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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
/X/ AMENDMENT NO. 3 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended February 28, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from _________ To _________
Commission File No. 0-11380
STAFF BUILDERS, INC.
(Exact name of issuer as specified in charter)
Delaware 11-2650500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1983 Marcus Avenue
Lake Success, New York 11042-7011
(Address of principal executive offices)
(516) 358-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of such stock on April 28, 1995 was
$97,933,137.
The number of shares of Common Stock outstanding on April 28, 1995 was
23,289,055 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
Staff Builders, Inc. is a Delaware corporation which was incorporated
in New York in 1978 and reincorporated in Delaware in May 1983. Unless the
context otherwise requires, all references to the "Company" include the
Company's predecessor and its subsidiaries.
GENERAL
The Company is a leading national provider of home health care. In
addition, it provides supplemental staffing to health care institutions. These
services are provided through a pool of approximately 30,000 caregivers
operating within a network of 170 offices located in 37 states and the District
of Columbia. Of these offices, 44 are directly owned by the Company and 126 are
operated by 70 franchisees. See "Business -- Franchisees."
The Company's 170 field office locations include 28 locations which
were added from three acquisitions made during the two years ended February 28,
1995. In July 1993, the Company acquired eight locations of a regional home
health care business which contributed revenues of approximately $29.7 million
and $16.8 million for the years ended February 28, 1995 and 1994, respectively.
In July 1994, the Company acquired thirteen locations of a supplemental staffing
business operating in seven states, and in a separate acquisition in November
1994, seven additional supplemental staffing offices operating in five states
were added. These supplemental staffing locations contributed revenues of
approximately $15.4 million for the fiscal year ended February 28, 1995. See
"Business -- Supplemental Staffing."
HOME HEALTH CARE
The Company provides a broad range of health care services to
individuals in their homes, affording an alternative to institutionalized care.
Services are rendered by licensed and registered nurses, therapists and medical
social workers, who provide skilled care such as intravenous therapy, pain
management, ventilator care, changing of dressings, injections, administration
of medication and other nursing procedures. In addition, unskilled care is
provided by home health aides and other unlicensed personnel who assist patients
with their daily activities.
Services are available 24 hours per day, seven days per week, and
personnel at each of the Company's offices are available after normal business
hours to respond to emergencies and meet other service requests. Each office
generally is staffed by a manager who has responsibility for general management
of the office; one or more field staff supervisors who are responsible for
ensuring that requested services are provided; and a director of home care
services who is responsible for overseeing the implementation of the patient's
plan of care as prescribed by the physician.
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Clients' requests for home health care are generally received at a
local office and all skilled home health care services are provided pursuant to
the orders of the patient's physician. Generally, after a referral is received,
the director of home care services will make arrangements for an assessment in
which the patient's condition is analyzed in order to identify the patient's
needs. Home care services are rendered in accordance with the plan of care.
During the intake process, the Company contacts third-party payors to confirm
the extent of insurance coverage.
Home health care services accounted for approximately
89%, 95% and 91% of revenues for the fiscal years ended February 1993, 1994 and
1995, respectively. The primary payment sources for home health care revenues
are Medicare, Medicaid, commercial insurance carriers and individuals, and state
and local government health programs. See "Business -- Reimbursement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUPPLEMENTAL STAFFING
The Company has sought to strengthen its supplemental staffing
business through the acquisition in July 1994 of ATC Services Incorporated
("ATC"), a provider of temporary and contractual staffing services to health
care institutions and other organizations, through thirteen offices located in
seven states, and the acquisition by ATC in November 1994 of seven additional
offices in five states. The Company's supplemental staffing operations provide
clients with temporary technicians, registered nurses, licensed practical
nurses, insurance billers and other personnel. Health care institutions use
supplemental staffing to cover permanent positions for which they have openings,
for peak periods, vacations and emergencies and to accommodate periodic
increases in the number of patients.
Local offices are generally familiar with the operations, procedures
and policies of the institutions in the areas served by such offices and use
this knowledge in providing the training and orientation to their supplemental
staffing personnel. Accordingly, the personnel provided are able to assume
responsibility quickly and work effectively with permanent staff members.
Supplemental staffing operations accounted for approximately 10%, 5%
and 9% of the revenues for the fiscal years ended February 1993, 1994 and 1995,
respectively. The increase in the fiscal year ended February 1995 resulted
primarily from the acquisition of ATC.
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FRANCHISEES
Of the Company's 170 field office locations, 126 are operated by 70
franchisees pursuant to the terms of a franchise agreement with the Company.
The Company utilizes a form of franchising whereby it licenses independent
companies or contractors to represent the Company within a designated territory
using the Company's trade names and service marks. These franchisees recruit
direct service personnel, solicit orders and assign Company personnel
including registered nurses, therapists and home health aides to service the
Company's clients. The Company pays and distributes the payroll for the direct
service personnel, administers all payroll withholdings and payments, bills the
customers, and receives and processes the accounts receivable. The franchisees
are responsible for providing an office and paying related expenses for
administration including rent, utilities and costs for administrative personnel.
The Company owns all necessary health care-related permits and licenses and,
where required, certificates of need for operation of franchise offices. The
revenues and related direct costs are included in the Company's consolidated
service revenues and operating costs.
The locations operated by franchisees contributed approximately $251
million, $184 million and $136 million, or approximately 77%, 75% and 69% of the
Company's service revenues for the years ended February 28, 1995, 1994 and 1993,
respectively.
