Stock, after giving effect to the TPC
Merger, intend to vote FOR the approval of the STAR Merger, thus ensuring its
approval under the provisions of the NYBCL, which requires the affirmative vote
of two-thirds of all outstanding shares of EFCC Common Stock to approve the STAR
Merger. The rules of the NASDAQ Stock Market, where STAR's shares are currently
issued, require a majority of shares attending in person or proxy, at a duly
held meeting of STAR stockholders, to approve the STAR Merger, if Star issues
more than 20% of its outstanding Common Stock in the Star Merger. See the
"Star Proxy/Prospectus-THE MERGER." Steven Sternbach, who owns
863,262 shares of STAR, constituting 20.77% of shares of STAR entitled
to vote as of the record date of the meeting of STAR shareholders to approve the
STAR Merger, is bound to vote his shares in favor of the STAR Merger and has
given EFCC an irrevocable proxy in connection therewith. See in the "STAR
Proxy/Prospectus, THE MERGER - The Sternbach Proxy." However, to EFCC's
knowledge, sufficient votes to approve the STAR Merger on behalf of the STAR
shareholders pursuant to NASDAQ Stock Market rules have not yet committed to
such approval. Mr. Sternbach does not, to EFCC's or TPC's knowledge, own any
shares of EFCC or TPC.
OPINION OF FINANCIAL ADVISOR. Telesis Mergers & Acquisitions, Inc.
("Telesis") delivered to the Board of Directors of TPC a written opinion dated
January 22, 1997 that, as of such date and based upon and subject to certain
matters as stated therein, the terms of the TPC Merger are fair to the
shareholders of TPC from a financial point of view. See "THE TPC MERGER -
Financial Advisor; Fairness Opinion; and "Fairness Opinion for the STAR Merger."
The full text of the written opinion of Telesis, which sets forth the
assumptions made, matters considered and limitations on the review undertaken by
Telesis, is attached as Appendix B-1 hereto and is incorporated herein by
reference. TPC shareholders are urged to read the opinion carefully in its
entirety.
EFFECTIVE TIME OF THE TPC MERGER. The TPC Merger will be effected at
the time of the filing of a Certificate of Merger (the "Certificate of Merger")
with the New York Department of State or at such later date designated in such
filing. The date and time of such filing (the "Effective Time") is currently
expected to occur on or shortly after the date of the TPC Meeting and the EFCC
Meeting and satisfaction or waiver of the conditions precedent to the TPC Merger
set forth in the TPC Merger Agreement. See "THE TPC MERGER AGREEMENT - Effective
Time of the TPC Merger" and "Conditions of the TPC Merger."
CONDITIONS OF THE MERGER; TERMINATION. The obligations of TPC and EFCC
to consummate the TPC Merger are subject to the satisfaction of the following
conditions: (i) obtaining requisite TPC and EFCC shareholder approvals; (ii) the
effectiveness of the Registration Statement; (iii) the receipt by EFCC of all
necessary approvals under applicable state securities laws; (iv) no governmental
body or any authority shall have enacted any rule or regulation prohibiting the
TPC Merger; (v) the receipt of an opinion of counsel as to the tax effects of
the TPC Merger; and (vi) obtaining of all required third-party consents to the
TPC Merger. See "THE TPC MERGER AGREEMENT - Conditions of the TPC Merger."
SURRENDER OF TPC SHARE CERTIFICATES. After the Effective Time, holders
of TPC Common Stock will be furnished with a transmittal letter to be used to
exchange their TPC Share certificates for the TPC Merger Consideration. Holders
of TPC Common Stock should not return any stock certificates with the form of
proxy accompanying this Joint Proxy Statement/Prospectus. See "THE TPC MERGER
AGREEMENT - Exchange of Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Assuming the TPC Merger is
consummated at the Effective Time pursuant to the terms of the TPC Merger
Agreement, EFCC and TPC have received an opinion from Meltzer, Lippe, Goldstein,
Wolf & Schlissel, P.C. ("Meltzer, Lippe"), counsel to TPC, that it is more
likely than not; (i) the TPC Merger will qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) no gain or loss will be recognized by any holder whose shares of
TPC Common Stock are converted into and exchanged for shares of EFCC Common
Stock (except to the extent of any cash received in lieu of fractional shares of
EFCC Common Stock), (iii) each holder of TPC Common Stock receiving cash in lieu
of a fractional share of EFCC Common Stock will be treated for federal income
tax purposes as having received such fractional share interest and as having
sold it for the cash received, and will recognize capital gain or loss (long-or
short-term depending on whether the holder's holding period is more or less than
12 months) equal to the difference between the amount of cash received and that
portion of the holder's basis in the shares of TPC Common Stock deemed exchanged
for the fractional share interest; (iv) the tax basis of the shares of EFCC
Common Stock received by the holders of TPC Common Stock will be equal to the
basis of the shares of TPC Common Stock exchanged therefor (except for the basis
attributable to any fractional share interest in EFCC Common Stock) and (v) the
holding period of the EFCC Common Stock will include the holding period of the
TPC Common Stock surrendered in exchange therefor. Meltzer, Lippe's opinion is
based on the accuracy of certain representations that it will receive from TPC
and EFCC concerning TPC and EFCC at the Effective Time. See "THE TPC MERGER -
Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT OF EFCC/TPC MERGER.The acquisition of the minority
interest of TPC will be accounted for by EFCC under the "purchase method" of
accounting in accordance with generally accepted accounting principles.
Accordingly, the results of operations of the minority interest in TPC will be
included in the results of operations of EFCC only for periods subsequent to the
Effective Time, and any excess consideration paid by EFCC will be allocated to
goodwill.
CONTINUATION OF INDEMNIFICATION PROVISIONS. Under the terms of the TPC
Merger Agreement, EFCC has agreed to insure and guaranty that any provision with
respect to indemnification by TPC and existing in favor of any present or former
director, officer, employee or agent of TPC, set forth in the Certificate of
Incorporation or by-laws of TPC or pursuant to any other agreements, will
survive the TPC Merger, will not be amended, repealed or modified in any manner
that would adversely affect an indemnified party, and will continue in full
force and effect for a period of at least six years from the Effective Time.
DISSENTERS' RIGHTS. Under the NYBCL, holders of TPC Common Stock are
entitled to dissenters' rights of appraisal in connection with the TPC Merger.
Those persons who validly perfect and do not withdraw their rights of dissent
from the TPC Merger, instead of receiving the TPC Merger Consideration, will
have the right, as provided in Section 910 of the NYBCL, subject to compliance
with Section 623 of the NYBCL, to receive the fair value of their shares and
certain other rights and benefits. See "APPRAISAL RIGHTS OF DISSENTING
SHAREHOLDERS IN THE TPC MERGER."
COMMITTED VOTES TO APPROVE TPC MERGER AGREEMENT. Arbor and Coss, which
collectively own approximately 80.5% of the shares of EFCC Common Stock, have
advised EFCC that they intend to vote FOR the approval and adoption of the TPC
Merger Agreement and the transactions contemplated thereby. Further, EFCC, which
owns 83% of the outstanding shares of TPC Common Stock, also intends to vote FOR
the approval of the TPC Merger Agreement and the transactions contemplated
thereby. Since the NYBCL requires the approval of holders of two-thirds of the
outstanding shares of EFCC and TPC to approve the TPC Merger Agreement, required
shareholder approval of the TPC Merger Agreement will be satisfied by (i) the
votes of Arbor and Coss, with respect to EFCC and (ii) the vote of EFCC, with
respect to TPC.
RESALES OF EFCC COMMON STOCK. The shares of EFCC Common Stock to be
issued pursuant to the TPC Merger Agreement have been registered under the
Securities Act, and therefore may be resold without restriction by persons who
are not deemed to be "affiliates" (as such term is defined under the Securities
Act) of either TPC or EFCC. See "THE TPC MERGER - Resale Restrictions."
RISK FACTORS. Given that TPC represents EFCC's sole operating business and
EFCC has no other substantial activity, there are no special risks relevant to
an investment in EFCC which are not already present in the investment of a
shareholder in TPC. Nevertheless, TPC shareholders should be aware, in
determining whether to vote for the TPC Merger Agreement, of possible risks of
an investment in EFCC, including those relating to: (i) adverse effects of
health care reform; (ii) the regulatory environment in which EFCC operates;
(iii) competition in the home health care and temporary personnel care markets;
(iv) a shortage of qualified personnel; (v) possible need for additional
financing in connection with the payment of a special dividend in January, 1997;
(vi) potential liability of EFCC for services provided in the health care field;
(vii) other than a special dividend paid in January 1997 pursuant to the STAR
Merger Agreement, EFCC's failure to pay cash dividends since inception; and
(viii) risks associated with third party payor audits. In addition, there are
certain risks associated with the TPC Merger, including those relating to: (i)
continuing control over EFCC by Arbor; (ii) the possible adverse tax effect on
the TPC shareholders if the TPC Merger were not to constitute a tax-free
reorganization; (iii) EFCC's and TPC's past non-compliance with their reporting
obligations under the Securities Exchange Act of 1934 (the "Exchange Act"); (iv)
<PAGE>
the fixed TPC Exchange Ratio with respect to shares to be issued in the TPC
Merger; (v) dilution; (vi) the possible adverse impact upon EFCC if the STAR
Merger is not consummated; and (vii) a possible conflict of interest of certain
persons. See "Risk Factors" for a more complete discussion of the factors which
should be considered in evaluating the TPC Merger and the securities offered
hereby. In addition, special risks associated with the STAR Merger are described
in the STAR Proxy/Prospectus at the section in that document entitled "RISK
FACTORS."
THE STAR MERGER
As discussed in greater detail in the STAR Proxy/Prospectus, a copy of
which accompanies this Joint Proxy/Prospectus, on January 3, 1997, EFCC entered
into an agreement pursuant to which, based on the satisfaction of various
conditions, EFCC will be merged with and into an acquisition subsidiary of STAR.
SHAREHOLDERS OF EFCC AND TPC ARE URGED TO CAREFULLY CONSIDER THE STAR
PROXY/PROSPECTUS AND THE TERMS OF THE STAR MERGER. IF THE STAR MERGER OCCURS,
(i) SHAREHOLDERS OF EFCC WHO DO NOT DISSENT FROM THE STAR MERGER, AND (ii) THOSE
SHAREHOLDERS OF TPC WHO DO NOT DISSENT FROM THE TPC MERGER OR THE STAR MERGER,
AND WHO REMAIN SHAREHOLDERS OF EFCC ON THE RECORD DATE OF THE STAR MERGER, WILL
RECEIVE THE MERGER CONSIDERATION PAYABLE IN THE STAR MERGER IN LIEU OF, AND IN
EXCHANGE FOR, THEIR EFCC COMMON STOCK. SEE THE "STAR PROXY/PROSPECTUS." AFTER
GIVING EFFECT TO BOTH THE TPC MERGER AND THE STAR MERGER, EACH SHARE OF TPC
COMMON STOCK WILL BE EXCHANGED FOR A COMBINATION OF STAR STOCK AND CASH, WITH A
VALUE OF APPROXIMATELY $3.614141 PER SHARE OF TPC COMMON STOCK, WHICH IS
EQUIVALENT TO $.1928 PER SHARE OF EFCC COMMON STOCK EXCHANGED IN THE STAR
MERGER. TPC STOCK CERTIFICATES DO NOT GIVE EFFECT TO A 1:4 REVERSE STOCK SPLIT,
SO THE AMOUNT OF CONSIDERATION PAYABLE PURSUANT TO THE STAR MERGER PER SHARE OF
TPC COMMON STOCK AS REPRESENTED BY A TPC STOCK CERTIFICATE IS 25% OF THE
$3.614141 SPECIFIED ABOVE, OR $.903532.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The respective summary historical data presented in the tables below
have been derived from EFCC's Consolidated Financial Statements and notes
thereto and STAR's Consolidated Financial Statements and the notes thereto
included elsewhere herein and should be read in conjunction therewith. See
EFCC's "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" and STAR'S
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
Data for STAR for the nine months ended February 28, 1997 and February
29, 1996 and data for EFCC for the three-months ended March 31, 1997 and March
31, 1996, have been derived from unaudited condensed consolidated financial
statements. The unaudited financial statements of STAR and EFCC include all
adjustments which are of a normal and recurring nature, that STAR and EFCC
considered necessary for a fair presentation of the financial position and
results of operations for those periods. Operating results for EFCC for the
three months ended March 31, 1997 and for STAR for the nine months ended
February 28, 1997 are not necessarily indicative of the results that may be
expected for the full respective fiscal year of EFCC and STAR.
<PAGE>
EFCC SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31, March 31,
1996 1995 1994 1993(1) 1992 1997 1996
---- ---- ---- ------- ---- ---- ----
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues $ 8,929 $ 7,368 $ 4,610 $ 3,053 $ 2,549 $ 2,322 $ 1,985
Income (Loss) from Operations 68 482 1 (187) (76) 18 (100)
Interest Income (Expense) 6 (4) (21) -- (47) 2 (2)
Income (Loss) from Continuing 19 268 (56) (187) (123) 8 (64)
Operations
Minority Interest in Subsidiary -- (46) 9 11 -- (2) 11
(Income) Loss
Income Per Share
Income (Loss) from Continuing $ 0.009 $ 0.0127 $(0.0029) $(0.0221) $(0.0238) $ 0.0002 $(0.0027)
Operations
Shares Used in Computing Per Share 21,809 21,034 19,300 8,454 5,162 32,000 19,300
Amounts
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 1,066 $ 512 $ 97 $ 25 $ 18 $ 445
Working Capital 1,528 286 (179) (30) 95 815
Total Assets 3,572 2,458 2,043 1,302 688 2,962
Total Long-Term Obligations 106 95 62 239 511 98
Minority Interest 140 140 94 17 -- 141
Shareholders' Equity 2,225 956 734 363 (335) 1,481
Current Ratio 2.39 1.23 0.84 0.96 1.19 1.66
Cash Dividend Per Common Share $ -- $ -- $ -- $ -- $ -- $ 0.0234
</TABLE>
(1) In 1993, EFCC implemented Statement of Position 90-70 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code."
<PAGE>
<TABLE>
<CAPTION>
STAR Summary Historical Consolidated Financial Data
Year Ended Nine Months Ended
May 31 February 28, February 29
1996 1995(2)(3) 1994(4) 1993(5) 1992(6) 1997 1996
---- ---------- ------- ------- ------- ---- ----
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Net Revenues $ 49,163 $ 38,430 $ 29,694 $ 23,428 $ 14,110 $ 39,164 $ 35,464
Income from Operations 1,832 1,251 576 118 49 2,406 1,450
Other Income (Expense) (120) (21) 67 130 122 (2,911) (74)
Income (Loss) from Continuing 1,143 758 358 135 55 (298) 766
Operations
Income (Loss) from -- -- (711) (359) 290 -- --
Discontinued Operations
Gain (Loss) on Disposal of -- 30 (1,168) -- 1,405 -- --
Discontinued Operations
Cumulative Effect of Change in -- 24(7) 65(8) -- -- -- --
Accounting Principle
Net Income (Loss) $ 1,143 $ 812 $ (1,456) $ (224) $ 1,750 $ (298) $ 766
Income Per Share
Income (Loss) from Continuing $ 0.28 $ 0.10 $ 0.04 $ $ $
Operations $ 0.20 0.01 (0.07) 0.18
Income (Loss) from -- -- 0.08 -- --
Discontinued Operation (0.20) (0.10)
Gain (Loss) on Disposal of -- -- 0.38 -- --
Discontinued Operations 0.01 (0.33)
Cumulative Effect of Change in -- 0.02 -- -- -- --
Accounting Principle 0.01
Net Income $ 0.28 $ 0.22 $ (0.41) $ (0.06) $ 0.47 $ (0.07) $ 0.18
Shares Used in Computing Per 4,012 3,799 3,529 3,621 3,699 4,278 4,257
Share Amounts
BALANCE SHEET DATA: (1)
Cash and Cash Equivalents $ 1,882 $ 1,497 $ 1,069 $ 2,334 $ 3,475 $ 79
Working Capital 9,415 6,774 5,525 6,650 7,901 9,197
Total Assets 19,369 16,798 14,196 13,436 14,867 18,258
Total Long-Term Obligations 3,604 2,156 832 115 745 3,345
Redeemable Preferred Stock 341 683 -- -- -- --
Shareholders' Equity 12,045 10,622 9,577 11,201 11,403 12,142
Current Ratio 3.79 3.03 2.46 4.14 3.91 4.32
Cash Dividend Declared Per
Common Share $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(1) In August 1996, STAR acquired AMSERV HEALTHCARE SERVICES, INC.
("Amserv") in a transaction accounted for as a pooling-of-interests,
accordingly, all periods presented have been restated to include the accounts
and operations of Amserv for the periods prior to the acquisition.
(2) In May 1995, STAR acquired certain assets of Long Island Nursing
Registry, Inc. in a transaction accounted for as a purchase.
(3) In June 1994, STAR acquired certain assets of North Central Personnel,
Inc. in a transaction accounted for as a purchase.
(4) In November 1993, STAR acquired certain assets of DSI Health Care
Services, Inc. in a transaction accounted for as a purchase.
(5) In August 1992, STAR acquired certain assets of Unity Care Services,
Inc.-New York Medicaid Operations in a transaction accounted for as a purchase.
(6) In May 1992, STAR acquired certain assets of Unity Healthcare Holding
Company, Inc., Unity Care Services, Inc.-New York Operations and Unity Home Care
of Florida, Inc. in a transaction accounted for as a purchase.
(7) Effective July 1994, STAR adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." See Note 3 of STAR's Notes to
Consolidated Financial Statements.
(8) Effective June 1, 1993, STAR adopted SFAS No. 109, "Accounting for
Income Taxes." See Note 9 of STAR's Notes to Consolidated Financial Statements.
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table presents summary unaudited pro forma selected
operations data for the year ended December 31, 1996 and for the three months
ended March 31, 1997 as if the merger of EFCC and TPC and other transactions
requiring pro forma adjustments had occurred on January 1, 1996. In addition,
summary unaudited pro forma selected operations data for the year ended May 31,
1996 and the nine months ended February 28, 1997 is provided as if the merger of
STAR and EFCC and other transactions requiring pro forma adjustments had
occurred on July 1, 1995. The summary unaudited pro forma selected operations
data was prepared assuming that the mergers had been consummated and accounted
for using the purchase method of accounting. The balance sheet data has been
prepared assuming the mergers had been consummated on February 28, 1997.
The following summary unaudited pro forma condensed combined financial data
are provided for comparative purposes only and should be read in conjunction
with the unaudited pro forma condensed combined financial statements and notes
thereto and the separate audited consolidated financial statements and related
notes thereto of EFCC and STAR. See "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS." The following summary unaudited pro forma condensed
combined financial data does not purport to be indicative of the results which
actually would have occurred if the mergers had been consummated on the dates
indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
Merger of EFCC into Star Merger of TPC into EFCC
Year Ended Nine Months Ended Year Ended Three Months Ended
May 31, February 28, December 31, March 31,
1996 1997 1996 1997
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $ 57,281 $ 46,212 $ 8,929 $ 2,322
Operating expenses 55,557 43,815 8,861 2,304
Income from operations 1,724 2,397 68 18
Other (expense) income (384) (3,093) 6 2
Income (loss) from continuing operations 1,340 (696) 74 21
before provision for income taxes
Provision (benefit) for income taxes 422 (258) 55 13
Income (loss) from continuing operations 918 (438) 19 8
Income (loss) from continuing operations $ .18 $ (0.08) $ 0.0007 $ 0.0002
per common share
Weighted average shares outstanding 5,089 5,356 27,411 37,602
BALANCE SHEET DATA:
Cash and cash equivalents $ 524 $ 445
Working capital 9,693 660
Total assets 27,483 3,746
Long-term obligations, excluding current maturities 6,478 98
Shareholders' equity 16,992 2,406
</TABLE>
<PAGE>
RISK FACTORS
Certain statements in this Joint Proxy Statement/Prospectus are not
historical facts and constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of EFCC, TPC and STAR to be materially
different from historical results or from any results expressed or implied by
such forward-looking statements.
Such risks, uncertainties and other factors include, but are not
limited to, the risks set forth below:
RISKS RELATING TO AN INVESTMENT IN EFCC
Given that TPC represents EFCC's sole operating business and EFCC has
no other substantial activity, there are no special risks relevant to an
investment in EFCC which are not already present with respect to the investment
of a shareholder in TPC. Nevertheless, TPC shareholders should be aware, in
determining whether to vote for the approval of the TPC Merger Agreement, of
possible risks of an investment in EFCC, including those relating to:
HEALTH CARE REFORM. As a result of the escalation of health care costs and the
inability of many individuals and employers to obtain affordable health
insurance, numerous proposals have been or may be introduced in the United
States Congress and state legislatures, and other proposals are being
considered, relating to health care reform. Such proposals have included, among
other things, provision of universal access to health care, reforming the
payment methodology for health care goods and services by both the public
(Medicare and Medicaid) and private sectors, and methods to control or reduce
public and private spending on health care. The ultimate timing or effect such
reforms may have on EFCC cannot be predicted and no assurance can be given that
any such reforms will not have a material adverse effect on EFCC's revenues
and/or earnings. Short-term cost containment initiatives may vary substantially
from long-term reforms and may have a material adverse effect on EFCC.
REGULATORY ENVIRONMENT; DEPENDENCE ON MEDICAID REIMBURSEMENT. EFCC's business is
subject to substantial regulation by state and local authorities. These
regulations can cause significant time delays, as well as additional costs, as
EFCC must comply with state eligibility standards for licensing and/or
accreditation as a Home Care provider. The imposition of more stringent
regulatory requirements or the denial, revocation, or suspension of any license
or accreditation necessary for EFCC to operate in a particular market could have
a material adverse effect on EFCC's operations.
EFCC's business is substantially dependent on reimbursements by
Medicaid, from which it derives a majority of its revenues. Medicaid
reimbursement rates in New York and New Jersey are not negotiated by EFCC, but
are established by these respective states. Recent budgetary pressures at the
federal and state governmental levels have, and may in the future, reduce the
allocation of federal and state budgetary dollars appropriated for the Medicaid
program. Such reductions may have a negative impact on EFCC's revenues and
profitability. Federal and state budgetary pressures may adversely impact EFCC
by: (1) reducing the Medicaid reimbursement rates paid by the state; (2)
reducing the number of hours that will be reimbursed per case; and (3) reducing
the funding of one or more public assistance agencies with which EFCC presently
does business. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Industry Information."
<PAGE>
On July 9, 1996, authorities of the State of New Jersey met to discuss
the reduction of Medicaid reimbursement rates for the year July 1, 1996 to July
1, 1997. The meeting did not result in a material reduction in the Medicaid
reimbursement rates for the period July 1, 1996 to July 1, 1997. During the
quarter ended March 31, 1996, a reduction in authorized Medicaid reimbursable
hours per case was imposed by New York State. The results of this reduction did
not have a material adverse effect on EFCC's results of operations for the
fiscal year ended December 31, 1996. However, if a similar Medicaid reduction is
imposed by the State of New Jersey, the results of this reduction would have a
material adverse effect on EFCC's results of operations, as EFCC currently
derives a majority of its revenues from New Jersey Medicaid reimbursements. EFCC
cannot predict the magnitude of future reductions, if any, in Medicaid
reimbursement rates or reimbursable hours.
New York State requires approval of the Public Health Council of the
New York State Department of Health ("NYPHC") for any change in a "Controlling
Person" of an operator of a licensed health care services agency ("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. To the
extent EFCC may seek to acquire control of an LHCSA, EFCC would have to be
granted the approval of the NYPHC prior to exercising control over such LHCSA.
NYPHC approval is also required if any entity seeks control of more than 10
percent of the voting securities of EFCC or TPC. The NYPHC has approved the
change of control that occurred from the acquisition by Coss of approximately 66
percent of EFCC Common Stock and the change of control which occurred when Arbor
acquired 40 percent of EFCC Common Stock. An application to approve STAR's
control over EFCC pursuant to the STAR Merger Agreement, was approved on June
27, 1997. See the "The TPC MERGER - The STAR Merger."
Health regulatory agencies of New York and New Jersey, where EFCC
operates, require satisfaction of certain standards with respect to personnel,
services and supervision. Health regulatory agencies also require 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. EFCC is currently in compliance with such
standards.
EFCC is subject to the federal fraud and abuse and the so-called
"Stark" anti-referral laws, violations of which may result in civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid
programs. In addition, several states have enacted their own statutory analogs
of the federal fraud and abuse and anti-referral laws. There can be no assurance
that administrative or judicial interpretations of existing statutes or
regulations or enactments of new laws or regulations will not have a material
adverse effect on EFCC's operations or financial condition.
Health care is subject to laws and regulations of federal, state and
local governments. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the business of EFCC and
could prevent it from offering products or services to patients.
COMPETITION. The home health care and temporary health care personnel
placement markets are highly fragmented and significant competitors are often
localized in particular geographic markets. Some of the entities with which EFCC
competes have substantially greater financial and other resources than EFCC.
Accordingly, EFCC may be unable to successfully compete in this environment. In
New York, EFCC has an annual contract with the Department of Social Services in
Nassau County representing approximately 11 percent of EFCC's total revenue in
1996. This type of contract was awarded to approximately sixty home health care
agencies, and currently, no additional agencies are permitted to bid on this
contract. Cases are referred to agencies on a rotating basis. EFCC is at a
competitive disadvantage in other locations in New York State, since EFCC does
not have Medicaid contracts in areas other than Nassau County.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant Medicaid contracts to any accredited home health care agency. Each
branch office of EFCC has a contract with the New Jersey Department of Medicaid
for billing and administrative purposes. For New Jersey, new business is
dependent on referrals through physicians, county medical services, community
organizations, hospital social service workers, nurses, insurance companies and
the patient's family. Consequently, all of EFCC's New Jersey business is subject
to numerous competitive factors. EFCC believes that prompt service, price
(excluding Medicaid which by virtue of fixed reimbursement rates cannot be a
differentiating factor), quality of service and the range of services offered
are the principal factors which enable it to compete effectively in the New
Jersey market.
SHORTAGE OF QUALIFIED PERSONNEL. EFCC's business is dependent in large
part upon its ability to recruit and retain qualified registered nurses and
other professional and medical support personnel to fill positions in a timely
manner. EFCC faces intense competition from other companies in recruiting such
qualified health care personnel for its Home Care and temporary placement
operations. EFCC's growth may depend, to a significant degree, on its ability to
continue to recruit and retain such qualified health care personnel. There can
be no assurance that such qualified health care personnel will continue to be
available to EFCC in the future. If EFCC were unable to attract or retain such
qualified health care personnel, such inability would have a material adverse
effect on the business of EFCC.
THIRD PARTY PAYORS. A significant portion of EFCC's revenues (14
percent in 1996) is generated by third party payors. Such payments are subject
to audit and adjustment, including retroactive adjustment. During the fiscal
years 1994, 1995 and 1996, such adjustments have been insignificant. In the
event that future audits result in adjustments that are not insignificant, then
such adjustments could have a material adverse effect on EFCC.
PAYMENT OF THE SPECIAL DIVIDEND -- POSSIBLE NEED FOR ADDITIONAL
FINANCING. EFCC does not currently have the benefit of a substantial amount of
the $1.3 million in capital provided by Arbor due to the payment of the special
dividend of $750,000 in January 1997. See "SUMMARY - EFCC AND TPC" and "BUSINESS
- - The Special Dividend." If EFCC's business expands, significant additional
financing may be required. If EFCC were unable to secure such financing on terms
deemed favorable by management, such inability could have a material adverse
effect on EFCC's financial condition, including its ability to meet certain of
its obligations as they come due. If the STAR Merger is consummated, EFCC's
capital requirements would be provided by STAR. See in the STAR Proxy/Prospectus
- - "RISK FACTORS - Liquidity."
The Special Dividend was paid in connection with the STAR Merger
transaction. Principally, the Special Dividend was paid to reduce the amount of
cash held by EFCC which STAR would be purchasing in the STAR Merger, in response
to STAR's desire to pay part of the merger consideration in cash. The payment of
cash by STAR to purchase a substantial amount of cash held by EFCC could
artifically inflate the cash portion of the purchase price of EFCC in the STAR
Merger and thus could affect certain rules relating to the qualification of the
STAR Merger as a tax-free reorganization. See "THE TPC MERGER-Background of the
STAR Merger."
LIABILITY FOR SERVICES; LIABILITY INSURANCE. EFCC's employees and
independent contractors routinely confront life threatening situations and also
make decisions which can have significant medical consequences to the patients
in their care. As a result, EFCC is exposed to substantial liability in the
event of negligence or wrongful acts of its personnel. EFCC maintains medical
professional insurance providing for coverage in a maximum amount of $1,000,000
per claim, subject to a limitation of $3,000,000 for all claims in any single
year. Although there are currently no material claims pending against EFCC,
there can be no assurance that EFCC will be able to maintain its existing
insurance at an acceptable cost or obtain additional insurance in the future as
required or that such level of insurance will be sufficient to cover liabilities
from claims that may be brought. A partially or completely uninsured claim, if
successfully asserted and of sufficient magnitude, could have a material adverse
effect on EFCC and its financial condition.
NO CASH DIVIDENDS. Since prior to its initial public offering in 1980,
EFCC has not paid cash dividends on the EFCC Common Stock, other than the
Special Dividend. See "BUSINESS - The Special Dividend." The Special Dividend
was declared and paid as contemplated in the STAR Merger Agreement in connection
with the STAR Merger. See "THE TPC MERGER - Background of the STAR Merger." It
is the present policy of EFCC to retain earnings, if any, to finance the
development and growth of its business. Accordingly, EFCC does not anticipate
that cash dividends will be paid until earnings of EFCC warrant such dividends,
and there can be no assurance that EFCC can achieve such earnings or any
earnings.
RISKS RELATING TO THE MERGER
SUBSTANTIAL INFLUENCE BY ARBOR. Arbor controls over 80% of the voting
stock of EFCC and has the power to elect a majority of EFCC's directors. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." After the TPC Merger, it will
control 68% of the voting stock of EFCC which is still sufficient for it to
elect a majority of EFCC's directors and thus to exercise a great degree of
control over EFCC.
PAST NON-COMPLIANCE WITH SECURITIES LAWS. Since filing its petition
for bankruptcy in 1986, until the filing of its Form 10-KSB for the period
ending December 31, 1995 (the "1995 10-KSB"), EFCC has not filed any required
reports under the Exchange Act. The last such report filed was EFCC's Form 10-K
for the fiscal year ended December 31, 1985. During the years while in
bankruptcy, EFCC did not possess adequate financial and staffing resources to
produce audited financial statements and other reports as required by the
Exchange Act. EFCC has filed all reports required under the Exchange Act
commencing with the 1995 10-KSB. TPC was required to and failed to file Exchange
Act reports, which obligation arose as a result of the registration statement
filed with the Commission in connection with its aborted 1985 offering having
been declared effective, coupled with its subsequent failure to withdraw this
registration statement. See "Business of EFCC and TPC."
As a result of EFCC's and/or TPC's past non-compliance with the
Exchange Act, the Securities and Exchange Commission (the "SEC") may determine
to bring civil and administrative proceedings against EFCC and/or TPC. While the
likelihood of such proceedings being brought is uncertain, if such proceedings
were to be brought, EFCC and/or TPC could be subject to substantial monetary
penalties and other administrative remedies.
NO UPDATE OF THE TELESIS OPINION. TPC has received an opinion from
Telesis, dated January 20, 1997, to the effect that, as of such date and based
upon certain matters as stated therein, the terms of the TPC Merger are fair to
the shareholders of TPC from a financial point of view. TPC's obligation to
consummate the Merger is not conditioned upon receipt of an updated fairness
opinion. TPC does not intend to obtain, and Telesis is under to no obligation to
provide, an update of such opinion. Accordingly, there can be no assurance that
Telesis would render a similar opinion as of a date subsequent to January 20,
1997. See "THE MERGER - TPC's Reasons for the Merger; Recommendation of the TPC
Board" and "Financial Advisor; Fairness Opinion."
FIXED TPC EXCHANGE RATIO. The TPC Exchange Ratio is fixed by the terms
of the Merger Agreement and is not subject to adjustment. The market prices of
the EFCC Common Stock are subject to market fluctuation. Therefore, the market
value of the EFCC Common Stock that the shareholders of TPC will receive in
exchange for their TPC Common Stock may change over time. See "COMPARATIVE
MARKET DATA."
FEDERAL INCOME TAXES. If the TPC Merger were not to constitute a
tax-free reorganization under Section 368(a)(1) of the Code, each holder of TPC
Common Stock would recognize gain or loss equal to the difference between the
fair market value of the EFCC Common Stock received and cash received in lieu of
fractional shares and such holder's basis in the TPC Common Stock exchanged
therefor. Such gain or loss would be long-term capital gain or loss, provided
such shares had been held for more than one year. See "THE TPC MERGER AGREEMENT
- -Certain Federal Income Tax Consequences" and "Conditions of the TPC Merger."
DILUTION. TPC Shareholders other than EFCC currently own approximately
17% of TPC. After the TPC Merger, they will own 5,601,975 shares of EFCC Common
Stock out of a total outstanding of 37,602,201 shares of EFCC Common Stock, or
14.90%. This dilution results from the fact that EFCC had assets, consisting of
cash, an intercompany receivable and prepaid expenses, in addition to its 83%
ownership of TPC at March 18, 1997, the date of execution of the TPC Merger
Agreement. The value of these assets, net of EFCC's liabilities, were deducted
from the valuation of TPC in the TPC Merger. If not for the value of these
assets, the holders of TPC Common Stock would have received the same 17%
interest in EFCC which they had in TPC. See "THE TPC MERGER - Background of the
Merger."
POSSIBLE ADVERSE IMPACT IF STAR MERGER IS NOT CONSUMMATED. Certain of
TPC's operations have been administered by STAR in furtherance of the STAR
Merger Agreement. If, for any reason, the STAR Merger were not to occur,
transferring these functions back to EFCC would be costly and time-consuming and
may adversely affect EFCC.
INTERESTS OF CERTAIN PERSONS IN THE TPC MERGER; POSSIBLE CONFLICT OF
INTEREST. EFCC, by virtue of its 83% ownership of TPC, has the power to elect
the entire TPC Board and the same directors serve on both the EFCC and TPC
Boards. Therefore, the valuation of the TPC Merger consideration was not arrived
at by third-party arm's length negotiations. Further, the controlling
stockholders of EFCC, i.e., Arbor and Coss, are not shareholders of TPC.
Accordingly, EFCC had an interest in valuing TPC in the TPC Merger at a lower
valuation to minimize dilution to shareholders of EFCC. However, given that the
Board of EFCC, on behalf of the EFCC shareholders, negotiated the valuation of
EFCC in the STAR Merger, which was negotiated at arms-length with a third party
(STAR), and it was in Arbor's and Coss' interest to obtain the highest possible
valuation of EFCC, and since TPC's valuation in the TPC Merger was based upon
EFCC's valuation in the STAR Merger, the Boards of Directors of EFCC and TPC
believe that this potential conflict was resolved in a manner which ultimately
treated the shareholders of TPC identically with shareholders of EFCC. See "THE
TPC MERGER - Background of the Merger; TPC's Reasons for the TPC Merger;
Recommendation of the TPC Board" and "EFCC's Reasons for the TPC Merger;
Recommendation of the EFCC Board."
COMPARATIVE PER SHARE DATA
The following table presents historical and equivalent unaudited pro
forma per share data of TPC and EFCC, assuming that the TPC Merger had been
effective during all periods presented. Separately, it gives pro forma effect to
the STAR Merger, assuming that both the TPC Merger and the STAR Merger had
occurred during all periods presented. The pro forma combined and EFCC
equivalent pro forma amounts were calculated assuming the issuance of 1,077,778
shares of STAR stock in exchange for the outstanding shares of EFCC (see "Notes
to Unaudited Pro Forma Condensed Combined Financial Statements"). The pro forma
data does not purport to be indicative of the results of future operations or
the results that would have occurred had the TPC Merger and/or the STAR Merger
been consummated at the beginning of the periods presented. The information set
forth below should be read in conjunction with the financial statements and the
notes thereto of TPC, EFCC and Star and the unaudited pro forma condensed
combined financial statements included elsewhere in this Joint Proxy
Statement/Prospectus.
<PAGE>
<TABLE>
<CAPTION>
Merger of EFCC into STAR Merger of TPC into EFCC
STAR EFCC EFCC
Pro Forma Equivalent Equivalent Pro Forma Equivalent
Combined Historical Pro Forma Historical Pro Forma Combined Historical Pro Forma
----------- ----------- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book value per share of
common stock
outstanding at March
31, 1997 $ 3.34 $ 3.02 $ - $ 0.05 $ 0.14 $ 0.06 $ 0.05 $ -
Cash Dividends Declared $ 0.15 $ $ - $ 0.02 $ 0.01 $ 0.02 $ 0.02 $ -
(1) -
Income (loss) per share
from continuing
operations:
Three months ended
March 31, 1997 $ - $ - $ - $ - $ - $ 0.00 $ 0.00 $ -
Year ended December 31,
1996 $ - $ - $ - $ - $ - $ 0.00 $ 0.00 $ -
Nine months ended
March 31, 1997 $ (.08) $ (.07) $ - $ .00 $ .00 $ $ - $ -
Year ended June 30, 1996 $ .18 $ .28 $ - $ .00 $ .01 $ $ - $ -
</TABLE>
(1) On January 21, 1997, EFCC paid a special cash dividend of $750,000 to
its stockholders of record on January 13, 1997. Neither EFCC, TPC of STAR has
paid any other cash dividend in the past five years. See the "BUSINESS OF EFCC -
THE SPECIAL DIVIDEND."
<PAGE>
COMPARATIVE MARKET DATA
EFCC Common Stock is quoted by the National Quotations Bureau, Inc. of
Cedar Grove, New Jersey on the Pink Sheets and is traded in the over-the-counter
market and quoted on the NASDAQ Bulletin Board, under the symbol "CXCS." The
table below sets forth, for the fiscal quarters indicated, the high and low bid
sales prices per share of EFCC as reported by the National Quotations Bureau and
the NASDAQ Bulletin Board. The reported prices reflect inter-dealer quotations
that may not represent actual transactions and do not include retail mark-ups,
mark downs or commissions. To TPC's knowledge, prices for TPC Common Stock are
not quoted on any exchange or market.
Bid Prices
High Low
FISCAL 1995
First Quarter............. .125 .031
Second Quarter............ .250 .063
Third Quarter............. .250 .063
Fourth Quarter............ .375 .063
FISCAL 1996
First Quarter............. .437 .250
Second Quarter............ .500 .187
Third Quarter............. .250 .125
Fourth Quarter............ .156 .040
FISCAL 1997
First Quarter.............. .160 .062
Through 5/30/97 .10 .062
The last reported bid price per share of EFCC Common Stock on January
3, 1997, the date preceding announcement of the STAR Merger, was $.15. The last
reported bid price per share of EFCC Common Stock on April 15, 1997, the date
preceding publication, through EFCC's Form 10-KSB, of the TPC Merger, was $.08.
On July 23, 1997, the number of holders of record of EFCC Common Stock
and TPC Common Stock was 1,271 and 1,115, respectively. TPC paid no cash
dividends in the past five years. On January 21, 1997, EFCC paid a special
dividend of$750,000 to its shareholders of record as of January 13, 1997 (See
"BUSINESS OF EFCC AND TPC - The Special Dividend"), but has otherwise paid no
other dividends in the past five years. It is the policy of both EFCC and TPC to
retain earnings, if any, to finance the development and growth of its business.
Accordingly, EFCC does not anticipate paying cash dividends in the foreseeable
future.
BECAUSE THE TPC EXCHANGE RATIO IN THE TPC MERGER IS FIXED AND BECAUSE
THE MARKET PRICE OF SHARES OF EFCC COMMON STOCK ARE SUBJECT TO FLUCTUATION, THE
MARKET VALUE OF EFCC COMMON STOCK THAT HOLDERS OF TPC COMMON STOCK WILL RECEIVE
IN THE TPC MERGER MAY INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE TPC
MERGER. SHAREHOLDERS OF EFCC AND TPC ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR EFCC COMMON STOCK.
FOR ADDITIONAL INFORMATION REGARDING THE MERGER CONSIDERATION TO BE
PAID IN THE STAR MERGER, SEE "THE STAR PROXY/PROSPECTUS." SEE, ALSO, IN THIS
JOINT PROXY/PROSPECTUS - "SUMMARY - THE STAR MERGER" AND "THE TPC MERGER
AGREEMENT - THE STAR MERGER."
<PAGE>
THE TPC MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by TPC to the
holders of TPC Common Stock in connection with the solicitation of proxies by
the Board of Directors of TPC for use at a Special Meeting of Shareholders of
TPC (the "TPC Meeting") to be held on August 8, 1997 at the offices of
Arbor Home Healthcare Holdings, LLC, 333 Earle Ovington Boulevard, 9th floor,
Uniondale, New York 11553, at 10:00 a.m., local time, and any adjournments
or postponements thereof.
The Joint Proxy Statement/Prospectus, the attached Notice of Meeting
and the accompanying form of proxy are first being mailed to shareholders of TPC
on or about July 29, 1997.
MATTERS TO BE CONSIDERED AT THE TPC MEETING
At the TPC Meeting, holders of TPC Common Stock will consider and vote
on:
1. A proposal to approve and adopt the TPC Merger Agreement and the
transactions contemplated thereby; and
2. Such other business as may properly come before the TPC Meeting.
The TPC Board of Directors has approved the TPC Merger Agreement and
the transactions contemplated thereby. The TPC Board of Directors believes that
the terms of the TPC Merger are fair to, and in the best interests of, TPC and
its shareholders and unanimously recommends that the holders of TPC Common Stock
vote FOR approval and adoption of the TPC Merger Agreement and the transactions
contemplated thereby. For further information, see "THE TPC MERGER AGREEMENT -
TPC's Reasons for the TPC Merger; Recommendation of the TPC Board."
TPC RECORD DATE
The Board of Directors of TPC has fixed the close of business on July
7, 1997 as the TPC Record Date for the determination of TPC shareholders
entitled to notice of, and to vote at, the TPC Meeting. Accordingly, only
holders of record of shares of TPC Common Stock at the close of business on the
TPC Record Date are entitled to notice of, and to vote at, the TPC Meeting. As
of the TPC Record Date, 1,750,000 shares of TPC Common Stock were outstanding
and held of record by 1,115 TPC shareholders. Those shareholders of TPC who do
not elect to dissent from the TPC Merger will also become shareholders of record
of EFCC for purposes of voting for the approval of, or exercising dissenters'
rights of appraisal in respect to, the STAR Merger, unless they transfer their
interests in EFCC or TPC before the Record Date for the STAR Merger. See the
"STAR Proxy/Prospectus - The EFCC Meeting."
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the TPC Meeting and does not return
the signed proxy card, such shareholder's shares will not be voted. If a
shareholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of the TPC Merger
Agreement and the transactions contemplated thereby. As of the date of this
Joint Proxy Statement/Prospectus, the TPC Board of Directors does not know of
any other matters which are to come before the TPC Meeting. If any other matters
are properly presented at the TPC Meeting for consideration, including, among
other things, consideration of a motion to adjourn the TPC Meeting to another
time and/or place, the persons named in the enclosed form of proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment. Such discretionary authority, however, will not allow the persons
named in the enclosed form of proxy to adjourn or postpone the TPC Meeting for
the purpose of soliciting additional votes.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of TPC, at or before the taking of the vote at the TPC
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later dated proxy relating to the same shares of TPC
Common Stock and delivering it to the Secretary of TPC before the taking of the
vote at the TPC Meeting, or (iii) attending the TPC Meeting and voting in person
and validly revoking the proxy prior to said vote (attendance at the TPC Meeting
will not in and of itself constitute a revocation of a proxy). Any written
notice of revocation or subsequent proxy should be sent so as to be delivered to
TPC Home Care Services, Inc., One Old Country Road, Carle Place, New York,
11514, Attention: Corporate Secretary, by mail or hand delivered at or before
the taking of the vote at the TPC Meeting.
TPC will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of TPC in person or by telephone
or other means of communication. Such directors, officers and employees will not
be additionally compensated, but may be reimbursed for out-of-pocket expenses
incurred in connection with such solicitation. Arrangements also will be made
with custodians, nominees and fiduciaries for the forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and TPC will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith.
TPC SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. THE PROCEDURES FOR THE EXCHANGE OF SHARES AFTER THE TPC MERGER IS
CONSUMMATED ARE SET FORTH BELOW IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
<PAGE>
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of TPC Common Stock is necessary
to constitute a quorum at the TPC Meeting. Both abstentions and broker non-votes
are considered present for purposes of determining a quorum but are excluded
from votes cast.
VOTE REQUIRED
TPC shareholders are entitled to one vote at the TPC Meeting for each
share of TPC Common Stock held of record by them on the TPC Record Date. The
affirmative vote of the holders of two-thirds of outstanding TPC Common Stock
entitled to vote thereon is required to approve and adopt the TPC Merger
Agreement. Since approval of the TPC Merger Agreement requires the affirmative
vote of two-thirds of outstanding TPC Common Stock, abstentions and broker
non-votes will have the effect of votes against the TPC Merger Agreement. TPC
has been advised that EFCC, which owns approximately 83% of the outstanding TPC
Common Stock as of the TPC Record Date, intends to vote in favor of the approval
and adoption of the TPC Merger Agreement. This percentage is sufficient under
New York law to approve the TPC Merger on behalf of the TPC shareholders.
THE EFCC MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by EFCC to
the holders of EFCC Common Stock in connection with the solicitation of proxies
by the Board of Directors of EFCC for use at a Special Meeting of Shareholders
of EFCC to be held on August 8, 1997 at the offices of Arbor Home
Healthcare Holdings, LLC, 333 Earle Ovington Boulevard, 9th floor, Uniondale,
New York 11553 at 10:00 a.m., local time, and any adjournments or postponements
thereof.
The Joint Proxy Statement/Prospectus, the attached Notice of Meeting
and the accompanying form of proxy are first being mailed to shareholders of
EFCC on or about July 29, 1997.
MATTERS TO BE CONSIDERED AT THE EFCC MEETING
At the EFCC Meeting, holders of EFCC Common Stock will consider and
vote upon:
1. A proposal to approve and adopt the TPC Merger Agreement and the
transactions contemplated thereby; and
2. Such other business as properly may come before the EFCC Meeting
and any adjournments or postponements thereof.
The EFCC Board of Directors has unanimously approved the TPC Merger
Agreement and the transactions contemplated thereby. The EFCC Board of Directors
believes that the terms of the TPC Merger are fair to, and in the best interests
of, EFCC and its shareholders and unanimously recommends that the holders of
EFCC Common Stock vote FOR the approval and adoption of the TPC Merger Agreement
and the transactions contemplated thereby. For further information, see "THE TPC
MERGER AGREEMENT - EFCC's Reasons for the Merger; Recommendation of the EFCC
Board."
EFCC RECORD DATE
The Board of Directors of EFCC has fixed the close of business on
July 7, 1997 as the EFCC Record Date for the determination of EFCC
shareholders entitled to notice of, and to vote at, the EFCC Meeting.