The initial franchise term granted by the Company is generally ten
years. A franchisee has the option to extend for an additional five-year term,
subject to the franchisee adhering to the operating procedures and quality
control standards established by the Company. The initial franchise fee is
currently $29,500 for home health care and $19,500 for the ATC supplemental
staffing operations. In addition, franchisees who have converted branch offices
into franchises may be required to lease certain assets of the branch office
from the Company. When converting independently owned agencies into franchises,
the Company negotiates the terms of the conversion on a transaction-by-
transaction basis depending on the size of the agency, the nature of the
agency's business and the location of the agency.
The Company pays a distribution or commission to the franchisees based
upon a defined formula of gross profit generated. Generally, the Company pays
the home health care franchisee 60% of the gross profit attributable to the non-
Medicare operations of the franchise. The payment to the Company's franchises
related to Medicare operations is adjusted for cost limitations and
reimbursement of allowable Medicare costs. The Company pays the supplemental
staffing franchises between 50% and 60% of the gross profit based on volume.
For Fiscal 1995, 1994 and 1993 total franchisee distributions of approximately
$56.9 million, $40.5 million and $30.1 million, respectively, were included in
the Company's general and administrative expenses.
The Company has implemented its franchise program to permit it to
quickly penetrate new markets and realize economies of scale. The program also
enables the Company to maintain stable local management by reducing personnel
turnover.
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DATA PROCESSING
The Company maintains central computerized management information
systems (including payroll, billing and other administrative functions) for its
home health care operations at its corporate headquarters in Lake Success, New
York. The ATC operations have their corporate headquarters in Atlanta, Georgia.
Generally, bills are rendered, payroll is processed and collections are received
at the corporate headquarters or at lock-boxes which have been established in
connection with the Company's revolving line of credit.
RECRUITING AND TRAINING
The Company and its franchisees recruit health care and medical
staffing personnel principally through referrals from other personnel, newspaper
advertisements and direct mail solicitations to nursing, paramedical and other
recruiting sources. A large percentage of these personnel are employed only
when needed, and are paid for the actual number of hours worked or visits made.
The Company has standardized procedures for recruiting, interviewing,
testing and reference-checking prospective personnel. All nurses and therapists
must be licensed by the appropriate licensing authorities. Substantially all
unlicensed health care personnel must be certified either through a state-
approved certification program or must have had previous experience in providing
direct patient care in a hospital, nursing home or in the home. After
selection, applicants receive instruction in the Company's procedures and
policies. Subsequently, they are included on a list of personnel eligible for
placement on home care cases. The Company has an in-service training program
for its home health personnel which satisfies the statutory prerequisites for
certification required by certain states.
In addition to health care personnel recruited and trained by the
Company, the Company contracts with third parties to meet its personnel
requirements. These contracted personnel must have the same qualifications
required of Company personnel.
QUALITY CONTROL
As a service business, the quality and reputation of the Company's
personnel and operations is critical to the Company's success. The Company has
implemented uniform quality assurance programs for its home health care
operations, including its consumer hotline and service evaluation system in
which patients are asked by the Company to rate the quality of care provided.
These programs are administered at the national and local levels. The Company's
Directors of Professional Services conduct periodic on-site reviews to determine
compliance with all regulations.
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MARKETING
The Company markets its services on a national and local basis. Each
office seeks to retain strong local identification in order to best respond to
prevailing market conditions and cultivate local referrals. Office managers and
franchisees are able to offer the most appropriate services based on market need
and implement customized marketing programs for the areas they serve. The
Company provides marketing support including sales brochures, selling seminars,
advertising and marketing materials in addition to assistance in developing
marketing plans.
Local marketing efforts principally involve periodic visits or calls
to hospital discharge planners, nursing management, physicians and other
individuals at hospitals, nursing homes and other health care facilities who are
responsible for discharge planning.
Due to changes in health care reimbursement, insurance companies and
health maintenance organizations have become more involved in directing services
for those to whom they provide coverage. The Company has sought to adapt to the
increased role of these organizations in patient referrals through the
implementation of its Managed Care Program. Under this program, the Company
provides services to members of health maintenance organizations or policy
holders of insurance companies at a negotiated rate. The Company believes that
some of these organizations, as a result of their strict guidelines, centralized
administration and geographic diversity, retain the Company because of its
ability to consistently offer quality services on a national basis. Moreover,
the Company believes that its ability to offer patients a wide variety of home
health care services will provide it with a competitive edge in obtaining
additional business from these organizations.
The Company's representatives attend and participate in health care
functions, trade shows and conventions and have ongoing public education
programs to further enhance the Company's role as a national home health care
provider.
REIMBURSEMENT
Revenues generated from the Company's home health care services are
paid by private insurance carriers, health maintenance organizations and
individuals, Medicare, Medicaid and other state and local government health
insurance programs. During the 1995 fiscal year, approximately 15% of the
Company's total revenues represented reimbursement from commercial insurance
carriers, health maintenance organizations and individuals; 57% came from
Medicare; and 20% came from Medicaid and other local government health programs.
Medicare is a Federally funded program available to persons with certain
disabilities and persons of age 65 or older. Medicaid, a program jointly funded
by Federal and state governments, and other local government health care
programs are designed to pay for certain health care and medical services
provided to low income individuals without regard to age.
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The Company has 105 offices which are certified to provide home health
care services to Medicare patients. Medicare reimburses the Company for covered
items and services at the lower of the Company's cost, as determined by
Medicare, cost limits established by the Federal government, or the amount
charged by the Company. The Company submits all Medicare claims to a single
insurance company acting as a fiscal intermediary which processes claims on
behalf of the Federal government. As of February 28, 1995, the Company has 65
offices which qualify to participate in Medicare's periodic interim payments
("PIP") program. Under PIP, the Company receives regular bi-weekly Medicare
payments based on past Medicare activity of qualifying offices, which are
adjusted at the end of each calendar quarter for actual levels of activity.
Offices which are not participating in the PIP program receive payment for
services upon submission of individual claims.
The Company is also reimbursed for covered items by Medicaid.
Approximately 75% of the Company's local offices are approved to provide home
health care services to Medicaid recipients. Medicaid reimbursement procedures
vary from state to state.
COMPETITION
Although there are national home health care and supplemental staffing
companies, the home health care industry is highly fragmented and competitors
are often localized in particular geographical markets. In general, there has
been a recent trend toward consolidation in the health care industry, and
particularly within the home health care industry. As the nation's health care
system is overhauled to encourage "managed competition", it is likely that this
trend toward increased consolidation in the home health care industry will
accelerate. In any event, the Company expects that it will continue to compete
with the national organizations as well as local providers including home health
care providers owned or otherwise controlled by hospitals. Some of the entities
with which the Company competes have substantially greater financial and other
resources. In addition, the Company's operations depend, to a significant
degree, on its ability to recruit qualified health care personnel and the
Company faces competition from other companies in recruiting. Generally, there
is a shortage of qualified health care personnel and, as a result, the Company,
from time to time, has experienced difficulties in obtaining personnel to meet
demands for services.
The Company believes that prompt service, price, quality and range of
services offered are the principal competitive factors which enable it to
compete effectively. The Company believes that its rate structure is
competitive with others in the industry. During the 1995 fiscal year no single
client or group contract accounted for ten percent or more of the consolidated
revenues of the Company. The Company expects additional competition will
develop given the increasing level of demand for the type of services offered.
See "Business -- Recruiting and Training."
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SERVICE MARKS
The Company believes that its service marks, Staff Builders-Registered
Trademark- and EthiCare-Registered Trademark-, have significant value and are
important to the marketing of its services. These names are registered as
service marks with the United States Patent and Trademark Office. The
registration of the Staff Builders-Registered Trademark- service mark will
remain in effect through February 14, 1999, with respect to home care and
hospital staff relief, and through June 28, 2006 with respect to temporary
personnel for business and industry. The registration of the EthiCare-
Registered Trademark- service mark will remain in effect through December 28,
2002. Each of these marks is renewable for additional ten-year periods,
provided the Company continues to use them in the ordinary course of business.
The Company also owns other federally registered marks for names used in
connection with its business.
GOVERNMENT REGULATION
The Company's health care business is subject to extensive and
frequently changing regulation by Federal, state and local authorities. This
regulation imposes a significant compliance burden on the Company, including
state licensing and certificate of need requirements and Federal and state
eligibility standards for certification as a Medicare and Medicaid provider.
The imposition of more stringent regulatory requirements or the denial or
revocation of any license or permit necessary for the Company to operate in a
particular market could have a material adverse effect on the Company's
operations. In addition, the Company will be required to comply with the
licensing and/or Certificate of Need ("CON") requirements and applicable
regulations in the jurisdictions in which it plans to provide services, except
for the states of Massachusetts, Michigan and Ohio which have neither CON nor
licensure requirements.
The Federal government and all states in which the Company currently
operates regulate various aspects of the Company's business. Home health agency
certification by the Health Care Financing Administration ("HCFA") is required
to receive reimbursement for services from Medicare. The Company has 105
offices in 31 states and the District of Columbia which provide services covered
by Medicare. HCFA requires, as conditions of participation as a home health
agency in the Medicare program, among other things, the satisfaction of certain
standards with respect to personnel, services and supervision; the preparation
of annual budgets and capital expenditure plans; and the establishment of a
professional advisory group that includes at least one physician, one registered
nurse and other representatives from related disciplines or consumer groups.
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Certain states require a provider of home health care services to
obtain a license before rendering services. Some states, including many of the
states in which the Company presently operates, maintain Certificate of Need
("CON") legislation requiring an office to file an application that must be
approved by the appropriate state authority before certain health care services
can be provided in an area. Approval is dependent upon, among other things,
good character and competence, financial capability and a demonstration that the
need exists for such services. In states having a CON requirement, HCFA will
grant Medicare certification to an office, thereby permitting the office to
provide services covered by Medicare, only if the office has obtained a CON.
New York State requires the approval by the Public Health Council of
the New York State Department of Health ("NYPHC") of any change in the
"controlling person" of an operator of a licensed health care services agency
(an "LHCSA"). Control of an entity is presumed to exist if any person owns,
controls or holds the power to vote 10% or more of the voting securities of such
entity. A person seeking approval as a controlling person of an operator of a
LHCSA must file an application for NYPHC approval within 30 days of becoming a
controlling person, and pending a decision by the NYPHC, such person may not
exercise control over the LHCSA. The Company has 16 offices in New York State
which are LHCSAs. Such offices accounted for approximately 15% of the Company's
revenues in fiscal 1995. If any person should become the owner or holder, or
acquire control, of the right to vote 10% or more of the Common Stock of the
Company, such person could not exercise control of the Company's LHCSAs until
such ownership, control or holding has been approved by the NYPHC.