Accordingly, only holders of record of EFCC Common Stock at the close of
business on the EFCC Record Date are entitled to notice of, and to vote at, the
EFCC Meeting. As of the EFCC Record Date, 32,000,226 shares of EFCC Common Stock
were outstanding and held of record by 1,271 EFCC shareholders.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the EFCC Meeting and does not
return the signed proxy card, such shareholder's shares will not be voted. If a
shareholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of the TPC Merger
Agreement and the transactions contemplated thereby. As of the date of this
Joint Proxy Statement/Prospectus, the EFCC Board of Directors does not know of
any other matters which are to come before the EFCC Meeting. If any other
matters are properly presented at the EFCC Meeting for consideration, the
persons named in the enclosed form of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment. Such
discretionary authority, however, will not allow the persons named in the
enclosed form of proxy to adjourn or postpone the EFCC Meeting for the purpose
of soliciting additional votes.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of EFCC, at or before the taking of the vote at the
EFCC Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares of
EFCC Common Stock and delivering it to the Secretary of EFCC before the taking
of the vote at the EFCC Meeting, or (iii) attending the EFCC Meeting and voting
in person and validly revoking the proxy prior to said vote (attendance at the
EFCC Meeting will not in and of itself constitute a revocation of a proxy). Any
written notice of revocation or subsequent proxy should be sent so as to
bedelivered to Extended Family Care Corporation, One Old Country Road, Suite
335, Carle Place, New York, 11514, Attention: Corporate Secretary, or hand
delivered to the Secretary of EFCC at or before the taking of the vote at the
EFCC Meeting.
EFCC will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of EFCC in person or by telephone
or other means of communication. Such directors, officers and employees will not
be additionally compensated, but may be reimbursed for out-of-pocket expenses
incurred in connection with such solicitation. Arrangements also will be made
with custodians, nominees and fiduciaries for the forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and EFCC will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of outstanding EFCC Common Stock entitled to vote is
necessary to constitute a quorum at the EFCC Meeting. Both abstentions and
broker non-votes are considered present for purposes of determining a quorum but
are excluded from votes cast.
VOTE REQUIRED
EFCC shareholders are entitled to one vote at the EFCC Meeting for
each share of EFCC Common Stock held of record by them on the EFCC Record Date.
The affirmative vote of the holders of two-thirds of the outstanding EFCC Common
Stock entitled to vote thereon, in person or by proxy, is required to approve
and adopt the TPC Merger Agreement and the transactions contemplated thereby.
Since approval of the TPC Merger Agreement requires the affirmative vote of
two-thirds of the outstanding shares, abstentions and broker non-votes will have
the affect of votes against the adoption of the TPC Merger Agreement.
As of the EFCC Record Date, Coss and Arbor own an aggregate of
25,749,658 shares of EFCC Common Stock or approximately 80.47% of the
outstanding shares of EFCC Common Stock. EFCC has been advised that Coss and
Arbor will vote FOR the approval and adoption of the TPC Merger Agreement. These
votes constitute a sufficient percentage under New York law to approve and adopt
the TPC Merger Agreement on behalf of EFCC shareholders.
<PAGE>
THE TPC MERGER
BACKGROUND OF THE TPC MERGER
EFCC, which owns 83% of TPC, had entered into discussions and
negotiations with STAR with a view towards a possible strategic alliance,
commencing with a meeting on February 17, 1996, as discussed below. Those
negotiations and discussions ultimately resulted in EFCC and STAR agreeing to
enter into the STAR Merger Agreement.
The TPC and EFCC Boards did not formally address the TPC Merger until
after the STAR Merger Agreement was entered into between EFCC and STAR. However,
since the valuation of EFCC pursuant to the STAR Merger Agreement formed the
basis of the valuation of TPC in the TPC Merger, the following discussion as to
the background of the STAR Merger is included to alert the TPC shareholders as
to how the valuation of EFCC in the STAR Merger was arrived at and as to how the
STAR Merger came about.
BACKGROUND OF THE STAR MERGER
STAR and EFCC were introduced by Mr. Gary Carpenter, a partner of
Carpenter & Onoroto, EFCC's auditors, whom EFCC had retained to assist it in
seeking potential acquisition candidates. At Mr. Carpenter's suggestion on
February 17, 1996 Stephen Sternbach, the President and Chief Executive Officer
of STAR contacted Mr. Ivan Kaufman to suggest a meeting to discuss a possible
strategic alliance between STAR and EFCC. On February 29, 1996, Stephen
Sternbach met with Mr. Kaufman and Joseph Martello, the Chief Financial Officer
of Arbor Management, an entity controlled by Mr. Kaufman (who in turn controls
Arbor which owns approximately 40% of EFCC's outstanding shares and controls the
voting rights as to an additional 40% of EFCC's outstanding shares). At that
meeting, Mr. Sternbach, Mr. Kaufman and Mr. Martello discussed, in general
terms, their respective businesses and business strategies. Messrs. Sternbach,
Kaufman and Martello expressed their mutual interest in pursuing the matter
further.
Prior to commencing discussions with STAR, EFCC had a series of
discussions with another home healthcare company, Transworld Home Healthcare,
Inc. ("Transworld"). Transworld held discussions, during February and March
1996, with Joseph Heller, Vice President of Arbor Management and Vice President
of EFCC, concerning the possibility of Transworld acquiring EFCC. A senior
officer of Transworld met with Ivan Kaufman, Joseph Martello and Joseph Heller
on April 24, 1996 to discuss a possible acquisition of EFCC by Transworld. The
parties agreed to exchange information about their respective companies and, in
furtherance thereof, executed confidentiality agreements. EFCC and Transworld
had only a limited amount of discussions after this time because, EFCC believes,
Transworld had been devoting its resources to other acquisitions. After Mr.
Sternbach made his initial proposal to EFCC (as discussed below), EFCC
communicated the range of that proposal to Transworld, at which point,
Transworld and EFCC broke off negotiations and terminated their discussions.
On March 25, 1996, Mr. Martello telephoned Mr. Sternbach to discuss
the possibility of STAR engaging in a joint venture transaction or other
strategic alliance with EFCC. Mr. Martello suggested that a meeting be called
and that Messrs. Sternbach, Kaufman and Heller attend to discuss a possible
transaction.
On May 1, 1996 Messrs. Sternbach and Solof, a member of the STAR
board, met with Messrs. Kaufman, Martello and Heller. At this meeting the
parties exchanged publicly available financial information about their
respective companies (Forms 10-Ks, 10-KSBs, 10-Qs and 10-QSBs) and discussed the
possible operating synergies that would exist between the two companies.
On May 21, 1996, Mr. Sternbach met again with Messrs. Kaufman,
Martello and Heller. At that meeting Mr. Sternbach described the success that
STAR had in its recent acquisitions and how STAR had been able to operate those
acquired companies in a more efficient manner, substantially reducing the level
of selling, general and administrative expenses of the acquired company by
effectively integrating their operations with those of STAR. Mr. Sternbach
suggested that Messrs. Kaufman, Martello and Heller meet with William Fellerman
and Gregory Turchan, the Chief Financial Officer and Chief Operating Officer,
respectively, of STAR to further explore the possibility of a strategic alliance
between STAR and EFCC. At this time, the parties also executed confidentiality
agreements in furtherance of the proposed transaction.
On May 23, 1996, Mr. Fellerman received from Mr. Martello detailed
financial information, including revenue and expense reports by branch,
concerning the business and operations of EFCC (together with the publicly
available information described above, the "Evaluation Material").
On May 29, 1996, a meeting was held at the offices of Arbor, attended
by Messrs. Sternbach, Fellerman, Kaufman, Martello and Heller. At that meeting,
Mr. Sternbach expressed STAR's interest in pursuing a merger or other
acquisition of EFCC. Mr. Kaufman suggested that it would be mutually beneficial
to STAR and EFCC if a merger could be successfully negotiated. Mr. Kaufman
stated that EFCC had to grow to become profitable and create an acceptable
return on investment for its shareholders. He further stated that as EFCC lacked
sufficient capital to do so on its own, and also lacked substantial management
experience in the Home Care industry, it made business sense for EFCC to merge
with a company, such as STAR, which had greater depth of management, better
automation and quality control and greater capital resources. Mr. Fellerman
suggested that, since the parties believed that a strategic alliance would be
mutually beneficial, that he and Mr. Heller hold separate discussions with the
intention of preparing a set of pro forma financial statements and a complete
analysis of the combined entity. Mr. Fellerman stated that after this analysis
was prepared, STAR would be prepared to make a proposal to EFCC. Messrs.
Fellerman, Sternbach and Turchan met on several occasions over the next few
weeks. At those meetings they reviewed the Evaluation Materials and they
concluded that the acquisition of EFCC would result in the addition of
approximately $9.0 million in additional revenues to STAR which would increase
STAR's cash flow, reduce its financial leverage and improve its overall
financial position and results of operations. They also concluded that STAR
could achieve substantial cost savings for the operations of the EFCC business
through the elimination of many operations that could be carried out by STAR's
existing personnel. Mr. Fellerman stated that he had concluded that
approximately $1.0 million annually in selling, general and administrative
expenses would be eliminated as a result of the increased efficiencies and
economies of scale that were expected to result from the STAR Merger. Messrs.
Sternbach and Fellerman initially concluded that a total purchase of between
$8.0 and $8.5 million, consisting solely of STAR's Common Stock, would be an
appropriate purchase price for all of the outstanding stock of EFCC.
On May 31, 1996 Messrs. Sternbach, Fellerman and Turchan held a
telephone conference with Mr. Martello and other representatives of EFCC to
discuss the operations of the offices of EFCC and to consider how such offices
could be consolidated into the existing operations of STAR.
On July 2, 1996 Messrs. Sternbach, Fellerman and Turchan held a
telephone conference with Messrs. Martello and Heller to discuss further the pro
forma financial information, prepared by STAR with the assistance of EFCC and to
arrange for a mutually acceptable date at which STAR would present its proposal
to acquire EFCC.
One week later, on July 9, 1996, at a meeting held at the offices of
STAR, attended by Messrs. Sternbach, Fellerman, Turchan, Kaufman, Martello and
Heller, Mr. Sternbach presented STAR's proposal for the acquisition of EFCC. Mr.
Sternbach advised the representatives of Arbor Management and EFCC that, after
analyzing the Evaluation Materials, STAR was prepared to acquire all of the
outstanding stock of EFCC for a total purchase price of $8.5 million, to be paid
in STAR Common Stock. This offer was based on the assumption that $1.3 million
would be injected into EFCC by Arbor exercising its option to acquire 13,000,000
newly issued shares of EFCC Common Stock. Mr. Sternbach said that the offer was
conditioned on the ability of STAR to account for the transaction as a pooling
of interests. Mr Sternbach also advised the representatives of Arbor Management
and EFCC that a precondition to engaging in the proposed transaction was that
EFCC would merge its subsidiary TPC with and into EFCC. Mr. Sternbach also said
that STAR would want to have the option, at its sole discretion to purchase the
stock of EFCC for cash.
EFCC representatives stated that if the purchase price was paid in
STAR Common Stock, then they required the transaction to be structured so that
it qualified as a tax-free reorganization.
On August 9, 1996 a meeting was held at the offices of Arbor
Management. That meeting was attended by Messrs. Sternbach, Fellerman, Kaufman,
Martello and Heller as well as the respective legal counsel of STAR and EFCC. At
that meeting it was agreed that the terms of the proposed transaction would
preclude the STAR Merger from being accounted for as a pooling of interests and
that instead it would be accounted for using the purchase method. Based on the
fact that the transaction could not qualify as a pooling of interests, STAR
revised its offer. Mr. Sternbach advised the representatives of Arbor Management
and EFCC that STAR would be willing to pay a total purchase price of $8.0
million in STAR Common Stock. In addition, Mr. Sternbach said that STAR would
retain the right to acquire the stock of EFCC for cash. Mr Sternbach also stated
that the transaction was conditioned on EFCC entering into agreements,
substantially in the form of the Consulting Agreement and Management Agreements,
described elsewhere in this Joint Proxy Statement/Prospectus. Mr. Sternbach
advised the representatives of EFCC that the offer was subject to approval of
the Board of Directors of STAR. EFCC representatives stated that they wanted to
make certain that the amount of STAR Common Stock to be received in the STAR
Merger would be subject to adjustment, based on the market value of the STAR
Common Stock. Mr. Heller advised Mr. Sternbach and the other representatives of
STAR that, while he believed that the terms set out at the meeting would be
acceptable, he would seek the approval of the Board of Directors of EFCC to
continue negotiations.
It was proposed and subsequently integrated into the STAR Merger
Agreement that the number of shares to be issued in exchange for the shares of
Common Stock of EFCC would be based upon the closing price of the STAR Common
Stock quoted on the Nasdaq National Market for the preceding 120 trading days
ending three business days prior to the Effective Time of the Star Merger.
On August 12, 1996, the Board of STAR considered and discussed the
proposed transaction. Messrs. Sternbach, Fellerman and Turchan explained the
terms of the proposed transaction as well as the anticipated benefits to STAR.
Mr. Fellerman described the expected savings and efficiencies that could be
expected to occur, as well as how the transaction fit within STAR's strategic
objectives of acquiring complimentary companies. Mr. Fellerman noted in
particular the expected cost savings that could be expected. At the same time,
EFCC's Board also gave Arbor Management permission to continue negotiating the
transaction and to continue cooperating in the due diligence investigation being
conducted by both companies.
During the period from August 13, 1996 to August 23, 1996, Mr.
Fellerman and other representatives of STAR conducted their due diligence review
of the books, records and operations of EFCC including the Evaluation Materials.
At the same time, work was commenced on preparing the necessary documentation to
finalize the proposed transaction. Similarly, Mr. Heller and other EFCC
representatives continued their due diligence investigation of STAR.
Between October and November 1996, legal counsel and representatives
of both parties negotiated and prepared various drafts of the STAR Merger
Agreement. On September 5, 1996, Messrs. Sternbach and Fellerman informed EFCC
that it was concerned that by paying the purchase price entirely in stock, the
holdings of the current owners would be diluted. Accordingly, STAR expressed a
strong preference for paying a portion of the purchase price in cash. Certain of
EFCC's shareholders indicated they would not approve that form of the
transaction unless the stock portion of the transaction qualified as a tax free
reorganization. The transaction would qualify as a tax free reorganization only
if a sufficient level of "continuity of interest" was maintained by the target
shareholders. It became apparent that a substantial portion of what STAR was
purchasing was the cash recently contributed by Arbor when it exercised its
option to purchase EFCC stock. It seemed unnecessary for STAR to pay cash to, in
effect, purchase the cash held by EFCC. To do so would artificially inflate the
cash portion of the purchase price, which would arguably reduce the level of
continuity of interest. The Special Dividend was paid since it reduced the need
for STAR to pay additional cash consideration for the cash held by EFCC.
At the annual meeting of the Board of Directors of STAR, held on
December 18, 1996, a draft of the STAR Merger Agreement was submitted to the
Board of Directors of STAR for their consideration and review. At this meeting,
Mr. Fellerman discussed the anticipated advantages of acquiring EFCC. The
reasons discussed by Mr. Fellerman, as well as the other members of the Board,
are discussed at length under the caption "STAR's Reasons for the STAR Merger;
Recommendation of the STAR Board" in the STAR Proxy/Prospectus. At that meeting
the STAR Board unanimously approved the terms of the proposed transaction.
At a special meeting of the Board of Directors of EFCC, held on
December 20, 1996, the EFCC Board discussed the transaction in detail and
debated the positive and negative factors with respect to the transaction. It
also determined to hire Telesis Mergers and Acquisitions, Inc. to render an
independent opinion on the fairness of the transaction. At this meeting, the
Board debated and discussed the reasons for the STAR Merger set forth in detail
under the caption "EFCC's Reasons for the STAR Merger -- Recommendations of the
EFCC Board" as set forth below. On December 30, 1996, the EFCC Board met a
second time. After again reviewing the terms of the transaction, as well as the
Telesis fairness opinion rendered to the Board, and being advised by counsel of
its responsibilities to its shareholders, the EFCC Board unanimously approved
the terms of the STAR Merger Agreement on December 30, 1996.
On January 3, 1997 the STAR Merger Agreement was signed.
The following discussion of the EFCC Board's reasons for approving the
STAR Merger and the fairness opinion the EFCC Board received in connection
therewith, is included herein for its relevance on the TPC shareholders in
assessing the valuation of EFCC and, therefore, TPC pursuant to the STAR Merger
Agreement and the TPC Merger Agreement.
EFCC'S REASONS FOR THE STAR MERGER; RECOMMENDATION OF THE EFCC BOARD
The EFCC Board of Directors believes that the STAR Merger is in the
best interests of its shareholders as it provides a favorable valuation of EFCC,
immediate cash benefits to its shareholders and provides EFCC's shareholders
with the possibility of a long term stake in the Home Health Care industry with
a company that, subsequent to the STAR Merger, will be a strong entity with
greater potential for growth than EFCC alone. In considering its approval of the
STAR Merger, the EFCC Board of Directors considered the following positive
factors:
(i) STAR's and EFCC's businesses are a good strategic fit in that the
referrals to be gained by consolidation of EFCC's and STAR's offices,
which currently operate in close proximity, would add a greater base
of patients to the combined entity;
(ii) because the areas serviced by STAR and EFCC are relatively similar,
administrative overhead currently existing in STAR would be
sufficient, to a great extent, to absorb EFCC's operations, thus
creating cost savings in the combined companies;
(iii)the EFCC Board considered that STAR is a growing company which is,
relative to EFCC, better capitalized, with a greater depth of
management and thus better poised to take advantage of the
opportunities in the Home Health Care field;
(iv) EFCC continues to struggle with profitability. The net income of EFCC
was down by $85,000 in the third quarter of the prior year and for the
year ended December 31, 1996, was estimated to be down approximately
$200,000 from the prior year;
(v) based upon the financial analysis of STAR performed by Telesis, upon
consummation of the STAR Merger, proforma earnings per share of STAR
are projected to increase on a going-forward basis;
(vi) the consummation of the STAR Merger would save EFCC a substantial
amount that it would otherwise have to spend on hiring additional
management, automation and quality control in order to remain
competitive in the home health care industry;
(vii)cutbacks in Medicaid, intense industry competition, difficulty in
finding good employees and poor economies of scale at EFCC's current
size were additional reasons for finding a stronger partner with which
to combine;
(viii) in addition, EFCC's current capitalization is inadequate to produce
the kind of growth necessary for an acceptable return on investment;
STAR's larger size and market position make it an easier entity to
raise capital;
(ix) STAR's Common Stock trades more actively in the Nasdaq National Market
than EFCC's stock. Therefore, additional liquidity would be afforded
the EFCC shareholders by virtue of the STAR Merger Stock that they
will receive;
(x) other than $250,000 being put in escrow by Arbor and Coss to indemnify
STAR for breaches of certain representations and warranties, no other
shareholder of EFCC will be required to put any money or property in
escrow;
(xi) the terms and conditions of the STAR Merger Agreement generally are
fair and in the best interests of EFCC's shareholders. The Board
concluded that the possibility of appreciation of the STAR Common
Stock, combined with the immediate cash benefit also being paid, when
balanced with all of the costs and challenges EFCC would encounter by
remaining independent, made the transaction fair and in the best
interests of the EFCC shareholders.
The EFCC Board also considered the following negative factors:
(xii)the shareholders of EFCC would be receiving stock in an entity no
longer under the control of the current Board of EFCC;
(xiii) the Consulting Agreement and Management Agreement are being signed
in connection with the STAR Merger Agreement, pursuant to which STAR
will take over many of the operating functions of EFCC, including the
transfer of certain of EFCC's staff and patients to STAR's facilities;
if, for any reason, the STAR Merger was not consummated, unwinding the
transfers that had occurred would be a difficult and expensive process
and may not be fully effective in returning to EFCC the status of its
operations prior to the execution of the STAR Merger Agreement;
(xiv)although EFCC's profitability had declined recently, its revenue
growth had been favorable and the advantage of remaining independent
and possibly capitalizing on this growth would be lost;
(xv) certain matters described above under the heading "Risk Factors" (in
the STAR Proxy\Prospectus) would make the STAR Merger speculative and
of high risk, but the EFCC Board concluded that such risks were
outweighed by the possible benefits to be achieved upon the
consummation of the STAR Merger.
After considering all of the foregoing reasons, EFCC's Board of
Directors concluded that a combination with Star on the terms set forth in the
STAR Merger Agreement is in the best interests of the shareholders of EFCC. The
EFCC Board concluded that the favorable factors set forth in items (i) through
(xi) outweigh the negative aspects set forth in items (xii) through (xv). The
Board of Directors of EFCC also relied upon an independent financial analysis
performed by Telesis, as discussed below.
The foregoing discussion addresses all of the material factors
considered by the EFCC Board in connection with its evaluation of the STAR
Merger. In view of the wide variety of factors, the EFCC Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the foregoing factors or determine that any factor was of particular
importance. Rather, the EFCC Board viewed its position and recommendation as
being based on the totality of the information presented to and considered by
it.
FINANCIAL ADVISOR; FAIRNESS OPINION FOR THE STAR MERGER
On December 20, 1996 EFCC retained Telesis Mergers & Acquisitions,
Inc. ("Telesis") to assist EFCC in its consideration and evaluation of possible
transactions and to render an opinion as to the fairness of the STAR Merger to
the holders of EFCC Common Stock from a financial point of view. EFCC's Board
did not place limitations on the investigations to be made or the procedures to
be followed by Telesis in preparing and rendering its opinion. Telesis did not
recommend the form or amount of consideration to be paid in the STAR Merger,
which was determined through arm's length negotiations between EFCC and STAR.
On December 31, 1996, Telesis delivered its written opinion that the
terms of the STAR Merger are fair to the shareholders of EFCC from a financial
point of view.
The full text of the written opinion of Telesis, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached as Appendix B-2 to this
Proxy\Prospectus. The Telesis opinion is directed to EFCC's Board and does not
constitute a recommendation to any individual shareholder as to how such
shareholder should vote at the EFCC Meeting. The summary of Telesis' opinion set
forth in this Joint Proxy Statement\Prospectus is qualified in its entirety by
reference to the full text of such opinion attached as Appendix B-2 to this
Proxy\Prospectus.
Telesis relied upon and assumed without independent verification the
accuracy and completeness of all publicly available financial information and
all financial information furnished or otherwise communicated to it by STAR and
EFCC. Telesis did not make any appraisal of the assets of such companies.
Telesis does not express any opinion as to what the value of the STAR Common
Stock actually will be when issued to EFCC shareholders pursuant to the STAR
Merger or the price at any time at which the STAR Common Stock will trade.
Telesis' opinion does not address the underlying business decision to enter into
the STAR Merger.
In connection with rendering its opinion, Telesis, among other things
reviewed: (i) the STAR Merger Agreement; (ii) Proxy Statements for EFCC for
September 9, 1996; (iii) EFCC's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and its Quarterly Reports on Form 10-QSB, for the
periods ended March 31, 1996, June 30, 1996 and September 30, 1996, (iv) the
most recently available Annual Report to Shareholders and Annual Report on Form
10-KSB and certain interim reports to Shareholders and Quarterly Reports on
Forms 10-QSB of STAR; (v) Current Reports of EFCC on Form 8-K dated (date of
earliest event reported) August 21, 1996 and October 31, 1996; Form 8-K/A dated
(date of earliest event reported) June 30, 1996 and July 9, 1996; (vi)
amendments to the Schedule 13D filed by Ivan Kaufman dated September 11, 1996
and November 14, 1996; (vii) certain other communications from EFCC and STAR to
their shareholders; and (viii) certain internal financial analyses and forecasts
of EFCC and STAR prepared by their respective managements. Telesis also met with
the respective management teams of STAR and EFCC to discuss their respective
businesses and business prospects. Telesis assumed that all financial
projections provided by STAR and EFCC were based upon assumptions reflecting the
best, currently available estimates and good faith judgments of the respective
managements as to the future performance of EFCC and STAR and that the
respective managements of EFCC and STAR do not have any information or beliefs
that would make the projections materially misleading. Telesis assumed that the
operating benefits contemplated by the STAR Merger, as reflected in the
financial projections provided by EFCC and STAR, will be achieved. In addition,
Telesis reviewed financial information for the pro forma combined entity of STAR
and EFCC, compared historical and projected financial and operating performance
of STAR and EFCC with certain other publicly held entities in the health care
industry, and reviewed acquisitions and mergers of certain companies in the home
health industry for which sufficient data was publicly available. Telesis
determined that the EFCC shareholders' equity interests in the combined entity
compared favorably with its pro forma analysis, analysis of selected publicly
traded companies, analysis of selected merger and acquisition transactions and
discounted cash flow analysis.
PRO FORMA ANALYSIS. Telesis analyzed the pro forma effects of the STAR
Merger upon the earnings per share of EFCC and the combined companies. Telesis
analyzed the operations and earnings of both EFCC and STAR as individual
companies as well as on a combined basis assuming the merger would be
consummated. The analyses were performed for the years of 1996, 1997, and 1998.
It is Telesis' opinion that the merger of the companies would generate a
combined incremental earnings contribution and cost savings that could not be
achieved by adding together the individual results of each company should the
merger not be consummated. In addition, the pro forma analysis performed by
Telesis reflected certain assumptions made by Telesis and by EFCC, some of which
may be beyond the control of EFCC and which may not reflect what will actually
occur upon the consummation of the STAR Merger. The pro forma analysis assumed
that upon consummation of the STAR Merger (i) EFCC would combine earnings
contribution (or earnings deficit) and (ii) EFCC would be able to generate
certain cost savings by combining the operations of EFCC with STAR. Such
analysis did not take into account the potential impact of the timing of the
implementation of such adjustments on EFCC's earnings. In general the pro forma
analysis examined the ongoing impact of such adjustments on an annual basis as
if the STAR Merger had been consummated on January 1, 1996. In addition, the pro
forma analysis did not factor in the potential cost of implementation of any of
the adjustments referenced above.
Giving effect to the adjustments described above, as well as the
assumptions incorporated in the pro forma analysis, Telesis noted that the pro
forma analysis indicated that the aggregate annual impact of the adjustments
could potentially result in incremental net income to the combined companies of
$1.1 million, $2.4 million and $3.0 million for the years ending December 31,
1996, 1997 and 1998, respectively. On a per share basis the annual impact of
such adjustments could potentially increase earnings per share of the combined
companies by $.03, $.06, and $.08 for the years ended December 31, 1996, 1997
and 1998, respectively. The pro forma analysis included certain assumptions
regarding cost savings, reflecting the combination and the timing of the
implementation of such cost savings which may or may not reflect the actual cost
savings achieved by the combined companies upon the consummation of the STAR
Merger. Telesis noted, based upon the pro forma analysis, that the STAR Merger
could potentially have a substantial positive impact on the combined companies'
earnings per share.
Based upon the pro forma analysis, Telesis concluded that the STAR
Merger was fair, from a financial point of view, to the shareholders of EFCC.
COMPARABLE PUBLIC COMPANY METHODOLOGY. Telesis performed an analysis
of selected publicly traded companies which it deemed to have businesses that
were similar to that of EFCC. Telesis reviewed a group of companies that
provide, among other services, home health care services, including Olsten;
Apria Healthcare Group, Inc.; Interim Services, Inc.; The Care Group, Inc.; Home
Health Corporation of America; Career Horizons, Inc.; Home Care Affiliates,
Inc./Housecall Medical Resources, Inc.; Nurse's Housecall/Olsten Heath Services;
Amserv Healthcare/Star Multi Care Services, Inc.; and Staff Builders, Inc. In
its review of the companies referenced above, Telesis focused specifically upon
the companies within this group that provided home nursing services, namely
Olsten; Interim Services, Inc.; Career Horizons, Inc. and Staff Builders, Inc.
(the "Comparable Companies"). Telesis deemed the home health care companies to
incorporate business fundamentals which were similar to the Company's. For each
of the Comparable Companies, Telesis examined certain publicly available
financial data, including net revenue, gross margin, selling, general and
administrative expenses, contribution margin, earnings before interest and taxes
("EBIT"), EBIT margin, net income, earnings per share and net income margin.
Telesis examined the balance sheet items of each of the Comparable Companies and
published earnings forecasts and the trading performance of the various
companies' common stock. In addition, Telesis calculated the ratio of the market
price (as of November 29, 1996) of the stock to the projected earnings per share
for calendar year 1996 of each Comparable Company and the ratio of the
enterprise value (the total market value of the common stock outstanding plus
EFCC's total debt at par less cash and cash equivalents) to the latest twelve
months' ("LTM") net revenue and to the LTM EBIT of each Comparable Company.
Telesis noted that the harmonic mean of the ratio of the stock price to
projected earnings per share of the Comparable Companies was 15.2x at the range
of ratios was from 13.8x to 17.2x. The harmonic mean of the ratios of the
enterprise value to LTM net revenue of the Comparable Companies was 0.42x and
the range of ratios was from 0.30x to 0.56x. The harmonic mean to the ratios of
the enterprise value to LTM EBIT of the Comparable Companies was 10.8x and the
range of ratios was from 9.9x to 11.4x.
The ratios referenced above were used by Telesis to impute a range of
values for EFCC. Based upon the harmonic mean and the range of ratios of the
stock price to projected earnings per share for calendar year 1996 of the
Comparable Companies, the imputed value of EFCC was $3.4 million, and the
imputed range of values of EFCC was $3.1 million to $3.8 million. Based upon the
harmonic mean and the range of ratios of the enterprise value to LTM net revenue
of the Comparable Companies, the imputed value of EFCC was $3.7 million, and the
imputed range of values of EFCC was $2.6 million to $4.8 million. Based upon the
ratios of the enterprise value to LTM EBIT of the Comparable Companies, the
imputed values of EFCC were $4.8 million to $5.5 million.
COMPARABLE ACQUISITION TRANSACTION METHODOLOGY. Telesis performed an
analysis of selected precedent merger and acquisition transactions in the home
healthcare industry including (target company/acquiring company): In Home Health
Inc.,/Manor Care, Inc.; Apria Healthcare Group, Inc.; Home Health Corporation of
America; The Care Group, Inc.; Home Care Affiliates, Inc./Housecall Medical
Resources, Inc.; Nurse's Housecall/Olsten Health Services; Amserv
Healthcare/Star Multi Care Services, Inc.; Caremark International Inc.'s home
health care business/Coram Healthcare Corporation, Inc.; Home Nutritional
Services, Inc./W.R. Grace & Co., Inc.; Curaflex Health Services, Inc.,
HealthInfusion, Inc. and Medysis, Inc./T(2) Medical, Inc.; Critical Care
America, Inc./Caremark International Inc.; Lifetime Corporation/Olsten; Clinical
Homecare, Ltd./Curaflex Health Services, Inc.; Total Home Care, Inc./Curaflex
Health Services, Inc.; Critical Care America, Inc./Medical Care International,
Inc.; TeamCare, Inc./Critical Care America, Inc.; Care Plus, Inc./New England
Critical Care, Inc.; Upjohn Healthcare Services, Inc./Olsten; Mentor Clinical
Care, Inc./Lifetime Corporation; Quality Care, Inc./Lifetime Corporation. In its
review of the transactions referenced above, Telesis focused specifically upon
the following transactions within this group (the "Precedent Transactions"): In
Home Health, Inc./Manor Care, Inc.; Caremark International Inc.'s home health
care business/Coram Healthcare Group, Inc.; Critical Care America. (a subsidiary
of Medical Care International, Inc.)/Caremark International Inc.; and Lifetime
Corporation/Olsten Corporation. For each of the target companies involved in the
Precedent Transactions, Telesis examined certain publicly available financial
data, including net revenue, gross margin, selling, general and administrative
expenses, contribution margin, EBIT, EBIT margin, net income, earnings per share
and net income margin. Telesis examined the balance sheet items of each of the
target companies involved in the Precedent Transactions and published earnings
forecasts and the trading performance of the various target companies' common
stock. In addition, Telesis calculated the ratio of the purchase price of the
target company in relation to the target company's LTM and projected net income
(for the next calendar year) and the ratio of the transaction value (the total
purchase price of the equity plus the target company's total debt at par less
cash and cash equivalents) of each target company to its LTM net revenue and LTM
EBIT. Telesis noted that the harmonic mean of the ratios of the purchase price
of the equity to LTM net income of the target companies in the Precedent
Transactions was 20.0x and that the range of ratios was from 12.7x to 46.1x. The
harmonic mean of the ratios of the purchase price of the equity to projected net
income of the target companies in the Precedent Transactions was 0.56x and the
range of ratios was from 0.47x to 0.75x. The harmonic mean of the transaction
value to LTM EBIT of the target companies in the Precedent Transactions was
11.8x and the range of ratios was from 5.6x to 41.6x.
The ratios referenced above were used by Telesis to impute a range of
values for EFCC. Based upon the ratios of the purchase price to LTM net income
of the target companies in Precedent Transactions, the imputed range of value of
EFCC was $2.8 million to $10.2 million. Based upon the harmonic mean and the
range of ratios of the purchase price to projected earnings per share of the
target companies in the Precedent Transactions, the imputed value of EFCC was
$4.1 million and the imputed range of values for EFCC was $3.4 million to $5.4
million. Based upon the harmonic mean and the range of ratios of the transaction
value LTM net revenue of the target companies in the Precedent Transactions, the
imputed value of EFCC was $5.7 million and the imputed range of values of EFCC
was $2.0 million to $6.7 million.
GOING CONCERN VALUE OF EFCC - Discounted cash flow analysis. Telesis
performed a discounted cash flow analysis of EFCC using projected financial
results for EFCC prepared internally by the management of EFCC, which financial
results reflected certain assumptions made by the management of EFCC regarding
EFCC's projected results and certain cost savings which could be achieved by
combining operations. The analysis included certain assumptions including a
range of price-to-earnings ratios in the terminal year of the projection period
of 16.0x to 20.0x and a range of discount rates of 15% to 20%. Based upon the
discounted cash flow analysis, the imputed range of values of EFCC was $2.2
million to $5.2 million.
VALUATION OF CONSIDERATION TO BE RECEIVED FOR EFCC. In assessing the
value of the consideration to be received by EFCC in the STAR Merger, Telesis
concluded that an appropriate range of values for EFCC was $2.4 million to $5.4
million.
VALUATION OF EFCC. Telesis noted that EFCC reported an operating loss
for its latest historical period and was not projected to earn a material level
of earnings in the current fiscal period. Telesis reviewed the historical and
projected operating results of EFCC including the contributing factors that
would affect these results such as business mix, reimbursement sources,
diversification of referral sources, strength of management, future opportunity
for business growth, and the operating and regulatory environments in which EFCC
provides its services. These factors were then analyzed against industry
standards and operating and financial profiles of comparable companies. Given
Telesis' work in the home health care industry as a financial advisor for more
than 17 years, along with its detailed knowledge of the issues affecting
valuation and performance in the industry and based on the analysis set forth in
the Prospectus\Proxy Statement, Telesis concluded that based on the operating
and future results of EFCC that the imputed range of valuations for EFCC based
on the ratio of the enterprise and transaction value LTM net revenue were too
high. Telesis concluded that the appropriate range of values of EFCC would be
$2.4 million to $5.4 million. Telesis noted further that the imputed range of
values of the consideration to be received by EFCC in the STAR Merger for EFCC,
approximately $7.25 million to $8.0 million, was greater than the range of
values of EFCC. Telesis concluded that the STAR Merger was fair, from a
financial point of view, to the shareholders of EFCC.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Telesis' opinion. In arriving at its opinion, Telesis considered the
results of such analyses but did not ascribe particular weight to any one
analysis. The analyses were prepared solely for the purposes of providing its
opinion as to the fairness of the STAR Merger, from a financial point of view,
to the shareholders of EFCC and do not purport to be appraisals or necessarily
reflect the price at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, Telesis did not, in arriving at its
fairness opinion, evaluate alternatives to the STAR Merger. The foregoing
summary does not purport to be a complete description of the analyses performed
by Telesis.
The Board of Directors of EFCC retained Telesis to act as its
financial advisor based upon its qualifications, experience and expertise.
Telesis, as part of its investment banking business, is engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
private placements and valuations for corporate and other purposes.
Pursuant to a letter agreement, dated December 20, 1996, EFCC agreed
to pay Telesis a fee of $20,000 upon the rendering of its fairness opinion
relating to the STAR Merger.
CONSIDERATION OF THE TPC MERGER
After the execution of the STAR Merger Agreement, the TPC Board and
the EFCC Board (which consists of the same members) determined to consider the
TPC Merger. In this connection, Telesis was engaged to render an independent
opinion for the benefit of the TPC shareholders. Telesis' fairness opinion to
the TPC shareholders is described below at "Fairness Opinion for the TPC
Merger." The TPC Board reviewed Telesis' fairness opinion, both that given with
respect to the TPC Merger and that given with respect to the STAR Merger, and
both EFCC's and TPC's Board considered the factors discussed below, before
approving the TPC Merger.
By written consent dated January 31, 1997, TPC's Board determined that
the TPC Merger is fair to, and in the best interests of, the shareholders of
TPC, approved the form of Agreement and Plan of Merger among EFCC and TPC, which
was executed March 18, 1997 (the "TPC Merger Agreement") and the transactions
contemplated thereby, and determined to recommend to TPC shareholders that they
vote for approval and adoption of the TPC Merger Agreement and the transactions
contemplated therein. By written consent dated January 31, 1997, EFCC's Board
unanimously determined that the TPC Merger is fair to, and in the best interests
of, the shareholders of EFCC, approved the form of the TPC Merger Agreement and
determined to recommend to EFCC's shareholders that they vote for approval and
adoption of the TPC Merger Agreement and the transactions contemplated therein.
The following discussion sets forth certain information relating to the
background of the discussions and meetings leading up to the TPC Merger.
TPC'S REASONS FOR THE TPC MERGER; RECOMMENDATION OF THE TPC BOARD
The TPC Board of Directors believes that the TPC Merger is in the best
interests of its shareholders as it provides liquidity for its shareholders
since EFCC's shares are traded and quoted on the NASDAQ Bulletin Board and in
the "Pink Sheets" published by the National Quotation Bureau, Inc., and the EFCC
shares to be issued pursuant to the TPC Merger will be registered under the
Securities Act of 1933. As TPC represents EFCC's sole operating business, there
is effectively no difference between the business and prospects of EFCC and
those of TPC. In considering approval of the TPC Merger, the TPC Board of
Directors focused principally on the positive factor of the liquidity to be
provided by virtue of the TPC Merger, the favorable valuation accorded EFCC and
TPC in the STAR Merger, and the absence of any negative or countervailing
factors. See "Fairness Opinion for the TPC Merger." The TPC Board also noted
that the TPC Merger is a condition precedent to the STAR Merger; however, the
completion of the TPC Merger is not dependent upon the completion of the STAR
Merger.
The TPC Board, at the time the TPC Merger was approved, consisted of
the current directors, Joseph Heller, Paul Elenio and Robert Kohlmeyer, as well
as Mary Ann Page, former Acting Chief Executive Officer of EFCC, who resigned in
April, 1997. Ms. Page had no affiliation with EFCC, TPC or STAR, or any of their
stockholders, other than her offices and directorship with EFCC and TPC. Ms.
Page resigned to pursue her own interests and because her function was no longer
critical in light of the transfer of certain administrative functions to STAR.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Aside from the resolutions adopted by the TPC Board and reflected in a
written consent dated January 31, 1997, which resolutions are summarized above,
the TPC Board did not formally meet to discuss the TPC Merger, although their
awareness of the process of the STAR Merger in their capacity as EFCC directors
kept them apprised on all of the issues relating to the STAR Merger transaction.
No other factors, other than those mentioned above, were considered by the TPC
Board in approving the TPC Merger Agreement.
The Board of Directors of TPC has unanimously determined that the TPC
Merger is fair to, and in the best interests of, the shareholders of TPC, has
approved the TPC Merger Agreement and unanimously recommends that the
shareholders of TPC vote to approve and adopt the TPC Merger Agreement and the
transactions contemplated thereby.
EFCC'S REASONS FOR THE TPC MERGER; RECOMMENDATION OF THE EFCC BOARD
The EFCC Board of Directors believes that the TPC Merger is in the
best interests of its shareholders as the administrative costs of maintaining
TPC as a subsidiary no longer serves as a useful purpose. These costs include
the need to hold shareholders' meetings for any matter requiring TPC
shareholders' approval, the need to maintain separate financial and accounting
records for TPC for transactional and bookkeeping purposes and other
administrative costs associated with maintaining two separate companies such as
franchise fees, legal fees and other miscellaneous costs. The EFCC Board noted
that there is no compelling reason for TPC to remain in existence as a
subsidiary. The positive factors of cost savings and administrative efficiency,
along with the fact that the EFCC Stock constituting the TPC Merger
Consideration would be valued on the same basis as EFCC as a whole in the STAR
Merger, were the sole factors considered by the EFCC Board in approving the TPC
Merger. The EFCC Board also noted that the completion of the TPC Merger is a
condition to the STAR Merger although the completion of the TPC Merger is not
conditioned upon the completion of the STAR Merger. The EFCC Board also noted
that there are no negative or countervailing factors associated with the TPC
Merger.
The EFCC Board, at the time the TPC Merger was approved, consisted of
the current directors, Joseph Heller, Paul Elenio and Robert Kohlmeyer, as well
as Mary Ann Page, former Acting Chief Executive Officer of EFCC, who resigned in
April, 1997.
After considering all the foregoing reasons, EFCC's Board concluded
that the TPC Merger was in the best interest of the EFCC shareholders. Aside
from the adoption, on January 31, 1997, of the resolutions described above
approving the TPC Merger, and aside from the above-described meetings related to
the STAR Merger, the EFCC Board held no other meetings with respect to the TPC
Merger. No other factors, other than those mentioned above, were considered by
the EFCC Board in approving the TPC Merger.
FAIRNESS OPINION FOR THE TPC MERGER
In considering the valuation of TPC in the TPC Merger, TPC's Board of
Directors relied upon a fairness opinion of Telesis Mergers & Acquisitions, Inc.
("Telesis"). This opinion is annexed as Appendix B-1 to this Proxy/Prospectus.
Telesis has experience in evaluating companies in the home healthcare field and
also gave the fairness opinion as to the valuation of EFCC in the STAR Merger.
The Telesis fairness opinion states that the valuation of TPC should be
calculated on the basis of the percentage interest represented by the TPC shares
not owned by EFCC or approximately 17%. The value of EFCC's net assets,
excluding its investment in TPC, were deducted from this percentage to yield a
14.9% interest in EFCC to be distributed to the holders of shares of TPC other
than EFCC. Those net assets were valued at their book value. The shares of TPC
to be exchanged for the TPC Merger Consideration, and the shares of EFCC to be
exchanged therefor, were valued at the valuation placed on EFCC as a whole,
pursuant to the STAR Merger Agreement, which valued EFCC at $7,250,000, after
giving effect to the TPC Merger and after netting out the Special Dividend.
Telesis assumed the fairness of this valuation due to the fairness opinion
rendered by it to EFCC's shareholders in connection with the STAR Merger. See
"Financial Adviser Fairness Opinion for the STAR Merger." The Boards of EFCC and
TPC did not consider alternative valuations as the valuation specified above
reflects a current valuation of EFCC pursuant to the STAR Merger, which
valuation was based almost entirely on the value of TPC and was negotiated at
arm's length by the EFCC Board with STAR, an independent third party. See,
"Background of the STAR Merger; Financial Advisor; Fairness Opinion" for the
STAR Merger.
In summary, after valuing EFCC at $7,250,000 and deducting assets held
only at the EFCC level, the TPC minority shareholders are to be given 17% of
this net figure pursuant to the TPC Merger, constituting approximately 14.9% of
the $7,250,000 valuation of EFCC pursuant to the STAR Merger.
THE BOARD OF DIRECTORS OF EFCC HAS UNANIMOUSLY DETERMINED THAT THE TPC
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, EFCC'S SHAREHOLDERS, HAS
APPROVED THE TPC MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT EFCC'S
SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE TPC MERGER AGREEMENT.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States
federal income tax consequences of the TPC Merger and is not intended to be a
complete discussion of all potential tax effects that might be relevant to the
TPC Merger. Such discussion deals only with U.S. holders, and assumes that the
shares of TPC Common Stock have been held as a capital asset. It may not be
applicable to certain classes of taxpayers, including, without limitation,
insurance companies, tax-exempt organizations, financial institutions,
securities dealers, broker-dealers, foreign persons, persons who hold TPC Common
Stock as part of a conversion transaction and persons who acquired TPC Common
Stock pursuant to an exercise of employee stock options or rights or otherwise
as compensation. There can be no assurance that the Internal Revenue Service
(the "Service") will not take a contrary view to those expressed herein. No
rulings have been or will be requested from the Internal Revenue Service with
respect to the tax consequences of the TPC Merger. Moreover, the state, local,
foreign and estate tax consequences to TPC shareholders of the TPC Merger are
not discussed.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations, judicial decisions and
administrative rulings and practice in effect at the date of this Joint
Proxy/Prospectus and the opinion of Meltzer, Lippe, counsel to EFCC. However,
legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences described herein to shareholders. EACH
SHAREHOLDER IS URGED TO CONSULT WITH SUCH SHAREHOLDER'S OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE TRANSACTIONS DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
It is intended that the TPC Merger qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code, and that, for federal income
tax purposes, no gain or loss will be recognized by EFCC or TPC as a result of
the TPC Merger.
EFCC has received a tax opinion of Meltzer, Lippe, counsel to EFCC
(the "Tax Opinion"), dated immediately prior to the mailing of this
Proxy\Prospectus, to the effect that, it is more likely than not that (i) the
TPC Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, (ii) TPC and EFCC will each be a party to the reorganization
pursuant to Section 368(b) of the Code, (iii) no gain or loss will be recognized
by a holder whose shares of TPC Common Stock are converted into and exchanged
for EFCC Common Stock (with the possible exception of TPC Common Stock acquired
by a holder pursuant to an employee stock option plan or other compensation
agreement in anticipation of the TPC Merger and except to the extent of any cash
received in lieu of fractional EFCC Common Stock), (iv) each holder of shares of
TPC Common Stock receiving cash in lieu of a fractional share of EFCC Common
Stock will be treated for federal income tax purposes as having received such
fractional share interest and as having sold it for the cash received and will
recognize capital gain or loss (long or short-term depending on whether the
holder's holding period is more or less than 12 months) equal to the difference
between the amount of cash received and the portion of that holder's basis in
the TPC Common Stock deemed exchanged for the fractional share interest; (v) the
tax basis of the shares of EFCC Common Stock received by the holders of shares
of TPC Common Stock will be equal to the basis of the shares of TPC Common Stock
exchanged therefor (except for the basis attributable to any fractional share
interest in EFCC Common Stock); and (vi) the holding period of the EFCC Common
Stock received by the holders of shares of TPC Common Stock will include the
holding period of shares of the TPC Common Stock surrendered in exchange
therefor.
Meltzer, Lippe's opinion is based on the accuracy of certain
representations that it will receive concerning EFCC and TPC, including the
following: (i) the TPC Merger will be consummated in accordance with the TPC
Merger Agreement; (ii) the minority shareholders of TPC acquired their TPC
Common Stock before the formulation of any plan in connection with the TPC
Merger and not in contemplation of EFCC's subsequent acquisition of TPC; and
(iii) as of the Effective Time, there will be no binding commitment or
preconceived plan or arrangement on the part of the shareholders of TPC to sell,
exchange or otherwise dispose of any of their EFCC Common Stock received in the
TPC Merger (including EFCC Common Stock held prior to the TPC Merger), other
than pursuant to the STAR Merger. An opinion is not binding on the Internal
Revenue Service or the courts and, therefore, the delivery of the Tax Opinion
cannot assure that the Internal Revenue Service or the courts will treat the TPC
Merger as a reorganization within the meaning of Section 368(a) of the Code.