The Company is subject to Federal and state laws and rules and
regulations that govern the offer and sale of franchises. The Company is also
subject to a number of state laws that regulate certain substantive aspects of
the franchisor-franchisee relationship. If the Company fails to comply with the
franchise laws, rules and regulations of a particular state relating to offers
and sales of franchises, the Company will be unable to engage in offering or
selling franchises in or from such state. To offer and sell franchises, the
Company is required by the Federal Trade Commission to furnish to prospective
franchisees a current franchise offering disclosure document. The Company has
used a Uniform Franchise Offering Circular to satisfy this disclosure
obligation. In addition, in certain states the Company is required to register
or file with such states and to provide prescribed disclosures. The Company is
currently permitted to offer franchises in 44 states.
The Company is required to update its offering disclosure document to
reflect intended changes or the occurrence of certain material events. The
occurrence of any such changes or events may from time to time require the
Company to stop offering and selling franchises until the document is so
updated.
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INSURANCE
The Company's field employees make decisions which can have
significant medical consequences to the patients in their care. As a result,
the Company is exposed to substantial liability in the event of negligence or
wrongful acts of its personnel. The Company maintains medical professional and
general liability insurance providing for coverage in a maximum amount of $16
million per claim, subject to a limitation of $16 million for all claims in any
single year and to a deductible for each claim. In addition, franchisees are
required to maintain general liability insurance providing for coverage of at
least $1 million.
PERSONNEL AND EMPLOYEES
At February 28, 1995, the Company employed approximately 2,200 full-
time administrative and management personnel. Approximately 1,870 of these
employees were located at the Company's branch offices, 300 were located at its
corporate headquarters in Lake Success, New York, and 30 were located at its
medical staffing division headquarters in Atlanta, Georgia.
In addition, the Company draws upon a pool of approximately 30,000
caregivers who are eligible for placement and utilizes the services of
approximately 12,000 of them at any one time. Approximately 34% of these
individuals are registered nurses and other licensed personnel and 66% are home
health aides and other unlicensed personnel. The Company screens all applicants
to ensure that they meet all licensing requirements and the Company's
eligibility standards. This screening process includes skills testing,
reference checking, professional license verification, personal interviews and a
physical examination. In addition, new employees receive an orientation on the
Company's policies and procedures prior to their initial assignment. Further,
the registered professional nurse who has responsibility for coordinating the
patient's care visits the patient within 72 hours after commencement of
services, as required, to assess the caregiver's performance. The Company is
not a party to any collective bargaining agreement and considers its
relationship with its employees to be satisfactory.
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ITEM 2. PROPERTIES
In December 1994, the Company moved its corporate headquarters to
another building within the same office complex in Lake Success, New York. The
Company's new corporate headquarters consists of approximately 48,000 square
feet of leased office space and 5,000 square feet of storage space. In
connection with its relocation, the Company entered into a new lease agreement
with its existing landlord which expires on September 30, 2003. The lease
provides for a seven month rent abatement for the period December 1994 through
June 1995. Commencing on July 1, 1995, the base rent will be $82,500 per month,
which increases by three percent on December 1, 1995 and each year thereafter.
In connection with the Company's acquisition of ATC Services
Incorporated in July 1994, the Company maintains its medical staffing division
in Atlanta, Georgia which consists of approximately 9,500 square feet of office
space. The lease, which expires on May 31, 2000, provides for a current monthly
base rent of approximately $7,100 which increases to approximately $10,500 on
June 1, 1995.
The Company believes that its corporate and divisional headquarters
office space is sufficient for its present and reasonably foreseeable future
needs.
The Company leases substantially all of its branch office locations
from landlords unaffiliated with the Company or any of its executive officers or
directors. Most of these leases are for a specified term, although several of
them are month-to-month leases. As of February 28, 1995, there were 170 offices
including 44 managed directly by the Company and 126 managed by franchisees; 12
of these franchise offices sublease the office space from the Company and the
remaining franchise offices are leased by the franchisee from third-party
landlords. The Company believes that it will be able to renew or find adequate
replacement offices for all leases which are scheduled to expire in the next
twelve months at comparable costs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several civil actions which are routine
and incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent. In the opinion of
management, the outcome of pending litigation will not have a material adverse
effect on the Company's consolidated financial condition, liquidity or results
of operations. Accrued expenses include $462,000 at February 28, 1995 which
represents the estimated amount of liability claims payable. Such amount
represents the deductible amounts for which the Company is liable net of
payments by the Company's insurers which are probable of realization,
estimated at $1,085,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
(Dollars in thousands, except per share amounts or where otherwise indicated).
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993
TOTAL REVENUES. Total revenues increased by $79.0 million or 32.1% to
$325.1 million for the year ended February 28, 1995 (the "1995 period") from
$246.1 million for the year ended February 28, 1994 (the "1994 period"). This
increase includes $15.4 million of revenue from an Atlanta, Georgia based
provider of medical staffing services acquired by the Company in July 1994.
Further, revenues generated by a regional home health care business acquired in
July 1993, which are included for the full 1995 period, contributed $12.9
million of increased revenue in the 1995 period as compared to the 1994 period.
In addition to the effect of these acquisitions, the increase in revenues is
primarily due to an increase of $39.1 million, or 33.6%, in the Company's
Medicare revenues to $155.5 million in the 1995 period from $116.4 million in
the 1994 period. Additionally, there was an increase of $6.2 million, or 10.6%,
in the Company's Medicaid and other local government program revenues to $64.7
million from $58.5 million in the 1994 period. The remainder of the increase of
$5.4 million in revenues in the 1995 period is primarily due to an increase of
$3.4 million, or 8.2%, in revenues from insurance and private payors to $45.1
million from $41.7 million in the 1994 period. The foregoing increases in
revenues include $13.6 million derived from new franchise operations added in
the 1995 period in connection with the Company's continued expansion of its
franchise program.