If the TPC Merger were not to constitute a reorganization under
Section 368(a)(1) of the Code, each holder of shares of TPC Common Stock would
recognize gain or loss equal to the difference between the fair market value of
the shares of EFCC Common Stock received and cash received in lieu of fractional
shares and such holder's basis in the shares of TPC exchanged therefor. Such
gain or loss would be long-term capital gain or loss, provided such shares had
been held for more than one year.
ACCOUNTING TREATMENT OF EFCC/TPC MERGER
The acquisition of the minority interest of TPC will be accounted for
by EFCC under the "purchase method" of accounting in accordance with generally
accepted accounting principles. Accordingly, the results of operations of the
minority interest in TPC will be included in the results of operations of EFCC
on for periods subsequent to the Effective Time, and any excess consideration
paid by EFCC will be allocated to goodwill.
REGULATORY APPROVALS
EFCC and TPC are not aware of any license or regulatory permit which
is material to the business of EFCC or TPC and which is likely to be adversely
affected by consummation of the TPC Merger or any approval or other action by
any state, federal or foreign government or governmental agency (other than
routine re-licensing procedures) that would be required prior to the TPC Merger.
RESALE RESTRICTIONS
All shares of EFCC Common Stock received by TPC shareholders in the
TPC Merger will be freely transferable, except that shares of EFCC Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of EFCC or TPC prior to the TPC Merger may be resold
by them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who, after the Effective Time, are or become affiliates of EFCC or as otherwise
permitted under the Securities Act). Persons who may be deemed to be affiliates
of EFCC or TPC generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal shareholders
of such party.
THE TPC MERGER AGREEMENT
THE DETAILED TERMS AND CONDITIONS OF THE TPC MERGER ARE CONTAINED IN
THE TPC MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS APPENDIX A TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING
SUMMARY OF THE MATERIAL TERMS OF THE TPC MERGER AGREEMENT IS QUALIFIED IN ITS
ENTIRETY BY, AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE
TPC MERGER AGREEMENT.
THE MERGER
Subject to the terms and conditions of the TPC Merger Agreement, at
the Effective Time, TPC will be merged with and into EFCC and thereupon the
separate existence of TPC will cease and EFCC will continue to exist.
EFFECTIVE TIME OF THE TPC MERGER
Upon the satisfaction or waiver of all conditions to the TPC Merger,
and provided that the TPC Merger Agreement has not been terminated or abandoned,
TPC and EFCC will cause a Certificate of Merger to be filed with the Department
of State of the State of New York. The TPC Merger will become effective upon the
filing of the Certificate of Merger or at such later time as TPC and EFCC have
agreed upon and designated in such filing as the Effective Time.
CONVERSION OF SECURITIES
Each share of EFCC Common Stock, which is issued and outstanding
immediately prior to the Effective Time will continue to be issued and
outstanding; and each share of TPC Common Stock, which is issued and outstanding
immediately prior to the Effective Time, except those held by EFCC and except
those held by TPC shareholders who validly and properly demand and perfect
dissenters' rights under the NYBCL, will be converted into the right to receive
the following consideration: (i) 18.745545 shares of duly authorized, validly
issued fully paid and non-assessable shares of EFCC Common Stock for each share
of TPC Common Stock surrendered by a holder pursuant to the TPC Merger Agreement
and (ii) cash representing the Market Price (as defined below) of one share of
EFCC Common Stock multiplied by the fraction of any share of EFCC Common Stock
otherwise issuable to a holder of TPC Common Stock pursuant to the TPC Merger
Agreement, such cash to be paid in lieu of any such fractional of share of EFCC
Common Stock. Market Price shall be equal to the last quoted bid price of EFCC
Common Stock as supplied by the National Quotations Bureau, Inc. at the
Effective Time. TPC Common Stock owned by EFCC will be cancelled as a result of
the TPC Merger and no EFCC Common Stock will be issued to EFCC in respect
thereof. Certificates for TPC Common Stock previously issued do not give effect
to a 1:4 reverse stock split which occurred in 1985. Thus, shareholders of TPC
actually own only one share of TPC Common Stock for every four shares for which
they possess a TPC Share certificate. Therefore, the TPC Merger Consideration
payable for each share represented on a certificate for TPC Common Stock will be
25% of the TPC Exchange Ratio or 4.686386 shares of EFCC Common Stock.
DISSENTERS RIGHTS
Shares of TPC Common Stock that have not been voted for the adoption
of the TPC Merger and with respect to which dissenters' rights shall have been
validly and properly demanded and perfected in accordance with the NYBCL
("Dissenting Shares") will not be converted into the right to receive the TPC
Merger Consideration on or after the Effective Time unless and until the holder
of such shares withdraws its demand for such appraisal in accordance with
applicable law or becomes ineligible for such appraisal, at which time such
shares shall be converted into and represent the right to receive the TPC Merger
Consideration, without interest. See "APPRAISAL RIGHTS OF DISSENTING
SHAREHOLDERS".
EXCHANGE OF CERTIFICATES
As of the Effective Time, EFCC will deposit, or cause to be deposited
with American Stock Transfer and Trust Company, or such other mutually
acceptable bank or trust company (the "Exchange Agent"), for the benefit of
holders of TPC Common Stock for exchange in accordance with the TPC Merger
Agreement; (i) certificates representing the EFCC Common Stock constituting the
TPC Merger Consideration and (ii) the estimated amount of cash to be paid in
lieu of fractional shares (together, all such certificates and cash being
hereinafter refereed to as the "Exchange Fund"). The Exchange Agent will
deliver, pursuant to irrevocable instructions, the EFCC Common Stock
contemplated to be issued pursuant to the TPC Merger Agreement and the cash to
be issued in lieu of fractional shares out of the Exchange Fund.
As soon as reasonably practicable after the Effective Time, the
Exchange Agent will mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of TPC Common Stock (the "TPC Certificates") whose shares
were converted into the right to receive the TPC Merger Consideration (i) a
letter of transmittal and (ii) instructions for use in effecting the surrender
of the TPC Certificates in exchange for the TPC Merger Consideration. Upon
surrender of a TPC Certificate for cancellation to the Exchange Agent, or to
such other agent or agents as may be appointed by EFCC, together with such
letter of transmittal, duly executed, and such other documents as may be
reasonably required by the Exchange Agent, the holder of such TPC Certificate
will be entitled to receive in exchange therefor the TPC Merger Consideration
which such holder has the right to receive.
If the STAR Merger is consummated, (i) EFCC shareholders who do not
dissent from the STAR Merger and (ii) holders of TPC Common Stock who do not
dissent from the TPC Merger or STAR Merger, and who are EFCC shareholders on the
STAR Record Date, will receive a combination of STAR Common Stock and cash,
pursuant to the terms of the STAR Merger Agreement. See, the "STAR
PROXY/PROSPECTUS". In such event, the holder of TPC shares who is entitled to
receive TPC Merger Consideration hereunder and does not dissent from the STAR
Merger, as a matter of expediency and not in alteration or derogation of rights
granted to such holder, will not be issued certificates for shares of EFCC
Common Stock in connection with the TPC Merger, but rather will be deemed to
have been issued such certificates. Such shareholders will receive the same
consideration payable to an EFCC shareholder in the STAR Merger, in proportion
to the number of EFCC shares issuable to such shareholder as TPC Merger
Consideration hereunder, as if such EFCC share certificates had actually been
issued. Such shareholders will also receive any cash payable in lieu of
fractional EFCC shares issued pursuant to the TPC Merger. The consideration
payable in the STAR Merger will be equal to $3.614141 per share of TPC Common
Stock exchanged for EFCC Common Stock in the TPC Merger, which is equivalent to
$.1928 per share of EFCC Common Stock exchanged in the STAR Merger. TPC
Certificates do not give effect to a 1:4 reverse stock split, so the amount of
consideration payable pursuant to the STAR Merger per share of TPC Common Stock
as represented by a TPC Certificate is $.9035352. See "THE TPC MERGER AGREEMENT
- - The STAR Merger" and, generally, "The STAR Proxy/Prospectus."
TPC SHAREHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A NOTICE AND TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
No dividends or other distributions with respect to EFCC Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered TPC Certificate with respect to the EFCC Common Stock represented
thereby and no cash payment (including, without limitation, cash payment in lieu
of fractional shares) will be paid to any such holder until the surrender of
such TPC Certificate in accordance with the terms of the TPC Merger Agreement,
or, if applicable, the STAR Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such Certificate, there will be paid
to the holder of the Certificates representing whole shares of EFCC Common Stock
issued in exchange therefor, without interest: (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
EFCC Common Stock; and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of EFCC Common Stock.
All EFCC Common Stock issued, upon the surrender for exchange of TPC
Certificates in accordance with the terms of the TPC Merger Agreement (including
any cash paid in lieu of fractional shares) will be deemed to have been issued
(and/or paid) in full satisfaction of all rights pertaining to such TPC Common
Stock.
No certificates or scrip representing fractional EFCC Common Stock
will be issued upon the surrender for exchange of TPC Certificates, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a shareholder of EFCC. Notwithstanding any other provision of the TPC
Merger Agreement, each holder of shares of TPC Common Stock exchanged pursuant
to the TPC Merger Agreement who would otherwise have been entitled to receive a
fraction of a share of EFCC Common Stock (after taking into account all TPC
Certificates delivered by such holder) will receive, in lieu therefor, cash
(without interest) in an amount equal to such fractional share of EFCC Common
Stock multiplied by the Market Price of one share of EFCC Common Stock.
MANAGEMENT AFTER THE MERGER
TPC will cease to exist as a result of the TPC Merger Agreement and
the current Board of Directors of EFCC will be the Board of Directors of the
merged entity. If the STAR Merger is completed, then EFCC's Board will be
appointed pursuant to the terms of the STAR Merger Agreement. See the "STAR
Proxy/Prospectus - THE MERGER -Management After the Merger".
CONDITIONS OF THE MERGER
The respective obligations of TPC and EFCC to consummate the TPC
Merger are subject to the fulfillment of certain conditions, certain of which
may be waived by the mutual consent of TPC and EFCC, including, without
limitation, the following (i) the Registration Statement shall have been
declared effective, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission or shall
continue to be in effect, and no proceedings for the purpose shall have been
initiated or threatened by the Commission; (ii) EFCC shall have received all
state securities laws or "blue sky" permits and authorizations necessary to
issue EFCC Common Stock pursuant to the TPC Merger and the transactions
contemplated thereby; (iii) the TPC Merger Agreement and the TPC Merger
contemplated thereby and any other action necessary to consummate the
transactions contemplated thereby will have been approved and adopted by the
requisite vote of the holders of the outstanding shares of TPC Common Stock
entitled to vote thereon at the TPC Meeting and the requisite vote of the
holders of outstanding shares of EFCC Common Stock entitled to vote thereon at
the EFCC Meeting; (iv) no governmental authority or other agency, commission or
court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, injunction or the order
(whether temporary, preliminary or permanent) which is in effect and has the
effect of making the TPC Merger illegal or otherwise prohibiting consummation of
the transactions contemplated by the TPC Merger Agreement; provided, however,
that, prior to invoking this condition, each party to the TPC Merger Agreement
shall use all reasonable efforts to have such statute, rule, regulation,
injunction or order vacated; (v) the receipt of an opinion by Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C. that, more likely than note, the TPC Merger
will constitute a tax-free reorganization under Section 368(a) of the Internal
Revenue Code; and (vi) any required third-party consents or approvals shall have
been obtained.
TERMINATION AND AMENDMENT
The TPC Merger Agreement may be terminated and the TPC Merger
abandoned at any time prior to the Effective Time, before or after approval by
the shareholders of EFCC and TPC, by the mutual consent of EFCC and TPC and the
approval of each corporation's Board of Directors.
Subject to the applicable provisions of state law, the TPC Merger
Agreement may be amended by the parties thereto solely by action taken by their
respective Boards of Directors. The TPC Merger Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto. TPC and EFCC undertake to recirculate a request for proxies in the event
of a material amendment to the TPC Merger Agreement or a waiver of a material
condition thereto.
At any time prior to the Effective Time, the parties to the TPC Merger
Agreement, by action taken by their respective Boards of Directors, may (i)
extend the time for the performance of any of the obligations or other acts of
the other parties, (ii) waive any inaccuracies in the representations and
warranties of the other party contained in the TPC Merger Agreement or in any
documents delivered pursuant thereto, and (iii) waive compliance by the other
party with any of the agreements or conditions therein. Any agreement on the
part of a party thereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party. No waiver
by either party of any default with respect to any provision, condition or
requirement of the TPC Merger Agreement will be deemed to be a waiver of any
other provision, condition or requirement thereof; nor shall any delay or
omission of either party to exercise any right thereunder in any manner impair
the exercise of any such right accruing to it thereunder.
The TPC Merger Agreement provides that any current indemnification
provision and agreement with a TPC officer or director will survive the TPC
Merger, will not be amended, replaced or modified in a manner that would
adversely affect an indemnified party, and will continue in full force and
effect for a period of at least six years from the Effective Time.
THE STAR MERGER
All Shareholders of EFCC as of the STAR Record Date and all
Participating TPC Shareholders (i.e. those who did not dissent from the TPC
Merger) who are also shareholders of EFCC at the STAR Record Date, will be
entitled to vote upon and approve, or dissent from, the STAR Merger, which is
described in detail in the STAR Proxy Prospectus which accompanies this Joint
Proxy/Prospectus. If (i) the TPC Merger is approved by the respective
shareholders of EFCC and TPC and the TPC Merger is completed in accordance with
applicable law and (ii) the STAR Merger is approved by the shareholders of EFCC
and STAR and is completed in accordance with applicable law, then (a) each
shareholder of EFCC, and (b) each Participating TPC Shareholder, who is a
shareholder of EFCC on the STAR Record Date and does not dissent from the STAR
Merger, will receive all consideration payable to an EFCC Shareholder in the
STAR Merger, which consideration shall be paid in exchange for the EFCC Common
Stock held by such EFCC Shareholder or Participating TPC Shareholder. That
consideration (a combination of STAR Common Stock and cash) is equal to $.1928
per share of EFCC Common Stock or $3.614141 per share of TPC Common Stock (or
$.9035352 per share represented by a TPC Certificate due to the reverse stock
split) based on the TPC Exchange Ratio in the TPC Merger. See the "STAR
Proxy/Prospectus." A shareholder of TPC which is not a Participating TPC
shareholder will not be entitled to receive consideration payable to EFCC
Shareholders with respect to the STAR Merger if the STAR Merger is consummated.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Section 910 of the NYBCL ("Section 910") provides that any holder of
TPC Common Stock as of the TPC Record Date who has not voted in favor of the TPC
Merger Agreement shall have the right, as an alternative to receiving EFCC
Common Stock in the TPC Merger, to receive payment of the fair value of his
shares and certain other rights and benefits, subject to complying with Section
623 of the NYBCL ("Section 623"). Copies of Section 623 and Section 910 are
attached hereto as Appendix C and a summary of the procedures relating to the
exercise of appraisal rights is set forth below. This summary does not purport
to be a complete statement of the provisions of Section 623 and Section 910 and
is qualified in its entirety by reference to Appendix C. A person having a
beneficial interest in shares of TPC Common Stock that are held of record in the
name of another person, such as a broker or nominee, must act promptly to cause
the record holder to follow the steps summarized below properly and in a timely
matter to perfect whatever appraisal rights such beneficial owner may have.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY
SHAREHOLDER OF TPC WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO. FAILURE TO STRICTLY COMPLY WITH ANY OF
THE PROCEDURAL REQUIREMENTS OF SECTION 623 MAY RESULT IN A TERMINATION OR WAIVER
OF APPRAISAL RIGHTS UNDER SECTION 623.
TPC does not intend to waive compliance with any statutory procedures.
Unless all of the procedures as set out in Section 623 are followed by a
shareholder who wishes to exercise appraisal rights, such shareholder will be
bound by the terms of the TPC Merger Agreement.
Each holder of TPC Common Stock on the TPC Record Date who desires to
exercise appraisal rights must satisfy the following conditions and otherwise
comply with the provisions of Section 623.
(i) A separate, written objection to the TPC Merger must be filed with
TPC before or at the TPC Meeting but prior to the taking of the vote on the TPC
Merger. This objection must include: (a) a notice of the shareholder's election
to dissent, (b) the shareholder's name and residence address, (c) the number of
shares as to which the shareholder dissents and (d) a demand for payment of the
fair-value of such shares if the TPC Merger is consummated. Such objection is
not required for any holder of TPC Common Stock to whom TPC did not give notice
of the TPC Meeting. A shareholder may not dissent as to less than all of the
shares which such shareholder owns beneficially, and a nominee or fiduciary may
not dissent on behalf of any beneficial owner as to less than all of the shares
of such owner held of record by such nominee or fiduciary. A record holder, such
as a broker or an agent, who holds TPC Common Stock as a nominee or fiduciary
for beneficial owners, some of whom desire to demand appraisal, must exercise
appraisal rights on behalf of such beneficial owners who desire to demand
appraisal with respect to the TPC Common Stock held for such beneficial owners.
A proxy or vote abstaining from voting, or voting against the TPC Merger, or a
failure to vote on the TPC Merger, does not constitute such an objection within
the meaning of Section 623. Failure to vote against the TPC Merger Agreement,
however, will not constitute a waiver of rights under Sections 623 and 910 of
the NYBCL provided that a written objection to the TPC Merger, as described
above, has been properly filed. TPC will treat only those written objections
which are actually received by it before the taking of the vote on the TPC
Merger as being timely.
(ii) A shareholder wishing to exercise appraisal rights under Section
623 must not vote for the approval and adoption of the TPC Merger Agreement. If
a shareholder returns a signed proxy failing to specify either (a) a vote
against the approval and adoption of the TPC Merger Agreement, or (b) a
direction to abstain from voting on the approval and adoption of the TPC Merger
Agreement, the proxy will be voted "FOR" the approval and adoption of the TPC
Merger Agreement, which will have the effect of waiving such shareholder's
appraisal rights and nullifying any previously filed objection.
All notices of election to dissent should be addressed to TPC c/o
Arbor Home Healthcare Holdings, LLC, 333 Earle Ovington Blvd., Uniondale, New
York 11553, Attention: Joseph Heller, Vice President.
Within ten days after the Effective Time, TPC will provide written
notice of the consummation of the TPC Merger to all shareholders who filed
written objections to the TPC Merger or from whom a written objection was not
required and have not voted for adoption and approval of the TPC Merger. Within
20 days after the giving of such notice to any shareholder from whom written
objection was not required, if such shareholder elects to dissent, such
shareholder may file with TPC a written notice of such election, stating the
shareholder's name and residence address, the number of shares of TPC Common
Stock as to which such shareholder dissents and a demand for payment of the fair
value of such shareholder's shares of TPC Common Stock.
Each shareholder who has complied with Section 623 must submit the
certificates representing such shares to TPC or its transfer agent at the time
of filing the notice of dissent or within one month thereafter for notation
thereon of the pendency of an appraisal claim, after which such certificates
will be returned to such holder or other person who submitted them on behalf of
the holder.
American Stock Transfer and Trust Company serves as the transfer agent
for TPC Common Stock, and its address is 40 Wall Street, New York, New York
10005, telephone (212) 936-5100. Any such shareholder who fails to submit such
certificates for notation will, at the election of TPC (exercised by written
notice to such holder within 45 days from the date of filing of the notice to
dissent), lose such dissenter's rights unless a court, for good cause shown,
otherwise directs. Upon transfer of a certificate bearing such notation, each
new certificate issued therefor shall bear a similar notation together with the
name of the original dissenting holder of the shares and a transferee shall
acquire no rights in TPC except those which the original dissenting shareholder
had at the time of the transfer.
Within 15 days after the expiration of the period within which holders
of TPC Common Stock may file their notices of election to dissent, or within 15
days after the Effective Time, whichever is later (but in no case later than 90
days after the TPC Meeting), TPC (or EFCC, if after the Effective Time) is
required to make a written offer by registered mail to each shareholder who has
filed a notice of election to dissent to pay for such holder's TPC Common Stock
at a specified price which TPC (or EFCC) considers to be their fair value (which
price is to be the same for all dissenting holders). If the STAR Merger is
completed, STAR will make the offer instead of EFCC after the effective date of
the STAR Merger. Such offer will be accompanied by a statement setting forth the
aggregate number of shares of TPC Common Stock with respect to which notices of
election to dissent from approval and adoption of the TPC Merger Agreement have
been received and the aggregate number of holders of such TPC Common Stock. If
the TPC Merger has been consummated at the time such offer is made, such offer
will also be accompanied by (i) advance payment to each dissenting holder who
has submitted such holder's TPC Certificates for notation thereon of such
holder's election to dissent, an amount equal to 80% of the amount of such
offer, or (ii) as to each dissenting holder who has not yet submitted such
certificates for such notation, a statement that advance payment to such holder
of any amount equal to 80% of such offer will be made by EFCC promptly upon
submission of such certificates. If the TPC Merger has not been consummated at
the time of such offer, such advance payment or statement as to advance payment
will be sent to each holder entitled thereto forthwith upon consummation of the
TPC Merger. Every such advance payment or statement as to advance payment will
include advice to such holder that acceptance of such payment by a dissenting
holder will not constitute a waiver of such holder's dissenter's rights. If the
TPC Merger has not been consummated by the expiration of the above-mentioned
90-day period, the offer by TPC many be conditioned upon the consummation of the
TPC Merger. If within 30 days after the making of a written offer by TPC, TPC
and any dissenting holder agree upon the price to be paid for such shareholder's
shares of TPC Common Stock, payment therefor will be made within 60 days after
the making of such offer or the Effective Time, whichever is later, upon the
surrender of the certificates representing such shares of TPC Common Stock.
If TPC fails to make such an offer within the 15-day period described
in the preceding paragraph, or if it makes an offer but TPC and a dissenting
holder do not agree within 30 days of the making of the offer upon the price to
be paid for such holder's shares of TPC Common Stock, TPC must, within 20 days
of such 15 or 30-day period, as the case may be, institute a special proceeding
in the New York Supreme Court, Nassau County (the "Court"), to determine the
rights of dissenting shareholders and fix the fair value of their shares of TPC
Common Stock. It is the current intention of TPC to institute any such
proceeding within the 20-day period; however, if TPC does not institute such
proceeding within the 20-day period, any dissenting holder may, within 30 days
after the expiration of the 20-day period, institute a proceeding for the same
purposes. If such proceeding is not instituted within such 30-day period,
dissenting holders who have not agreed with TPC as to the price to be paid for
their shares of TPC Common Stock will lose their dissenter's rights, unless the
Court, for good cause shown, otherwise directs.
All dissenting holders, other than those who shall have agreed with
TPC as to the price to be paid for their shares of TPC Common Stock, will be
made parties to such appraisal proceeding. The Court will determine whether each
dissenting holder, as to whom TPC requests the Court to make such determination,
is entitled to receive payment for such holder's shares of TPC Common Stock. If
TPC does not request any such determination or if the Court finds that such
dissenting shareholder is so entitled, the Court will then determine the fair
value of such holder's shares of TPC Common Stock as of the close of business on
the day prior to the date of the Special Meeting. In fixing the fair value of
the share of TPC Common Stock, the Court will consider the nature of the
transaction giving rise to the holder's right to receive payment for such
holder's shares of TPC Common Stock and its effects on TPC and its shareholders,
the concepts and methods then customary in the relevant securities and financial
markets for determining the fair value of the shares of a corporation engaging
in a similar transaction under comparable circumstances, and all other relevant
factors. Within 60 days after the completion of any such Court proceeding, TPC
will be required to pay to each dissenting holder the amount found to be due
(less the advance payment referred to above), with interest thereon at such rate
as the Court finds to be equitable, from the date the TPC Merger is consummated
to the date of payment, upon surrender to TPC by such holder of its TPC
Certificates. If the Court finds that the refusal of any dissenting holder to
accept the offer of TPC was arbitrary, vexatious, or otherwise not in good
faith, no interest will be allowed to such holder.
The parties to such appraisal proceeding will bear their own costs and
expenses, including the fees and expenses of their counsel and any experts
employed by them, except that the Court, in its discretion, (i) may apportion
and assess all or any part of the costs, expenses and fees incurred by any or
all dissenting shareholders who are parties to the appraisal proceeding against
TPC if, among other things, the Court finds (a) that the fair value of the
shares of TPC Common Stock materially exceeds the offer by TPC, (b) that no
offer of payment or required advance payment was made by TPC, (c) that TPC
failed to institute such appraisal proceeding within the required period, or (d)
that the actions of TPC in complying with its obligations under Section 623 were
arbitrary, vexatious or otherwise not in good faith, or (ii) may apportion and
assess all or any part of the costs, expenses and fees incurred by TPC against
any or all of the dissenting shareholders who are parties to the proceeding,
including any who have withdrawn their notices of election to dissent for the
TPC Merger, if the Court finds that their refusal to accept TPC's offer of
payment was arbitrary, vexatious or otherwise not in good faith.
Any shareholder who has filed a notice of election to dissent will
not, after the Effective Time, have any of the rights of a shareholder with
respect to such holder's shares of TPC Common Stock (including the right to
receive the consideration payable in the STAR Merger), other than the right to
be paid the fair value of such TPC Common Stock pursuant to the NYBCL and any
other rights or benefits provided by the NYBCL for shareholders who have filed
such a notice. Any notice of election to dissent may be withdrawn by a
dissenting shareholder at any time prior to such shareholder's acceptance in
writing of an offer made by TPC, as described above, but in no case later than
60 days after the Effective Time (or if TPC fails to make a timely offer to pay
such shareholder the fair value of such shares of TPC Common Stock as described
above, at any time within 60 days after any date such an offer is made), or
thereafter with the written consent of TPC or as provided below. In order to be
effective, withdrawal of a notice of election to dissent must be accompanied by
the return to TPC of any advance payment to the shareholder made by TPC, as
described above. Any dissenting shareholder who withdraws such holder's notice
of election to dissent or otherwise loses such dissenter's rights will thereupon
have only the right to receive the consideration provided for in the TPC Merger
Agreement for each of such holder's shares of TPC Common Stock.
Under Section 623(j) of the NYBCL, no payment of the fair value of TPC
Common Stock may be made to dissenting shareholders by TPC if TPC was then
insolvent of if such payment would render TPC insolvent. In that event, such
dissenting shareholder would be required to file written notice with TPC within
30 days after such shareholder receives a written notice from TPC that TPC was
insolvent or payment for such shareholder's shares would render TPC insolvent.
In such a case, the dissenting shareholder would have the option to either (i)
withdraw such holder's notice of election to dissent (which would be deemed
accepted by TPC) or (ii) retain such holder's status as a claimant against TPC.
If a dissenting shareholder were to elect to remain a claimant against TPC, such
dissenting shareholder's rights would be subordinated to the rights of the
creditors of TPC but would be superior to those of non-dissenting shareholders
should TPC be liquidated. If TPC were not liquidated, the dissenting shareholder
would retain such holder's right to payment for such holder's TPC Common Stock,
which obligation TPC would be required to meet once it was no longer insolvent
or if such payment would not render TPC insolvent. If a dissenting shareholder
fails to exercise either such option within 30 days after TPC has given such
holder written notice that payment cannot be made because of the restrictions of
Section 623(j) of the NYBCL, TPC would be required to exercise such option by
written notice to such holder within 20 days after the expiration of such period
of 30 days. For purposes of the NYBCL, an "insolvent corporation" is a
corporation that is unable to pay its debts as they become due in the usual
course of its business.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time TPC
makes any payment in respect of any dissenting shares (each, a "Transfer"), TPC
(i) made the Transfer with intent to hinder, delay or defraud creditors, or (ii)
received less than a reasonably equivalent value or fair consideration for the
Transfer, and (a) was insolvent at the time of the Transfer, (b) was rendered
insolvent by reason of the Transfer, (c) was engaged or about to engage in a
business or transaction for which the assets remaining with TPC constituted
unreasonably small capital to carry on its business, or (d) intended to incur,
or believed that it would incur, debts beyond its ability to pay as such debts
matured, the court could find that the Transfer constituted a "fraudulent
conveyance" under applicable federal or state law. If the Transfer were
determined to be a fraudulent conveyance, there is a risk that holders of
dissenting shares, as recipients of the Transfers, would be ordered to turn over
to TPC, its creditors or its trustee in bankruptcy, all or a portion of the
payments in respect of dissenting shares. The measure of insolvency for purposes
of the foregoing will vary depending upon the law of the jurisdiction which is
being applied. Generally, however, TPC would be considered insolvent if at the
time of the Transfer in question the fair value (or fair saleable value) of its
assets was less than the amount required to pay its probable liability on its
existing debts (including contingent liabilities) as they become absolute and
matured, or if the sum of TPC's debts (including any contingent liabilities) at
the time of the Transfer is greater than the fair value of all TPC's assets. The
Transfers could be deemed to be fraudulent conveyances even if TPC is not deemed
to be an "insolvent corporation" for purposes of Section 623.
In any proceeding to enforce its rights to payment for shares pursuant
to Section 623, a shareholder is precluded from seeking the enforcement of any
other right to which he might otherwise be entitled by virtue of share
ownership, except (i) the right to be paid the fair value of his shares pursuant
to Section 623 and (ii) the right to bring or maintain an appropriate action to
obtain relief on the ground that the TPC Merger is unlawful or fraudulent as to
him.
A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE TPC MERGER AGREEMENT
WILL NOT BE DEEMED TO SATISFY THE REQUIREMENTS FOR (i) A WRITTEN OBJECTION BY A
DISSENTING SHAREHOLDER TO THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT OR
(ii) A WRITTEN DEMAND FOR PAYMENT OF THE VALUE OF THE SHARES OWNED BY A
DISSENTING SHAREHOLDER.
The obligation of STAR to consummate the STAR Merger is subject to
satisfaction or waiver of the condition that holders of not more than 5% of the
shares of outstanding EFCC Common Stock (giving effect to all EFCC Common Stock
issuable in the TPC Merger without regard to dissenters rights) have properly
demanded and perfected appraisal rights pursuant to either the TPC Merger or the
STAR Merger. See "THE STAR PROXY-PROSPECTUS" Certain Terms of the Merger
Agreement - Conditions to the Merger."
COMPARISON OF RIGHTS OF HOLDERS OF
EFCC COMMON STOCK AND TPC COMMON STOCK
GENERAL
As a result of the Merger, holders of TPC Common Stock will become
shareholders of EFCC, and the rights of such former TPC shareholders will
thereafter be governed by the EFCC Certificate of Incorporation (the "EFCC
Charter") and the EFCC by-laws (the "EFCC By-laws"). The rights of the holders
of TPC Common Stock are presently governed by the TPC Certificate of
Incorporation (the "TPC Charter") and the TPC by-laws (the "TPC By-laws"). Both
corporations are governed by the laws of the State of New York. The following
summary, which does not purport to be a complete statement of the differences
between the rights of the shareholders of EFCC and the shareholders of TPC, is
an explanation of the material differences between the TPC Common Stock and EFCC
Common Stock resulting from the differences between the EFCC Charter and the TPC
Charter, and the EFCC By-laws and the TPC By-laws, as well as an explanation of
certain material provisions of the NYBCL. This summary is qualified in its
entirety by reference to the full text of each of such documents and the
provisions of the NYBCL.
EFCC CAPITAL STOCK
EFCC has two authorized classes of capital stock: (i) the EFCC Common
Stock (Common Stock $.01 par value), of which EFCC is authorized to issue
50,000,000 shares and of which 32,000,226 shares are outstanding as of the EFCC
Record Date; and (ii) one class of Preferred Stock, $.01 par value, of which
10,000,000 shares have been authorized and no shares have been issued as of the
EFCC Record Date. The EFCC Preferred Stock may be issued with such rights,
designations, preferences and privileges as may be determined by the EFCC Board
of Directors.
The holders of EFCC Common Stock are entitled to one vote for each
share of EFCC Common Stock of record held by them on all matters to be voted on
by shareholders. There is no right to cumulative voting; thus, the holder[s] of
50% or more of the EFCC Common Stock outstanding, if they choose to do so, can
elect all of the directors of EFCC; although Arbor, which controls the voting of
approximately 80% of EFCC's voting shares, has agreed with Coss pursuant to the
Option Agreement that it will elect only a majority of EFCC's directors,
effectively giving Coss one seat on the Board, currently constituting three
directors. This Agreement will terminate upon the closing of the STAR Merger.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The holders of EFCC Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the affairs of EFCC, the holders of EFCC Common
Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities. Holders of EFCC Common Stock
have no preemptive or other subscription rights.
As of the EFCC Record Date, there were 32,000,226 shares of EFCC
Common Stock issued and outstanding which were held of record by 1,271 persons.
TPC COMMON STOCK
TPC has one authorized class of capital stock, the TPC Common Stock,
of which TPC is authorized to issue 10,000,000 shares. As of the TPC Record
Date, 1,750,000 shares of TPC Common Stock are outstanding. This figure gives
effect to a 1:4 reverse split which occurred in August, 1985. Due to its
bankruptcy in 1985, TPC failed to issue new stock certificates representing the
smaller number of outstanding shares after the reverse split. Therefore, for
each share of TPC currently outstanding, TPC shareholders currently own
certificates which represent four such shares. Since no percentage difference
arises from this discrepancy, there is no effect on any shareholder of TPC and
TPC and EFCC will treat the previous TPC Certificate as actually representing
only one share for every four shares shown on a TPC Certificate.
EFCC owns 1,451,156 shares of TPC, or approximately 83% of the total
outstanding shares of TPC. As of the TPC Record Date, shares of TPC Common Stock
were held of record by 1,115 persons.
The holders of TPC Common Stock are entitled to one vote for each
share of record held by them on all matters to be voted on by shareholders.
There is no right to cumulative voting; thus, the holder[s] of more than 50% of
the TPC Common Stock outstanding can, if they choose to do so, elect all of the
directors of TPC. The holders of TPC Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the affairs of TPC, the holders of TPC Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities. Holders of TPC Common Stock have no preemptive or other
subscription rights.
VOTING RIGHTS
Generally
Each shareholder of record of TPC Common Stock or EFCC Common Stock is
entitled to one vote for every share of such stock on all matters upon which
holders of shares of each respective corporation are entitled or afforded the
opportunity to vote. Except as otherwise provided by law, whenever any corporate
action other than the election of directors is to be taken by vote of the
shareholders of either EFCC or TPC, it must be authorized by a majority of the
votes cast at a meeting of shareholders by the holders of shares entitled to
vote thereon.
Election of Directors
Both the EFCC and TPC Charters provide that the number of directors
shall be fixed in the By-laws of each corporation, each of which provides that
the number cannot be less than three nor more than five. The number of directors
of each of EFCC and TPC is currently fixed at four. Directors are elected at a
meeting of shareholders by the vote of the holders of a plurality of the
outstanding shares of all classes of stock entitled to vote thereon present in
person or by proxy at the meeting.
Thus, there is no difference between the EFCC and TPC Charters with
respect to the election of Directors. As previously voted, Arbor elects a
majority of EFCC's directors and Coss has one appointee on the Board. EFCC, by
virtue of its 83% ownership of TPC, is entitled to elect all of the directors of
TPC.
Other Transactions
The NYBCL requires the affirmative vote of two-thirds of all
outstanding shares entitled to vote thereon to effect a merger, a consolidation,
a share exchange or the sale, lease or disposition of all or substantially all
of a corporation's assets. Notwithstanding any provision in the certificate of
incorporation, the holders of shares of a class or series are entitled to vote
as a class if the proposed transaction contains any provision which, if
contained in an amendment to the certificate of incorporation, would entitle the
holder of shares of such class or series to vote as a class thereon; in such a
case, in addition to the required two-thirds vote of all outstanding shares, the
merger, consolidation, share exchange or asset disposition must be authorized by
a vote of the holders of a majority of all outstanding shares of each such class
or series.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Under New York law, amendments to a certificate of incorporation may
be authorized by the vote of the holders of a majority of all outstanding shares
entitled to vote thereon. New York law also provides for approval by vote of the
holders of a majority of outstanding shares of a particular class of stock in
certain circumstances.
SPECIAL MEETINGS
Under New York law, special meetings of shareholders may be called by
the board of directors and by such other person or persons authorized to do so
by the corporation's certificate of incorporation or by-laws. Under New York
law, if there is a failure to elect a sufficient number of directors to conduct
the business of the corporation for a period of one month after the date fixed
by or under the by-laws for the annual meeting of shareholders or for a period
of 13 months after the last annual meeting, the board of directors will call a
special meeting for the election of directors. If the board fails to do so
within 14 days of the expiration of such period or if it is so called but such
directors are not elected within two months, holders of 10% of the shares
entitled to vote in an election of directors may demand the call of a special
meeting for the election of directors. Under the By-laws of EFCC and TPC,
special meetings may also be called by the President or by holders of a majority
of outstanding shares.
SHAREHOLDERS' ACTION WITHOUT A MEETING
The NYBCL provides that shareholders may take any action without a
meeting by written consent only if such consent is signed by the holders of all
outstanding shares entitled to vote thereon and then only under very limited
circumstances. Neither the EFCC or TPC Charter contains a provision altering the
provisions of the statute.
As previously noted, the necessity of calling a shareholders' meeting
to approve various actions was cited by the EFCC Board as one of the reasons for
approval of the TPC Merger. See "THE TPC MERGER - EFCC's Reasons for the TPC
Merger- Recommendations of the EFCC Board."
PREEMPTIVE RIGHTS
The NYBCL provides, subject to certain exceptions, preemptive rights
to shareholders upon an issuance of securities which would adversely affect
certain specified interests of such shareholders, provided that the certificate
of incorporation may provide otherwise. Both the EFCC Charter and TPC Charter
states that no holders of shares of EFCC or TPC of any class or series, now or
hereafter authorized or issued, shall have any preemptive rights.
DIVIDENDS
Under the NYBCL, a corporation may declare and pay dividends on its
outstanding shares except when the corporation is insolvent or thereby would be
made insolvent, or when the declaration, payment or distribution would be
contrary to any restrictions contained in the certificate of incorporation. In
general, dividends may be declared or paid out of surplus only. When any
dividend is paid or any other distribution is made, in whole or in part, from
sources other than earned surplus, it must be accompanied by a written notice
disclosing the amounts by which such dividend or distribution affects stated
capital, capital surplus and earned surplus, or, if such amounts are not yet
determinable, disclosing the approximate effect of such dividend on stated
capital, capital surplus and earned surplus and stating that such amounts are
not yet determinable.
Under the NYBCL, a corporation may, subject to restrictions imposed by
law or its certificate of incorporation, repurchase or redeem its shares out of
surplus except when the corporation is insolvent or thereby would be made
insolvent. A corporation may repurchase its shares out of stated capital (with
the foregoing exception) if the purchase is made for the purpose of (i)
eliminating fractions of shares, (ii) collecting or compromising indebtedness to
the corporation or (iii) paying shareholders the fair value of their shares in
connection with the exercise of statutory appraisal rights.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS,
OFFICERS AND EMPLOYEES
The NYBCL requires that the issuance to officers, directors or
employees of rights or options to purchase shares be authorized by a majority of
all outstanding shares entitled to vote thereon, or authorized by and consistent
with a plan adopted by such vote of shareholders. In the absence of preemptive
rights, such authorization is not required in New York for the issuance of
rights or options in substitution for or upon the assumption of rights or
options of a corporation with which the issuing corporation is merging or
consolidating.
LOAN TO DIRECTORS
Under New York law, any loan made by the corporation to any director
must be authorized by a vote of the shareholders. For purposes of this
authorization, the shares held by the director who would be the borrower are not
entitled to vote.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The NYBCL provide that a corporation's board of directors may be
divided into classes with staggered terms of offices. Neither the EFCC Charter
or the EFCC By-laws nor the TPC Charter or the TPC By-laws provides for a
classified board.
DUTIES OF DIRECTORS
The NYBCL specifically permits a board of directors to consider
constituencies other than the holders of a corporation's capital stock and to
consider both the long-term and short-term interests of the corporation and such
constituencies when taking any action, including action taken in connection with
a change or potential change in the control of the corporation. The NYBCL
permits directors to consider the effect that a corporation's action may have in
the short-term and the long-term upon (i) potential growth, development,
productivity and profitability of the corporation; (ii) current employees; (iii)
retired employees and other beneficiaries receiving or entitled to receive
retirement, welfare or similar benefits from the corporation; (iv) the
corporation's customers and creditors; and (v) the ability of the corporation to
provide continuously goods, services, employment opportunities and employment
benefits and otherwise to contribute to the communities in which it does
business. EFCC's and TPC's by-laws do not contain provisions contrary to the
above NYBCL provisions.
INTERESTED DIRECTOR TRANSACTIONS
The NYBCL provides that no transaction between a corporation and one
or more of its directors or an entity in which one or more of its directors are
directors or officers or have a substantial financial interest shall be void or
voidable solely for that reason. In addition, no such transaction shall be void
or voidable solely because the director is present at or votes at the meeting of
the board of directors or committee which authorized the transaction. In order
for such a transaction not to be void or voidable, after disclosure of material
facts (unless such facts were known), the transaction (i) must be approved by
the disinterested directors or a committee of disinterested directors by a vote
sufficient for such purpose without counting the vote of any interested director
(or, if the vote of disinterested directors is insufficient to constitute an act
of the board under New York law, by the unanimous vote of the disinterested
directors) or (ii) must be approved by a vote of the shareholders.
Alternatively, the transaction will not be void or voidable if it is shown to
have been fair to the corporation at the time it was approved by the board of
directors, a committee thereof or the shareholders.
LIMITATIONS ON DIRECTORS' LIABILITY
The NYBCL permits a corporation to limit or eliminate a director's
personal liability to the corporation or the holders of its capital stock for
breach of duty. This limitation is generally unavailable for acts or omissions
by a director which were (i) in bad faith, (ii) involved intentional misconduct
or a knowing violation of law, or (iii) involved a financial profit or other
advantage to which such director was not legally entitled. The NYBCL also
prohibits limitations on director liability for acts or omissions which resulted
in a violation of a statute prohibiting certain dividend declarations, certain
payments to shareholders after dissolution and particular types of loans. The
EFCC Charter, but not the TPC Charter, provides for limitations on directors'
liability as permitted by the NYBCL. Thus, directors of EFCC are subject to less
exposure to such claims than directors of TPC.
POTENTIAL ISSUANCES OF PREFERRED STOCK
Unlike the TPC Charter, the EFCC Charter has provisions authorizing a
class of Preferred Stock to be issued at the discretion of the Board of
Directors of EFCC.
The Preferred Stock will have such designations, preferences,
conversion rights, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof as are determined by the Board of Directors. Thus, the Board of
Directors of EFCC may authorize the creation and issuance of up to 10,000,000
shares of Preferred Stock in one or more series with such rights, preferences,
privileges, limitations and restrictions as may be determined in the Board's
sole discretion, without further authorization by EFCC's shareholders.
Shareholders will not have preemptive rights to subscribe for shares of
Preferred Stock.
It is not possible to determine the actual effect of the Preferred
Stock on the rights of the shareholders of EFCC until the Board of Directors
determines the rights of the holders of a particular series of Preferred Stock.
However, such effects might include (i) restrictions on the payment of dividends
to holders of the Common Stock; (ii) dilution of voting power to the extent that
the holders of shares of Preferred Stock are given voting rights; (iii) dilution
of the equity interests and voting power if the Preferred stock is convertible
into Common Stock; and (iv) restrictions upon any distribution of assets to the
holders of the Common Stock upon liquidation or dissolution and until the
satisfaction of any liquidation preference granted to the holders of Preferred
Stock.
The Board of Directors is required by New York law to make any
determination to issue shares of Preferred Stock based upon its judgment as to
the best interests of the shareholders and EFCC. Although the Board of Directors
has no present intention of doing so, it could issue shares of Preferred Stock
(within the limits imposed by applicable law) that could, depending on the terms
of such series, make more difficult or discourage an attempt to obtain control
of EFCC by means of a merger, tender offer, proxy contest or other means. When
in the judgment of the Board of Directors such action would be in the best
interests of the shareholders and EFCC, the issuance of shares of Preferred
Stock could be used to create voting or other impediments or to discourage
persons seeking to gain control of EFCC, for example, by the sale of Preferred
Stock to purchasers favorable to the Board of Directors. In addition, the Board
of Directors could authorize holders of a series of Preferred Stock to vote
either separately as a class or with the holders of Common Stock, on any merger,
sale or exchange of assets by EFCC or any other extraordinary corporate
transaction. The existence of the additional authorized shares could have the
effect of discouraging unsolicited takeover attempts. The issuance of new shares
could also be used to dilute the stock ownership of a person or entity seeking
to obtain control of EFCC should the Board of Directors consider the action of
such entity or person not to be in the best interests of the shareholders and
EFCC. Such issuance of Preferred Stock could also have the effect of diluting
the earnings per share and book value per share of the Common Stock held by the
holders of Common Stock. Thus, the potential for the issuance of Preferred
Shares in EFCC, may under certain circumstances be disadvantageous to
shareholders of EFCC. TPC currently has no authorized shares of Preferred Stock.
Management has no plans at present to issue any of the shares of
Preferred Stock. The STAR Merger Agreement precludes EFCC from issuing shares of
any kind without the prior written consent of STAR.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the NYBCL, indemnification of directors and officers may be
provided to whatever extent shall be authorized by a corporation's certificate
of incorporation or a by-law. However, the NYBCL does not permit indemnification
with respect to any matter as to which the director or officers has been
adjudicated not to have acted in good faith and in the reasonable belief that
his action was in the best interest of the corporation.
The NYBCL provides that no indemnification of directors in shareholder
derivative suits may be made in respect of (i) a threatened action, or a pending
action which is settled or otherwise disposed of, or (ii) any claim, issue or
matter as to which the director or officer has been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought or, if no action is brought, any court of competent jurisdiction,
determines upon application that, in view of the circumstances of the case, the
director or officer is fairly and reasonably entitled to indemnity for such
portion of the settlement amount and expenses as the court deems proper. The
statutory provisions for indemnification and advancement of expenses are not
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled independently of the applicable
statutory provision.
The EFCC and TPC By-laws both currently provide for indemnification of
directors and officers and advancement of indemnified expenses to the full
extent now or hereafter permitted by the NYBCL.
REMOVAL OF DIRECTORS
The NYBCL provides that any or all of the directors of a corporation
may be removed for cause by a vote of the shareholders and that the certificate
of incorporation or by-laws may provide for removal without cause by vote of the
shareholders. EFCC's and TPC's By-laws provide that any director may be removed,
with or without cause, at any time by the shareholders. The NYBCL also imposes
additional restrictions on the removal of directors of corporations with
cumulative voting or directors elected by the holders of a specific class or
series of shares. These provisions are inapplicable to EFCC and TPC as none of
the directors of either company were elected by holders of a specific class of
shares and neither company's Certificate of Incorporation provides for
cumulative voting or class voting.
BUSINESS OF EFCC AND TPC
EFCC is in the business of providing home health care services,
principally personal hygiene, homemaking, general patient safety, and to a
lesser extent nursing services ("Home Care"), primarily through contracts with
government agencies under the Medicaid program. EFCC is a holding company which
derives 100 percent of its operating revenues from the operation of TPC, an 83
percent owned subsidiary.
EFCC was incorporated in New York on May 10, 1978 under the name
M.A.E. Enterprises, Inc. In 1980, its name was changed to Cosmetic Sciences,
Inc; which was changed again in 1996 to Extended Family Care Corporation, its
current name.
In 1980, EFCC completed its initial public offering of 1.5 million
shares of common stock, raising gross proceeds of $1.5 million. Between 1980 and
1985, EFCC engaged in research, development, marketing and distribution of
medical devices and cosmetics. These products never proved to be commercially
viable, and by the mid-1980's the development of these products were
discontinued and the subsidiaries through which these businesses were operated
were dissolved.
In August 1984, EFCC entered the Home Care industry by acquiring all
of the outstanding shares of TPC, which at the time was providing Home Care
services in New York and New Jersey. In December 1984, the then shareholders of
EFCC received as a dividend approximately 17 percent of the outstanding common
stock of TPC, leaving TPC as an approximately 83 percent owned subsidiary of
EFCC.
On April 25, 1985, TPC entered into an agreement to acquire all of the
outstanding stock of A-Round the Clock Nursing Services, Inc. ("A-Round the
Clock"), a home health care company doing business in New Jersey. In December
1985, a Form S-1 Registration Statement was declared effective in anticipation
of an initial public offering by TPC. Proceeds from this offering were to
provide the funding for the acquisition of A-Round the Clock. However, the
underwriter terminated the offering, and TPC was unable to find another
underwriter to complete the offering. TPC was forced to borrow the funds
required to consummate the acquisition of A-Round the Clock. The burden of the
additional debt service, coupled with the increased demand for working capital,
further reduced cash flow. Facing bank foreclosure of liens upon TPC's accounts
receivable, significant tax arrears and cash shortfalls, EFCC and TPC filed a
petition under Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy
Court, Southern District, New York, in August 1986.
Following the filing of the bankruptcy petition, TPC continued to
operate its Home Care business as a debtor in possession. In July 1987, a
secured lender foreclosed its liens on the common stock of A-Round the Clock,
and took possession and control of the business of A-Round the Clock. TPC
continued to provide Home Care services with operating branches in Hempstead,
New York and Hackensack, New Jersey.
In 1992, EFCC's headquarters were moved from Hempstead, New York to
Carle Place, New York. In March 1994, TPC opened a branch office in Irvington,
New Jersey, which moved in March 1996 to East Orange. In February 1995, a
satellite office of the Hackensack branch office was opened in Paterson, New
Jersey, which relocated to Clifton, New Jersey on or about April 15, 1996. In
August 1995, a TPC satellite office was opened in Jersey City, New Jersey, which
office was sold in December, 1996. In March 1996, a satellite office was opened
in Elizabeth, New Jersey, which office was closed in September, 1996. In May
1996, a branch office was opened in Allentown, Pennsylvania. In the first
quarter of 1997 the staff and patient files of the East Orange office and
Hempstead office were moved into existing facilities of STAR; and the Hackensack
office was closed and integrated into EFCC's Clifton office.
In October 1993, and in connection with EFCC's Amended Plan of
Reorganization adopted in 1992, an investment group, COSS Holding Corp.
("Coss"), invested cash of $250,000 in EFCC and thereby became the holder of
approximately 66 percent (at that time) or 12,748,658 shares of EFCC's common
stock. See "Bankruptcy Proceedings"
On October 31, 1995, EFCC, TPC and Coss entered into an agreement with
Arbor, pursuant to which EFCC granted Arbor the option to purchase 13 million
newly issued shares of its common stock for $1.3 million, ($.10 per share).
Arbor exercised this option in two installments, on August 21, 1996 and October
31, 1996, thus becoming the owner of approximately 40% of EFCC's outstanding
stock. In addition, in June of 1996, Coss placed its holdings of EFCC's common
stock in a voting trust, providing Arbor the right to direct the voting of such
shares and to thus elect a majority of the board of directors of EFCC. EFCC,
Coss and Arbor have also entered into various agreements relating to Coss'
holdings of EFCC's common stock, but these agreements, as well as the voting
trust arrangement as to Coss' shares of EFCC, will terminate upon the completion
of the STAR Merger. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
On October 31, 1995, EFCC entered into an agreement with Arbor
Management, LLC (in which Ivan Kaufman owns a 99% interest), for a two year
term, pursuant to which EFCC will pay $7,500 a month to Arbor Management, LLC
for management services, including accounting, finance, human resources and
marketing, rendered to EFCC. This agreement will also terminate as of the
completion of the STAR Merger.
On January 3, 1997, EFCC entered into the STAR Merger Agreement. See
"THE TPC MERGER AGREEMENT - The STAR Merger."
CONSULTING AGREEMENT. STAR and EFCC entered into a consulting
agreement on January 3, 1997 (the "Consulting Agreement") pursuant to which STAR
agreed that upon EFCC's request it will render to EFCC, by and through such of
its officers, employees and agents as STAR, in its sole discretion, designates
from time to time, consulting services with respect to the management and
operation of EFCC. The consulting services to be rendered by STAR under the
Consulting Agreement consist of those consulting services relating to the
management and operation of EFCC's healthcare business reasonably requested by
EFCC. STAR and EFCC have agreed that STAR's role is that of a consultant and
advisor to, and not that of a manager of, EFCC. Under the Consulting Agreement,
STAR has no duty or responsibility to manage the affairs of EFCC which duty and
responsibility remains at all times with the Board of Directors and management
of EFCC. STAR began rendering services under the Consulting Agreement in
January, 1997. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Consulting
Agreement."
MANAGEMENT AGREEMENT. STAR and EFCC have also entered into a
management agreement (the "Management Agreement") pursuant to which STAR agreed
to act as manager of EFCC. The Management Agreement is subject to approval of
the Commissioner of the New York State Department of Health (the
"Commissioner"). Pursuant to the Management Agreement STAR will have the
authority and responsibility to conduct, supervise and effectively manage the
day-to-day operation of EFCC. In the absence of oral or written direction or
written policies of the Board of Directors of EFCC, STAR will be expected to
exercise the reasonable judgment of a management company in its management
activities.
The Management Agreement will become effective upon the date it is
approved by the Commissioner. The Management Agreement may be terminated by the
Commissioner, not more than sixty (60) days after notification to the parties by
the Department of Health of a determination that the management of EFCC is so
deficient that the health and safety of patients would be threatened by
continuation of the Management Agreement. The Management Agreement may be
terminated by EFCC without cause on 60 days' notice and with cause on 14
business days' notice. Unless sooner terminated in accordance with the terms of
the Management Agreement, or extended or renewed by mutual agreement of the
parties thereto, the Management Agreement will remain in effect until the
consummation of the Star Merger or December 31, 1998, whichever is sooner. The
Management Agreement may only be terminated by STAR upon the occurrence of an
Event of Default as such term is defined in the Management Agreement. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Management Agreement."
Both the Consulting Agreement and Management Agreement were entered
into because the Boards of EFCC and TPC believed that STAR could more
cost-effectively perform certain functions called for by these agreements. If
the STAR Merger is not consummated, these agreements will be terminated. In such
event, transferring these functions back to EFCC and TPC would be costly and
time consuming. See "RISK FACTORS - Possible Adverse Impact if STAR Merger is
not Consummated."
HOME CARE SERVICES
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20
percent. Primary reasons cited for such rapid growth include: (1) the general
aging of the United States' population; (2) the cost savings achievable through
at-home treatment as an alternative to hospital care; (3) medical and
technological advances which enable a growing number of treatments to be
administered at home rather than in a medical facility; and (4) insurance (both
government regulated and private) reimbursement policies which provide certain
incentives to minimize the length of in-patient hospital care.
TPC provides its patients the services of certified home health aides,
personal care aides, homemakers and to a lesser extent registered and licensed
practical nurses. These individuals are part-time employees of TPC who work for
TPC as needed. TPC's active roster of Home Care personnel includes approximately
487 paraprofessionals and 30 nurses.
TPC requires its paraprofessionals and nurses to meet certain
licensing, certification, and/or other requirements. TPC conducts mandatory
in-service classes for its nurses and paraprofessionals both to meet New York
and New Jersey continuing education requirements and to fulfill TPC's own
quality assurance standards. These in-service classes typically last between
three and six hours and are offered periodically. They are taught by health care
professionals selected by TPC for their expertise in their fields, including
nurses, physical therapists, social workers and occasionally physicians. All
field staff employees are subject to an internal review not less than every 60
days.
TPC was recently surveyed by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) and, in February 1996, was found to meet the
requirements for accreditation. JCAHO is the accrediting body for hospitals; its
accreditation enhances TPC's contractual business. TPC's accreditation will
expire in October 1998, at which time TPC must be resurveyed for the following
three-year term.
PROCEDURE FOR A TYPICAL HOME CARE PLACEMENT
When TPC accepts a new patient for service, TPC's Director of Nursing
or nursing supervisor confers with the patient's physician and other medical and
health care professionals (collectively, the patient's "Health Care Team") to
(1) obtain the physician's orders; (2) acquire a detailed description of the
patient's medical problem; (3) determine the patient's specific home care
requirements (the "Protocol"), including the plan of treatment and
pharmaceutical services, products and equipment which will be needed; and (4)
determine the type of personnel and the number of hours and shifts required. The
Director of Nursing and/or a nursing supervisor seeks to verify all initial
information received and selects the appropriate Home Care personnel to care for
the patient.
In a typical Home Care case, TPC's personnel assigned to the case
visit the patient on a prescribed schedule to administer the Protocol and to
provide other general care to the patient. All Home Care cases are supervised by
a nursing supervisor to ascertain whether any problems have arisen in connection
with the services. Occasionally EFCC acts as a subcontractor for other home care
companies, implementing the patient Protocol under the direct supervision of the
primary contractor. TPC's nurses and paraprofessionals are in frequent contact
with the patient's Health Care Team.
CARE GIVERS
TPC employs a variety of clinical and ancillary personnel as follows:
1. Certified Home Health Aides ("CHHA") provide assistance as prescribed by the
physician in accordance with the Protocol and assist with personal hygiene,
housekeeping, general patient safety and other supportive tasks. CHHAs hold a
higher level of education, classroom training and field supervision than
Personal Care Aides.
2. Personal Care Aides ("PCA") assist the patient with personal hygiene,
dressing, bathing, meal preparation/feeding, housekeeping, general patient
safety and other activities of daily living.
3. Homemakers assist with light housekeeping, meal preparation and shopping.
4. Registered Nurses ("RN") supervise and implement plans of treatment as
mandated by a physician, administer medication, maintain required documentation
and supervise all other non-RN health care employees.
5. Licensed Practical Nurses ("LPN") can administer certain medications and
assist the RN's in performing certain procedures.
ORGANIZATIONAL STRUCTURE
Branch Description
TPC presently has two operating branches, utilizes space in two of
STAR's facilities, and has a corporate headquarters. The branches are located in
New York, New Jersey and Pennsylvania with a corporate headquarters located in
New York. Each operating branch is licensed by the appropriate state agency for
its location. Each operating branch is staffed by a director of nursing, nursing
supervisors, a branch director, a personnel manager, staffing coordinator(s) and
clerical personnel. TPC conducts its own in house state approved training
courses to prepare qualified employees for employment. In addition, TPC
maintains a recruiting program to attract qualified personnel to its staff.
CUSTOMERS
TPC has four types of customers: public assistance agencies, other
third party payers, insurance companies and private pay customers.
Public assistance agencies, which provided approximately 80 percent,
81 percent and 71 percent of total TPC's revenues in 1996, 1995 and 1994,
respectively, are billed directly for Home Care services provided to individuals
who have qualified for Medicaid benefits. TPC's business in Nassau County, New
York is tied directly to a single contract between TPC and the Department of
Social Services in Nassau County. A substantial portion of TPC's business would
be lost should this single contract be terminated. The contract with Nassau
County is renewable on an annual basis and has been in existence in excess of
ten years. TPC has no reason to believe that this contract will not be renewed
in the future, however, there is no assurance that the contract will be renewed.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant a Medicaid contract to any accredited home health care agency. New
business is obtained through referrals from physicians, county medical services,
community organizations, hospital social service workers, nurses, insurance
companies and the patient's family.
Other third party payers, such as hospitals and other health care
institutions, provided 14 percent, 11 percent and 12 percent of total TPC
revenues, in 1996, 1995 and 1994, respectively. The third party payer
subcontracts with TPC for Home Care services. These contracts are generally
non-exclusive.
The insurance segment of TPC's business represented approximately 1
percent, 2 percent and 7 percent of TPC's total revenues in 1996, 1995 and 1994,
respectively. This business is dependent upon the insurer's decision to enter
into various preferred provider networks ("PPO") and health maintenance
organization networks ("HMO"). The insurance segment has become more closely
linked to associations with various PPOs and HMOs. Therefore, TPC will have to
develop alliances with such networks or risk the loss of business.
Private pay customers represented approximately 5 percent, 6 percent
and 10 percent of TPC's revenues in 1996, 1995 and 1994, respectively. These
customers have determined, for a variety of reasons, including ineligibility of
public assistance, or insurance benefits, to personally pay for the Home Care
services provided by TPC. These customers are referred to TPC from a variety of
sources.
The charts below sets forth: (a) the percent of total TPC revenues by
type of customer; (b) percent of total TPC revenues by state; and (c) TPC
Medicaid revenues as percentages of total state revenues.
Percent of Total TPC Revenues by Type of Customer
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Medicaid (Through public assistance agencies) 80% 81% 71%
Other third party payers 14% 11% 12%
Insurance 1% 2% 7%
Private pay 5% 6% 10%
------ ----- -----
100% 100% 100%
Percent of Total TPC Revenues by State
1996 1995 1994
New York 15% 25% 36%
New Jersey 84% 75% 64%
Pennsylvania 1% NA NA
------ ---- -----
100% 100% 100%
TPC Medicaid Revenues as Percentages of
Total State Revenues
1996 1995 1994
New York 74% 82% 84%
New Jersey 81% 80% 63%
Pennsylvania 65% NA NA
</TABLE>
GOVERNMENTAL REGULATION AND LICENSING
EFCC's business is subject to substantial regulation by state and
local authorities. These regulations can cause significant time delays, as well
as additional costs, as TPC must comply with state eligibility standards for
licensing and/or accreditation as a Home Care provider. The imposition of more
stringent regulatory requirements or the denial, revocation, or suspension of
any license or accreditation necessary for TPC to operate in a particular market
could have a material adverse effect on TPC's operations.
Medicaid reimbursement rates in New York and New Jersey are not
negotiated by TPC, but are established by the respective states. Recent
budgetary pressures at the federal and state governmental level, may in the
future, reduce the allocation of federal and state budgetary dollars
appropriated for the Medicaid program. Reductions may have a negative impact on
TPC's revenues and profitability. Federal and state budgetary pressures may
adversely impact TPC by: (1) reducing the Medicaid reimbursement rates paid by
the state; (2) reducing the number of hours that will be reimbursed per case;
and (3) reducing the funding of one or more public assistance agencies with
which TPC presently does business. [See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - Industry Information" and "BUSINESS OF EFCC AND TPC -
Forward Looking Statements - Cautionary Factors"]
On July 9, 1996, authorities of the State of New Jersey met to discuss
the reduction of Medicaid reimbursement rates for the year July 1, 1996 to July
1, 1997. This meeting did not result in material reduction in the Medicaid
reimbursement rates for the period July 1, 1996 to July 1, 1997. During the
quarter ended March 31, 1996, a reduction in authorized Medicaid reimbursable
hours per case was imposed by New York State. The results of this reduction did
not have a material adverse effect on EFCC's results of operations for the
fiscal year ended December 31, 1996. However, if a similar Medicaid reduction is
imposed by the State of New Jersey, the results of this reduction would have a
material adverse effect on EFCC's results of operations, as EFCC currently
derives a majority of its revenues from New Jersey Medicaid reimbursements. EFCC
cannot predict the magnitude of future reductions, if any, in Medicaid
reimbursement rates or reimbursable hours.
New York State requires approval of the Public Health Council of the
New York State Department of Health ("NYPHC") for any change in a "Controlling
Person" of an operator of a licensed health care services agency ("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. To the
extent TPC or EFCC may seek to acquire control of an LHCSA, TPC would have to be
granted the approval of the NYPHC prior to exercising control over such LHCSA.
NYPHC approval is also required if any entity seeks control of more than 10
percent of the voting securities of EFCC or TPC. The NYPHC has approved the
change of control that occurred from the acquisition by Coss of approximately 66
percent of EFCC's Common Stock and the change of control which occurred when
Arbor acquired approximately 40 percent of EFCC's Common Stock. An application
to permit STAR's control over EFCC pursuant to the STAR Merger Agreement was
approved on June 27, 1997.
Health regulatory agencies of New York and New Jersey, where TPC
operates, require satisfaction of certain standards with respect to personnel,
services and supervision. Health regulatory agencies also require 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. TPC is currently in compliance with such
standards.
Applicable federal and state "anti-kickback" regulations in general
provide that TPC may not make certain payments in order to receive referrals of
patients. EFCC believes that it and TPC are in compliance with both state and
Federal "anti-kickback" regulations.
COMPETITIVE CONDITIONS
TPC's health care operations face competition in recruiting qualified
health care personnel, securing customers and providing services, from numerous
proprietary health care agencies and not-for-profit organizations, some of which
are substantially larger and better financed than TPC.
In New York, TPC has an annual contract with the Department of Social
Services in Nassau County representing approximately 21 percent of TPC's total
revenue in 1995 and 11 percent in 1996. This type of contract was awarded to
approximately sixty home health care agencies, and currently, no additional
agencies are permitted to bid on this contract. Cases are referred to agencies
on a rotating basis. TPC is at a competitive disadvantage in other locations in
New York State, since TPC does not have Medicaid contracts in areas other than
Nassau County.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant Medicaid contracts to any accredited home health care agency. Each
branch office of TPC has a contract with the New Jersey Department of Medicaid
for billing and administrative purposes. For New Jersey, new business is
dependent on referrals through physicians, county medical services, community
organizations, hospital social service workers, nurses, insurance companies and
the patient's family. Consequently, all of TPC's New Jersey business is subject
to numerous competitive factors. TPC believes that prompt service, price
(excluding Medicaid which by virtue of fixed reimbursement rates cannot be a
differentiating factor), quality of service and the range of services offered
are the principal factors which enable it to compete effectively in the New
Jersey market.
<PAGE>
MARKETING AND SALES
TPC currently markets its health care personnel and services in Nassau
and Queens counties in New York, in the eastern and northern counties in New
Jersey and in Allentown, Pennsylvania. TPC's services are marketed by a team of
professionals headed by a Regional Director, in each state. All of TPC's
services are promoted through print and yellow page advertising, brochures,
direct mail and visual presentations through field sales calls. Targeted clients
are hospitals, nursing homes, retirement centers, social service agencies,
senior citizen centers and other home care companies for sub-contract referrals.
TPC's representatives maintain telephonic contact not only to maintain a
relationship with existing referral sources, but also to establish new sources
and markets. TPC's staff attend health care sponsored seminars and various trade
shows and exhibitions.
LIABILITY INSURANCE
TPC is exposed to potential liability in the event of negligence or
wrongful acts of its personnel. TPC maintains liability insurance which it
believes to be adequate. There can be no assurance, however, that TPC will be
able to maintain its existing insurance at an acceptable cost or obtain
additional insurance in the future as required. There can be no assurance that
TPC's insurance will be sufficient to cover liabilities resulting from claims
that may be brought in the future.
EMPLOYEES
EFCC currently has approximately 557 active employees, 40 of which are
full-time employees. TPC has no union contracts with any of its employees and
believes that its relationship with its employees is good. TPC pays its
employees at rates that it believes are competitive.
EFCC is not aware of any current efforts to unionize in any of its
branches. If such an effort were made, it is uncertain if same would be
successful and if successful whether it would have a material effect upon EFCC's
operations or financial condition.
SECURITIES FILINGS
Since filing its petition for bankruptcy in 1986, until the filing of
its Form 10-KSB for period ending December 31, 1995 (the "1995 10-KSB") EFCC has
not filed any required reports under the Securities Exchange Act of 1934 (the
"Exchange Act"). The last such report filed was EFCC's Form 10-K for the fiscal
year ended December 31, 1985. During the years while in bankruptcy, EFCC did not
possess adequate financial and staffing resources to produce audited financial
statements and other reports as required by the Exchange Act. EFCC has filed
reports required under the Exchange Act commencing with its 1995 10-KSB. TPC was
required to and failed to file Exchange Act reports, which obligation arose as a
result of the registration statement filed with the Commission in connection
with its aborted 1985 offering having been declared effective, coupled with its
subsequent failure to withdraw this registration statement.
As a result of EFCC's and/or TPC's past non-compliance with the
Exchange Act, the Securities and Exchange Commission (the "SEC") may determine
to bring civil and administrative proceedings against EFCC. While the likelihood
of such proceedings being brought is uncertain, if such proceedings were
brought, EFCC could be subject to substantial monetary penalties and other
administrative remedies. TPC may also be subject to these concerns. See "RISK
FACTORS".
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
Except for the historical information and statements contained in this
Joint Proxy/Prospectus, certain matters and items set forth in this Joint
Proxy/Prospectus are forward looking statements that involve uncertainties and
risks some of which are discussed at appropriate points in the Joint
Proxy/Prospectus and are also summarized at the Section entitled "RISK FACTORS."
DESCRIPTION OF PROPERTY
EFCC's corporate office is located in Carle Place, New York. The lease
expires on November 30, 2000. EFCC leases 2,060 gross square feet at an annual
rental of $39,140, with annual escalations of 12%.
TPC's New York branch is located in Hempstead, New York. The space
consists of 1,688 square feet for a rental period expiring on July 31, 2000 at
an annual rental of $20,286. The staff and patient files of TPC's Hempstead
office were moved into STAR's Hicksville office during the first quarter of
1997.
TPC leases space for three locations in New Jersey.
The East Orange, New Jersey branch office occupies approximately 2,250
square feet. The lease term runs from March 1, 1996 through February 28, 2001 at
an annual rental of $29,400. The staff and patient files of TPC's East Orange
office were moved into STAR's South Orange, New Jersey office in the first
quarter of 1997.
The Hackensack, New Jersey branch office occupies approximately 2,000
square feet at an annual rental of $27,600, pursuant to a lease that expires on
February 28, 2000. The employees of the Hackensack office were integrated into
EFCC's Clifton, New Jersey office in the first quarter of 1997.
The Clifton, New Jersey location serves as the New Jersey Regional
Office. This location occupies approximately 3,500 square feet with an annual
rental of $61,250. The lease term expires January 31, 2006. The Patterson, New
Jersey satellite office was integrated into the Clifton Regional Office during
April, 1997.
TPCoperates one office in Allentown, Pennsylvania. This office
occupies 1,360 square feet. The base term runs from June 1, 1996 to June 30,
1999 at an annual rental of $22,576, plus 2.7% of total operating expense.
BANKRUPTCY PROCEEDINGS
In 1986 EFCC and TPC filed for protection from their respective
creditors under Chapter 11 of the U.S. Bankruptcy Code in the Southern District,
New York. An Amended Joint Plan of Reorganization (the "Plan") dated February 5,
1992 was filed for both EFCC and TPC. The Plan was approved on March 23, 1992.
Shareholders of EFCC prior to the bankruptcy filing retained ownership of their
shares.
There were seven classes of creditors. Some creditors withdrew their
claims, some received cash or negotiated extended payment terms, and some were
offered an option of receiving cash or newly issued common stock. The latter
group of creditors received 1,388,959 shares of newly issued common stock in
exchange for their claims.
As noted above, COSS received 12,749,658 shares of newly issued common
stock, representing, and at that time, 66 percent of EFCC's outstanding common
stock for a $250,000 cash investment.
A Final Decree was entered on January 13, 1995 confirming that the
Plan has been consummated permitting EFCC and TPC to emerge from bankruptcy
proceedings.
THE SPECIAL DIVIDEND
On January 21, 1997, pursuant to the STAR Merger Agreement, EFCC paid
a special cash dividend of $750,000 to its shareholders of record on January 13,
1997. This dividend was paid in contemplation of the STAR Merger transaction.
See "THE TPC MERGER - Background of the STAR Merger." Otherwise, EFCC has not
paid dividends on its common equity in the past five fiscal years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides information which
EFCC's management believes is relevant to an assessment and understanding of
EFCC's results of operations and financial condition. This discussion should be
read in conjunction with the audited consolidated financial statements and
related notes contained elsewhere in this filing.
OVERVIEW
TPC's revenues are derived from providing Home Care services to
individuals, in New York and New Jersey, through various contracts with
government agencies (under the Medicaid program) and to a lesser extent
hospitals, insurance companies, private pay and other third party payers.
INDUSTRY INFORMATION
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20 percent
for this industry sector. Primary reasons cited for such rapid growth include:
(1) the general aging of the United States' population; (2) the substantial cost
savings achievable through at-home treatment as an alternative to hospital care;
(3) medical and technological advances which enable a growing number of
treatments to be administered at home rather than in a medical facility; and (4)
insurance (both government regulated and private) reimbursement policies which
provide certain incentives to minimize the length of in-patient hospital care.
EFCC believes that the factors above will continue to contribute to steady
growth for the home care industry.
Discussions in New York and New Jersey at the executive and
legislative branches of government, concerning a possible reduction of Medicaid
reimbursement rates have taken place and such discussions may continue. On July
9, 1996, the State of New Jersey met to discuss the reduction of Medicaid
reimbursement rates for the year July 1, 1996 to July 1, 1997. The meeting did
not result in a material reduction in the Medicaid reimbursement rates for the
period July 1, 1996 to July 1, 1997. During the quarter ended March 31, 1996, a
reduction in authorized Medicaid reimbursable hours per case was imposed by the
New York State Department of Social Services. While this reduction did not have
a material adverse effect on EFCC's results of operations for the fiscal year
ended December 31, 1996, if a similar reduction were imposed by the State of New
Jersey, where EFCC derives a majority of its revenues, there would be a material
adverse effect on EFCC. EFCC cannot predict the magnitude of future reductions,
if any, in medicaid reimbursement rates or reimbursable hours. See "BUSINESS OF
EFCC AND TPC - Forward Looking Statements - Cautionary Factors." See, also,
"RISK FACTORS - Regulatory Environment."
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
NET PATIENT SERVICE REVENUE: Net patient service revenue increased $1,561,372
or 21% to $8,929,330 for the year ended December 31, 1996 from $7,367,958 for
the year ended December 31, 1995. The addition of three new branches in 1996
increased net patient service revenue by $1,358,545 or 18%. The balance of the
net increase in net patient service revenue resulted from (a) one branch
location which opened in August 1995 and therefore generated a full year revenue
in 1996 compared to four months of revenue in 1995; partially offset by (b) an
overall decrease in pre-existing branch net patient service revenue. The
decrease in pre-existing branch net patient service revenue was mainly due to an
overall general decrease in authorized Medicaid reimbursable costs by New York
State (see "BUSINESS OF EFCC AND TPC - Forward Looking Statements - Cautionary
Factors").
COST OF SERVICES: Cost of services increased $937,358 or 20% to $5,643,554 for
1996 from $4,706,196 for 1995. The increase in cost of services is primarily due
to increases in field staff payroll cost resulting from a 21% increase in net
patient service revenue. EFCC's growth in the number of cases serviced increased
the need for additional field staff to service these cases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses increased $1,064,337 or 50% to $3,192,769 for 1996 from
$2,128,432 for 1995. Selling, general and administrative expenses as a
percentage of net revenues increased to 36% for 1996 from 29% for 1995. This
increase is due to (a) higher administrative salaries, marketing and facility
expenses associated with the additional branch locations and the increase in
case volume; (b) EFCC's investment in its corporate infrastructure; and (c)
increased professional fees due to EFCC's commitment to resume filing the
reports required under the Securities Exchange Act of 1934.
PROVISION FOR INCOME TAXES: Provision for income taxes decreased by $154,000 or
74% to $55,000 for the year ended December 31, 1996 from $209,000 for the year
ended December 31, 1995. The decrease is primarily due to a $403,645 or 84%
decrease in pre-tax income and partially offset by an increase in EFCC's
effective tax rate from 1995 to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The nature of EFCC's business requires weekly payments of wages to its
personnel at the time they render services, while it receives payments for
services rendered over an extended period of time (30 to 90 days). At December
31, 1996 and December 31, 1995, EFCC's accounts receivable balances were
$1,066,277 and $895,131, respectively. During 1996 and 1995, TPC's days sales in
accounts receivable was approximately 47 days and 49 days, respectively.
At December 31, 1996, EFCC had working capital of $1,527,503.
Historically, EFCC's cash requirements have been met internally from operations.
EFCC currently has no outstanding bank debt nor does it have any agreements for
a line of credit.
EFCC's working capital was reduced on January 21, 1997 as a result of
the payment of a special dividend in the amount of $750,000. EFCC's working
capital should be sufficient to fund existing operations for the next 12 months,
but will not be sufficient to fund expanded activities if the STAR Merger is not
consummated. If the STAR Merger is consummated, EFCC's capital requirements
would be provided by STAR.
In 1996, EFCC used cash for operating activities of $457,092 and in
1995, EFCC generated cash from operating activities of $555,433, respectively.
The change in cash generated from operating activities in 1995 and cash used for
operations in 1996 was a result of decreased income from operations, increased
professional fees related to the anticipated STAR Merger, increased accounts
receivable due to increased revenues and the settlement of a pre-petition
payroll tax claim by the IRS.
During 1996, EFCC invested $122,979 in property and equipment
primarily for purchases of computers, telecommunication equipment and furniture
and equipment associated with EFCC's three new branch locations, including a
regional office in Clifton, New Jersey, as well as increased purchases of
computer equipment throughout EFCC. During 1995 EFCC invested $57,373 in
property and equipment primarily for purchases of computers, telecommunication
equipment, and furniture and equipment associated with EFCC's two new branch
locations.
In 1996, EFCC was provided cash through financing activities of
$1,134,701 and in 1995, EFCC used cash in financing activities of $83,687. The
change in cash used in financing activities in 1995 and cash provided by
financing activities in 1996 was primarily due to the $1,250,000 net cash
proceeds received by EFCC in 1996 from the exercise of the Arbor stock options.
In 1995, EFCC used cash to pay down $83,687 in various loan and capital lease
obligations.
Three Months Ended March 31, 1997
---------------------------------
The following discussion and analysis provides information which
EFCC's management believes is relevant to an assessment and understanding of
EFCC's results of operations and financial condition for the three months ended
March 31, 1997. This discussion should be read in conjunction with EFCC's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1996.
OVERVIEW
EFCC's revenues are derived from providing home health services to
individuals, in New York and New Jersey, through various contracts with
government agencies (under the Medicaid program) and to a lesser extent
hospitals, insurance companies, private pay and other third party payers.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
NET PATIENT SERVICE REVENUE: Net patient service revenue increased $337,047 or
17% to $2,321,939 for the quarter ended March 31, 1997 from $1,984,892 for the
quarter ended March 31, 1996. The addition of one new satellite branch from
March 31, 1996 to March 31,1997 and three months of full operation during the
quarter ended March 31, 1997 for a branch opened in February 1996 increased net
patient service revenue by $221,098 or 11%. The balance of the increase in net
patient service revenue was from existing branches, offset by the sale of the
Jersey City branch in December 1996.
COST OF SERVICES: Cost of services increased $278,794 or 22% to $1,525,058 for
the quarter ended March 31, 1997 from $1,246,264 for the quarter ended March 31,
1996. The increase in cost of services is primarily due to increases in field
staff payroll costs resulting from the increase in net patient service revenue.
EFCC's growth in the number of cases serviced increased the need for additional
field staff to service these cases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses decreased $84,918 or 10% to $753,594 for the quarter
ended March 31, 1997 from $838,512 for the quarter ended March 31, 1996.
Selling, general and administrative expenses as a percentage of net revenues
decreased to 32% for the quarter ended March 31, 1997 from 42% for the quarter
ended March 31, 1996. This decrease is primarily attributable to an overall
reduction in overhead expenses during the quarter ended March 31, 1997,
resulting from the Company entering into a consulting agreement with Star on
January 3, 1997 and resulting integration of certain administrative functions,
partially offset by the payment of consulting fees to Star.
PROVISION (BENEFIT) FOR INCOME TAXES: Provision for income taxes increased by
$51,500 to $13,000 for the quarter ended March 31, 1997 from a benefit of
($38,500) for the quarter ended March 31, 1996. The increase is primarily due to
a $122,882 increase in pre-tax income.
INFLATION AND SEASONALITY
Medicaid reimbursements, which represent EFCC's principal source of
revenue, have historically been adjusted to keep pace with inflation. There can
be no assurance that future Medicaid reimbursement will keep pace with
inflation. See EFCC's Management's Discussion and Analysis for the twelve months
ended December 31, 1996. "Forward-Looking Statements - Cautionary Factors."
EFCC's business is generally not subject to seasonal trends.
LIQUIDITY AND CAPITAL RESOURCES
The nature of EFCC's business requires weekly payments of wages to its
personnel as they render services, while EFCC receives payments for services
rendered over an extended period of time (30 to 90 days). At March 31, 1997 the
Company's accounts receivable balance increased $105,366 to $1,171,643 from
$1,066,277 at December 31, 1996. The increase in accounts receivable was due to
increased net patient service revenue offset by a decrease in days sales in
accounts receivable from approximately 54 to 44 days and an additional $25,000
allowance for doubtful accounts.
At March 31, 1997 EFCC had working capital of $815,125. Historically,
EFCC's cash requirements have been met internally from operations. EFCC
currently has no outstanding bank debt nor does it have any agreements for a
line of credit.
EFCC's working capital was reduced on January 21, 1997 as a result of
the payment of a special dividend in the amount of $749,990. EFCC's working
capital should be sufficient to fund existing operations for the next 12 months,
but may not be sufficient to fund expanded activities if the Star Merger is not
consummated. If the Star Merger is consummated, EFCC's capital requirements
would be provided by Star.
Net cash provided by (used in) operating activities for the Company
was $137,528 for the quarter ended March 31, 1997 and ($246,403) for the quarter
ended March 31, 1996. The change in cash provided by operating activities for
the quarter ended March 31, 1997, and cash used in operations for the quarter
ended March 31, 1996 was the result of increased gross profit, decreased
selling, general and administrative expenses and a decrease in the number of
days sales in accounts receivable from approximately 54 days to 44 days.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective February 19, 1996, EFCC dismissed Rose, Michlin, Karpf & Co.
("Rose, Michlin") as its independent auditor for the audit of its financial
statements. The new independent auditor to be engaged by EFCC to audit EFCC's
financial statements, effective February 19, 1996, is Carpenter & Onorato, P.C.
Rose, Michlin did not complete the audit of EFCC's financial
statements for the two most recent fiscal years 1994 and 1995. However, during
these years there were no disagreements with Rose, Michlin on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. Further, EFCC was not advised by Rose, Michlin during this
period of the existence of any of the events described in Item 304(a)(1)(B) of
Regulation S-B.
The decision to change accountants was recommended and approved by
EFCC's Board of Directors.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The directors and executive officers of EFCC and TPC are as follows:
Name Age Position
- ---- --- --------
CURRENT DIRECTORS AND OFFICERS
- ------------------------------
EFCC TPC
---- ---
<S> <C> <C> <C>
Joseph Heller 33 Vice President/Acting Chief Acting Chief Executive
Executive Officer/Principal Officer/Director
Financial Officer/
Controller/Director
Paul Elenio 30 Director and Former Vice Director
President/Controller/
Principal Financial
Officer
Robert Kohlmeyer 42 Secretary/Treasurer/ Secretary/Treasurer/
Director Director
FORMER DIRECTORS AND OFFICERS
- -----------------------------
EFCC TPC
---- ---
Mary Ann Page 55 Former Chief Executive Former President/
Officer/Former Vice- Former Director
President/Former Director
Patricia Cantalupo 37 Former Vice-President/ Former Vice President/
Former Director Secretary
Peter P. Jackson 46 None Former Chief Executive
Officer
Steven Gorenstein 53 Former President/Former None
Chief Executive Officer/
Former Director
</TABLE>
JOSEPH HELLER
Mr. Heller was appointed Vice President of EFCC in March, 1996,
principal financial officer and controller in January, 1997, and acting Chief
Executive Officer in April, 1997. Mr. Heller has been a director of EFCC and TPC
since September, 1996. From August 1995 to the present, Mr. Heller also has been
a Vice President of Arbor, a holding company which owns 40% of the currently
outstanding shares of EFCC. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." From June 1995 to the present, Mr. Heller also has been Vice
President of Corporate Planning for Arbor Management, LLC. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." From 1991 to May 1995, Mr. Heller has
held the positions of Vice President of Financial Analysis and Budgeting and
Director of Shareholder Relations for Arbor National Mortgage, Inc. and its
successor. From 1990 to 1991, Mr. Heller was an Acquisition Associate for
WinStar Services, Inc., a merchant and investment banking firm. From 1987 to
1990, Mr. Heller was a Senior Analyst for Morgan Stanley & Co., a leading
investment banking firm, and from 1985 to 1987, Mr. Heller was a Senior
Accountant for Ernst & Young, LLP, an international accounting and consulting
firm. Mr. Heller is a Certified Public Accountant. In 1991, he received a
Masters degree in Business Administration from Fordham University.
PAUL ELENIO
Director of EFCC and TPC since September, 1996. Mr. Elenio was Vice
President and Controller of EFCC since January 1996, but resigned from this
position in January, 1997. From 1993 to 1995 Mr. Elenio held the position of
Financial Reporting and Tax Supervisor for BankAmerica Mortgage, FSB, formally
Arbor National Mortgage, Inc., a mortgage banking company which originated, sold
and serviced residential and commercial mortgages. From 1991 to 1993, Mr. Elenio
held the position of Senior Accountant for Arbor National Mortgage, Inc.
ROBERT KOHLMEYER
Secretary, Treasurer and Director of EFCC since 1992. Mr. Kohlmeyer is
also Secretary/Treasurer and a Director of TPC. Mr. Kohlmeyer has been President
and Chief Operating Officer of CRK Contracting, a regional large scale
electrical contracting company, since 1987.
MARY ANN PAGE
Ms. Page was Acting Chief Executive Officer since January 1996; Vice
President and Director of EFCC since June 1994. Ms. Page was also President and
a Director of TPC. From 1991 to 1993, Ms. Page held the position of Director of
Training for Health Force, a national home health care agency, where she was
responsible for training new franchisees in all aspects of home care personnel
services. From 1988 to 1991, she held the position of Director of Franchising
for Winston Franchising Corp. Ms. Page's employment with EFCC and TPC ended on
March 31, 1997. Ms. Page resigned as a director in April, 1997.
PATRICIA CANTALUPO
Vice President and Director since 1992. Dr. Cantalupo is also a Vice
President and Secretary of TPC. Dr. Cantalupo has been the principal owner of
Cantalupo Chiropractic Associates, a full service multi-disciplinary
Chiropractic Health Care Facility, since 1985. Dr. Cantalupo resigned from all
positions with EFCC and TPC in August, 1996.
PETER P. JACKSON
Mr. Jackson's employment with EFCC and TPC ended in August, 1996. Mr.
Jackson had been Managing Director of Business Development since January 1996.
Mr. Jackson was Chief Executive Officer of TPC from July 1993 to December 1995.
STEVE GORENSTEIN
President, Chief Executive Officer and Director of EFCC since 1992.
Mr. Gorenstein resigned as an officer and director in January 1996. From 1991 to
present, Mr. Gorenstein has been President of Career Placements, Inc., a
temporary employment agency.
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION FOR EFCC AND TPC
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
(a) (b) (c) (d) (e)
Name and
Principal Other
Position Year Salary($) Bonus($) Compensation($)
- -------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Steve Gorenstein 1996 N/A N/A N/A
Chief Executive Officer 1995 $0 $0 $0
President and Director
Mary Ann Page 1996 $88,609 $5,000 $0
Acting Chief Executive 1995 $82,210 $6,250 $0
Officer
</TABLE>
No officer of EFCC or TPC received compensation in excess of $100,000
from 1995 - 1996. All compensation specified above is paid by TPC for services
rendered to TPC. Members of the Board of Directors received no compensation of
any kind for services provided as a director.
There are no employment agreements with any officer or director of EFCC
or TPC.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of certain beneficial owners.
The following sets forth the holdings of any person known by the
issuer to be the beneficial owner of more than five percent of EFCC's and TPC's
Common Stock:
<TABLE>
<CAPTION>
EFCC
----
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
- -------------- ---------------- --------- --------
<S> <C> <C> <C>
Common Stock Coss Holding Corp. 12,749,658 39.84%
1 Old Country Road
Suite 335
Carle Place, NY 11514
Common Stock Arbor Home HealthCare 25,749,658 (1) 80.47%
Holding, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
Common Stock Ivan Kaufman 25,749,658 (1)(2) 80.47%
c/o Arbor Home
HealthCare Holding, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
</TABLE>
- --------------------------
(1) Includes 13 million shares owned directly and also includes voting
power over 12,749,658 shares owned by Coss Holding Corp. pursuant to a voting
trust. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
(2) Ivan Kaufman owns a 99 percent interest in Arbor Home HealthCare
Holding LLC. and is its controlling member.
<TABLE>
<CAPTION>
TPC
---
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
- -------------- ---------------- --------- --------
<S> <C> <C> <C>
Common Stock Extended Family 1,451,156 82.93%
Care Corporation
1 Old Country Road
Carle Place, NY 11514
</TABLE>
(b) Security Ownership of Management.
The following sets forth the holdings of all of EFCC's directors and
executive officers, as well as all directors and officers as a group:
<TABLE>
<CAPTION>
EFCC TPC
---- ---
Name and Amount and Amount and
Address of Nature of Nature of
Title Beneficial Beneficial Percent Beneficial Percent
of Class Owner Ownership of Class Ownership of Class
- -------- ----- --------- -------- --------- --------
<S> <C> <C> <C>
<C> <C> <C> <C> <C>
Common Stock Robert Kohlmeyer (1) 0 0 0 0
86 Hilltop Drive
Smithtown, NY 11787
Common Stock Paul Elenio 0 0 0 0
c/o Cosmetic Sciences, Inc.
1 Old Country Road
Carle Place, NY 11514
Common Stock Joseph Heller 0 0 0 0
c/o Arbor Management, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
Common Stock All directors and 0 0 0 0
executive officers
as a group
</TABLE>
- -----------------------------
Coss Holding Corp. has five directors; Robert Kohlmeyer, Steven
Gorenstein, Pamela Robb, Donald Lia and John Curtin. Arbor also received a
pledge of Coss' EFCC shares and a pledge of certain shares of Coss in connection
with loans made to Coss and certain shareholders of Coss. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(c) Changes in control
Coss has placed all of its 12,749,658 shares of EFCC's Common Stock
(the "Coss Shares"), representing approximately 40 percent of the currently
outstanding EFCC Common Stock, in a voting trust. Arbor has the right under this
voting trust to direct the voting of all of the Coss Shares and to nominate a
majority of EFCC's Board of Directors. (See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".)
In addition, pursuant to a certain Amended and Restated Option
Agreement (the "Option Agreement"), dated as of October 31, 1995, by and among
Arbor, Coss, Coss' shareholders, EFCC, and TPC, Arbor acquired from EFCC an
option to purchase up to 13 million shares of EFCC's Common Stock. This option
has been exercised in full. Thus, Arbor has beneficial ownership and voting
rights to 80.47 percent of the outstanding Common Stock of EFCC. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".)
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Option Agreement, Arbor acquired from EFCC an option
to purchase up to 13 million shares of EFCC's Common Stock as follows: (a) Arbor
had an irrevocable option (the "First Option") to purchase, by June 21, 1996
(which date was extended to August 21, 1996), 6.5 million shares of EFCC's
Common Stock at an exercise price of $.10 per share; (b) subject to Arbor's
timely exercise of the First Option and the issuance of the shares of EFCC
Common Stock pursuant to such exercise, Arbor was given the option (the "Second
Option") to purchase, by November 1, 1996, up to an additional 6.5 million
shares of EFCC's Common Stock at an exercise price of $.10 per share. The First
and Second Options were subject to adjustment in the event of stock splits and
similar events.
On August 21, 1996, Arbor exercised the First Option by delivering to
EFCC a notice of exercise of the First Option and by depositing $650,000 in
escrow, to be released to EFCC upon approval of an amendment to EFCC's
Certificate of Incorporation providing sufficient authorized capital to exercise
the First and Second Option. This approval occurred at EFCC's annual meeting on
September 25, 1996 and the amendment was filed in October, 1996. On October 31,
1996, Arbor exercised the Second Option by delivering to EFCC a notice of
exercise of the Second Option and by paying $650,000 to EFCC.
The Option Agreement also provides that Arbor's consent shall be
required before certain actions may be taken by Coss, its shareholders, EFCC and
TPC. The Option Agreement will terminate upon the completion of the STAR Merger.
Coss has placed all of its remaining 12,749,658 shares of EFCC's
Common Stock (the "Coss Shares"), representing approximately 40 percent of the
currently outstanding EFCC Common Stock, in a voting trust. Arbor has the right
under this voting trust to direct the voting of all of the Coss Shares. Arbor
has agreed, however, pursuant to the Option Agreement, that it will elect only a
majority of EFCC's directors, effectively giving Coss one seat on the EFCC
Board, currently constituting three directors. In addition, under certain
circumstances, the trustee of the voting trust is required to observe certain
restrictions in the event Coss wishes to effect a sale, transfer or encumbrance
of the Coss Shares. Coss will retain all economic rights in the Coss Shares,
including, but not limited to, its right to dividends. This Voting Trust
Agreement will also terminate upon completion of the STAR Merger.
Pursuant to a Registration Rights and Conditional Put Option Agreement
(the "Registration Rights Agreement"), dated as of October 31, 1995, between
Coss and EFCC, EFCC has agreed to register the Coss Shares for resale under the
Securities Act, upon the written demand of Coss made at any time commencing one
year after the date on which EFCC's Common Stock is listed on the Nasdaq Stock
Market (whether as a SmallCap Market security or a National Market System
security, or any equivalent or successor of the foregoing). Pursuant to the
Registration Rights Agreement, EFCC will be obligated to file up to three
registration statements over a three-year period, with one-third of the Coss
Shares (subject to certain adjustments) to be registered in each year of such
three year period. Notwithstanding the foregoing, EFCC has the right to reject
the demand by Coss, following which Coss may require that EFCC redeem the Coss
Shares at a price equal to 75 percent of the average bid price in effect during
the thirty trading days prior to the demand for registration. Upon EFCC's
rejection of the demand, Coss, at its option, may sell the Coss Shares to a
party other than EFCC, subject to EFCC's right of first refusal on such sale.
Arbor has the right to purchase the Coss Shares in lieu of EFCC on the same
terms and conditions granted EFCC as described in the two preceding sentences.
In addition, Coss has been granted certain registration rights in the event EFCC
shall register any shares for sale under the Securities Act. In the event the
STAR Merger occurs, neither EFCC or Arbor will have any further obligations
under this agreement.