Total revenues increased by $47.5 million or 23.9% to $246.1 million
in the 1994 period from $198.6 million for the year ended February 28, 1993 (the
"1993 period"). This increase includes $16.8 million of additional revenue from
a regional home health care business, consisting of eight locations, acquired by
the Company in July 1993. In addition to the effect of this acquisition, the
increase in revenues is primarily due to an increase of $38.4 million, or 49.3%,
in the Company's Medicare revenues to $116.4 million in the 1994 period from
$78.0 million in the 1993 period. Additionally, there was an increase of $5.0
million, or 9.4%, in the Company's Medicaid and other local government program
revenues to $58.5 million in the 1994 period from $53.5 million in the 1993
period. These increases were partially offset by a decrease of $9.4 million in
the Company's supplemental staffing revenues to $10.5 million in the 1994 period
from $19.9 million in the 1993 period. The foregoing net increase in revenues,
in addition to the effect of the acquisition, includes $4.2 million derived from
new franchise operations added in the 1994 period in connection with the
Company's expansion of its franchise program.
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The increase in Medicare and Medicaid revenues during the three years
ended February 28, 1995 was due to an increase in the number of locations
participating in these programs. In order to be certified by the Health Care
Finance Administration as a home health agency which may participate in the
Medicare program, among other things, a location must satisfy certain
operational standards with respect to the number and qualifications of
personnel, service levels and related supervision as well as meet certain
financial standards with respect to the preparation of annual budgets and
capital expenditure plans. The number of locations which are eligible to
provide Medicare services has increased from 50 as of February 28, 1993, to 105
as of February 28, 1995. Additionally, the Company has continued to respond to
the related, increasing market demand for health care services.
The Company receives payment for its health care services from several
sources. The following are the Company's service revenues by payment source:
YEARS ENDED FEBRUARY 28,
------------------------
1995 1994 1993
---- ---- ----
Medicare .......................... 56.5% 53.5% 39.4%
Medicaid and other local
government programs ............. 20.1 24.2 27.1
Insurance and private payors ...... 14.5 17.4 22.5
Hospitals, nursing homes and
other health care institutions ... 8.9 4.3 10.0
Other ............................. - 0.6 1.0
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Total ............................. 100.0% 100.0% 100.0%
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The change in revenue mix and the reimbursement sources reflect the
Company's growth of its home health care operations and the expansion of its
supplemental staffing services. Supplemental staffing revenues increased by
$18.2 million to $28.7 million in the 1995 period from $10.5 million in the 1994
period. This includes $15.4 million of revenue from an Atlanta, Georgia based
provider of medical staffing services acquired in July 1994. The remainder of
this increase is due to the introduction and expansion of medical staffing
services by some of the Company's franchisees. The decrease in supplemental
staffing revenues of $9.4 million to $10.5 million in the 1994 period from $19.9
million in the 1993 period was due to a decrease in demand by institutions in
market regions in which the Company had traditionally provided such services.
The portion of the Company's service revenues attributable to
franchise operations has been increasing. The service revenues attributable to
franchise offices increased to 77% in the 1995 period from 75% in the 1994
period and from 69% in the 1993 period. The increase in revenues attributable
to franchise offices was due to the increase in the number of locations operated
by franchisees from 62 locations operated by 41 franchisees as of February 28,
1993 to 126 locations operated by 70 franchisees as of February 28, 1995. These
increases result from the Company's continuing efforts to expand its operations
in additional markets primarily through the recruitment of new franchisees.
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OPERATING COSTS. Operating costs were 62.1%, 62.3% and 64.9% of
service revenues in the 1995, 1994 and 1993 periods, respectively. Operating
costs represent the direct costs of providing services to patients, including
direct service wages, payroll taxes, travel costs, insurance costs directly
related to services, medical supplies and the cost of contracted services. The
decline in the percentage of operating costs is due to the increase in Medicare
revenues which have lower operating costs as compared to other revenue sources.
Participation in the Federal Medicare program subjects the Company to certain
administrative costs for clinical documentation, statistical reporting, billing
and financial reporting which are not required for the services provided to
other clients, such as insurance companies, private individuals, or for staffing
services provided to health care institutions. Medicare revenues include
reimbursement for the administrative expenses associated with these tasks.
Accordingly, operating costs constitute a smaller percentage of Medicare
revenues than revenues from other payment sources.
The payroll fringe costs, consisting primarily of payroll taxes and
workers compensation insurance, represents 17.3%, 21.1% and 20.4% of direct
service wages in the 1995, 1994 and 1993 periods, respectively. The decrease in
payroll fringe costs in the 1995 period was primarily due to reduced premiums
for workers compensation insurance.
The cost of contracted services represents 9.8%, 7.4% and 8.3% of
service revenues in the 1995, 1994 and 1993 periods, respectively. These costs
have increased primarily due to the increase in Medicare services provided by
the Company.