On October 31, 1995, EFCC entered into a two year Financial Services
Agreement with Arbor Management, LLC ("Arbor Mgt."), in which Ivan Kaufman owns
a 99% interest. This Agreement requires Arbor Mgt. to provide consulting
services in the areas of finance, information systems, accounting and marketing.
Arbor Mgt. receives a fee of $7,500 per month for these services. This agreement
is subject to early termination upon (i) the listing of EFCC's Common Stock on
the NASDAQ Stock Market or (ii) upon the completion of the STAR Merger.
CONSULTING AGREEMENT
On January 3, 1997, STAR and EFCC entered into a consulting agreement
(the "Consulting Agreement") pursuant to which STAR agreed that, upon EFCC's
request it will render to EFCC, by and through such of its officers, employees
and agents as STAR, in its sole discretion, designates from time to time,
consulting services with respect to the management and operation of EFCC. The
consulting services to be rendered by STAR under the Consulting Agreement
consist of those consulting services relating to the management and operation of
EFCC's healthcare business reasonably requested by EFCC. EFCC and STAR have
agreed that STAR's role is that of a consultant and advisor to, and not that of
a manager of, EFCC. Under the Consulting Agreement, STAR has no duty or
responsibility to manage the affairs of EFCC which duty and responsibility
remains at all times with the Board of Directors and management of EFCC.
For the consulting services to be rendered by STAR, EFCC has agreed to
pay STAR fees in the amount of Twenty-five Thousand Dollars ($25,000) per month,
payable (a) $15,000 in arrears on the last day of each month, pro rated for any
partial month, and (b) the remaining $10,000 on the earlier to occur of the
Consummation of the Star Merger or the termination of the Star Merger Agreement.
The Consulting Agreement will terminate on the earlier of (i) the date
on which the STAR Merger Agreement shall have been terminated pursuant to the
terms thereof other than by reason of the default of EFCC thereunder, (ii) the
Effective Date of the Management Agreement (as defined in the STAR Merger
Agreement, discussed below) or (iii) the consummation of the STAR Merger
provided, that STAR has the right to terminate its obligation to render services
under the Consulting Agreement at any time upon forty-five (45) days prior
notice to EFCC.
MANAGEMENT AGREEMENT
On January 3, 1997, STAR and EFCC also entered into a management
agreement (the "Management Agreement") pursuant to which STAR agreed to act as
manager of EFCC. The Management Agreement is subject to approval of the
Commissioner of the New York State Department of Health (the "Commissioner").
Pursuant to the Management Agreement STAR will have the authority and
responsibility to conduct, supervise and effectively manage the day-to-day
operation of EFCC. In the absence of oral or written direction or written
policies of the Board of Directors of EFCC, STAR will be expected to exercise
the reasonable judgment of a management company in its management activities.
STAR will specifically have responsibility and commensurate authority, subject
among other things to the direction of the Board of EFCC to act on its behalf
for the following activities: (i) the establishment, maintenance, revision and
administration of the overall charge structure of EFCC pursuant to pertinent
regulations, including, but not limited to, patient charges, charges for
ancillary services, charges for supplies and special services; (ii) (A) the
hiring, discharge, supervision and management of all employees of EFCC,
including the determination, from time to time, of the numbers and
qualifications of employees needed in the various departments and services of
EFCC, (B) the establishment, revision and administration of wage scales, rates
of compensation, employee benefits, rates and conditions of employment,
in-service training, attendance at seminars or conferences, staffing schedules,
and job and position descriptions with respect to all employees of EFCC; (iii)
the issuance of bills for services and materials furnished by EFCC, and the
collection of accounts and monies owed to EFCC, including the responsibility to
enforce the rights of EFCC as creditor under any contract or in connection with
the rendering of any service; (iv) the payment of payroll, trade accounts,
amounts due on short and long-term indebtedness, taxes and all other obligations
of EFCC; provided, however, that the responsibility will be limited to the
exercise of reasonable diligence and care to apply the funds collected in the
operation of EFCC to its obligations in a timely and prudent manner, and STAR
will not become personally liable or act in a guarantor capacity with respect to
any obligation of EFCC; (v) the establishment and administration of accounting
procedures and controls, in accordance with generally accepted accounting
principles and the establishment and administration of systems for the
development, preparation and safekeeping of records and books of account
relating to the business and financial affairs of EFCC; (vi) the maintenance of
accounts in such banks, savings and loan associations, and other financial
institutions as the Board of EFCC may, from time to time, select (including
certificates of deposit) with such balances therein (which may be interest
bearing or non-interest bearing) as STAR shall, from time to time, deem
appropriate, taking into account the operating needs of EFCC and the
disbursements from such accounts of such amounts of EFCC's funds as STAR shall,
from time to time, determine is appropriate in the discharge of its
responsibilities under the Management Agreement; provided, however, that STAR
will not, in any case, have any obligation to supply, out of its own funds,
working capital for EFCC; (vii) the management of all purchases and leases of
real property, equipment, supplies and all materials and services which STAR
deems to be necessary in the operation of EFCC; (viii) the evaluation of all
quality control aspects of EFCC operation, and the implementation, with approval
of the Board of EFCC, of quality control programs designed to meet standards
imposed by appropriate certifying agencies and to bring about a high standard of
health care in accordance with Board of EFCC policies and resources available to
EFCC.
Under the Management Agreement, STAR will be empowered to negotiate,
enter into, terminate and administer on behalf of EFCC contracts for services by
medical, paramedical and other persons and organizations.
Notwithstanding any other provision of the Management Agreement, the
Board of EFCC retains and STAR is prohibited from exercising: (i) direct
independent authority to hire or fire STAR or a qualified agency administrator
of EFCC; (ii) independent control of EFCC's books and records; (iii) authority
over the disposition of assets and the authority to incur on behalf of EFCC
liabilities not normally associated with the day-to-day operation of EFCC; and
(iv) authority for the independent adoption and enforcement of policies
affecting the delivery of health care services.
The Management Agreement will become effective upon the date it is
approved by the Commissioner (the "Effective Date"). The Management Agreement
may be terminated by the Commissioner, without financial penalty to the Board,
not more than sixty (60) days after notification to the parties of a
determination that the management of EFCC is so deficient that the health and
safety of patients would be threatened by continuation of the Management
Agreement. The Management Agreement can be terminated by EFCC without cause on
60 days' notice and with cause on 14 business days' notice. Unless sooner
terminated in accordance with the terms of the Management Agreement, or extended
or renewed by mutual agreement of the parties thereto, the Management Agreement
will remain in effect until the Consummation of the Star Merger or December 31,
1998, whichever is sooner.
In 1997, Arbor lent funds to Coss, which loans were secured by certain
Coss shareholders' shares in Coss, as well as Coss' shares of EFCC. Coss then
lent these funds to certain of its shareholders, including Robert Kohlmeyer, a
director of EFCC and TPC. Ivan Kaufman and Arbor already acknowledged beneficial
ownership of Coss' EFCC shares by virtue of the voting trust arrangement
discussed above in the fourth paragraph of this section.
In 1995 and 1996, an Arbor affiliate lent certain funds directly to
certain Coss shareholders against a pledge of such shareholders' Coss shares.
All loans referred to in this paragraph were for a fixed term at current market
rates of interest.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
EFCC by Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C. ("Meltzer, Lippe"),
190 Willis Avenue, Mineola, New York 11501. The federal income tax consequences
in connection with the TPC Merger will be passed upon for TPC by Meltzer, Lippe.
PROPOSALS FOR ANNUAL MEETING
In order to be considered for inclusion in EFCC's annual meeting, any
stockholder proposal would have had to have been received by May 11, 1997 (the
"Proposal Submission Date"). EFCC does not intend to hold an annual meeting if
the STAR Merger is completed. If not, it will schedule an annual meeting and
will advise stockholders of any required adjustment in the Proposal Submission
Date in accordance with Rule 14a-5(e) of the Securities Exchange Act of 1934.
EXPERTS
The consolidated financial statements of Extended Family Care
Corporation and subsidiaries as of December 31, 1996 and for each of the years
in the two-year period ended December 31, 1996 included in this Joint Proxy
Statement/Prospectus have been audited by Carpenter & Onorato, P.C., independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
<PAGE>
The consolidated financial statements of STAR MULTI CARE SERVICES,
INC. and subsidiaries, except AMSERV HEALTHCARE, INC. and subsidiaries, as of
May 31, 1995 and 1996 and for each of the years in the three-year period ended
May 31, 1996 included in this Joint Proxy Statement/Prospectus have been audited
by Holtz Rubenstein & Co., LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of AMSERV HEALTHCARE INC. and
subsidiaries as of May 31, 1996 and June 24, 1995 and for the period from June
25, 1995 to May 31, 1996 and the year ended June 24, 1995 (not separately
presented herein) have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report appearing elsewhere herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of AMSERV HEALTHCARE INC. and
subsidiaries for the year ended June 30, 1994 (not separately presented herein)
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report appearing elsewhere herein, and are included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
<PAGE>
EXTENDED FAMILY CARE CORPORATION
TPC HOME CARE SERVICES, INC.
AND
STAR MULTI CARE SERVICES, INC.
------------------------------
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
-----------------------------
The following unaudited pro forma condensed combined financial statements
give effect to the merger of TPC Home Care Services, Inc. ("TPC") with Extended
Family Care Corporation ("EFCC") accounted for as a purchase transaction, and
the merger of Star Multi Care Services, Inc. ("Star") and EFCC, accounted for as
a purchase transaction. These pro forma financial statements are presented for
illustrative purposes only, and therfore are not necessarily indicative of the
operating results and financial position that might have been achieved had the
mergers occurred as of an earlier date, nor are they necessarily indicative of
operating results and financial position which may occur in the future.
A pro forma condensed combined balance sheet is provided as of March 31,
1997, giving effect to the mergers as though they had been consummated on that
date. The pro forma condensed combined balance sheet combines the consolidated
balance sheet of EFCC as of March 31, 1997 with that of Star as of February 28,
1997. Pro forma condensed combined statements of operations are provided giving
effect to the merger of the TPC Minority Interest with and into EFCC for the
three months ended March 31, 1997 and the year ended December 31, 1996, giving
effect to the merger as though it had occurred on January 1, 1996. Pro forma
condensed combined statements of operations are provided combining EFCC for the
nine month period ended March 31, 1997 and the year ended June 30, 1996 with
Star for the nine month period ended February 28, 1997 and the year ended May
31, 1996, giving effect to the mergers as though they had occurred on July 1,
1995.
The pro forma financial statements are based on preliminary estimates of
values and transaction costs and preliminary appraisals. The actual recording of
the transactions will be based on final appraisals, values and transaction
costs. Accordingly, the actual recording of the transactions can be expected to
differ from these pro forma financial statements.
The historical condensed statements of operations presented for the years
ended June 30, 1996 and December 31, 1996 are derived from the separate
historical consolidated financial statements of EFCC and Star, and should be
read in conjunction with the companies' separate financial statements included
elsewhere herein. The historical condensed financial statements as of or for the
three and nine months ended March 31, 1997 are derived from the historical
interim consolidated financial statements of EFCC and Star, included elsewhere
herein, and have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and, in the opinion of
EFCC's and Star's respective managements, include all adjustments necessary for
a fair presentation of financial information for such interim periods.
<PAGE>
EXTENDED FAMILY CARE CORPORATION
TPC HOME CARE SERVICES, INC.
AND
STAR MULTI CARE SERVICES, INC.
------------------------------
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
-----------------------------
1. Basis of Presentation:
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only, giving effect to the merger of TPC
Home Care Services, Inc. ("TPC") and Extended Family Care Corporation ("EFCC"),
and the merger of Star Multi Care Services, Inc. ("Star") and EFCC, both
accounted for as purchase transactions. In accordance with Commission reporting
rules, the pro forma combined statements of operations, and the historical
statements from which they are derived, present only income from continuing
operations and, therefore, do not include discontinued operations, extraordinary
items, and the cumulative effects of accounting changes.
Star reports on a fiscal year ended May 31 basis. For purposes of
combining Star's historical financial information with EFCC's historical
financial information in the pro forma condensed financial statements, the
financial information of EFCC has been accumulated for the twelve month period
ended June 30, 1996 and the nine month period ended March 31, 1997.
2. Pro Forma Adjustments:
a. Pro Forma Condensed Combined Balance Sheet
(i) Acquisition of Minority Interest in TPC Home Care Services, Inc.
by EFCC
Reflects the estimated purchase price of $1,080,065 for the
Merger of the TPC Home Care Services, Inc. Minority Interest ("TPC") with and
into EFCC. The foregoing assumes the issuance of 5,601,975 shares of $.01 par
value Common Stock of EFCC, at the value per EFCC share of consideration to be
issued in the Star merger, or $.193 per share, in exchange for 298,844 shares of
$.01 par value Common Stock of TPC. The actual purchase price will vary with the
market price of EFCC Common Stock. The excess of the purchase price over the net
assets acquired of $938,796 has been allocated to goodwill (amortized over 40
years).
(ii) Acquisition of EFCC by Star
Reflects the estimated purchase price of $8,050,000 (including
aggregate estimated related acquisition costs of $800,000 of which $165,000 has
been paid as of March 31, 1997) for the Merger of the EFCC with and into Star.
Of such estimated purchase price, $4,850,000 represents the issuance of
1,077,778 shares of Star $.001 par value Common Stock with the balance of
$3,200,000 (including acquisition costs of $800,000) paid in cash. The
foregoing, although not necessarily indicative of future price levels, assumes a
recent average market price of Star Common Stock of $4.50 per share.
The preliminary allocation of the purchase price paid for the
net assets of EFCC based upon the estimated fair values of such net assets is as
follows:
<TABLE>
<S> <C>
Estimated acquisition cost $ 8,050,000
Less historical book value of net assets of EFCC, which approximate
fair value, at March 31, 1997, after pro forma adjustment for
acquisition of TPC minority interest (2,405,954)
----------
Intangible assets acquired $ 5,644,046
==============
Goodwill (amortized over 40 years) $ 5,363,046
Trained and assembled workforce (amortized over 7 years) 193,000
Corporate manuals (amortized over 5 years) 38,000
Other (amortized over 25 years) 50,000
--------------
$ 5,644,046
==============
</TABLE>
<PAGE>
2. Pro Forma Adjustments: (Cont'd)
(iii) Acquisition Financing
Reflects additional estimated borrowing under Star's line of credit
for the acquisition of EFCC as discussed in Note 2a(ii).
(iv) Transaction Costs of EFCC
Reflects the write-off of $155,000 of acquisition costs incurred by
EFCC. Total acquisition costs of EFCC are estimated to be $300,000.
b. Pro Forma Condensed Combined Statements of Operations - Merger of
EFCC into Star
(i) Cost Savings Plan
Star has begun to identify cost savings resulting from a
business integration plan which is expected to be implemented following the
merger. The business integration plan contemplates, among other things, (i)
elimination of duplicative executive and administrative functions and (ii)
closing and consolidation of certain facilities. Star's preliminary assessment
of cost savings is estimated to be $1.0 million, however, management has not
included the impact of any special charges or cost savings in the pro forma
combined statements of operations.
(ii) Minority Interest
Reflects elimination of minority interest in connection with
the acquisition of the TPC minority interest, as more fully described in Note
2a(i).
(iii) Depreciation and Amortization
Reflects adjustment to depreciation and amortization based on
the preliminary purchase accounting allocations related to intangible assets
acquired in connection with the acquisition of EFCC by Star, as more fully
described in Note 2a(ii).
(iv) Interest Expense
Reflects adjustment to interest expense on funds borrowed in
connection with the acquisition of EFCC by Star.
(v) Consulting Fees
Star charged EFCC a consulting fee of $75,000 for the nine month
period ended March 31, 1997, which was eliminated in combination.
(vi) Income Taxes
Reflects recognition of income tax effect of pro forma
adjustments related to acquisition of EFCC by Star.
(vii) Earnings Per Common Share
Pro forma weighted average number of common shares outstanding
for the nine months ended March 31, 1997 and the year ended June 30, 1996 are
based upon EFCC's and Star's historical weighted average shares, after
adjustment for the estimated conversion of EFCC shares to shares of Star common
stock.
c. Pro Forma Condensed Combined Statements of Operations - Merger of
TPC into EFCC
(i) Minority Interest
Reflects elimination of minority interest in connection with
the acquisition of the TPC minority interest, as more fully described in Note
2a(i).
<PAGE>
2. Pro Forma Adjustments: (Cont'd)
(ii) Earnings Per Common Share
Pro forma weighted average number of common shares outstanding
for the three months ended March 31, 1997 and the year ended December 31, 1996
are based upon EFCC's historical weighted average shares, after adjustment for
the estimated conversion of TPC shares to shares of EFCC common stock.
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION
TPC HOME CARE SERVICES, INC.
AND
STAR MULTI CARE SERVICES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
Historical Pro Forma Historical Pro Forma
---------- ---------------------------- ---------- ------------------------------
Extended Acquisition of Star
Family Care TPC Minority Multi Care
ASSETS Corporation Interest Combined Services, Inc. Adjustments Combined
------ ----------- --------------- --------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 445,021 $ - $ 445,021 $ 78,574 $(3,035,000) 2a(ii)
3,035,000 2a(iii) $ 523,595
Accounts receivable, net 1,171,643 - 1,171,643 10,130,449 - 11,302,092
Prepaid expenses and
other current assets 440,874 (155,000) 2a(iv) 285,874 769,365 (165,000) 2a(ii) 890,239
Income taxes receivable - - - 28,997 - 28,997
Deferred income taxes - - - 961,232 - 961,232
----------- --------- ---------- ----------- ----------- -----------
Total current assets 2,057,538 (155,000) 1,902,538 11,968,617 (165,000) 13,706,155
PROPERTY AND EQUIPMENT, net 217,897 - 217,897 916,281 - 1,134,178
NOTES RECEIVABLE
FROM OFFICER - - - 94,937 - 94,937
INTANGIBLE ASSETS, net 466,233 938,796 2a(i) 1,405,029 5,059,300 5,644,046 2a(ii) 12,108,375
DEFERRED INCOME TAXES 191,000 - 191,000 - - 191,000
OTHER ASSETS 29,410 - 29,410 218,916 - 248,326
----------- --------- ---------- ----------- ----------- -----------
Total assets $ 2,962,078 $ 783,796 $3,745,874 $18,258,051 $ 5,479,046 $27,482,971
=========== ========= ========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related exp $ 944,672 $ - $ 944,672 $ 1,241,205 $ - $2,185,877
Accounts payable and other
current liabilities 254,292 - 254,292 1,405,020 - 1,659,312
Current maturities-long-term debt 43,449 - 43,449 125,000 - 168,449
---------- -------- ---------- ---------- ----- ----------
Total current liabilities 1,242,413 - 1,242,413 2,771,225 - 4,013,638
----------- --------- ---------- ----------- ----- -----------
LONG TERM LIABILITIES:
Revolving credit line - - - 1,997,000 3,035,000 2a(iii) 5,032,000
Long-term debt 97,507 - 97,507 156,250 - 253,757
Other long-term liabilities - - - 1,192,000 - 1,192,000
----------- --------- ---------- ------------ ----------- -----------
Total long-term liabilities 97,507 - 97,507 3,345,250 3,035,000 6,477,757
----------- --------- ---------- ----------- ----------- -----------
INTEREST OF MINORITY HOLDERS
IN SUBSIDIARY 141,269 (141,269) 2a(i) - - - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value - - - - - -
Common stock, $.001 par value 320,002 56,020 2a(i) 376,022 4,154 (374,944) 2a(ii) 5,232
Additional paid-in capital 1,013,358 1,024,045 2a(i) 2,037,403 14,925,603 2,811,519 2a(ii) 19,774,525
Subscription receivable - - - (397,782) - (397,782)
Retained earnings (deficit) 147,529 (155,000) 2a(iv) (7,471) (2,111,477) 7,471 2a(ii) (2,111,477)
Treasury stock, at cost - - - (278,922) - (278,922)
----------- --------- ---------- ----------- ----------- -----------
Total shareholders' equity 1,480,889 925,065 2,405,954 12,141,576 2,444,046 16,991,576
----------- --------- ---------- ----------- ----------- -----------
$ 2,962,078 $ 783,796 $3,745,874 $18,258,051 $ 5,479,046 $27,482,971
=========== ========= ========== =========== =========== ===========
See accompanying notes to pro forma condensed combined financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION
AND
TPC HOME CARE SERVICES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
Historical Pro Forma
---------- ---------
Extended Acquisition of
Family Care TPC Minority
Corporation Interest Combined
----------- -------- --------
<S> <C> <C> <C>
REVENUES, net $ 2,321,939 $ - $ 2,321,939
OPERATING EXPENSES 2,303,652 - 2,303,652
------------- ------------- -------------
INCOME FROM OPERATIONS 18,287 - 18,287
OTHER INCOME 2,368 - 2,368
------------- ------------- -------------
INCOME BEFORE TAXES AND
MINORITY INTEREST 20,655 - 20,655
PROVISION FOR INCOME TAXES 13,000 - 13,000
------------- ------------- -------------
INCOME BEFORE MINORITY
INTEREST 7,655 - 7,655
MINORITY INTEREST IN INCOME (1,620) 1,620 2c(i) -
------------- ------------- ------------
NET INCOME $ 6,035 $ 1,620 $ 7,655
============= ============= =============
EARNINGS PER COMMON SHARE:
Primary:
Net income $ 0.0002 $ 0.0002
============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 32,000,226 37,602,223
========== ==========
EARNINGS PER COMMON SHARE:
Full dilution:
Net income $ 0.0002 $ 0.0002
============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 32,000,226 37,602,223
========== ==========
See accompanying notes to pro forma condensed combined financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION AND TPC HOME CARE SERVICES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(Unaudited)
Historical Pro Forma
---------- ---------
Extended Acquisition of
Family Care TPC Minority
Corporation Interest Combined
----------- -------- --------
<S> <C> <C> <C>
REVENUES, net $ 8,929,330 $ - $ 8,929,330
OPERATING EXPENSES 8,861,323 - 8,861,323
------------- ------------- -------------
INCOME FROM OPERATIONS 68,007 - 68,007
OTHER INCOME 5,548 - 5,548
------------- ------------- -------------
INCOME BEFORE TAXES AND
MINORITY INTEREST 73,555 - 73,555
PROVISION FOR INCOME TAXES 55,000 - 55,000
------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
MINORITY INTEREST 18,555 - 18,555
MINORITY INTEREST IN LOSS 359 (359)2c(i) -
------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS $ 18,914 $ (359) $ 18,555
============= ============= =============
EARNINGS PER COMMON SHARE:
Primary:
Income from continuing operations $ 0.0009 $ 0.0007
============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 21,808,560 27,410,557
========== ==========
EARNINGS PER COMMON SHARE:
Full dilution:
Income from continuing operations $ 0.0009 $ 0.0007
============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 21,808,560 27,410,557
========== ==========
See accompanying notes to pro forma condensed combined financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1997 (Unaudited)
Historical Pro Forma Adjustments
---------- ---------------------
Star Extended Acquisition of
Multicare Family Care TPC Minority Acquisition of Pro Forma
Services, Inc. Corporation Interest EFCC Combined
-------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
REVENUES, net $39,163,979 $7,048,264 $ - $ - $46,212,243
OPERATING EXPENSES 36,757,660 6,911,716 - 146,038 2b(iii) 43,815,414
---------- --------- ------ ------- ----------
INCOME FROM OPERATIONS 2,406,319 136,548 - (146,038) 2,396,829
OTHER INCOME (EXPENSE) (2,910,880) 11,177 - (193,481) 2b(iv) (3,093,184)
----------- ------ - -------- -----------
(LOSS) INCOME BEFORE TAXES
AND MINORITY INTEREST (504,561) 147,725 - (339,519) (696,355)
PROVISION (BENEFIT) FOR
INCOME TAXES (207,000) 88,000 - (139,203) 2b(vi) (258,203)
-------- ------ - -------- --------
INCOME BEFORE MINORITY
INTEREST (297,561) 59,725 - (200,316) (438,152)
MINORITY INTEREST IN INCOME - (6,652) 6,652 - -
------ ----- --------- ---------
NET (LOSS) INCOME $ (297,561) $ 53,073 $ 6,652 $ (200,316) $ (438,152)
=========== ========== ========== ========== ============
EARNINGS PER COMMON SHARE:
Primary:
Net (loss) income $ (0.07) $ 0.0017 $ (0.08)
========== ========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 4,278,169 32,000,226 5,355,947
========== =========== ==========
EARNINGS PER COMMON SHARE:
Full dilution:
Net (loss) income $ (0.07) $ 0.0017 $ (0.08)
========== =========== =========
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 4,278,169 32,000,226 5,355,947
========== =========== ==========
See accompanying notes to pro forma condensed combined financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 30, 1996
(Unaudited)
Historical Pro Forma Adjustments
---------- ---------------------
Star Extended Acquisition of
Multicare Family Care TPC Minority Acquisition of Pro Forma
Services, Inc. Corporation Interest EFCC Combined
-------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES, net $49,162,934 $8,118,586 $ - $ - $57,281,520
OPERATING EXPENSES 47,330,647 8,031,976 - 194,717 2b(iii) 55,557,340
---------- ---------- ----------- ---------- ------------
INCOME FROM OPERATIONS 1,832,287 86,610 - (194,717) 1,724,180
OTHER INCOME (EXPENSE) (120,184) (5,952) - (257,975)2b(iv) (384)084)
---------- ---------- ----------- --------- ------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 1,712,103 80,685 - (452,692) 1,340,096
PROVISION (BENEFIT) FOR
INCOME TAXES 568,844 38,499 - (185,604)2b(vi) 421,739
------- ---------- ----------- -------- ----------
INCOME BEFORE MINORITY
INTEREST 1,143,259 42,186 - (267,088) 918,357
MINORITY INTEREST IN INCOME - (7,835) 7,835 - -
----------- ---------- ---------- --------- -----------
NET INCOME $ 1,143,259 $ 34,351 $ 7,835 $(267,088) $ $918,357
=========== ========== ========= ========== ===========
EARNINGS PER COMMON SHARE:
Primary:
Net income $ 0.29 $ 0.0011 $ 0.18
----------- ---------- -----------
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 3,996,993 32,240,228 5,074,771
------------ ------------ ------------
EARNINGS PER COMMON SHARE:
Full dilution:
Net income $ 0.28 $ 0.0011 $ 0.18
---------- ----------- -----------
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 4,011,503 32,240,228 5,089,281
=========== ============ ============
See accompanying notes to pro forma condensed combined financial statements
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
EFCC's Independent Auditor's Report F-1
EFCC's Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995 F-2
EFCC's Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 F-3
EFCC'S Consolidated Statements of Shareholder's Equity for the
years ended December 31, 1996 and 1995 F-4
EFCC'S Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 F-5
EFCC's Notes to Consolidated Financial Statements F-6 - F-11
EFCC's Condensed Consolidated Balance Sheet as of March 31, 1997
(unaudited) F-12
EFCC's Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997 and
March 31, 1996 (unaudited) F-13
EFCC's Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1977 and March 31, 1996
(unaudited) F-14
EFCC's Notes to Unaudited Condensed Consolidated Financial
Statements for the three months ended March 31, 1997
and March 31, 1996 F-15 F-16
STAR's Independent Auditors' Report F-17
STAR's Independent Auditors' Report F-18
STAR's Independent Auditors' Report F-19
STAR's Supplemental Consolidated Balance Sheets as of
May 31, 1996 and 1995 F-20
STAR's Supplemental Consolidated Statements of Operations
for the three years ended May 31, 1996 F-21
STAR's Supplemental Consolidated Statement of Shareholders'
Equity for the three years ended May 31, 1996 F-22
STAR's Consolidated Statements of Cash Flows for the three years
ended May 31,1996 F-23
STAR's Notes to Supplemental Consolidated Financial Statements F-24 - F-38
STAR's Condensed Consolidated Balance Sheet as of
February 28, 1997 (unaudited) F-39
STAR's Condensed Statements of Operations for the nine months
ended February 28, 1997 and February 29, 1996 (unaudited) F-40
STAR's Condensed Consolidated Statements of Cash Flows for
the nine months ended February 28, 1997 and February 28,
1996 (unaudited) F-41
STAR's Notes to Unaudited Condensed Consolidated Financial
Statements for nine months ended February 28, 1997 and
February 29, 1996 F-42 - F-43
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Extended Family Care Corporation
We have audited the accompanying balance sheets of Extended Family Care
Corporation and subsidiary, as of December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
EFCC's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Extended Family Care Corporation, at December 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Carpenter & Onorato, P.C.
Carpenter & Onorato, P.C.
Certified Public Accountants
Garden City, NY 11530
February 18, 1997
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
1996 1995
---- ----
Assets
------
<S> <C> <C>
Current assets:
Cash $ 1,066,193 $ 511,563
Accounts receivable, net of allowance for doubtful accounts
of $100,000 for 1996 and 1995 (note 2) 1,066,277 895,131
Prepaid expenses and other current assets (note 9) 496,185 146,809
------- -------
Total current assets 2,628,655 1,553,503
Property and equipment, net (note 5) 233,644 118,591
Other assets:
Deferred tax asset (note 6) 204,000 259,000
License, net (notes 3) 476,153 515,832
Other 29,410 11,197
------ ------
Total assets $ 3,571,862 $ 2,458,123
================ ==============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 223,362 $ 222,677
Accrued expenses (note 8) 586,396 543,974
Customer deposits 73,374 59,146
Notes payable (note 4) 43,449 148,449
Payroll taxes payable (note 8) 151,721 280,584
Current portion of obligations under capital leases 22,850 12,845
------ ------
Total current liabilities 1,101,152 1,267,675
Non-current liabilities
Long-term debt (note 4) 36,500 54,500
Obligations under capital leases 69,717 40,010
------ ------
Total non-current liabilities 106,217 94,510
------- ------
Total liabilities 1,207,369 1,362,185
Commitments and contingencies (notes 7, 8, 10 and 12)
Minority interest in subsidiary 139,649 140,008
------- -------
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized in 1996
Common stock, $.01 par value, 50,000,000 shares authorized, 30,000,000
in 1996; 32,000,226 and 19,300,229 shares issued and outstanding,
respectively 320,002 194,506
Additional paid-in-capital 1,763,348 638,844
Retained earnings 141,494 122,580
------- -------
Total shareholders' equity 2,224,844 955,930
--------- -------
Total liabilities and shareholders' equity $ 3,571,862 $ 2,458,123
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Net patient service revenue (note 2) $ 8,929,330 $ 7,367,958
--------- ---------
Cost of services:
Salaries 4,806,668 4,058,749
Payroll taxes and other 836,886 647,447
--------- ---------
Total cost of services 5,643,554 4,706,196
--------- ---------
Gross profit 3,285,776 2,661,762
Selling, general and administrative expenses 3,192,769 2,128,432
Provision for doubtful accounts 25,000 51,810
------ ------
Income from operations 68,007 481,520
Interest (income) expense, net (5,548) 4,320
----- -----
Income before provision for income
taxes and minority interest 73,555 477,200
Provision for income
taxes (note 6 ) 55,000 209,000
------ -------
Net income before minority interest 18,555 268,200
Minority interest in subsidiary net income (359) 46,398
--- ------
Net income $ 18,914 $ 221,802
====== =======
Primary earnings per share $ 0.0009 $ 0.0107
======= ======
Fully diluted earnings per share $ 0.0009 $ 0.0105
======= ======
Weighted average number of shares outstanding:
Primary 21,808,560 20,823,555
=========== ==========
Fully diluted 21,808,560 21,033,562
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1996 and 1995
Common Stock Total
Additional Retained Shareholders'
Shares Amount Paid-in Earnings Equity
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1994 19,300,229 194,506 638,844 (99,222) 734,128
Net income -- -- -- 221,802 221,802
----------- -------- -------- ------- --------
December 31, 1995 19,300,229 194,506 638,844 122,580 955,930
Retired shares (300,003) (4,504) 4,504 -- --
Exercise of stock
options 13,000,000 130,000 1,120,000 -- 1,250,000
Net income -- -- -- 18,914 18,914
--------- ------ -------- ------- ---------
December 31, 1996 32,000,226 $ 320,002 $ 1,763,348 $ 141,494 $ 2,224,844
=========== ======= ========= ======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED FAMILY CARE CORPORATION
AND SUBSIDIARY Statements
of Cash Flows Years Ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income $ 18,914 $ 221,802
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Allowance for doubtful accounts -- 51,810
Depreciation and amortization 62,107 36,273
Amortization of intangible assets 39,680 39,679
Provision for income taxes 55,000 209,000
Minority interest in subsidiary net income (359) 46,398
Change in operating assets and liabilities:
(Increase) in assets:
Accounts receivable (171,146) (143,276)
Prepaid expenses (349,376) (74,053)
Security deposits (18,213) (4,074)
Increase (decrease) in liabilities:
Accounts payable (21,486) 17,982
Accrued expenses 42,422 218,290
Customer deposits 14,228 (12,124)
Payroll taxes payable (128,863) (52,274)
------- -------
Net cash (used in) provided by operating activities (457,092) 555,433
------- -------
Cash flow from investing activity:
Purchase of property and equipment (122,979) (57,373)
------- ------
Net cash (used in) investing activity (122,979) (57,373)
------- ------
Cash flow from financing activities:
Proceeds from exercise of stock options 1,250,000 --
Payment of obligations under capital leases (14,471) (6,187)
Repayment of loans (100,828) (77,500)
------- ------
Net cash provided by (used in) by financing activities 1,134,701 (83,687)
--------- ------
Increase in cash 554,630 414,373
Cash balance at beginning of year 511,563 97,190
Cash balance at end of year $ 1,066,193 $ 511,563
========= =======
Supplemental disclosures:
Equipment acquired under capital lease obligation $ 54,183 $ 59,042
====== ======
Cash paid during the year for:
Interest $ 7,080 $ 5,825
===== =====
Income taxes $ 14,638 $ 654
====== ===
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
December 31, 1996
(1) Significant Accounting Policies
(a) Description of Business
Extended Family Care Corporation (EFCC) or (the Company), is primarily
engaged in the business of providing health care services in the home
through its 83% majority owned subsidiary, T.P.C. Home Care Services, Inc.
(TPC). EFCC is the holding company for TPC.
TPC is a licensed home care provider servicing patients since 1980. TPC has
offices in New York and New Jersey, providing twenty four hour home care
services. On August 5, 1986, TPC and its parent, EFCC, filed voluntary
petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. On March 23, 1992, this plan of reorganization was
confirmed by the United States Bankruptcy Court. On January 13, 1995, the
bankruptcy court issued a final decree.
As part of the plan of reorganization, on October 8, 1993, per an agreement
between C.O.S.S. Holding Corp. (C.O.S.S.), an investor group, and EFCC
dated March 23, 1992, EFCC issued 12,749,658 shares of stock to C.O.S.S.
for $250,000 in cash which resulted in C.O.S.S. owning a 66% interest in
EFCC. Also, unsecured creditors were given the option to receive a pro rata
share of EFCC's common stock or 12% of the allowed amount of their
respective claims. Creditors exercising this option resulted in EFCC
issuing 1,388,959 shares of common stock to the unsecured creditors.
On October 31, 1995, EFCC entered into an agreement with Arbor Home
Healthcare Holdings, LLC (Arbor) (in which Ivan Kaufman owns a 99%
interest), by which EFCC granted Arbor an irrevocable option exercisable in
two installments for EFCC to issue in total 13,000,000 shares of EFCC
common stock to Arbor at $.10 per share. The first and second installments
of the option were exercised by Arbor on August 21, 1996 and October 31,
1996, respectively. Shares were not issued with respect to the first
installment until October, 1996, when the Company's certificate of
incorporation was amended to provide sufficient authorized capital to issue
such shares. Arbor owns approximately a 40% interest in EFCC. In addition,
per the option agreement, C.O.S.S. placed all of its 12,749,658 shares of
EFCC common stock in a voting trust. Arbor has the right to direct the
voting of all of the C.O.S.S. shares and to nominate a majority of the EFCC
Board of Directors.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of EFCC and its
majority owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Revenue Recognition and Allowance for Doubtful Accounts
Net patient service revenue is recorded at the Company's reimbursement
rates or contracted rates. Such revenue is received from patients, third
party payors and others for services rendered. A significant portion of the
Company's revenue is received from third-party payors (i.e. Medicaid) and
is subject to audit and adjustment by those payors.
A provision for doubtful accounts is made for accounts receivable estimated
to be uncollectible; which is based upon management's evaluation of
relevant facts that effect the collectibility of accounts receivable.
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
- Notes to Consolidated Financial Statements, Continued
(d) Property and Equipment
Property and equipment are recorded at cost. The carrying amount of the
assets and related accumulated depreciation and amortization are removed
from the accounts when such assets are disposed of and the resulting gain
or loss is included in operations. Depreciation and amortization of
equipment and leasehold improvements are computed using the declining
balance method for the following useful lives of the assets:
Furniture and fixtures 5 - 7 years
Equipment 5 years
Leasehold improvements lesser of the useful life of the
asset or the remaining lease period.
For assets acquired in 1996, the straight line method was used. Management
believes that the difference is immaterial.
(e) Post-retirement Health Care and Life Insurance Benefits
The Company does not provide post-retirement benefits for its employees.
(f) Income Taxes
The Company is a C corporation for the taxable years ended December 31,
1996 and 1995, respectively.
(g) Net Income per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding during each period. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(i) Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(2) Concentration of Segment Risk
TPC provides temporary health care personnel to in-home patients in New
York and New Jersey. TPC grants credit to its patients who are insured
under third-party payor agreements. Deposits are required for all private
business. The mix of accounts receivable from private and third-party
payors at December 31 were as follows:
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1996 1995
---- ----
Medicaid 54% 62%
Insurance 3 2
Other third-party payors 34 29
Private 8 7
Medicare 1 --
- --
100% 100%
===== =====
Historically, credit losses relating to customers have not been significant
and have been within management's expectations.
(3) Intangible Assets
Intangible assets at December 31 are as follows:
1996 1995
---- ----
License $595,190 $595,190
less accumulated amortization 119,037 79,358
$476,153 $515,832
======= =======
(4) Notes Payable and Long-Term Debt
Notes payable and long-term debt consist of the following at December 31:
1996 1995
---- -----
Note payable, non-interest bearing,
payable in monthly installments of $1,500
with a final balloon payment of $26,000
due in August, 1998. Interest on this
note was not imputed, as the Company
considers the amount to be immaterial. $54,500 $72,500
Notes payable, non-interest bearing
and payable on demand. - 80,000
Due to Affiliated Parties (see note 7) 25,449 50,449
------ -------
Notes payable and long-term debt 79,949 202,949
Less current portion 43,449 148,449
------ -------
Long-term debt $36,500 $ 54,500
====== ======
(5) Property and Equipment
Property and equipment consist of the following:
1996 1995
---- ----
Furniture and fixtures $ 64,095 $ 18,751
Machinery and equipment 229,872 167,108
Leasehold improvements 15,539 7,039
Equipment held under capital leases 113,225 59,042
------- ------
422,731 251,940
less accumulated depreciation and 189,087 133,349
amortization
$233,644 $118,591
======= =======
<PAGE>
(6) Income Taxes
The provision for income taxes consists of the following:
1996 1995
---- ----
Current
Federal $ -- $ --
State -- --
----- -----
$ -- $ --
====== ======
Deferred
Federal $42,000 $160,500
State 13,000 48,500
------ -------
55,000 209,000
------ -------
$55,000 $209,000
======= ========
Deferred tax assets consist of the following:
Pre-reorganization net operating
loss carryforward $100,000 $221,000
Allowance for doubtful accounts 38,000 38,000
Other 66,000 --
-------- -------
Total deferred tax assets $204,000 $259,000
======= =======
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Computed income tax (benefit) expense at 34% $ 25,000 $162,000
Increase in taxes resulting from:
Nondeductible expenses 22,000 15,000
State income taxes, net of federal tax benefit 8,000 32,000
Other - effect of graduated tax rates -- --
-------- -------
$ 55,000 $209,000
======== ========
At December 31, 1996, the Company has a net operating loss carryforward
(NOL) of approximately $575,000 for tax purposes, expiring beginning with
the year 2000 through 2008.
(7) Related Party Transactions
Notes payable consist of the following at December 31:
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1996 1995
---- ----
C.O.S.S. holds a note which is non-interest
bearing, and payable upon demand $25,449 $25,449
An officer of the Company holds a note
which bears an interest rate of 11% and is
payable upon demand. Annual interest expense
amounted to $1,840 and $3,238, respectively. -- 25,000
------- -------
$25,449 $50,449
======= =======
The landlord for the Company's corporate office is an entity owned by
C.O.S.S. The annual rental is $43,837 per year, and shall be increased by
12% over the prior year's fixed minimum annual rent. The lease expires
November 30, 2000.
On October 31, 1995, EFCC entered into an agreement with Arbor Management,
LLC (in which Ivan Kaufman owns a 99% interest), for two years by which
EFCC will pay $7,500 a month to Arbor Management, LLC for management
services, including accounting, finance, human resources and marketing,
rendered to the Company.
(8) Payroll Taxes Payable/Accrued Expenses
Federal pre-petition payroll tax liabilities were settled with the Internal
Revenue Service for $175,000 in cash on September 16, 1996, which
approximated the amounts recorded as payroll taxes payable and accrued
interest and penalties for this claim. As of December 31, 1996, payroll
taxes payable and accrued expenses included tax liabilities to various
state government agencies in the amounts of $52,437 and $5,775,
respectively.
(9) Sale of Branch Operations
On December 5, 1996, TPC sold certain assets and liabilities; and its
operations of its Jersey City branch to Public Services, Inc (P.S.I.) for a
$175,000, six month, 9% promissory note, plus an amount equal to 12% of the
gross revenues of P.S.I. in excess of $90,000 per month for a 24 month
period commencing on October 6, 1997. The Company recognized a gain of
$24,617 on the sale of these assets. The assets from this branch, remaining
in the company, included cash and substantially all of its security
deposits.
(10) Commitments and Contingencies
TPC conducts its operations from leased office spaces in New York, New
Jersey and Pennsylvania. These leases expire at various dates through the
year 2000. Management expects that in the normal course of business, these
leases will be renewed or replaced by other leases. Rent expense for the
years ended December 31 amounted to $208,973 and $104,965, respectively.
The Company is also the lessee of machinery and equipment under capital
leases expiring in various years through 2001.
As of December 31, future net minimum lease payments under capital and
operating leases are as follows:
Capital Operating
1997 $ 22,850 $ 203,482
1998 22,850 208,567
1999 21,984 201,093
2000 18,769 149,371
2001 6,116 66,150
Thereafter ---- 260,313
--------- ----------
$ 92,569 $ 1,088,976
======== ===========
The gross amount of assets recorded under capital lease obligations was
$113,225 at December 31, 1996. Interest on the capital lease obligations
was imputed and the Company considers the amount to be immaterial.
(11) Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. The carrying value of the Company's financial
instruments in the accompanying balance sheets approximates their fair
value.
(12) Subsequent Events
An "Agreement and Plan of Merger" (Merger), was entered into on January 3,
1997 between the Company and Star Multi Care Services, Inc. (Star),
pursuant to which Star will acquire 100% of the outstanding common shares
of the Company. Under the terms of the merger agreement EFCC shareholders
will receive $2,400,000 in cash or approximately $.064 per share and
$4,850,000 in Star common stock or approximately $.129 per share for total
consideration of $7,250,000 or approximately $.193 per share, after giving
effect to the merger of TPC with and into EFCC (see below). As part of the
merger agreement, EFCC paid a $.0234 per share cash dividend on January 21,
1997 to all its common shareholders of record on January 13, 1997.
It is anticipated that the Merger will be treated as a tax free
reorganization for Federal income tax purposes to the extent of Star's
common stock received by EFCC's shareholders. This merger is expected to be
completed by August 1997, subject to approval of EFCC and Star
shareholders, certain state regulatory boards and other conditions.
In connection with the Merger, EFCC and Star have entered into a Consulting
Agreement pursuant to which Star will render to EFCC consulting and
advisory services in connection with the management, operation and
supervision of EFCC. The term of the Consulting Agreement shall end on the
earlier of (i) one year from the signing of the Merger, (ii) the closing of
the merger or (iii) the termination of the Merger. In consideration for the
consulting services to be rendered by Star, EFCC will pay Star $25,000 per
month, payable (a) $15,000 in arrears on the last day of each month and (b)
the remaining $10,000 on the earlier to occur of the closing date or the
termination of the Merger Agreement.
On January 3, 1997, Star and EFCC also entered into a management agreement
(the "Management Agreement") pursuant to which Star agreed to act as
manager of EFCC. The Management Agreement will become effective upon
approval of the Commissioner of the New York State Department of Health
(the "Commissioner"). Pursuant to the Management Agreement Star will have
the authority and responsibility to conduct , supervise and effectively
manage the day-to-day operation of EFCC. Star will be expected to exercise
the reasonable judgment of a management company in its management
activities.
The Management Agreement may be terminated by the Commissioner, without
financial penalty to the Board, not more than sixty (60) days after
notification to the parties of a determination that the management of EFCC
is so deficient that the health and safety of patients would be threatened
by continuation of the Management Agreement. The Management Agreement may
be terminated by the Company with cause on 14 business days' notice or
without cause on 60 days' notice. Unless sooner terminated in accordance
with terms of the Management Agreement, or extended or renewed by mutual
agreement of the parties thereto, the Management Agreement will remain in
effect until the closing of the Star Merger or December 31, 1998, whichever
is sooner.
On March 18, 1997 the company entered into a merger agreement with its 83%
owned subsidiary, TPC, where EFCC will be the surviving entity. It is
anticipated that the minority shareholders of TPC will receive 5,601,975
common shares of EFCC or 18.745545 common shares of EFCC for each common
share of TPC upon the completion of the merger. TPC common stock owned by
EFCC will be cancelled as a result of the merger and no EFCC common stock
shall be issued to EFCC. This anticipated merger will not be conditioned
upon the completion of the merger of EFCC and Star. This merger is expected
to close prior to the merger of EFCC and Star.
<PAGE>
<TABLE>
<CAPTION>
Extended Family Care Corporation and Subsidiary
Condensed Consolidated Balance Sheets
March 31, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ 445,021 $1,066,193
Accounts receivable, net of allowance for
doubtful accounts of $125,000 at March 31, 1997
and $100,000 at December 31, 1996 1,171,643 1,066,277
Prepaid expenses and other current assets 440,874 496,185
------- -------
Total current assets 2,057,538 2,628,655
Property and equipment, net 217,897 233,644
Other assets:
Deferred taxes 191,000 204,000
License, net 466,233 476,153
Other 29,410 29,410
------ ------
Total assets $2,962,078 $3,571,862
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and other accrued expenses $ 944,672 $ 809,758
Payroll taxes payable 156,882 151,721
Notes payable 43,449 43,449
Other current liabilities 97,410 96,224
------ ------
Total current liabilities 1,242,413 1,101,152
--------- ---------
Non-current liabilities:
Long-term debt 33,500 36,500
Obligations under capital leases 64,007 69,717
------ ------
Total non-current liabilities 97,507 106,217
------ -------
Total liabilities 1,339,920 1,207,369
--------- ---------
COMMITMENTS AND CONTINGENCIES
Minority interest in subsidiary 141,269 139,649
------- -------
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized in 1996 -- --
Common stock, $.01 par value per share,
50,000,000 shares authorized, 30,000,000 in 1996;
32,000,226 shares issued and outstanding 320,002 320,002
Additional paid-in capital 1,013,358 1,763,348
Retained earnings 147,529 141,494
------- -------
Total shareholders' equity 1,480,889 2,224,844
--------- ---------
Total liabilities and shareholders' equity $2,962,078 $3,571,862
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Extended Family Care Corporation and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Net patient service revenue $ 2,321,939 $ 1,984,892
------------ ------------
Cost of services 1,525,058 1,246,264
--------- ---------
Gross profit 796,881 738,628
Selling, general and administrative expenses 753,594 838,512
Provision for doubtful accounts 25,000 -
------ -------
Income (loss) from operations 18,287 (99,884)
Interest income (expense) 2,368 (2,343)
----- ------
Income(loss) before provision (benefit) for
income taxes and minority interest 20,655 (102,227)
Provision (benefit) for income taxes 13,000 (38,500)
------ -------
Net income (loss) before minority interest 7,655 (63,727)
Minority interest in subsidiary net income (loss) 1,620 (10,681)
----- -------
Net income (loss) $ 6,035 $ (53,046)
------------ ------------
Net income (loss) per common share :
Primary $ 0.0002 $ (0.0027)
============ ============
Fully diluted $ 0.0002 $ (0.0027)
============ ============
Weighted average number of common shares outstanding:
Primary 32,000,226 19,300,229
========== ==========
Fully diluted 32,000,226 19,300,229
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Extended Family Care Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flow from operating activities:
- ------------------------------------
Net income (loss) $ 6,035 $ (53,046)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Allowance for doubtful accounts 25,000 --
Depreciation and amortization 15,747 14,195
Amortization of intangible assets 9,920 9,920
Provision (benefit) for income taxes 13,000 (38,500)
Minority interest in subsidiary income (loss) 1,620 (10,681)
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (130,366) (199,226)
Prepaid expenses and other current assets 55,311 12,038
Other assets -- (16,332)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 134,914 (9,502)
Payroll taxes payable 5,161 47,653
Other liabilities 1,186 (2,922)
----- ------
Net cash provided by (used in) operating activities 137,528 (246,403)
------- --------
Cash flow from investing activities:
Purchase of property and equipment -- (56,541)
------- -------
Net cash used in investing activity -- (56,541)
------- -------
Cash flow from financing activity:
Payment of dividends (749,990) --
Payment of obligations under capital leases (5,710) --
Repayment of loans (3,000) (4,500)
------ ------
Net cash used in financing activities (758,700) (4,500)
-------- ------
Net decrease in cash (621,172) (307,444)
Cash at beginning of period 1,066,193 511,563
--------- -------
Cash at end of period $ 445,021 $ 204,119
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 25 $ 690
=========== ===========
Income taxes $ 2,525 $ 1,333
=========== ===========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Extended Family Care Corporation ("EFCC") and its 83% owned subsidiary, TPC Home
Care Services, Inc. ("TPC") (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B.
Accordingly, these financial statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation (consisting of normal recurring accruals) have been
included. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1996.
Note 2 - Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during each
period.
Note 3 - Merger
An Agreement and Plan of Merger (the "Star Merger Agreement"), was entered
into on January 3, 1997 between EFCC and Star Multi Care Services, Inc.
("Star"), pursuant to which Star will acquire 100% of the outstanding common
shares of EFCC (the "Star Merger"). Under the terms of the Star Merger
Agreement, EFCC's shareholders will receive $2,400,000 in cash or approximately
$.064 per share and $4,850,000 in Star common stock or approximately $.129 per
share for total consideration of $7,250,000 or approximately $.193 per share. As
part of the Star Merger Agreement, EFCC paid a $.0234 per share cash dividend on
January 21, 1997 to all its common shareholders of record on January 13, 1997.
It is anticipated that the Star Merger will be treated as a tax-free
reorganization for Federal income tax purposes to the extent of Star's common
stock received by EFCC's shareholders. The Star Merger is expected to be
completed by August 1997, subject to approval of EFCC's and Star's shareholders,
certain state regulatory boards and other conditions.
In connection with the Star Merger, EFCC and Star have entered into a
consulting agreement (the "Consulting Agreement") pursuant to which Star will
render to EFCC consulting and advisory services in connection with the
management, operation and supervision of EFCC. The term of the Consulting
Agreement shall end on the earlier of (i) one year from the signing of the Star
Merger Agreement, (ii) the closing of the Star Merger or (iii) the termination
of the Star Merger Agreement. In consideration for the consulting services to be
rendered by Star, EFCC will pay Star $25,000 per month payable (a) $15,000 in
arrears on the last day of each month and (b) the remaining $10,000 on the
earlier to occur of the closing date or the termination of the Star Merger
Agreement.
On January 3, 1997, EFCC and Star also entered into a management agreement
(the "Management Agreement") pursuant to which Star agreed to act as manager of
EFCC. The Management Agreement will become effective upon approval of the
Commissioner of the New York State Department of Health (the "Commissioner").
Pursuant to the Management Agreement, Star will have the authority and
responsibility to conduct, supervise and effectively manage the day-to-day
operation of EFCC. Star will be expected to exercise the reasonable judgment of
a management company in its management activities.
The Management Agreement may be terminated by the Commissioner, without
financial penalty to the EFCC Board, not more than sixty (60) days after
notification to the parties of a determination that the management of EFCC is so
deficient that the health and safety of patients would be threatened by
continuation of the Management Agreement. The Management Agreement may be
terminated by EFCC for cause, on 14 business days' notice, and without cause, on
60 days' notice. Unless sooner terminated in accordance with terms of the
Management Agreement, or extended or renewed by mutual agreement of the parties
thereto, the Management Agreement will remain in effect until the closing date
of the Star Merger or December 31, 1998, whichever is sooner.
On March 18, 1997, EFCC entered into a merger agreement (the "TPC Merger
Agreement") with its 83% owned subsidiary TPC Home Care Services, Inc. ("TPC")
pursuant to which EFCC will be the surviving entity (the "TPC Merger"). It is
anticipated that the minority shareholders of TPC will receive 5,601,975 common
shares of EFCC or 18.74545 common shares of EFCC for each common share of TPC
upon completion of the TPC Merger. TPC common stock owned by EFCC will be
canceled as a result of the TPC Merger and no EFCC stock shall be issued to EFCC
in connection therewith. This anticipated TPC Merger will not be conditioned
upon the completion of the Star Merger. The TPC Merger is a condition precedent
to the closing of the Star Merger, and, accordingly, must close prior to the
Star Merger.
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Star Multi Care Services, Inc.
Hicksville, New York
We have audited the accompanying supplemental balance sheets of Star Multi Care
Services, Inc. as of May 31, 1996 and 1995 and the related supplemental
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 1996. The supplemental
financial statements give retroactive effect to the merger of Star Multi Care
Services, Inc. and AMSERV HEALTHCARE, INC. on August 23, 1996, which has been
accounted for as a pooling of interests as described in Notes 1a and 2a to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Star Multi Care Services, Inc.
after financial statements covering the date of consummation of the business
combination are issued. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of AMSERV HEALTHCARE, INC., which statements reflect total assets
constituting 34% in 1996 and 39% in 1995, and total revenues constituting 26% in
1996, 30% in 1995 and 25% in 1994 of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for AMSERV
HEALTHCARE, INC., is based solely on the report of other auditors.
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, based upon our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Star Multi Care
Services, Inc. at May 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 1996, after giving retroactive effect to the merger with AMSERV
HEALTHCARE, INC., in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
/s/ HOLTZ RUBENSTEIN & CO. LLP
-----------------------------
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 19, 1996 (except for Notes 1a, 2a and 8,
as to which the date is August 23, 1996)
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders AMSERV HEALTHCARE INC.
We have audited the accompanying consolidated balance sheets of AMSERV
HEALTHCARE NC. as of May 31, 1996 and June 24, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from June 25, 1995 to May 31, 1996 and the year ended June 24,1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of AMSERV HEALTHCARE INC. for the year
ended June 30, 1994, were audited by other auditors whose report dated October
7, 1994, expressed an unqualified opinion on those statements,
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, the May 31,1996 and June 24, 1995 financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of AMSERV HEALTHCARE INC. at May 31, 1996 and June 24, 1995, and the
consolidated results of its operations and its cash flows for the period from
June 25, 1995 to May 31,1996 and for the year ended June 24, 1995, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
August 8, 1996
except for Note 6 and 13, as to which the date is
August 23, 1996
<PAGE>
Report of Deloitte & Touche LLP
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors AMSERV HEALTHCARE INC.:
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of AMSERV HEALTHCARE INC. and subsidiaries (the "Company") for
the year ended June 30, 1994 (none of which are presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations of AMSERV HEALTHCARE INC. and
subsidiaries and their cash flows for the year ended June 30, 1994 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 7, 1994
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
May 31,
ASSETS (Note 5) 1996 1995
- --------------- ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,881,979 $1,496,792
Short-term investments (Note 3) 100,000 1,392,021
Accounts receivable, net of allowance for doubtful accounts of $808,000 and
$493,264 at May 31 1996 and 1995, respectively (Note 14) 9,611,169 6,715,907
Prepaid expenses and other current assets 800,665 346,629
Deferred income taxes (Note 9) 400,015 160,000
------- -------
Total current assets 12,793,828 10,111,349
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $706,818 and
$519,896 at May 31, 1996 and 1995, respectively 766,480 648,154
NOTES RECEIVABLE FROM OFFICER (Note 12) 100,517 109,717
INTANGIBLE ASSETS, net (Note 4) 5,197,778 5,548,763
OTHER ASSETS 510,487 380,233
------- -------
$19,369,090 $16,798,216
LIABILITIES, REDEEMABLE PREFERRED STOCK =========== ==========
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,329,826 $ 1,454,732
Accounts payable and other accrued expenses 1,530,138 1,065,637
Net liabilities of discontinued operations (Note 7) 98,081 391,770
Income taxes payable (Note 9) 295,647 300,440
Current maturities of long-term debt (Note 6) 125,000 125,000
Total current liabilities 3,378,692 3,337,579
--------- ---------
LONG-TERM LIABILITIES:
Revolving credit line (Note 5) 3,280,000 1,750,000
Long-term debt (Note 6) 250,000 375,000
Deferred income taxes (Note 9) 39,909 --
Other long-term liabilities
33,970 30,859
------ ------
Total long-term liabilities 3,603,879 2,155,859
--------- ---------
REDEEMABLE PREFERRED STOCK: (Note 8)
Preferred stock, $.01 par value; authorized 3,000,000 shares:
Class A; issued and outstanding 341,435 shares -- 3,414
Class B; issued and outstanding 130,071 shares 1,301 --
Additional paid-in capital 340,135 679,456
------- -------
Total redeemable preferred stock 341,436 682,870
------- -------
COMMITMENTS AND CONTINGENCY (Notes 2, 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 10, 11, and 12)
Preferred stock, $1.00 par value, 5,000,000 shares authorized -- -
Common stock, $.001 par value, 10,000,000 shares authorized; 3,820,358 and 3,820 3,604
3,604,050 shares issued, respectively
Additional paid-in capital 13,288,607 11,882,682
Subscription receivable (397,782) (198,440)
Unrealized (loss) on short-term investments (6,000) (14,564)
Deficit (564,640) (772,452)
Treasury stock, 137,500 common shares at May 31, 1996 and 1995
(278,922) (278,922)
-------- --------
Total shareholders' equity 12,045,083 10,621,908
---------- ----------
$19,369,090 $16,798,216
=========== ===========
</TABLE>
See notes to supplemental consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
May 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES, net (Note 14) $49,162,934 $38,430,035 $29,694,178
----------- ----------- -----------
OPERATING EXPENSES (Notes 12, 16 and 17)
Costs of revenues 31,943,356 24,854,524 19,333,452
Selling, general and administrative 14,634,533 11,569,405 9,057,610
Depreciation and amortization 752,758 755,449 726,978
------- ------- -------
47,330,647 37,179,378 29,118,040
---------- ---------- ----------
INCOME FROM OPERATIONS 1,832,287 1,250,657 576,138
INTEREST (EXPENSE) INCOME, net (120,184) (20,583) 67,240
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,712,103 1,230,074 643,378
PROVISION FOR INCOME TAXES (Note 9) 568,844 472,038 285,832
------- ------- -------
1,143,259 758,036 357,546
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS: (Note 7)
Loss from discontinued operations, net of income taxes of - - (710,636)
Gain (loss) on disposal of discontinued operations, net of
income taxes of $168,211 in 1995 and ($77,110) in 1994 - 30,302 (1,167,949)
--------- ------- --------
1,143,259 788,338 (1,521,039)
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - 23,683 65,000
PRINCIPLE (Notes 3 and 9) ------------ ------------- ------------
NET INCOME (LOSS) $ 1,143,259 $ 812,021 $ (1,456,039)
============= ============= ============
NET INCOME PER COMMON SHARE:
Primary:
Income from continuing operations and before cumulative $.29 $.20 $.10
effect of accounting change
Loss from discontinued operations - - (.20)
Gain (loss) on disposal of discontinued operations - .01 (.33)
Cumulative effect of change in accounting principle - .01 .02
---- --- ---
Net income (loss) $.29 $.22 $(.41)
==== ==== =====
Assuming full dilution:
Income from continuing operations and before
cumulative effect of accounting change $.28 $.20 $.10
Loss from discontinued operations- - - (.20)
Gain (loss) on disposal of discontinued operations - .01 (.33)
Cumulative effect of change in accounting principle - .01 .02
--- --- ---
Net income (loss) $.28 $.22 $ (.41)
==== ==== ======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 3,996,993 3,772,926 3,529,377
========= ========= =========
Assuming full dilution 4,011,503 3,798,581 3,529,377
========= ========= =========
See notes to supplemental consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Note 10)
Common Stock
Additional Subscription Unrealized
Paid-in Receivable (Loss) on
Shares Par Value Capital ------------ Investments
------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1993, as previously reported 1,445,000 $1,445 $ 4,842,513 $ - $ -
Pooling of interest with AMSERV Healthcare, Inc. 1,204,311 1,204 6,107,556 - -
(Note 2) --------- ----- --------- ------ -----
Balance, May 31, 1993, as adjusted 2,649,311 2,649 10,950,069 - -
Purchase of treasury stock - - - - -
Stock split 722,500 723 (723) - -
Net loss - - - - -
--------- ------ ----------- ------ -----
Balance, May 31, 1994 3,371,811 3,372 10,949,346 - -
- - - - -
Purchase of treasury stock - - - - -
Exercise of stock options 19,000 19 36,145 - -
Exercise of stock options on pooled company
including income tax benefit 84,892 85 416,018 (198,440) -
Stock dividend 128,347 128 481,173 - -
Cumulative effect of change in accounting principle - - - - (23,683)
Change in unrealized loss on short-term investments - - - - 9,119
Net income - - - - -
---------- ------- ------------ --------- ------
Balance, May 31, 1995 3,604,050 3,604 11,882,682 (198,440) (14,564)
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. - - - - -
Exercise of stock options 17,287 17 40,611 - -
Exercise of Stock options on pooled company
including income tax benefits 62,931 63 293,741 (199,342) -
Stock dividend 136,090 136 1,071,573 - -
Change in unrealized loss on short-term investments - - - - 8,564
Net income - - - - -
-------- ------ ----------- --------- -------
Balance May 31, 1996 3,820,358 $3,820 $13,288,607 $(397,782) $(6,000)
========= ====== =========== ========= =======
See notes to supplemental consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Cont'd.)
(Note 10)
Retained Treasury Stock Total
Earnings ----------------- Shareholders'
(Deficit) Shares Value Equity
--------- ------ ----- ------
<S> <C> <C> <C> <C>
Balance, May 31, 1993, as previously reported $ 171,738 45,000 $(105,000) $ 4,910,696
Pooling of interest with AMSERV Healthcare, Inc. 181,129 - - 6,289,889
(Note 2) ------- ------- -------- -----------
Balance, May 31, 1993, as adjusted 352,867 45,000 (105,000) 11,200,585
Purchase of treasury stock - 90,000 (167,985) (167,985)
Stock split - - - -
Net loss (1,456,039) - - (1,456,039)
---------- ------- -------- ----------
Balance, May 31, 1994 (1,103,172) 135,000 (272,985) 9,576,561
Purchase of treasury stock - 2,500 (5,937) (5,937)
Exercise of stock options - - - 36,164
Exercise of stock option on pooled company
including income tax benefits - - - 217,663
Stock dividend (481,301) - - -
Cumulative effect of change in accounting principle - - - (23,683)
Change in unrealized loss on short-term investments - - - 9,119
Net income 812,021 - - 812,021
---------- ------- -------- ----------
Balance, May 31, 1995 (772,452) 137,500 (278,922) 10,621,908
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. 136,262 - - 136,262
Exercise of stock options - - - 40,628
Exercise of stock options on pooled company
including income tax benefit - - - 94,462
Stock dividend (1,071,709) - - -
Change in unrealized loss on short-term investments - - - 8,564
Net income 1,143,259 - - 1,143,259
---------- ------- -------- ----------
Balance, May 31, 1996 $ (564,640) 137,500 $(278,922) $12,045,083
=========== ======= ========= ===========
See notes to supplemental consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
May 31
------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,143,259 $ 812,021 $ (1,456,039)
------------- ------------ -------------
Adjustments to reconcile net income (loss) to net cash
(used in) provided by
operating activities:
Provision for doubtful accounts 511,736 196,309 255,446
Depreciation and amortization 722,609 755,449 902,406
Deferred income taxes (200,106) (12,765) (11,000)
AMSERV fiscal year conversion 136,262 - -
Loss on disposal of equipment - 47,286 45,078
(Gain) loss on disposal of discontinued operations - (30,302) 1,167,949
Cumulative effect of change in accounting principles - (23,683) (65,000)
Write-off of intangibles - - 137,616
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (3,406,998) (357,874) (1,746,575)
Prepaid expenses and other assets (584,290) 122,811 (134,455)
Valuation allowance (16,902) - -
Increase (decrease) in liabilities:
Accounts payable and accrued payroll and expenses 257,250 369,760 243,632
Income taxes payable (4,793) 104,903 140,653
Other liabilities (14,544) 238,812 94,122
Loss contracts and unfavorable leases - - (44,000)
----------- --------- -------
Total adjustments (2,599,776) 1,410,706 985,872
----------- --------- -------
Net cash (used in) provided by operating activities (1,456,517) 2,222,727 (470,167)
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (992,999) (1,586,285) (497,125)
Proceeds from sale of short-term investments 2,310,486 880,000 268,750
Purchase of intangibles (82,403) (14,829) -
Repayment on note receivable from officer 9,200 15,506 4,777
Purchase of property and equipment (307,547) (398,332) (152,545)
Business acquisitions - (1,215,770) (1,469,839)
Payment of costs related to discontinued operations (293,689) (508,587) -
Proceeds from sale of discontinued operations - 813,941 -
Cash received on notes receivable - 50,411 191,504
Proceeds from sale of property and equipment - 31,851 4,034
Payment of earnout advance - (500,000) -
--------- ---------- -----------
Net cash provided by (used in) investing activities 643,048 (2,432,094) (1,650,444)
--------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit line 1,530,000 800,000 950,000
Repayment of long-term debt (125,000) (166,666) -
Proceeds from the exercise of stock options 135,090 253,827 -
Redemption of Class A preferred shares - (170,718) -
Redemption of Class B preferred shares (341,434) - -
Repayment of note payable - (73,349) (57,238)
Issuance of note payable - - 130,587
Purchase of treasury stock - (5,937) (167,985)
--------- ---------- ----------
Net cash provided by financing activities 1,198,656 637,157 855,364
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 385,187 427,790 (1,265,247)
CASH AND CASH EQUIVALENTS, beginning of year 1,496,792 1,069,002 2,334,249
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,881,979 $ 1,496,792 $ 1,069,002
============== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 858,932 $ 526,784 $ 218,294
============== ============ ===========
Interest paid $ 280,000 $ 117,289 $ 40,421
============= ============= ==========
See notes to supplemental consolidated financial statements
</TABLE>
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Basis of presentation
The supplemental consolidated financial statements of Star
Multi Care Services, Inc. have been prepared to give retroactive effect to the
merger with AMSERV HEALTHCARE, INC. ("AMSERV") on August 23, 1996, which has
been accounted for as a pooling of interests as described in Note 2. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Star Multi Care
Services, Inc. after financial statements covering the date of consummation of
the business combination are issued.
b. Description of business
The Company is principally engaged in providing temporary
health care personnel, including registered nurses, licensed practical nurses,
nurses' aides and respiratory therapists to hospitals, nursing homes, extended
care facilities and in-home patients in Florida, Ohio and the New York City
metropolitan area.
c. Principles of consolidation
The consolidated financial statements include the accounts of
Star Multi Care Services, Inc. and its subsidiaries (the "Company"), all of
which are wholly-owned. All significant intercompany transactions and accounts
have been eliminated.
d. Revenue recognition and allowance for doubtful accounts
Net revenue is recorded at the estimated net realizable amount
from patients, third-party payors and others for services rendered. A provision
for doubtful accounts is made for revenue estimated to be uncollectible and is
adjusted periodically based upon management's evaluation of current industry
conditions, historical collection experience and other relevant factors which,
in the opinion of management, deserve recognition in estimating the allowance
for doubtful accounts.
e. Investments in debt and equity securities
In July 1994, the Company has adopted Statement of Financial Accounting
Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its investment securities as
available-for-sale and has recorded unrealized holding gains and losses as a
separate component of stockholders' equity. The cumulative effect of the change
in
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
accounting principle resulted in an after-tax increase to income for unrealized
losses of $23,683 at June 1, 1994.
f. Property and equipment
Property and equipment are recorded at cost. The carrying
amount of assets and related accumulated depreciation and amortization are
removed from the accounts when such assets are disposed of, and the resulting
gain or loss is included in operations. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the remaining life of the lease
or the life of the improvements.
g. Intangible assets
Intangible assets are stated at acquisition cost and are being
amortized on a straight-line basis over their estimated useful lives.
h. Contractual adjustments
Under Medicare, Medicaid and other cost-based reimbursement
programs, the Company is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the programs and
patient payments are recorded as contractual adjustments and deducted from
revenues.
Retroactively calculated third-party contractual adjustments
are accrued on an estimated basis in the period the related services are
rendered. Revisions to estimated contractual adjustments are recorded based upon
audits by third-party payors, as well as other communications with third-party
payors such as desk reviews, regulation charges and policy statements. These
revisions are made in the year such amounts are determined.
i. Cash equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents.
j. Income taxes
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Temporary differences and
carryforwards giving rise to deferred taxes primarily relate to the allowance
for doubtful accounts, depreciation and subsidiary net operating loss
carryforwards.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
k. Net income per share
Net income per share has been computed by dividing net income
by the weighted average number of common stock and common stock equivalents
outstanding during each period. Common stock equivalents represents the dilutive
effect of the assumed exercise of certain outstanding options and warrants.
l. Derivative financial instruments
Derivative financial instruments are utilized by the Company
in order to reduce the impact of changes in interest rates. The Company does not
hold or issue derivative financial instruments for trading purposes. Income and
expenses are recorded in the same category as that arising from the related
asset or liability being hedged. Gains realized on termination of interest rate
swap contracts are deferred and amortized over the remaining terms of the
original swap agreement. Costs of interest rate cap contracts are amortized over
the lives of the contracts.
m. 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
n. Reclassifications
Certain reclassifications have been made to the prior year's
financial statements to conform with the classifications used in 1996.
2. MERGERS AND ACQUISITIONS:
a. Merger
In February 1996, the Company entered into an Agreement and
Plan of Merger (the "Agreement") with AMSERV. On August 23, 1996 AMSERV was
merged with and into the Company. Under terms of the Agreement, each share of
AMSERV common stock was exchanged for .4090 shares of the Company's common
stock. The Company also assumed all outstanding options and other rights to
acquire AMSERV stock. Approximately 1,360,000 shares of the Company's common
stock were exchanged for all of the outstanding stock of AMSERV. The merger
qualified as a tax-free reorganization and was accounted for as a pooling of
interests, and accordingly, the accompanying supplemental financial statements
have been restated to include the accounts and operations of AMSERV for all
periods prior to the merger.
AMSERV changed its year end to May 31 for fiscal 1996,
utilized a 52/53 week fiscal year end for fiscal 1995 and a June 30 year end for
fiscal 1994. AMSERV's statements of operations for the years ended June 24, 1995
and June 30, 1994 have been combined with Star's statements of
<PAGE>
2. MERGERS AND ACQUISITIONS: (Cont'd)
operations for the fiscal years ended May 31, 1995 and 1994, respectively. In
order to conform AMSERV's year end to Star's fiscal year end, the supplemental
consolidated statement of operation for fiscal year ended May 31, 1996 includes
four weeks (June 1, 1995 to June 24, 1995) for AMSERV which are also included in
the supplemental consolidated statement of operation for fiscal year ended May
31, 1995. Accordingly, an adjustment has been made in fiscal 1996 to retained
earnings for the duplication of net loss of ($136,262) for such four week
period. Other results of operations for such four week period of AMSERV include
net revenues of $1,113,322, depreciation and amortization of $30,149, loss
before taxes of ($199,624) and income tax benefit of $63,362.
Separate approximated net revenues and net income/(loss)
amounts of the merged entities for the period prior to the merger are as
follows:
Year Ended
May 31, 1996
Net revenues:
Star Multi Care Services, Inc. $36,339,000
AMSERV HEALTHCARE, INC. 12,823,000
-----------
$49,162,000
Net income:
Star Multi Care Services, Inc. $ 1,046,000
AMSERV HEALTHCARE, INC. 97,000
-----------
$ 1,143,000
===========
b. Acquisitions
In May 1995, the Company acquired certain assets of Long
Island Nursing Registry, Inc. ("LINR") for approximately $1,716,000, including
acquisition costs of approximately $100,000. The assets purchased consisted of
customers and patient lists of $1,156,000, nurses lists of $250,000, covenant
not-to-compete of $150,000, furniture and office equipment of $25,000 and
goodwill of $35,000.
In June 1994, the Company acquired substantially all the
assets and property of North Central Personnel, Inc. ("North Central"). The
acquisition had an initial purchase price of $1,553,835. The Company paid
$553,835 of the purchase price with cash, and the balance of $1,000,000 was
financed by a promissory note payable to the seller. The final purchase price is
contingent on an earnout, of which $500,000 was earned in 1995 and $100,000 was
earned as of May 31, 1996. The remaining earnout will not exceed $400,000. The
excess of the purchase price over the valuation of tangible assets was assigned
to goodwill ($1,047,000) and a non-competition agreement ($25,000). The earnout
advance and all future earnout payments will be accounted for as additional
purchase price of North Central.
In November 1993, the Company acquired certain assets of DSI
Home Care Services, Inc. for approximately $725,000, including acquisition costs
of $175,000. The assets purchased consisted of customer and patient lists of
$400,000, nurses lists of $120,000, furniture and office equipment of $30,000
and goodwill of $175,000.
<PAGE>
2. MERGERS AND ACQUISITIONS: (Cont'd)
The above acquisitions have been accounted for utilizing
purchase accounting principles. Accordingly, the results of operations have been
included in the accompanying consolidated financial statements since the date of
acquisition.
3. SHORT-TERM INVESTMENTS:
Short-term investments are recorded at estimated fair market values at
May 31, 1996 and 1995. The Company has classified all of its investments as
available-for-sale securities according to Statement of Financial Accounting
Standards ("SFAS") No. 115. The following table summarizes available-for-sale
securities:
May 31, 1996
------------
Gross
Unrealized Estimated
Cost Losses Fair Value
---- ------ ----------
Common stock $110,000 $10,000 $100,000
======== ======= ========
May 31, 1996
------------
Gross
Unrealized Estimated
Cost Losses Fair Value
---- ------ ----------
Money market/non-gov't securities $453,903 $ 2,494 $451,409
Tax exempt government bonds 605,020 158 604,862
Common stock 110,000 23,000 87,000
Preferred stock 250,000 1,250 248,750
-------- ------- --------
Total $1,418,923 $26,902 $1,392,021
========== ======= ==========
As a result of the adoption of SFAS No. 115 during the year ended May
31, 1995, the Company records net unrealized holding gains and losses, net of
income tax effects, as a separate component of shareholders' equity. Previously,
unrealized losses had been charged to operations. The cumulative effect of this
change in accounting principle resulted in an after-tax adjustment to earnings
of $23,683 at June 1, 1994.
A net realized loss on sales of available-for-sale securities of
$10,098 was recognized in the year ended May 31, 1996. A net realized gain of
$2,413 was recognized in the year ended May 31, 1995 and a net realized loss of
$11,250 was recognized in the year ended May 31, 1994.
4. INTANGIBLE ASSETS:
Intangible assets are as follows:
<TABLE>
<CAPTION>
Amortization May 31,
Period 1996 1995
------ ---- ----
<S> <C> <C> <C>
Goodwill 25 - 37 $2,989,000 $2,895,000
Customer contracts 11 - 15 2,225,000 2,225,000
Covenants not-to-compete 2 - 8 1,100,000 1,125,000
Nurses' list 9 - 15 703,000 703,000
Accreditation and training programs 5 503,000 503,000
Assembled workforce 5 497,000 497,000
Other 2 - 10 127,000 49,000
--------- ---------
8,144,000 7,997,000
Less accumulated amortization 2,946,000 2,448,000
--------- ----------
$5,198,000 $5,549,000
========== ==========
</TABLE>
5. REVOLVING CREDIT LINE:
The Company has a $6.0 million line of credit with a bank which bears
interest at 1/4% above the bank's prime lending rate (8 1/4% at May 31, 1996)
and matures on October 31, 1997, at which time it may be converted into a three
year term loan which will bear interest at 1/2% above the bank's prime lending
rate. The facility is renewable at the sole discretion of the bank. All loans
under the line of credit are collateralized by all assets of the Company. The
Company can borrow against the line to the extent of 80% of eligible accounts
receivable (120 days and under, net of contractual allowances).
Under the line of credit agreement, the Company can from time to time
borrow at a rate based on the bank's money market rate (5.31% at May 31, 1996)
plus 2 3/4% for a period no less than three months. At May 31, 1996, $2,900,000
was at the money market rate and the remainder of the outstanding credit line of
$380,000 was at prime plus 1/4%.
6. LONG-TERM DEBT:
Long-term debt consists of a note payable in monthly installments of
$10,417 through May 1999. Interest is payable monthly at 8.5%. The note was
issued in connection with the acquisition discussed in Note 8.
<PAGE>
6. LONG-TERM DEBT: (Cont'd.)
Long-term debt matures as follows:
Years Ending
May 31,
-------
1997 $125,000
1998 125,000
1999 125,000
--------
$375,000
========
7. DISCONTINUED OPERATIONS:
On September 20, 1994, the Company signed a Letter of Intent to sell its
temporary nursing services business. As a result, the Company recorded a fiscal
1994 charge of $1,167,949 (after income tax benefit of $77,110) to provide for a
loss on the disposal of this discontinued operations and the after-tax estimated
operating losses of $149,627 until the estimated date of disposal. On November
9, 1994, the Company completed this transaction, and sold substantially all of
the fixed and intangible assets of its temporary nursing services business for
$814,000. The related net liabilities for this discontinued operation are
included in the balance sheet under the caption, "Net liabilities of
discontinued operations." The balance remaining unpaid at May 31, 1996 and 1995,
relates to various state and local tax and payroll liabilities that have not
been finalized and a remaining severance obligation. The consolidated statements
of operations for the years ended May 31, 1996, 1995 and 1994, exclude sales and
expenses for its temporary nursing services business from captions applicable to
continuing operations. Revenues from the discontinued operation during fiscal
1995 were $3,988,696. Operating results of the discounted operation for fiscal
1994 is summarized below:
May 31,
1994
----
Net sales $12,022,618
Loss before income taxes $ (993,037)
Income tax benefit $ (282,401)
Loss from discontinued operations $ (710,636)
8. REDEEMABLE PREFERRED STOCK:
In April 1995, the Company issued 426,794 shares of its voting Class A
Redeemable Preferred Stock, which had a redemption value of $2.00 per share, in
exchange for a promissory note payable in connection with the purchase of North
Central and related accrued interest which totalled $853,588 on the date of the
exchange. The preferred shares paid no dividends and could be redeemed at the
option of the holder, in specified installments for cash. On May 29, 1995,
85,359 shares were redeemed for $170,718. On July 6, 1995, the remaining 341,435
Class A Redeemable Preferred Shares were exchanged for 260,141 Class B
Redeemable preferred Shares, with a redemption price of $2.625 per share and an
aggregate redemption value of $682,870. During the current fiscal period,
130,070 shares have been redeemed for $341,434. As of May 31, 1996, the
remaining 130,071 shares with an aggregate redemption
<PAGE>
8. REDEEMABLE PREFERRED STOCK: (Cont'd)
value of $341,436 may be redeemed in installments of approximately 65,000 shares
on or after November 29, 1996 and May 29, 1997, at the option of the holder. All
outstanding Class B shares become redeemable in the event of default or change
of control. As a result of the merger with AMSERV (Note 2), the holder of the
preferred shares called for redemption, which was paid in full on August 23,
1996. Holders of all classes of Redeemable Preferred Stock have the same voting
rights as common stock.
9. INCOME TAXES:
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
a liability approach to financial accounting and reporting for income taxes. The
effect of adopting SFAS No. 109 on net income for the year ended May 31, 1994
was an increase of $76,000, which includes an increase in net income of $65,000
for the cumulative effect on years prior to June 1, 1993. As permitted under the
standard, the financial statements for the prior year have not been restated.
The provision for income taxes from continuing operations consists of
the following:
Years Ended May 31,
1996 1995 1994
---- ---- ----
Current:
Federal $551,758 $314,781 $215,832
State and local 217,192 170,022 81,000
------- ------- ------
768,950 484,803 296,832
------- ------- -------
Deferred:
Federal (197,498) (8,765) (8,000)
State (2,608) (4,000) (3,000)
------- ------- -------
(200,106) (12,765) (11,000)
--------- -------- --------
$568,844 $472,038 $285,832
The components of the net deferred tax asset are as follows:
May 31,
1996 1995
Deferred tax assets:
Allowance for doubtful accounts $296,772 $201,448
Reserve for discontinued operations 35,099 157,249
Accrued expenses 111,811 102,190
Tax credits 71,973 92,696
Net operating loss carryfoward 11,440 9,060
Other 19,313 26,064
------ ------
546,408 588,707
------- -------
<PAGE>
9. INCOME TAXES: (Cont'd.)
May 31,
1996 1995
Depreciation and amortization (143,322) (54,069)
Prepaid expenses (42,908) (38,874)
-------- --------
(186,302) (92,943)
Valuation allowance - (335,764)
-------- --------
(186,302) (428,707)
--------- ---------
Net deferred tax asset $360,106 $160,000
======== =========
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income before
taxes is as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed federal income tax at
statutory rates $582,115 $419,035 $218,025
State taxes, net of federal benefits 158,200 108,015 53,000
Items without tax benefit 103,856 51,552 32,000
Valuation allowance (335,764) (77,687) 4,922
Other, net 60,437 (28,877) (22,115)
------ -------- --------
$568,844 $472,038 $285,832
======== ======== ========
</TABLE>
10. SHAREHOLDER'S EQUITY:
a. Warrants
Pursuant to the Company's common stock offering in May 1991,
the Company issued to the underwriter warrants to purchase 112,922 shares of the
Company's common stock. The warrants, which contain certain anti-dilution
provisions have an exercise price of $4.98 per share. Warrants totalling 11,292
were cancelled in May 1996, the remaining 101,630 warrants were extended until
May 1999.
b. Preferred stock
On November 23, 1993, shareholders voted to amend the
Company's Certificate of Incorporation to create five million shares of
preferred stock, $1.00 par value, which the Board of Directors has authority to
issue from time to time in series. The Board of Directors also has the authority
to fix, before the issuance of each series, the number of shares in each series
and the designation, preferences, rights and limitations of each series. To
date, no shares of preferred stock have been issued.
<PAGE>
10. SHAREHOLDER'S EQUITY: (Cont'd)
c. Stock dividend
On December 5, 1995, the Company's Board of Directors approved
a stock dividend on January 12, 1996 for shareholders of record as of December
22, 1995. A total of 136,090 shares of common stock were issued in connection
with the dividend. Common stock has been adjusted for the par value of the
shares issued. Additional paid in capital and retained earnings have been
adjusted for the difference between the fair market value and the par value of
the shares.
On April 24, 1995, the Company's Board of Directors approved a
stock dividend payable on May 30, 1995 for shareholders of record as of May 15,
1995. A total of 128,347 shares of common stock were issued in connection with
the dividend. Common stock has been adjusted for the par value of the shares
issued. Additional paid-in capital and retained earnings have been adjusted for
the difference between the fair market value and the par value of the shares.
On April 12, 1994, the Company's Board of Directors approved a
stock split of the Company's common stock for shareholders of record as of April
29, 1994. A total of 722,500 shares of common stock were issued in connection
with the split. Common stock and additional paid-in capital have been adjusted
for the par value of the additional shares issued.
All references in the accompanying financial statements to the
number of common shares and per share amounts for all periods presented have
been restated to reflect the stock dividends.
11. STOCK OPTION PLANS:
The Company has three stock option plans (the "Plans") as adopted and
as adjusted for stock dividends. Participants may be granted either Incentive
Stock Options or Non-Qualified Stock Options to purchase an aggregate of
1,234,685 shares of common stock. The purpose of the Plans are to promote the
overall financial objectives of the Company and its shareholders by motivating
those persons selected to participate in the Plans to achieve long-term growth
in shareholder equity in the Company and by retaining the association of those
individuals who are instrumental in achieving this growth. Such options become
exercisable at various intervals based upon vesting schedules as determined by
the Compensation Committee. The options expire between November 1997 and May
2005.
The incentive stock options may be granted to employees and consultants
of the Company at a price not less than the fair market value on the date of
grant. All such options are authorized and approved by the Board of Directors,
based on recommendations of the Compensation Committee.
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
Information as to options granted is summarized as follows:
Exercise
Shares Price
------ --------
Outstanding, June 1, 1993 597,376 $1.44 - $15.60
Granted 254,256
Canceled and expired (46,153)
--------
Outstanding, May 31, 1994 805,379 $1.44 - $15.60
Granted 33,671
Exercised (105,033)
Canceled and expired (46,115)
--------
Outstanding, May 31, 1995 687,902 $1.44 - $15.60
Granted 98,302
Canceled and expired (17,963)
Exercised (80,218)
--------
Outstanding, May 31, 1996 688,023 $1.44 - $7.64
=======
Exercisable 621,297 $1.44 - $7.64
=======
Shares reserved for future issuance at May 31, 1996 are comprised of
the following:
Shares issuable upon exercise of
stock option under the plans 1,222,000
Shares issuable upon exercise of
warrants by underwriter 102,000
Shares issuable under the Company's
employee stock purchase plan 318,000
1,642,000
=========
In November 1995, the Company adopted an Employee Stock Purchase Plan
whereby certain employees can purchase shares of common stock at the lesser of
85% of fair market value of the stock at the beginning or end of the calendar
year.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which requires companies to measure employee stock compensation
based on the fair value method of accounting, or to use the intrinsic value
method prescribed in Accounting Principles Board Option No. 25 and to provide
pro forma footnote disclosures under the fair value method in SFAS No. 123. The
Company will adopt the new standard in fiscal 1997 and expects to elect the
continued use of APB Opinion No. 25.
<PAGE>
12. RELATED PARTY TRANSACTIONS:
a. Notes receivable from officer
Notes receivable from officer of $100,517 represents amounts
loaned by the Company and/or subsidiaries of the Company to the Company's
President. These notes bear interest at 6% and mature August 1, 1998. All
interest has been paid through May 31, 1996.
b. Stock subscription receivable
On April 20, 1995, the Company accepted a non-recourse
promissory note from the former Chief Executive Officer of AMSERV, Eugene J.
Mora, in the original principal amount of $198,440, bearing interest at a rate
of 10% per annum and maturing in April 2000, and $1,100 in cash for the exercise
of options for 44,990 shares of the Company's common stock. The promissory note
is secured by 72,623 shares of the Company's common stock owned by Mr. Mora. On
January 16, 1996, the promissory note was amended to become a recourse
promissory note, secured by 44,990 shares of common stock owned by Mr. Mora,
with interest at a rate of 5.73% per annum. Also on January 16, 1996, the
Company accepted an additional recourse promissory note from Mr. Mora in the
original principal amount of $199,342, bearing interest at a rate of 5.73% per
annum and maturing in January 2001, and $1,105 in cash for the exercise of
options for 45,194 shares of the Company's common stock.
c. Services
A director provides accounting services to the Company for
which he was compensated approximately $100,000 in each of the years 1996, 1995
and 1994.
A former director of AMSERV, provided certain legal services
to the Company. The Company incurred legal fees with such firm of $7,027,
$114,208 and $39,272 for fiscal years 1996, 1995 and 1994, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosure about Fair Value of Financial Instruments,
which requires disclosures about the fair value of the Company's financial
instruments. The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt,
including the current portions, was estimated using a discounted cash
flow analysis, based on the Company's assumed incremental borrowing
rates for similar types of borrowing arrangements. The carrying amount
of variable and fixed rate debt at May 31, 1996 approximates its fair
value.
<PAGE>
14. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable
and temporary cash investments.
The Company provides temporary health care personnel to hospitals,
nursing homes, extended care facilities and in-home patients in Florida, New
Jersey and the New York City metropolitan area. At May 31, 1996, approximately
30% of accounts receivable was due from Medicaid and approximately 8% of
accounts receivable was due from Medicare. Credit losses relating to customers
historically have not been significant and within management's expectations.
The Company places it temporary cash investments with high credit
quality financial institutions.
15. CONTINGENCIES:
The Company in the past treated certain of its nurses and certain
others as independent contractors. The Internal Revenue Service ("IRS") and the
New York State Department of Labor ("DOL") have, in certain cases, determined
that per diem health care workers were employees, and not independent
contractors, of the firm placing them. Two of the Company's subsidiaries have
been selected for an employment tax audit by DOL and another of the Company's
subsidiaries has been selected for an employment tax audit by the IRS.
In October 1994, the subsidiary subjected to the IRS audit received
from the IRS a formal report proposing an adjustment in taxes of $1,222,220 for
years 1989-1993. On October 12, 1995, that subsidiary signed a closing agreement
with the IRS providing for zero tax liability for the years 1989-1995. The
subsidiary has agreed to treat all skilled nurses providing hospital staffing
services as employees for federal employment tax purposes commencing January 1,
1996. As skilled hospital staffing services currently represents only 3% of
revenues this change is not expected to have a significant impact on earnings.
In May 1993, one of the Company's subsidiaries received from the DOL a
formal report proposing an adjustment in the amount of $73,000. In January 1994,
the other of the Company's subsidiaries received from the DOL a formal report
proposing an adjustment in the amount of $33,000. The Company prevailed before
the hearing examiner in the latter of these cases, which decision is presently
being appealed by the DOL, and the Company is vigorously defending its position.
The Company did not prevail in the former case and is currently appealing that
decision. Management believes that the possibility of an unfavorable outcome
which would materially affect the financial position and results of operations
of the Company is remote.
16. COMMITMENTS:
a. Employment agreement
The Company has an employment agreement, as amended, with an officer
which expires in December 2000. The aggregate commitment for future salary,
excluding bonuses, under the agreement is $1,125,000. The agreement also
provides for certain bonuses based upon annual pretax income. The Company has an
employment agreement with a former LINR shareholder which expires May 1997. The
<PAGE>
16. COMMITMENTS: (Cont'd)
aggregate commitment for future salary under the agreement is $100,000. The
aggregate minimum commitment for future salaries under both agreements are as
follows:
Years Ending
May 31,
-------
1997 $ 350,000
1998 250,000
1999 250,000
2000 250,000
2001 125,000
----------
$1,225,000
==========
Under the Merger Agreement with AMSERV, Star has agreed to honor the
provisions of certain agreements with AMSERV's chief executive officer. Pursuant
to these agreements, if AMSERV's chief executive officer is terminated without
cause, AMSERV is obligated to pay the chief executive officer the compensation
he earned in the final year of his employment in each of the immediately
following five years and transfer certain life insurance policies owned by the
Company. In 1996, compensation earned by the chief executive officer was
approximately $300,000.
b. Leases
The Company conducts its operations from leased office space
under various operating leases which expire at various dates through 2002.
Management expects that in the normal course of business these leases will be
renewed or replaced by other leases.
As of May 31, 1996 future net minimum rental payments (net of
sublease income) under operating leases having initial or remaining
noncancellable terms in excess of one year are as follows:
1997 $ 718,000
1998 643,000
1999 587,000
2000 230,000
2001 144,000
2002 75,000
---------
$2,397,000
Rental expenses for operating leases for fiscal years ended 1996, 1995
and 1994 were approximately $731,000, $519,000 and $470,000, respectively.
c. Guaranty
In connection with the sale of a business in 1992, the Company has
guaranteed certain lease payments. The amount of future lease payments
guaranteed by the Company totalled $290,836 at May 31, 1996 and are payable
through September 1998.
17. RETIREMENT PLANS:
The Company adopted a 401(k) savings plan in January 1995 covering all
eligible employees. Employees may defer up to 15% of their compensation. The
Company will match 10% of employees' contributions up to 8%. Contributions for
the year ended May 31, 1996 approximated $17,000.
A division of the Company has a deferred fringe benefits welfare
compensation plan covering substantially all of its employees. Contributions to
the plan are discretionary and are based on employee compensation. The plan was
amended in November 1995 to increase the vesting period of new entrants. New
entrants vest fully after 10 years of service, and participants prior to the
amendment vest fully after three years of service. Contributions to the plan for
1996, 1995 and 1994 approximated $233,000, $264,000 and $222,000, respectively.
18. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the years ended May 31, 1996 and 1995, the Company issued stock
dividends which amounted to $1,071,709 and $481,301, respectively. During the
years ended May 31, 1996 and 1995, the Company issued common stock upon the
exercise of stock options in exchange for notes receivable in the amount of
$199,342 and $198,440, respectively. During the year ended May 31, 1995, the
Company issued a note payable of $500,000 to finance a portion of the
acquisitions mentioned in Note 2. During the year ended May 31, 1995, the
Company issued $853,588 of Class A redeemable preferred stock in exchange for a
note payable and related accrued interest. During the year ended May 31, 1994.
the Company transferred $80,307 from accounts receivable to notes receivable.
19. FINANCIAL INSTRUMENTS:
On March 20, 1996, the Company entered into a two year notional amount
$1,500,000 interest rate swap with a bank, whereby the Company pays interest at
a fixed rate of 6.16% and receives interest at the three-month London Interbank
Offered Rate ("LIBOR"). The Company is exposed to credit loss in the event of
non-performance by the bank, however the Company does not anticipate a loss
resulting from this credit risk. The fair value of this financial instrument at
May 31, 1996 approximates $10,000.