The revenues, operating costs and resultant gross margins generated
by the Company's franchise and Company-owned locations are as follows:
($ IN MILLIONS)
YEARS ENDED FEBRUARY 28,
------------------------
1995 1994 1993
---- ---- ----
Total revenues - Franchise $251 $184 $136
Total revenues - Company-Owned 74 62 63
---- ---- ----
Total revenues $325 $246 $199
==== ==== ====
Operating costs - Franchise $154 $112 $86
Operating costs - Company-Owned 47 41 42
---- ---- ----
Operating costs $201 $153 $128
==== ==== ====
Gross margin - Franchise $ 97 $ 72 $ 50
Gross margin - Company-Owned 27 21 21
---- ---- ----
Gross margin $124 $ 93 $ 71
==== ==== ====
The gross margin percentages generated by Company-owned locations
are lower than those for franchise locations as a result of a proportionately
higher volume of services which have lower gross margin percentages, such as
supplemental staffing and Medicaid.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $27.8 million or 33.2% in the 1995 period as compared to
the 1994 period and increased by $21.6 million or 34.8% in the 1994 period as
compared to the 1993 period. These costs expressed as a percentage of service
revenues were 34.4%, 34.1% and 31.3% in the 1995, 1994 and 1993 periods,
respectively. The increase in general and administrative expenses as a
percentage of service revenues is primarily due to the increases in the
Company's Medicare services, which require higher administrative costs than non-
Medicare services. Included in the increase during the 1995 period is $3.5
million incurred from the additional locations of the medical staffing services
operations acquired in the 1995 period. Additionally, an increase of $3.9
million was reflected in the 1995 period due to the locations acquired of a
regional home health care business in the 1994 period, which are included in the
full 1995 period. Included in general and administrative expenses are reserves
and write-offs of notes receivable from franchisees of $400 and $600 in the 1994
and 1993 periods, respectively. There was no expense incurred in the 1995
period related to reserves and write-offs of notes receivable.
-14-
<PAGE>
PROVISIONS FOR DOUBTFUL ACCOUNTS RECEIVABLE. The provisions
represented 0.8%, 1.0% and 1.2% of service revenues in the 1995, 1994 and 1993
periods, respectively. The decreases in the provisions results from
improvements made in billing and collection procedures.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
was approximately $1.2 million in the 1995 period as compared to approximately
$900 and $800 in the 1994 and 1993 periods, respectively. The increase of $300
in the 1995 period over the 1994 period is due to business acquisitions made in
the 1995 period and amortization expense included for the entire 1995 period
related to business acquisitions made during the prior year.
INTEREST EXPENSE. Interest expense was approximately $1.2 million in
the 1995 period as compared to approximately $2.2 million in the 1994 and 1993
periods. Interest expense decreased by $1.0 million in the 1995 period as
compared to the 1994 period due to a combination of lower interest rates and
reduced levels of borrowings required due primarily to the reduction in the
amount of time that the Company's accounts receivable are outstanding.
INTEREST INCOME AND OTHER. Interest income and other primarily
consists of interest earned on franchise notes receivable which generally bear
interest at the prime rate plus three percent and are payable over ten years.
Such notes receivable result from the sale of franchises.
PROVISION FOR INCOME TAXES. The provision for income taxes reflects
an effective rate of 42%, 28% and 32% in the 1995, 1994 and 1993 periods,
respectively. The effective tax rate of 28% in the 1994 period includes a
reduction of the Company's valuation allowance of $858.
INCOME APPLICABLE TO COMMON STOCKHOLDERS. Income applicable to common
stockholders for the 1995 period was $4.74 million, or $.20 per share, compared
to $3.95 million, or $.20 per share, in the 1994 period and $2.17 million, or
$.14 per share, in the 1993 period. Included in the 1994 period was a non-
recurring gain of $590, or $.03 per share, resulting from a discount from the
redemption of the Company's Redeemable Class B Preferred Stock. Upon payment in
the 1994 period of $5.4 million to holders of the Redeemable Class B Preferred
Stock, the Company obtained the discount consisting of a gross amount of $900
less dividends accrued of $310.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has a secured revolving credit facility which consists of
a revolving line of credit and an acquisition line of credit, under which it can
borrow up to an aggregate amount of $25 million. The Company is permitted to
borrow up to 75% of eligible receivables up to the maximum amount of the credit
facility less amounts outstanding under the acquisition line of credit. The
acquisition line of credit provides for borrowings up to $7.5 million without
collateral to finance acquisitions made by the Company, provided that the sum of
all borrowings do not exceed $25 million. Eligible receivables are defined
principally as trade accounts receivable which have been outstanding for less
than 120 days. Long-term and short-term liquidity will be enhanced to the
extent that the accounts receivable on which the Company is not permitted to
borrow are reduced and by shortening the amount of time that its accounts are
outstanding. The average daily balance outstanding under the credit facility
was approximately $3.3 million, $11.2 million and $13.1 million in the 1995,
1994 and 1993 periods, respectively.
Trade accounts receivable at February 28, 1995, 1994 and 1993 were
outstanding for an average of approximately 54, 68 and 71 days, respectively.
Included in these receivables are amounts derived from Medicare services. The
reduction in the days of outstanding trade accounts receivable was due to an
increase in the number of the Company's offices which participate in Medicare's
periodic interim payment ("PIP") program. Under PIP, the Company receives
regular bi-weekly payments based on past Medicare volume. During the 1995
period, 72 offices participated in the PIP program compared to eleven offices in
the prior year.
The Company funds the operating costs for all Company owned and
franchise locations as well as all regional and Corporate general and
administrative expenses. Operating costs primarily consist of direct service
salaries paid on a weekly cycle. Each franchisee funds its own general and
administrative expenses. The Company pays a distribution to its franchisees,
based upon a percentage of gross profit generated by the franchise, within 25 to
45 days after each month-end. Some of the administrative personnel for
franchise locations are leased from the Company for which the related cost is
deducted from monthly distributions paid.