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
(Unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 78,574
Accounts receivable, net of allowance for doubtful accounts of $566,000 10,130,449
Prepaid expenses and other current assets 769,365
Income taxes receivable 28,997
Deferred income taxes 961,232
----------
Total current assets 11,968,617
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $871,610 916,281
NOTES RECEIVABLE FROM OFFICER 94,937
INTANGIBLE ASSETS, net 5,059,300
OTHER ASSETS 218,916
---------
$18,258,051
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,241,205
Accounts payable and other accrued expenses 1,405,020
Current maturities of long-term debt 125,000
-------
Total current liabilities 2,771,225
---------
LONG-TERM LIABILITIES:
Revolving credit line 1,997,000
Long-term debt 156,250
Other long-term liabilities 1,192,000
---------
Total long-term liabilities 3,345,250
---------
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 5,000,000 shares authorized --
Common stock, $.001 par value, 10,000,000 shares
authorized; 4,154,318 shares issued 4,154
Additional paid-in capital 14,925,603
Subscription receivable (397,782)
Deficit (2,111,477)
Treasury stock, 137,500 common shares at May 31, 1996 (278,922)
------- --- ---- --------
Total shareholders' equity 12,141,576
----------
$18,258,051
===========
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
------------------------------------------
February 28, February 29,
1997 1996
----------------- ------------------
REVENUES, net $39,163,979 $35,463,592
OPERATING EXPENSES: ----------- -----------
Costs of revenues 25,624,871 23,004,659
Selling, general and administrative 10,652,192 10,410,591
Depreciation and amortization 480,597 598,722
--------- -------
36,757,660 34,013,972
---------- ----------
INCOME FROM OPERATIONS 2,406,319 1,449,620
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (164,518) (216,668)
Interest income 61,861 142,345
Merger transaction costs (2,808,223) --
----------- ---------
(2,910,880) (74,323)
----------- ---------
(LOSS) INCOME BEFORE PROVISION (504,561) 1,375,297
FOR INCOME TAXES
INCOME TAX BENEFIT (PROVISION) 207,000 (608,955)
---------- ---------
NET (LOSS) INCOME $ (297,561) $ 766,342
============= ============
NET (LOSS) INCOME PER
COMMON SHARES $ (0.07) $ 0.18
============= ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,278,169 4,257,046
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (297,561) $ 766,342
---------- -------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Provision for doubtful accounts 148,556 230,000
Depreciation and amortization 480,597 598,722
Deferred income taxes (601,126) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (667,836) (2,918,989)
Prepaid expenses and other current assets 31,300 (225,216)
Income taxes receivable (28,997) --
Other assets 291,571 (60,108)
Increase (decrease) in liabilities
Accounts payable and related expenses (88,621) 334,535
Accounts payable and other accrued expenses (125,118) 157,605
Income taxes payable (295,647) (53,127)
Other liabilities 1,158,030 17,386
--------- ------
Total adjustments 302,709 (1,919,192)
--------- ----------
Net cash provided by (used in) operating activities 5,148 (1,152,850)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from short-term investments 106,000 1,089,179
Purchase of intangibles (177,327) (83,254)
Repayment on note receivable from officer 5,580 27,629
Purchase of property and equipment (314,593) (186,932)
Payment of costs related to discontinued operations (98,081) (306,747)
--------- --------
Net cash (used in) provided by investing activities (478,421) 539,875
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from revolving credit line (1,283,000) 1,500,000
Repayment of long-term debt (93,750) (93,750)
Proceeds from the exercise of stock options 388,054 296,130
Redemption of Class B preferred shares (341,436) (170,717)
--------- --------
Net cash (used in) provided by financing activities (1,330,132) 1,531,663
---------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,803,405) 918,688
CASH AND CASH EQUIVALENTS, beginning of period 1,881,979 1,496,792
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 78,574 $ 2,415,480
============= ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 600,000 $ 669,000
============ ============
Interest paid $ 173,000 $ 204,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
1. Adjustments:
In the opinion of management of Star Multi Care Services, Inc.
("Star"), the accompanying unaudited condensed consolidated financial statements
reflect all adjustments necessary (which are of a normal recurring nature) to
present fairly Star's financial position as of February 28, 1997, and the
results of operations and cash flows for the nine month periods ended February
28, 1997 and February 29, 1996. The unaudited condensed consolidated financial
statements contained herein should be read in conjunction with Star's audited
consolidated financial statements for the fiscal years ended May 31, 1996,
included elsewhere herein.
The results of operations for the nine month period ended February 28,
1997 are not necessarily indicative of the results to be expected for the full
year.
2 Net Income (Loss) Per Share:
Net income (loss) per share for the periods are based on the weighted
average number of common and common stock equivalent shares outstanding. Certain
stock options were not included in the computation of net loss per share because
their effect would be antidilutive. Net income (loss) per share assuming full
dilution is the same as primary income (loss) per share).
3. Merger:
On August 23, 1996, Star completed a merger (the "Amserv Merger"),
accounted for as a pooling of interest, to acquire AMSERV HEALTHCARE INC.
("Amserv"), a health care service company which provides home care services in
New Jersey and Ohio. In accordance with the Amserv Merger Agreement, each share
of common stock of Amserv outstanding immediately prior to consummation of the
Amserv Merger was converted into .4090 shares of common stock of Star The total
shares issued amounted to 1,410,731. Star also assumed all outstanding options
and other rights to acquire Amserv stock. Costs related to the Amserv Merger
amounted to $2,808,223. Unpaid amounts at February 28, 1997 have been included
in "accounts payable and other accrued expenses" and "other long-term
liabilities".
4. Stock Dividend:
Star declared a 5% stock dividend which was distributed on November 4,
1996 to shareholders of record as of October 11, 1996. A total of 188,570 shares
of common stock of Star were issued in connection with the dividend. Common
stock has been adjusted for the par value of the shares issued. Additional
paid-in capital and deficit have been adjusted for the difference between the
fair market value and the par value of the shares.
5. Subsequent Event:
On January 3, 1997, Star entered into an agreement and plan of merger
(the "Merger Agreement") to acquire (the "Merger") Extended Family Care
Corporation ("EFCC"), a health care service company which provides home care
services in New Jersey, New York and Pennsylvania. In accordance with the Merger
Agreement, Star will pay $2,400,000 in cash (plus cash payments to dissenting
shareholders, if any) and $4,850,000 in stock (less the amount that would have
been paid to dissenting shareholders, if any) or cash at Star's option.
In connection with the Merger, Star and EFCC have entered into a
consulting agreement pursuant to which Star will render to EFCC Consulting and
Advisory Services in connection with the management, operation and supervision
of EFCC. The term of the consulting agreement shall end on the earlier of (i)
one year from signing of the Merger Agreement, (ii) the effective time of the
Merger or (iii) the termination of the Merger. In consideration for the
consulting services rendered by Star, EFCC will pay $25,000 per month payable
(a) $15,000 in arrears on the last day of each month and (b) the remaining
$10,000 on the earlier of the closing date or termination of the Merger
Agreement. As of February 28, 1997 $35,000 due from EFCC is included in prepaid
and other current assets. The Merger is subject to approval by the shareholders
of both companies and certain other conditions and is expected to be consummated
on or before August 15, 1997.
6. Supplementary Information - Statement of Cash Flows:
During the period ended February 28, 1997, Star issued a 5% stock
dividend which amounted to $1,249,276.
7. Litigation:
STAR is a defendant in a lawsuit filed on November 14, 1996 in San
Diego Superior Court, by Eugene J. Mora the former President and Chief Executive
Officer of Amserv for alleged breach of contract. The suit asks for damages
totaling approximately $2,300,000. STAR has accrued approximately $1,790,000,
included in "Accounts Payable And Other Accrued Expenses" and "Other Long Term
Liabilities," in connection with this matter. The amount accrued is based upon
information which has been learned to date. As this case is in the early stages,
additional information may be learned in the future, which would require
STAR to modify this amount. Management does not believe that this matter will
have a material adverse impact on STAR.
<PAGE>
APPENDIX A
----------
PLAN AND AGREEMENT OF MERGER
OF
T.P.C. HOME CARE SERVICES, INC.,
a New York corporation
WITH AND INTO
EXTENDED FAMILY CARE CORPORATION,
a New York corporation
------------------------------------
Dated as of March __, 1997
<PAGE>
PLAN AND AGREEMENT OF MERGER
OF
T.P.C. HOME CARE SERVICES, INC.,
a New York corporation
WITH AND INTO
EXTENDED FAMILY CARE CORPORATION
a New York corporation
THIS PLAN AND AGREEMENT OF MERGER (hereinafter referred to as the "Plan
and Agreement of Merger"), is made as of March __, 1997, by and among T.P.C.
HOME CARE SERVICES, INC., a New York corporation ("TPC") and EXTENDED FAMILY
CARE CORPORATION, a New York corporation ("EFCC").
W I T N E S S E T H :
WHEREAS, EFCC is the legal and beneficial owner of 82.92% of the
issued and outstanding shares of TPC; and
WHEREAS, the directors of each of EFCC and TPC deem it advisable and in
the best interests of each such corporation that TPC merge with and into EFCC as
set forth in this Plan and Agreement of Merger (hereinafter referred to as the
"Merger"), upon the terms and conditions herein provided.
NOW, THEREFORE, for the purpose of prescribing the terms and conditions
of the Merger, the manner and mode of carrying the same into effect, and such
other details as are deemed necessary or desirable, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
NAMES OF CONSTITUENT CORPORATIONS;
SURVIVING CORPORATION
Section 1.1 NAMES OF CONSTITUENT CORPORATIONS. The names of each of
the constituent corporations to the Merger are as follows:
<PAGE>
(a) "T.P.C. HOME CARE SERVICES, INC.",
a New York corporation,
(b) "EXTENDED FAMILY CARE CORPORATION",
a New York corporation.
Hereinafter, TPC and EFCC are sometimes hereinafter referred to
individually as a "Constituent Corporation" and collectively as the "Constituent
Corporations."
Section 1.2 THE SURVIVING CORPORATION. The name of the surviving
corporation of the Merger is "EXTENDED FAMILY CARE CORPORATION", a New York
corporation (sometimes, hereinafter, the "Surviving Corporation"), which shall
continue to exist as the Surviving Corporation pursuant to the provisions of the
Business Corporation Law of the State of New York (the "New York BCL").
Section 1.3 FILING OF CERTIFICATE OF INCORPORATION; ETC.
(a) The Certificate of Incorporation of EFCC was originally filed by the
Office of the Department of State of the State of New York on May 10,
1978 under the name of M.A.E. Enterprises, Inc. The name of the
corporation was changed to Cosmetic Sciences, Inc. by filing a
certificate of amendment to the corporation's Certificate of
Incorporation on March 20, 1980. The name of the corporation was
changed for the second and last time to Extended Family Care
Corporation by filing a certificate of amendment to the corporation's
Certificate of Incorporation on October 1, 1996.
(b) The Certificate of Incorporation of TPC was filed by the Office
of the Department of State of the State of New York on October 26,
1983.
ARTICLE II
DESIGNATION AND NUMBER OF SHARES
OF CONSTITUENT CORPORATIONS
Section 2.1 CAPITALIZATION. As to each Constituent Corporation, the
designation and number of outstanding shares of each class and series are as
follows: --------------
Constituent Corporation Class Number Outstanding
- ----------------------- ----- ------------------
T.P.C. HOME CARE SERVICES, Common Stock, 1,750,000 Shares
INC., a New York $.01 par value
corporation ("TPC Common Stock")
<PAGE>
EFCC FAMILY CARE Common Stock, 32,000,226 Shares
CORPORATION, a New York $.01 par value
corporation ("EFCC Common Stock")
82.92% of the shares of TPC Common Stock are owned by EFCC, and the
balance of the shares of TPC Common Stock are owned by approximately 1,100
shareholders.
Section 2.2 VOTING RIGHTS. The Common Stock of each of the Constituent
Corporations is entitled to one vote per share. The number of outstanding shares
of each of the Constituent Corporations shall not change prior to the Effective
Date (hereinafter defined).
ARTICLE III
TERMS AND CONDITIONS OF MERGER OF TPC
WITH AND INTO EFCC
The terms and conditions of the Merger are as follows:
Section 3.1 MERGER; EFFECTIVE DATE. (a) Upon the terms and subject to
the conditions herein contained, and in accordance with the provisions of the
New York BCL, TPC shall be merged with and into EFCC as soon as practicable
following the satisfaction of the conditions set forth in Article V hereof, but
not later than the Effective Date (hereafter defined). The Merger shall become
effective upon the filing with the Department of State of the State of New York,
in accordance with the provisions of Section 904 of the New York BCL, of a
Certificate of Merger substantially in the form of Exhibit A attached hereto.
The parties hereto may determine a later time that the Merger may become
effective. The date and time when the Merger shall become effective is sometimes
herein referred to as the "Effective Date".
Section 3.2 EFFECT OF MERGER. On the Effective Date, the separate
existence of TPC shall cease and TPC shall be merged with and into EFCC in
accordance with the provisions of this Plan and Agreement of Merger and EFCC
shall survive such Merger and shall continue in existence and shall, without
other transfer, succeed to and possess all the rights, privileges, immunities,
powers and purposes of each of the Constituent Corporations, and all the
property, real and personal, including subscriptions to shares, causes of action
and every other asset of each of the Constituent Corporations shall vest in EFCC
without further act or deed; and EFCC shall assume and be liable for all the
liabilities, obligations and penalties of each of the Constituent Corporations.
No liability or obligation due or to become due, claims or demands for any cause
existing against any of the Constituent Corporations, or any shareholder,
officer or director thereof, shall be released or impaired solely by virtue of
the Merger. No action or proceeding, civil or criminal, then pending by or
against any Constituent Corporation, or any shareholder, officer or director
thereof, shall abate or be discontinued solely by virtue of the Merger, but may
be enforced prosecuted, settled or compromised as if such Merger had not
occurred, or the Surviving Corporation may be substituted in such action in
place of any Constituent Corporation.
Section 3.3 EXCHANGE AND CANCELLATION OF SHARES OF TPC COMMON STOCK.
(a) On the Effective Date, each issued and outstanding share of TPC Common Stock
shall, automatically, by virtue of the Merger and without any action on the part
of any of the Constituent Corporations or the holders thereof, be transferred to
EFCC and be cancelled and each share of TPC Common Stock shall entitle the
holder thereof to be issued 18.745545 shares of EFCC Common Stock, such shares
of EFCC Common Stock to be issued, subject to Section 3.11, as soon as
practicable after the Effective Date. TPC Common Stock owned by EFCC will be
cancelled as a result of the Merger and no EFCC Common Stock shall be issued to
EFCC in respect thereof. No fractional shares of EFCC Common Stock shall be
issued in the Merger; rather in lieu of any such fractional shares of EFCC
Common Stock, each holder of shares of TPC Common Stock who would otherwise be
entitled to fractional shares of EFCC Common Stock shall, upon surrender of such
shareholder's TPC stock certificate (the "TPC Certificate") be paid an amount
(without interest) equal to such shareholder's proportionate interest in such
fractional shares multiplied by the last quoted bid price of EFCC Common Stock
as supplied by the National Quotation Bureau, Inc. at the Effective Date. The
shares of EFCC Common Stock and cash in lieu of fractional shares issuable
pursuant to the Merger is sometimes hereinafter referred to as the "Merger
Consideration."
Section 3.4 NO IMPACT ON CAPITAL STOCK OF EFCC. Other than with respect
to shares of EFCC Common Stock to be issued pursuant to the Merger, the Merger
shall have no impact whatsoever on the shares of EFCC Common Stock which were
issued and outstanding immediately prior to the Merger, which shares shall
remain issued and outstanding after giving effect to the Merger.
Section 3.5 ABANDONMENT OF MERGER. If, at any time prior to the
Effective Date, events or circumstances occur which, in the opinion of a
majority of the board of directors of either Constituent Corporation, renders it
inadvisable to consummate the Merger, this Plan and Agreement of Merger shall
not become effective even though previously adopted by the shareholders of the
Constituent Corporations. The filing of the Certificate of Merger referred to in
Paragraph 3.1 above shall conclusively establish that no action to terminate
this Plan and Agreement of Merger has been taken by the board of directors of
either Constituent Corporation.
Section 3.6 DISSENTERS' RIGHTS. Shares of TPC Common Stock that have
not been voted in favor of the adoption of the Merger and with respect to which
dissenters' rights shall have been validly and properly demanded and perfected
in accordance with the New York BCL ("Dissenting Shares") shall not be converted
into the right to receive the Merger Consideration on or after the Effective
Date unless and until the holder of such shares of TPC Common Stock withdraws
his demand for such appraisal in accordance with applicable law or becomes
ineligible for such appraisal, at which time such shares of TPC Common Stock
shall be converted into and represent the right to receive the Merger
Consideration. TPC shall give EFCC: (i) prompt notice of any written demand for
appraisal, withdrawals of demands for appraisal and any other instrument in
respect thereof received by TPC; and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal. TPC will not
voluntarily make any payment with respect to any demands for appraisal and will
not, except with the prior written consent of EFCC, settle or offer to settle
any such demand.
Section 3.7 EXCHANGE OF CERTIFICATES. As of the Effective Date, EFCC
shall deposit, or shall cause to be deposited, with American Stock Transfer and
Trust Company, or such other bank or trust company which shall be mutually
acceptable to the parties hereto (the "Exchange Agent"), for the benefit of
holders of shares of TPC Common Stock, for exchange in accordance with Section
3.3 through the Exchange Agent: (i) certificates representing the shares of EFCC
Common Stock (the "EFCC Certificates") to be issued pursuant to the Merger; and
(ii) the estimated amount of cash to be paid in lieu of fractional shares (in
each case other than with respect to Dissenting Shares) (together, all such
certificates and cash being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall deliver, pursuant to irrevocable instruments, the shares of
EFCC Common Stock and cash in lieu of fractional shares to be issued pursuant to
Section 3.3.
Section 3.8 INSTRUCTION TO TPC SHAREHOLDERS. As soon as reasonably
practicable after the Effective Date, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Date represented outstanding shares of TPC Common Stock, whose shares
of TPC Common Stock were converted into the right to receive the Merger
Consideration pursuant to Section 3.3: (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the TPC
Certificates shall pass, only upon delivery of the TPC Certificates to the
Exchange Agent and shall be in such form and have such other provisions as EFCC
may reasonably specify); and (ii) instructions for use in effecting the
surrender of TPC Certificates in exchange for the certificates representing
shares of EFCC Common Stock. Upon surrender of a TPC Certificate for
cancellation to the Exchange Agent, or to such other agent or agents as may be
appointed by EFCC, together with such letter of transmittal, duly executed, and
such other documents as may be reasonably required by the Exchange Agent, the
holder of such TPC Certificate shall be entitled to receive in exchange therefor
the Merger Consideration and the TPC Certificate so surrendered shall forthwith
be cancelled. In the event of a transfer of ownership of TPC Common Stock which
is not registered on the transfer records of TPC, the Merger Consideration may
be paid to and certificates representing the proper number of shares of EFCC
Common Stock may be issued to a transferee if the TPC Certificate representing
such TPC Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 3.8, each TPC Certificate shall be deemed at any
time after the Effective Date to represent only the right to receive upon such
surrender the Merger Consideration. The Exchange Agent shall not be entitled to
vote or exercise any rights of ownership with respect to the EFCC Common Stock
held by it from time to time hereunder.
Section 3.9 DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No
dividends or other distributions with respect to EFCC Common Stock with a record
date after the Effective Date shall be paid to the holder of any unsurrendered
TPC Certificate with respect to the shares of EFCC Common Stock represented
thereby and no cash payment (including, without limitation, cash payment in lieu
of fractional shares) shall be paid to any such holder pursuant to Section 3.3
until the surrender of such Certificate in accordance with Section 3.8. Subject
to the effect of applicable laws, following surrender of any such TPC
Certificate, there shall be paid to the holder of the share certificate
representing whole shares of EFCC Common Stock issued in exchange therefor,
without interest: (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Date theretofore paid
with respect to such whole shares of EFCC Common Stock; and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Date but prior to such surrender and with a
payment date subsequent to such surrender payable with respect to such whole
shares of EFCC Common Stock.
Section 3.10 NO FURTHER OWNERSHIP RIGHTS IN COMMON STOCK. All shares of
EFCC Common Stock issued, upon the surrender for exchange of TPC Certificates in
accordance with the terms hereof (including any cash paid pursuant to Section
3.3) shall be deemed to have been issued (and/or paid) in full satisfaction of
all rights pertaining to such shares of TPC Common Stock and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of TPC Common Stock which were outstanding immediately
prior to the Effective Date. If, after the Effective Date, TPC Certificates are
presented to the Surviving Corporation or the Exchange Agent for any reason,
they shall be canceled and exchanged as provided in Section 3.3.
Section 3.11 POSSIBLE MERGER WITH STAR MULTI CARE SERVICES, INC. In
the event that a currently contemplated merger between EFCC and Star Multi Care
Services, Inc., a New York corporation ("Star"), is consummated (hereinafter
referred to as the "Star Merger"), EFCC shareholders and those holders of shares
of TPC Common Stock entitled to receive the Merger Consideration will receive a
combination of Star common stock, par value $.001 per share, and cash, or all
cash, pursuant to the terms of an Agreement and Plan of Merger dated as of
January 3, 1997 among Star, EFCC and an acquisition subsidiary of Star, assuming
that such persons are shareholders of record of EFCC on the record date of the
Star Merger and do not exercise dissenters' rights with respect thereto. In such
event, the holder of shares of TPC Common Stock who is entitled to receive the
Merger Consideration hereunder and does not dissent from the Star Merger, as a
matter of expediency and not in alteration or derogation of the rights granted
to such holder hereunder, will not be issued EFCC Certificates in connection
with the Merger, but rather will be deemed to have been issued such EFCC
Certificates. Such shareholders will receive the same consideration payable to
an EFCC shareholder in the Star Merger, in proportion to the number of shares of
EFCC Common Stock issuable to such shareholder as Merger Consideration
hereunder, as if such shares EFCC Certificates had actually been issued.
ARTICLE IV
CERTIFICATE OF INCORPORATION, BY-LAWS,
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
The Certificate of Incorporation of EFCC and the By-Laws of EFCC as
they exist prior to the Effective Date, shall be and remain the Certificate of
Incorporation and the By-Laws of the Surviving Corporation until the same shall
be altered, amended or repealed as provided therein. The directors and officers
of EFCC shall continue to be the directors and officers of the Surviving
Corporation and shall serve until the expiration of the terms for which they
were elected and until their successors are duly elected and qualified or as
otherwise as provided in the By-Laws of the Surviving Corporation.
ARTICLE V
CONDITIONS PRECEDENT
Anything herein contained notwithstanding, the respective obligations
of each Constituent Corporation to effect the Merger are subject to, and the
Effective Date shall not occur until, all of the following conditions precedent
have been fully satisfied or waived, which satisfaction or waiver may occur
simultaneously on the Effective Date: (i) this Plan and Agreement of Merger
shall have been submitted to the shareholders of each of the Constituent
Corporations for adoption hereof, and shall have been adopted and approved by
the shareholders of each Constituent Corporation in accordance with the
requirements of Section 903 of the New York BCL, and applicable federal proxy
rules; (ii) a registration statement with respect to the shares of EFCC Common
Stock to be issued to TPC shareholders in the Merger shall have been declared
effective and no stop order suspending the effectiveness of the registration
statement shall have been issued by the Securities and Exchange Commission (the
"Commission") or shall be continuing in effect, and no proceedings for that
purpose shall have been initiated or threatened by the Commission; (iii) EFCC
shall have received all state securities laws or "blue sky" permits and
authorizations necessary to issue the shares of EFCC Common Stock pursuant to
the Merger and the transactions contemplated thereby; (iv) no governmental
authority or other agency, commission or court of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, injunction or the order (whether temporary, preliminary or
permanent) which is in effect and has the effect of making the Merger illegal or
otherwise prohibiting consummation of the transactions contemplated by this Plan
and Agreement of Merger; provided, however, that, prior to invoking this
condition, each party to this Plan and Agreement of Merger shall use all
reasonable efforts to have such statute, rule, regulation, injunction or order
vacated; (v) the receipt of the opinion of Meltzer, Lippe, Goldstein, Wolf &
Schlissel, P.C. that, more likely than not, the Merger will constitute a
tax-free reorganization under Section 368(a) of the Internal Revenue Code; and
(vi) any consents, permits, approvals or authorizations required by any third
party, including private parties and governmental or regulatory authorities, in
connection with the transactions contemplated hereby shall have been obtained.
ARTICLE VI
MISCELLANEOUS
Section 6.1 COUNTERPARTS. For the convenience of the parties and to
facilitate approval of this Plan and Agreement of Merger, any number of
counterparts hereof may be executed, and each such executed counterpart shall be
deemed to be an original instrument.
Section 6.2 FURTHER ASSURANCES. If at any time after the Effective
Date, the Surviving Corporation shall consider or be advised that any deeds,
assignments or assurances in law or any other things are necessary, desirable or
proper to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, the title to any property or rights of any of the Constituent
Corporations acquired or to be acquired by reason of, or as a result of, the
Merger, the Constituent Corporations agree that the Surviving Corporation and
its proper officers and directors shall and will execute and deliver all such
proper deeds, assignments and assurances in law and do all things necessary,
desirable or proper to vest, perfect or confirm title to such property or rights
in the Surviving Corporation and otherwise to carry out the purposes of this
Plan and Agreement of Merger, and that the proper officers and directors of the
Surviving Corporation are fully authorized in the name of each of the
Constituent Corporations or otherwise to take any and all such action.
Section 6.3 AMENDMENT. Subject to applicable law, this Plan and
Agreement of Merger may be amended, modified or supplemented only by written
agreement signed --------- by each of the parties hereto.
Section 6.4 ENTIRE AGREEMENT. This Plan and Agreement of Merger,
including the certificates referred to herein, embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein.
Section 6.5 ASSIGNMENT. This Plan and Agreement of Merger shall be
binding upon and inure to the benefits of the parties hereto and their
respective successors and permitted assigns, but neither this Plan and Agreement
of Merger nor any of the rights, interests or obligations hereunder shall be
assigned by any party hereto without the prior written consent of the other
party hereto, nor is this Plan and Agreement of Merger intended to confer upon
any other person or entity except the parties any rights or remedies hereunder.
Section 6.6 GOVERNING LAW. This Plan and Agreement of Merger shall be
governed by and construed in accordance with the internal, substantive laws of
the State of New York, without giving effect to the conflicts of laws principles
thereof.
Section 6.7 EXISTING AGREEMENTS. TPC and the Surviving Corporation
shall insure and guaranty that the provisions with respect to indemnification by
TPC or any of its subsidiaries or affiliates in favor of any present or former
director, officer, employee or agent (and their respective heirs and assigns) of
TPC or any of its subsidiaries or affiliates (the "Indemnified Parties"), as set
forth in their respective charters or bylaws or pursuant to other agreements
(including any insurance policies), shall survive the Merger, shall not be
amended, repealed or modified in any manner as to adversely affect the rights of
such Indemnified Parties and shall continue in full force and effect for a
period of at least six years from the Effective Date. This Section 6.7 shall
survive the closing of any of the transactions contemplated hereby, is intended
to benefit the directors and officers of TPC and affiliates at the Effective
Date and each of the Indemnified Parties (each of which shall be entitled to
enforce this Section 6.7 against TPC and the Surviving Corporation, as the case
may be, as a third-party beneficiary of this Plan and Agreement of Merger), and
shall be binding on all successors and assigns of the Surviving Corporation.
IN WITNESS WHEREOF, the undersigned have executed this Plan and
Agreement of Merger on this 18th day of March, 1997.
T.P.C. HOME CARE SERVICES, INC.,
a New York corporation
By:________________________________
Name:
Title:
EXTENDED FAMILY CARE CORPORATION,
a New York corporation
By:________________________________
Name:
Title:
<PAGE>
APPENDIX B-1
------------
TELESIS
Mergers & Acquisitions, Inc.
January 22, 1997
TPC Home Care Services, Inc.
One Old Country Road, Suite 335
Carle Place, New York 11514
To Members of the Board of Directors:
We understand that Extended Family Care Corporation ("EFCC"), a New York
corporation, and TPC Home Care Services, Inc. ("TPC"), a New York corporation,
plan to enter into an agreement and plan of merger ("Agreement").
BACKGROUND: EFCC owns approximately 83% of TPC, the
remaining 17% is owned by approximately 1,100
holders of record.
DESCRIPTION OF TRANSACTIONS: EFCC will acquire 100% of the outstanding common
shares of TPC for newly issued common shares of
EFCC, however, shares will not be issued to EFCC
for EFCC's interest in TPC.
VALUATION FORMULA: TPC shareholders will receive common stock of
EFCC valued as follows:
Value of Merger Consideration in Star/EFCC
merger - less net assets of EFCC at the time of
the execution of the merger agreement - of the
EFCC/TPC merger times 17%.
The terms of the Agreement provide, among other things, that TPC will be merged
with and into EFCC ("Surviving Corporation"). Each share of the common stock of
TPC, which is issued and outstanding immediately prior to the Effective Time,
shall be converted into the right to receive EFCC common shares utilizing the
above valuation formula.
795 Franklin Avenue, Franklin Lakes, NJ 07417 (201)848-9544
FAX (201)848-8335
<PAGE>
TELESIS
Mergers & Acquisitions, Inc.
-Page 2-
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of TPC's Common Stock in the Merger is fair to
such holders from a financial point of view.
For the purposes of the opinion set forth herein, we have:
(i) reviewed the consolidated financial statements of recent years and the
interim period to date and certain other financial information relating to
TPC and EFCC available to us;
(ii) reviewed certain internal financial statements relating to TPC prepared by
the management of TPC and certain internal financial statements relating to
EFCC prepared by the management of EFCC;
(iii)discussed the past and current operations and financial conditions and the
prospects of TPC and EFCC with senior executives of TPC and EFCC,
respectively;
(iv) reviewed the financial terms, to the extent publicly available and from
Telesis' proprietary database, of certain comparable acquisition
transactions;
(v) analyzed the pro forma financial impact of the Merger of TPC and EFCC;
(vi) performed such other analyses and examinations and considered such other
factors as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of this opinion.
In addition, we have not undertaken any independent valuation or appraisal of
the assets of EFCC and TPC. Our opinion is necessarily based on the economic,
market, and other conditions as in effect on, and the information made available
to us as of, the date hereof.
795 Franklin Avenue, Franklin Lakes, NJ 07417 (201)848-9544
FAX (201)848-8335
<PAGE>
TELESIS
Mergers & Acquisitions, Inc.
-Page 3-
We have acted as financial advisor to the Board of Directors of EFCC in
connection with this transaction and will receive a fee for our services. In the
past, Telesis Mergers & Acquisitions, Inc., as a customary part of its
investment banking business, is engaged in the valuation of business in
connection with mergers and acquisitions for corporate and other purposes. In
the past sixteen years, we have served as financial advisor to more than 300
successful transactions specifically in the home healthcare and medical staffing
industries.
Based upon, and subject to, the foregoing, we are of the opinion as of the date
hereof that the consideration to be received by the holders of shares of TPC
Common Stock in the proposed Merger is fair to such holders from a financial
point of view.
Very truly yours,
TELESIS
By:______________________________
President & CEO
795 Franklin Avenue, Franklin Lakes, NJ 07417 (201)848-9544
FAX (201)848-8335
<PAGE>
APPENDIX B-2
TELESIS
Merger & Acquisitions, Inc.
December 31, 1996
Extended Family Care Corporation
One Old Country Road, Suite 335
Carle Place, NY 11514
To Members of the Board of Directors:
We understand that Star Multi Care Services, Inc. ("Star"), a New York
corporation, EFCC Acquisition Corp., a wholly-owned subsidiary of Star ("Merger
Sub"), and Extended Family Care Corporation ("EFCC"), a New York corporation,
plan to enter into an agreement and plan of merger ("Agreement")
The terms of the Agreement provide, among other things, that EFCC will be merged
with and into the Merger Sub ("Surviving Corporation"). Each share of the common
stock, $.01 par value, of EFCC (the "EFCC Common Stock"), which is issued and
outstanding immediately prior to the Effective Time, except those held by
shareholders who validly and properly demand and perfect dissenters' rights
under the BCL, shall be converted into the right to receive the following
consideration (the "Merger Consideration"): (x) the Cash Consideration, without
interest; and (y) the number (the "Conversion Number") of duly authorized,
validly issued, full paid and non-assessable shares of common stock $.001 par
value, of Star (the "Star Common Stock"). Solely at Star's option (the "All Cash
Option"), in lieu of the consideration described in clauses (x) and (y) of the
immediately preceding sentence, the "Merger Consideration" shall be an amount in
cash equal to (A) $7,250,000, divided by (B) the EFCC Share Number. All shares
of EFCC Common Stock, and each holder of a certificate representing such shares
of EFCC Common Stock, shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration to be issued or paid in
consideration therefor upon surrender of such certificate.
The "Cash Consideration" means the amount equal to: (a) such number of shares of
Star Common Stock (the "Star Share Number") as has an aggregate Market Price on
the third business day prior to the Effective Time (the "Trigger Date") equal to
$4,850,000; divided by
<PAGE>
TELESIS
Merger & Acquisitions, Inc.
(b) the EFCC Share Number. As used herein, the "Market Price" of each share of
Star Common Stock on any day means the average of the closing sale prices of a
share of Star Common Stock as reported on the NASDAQ National Market during the
one hundred and twenty (120) trading days immediately preceding the date of the
determination, calculated by adding all such one hundred and twenty (120)
closing sale prices and dividing the sum by one hundred and twenty (120). EFCC
will also be paying a $750,000 dividend to its shareholders prior to the closing
date.
The terms and conditions of the merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the consideration to be received by
the holders of shares of EFCC's Common Stock in the Merger is fair to such
holders from a financial point of view.
For the purposes of the opinion set forth herein, we have:
(i) review the consolidated financial statements of
recent years and the interim period to date and
certain other financial information relating to EFCC
ad Star available to us from published sources;
(ii) reviewed certain internal financial statements
relating to EFCC prepared by the management of EFCC
and certain internal financial statements relating to
Star prepared by the management of Star;
(iii) discussed the past and current operations and
financial conditions and the prospects of EFCC and
Star with senior executives of EFCC and Star,
respectively;
(iv) reviewed the reported market prices and trading
volumes for both shares of EFCC Common Stock and
shares of the Star Common Stock;
(v) compared certain financial statistics of EFCC and
Star and the market prices and trading volumes of
shares of EFCC Common Stock and Star Common Stock
with published information regarding certain other
comparable publicly-traded companies and their common
equity securities;
(vi) reviewed the financial terms, to the extent
publicly available and from Telesis' proprietary
<PAGE>
TELESIS
Merger & Acquisitions, Inc.
database, of certain comparable acquisition
transactions;
(vii) analyzed the pro forma financial impact of the
Merger of EFCC and Star;
(viii) reviewed the Merger Agreement;
(ix) performed such other analyses and examinations and
considered such other factors as we have deemed
appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of this opinion.
In addition, we have not undertaken any independent valuation or appraisal of
the assets of EFCC and Star. Our opinion is necessarily based on the economic,
market, and other conditions as in effect on, and the information made available
to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of EFCC in
connection with this transaction and will receive a fee for our services. In the
past, Telesis Mergers & Acquisitions, Inc., as a customary part of its
investment banking business, is engaged in the valuation of business in
connection with mergers and acquisitions for corporate and other purposes. In
the past sixteen years we have served as financial advisor to more than 300
successful transactions specifically in the home healthcare and medical staffing
industries.
Based upon, and subject to , the foregoing, we are of the opinion as of the date
hereof that the consideration to be received by the holders of shares of EFCC
Common Stock in the proposed Merger is fair to such holders from a financial
point of view.
Very truly yours,
TELESIS
By: /s/ Fred Roa
--------------
President and
Chief Executive Officer
<PAGE>
APPENDIX C
----------
BUSINESS CORPORATION LAW
ARTICLE 6. SHAREHOLDERS
NY CLS Bus Corp @ 623 (1997)
@ 623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as
to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within
one month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates [fig 1] for any such
shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last mentioned,
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.
(2) If the corporation fails to institute such proceeding
within such period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the expiration
of such twenty day period. If such proceeding is not instituted within such
thirty day period, all dissenter's rights shall be lost unless the supreme
court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as
provided in paragraph (g), have agreed with the corporation upon the price to be
paid for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The corporation
shall serve a copy of the petition in such proceeding upon each dissenting
shareholder who is a resident of this state in the manner provided by law for
the service of a summons, and upon each nonresident dissenting shareholder
either by registered mail and publication, or in such other manner as is
permitted by law. The jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make such
determination, is entitled to receive payment for his shares. If the corporation
does not request any such determination or if the court finds that any
dissenting shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as of
the close of business on the day prior to the shareholders' authorization date.
In fixing the fair value of the shares, the court shall consider the nature of
the transaction giving rise to the shareholder's right to receive payment for
shares and its effects on the corporation and its shareholders, the concepts and
methods then customary in the relevant securities and financial markets for
determining fair value of shares of a corporation engaging in a similar
transaction under comparable circumstances and all other relevant factors. The
court shall determine the fair value of the shares without a jury and without
referral to an appraiser or referee. Upon application by the corporation or by
any shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law and
rules.
(5) The final order in the proceeding shall be entered against
the corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at
such rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder the amount
found to be due him, upon surrender of the certificates [fig 1] for any such
shares represented by certificates.
(i) Shares acquired by the corporation upon the payment of
the agreed value therefor or of the amount due under the final order, as
provided in this section, shall become treasury shares or be cancelled as
provided in section 515 (Reacquired shares), except that, in the case of a
merger or consolidation, they may be held and disposed of as the plan of merger
or consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder
under this section at a time when the corporation is insolvent or when such
payment would make it insolvent. In such event, the dissenting shareholder
shall, at his option:
(1) Withdraw his notice of election, which shall
in such event be deemed withdrawn with the written consent of the corporation;
or
(2) Retain his status as a claimant against the
corporation and, if it is liquidated, be subordinated to the rights of creditors
of the corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares, which
right the corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such
option under subparagraph (1) or (2) by written notice filed with the
corporation within thirty days after the corporation has given him written
notice that payment for his shares cannot be made because of the restrictions of
this paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given to
him within twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive
payment for his shares in the manner provided herein shall exclude the
enforcement by such shareholder of any other right to which he might otherwise
be entitled by virtue of share ownership, except as provided in paragraph (e),
and except that this section shall not exclude the right of such shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section,
any notice to be given by a corporation to a shareholder under this section
shall be given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations
except as provided in subparagraph (e)(2) of section 907 (Merger or
consolidation of domestic and foreign corporations).
<PAGE>
BUSINESS CORPORATION LAW
ARTICLE 9. MERGER OR CONSOLIDATION; GUARANTEE; DISPOSITION OF ASSETS;
SHARE EXCHANGES
NY CLS Bus Corp @ 910 (1997)
@ 910. Right of shareholder to receive payment for shares upon merger
or consolidation, or sale, lease, exchange or other disposition of assets, or
share exchange
(a) A shareholder of a domestic corporation shall, subject to and by
complying with section 623 (Procedure to enforce shareholder's right to receive
payment for shares), have the right to receive payment of the fair value of his
shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the taking
of an action specified in subparagraphs (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is a
party; except that the right to receive payment of the fair value of his shares
shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary corporations), or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations); and
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in subparagraph (i),
unless such merger effects one or more of the changes specified in subparagraph
(b) (6) of section 806 (Provisions as to certain proceedings) in the rights of
the shares held by such shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the shareholders'
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the shareholders in
accordance with their respective interests within one year after the date of
such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the right to
receive payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange.
(2) Any shareholder of the subsidiary corporation in a merger authorized by
section 905 or paragraph (c) of section 907, or in a share exchange authorized
by paragraph (g) of section 913, who files with the corporation a written notice
of election to dissent as provided in paragraph (c) of section 623.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Certain Provisions of the Certificate of Incorporation and
By-Laws of EFCC with Respect to Indemnification
(a) Section 722 of the NYBCL permits, in general, a New York
corporation to indemnify any person made, or threatened to be made, a party to
an action or proceeding by reason of the fact that he or she was a director or
officer of the corporation, or served another entity in any capacity at the
request of the corporation, against any judgment, fines, amount paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such person acted in good faith, for a purpose he or she reasonably
believed to be in, or, in the case of service for another entity, not opposed
to, the best interests of the corporation and, in criminal actions or
proceedings, in addition had no reasonable cause to believe that his or her
conduct was unlawful. Section 723 of the NYBCL permits the corporation to pay in
advance of a final disposition of such action or proceeding the expenses
incurred in defending such action or proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount as, and to the
extent, required by statute. Section 721 of the NYBCL provides that
indemnification and advancement of expense provisions contained in the NYBCL
shall not be deemed exclusive of any rights to which a director or officer
seeking indemnification or advancement of expenses may be entitled, whether
contained in the certificate of incorporation or by-laws of the corporation or,
when authorized by such certificate of incorporation or by-laws, (i) a
resolution of shareholders, (ii) a resolution of directors or (iii) an
agreement, provided no indemnification may be made on behalf of any director or
officer if a judgment or other final adjudication adverse to the director or
officer establishes that his or her acts were committed in bad faith or were the
result of active or deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
(b) EFCC's Charter contains a provision regarding indemnification of
officers or directors.
(c) Article XII of EFCC's By-laws (hereinafter, "Article XII")
provides, in general, that EFCC shall indemnify any officer of director
(including officers and directors serving another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any capacity
at EFCC's request) made, or threatened to be made, a party to an action or
proceeding (whether civil, criminal, administrative or investigative) by reason
of the fact that he or she was serving in any of those capacities, against
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees) actually and necessarily incurred in connection with the
defense of or as a result of such action or proceeding or in connection with any
appeal thereof, to the fullest extent permitted by Sections 722-725 of the
NYBCL. Indemnification is not available under Article XII if a judgment or other
final adjudication adverse to such director or officer establishes that (i) his
or her acts were committed in bad faith or were the result of active and
deliberate dishonesty and, in either case, were material to the cause of action
so adjudicated, or (ii) he or she personally gained in fact a financial profit
or other advantage to which he or she was not legally entitled.
(d) The NYBCL mandates indemnification in derivative actions if the
officer or director has been successful, on the merits or otherwise, in the
defense of the action. Section 722 of the NYBCL, as well as the EFCC By-laws,
does not permit indemnification in derivative actions for (i) proceedings which
are settled or otherwise disposed of or (ii) claims to which a person has been
adjudged to be liable, unless court approved.
(e) Pursuant to Section 723 of the NYBCL, Article XII provides that the
expenses incurred in defending any action to which a director or officer may be
entitled to indemnification shall be advanced by EFCC prior to the final
disposition of the action as long as the indemnitee undertakes to repay such
advances if required by law. EFCC has been advised by counsel that the NYBCL
currently requires that an officer or director undertake to repay such advances
to the extent they exceed the amount to which the officer or director ultimately
is entitled.
(f) Article XII prohibits the repeal of Article XII retroactively.
Article XII also provides that it applies, to the fullest extent permitted by
law, to acts or omissions occurring prior to its adoption. By-law Article XII
further stipulates that the rights granted therein are contractual in nature,
which is meant to prevent any retroactive denial or reduction of indemnification
if Article XII is later amended.
(g) Under Article XII, the Board of Directors of EFCC is permitted, to
the fullest extent permitted by law, to establish an appropriate scope of and
procedure for the indemnification of, and advancement of expenses to, employees
and other persons to whom EFCC or TPC is permitted to provide indemnification or
advancement of expenses.
<PAGE>
Item 21 Exhibits
Exhibit #
2.1 Agreement and Plan of Merger, dated as of January 3, 1997 among Star,
Merger Sub and the Company, dated as of January 3, 1997. (6)
2.2 Plan and Agreement of Merger between TPC and the Company dated March 18,
1997. (8)
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 By-Laws. (2)
3.3 Amendment No.1 to By-Laws dated October 1, 1996. (8)
5 Opinion Re: Legality.
8 Opinion Re: Tax Matters.
9 Voting Trust Agreement dated June 21, 1996. (5)
10.1 Amended and Restated Option Agreement by and among the Company, Arbor Home
Healthcare Holding, LLC ("Arbor"), COSS Holding Corp. ("COSS"), TPC Home
Care Services, Inc.("TPC"), et al., dated October 26, 1995. (3)
10.2 Registration Rights and Conditional Put Option between the Company and COSS
dated October 26, 1995. (3)
10.3 Financial Services Agreement between the Company and Arbor Management, LLC,
dated October 26, 1995. (2)
10.4 Lease dated March 1, 1996 between the Company and Hawke Associates for
TPC's Elizabeth, New Jersey office. (2)
10.5 Approval issued by the New York State Public Health Council of Application
No. 9586 submitted by TPC dated November 27, 1995. (2)
10.6 Notice of Accreditation issued by the Joint Commission on Accreditation of
Healthcare Organizations accrediting TPC d/b/a Extended Family Care, dated
February 9, 1996. (2)
10.7 Lease dated February 17, 1994 between 10-20 Banta Associates and the
Company for TPC's Hackensack, New Jersey office. (2)
10.8 Third Amendment of Lease dated July 1995, between TPC and Hempstead
Associates Limited Partnership for TPC's Hempstead, New York office. (2)
10.9 Lease dated May 12, 1995 between TPC and Castle Ventures Limited for the
Company's headquarters office. (2)
10.10 Agreement dated April 20, 1995 between TPC and the County of Nassau,
Department of Social Services. (2)
10.11 Lease dated February 1, 1996 between TPC and Phyllis C. Hyacinthe
for TPC's East Orange, New Jersey office. (2)
10.12 Lease dated February 8, 1996 between TPC and Clifton L&M Associates,
Ltd. for TPC's Clifton, New Jersey office. (2)
10.13 Agreement dated June 20, 1996 extending First Option Termination date
from June 21, 1996 to August 21, 1996. (4)
10.15 Stock Purchase Agreement dated June 30, 1996. (5)
10.16 Receivables Security Agreement between the Company and Arbor, dated
as of September 6, 1996, including letter agreement with TPC. (1)
10.17 Promissory Note dated September 6, 1996 in the amount of $250,000 made
by the Company to Arbor. (1)
10.18 Stock Purchase Agreement between the Company and Arbor dated October
31, 1996. (8)
10.19 Asset Sale Agreement between TPC and Public Services, Inc. dated
December 6, 1997. (8)
15 Letter Re: Unaudited Interim Financial Information.
16 Letter of Rose, Michlin, Karpf & Company. (7)
22 Subsidiaries of the Company.
23(a) Consent of Carpenter & Onorato, P.C.
23(b) Consent of Holtz Rubenstein & Co., LLP
23(c) Deloitte & Touche LLP
23(d) Ernst & Young LLP
23(e) Telesis Mergers & Acquisitions, Inc.
99(a) Form of TPC Proxy Card.
99(b) Form of EFCC Proxy Card.
=============================================================
(1) Filed as an Exhibit to the Company's Form 10-QSB for the period ended
September 30, 1996 and incorporated herein by reference thereto.
(2) Filed as an Exhibit to the Company's Form 10-KSB for the period ended
December 31, 1995 and incorporated herein by reference thereto.
(3) Filed as an Exhibit to the Company's Form 8-K for event of October 31, 1995
and incorporated herein by reference thereto.
(4) Filed as an Exhibit to the Company's Form 8-K/A #2 for event of June 20,
1996 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to the Company's Form 10-QSB for the period ended June
30, 1996 and incorporated herein by reference thereto.
(6) Included as Exhibit 1 to the Amended Schedule 13D filed by Stephen
Sternbach on January 17, 1997 and incorporated herein by reference thereto.
(7) Filed as an Exhibit to Company's Form 8-K for the period February 19, 1996
and incorporated herein by reference thereto.
(8) Filed as an Exhibit to EFCC's Form 10-KSB filed on April 15, 1997 and
incorporated herein by reference thereto.
<PAGE>
Item 22. Undertakings.
(a)(1) The undersigned registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registration statement.
(iii) To include any material information with respect to
the plan of distribution.
(B) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(C) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid for by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter had been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning the transaction,
and the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Uniondale,
State of New York on the 24th day of July 1997.
EXTENDED FAMILY CARE CORPORATION
By: /s/ Joseph Heller
---------------------------------
Joseph Heller
Vice President and Acting Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated, each of whom also constitutes and
appoints Joseph Heller, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution for him in any and all capacities,
to sign any and all amendments and post-effective amendments to this
Registration Statement, and to file the same, with exhibits thereto and any
other documents in connection therewith with the Securities and Exchange
Commission, granting unto each attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
in connection with such matters, and hereby ratifying and confirming all that
each attorney-in-fact and agent or his substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Joseph Heller
- ----------------------- Vice President, Acting Chief July 24, 1997
Joseph Heller Executive Officer, Principal
Financial Officer, Controller,
Director
/s/ Robert Kohlmeyer
- ---------------------- Director, Secretary July 24, 1997
Robert Kohlmeyer
/s/ Paul Elenio
- ---------------------- Director July 24, 1997
Paul Elenio
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
5. Opinion re: legality.
8. Opinion re: tax matters.
22. Subsidiaries of the Company.
23. Consents of Experts and Counsel.
(a) Consent of Carpenter & Onorato, P.C.
(b) Consent of Holtz Rubenstein & Co., LLP
(c) Consent of Deloitte & Touche LLP
(d) Consent of Ernst & Young LLP
(e) Consent of Telesis Mergers & Acquisitions, Inc.
99(a). Form of TPC Proxy Card.
99(b). Form of EFCC Proxy Card.
<PAGE>
EXHIBIT 5
---------
July 24, 1997
Extended Family Care Corporation
One Old Country Road
Suite 335
Carle Place, New York 11514
Gentlemen:
This opinion is rendered to you in connection with the filing by
Extended Family Care Corporation ("EFCC"), a New York corporation, of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission relating to the registration under the
Securities Act of 1933, as amended, of an aggregate of up to 5,602,000 shares
(the "Shares") of EFCC's common stock, par value $.01 per share, in connection
with the proposed merger (the "Merger") of TPC Home Care Services, Inc. ("TPC"),
a New York corporation, into EFCC pursuant to the Agreement and Plan of Merger
among EFCC and TPC, dated as of March 18, 1997 (the "Merger Agreement"), and the
transactions related thereto.
In rendering this opinion, we have examined, among other things, the
Merger Agreement, the Certificate of Incorporation and By-laws of EFCC and such
other corporate documents and records as we have deemed necessary or
appropriate. We have also made such examination of law as we have deemed
necessary or appropriate. As to any facts material to such opinion, we have, to
the extent that relevant facts were not established by us, relied upon
certificates and statements of public officials and officers and other
representatives of EFCC and TPC. In all such examinations, we have assumed the
genuineness of all signatures, the authenticity of all
<PAGE>
Extended Family Care Corporation
July 24, 1997
Page 2
documents submitted to us as originals and the accuracy and conformity with
original documents of documents submitted to us as copies.
Based upon and subject to the foregoing, it is our opinion that the
Shares, when issued in accordance with the terms of the Merger Agreement, will
be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Proxy\Prospectus constituting a part of the Registration
Statement.
Very truly yours,
MELTZER, LIPPE, GOLDSTEIN, WOLF
& SCHLISSEL, P.C.
By: /s/ Allan Graubard
----------------------
<PAGE>
Exhibit 8
---------
[MELTZER, LIPPE, GOLDSTEIN, WOLF & SCHLISSEL, P.C. LETTERHEAD]
July 24, 1997
Extended Family Care Corporation, Inc.
One Old Country Road
Suite 335
Carle Place, NY 11514
T.P.C. Home Care Services, Inc.
One Old Country Road
Suite 335
Carle Place, NY 11514
Re: Plan and Agreement of Merger of T.P.C. Home Care
Services, Inc. with and into Extended Family Care
Corporation, Dated as of March 18, 1997
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to the shareholders of Extended Family Care
Corporation, a New York corporation ("EFCC"), in connection with the proposed
merger (the "TPC Merger") of T.P.C. Home Care Services, Inc. ("TPC") with and
into EFCC, pursuant to the Plan and Agreement of Merger of TPC with and into
EFCC dated as of March 18, 1997 (the "TPC Merger Agreement").
In so acting, we have participated in the preparation of the TPC Merger
Agreement and the preparation and filing with the Securities and Exchange
Commission of a Joint Proxy Statement of TPC and EFCC relating to the proposed
TPC Merger and to the shares of common stock, par value $.01 per share, of EFCC
to be issued to TPC shareholders in the TPC Merger pursuant to the TPC Merger
Agreement (the "Joint Proxy Statement").
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 2
As required by Article V of the TPC Merger Agreement, you have
requested that we render the opinion set forth below. In rendering such opinion,
we have made inquiry as to the underlying facts which we consider to be relevant
to the conclusions set forth in this opinion. We have also examined and relied
upon the accuracy as of the date hereof and as of the date of the closing of the
TPC Merger of the representations and warranties as to factual matters set forth
in the documents referred to above and the letter of representation, dated as of
the date hereof, that EFCC has provided to us, a copy of which is attached
hereto (the "Letter of Representation"). Our opinion is expressly predicated on
the continuing validity of the Letter of Representation. We have no reason to
believe that these representations and facts are not true, but have not
attempted to verify them independently and expressly disclaim an opinion as to
their validity and accuracy.
For purposes of this opinion, we have also reviewed such documents and
materials as in our judgment are necessary or appropriate to enable us to render
the opinions set forth below. We have not, however, undertaken any independent
investigation of any factual matter set forth in any of the foregoing. In our
examination, we have assumed the genuineness of all signatures, the capacity of
each party executing a document to execute such document, the authenticity of
all documents submitted to us as originals and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Capitalized terms used but not specifically defined herein shall have the
meanings as defined in the TPC Merger Agreement.
This discussion is based on the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), final, temporary and proposed Treasury
regulations promulgated thereunder (the "Regulations") and administrative and
judicial interpretations thereof, all as in effect as of the date hereof and all
of which are subject to change (possibly on a retroactive basis). Moreover, it
is not possible to know whether any such changes will be made or court decisions
or interpretations will be issued, or the effect, if any, that such changes or
court decisions will have on our opinion. Any such change may adversely affect
our conclusions. No ruling from the Internal Revenue Service (the "IRS") has
been or will be sought on any of the issues discussed below, and there can be no
assurance that the IRS will not take a contrary view as to the federal income
tax consequences discussed below.
This opinion does not address all of the federal income tax
consequences that may be applicable to any particular holder subject to special
treatment under United States federal income tax law or to any particular holder
in light of such holder's
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 3
particular facts and circumstances. Certain holders may be subject to special
and/or different rules not discussed below. In addition, this opinion does not
address any aspect of state, local or foreign taxation.
This opinion is limited solely to the federal law of the United States
as in effect on the date hereof and the relevant facts that exist as of the date
hereof. No assurance can be given that the law or facts will not change, and we
have not undertaken to advise you or any other person with respect to any event
subsequent to the date hereof.
We are delivering this opinion to you, the Board of Directors and
shareholders, without our prior written consent, no other persons
are entitled to rely on this opinion. We hereby
consent to the filing of this opinion as an exhibit to the Joint Proxy Statement
and to the use of our name under the captions "The TPC Merger - Certain Federal
Income Tax Consequences" and "Legal Matters" in the Joint Proxy Statement. In
giving such consent, we do not thereby concede that we are within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the Rules and Regulations of the Securities and Exchange Commission
thereunder.
Facts
-----
EFCC is a New York public holding corporation with 32,000,225 shares of
common stock issued and outstanding. Coss Holding Corp. ("Coss") owns 12,749,658
(39.84%) of such shares, Arbor Home Healthcare Holdings, LLC ("Arbor") owns
13,000,000 (40.63%) of such shares and public shareholders own 6,250,568
(19.53%). Arbor acquired its shares for $1,300,000 on August 21, 1996 and
October 31, 1996 through the exercise of options granted on October 31, 1995.
On January 21, 1997, when EFCC had minimal current earnings and
profits, EFCC distributed to all of its shareholders with respect to their
shares $750,000 of cash in the aggregate (the "EFCC Dividend"). Such
distribution reduced the EFCC shareholders' basis in their EFCC shares, but not
below zero. EFCC's only remaining assets are approximately $160,000 in cash,
$150,000 in other current assets, 83% of the stock of TPC and $610,000 in
intercompany debt from TPC. The other 17% of TPC is owned by many different
shareholders.
On December 6, 1996, TPC sold the assets, subject to liabilities, of
its Jersey City, New Jersey division in a fully taxable transaction to Public
Services, Inc. ("Buyer") for $175,000, evidenced by a promissory note, plus an
amount equal to
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 4
12% of the gross revenues of Buyer in excess of $90,000 per month for a 24 month
period. Buyer is owned 100% by Gary Melius, who is the husband of a shareholder
of Coss, the voting trustee of Coss' shares in EFCC and owner of 25,000 shares
of EFCC, but does not otherwise own any direct or indirect interest in TPC and
is unrelated to all of the other shareholders of TPC and EFCC.
In order to effect desired operating efficiencies in the corporate
structure of EFCC by simplifying the current two-tiered structure, which no
longer serves any business purpose and entails a substantial cost to maintain
due to dual financial reporting, disclosure and administrative burdens, and to
make it more attractive to potential purchasers, subsequent to the sale of TPC's
Jersey City division and subsequent to the EFCC Dividend, TPC will merge into
EFCC pursuant to the Business Corporation Law of the State of New York, with
EFCC as the surviving entity (the "TPC Merger"). The shareholders of TPC (other
than EFCC) will receive solely 6,554,264 EFCC shares in the TPC Merger, which
represents 17% of all outstanding EFCC shares after such issuance.
Representations
---------------
In connection with the proposed transaction, the following
representations are being made by EFCC to us, as set forth in the Letter of
Representation:
(a) The TPC Merger will be effected in accordance with the Plan and
Agreement of Merger of TPC with and into EFCC dated as of March 18, 1997 and
pursuant to New York State law.
(b) The fair market value of the EFCC common stock received by each TPC
shareholder will be approximately equal to the fair market value of the TPC
stock surrendered in the exchange.
(c) The minority shareholders of TPC acquired their TPC stock before
the formulation of any plan in connection with the TPC Merger and not in
contemplation of EFCC's subsequent acquisition of TPC.
(d) As of the Effective Time, there will be no binding commitment or
preconceived plan or arrangement on the part of the shareholders of TPC to sell,
exchange or otherwise dispose of any of their EFCC stock received in the TPC
Merger (including EFCC shares held prior to the TPC Merger), other than pursuant
to the Star Merger.
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 5
(e) EFCC has no plan or intention to reacquire any of its
stock issued in the TPC Merger.
(f) EFCC has no plan or intention to sell or otherwise dispose of any
of the assets or stock of TPC acquired in the TPC Merger, except pursuant to the
Star Merger.
(g) The liabilities of TPC assumed by EFCC and the liabilities to which
the transferred assets of TPC are subject were incurred by TPC in the ordinary
course of its business and are associated with the business of TPC.
(h) EFCC and the shareholders of TPC will pay their respective
expenses, if any, incurred in connection with the TPC Merger and will not pay
any of the expenses of the other in connection with the TPC Merger. EFCC will
pay or assume only those expenses of TPC that are solely and directly related to
the TPC Merger in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(i) There is no intercorporate indebtedness existing between EFCC and
TPC that was issued, acquired or will be settled at a discount.
(j) EFCC and TPC are not investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(k) As of the Effective Time, TPC will not be under the jurisdiction of
a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
(l) The fair market value of the assets of TPC transferred to EFCC will
equal or exceed the sum of the liabilities assumed by EFCC plus the amount of
liabilities, if any, to which the transferred assets are subject.
(m) No cash will be paid to any of the shareholders of TPC pursuant to
the TPC Merger other than cash payments to dissenting shareholders.
(n) None of the compensation received by any shareholder- employees of
TPC will be separate consideration for, or allocable to, any of their shares of
TPC stock; none of the shares of EFCC stock received by any
shareholder-employees of TPC will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employee will be for
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 6
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
(o) TPC and EFCC intend to complete the TPC Merger whether or not the
Star Merger is finalized. The Star Merger is not a requirement for the
occurrence of the TPC Merger. TPC and EFCC do not have a binding commitment with
Star to exchange the stock of EFCC for the stock of Star prior to the TPC
Merger. There are valid business, non-tax reasons for the TPC Merger, such as to
effect desired operating efficiencies in the corporate structure of EFCC.
Conclusion
----------
Subject to the foregoing and to the qualifications and limitations set
forth herein, we are of the following opinion that, more likely than not:
1. Assuming that the TPC Merger is consummated strictly in
accordance with the TPC Merger Agreement and assuming that TPC is merged into
EFCC pursuant to New York State law, the TPC Merger will be treated for United
States federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code.
2. EFCC and TPC will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
3. No gain or loss will be recognized by TPC shareholders as a
result of the exchange of TPC common stock solely for EFCC common stock pursuant
to the TPC Merger.
4. Each shareholder of TPC who elects to dissent from the TPC
Merger and receive cash in exchange for his shares of TPC common stock will be
treated as receiving such payment in complete redemption of his shares of TPC,
provided such shareholder does not actually or constructively own any TPC common
stock after the exchange under the provisions and limitations of Code Section
302.
5. The tax basis of the EFCC common stock received by TPC
common stockholders will be the same as the basis of the TPC common stock
surrendered in exchange therefor.
6. The holding period of the EFCC common stock received by the
TPC common stockholders will include the period during which the TPC common
stock surrendered in exchange therefor was held,
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Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 7
provided that the TPC common stock is held as a capital asset in the hands of
the TPC stockholders on the effective date of the TPC Merger.
7. No gain or loss will be recognized by TPC on the
transfer of all of its assets to EFCC pursuant to the plan of
reorganization.
8. No gain or loss will be recognized by EFCC in the TPC
Merger.
9. The tax basis of TPC's assets in the hands of EFCC will be
the same as the basis of those assets in the hands of TPC immediately prior to
the TPC Merger. The tax basis of TPC's assets in the hands of EFCC will not be
increased by any cash paid to dissenters.
10. The holding period of the assets of TPC in the hands of
EFCC will include the period during which such assets were held by TPC.
We express no opinion other than as stated above, and any such opinion
is not intended to imply or be an opinion on any other matter. This opinion
represents only counsel's best legal judgment as to the likely outcome of an
issue if properly presented to a court (and assuming the court determines all
facts to be consistent with the facts stated in counsel's opinion). However, the
opinion has no binding effect or official status of any kind, and the
conclusions stated herein are not free from doubt. The IRS or a court may
disagree with any or all of our conclusions and, accordingly, there can be no
assurance that the IRS will not successfully contest this opinion in the courts
or otherwise.
DISCUSSION
----------
1. GENERAL
Section 354(a)(1) of the Code addresses the effects of corporate
reorganizations on shareholders, providing in general that no gain or loss shall
be recognized if stock or securities in a corporation a party to a
reorganization are, in pursuance of the plan of reorganization, exchanged solely
for stock or securities in such corporation or in another corporation a party to
the reorganization.
For purposes of Code Section 354, the term "reorganization" is defined
in Code Section 368(a). Code Section 368(a)(1)(A) states that the term
reorganization includes a statutory merger or
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 8
consolidation. Regulation Section 1.368-2(b)(1) states that in order for a
transaction to qualify as a reorganization under Code Section 368(a)(1)(A), the
transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States, a State, territory or the District of
Columbia.
The Regulations under Code Section 368 require as a part of a
reorganization a continuity of the business enterprise under the modified
corporate form, a bona fide business purpose for the reorganization and a
"continuity of interest" therein on the part of those persons who, directly or
indirectly, were owners of the enterprise prior to the reorganization.
Regulation Section 1.368- 1(d)(2) states that the continuity of business
enterprise requirement is met if the acquiring corporation either continues the
acquired corporation's historic business or uses a significant portion of the
acquired corporation's business assets in the operation of a trade or business.
Regulation section 1.368-2(g) indicates that in addition to coming
within the scope of the specific language of Code Section 368(a), a
reorganization must also be "undertaken for reasons germane to the continuance
of the business of a corporation a party to the reorganization." If the
transaction or series of transactions has no business or corporate purpose, then
the plan is not a reorganization pursuant to Code Section 368(a). Regulation
section 1.368-1(c).
The continuity of interest requirement mandates that the historic
shareholders of the acquired corporation must acquire a definite and substantial
interest in the continuing corporation, and stock must represent a material part
of the consideration transferred.The Supreme Court, in Nelson Co. v. Helvering,-
296 U.S. 374 (1935), held that equity equal to 38% of the entire consideration
constituted a definite and substantial interest in the purchasing corporation.
The percentage relates to the proportion of the equity consideration received by
the target shareholders in the aggregate to the total consideration paid by the
acquiror for target's assets or stock. An historic shareholder is a person who
owned the target corporation's stock before the acquisition of target commenced
and who purchased such target corporation stock before the formulation of the
transaction not in contemplation of the acquiring corporation's subsequent
acquisition of the target. It is not necessary that all historic shareholders of
the acquired corporation have a proprietary interest in the surviving
corporation after the acquisition. The IRS has announced that it considers a 50
percent continuity-of-equity interest by
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T.P.C. Home Care Services, Inc.
July 24, 1997
Page 9
value to be sufficient.1 Nevertheless, pursuant to the Nelson case, a 40 percent
continuity of interest by value on the part of the former historic shareholders
of the target should be sufficient.
In addition to meeting the continuity of interest requirement
immediately after the reorganization, the former shareholders of the acquired
corporation must retain their interest in the acquiring corporation for some
unspecified time after the reorganization. The courts have ruled that the
tax-free nature of the reorganization may be retroactively invalidated if the
continuity of interest is not maintained either because, at the time of the
reorganization, the shareholders intended to dispose of the proprietary interest
soon after the reorganization2 or because a shareholder disposes of stock
immediately following the reorganization in accordance with a pre-existing
commitment to sell.3
In Rev. Rul. 66-23, 1966-1 C.B. 67, the IRS held that the target
shareholders must not have a preconceived plan or arrangement for disposing of
their acquiring corporation stock; if such plan or arrangement exists, any
post-reorganization dispositions of the stock of the acquiring corporation may
be stepped together with the initial receipt of such stock in the
reorganization. The consequence of applying step transaction principles4 to the
subsequent stock disposition is to treat the selling shareholder as having
received the sales proceeds on the date of the reorganization for purposes of
testing continuity of interest. Nevertheless, target shareholders are free to
dispose of their acquiring corporation stock at any time following the
reorganization, as long as the disposition results from circumstances existing
after the reorganization and not from a
- --------
1 Rev. Proc. 77-37, 1977-2 C.B. 568. This is merely a
guideline established by the IRS for purposes of
obtaining a private letter ruling, and is not a
requirement of substantive law.
2 McDonald's Restaurants of Illinois, Inc. v.
Commissioner, 688 F.2d 520 (7th Cir. 1982).
3 American Wire Fabrics Corp. v. Commissioner, 16 T.C. 607
(1951).
4 See infra notes 11-13 and accompanying text.
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T.P.C. Home Care Services, Inc.
July 24, 1997
Page 10
preexisting plan.5 During the period of ownership of the acquiring corporation
stock, the target shareholders must have unrestricted rights of ownership for an
unspecified period of time sufficient to warrant the conclusion that such
ownership is definite and substantial.6
For purposes of Code Section 354, the term "party to a reorganization"
is defined in Code Section 368(b), which provides that the term "party to a
reorganization" includes both corporations in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another. In the case of a reorganization qualifying under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(D), the term "party to a
reorganization" includes the corporation which is in control of the acquiring
corporation.
Code Section 356(a)(1) provides that if Code Section 354 would apply
to an exchange but for the fact that the property received in the exchange
consists not only of property permitted to be received under Code Section 354
without the recognition of gain but also of other property or money then the
gain, if any, to the recipient shall be recognized but not in excess of the sum
of money and the fair market value of such other property. Code Section 356(c)
states that no loss from the exchange may be recognized by the shareholder.
- --------
5 Rev. Rul. 66-23. See also Penrod v. Commissioner, 88 T.C. 1415 (1987);
Estate of Christian v. Commissioner, 57 T.C.M. (CCH) 1231 (1989). Under
Proposed Regulation Section 1.368-1(e), the IRS states that stock
dispositions of the acquiring corporation by a former target
shareholder generally are not considered for determining continuity of
interest. However, under the Proposed Regulations, if the acquiring
corporation or a related party purchases the acquiring corporation
stock shortly after the reorganization, the facts and circumstances may
indicate that the transaction should be recast to treat the acquiring
corporation as furnishing cash in the reorganization and not satisfying
the continuity of interest requirement. Proposed regulations do not
become law until adopted as final regulations, and generally are
applied prospectively once adopted. Therefore, Proposed Regulation
Section 1.368-1(e) is inapplicable to this transaction. See also infra
note 23 and accompanying text.
6 Id.
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Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 11
The IRS, in Rev. Rul. 74-515, 1974-2 C.B. 118 and Rev. Rul. 74-516,
1974-2 C.B. 121, treated the distribution of cash as part of a reorganization
and in a transaction subject to Code Section 356 (including cash payments made
to dissenting shareholders of the acquired corporation) by applying the
redemption principles under Code Section 302. Code Section 302 provides, in
part, that a redemption will be treated as a distribution in part or full
payment in exchange for stock if it can meet the tests of that section. The
Supreme Court in Clark v. Commissioner., 489 U.S. 726 (1989), applied the tests
of Code Section 302 by viewing the exchange involving cash or other property as
a "hypothetical post-reorganization redemption." The Court viewed the exchange
as first an exchange of solely stock of the acquiring corporation for the
acquired company stock, followed by an exchange by the shareholder of the newly
acquired stock for cash from the acquiring corporation. The Code Section 302
tests are applied to the second hypothetical exchange.
One of the tests of Code Section 302 provides that where there is a
complete redemption of all of a shareholder's stock in a corporation (after
consideration of the constructive ownership rules of Code Section 302(c)), the
redemption payment is treated as made entirely in exchange for the shareholder's
stock in the corporation. Code Section 302(b)(3). The constructive ownership
rules of Code Section 302(c) are generally contained in Code Section 318 and
provide that an individual or entity is treated as owning the stock owned by
certain other related individuals and entities. Where there is a complete
termination of the shareholder's interest, the constructive ownership rules may
be waived if certain conditions are met.
In Rev. Rul. 66-365, 1966-2 C.B. 116, the IRS announced that in a
transaction qualifying as a reorganization under Section 368(a)(1)(A) of the
Code where a cash payment is made by the acquiring corporation in lieu of
fractional shares and is not separately bargained for, such cash payment will be
treated under Section 302 of the Code as in redemption of fractional share
interests. Therefore, each shareholder's redemption will be treated as a
distribution in full payment in exchange for his or her fractional share
interest under Section 302(a) of the Code and accorded capital gain or loss
treatment provided the redemption is not essentially equivalent to a dividend
and that the fractional shares redeemed constitute a capital asset in the hands
of the holder as discussed below. In Rev. Proc. 77-41, 1977-2 C.B. 574, the IRS
stated that "a ruling will usually be issued under Section 302(a) of the Code
that cash to be distributed to shareholders in lieu of fractional share
interests arising in corporate reorganizations will be treated as having been
received in part or
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Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 12
in full payment in exchange for the stock redeemed if the cash distribution is
undertaken solely for the purpose of saving the corporation the expense and
inconvenience of issuing and transferring fractional shares, and is not
separately bargained-for consideration."
Under Code Section 358(a)(1), in the case of an exchange to which Code
Section 354 or Code Section 356 applies, the basis of property which is
permitted to be received under such sections without the recognition of gain or
loss shall be the same as that of the property exchanged, decreased by the
amount of any money received by the recipient and the amount of loss recognized
by the recipient as a result of the exchange and increased by the amount which
was treated as a dividend and the amount of other gain recognized by the
recipient as a result of the transaction.
As described above, where cash is received in lieu of fractional
shares, the substance of the transaction is that of a hypothetical receipt of
the fractional shares and then a redemption of such shares. Therefore, the basis
that is to be allocated to the stock of the acquiring corporation received must
be allocated to the shares retained and the fractional shares hypothetically
received. The gain or loss attributable to the receipt of cash in lieu of
fractional shares is measured by comparing the cash received with the basis
allocated to the fractional shares that are hypothetically received, and such
gain or loss is recognized as discussed earlier pursuant to Rev. Rul. 66-365.
Code Section 361(a) states that, as a general rule, no gain or loss is
to be recognized by a corporation if such corporation is a party to a
reorganization and exchanges property, in pursuance of the plan or
reorganization, solely for stock or securities in another corporation a party to
the reorganization. Code Section 361(b) states that if Code Section 361(a) would
apply to an exchange but for the fact that the property received in the exchange
consists not only of stock or securities afforded nonrecognition treatment under
Code Section 361(a), but also of other property or money, then provided the
corporation receiving such other property or money distributes it in pursuance
of the plan of reorganization, no gain to the corporation shall be recognized
from the exchange. Code Section 361(c) states that as a general rule no gain or
loss shall be recognized by a corporation a party to a reorganization on the
distribution to its shareholders of any stock in another corporation which is a
party to the reorganization if such stock was received by the distributing
corporation in the exchange.
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 13
Code Section 1032(a) states that no gain or loss shall be recognized to
a corporation on the receipt of money or other property in exchange for such
corporation's stock, including treasury stock.
Code Section 362(a) states that the basis of property received by the
acquiring corporation in a reorganization is the same as it would be in the
hands of the transferor of the assets, increased by any gain recognized by the
transferor. The transferors for purposes of the preceding sentence in the
instant case is TPC and EFCC.
Code Section 1221 defines a capital asset as property held by the
taxpayer which is not inventory or other property held by the taxpayer primarily
for sale to customers in the ordinary course of a trade or business, property
used in the taxpayer's trade or business subject to the allowance for
depreciation under Code Section 167, a copyright, literary, musical or artistic
composition, a letter or memorandum, or similar property created by the personal
efforts of the taxpayer, accounts or notes receivable acquired in the ordinary
course of a trade or business for services rendered or from the sale of
inventory or other property held by the taxpayer primarily for sale to customers
in the ordinary course of business, or a publication of the United States
Government which is received from the United States Government or any agency
thereof other than by purchase at the price at which it is offered for sale to
the public.
Code Section 1223(1) states that in determining the period for which a
taxpayer has held property received in an exchange, there shall be included the
period for which he or she held the property exchanged if the property has, for
the purpose of determining gain or loss from a sale or exchange, the same basis
as the property exchanged and the property exchanged was a capital asset as
defined in Code Section 1221 as of the date of the exchange. Code Section
1223(2) states that for determining the period for which the taxpayer has held
property however acquired there shall be included the period for which such
property was held by another person if the property has the same basis in whole
or in part in his hands as it would have had in the hands of such other person.
2. THE TPC MERGER
Code Section 332 provides that under certain conditions a parent
corporation will not recognize gain or loss on the receipt of property
distributed in complete liquidation of an 80 percent or greater controlled
subsidiary. Code Section 337 provides that such subsidiary does not recognize
gain or loss on such distributions.
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T.P.C. Home Care Services, Inc.
July 24, 1997
Page 14
Minority shareholders participating in a Code Section 332 liquidation, who
receive stock of the parent in a statutory merger of the subsidiary into the
parent, may avoid recognition of gain or loss if the transaction also qualifies
as a reorganization under Code Section 368(a).
If the parent's stock interest in the subsidiary is "old and cold,"
there should be continuity of interest to support tax-free reorganization
treatment for the minority shareholders on the receipt of the stock of the
parent in a statutory merger of the subsidiary into the parent. The last
sentence of Section 332(b) of the Code provides, in effect, that the transfer of
a subsidiary's property to a parent corporation is not disqualified as a
complete liquidation merely because it involves a transfer to the parent of
property not attributable to shares owned by the parent, in an exchange
described in Code Section 361, and involves the complete cancellation or
redemption of minority shares not owned by the parent as a result of exchanges
described in Section 354 of the Code.
Regulation Section 1.332-2(d) provides, in effect, that a complete
liquidation otherwise meeting the requirements of Section 332 of the Code is not
disqualified from the application of Code Section 332 even though, for purposes
of the corporate reorganization provisions, the parent receives property
attributable to minority shares not owned by it, and the minority shares are
canceled as a result of a tax-free exchange described in Section 354 of the
Code. The regulatory example illustrating these rules does not, however,
describe the tax consequences to the minority shareholders. See Regulations
Section 1.332-2(e).
There appears to be no judicial decision holding that a merger of a
subsidiary into its parent qualifying under Section 332 of the Code is also a
Code Section 368(a)(1)(A) tax-free reorganization as to the minority
shareholders. In Rev. Rul. 58-93, 1958-1 C.B. 188, however, the IRS ruled that a
merger of a 79% owned subsidiary into its parent (which could not have qualified
as a Code Section 332 liquidation) qualified as a tax-free Code Section
368(a)(1)(A) reorganization both as to the corporate entities and as to the
minority shareholders who received stock of the parent.7
- --------
7 On the facts of this ruling, the merger would not have qualified under
Code Section 332 even if the parent had owned 80% of the subsidiary's
stock because, immediately prior to the merger, the subsidiary
transferred all of its operating assets to its new wholly owned
subsidiary which then became a wholly owned subsidiary of the parent.
Thus, the business of the subsidiary was not liquidated but was
reincorporated in a new subsidiary.
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 15
In Rev. Rul. 69-617, 1969-2 C.B. 57, the IRS ruled that a merger of a
more-than 80% owned subsidiary into its parent, which did not qualify as a
liquidation under Code Section 332 because the assets were dropped into another
subsidiary of the parent, qualified as a tax-free Code Section 368(a)(1)(A)
reorganization as to all parties where the minority shareholders received stock
of the parent in the merger.8
In Priv. Let. Rul. 9351028 (Sept. 28, 1993),9 the IRS ruled that the
merger of Corporation S into Corporation P would qualify under Code Section
332(a), where P owned more than 80% of the stock of S. With regard to the
minority shareholder of S, the IRS, citing its annual "no-ruling" revenue
procedure, did not rule as to whether the transaction would qualify under Code
Section 368(a)(1)(A), but did rule that several of the Code Section 368(a)(1)(A)
requirements would be met. The IRS concluded that if the merger of S into P
otherwise qualified as a Code Section 368(a)(1)(A) reorganization, the minority
shareholder would not recognize gain or loss on the exchange of his minority
interest in S stock for P stock, pursuant to Code Section 354(a)(1). Thus, the
IRS appears to agree that a merger of a subsidiary into a more than 80%
controlling parent may qualify as a reorganization with respect to the minority
shareholders, while being treated as a Code Section 332 liquidation with respect
to the parent.10
Since a sufficiently large portion of the ownership of the stock of TPC
is "old and cold," and since EFCC owns approximately 83 percent of TPC, a
statutory merger of TPC into EFCC should satisfy the continuity of interest
requirement (as well as the other requirements) for a valid Code Section
368(a)(1)(A) reorganization, and the receipt of EFCC's stock by the TPC minority
- --------
8 The ruling stated that "the fact that [the parent] owned more than 80%
of the stock of [the subsidiary] does not prevent the transfer of the
assets of [the subsidiary] to [the parent] from qualifying as a
statutory merger, where such assets are transferred to another
subsidiary."
9 Private Letter Rulings may not be relied upon or otherwise cited as
precedent. However, we believe it is appropriate to refer to them in
order to demonstrate an administrative position previously taken by the
Service.
10 See also Priv. Let. Rul. 8825048 (Mar. 23, 1988).
<PAGE>
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 16
shareholders should be tax free under Code Section 354. In addition, EFCC and
TPC will not recognize any gain or loss pursuant to Code Sections 332 and 337.
A tax-free transaction in which a target corporation's stock is
transferred to new shareholders followed by a subsequent tax-free reorganization
of the target corporation into another corporation should be respected if such
initial transaction has independent significance and a business purpose.11 Under
the step transaction doctrine, an analysis is made of the separate steps of a
transaction to determine whether each step should be accorded independent legal
significance or whether the steps should be treated as related steps in one
unified transaction and "stepped together" to produce the actual result.12 The
courts have established several tests to determine whether the doctrine is
applicable -- the "end result" test, the "interdependence test" and the "binding
commitment test."13 Although it is generally unclear which of these tests should
be given the greatest weight in any particular case, we believe the
interdependence test is the most relevant to this transaction.
In the instant case, the TPC Merger should be deemed to have
independent significance and a business purpose and, therefore, should be
respected. Under the "end result" test, since the TPC Merger is a separate
transaction grounded in economic and legal reality, its form should be
respected. We believe that the IRS would not have a reasonable justification for
disregarding or otherwise rearranging the steps in a less advantageous manner
for the taxpayers even if a less advantageous structure could be
- --------
11 See Weikel v. Commissioner, 51 T.C.M. (CCH) 432 (1986).
Even if the TPC Merger is not respected as a separate
Code Section 368(a)(1)(A) reorganization, it should be
treated as a Code Section 332 liquidation. See Priv.
Let. Rul. 8713033 (Dec. 29, 1986); Priv. Let. Rul.
8425081 (Mar. 21, 1984); Priv. Let. Rul. 8032114 (May,
1980); Priv. Let. Rul. 8024137 (Mar. 20, 1980). See also
infra notes 21-22 and accompanying text.
12 King Enterprises, Inc. v. U.S., 418 F.2d 511 (Ct. Cl.
------------------------------
1969).
13 Id; McDonald's Restaurant of Illinois, Inc. v.
Commissioner, 688 F.2d 520 (7th Cir. 1982); Redding v.
Commissioner, 630 F.2d 1169 (7th Cir. 1980) cert. denied
450 U.S. 913 (1981); Commissioner v. Gordon, 391 U.S. 83
(1968).
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Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 17
construed. Under the "binding commitment test", TPC and EFCC do not have a
binding commitment with Star to exchange the stock of EFCC for the stock of Star
prior to the approval and commitment to the TPC Merger. Under the
interdependence test, TPC and EFCC intended to complete the TPC Merger whether
or not the Star Merger was finalized. The Star Merger is not a condition to the
occurrence of the TPC Merger (although the TPC Merger is a condition to the Star
Merger). There is a real possibility that the TPC Merger will occur without the
closing of the Star Merger. The TPC Merger will not be fruitless without the
Star Merger.
There are real legal implications and potential economic consequences
to the TPC Merger; for example, the TPC minority shareholders will acquire
dissenters' rights in the TPC Merger. There are valid business reasons for the
TPC Merger, such as to effect desired operating efficiencies in the corporate
structure of EFCC by simplifying the current two-tiered structure, which no
longer serves any business purpose and entails a substantial cost to maintain
due to dual financial reporting, disclosure and administrative requirements, and
to make it more attractive to Star or any other potential purchaser if the Star
Merger does not close. Thus, the subsequent Star Merger should not disqualify
the TPC Merger as a tax-free reorganization.
Very truly yours,
/s/ Stephen M. Breitstone
Meltzer, Lippe, Goldstein, Wolf
& Schlissel, P.C.
<PAGE>
Extended Family Care Corporation
One Old Country Road
Carle Place, New York 11514
July 24, 1997
Meltzer, Lippe, Goldstein,
Wolf & Schlissel, P.C.
190 Willis Avenue
Mineola, NY 11501
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion to be provided in connection
with the TPC Merger (as defined below) and we understand that you will be
relying on such facts and representations in delivering your opinion. Unless
otherwise defined herein, capitalized terms shall have the meanings ascribed to
them in the Plan and Agreement of Merger of T.P.C. Home Care Services, Inc. with
and into Extended Family Care Corporation, dated as of March 18, 1997 (the "TPC
Merger Agreement").
(a) The merger of T.P.C. Home Care Services, Inc. ("TPC") with and into
Extended Family Care Corporation ("EFCC") (the "TPC Merger") will be effected in
accordance with the Plan and Agreement of Merger of TPC with and into EFCC dated
as of March 18, 1997 and pursuant to New York State law.
(b) The fair market value of the EFCC common stock received by each TPC
shareholder will be approximately equal to the fair market value of the TPC
stock surrendered in the exchange.
<PAGE>
Meltzer, Lippe, et. al.
July 24, 1997
Page 2
(c) The minority shareholders of TPC acquired their TPC stock before
the formulation of any plan in connection with the TPC Merger and not in
contemplation of EFCC's subsequent acquisition of TPC.
(d) As of the Effective Time, there will be no binding commitment or
preconceived plan or arrangement on the part of the shareholders of TPC to sell,
exchange or otherwise dispose of any of their EFCC stock received in the TPC
Merger (including EFCC shares held prior to the TPC Merger), other than pursuant
to the merger of EFCC with and into EFCC Acquisition Corp. (the "Star Merger").
(e) EFCC has no plan or intention to reacquire any of its
stock issued in the TPC Merger.
(f) EFCC has no plan or intention to sell or otherwise dispose of any
of the assets or stock of TPC acquired in the TPC Merger, except pursuant to the
Star Merger.
(g) The liabilities of TPC assumed by EFCC and the liabilities to which
the transferred assets of TPC are subject were incurred by TPC in the ordinary
course of its business and are associated with the business of TPC.
(h) EFCC and the shareholders of TPC will pay their respective
expenses, if any, incurred in connection with the TPC Merger and will not pay
any of the expenses of the other in connection with the TPC Merger. EFCC will
pay or assume only those expenses of TPC that are solely and directly related to
the TPC Merger in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(i) There is no intercorporate indebtedness existing between EFCC and
TPC that was issued, acquired or will be settled at a discount.
(j) EFCC and TPC are not investment companies as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended (the
"Code").
(k) As of the Effective Time, TPC will not be under the jurisdiction of
a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
<PAGE>
Meltzer, Lippe, et. al.
July 24, 1997
Page 3
(l) The fair market value of the assets of TPC transferred to EFCC will
equal or exceed the sum of the liabilities assumed by EFCC plus the amount of
liabilities, if any, to which the transferred assets are subject.
(m) No cash will be paid to any of the shareholders of TPC pursuant to
the TPC Merger other than cash payments to dissenting shareholders.
(n) None of the compensation received by any shareholder- employees of
TPC will be separate consideration for, or allocable to, any of their shares of
TPC stock; none of the shares of EFCC stock received by any
shareholder-employees of TPC will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
(o) TPC and EFCC intend to complete the TPC Merger whether or not the
Star Merger is finalized. The Star Merger is not a requirement for the
occurrence of the TPC Merger. TPC and EFCC do not have a binding commitment with
Star to exchange the stock of EFCC for the stock of Star prior to the TPC
Merger. There are valid business, non-tax reasons for the TPC Merger, such as to
effect desired operating efficiencies in the corporate structure of EFCC.
EFCC acknowledges that your tax opinion may not accurately describe the
effects of the TPC Merger if any of the foregoing facts or representations are
inaccurate.
Very truly yours,
/s/ Joseph Heller
Extended Family Care
Corporation
<PAGE>
EXHIBIT 22
----------
Subsidiaries: TPC Home Care Services, Inc.
<PAGE>
EXHIBIT 23A
----------
Consent of Carpenter & Onorato, P.C.
Independent Auditors
We consent to the reference of our firm under the caption "Experts" and the
use of our report dated February 18, 1997, with respect to the consolidated
financial statements of Extended Family Care Corporation included in this Proxy
Statement of Extended Family Care Corporation that is made a part of the
Registration Statement (Form S-4) and Prospectus of Extended Family Care
Corporation.
Carpenter & Onorato, P.C.
Garden City, New York
July 23, 1997
<PAGE>
EXHIBIT 23B
-----------
Consent of Holtz Rubenstein & Co., LLP
Independent Auditors
We hereby consent to the reference of our firm under the caption "Experts"
and the use of our report dated July 19, 1996, except as to the pooling of
interests with AMSERV HEALTHCARE INC., which is as of August 23, 1996, with
respect to the consolidated financial statements of Star Multi Care Services,
Inc. included in this Proxy Statement of Extended Family Care Corporation that
is made a part of the Registration Statement (Form S-4) and Prospectus of
Extended Family Care Corporation.
Holtz Rubenstein & Co., LLP
Melville, New York
July 23, 1997
<PAGE>
EXHIBIT 23C
-----------
Consent of Deloitte & Touche LLP
We consent to the inclusion in this Registration Statement of Extended Family
Care Corporation on Form S-4 of our report dated October 7, 1994 (relating to
the financial statements of AMSERV HEALTHCARE INC. and subsidiaries not
presented separately herein) and to the reference to us under the heading
"Experts" in the Proxy, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 23, 1997
<PAGE>
EXHIBIT 23D
-----------
Consent of Ernst & Young LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 8, 1996, except for Note 6 and 13, as to which
the date is August 23, 1996, with respect to the audited financial statements of
AMSERV HEALTHCARE INC., included in the Proxy Statement of Extended Family Care
Corporation that is made a part of the Registration Statement (Form S-4) and
Prospectus of Extended Family Care Corporation.
ERNST & YOUNG LLP
San Diego, California
July 23, 1997
<PAGE>
EXHIBIT 23E
-----------
Consent of Telesis Mergers & Acquisitions, Inc.
Telesis Mergers & Acquisitions, Inc.
795 Franklin Avenue
Franklin Lakes, New Jersey 07417
(201)848-9544
July 23, 1997
Extended Family Care Corporation
One Old Country Road, Suite 335
Carle Place, New York 11514
Star Multi Care Services Inc.
33 Walt Whitman Road, Suite 302
Huntington Station, New York 11746
We hereby consent to the inclusion of the fairness opinion in relation
to the EFCC/Star Merger and the TPC/EFCC Merger in the Registration Statement on
Form S-4 being filed by Star and EFCC, respectively.
Telesis Mergers & Acquisitions, Inc.
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT 99(A)
-------------
TPC HOME CARE SERVICES, INC.
One Old Country Road
Carle Place, New York 11514
THIS PROXY IS SOLICITED BY THE BOARD
OF DIRECTORS OF TPC HOME CARE SERVICES, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
To be held on [ ], 1997
The undersigned holder of Common Stock of TPC Home Care a New York
corporation ("TPC"), hereby appoints Joseph Heller and Paul Elenio, and each of
them, as proxies for the undersigned, each with full power of substitution, for
and in the name of the undersigned to act for the undersigned and to vote, as
designated below, all of the shares of Common Stock of TPC that the undersigned
is entitled to vote at the Special Meeting of Shareholders of TPC, to be held on
[ ], 1997 at [ ] local time, at the offices of ARBOR MANAGEMENT, LLC (9th
Floor), 333 Carle Ovington Blvd., Uniondale, New York 11553, and at any
adjournments or postponements thereof.
The Board of Directors recommends a vote in favor of adoption and
approval of the Agreement and Plan of Merger.
1. Adoption and approval of the Agreement and Plan of Merger dated
March 18, 1997, between EXTENDED FAMILY CARE CORPORATION, a New York corporation
("EFCC") and TPC, providing for the merger of TPC with and into EFCC.
_______ FOR _______ AGAINST _______ ABSTAIN
2. Upon such other matters as may properly come before the Special
Meeting and any adjournments or postponements thereof. In their discretion, the
proxies are authorized to vote upon such other business as may properly come
before the Special Meeting and any adjournments or postponements thereof. This
proxy does not convey discretionary authority to adjourn or postpone the meeting
for the purpose of soliciting additional votes.
(Continue and Sign on Other Side)
<PAGE>
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL SET FORTH IN ITEM 1, AND WITH REGARD TO
OTHER MATTERS THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF, IN THE DISCRETION OF THE PROXYHOLDERS AS DESCRIBED IN THE
JOINT PROXY STATEMENT.
The undersigned hereby acknowledges receipt of the Notice of the
Special Meeting and the accompanying Joint Proxy Statement.
Dated: __________, 1997 _______________________________________
(Signature)
_______________________________________
(Signature if held jointly)
Please sign exactly as name(s) appears
hereon and mail it promptly even though
you now plan to attend the Special
Meeting. When shares are held by joint
tenants, both should sign. When signing
as Attorney, Executor, Administrator,
Guardian or Trustee, please add your
full title as such. If a corporation,
please sign in full title as such. If a
corporation, pleas sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD
AND PROMPTLY RETURN IT IN THE ENVELOPE PROVIDED.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
<PAGE>
EXHIBIT 99(B)
-------------
EXTENDED FAMILY CARE CORPORATION
One Old Country Road
Suite 335
Carle Place, New York 11514
THIS PROXY IS SOLICITED BY THE BOARD
OF DIRECTORS OF EXTENDED FAMILY CARE CORPORATION
FOR THE SPECIAL MEETING OF SHAREHOLDERS
To be held on [ ], 1997
The undersigned holder of Common Stock of Extended Family Care
Corporation, a New York corporation ("EFCC"), hereby appoints Joseph Heller and
Paul Elenio, and each of them, as proxies for the undersigned, each with full
power of substitution, for and in the name of the undersigned to act for the
undersigned and to vote, as designated below, all of the shares of Common Stock
of EFCC that the undersigned is entitled to vote at the Special Meeting of
Shareholders of EFCC, to be held on [ ], 1997 at [ ] local time, at the offices
of ARBOR MANAGEMENT, LLC (9th Floor), 333 Carle Ovington Blvd., Uniondale, New
York 11553, and at any adjournments or postponements thereof.
The Board of Directors recommends a vote in favor of adoption and
approval of the Agreement and Plan of Merger.
1. Adoption and approval of the Agreement and Plan of Merger dated
March 18, 1997, between EXTENDED FAMILY CARE CORPORATION, a New York corporation
("EFCC") and TPC HOMECARE SERVICES, INC. ("TPC") providing for the merger of TPC
with and into EFCC.
______ FOR _______ AGAINST _______ ABSTAIN
2. Upon such other matters as may properly come before the Special
Meeting and any adjournments or postponements thereof. In their discretion, the
proxies are authorized to vote upon such other business as may properly come
before the Special Meeting and any adjournments or postponements thereof. This
proxy does not convey discretionary authority to adjourn or postpone the meeting
for the purpose of soliciting additional votes.
(Continue and Sign on Other Side)
<PAGE>
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL SET FORTH IN ITEM 1, AND WITH REGARD TO
OTHER MATTERS THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF, IN THE DISCRETION OF THE PROXYHOLDERS AS DESCRIBED IN THE
JOINT PROXY STATEMENT.
The undersigned hereby acknowledges receipt of the Notice of the
Special Meeting and the accompanying Joint Proxy Statement.
Dated: __________, 1997 _______________________________________
(Signature)
_______________________________________
(Signature if held jointly)
Please sign exactly as name(s) appears
hereon and mail it promptly even though
you now plan to attend the Special
Meeting. When shares are held by joint
tenants, both should sign. When signing
as Attorney, Executor, Administrator,
Guardian or Trustee, please add your
full title as such. If a corporation,
please sign in full title as such. If a
corporation, pleas sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD
AND PROMPTLY RETURN IT IN THE ENVELOPE PROVIDED.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
<PAGE>