During the year ended February 29, 1992, the Company completed a
public offering of common stock and warrants to purchase common stock. During
the 1994 period, the Company called for redemption of the outstanding public
warrants, which resulted in the issuance of 5,060 shares of its common stock.
As a result, the Company obtained net proceeds of $13.7 million, a portion of
which was used to redeem the Redeemable Class B Preferred Stock and pay certain
long-term debt obligations.
-16-
<PAGE>
During the 1995 period, the Company purchased and retired 977,774
shares of its common stock at a cost of $2.8 million.
The Company has several agreements under which it leases computer and
other capital equipment through September 2002. The net carrying value of the
assets under these leases was approximately $2.4 million and $1.4 million at
February 28, 1995 and 1994, respectively.
At February 28, 1995, the Company's debt obligations due within the
next twelve months were approximately $1.3 million.
The Company expects that its existing cash, cash from operations and
its banking facilities will be sufficient to meet its needs for at least the
next twelve months.
EFFECT OF INFLATION
The rate of inflation was immaterial during the year ended
February 28, 1995. In the past, the effects of inflation on salaries and
operating expenses have been offset by the Company's ability to increase its
charges for services rendered. The Company anticipates that it will be able to
continue to do so in the future, subject to applicable restrictions with respect
to services provided to clients eligible for Medicare and Medicaid
reimbursement. The Company continually reviews its costs in relation to the
pricing of its services.
-17-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STAFF BUILDERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
February 28, 1995 and 1994 F-2
Consolidated Statements of Income
for the Years ended February 28, 1995,
1994, and 1993 F-3
Consolidated Statements of Stockholders' Equity
for the Years ended February 28, 1995,
1994, and 1993 F-4
Consolidated Statements of Cash Flows
for the Years ended February 28, 1995,
1994, and 1993 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
FEBRUARY 28, 1995, 1994, and 1993
II - Valuation and Qualifying Accounts F-21
All other schedules were omitted because they are not required, not applicable
or the information is otherwise shown in the financial statements or the notes
thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Staff Builders, Inc.:
We have audited the accompanying consolidated balance sheets of Staff Builders,
Inc. and subsidiaries (the "Company") as of February 28, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended February 28, 1995. Our audits
also included the financial statement schedule listed in the table of contents.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at February 28, 1995
and 1994 and the results of their operations and their cash flows for each of
the three years in the period ended February 28, 1995 in conformity with
generally accepted accounting principles. Also in our opinion, the financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche, LLP
Jericho, New York
April 13, 1995
F-1
<PAGE>
STAFF BUILDERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------
FEBRUARY 28,
------------------
ASSETS NOTES 1995 1994
------ ----- -------- -------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,508 $ 7,330
Accounts receivable, net of allowance
for doubtful accounts of $1,750
and $1,400 at February 28, 1995
and 1994, respectively 53,369 49,417
Deferred income tax benefits 8 1,303 1,258
Prepaid expenses and other current assets 2 1,954 1,260
--------------------------------------------------------------------------
Total current assets 61,134 59,265
FIXED ASSETS, net 4 5,726 3,208
INTANGIBLE ASSETS, net 3 30,149 21,820
OTHER ASSETS 2,8 3,624 3,017
--------------------------------------------------------------------------
TOTAL 7 $100,633 $87,310
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable 9,654 $10,069
Accrued expenses 5 8,103 5,923
Accrued payroll 8,605 5,661
Accrued payroll related expenses 6 10,269 8,442
Current portion of long-term liabilities 7 1,267 827
Current income taxes payable 8 1,320 1,488
--------------------------------------------------------------------------
Total current liabilities 39,218 32,410
--------------------------------------------------------------------------
LONG-TERM LIABILITIES 7 9,064 13,924
--------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES 9
STOCKHOLDERS' EQUITY: 7,11
Common stock - $.01 par value; 50,000,000
shares authorized; 22,937,049 and
20,919,219 shares issued at February 28,
1995 and 1994, respectively 229 210
Convertible preferred stock, 10,000 shares
authorized; Class A - $1.00 par value;
666 2/3 shares outstanding at February 28,
1995 and 1994 1 1
Additional paid-in capital 71,828 65,207
Accumulated deficit (19,707) (24,442)
--------------------------------------------------------------------------
Total stockholders' equity 52,351 40,976
--------------------------------------------------------------------------
TOTAL $100,633 $87,310
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
STAFF BUILDERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28,
------------------------------------------
NOTES 1995 1994 1993
----- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Service revenues $324,013 $245,357 $197,791
Sales of franchises and fees, net 2 1,098 725 836
--------------------------------------------------------------------------------------------------------
Total revenues 325,111 246,082 198,627
--------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operating costs 201,365 152,824 128,331
General and administrative expenses 111,462 83,682 62,075
Provision for doubtful accounts 2,431 2,400 2,352
Amortization of intangible assets 1,237 884 775
Interest expense 1,237 2,189 2,244
Interest income and other (818) (569) (935)
--------------------------------------------------------------------------------------------------------
Total costs and expenses 316,914 241,410 194,842
--------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 8,197 4,672 3,785
PROVISION FOR INCOME TAXES 8 3,462 1,308 1,211
--------------------------------------------------------------------------------------------------------
NET INCOME $ 4,735 $ 3,364 $ 2,574
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
INCOME APPLICABLE TO COMMON STOCKHOLDERS:
NET INCOME $ 4,735 $ 3,364 $ 2,574
Add net discount (deduct dividends)
on Class B Preferred Stock 10 - 590 (400)
--------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 4,735 $ 3,954 $ 2,174
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
SHARE INFORMATION:
Primary earnings per share 12 $ .20 $ .20 $ .14
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 12 $ .20 $ .20 $ .13
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
STAFF BUILDERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
-------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED ADDITIONAL
COMMON STOCK, PAID-IN ACCUMULATED TREASURY
NOTES TOTAL STOCK CLASS A CAPITAL DEFICIT STOCK
----- ------- ------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 1, 1992
(15,709,235 common shares issued) $20,909 $157 $1 $51,403 $(30,570) $(82)
Issuance of 13,155 additional common
shares in connection with a 1987 acquisition - -
Issuance of 86,346 common shares in
connection with exercise of stock options 11 158 1 157
Dividends on Redeemable Class B Preferred Stock 10 (400) (400)
Net Income 2,574 2,574
--------------------------------------------------------------------------------------------------------------------------------
Balances, February 28, 1993
(15,808,736 common shares issued) 23,241 158 1 51,560 (28,396) (82)
Issuance of 1,076 additional common
shares in connection with a 1987 acquisition - -
Issuance of 60,500 common shares in
connection with exercise of stock options 11 129 1 128
Discount, net of accrued dividends, on
Redeemable Class B Preferred Stock 10 590 590
Issuance of 5,060,000 common shares in
connection with the call for redemption
of stock warrants 11 13,652 51 13,601
Retirement of 11,093 shares of treasury stock - (82) 82
Net Income 3,364 3,364
--------------------------------------------------------------------------------------------------------------------------------
Balances, February 28, 1994
(20,919,219 common shares issued) 40,976 210 1 65,207 (24,442) -
Issuance of 600 additional common
shares in connection with a 1987 acquisition - -
Issuance of 35,450 common shares in
connection with exercise of stock options 11 95 - 95
Issuance of 250,000 common shares in
connection with exercise of stock warrants 11 502 2 500
Issuance of 2,570,388 common shares in
connection with acquisitions 3 8,482 26 8,456
Issuance of 139,166 common shares in
connection with the employee stock
purchase plan 11 397 1 396
Purchase and retirement of 977,774 common shares (2,836) (10) (2,826)
Net Income 4,735 4,735
--------------------------------------------------------------------------------------------------------------------------------
Balances, February 28, 1995
(22,937,049 common shares issued) $52,351 $229 $1 $71,828 $(19,707) $ -
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
STAFF BUILDERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28,
-----------------------------------
NOTES 1995 1994 1993
----- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,735 $ 3,364 $ 2,574
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization of fixed assets 1,378 1,392 1,241
Amortization of intangibles and other assets 1,237 884 775
Amortization of rent escalation liability 7 106 (167) (92)
Allowance for doubtful accounts 350 200 200
Deferred income taxes 8 513 (1,611) (897)
Change in operating assets and liabilities:
Accounts receivable (1,300) (8,011) (5,876)
Prepaid expenses and other current assets (212) 912 207
Accounts payable and accrued expenses 5,116 5,052 1,359
Income taxes payable (398) 489 692
Other assets (595) 556 684
----------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 10,930 3,060 867
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses 3 (3,956) (1,025) (150)
Additions to fixed assets (2,101) (1,018) (627)
Proceeds from disposal of fixed assets 3 17 40
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,054) (2,026) (737)
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan 11 397 - -
Exercise of stock options 95 129 158
Exercise of warrants 11 502 13,652 -
Payment of Redeemable Class B Preferred Stock 10 - (5,444) -
Purchase and retirement of common stock (2,836) - -
Borrowings under revolving line of credit 7 (5,094) 1,870 604
Reduction of notes payable and other
long-term liabilities 7 (762) (4,090) (856)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (7,698) 6,117 (94)
----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,822) 7,151 36
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,330 179 143
----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,508 $ 7,330 $ 179
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Cash paid for:
Interest $ 962 $ 1,974 $ 1,936
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Income taxes, net $ 2,846 $ 2,485 $ 1,206
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Fixed assets purchased through
capital lease agreements $ 1,330 $ 493 $ 959
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Common stock issued for business acquisitions $ 8,482 $ - $ -
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1995 ("FISCAL 1995"), FEBRUARY 28, 1994
("FISCAL 1994"), AND FEBRUARY 28, 1993 ("FISCAL 1993")
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED OTHERWISE AND FOR PER
SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Staff Builders, Inc. ("Staff Builders" or the "Company") is a national
provider of home health care personnel and supplemental staffing to health care
institutions.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Staff Builders and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. Certain prior period amounts
have been reclassified to conform with the Fiscal 1995 presentation.
A majority of the Company's service revenues are derived under a form of
franchising where the Company licenses independent companies or contractors to
represent the Company within a designated territory using the Company's trade
names and service marks. These franchisees recruit direct service personnel
and solicit orders and assign Company personnel including registered nurses,
therapists and home health aides to service the Company's clients. The
Company pays and distributes the payroll for the direct service personnel,
administers all payroll withholdings and payments, bills the customers, receives
and processes the accounts receivable. The franchisees are responsible for
providing an office and paying related expenses for administration including
rent, utilities and costs for administrative personnel.
The Company owns all necessary health care-related permits and licenses
and, where required, certificates of need for operation of franchise offices.
The revenues generated by the franchise operations along with the related
accounts receivable belong to the Company. These revenues and related direct
costs are included in the Company's consolidated service revenues and operating
costs.
The Company pays a distribution or commission to the franchisees based on a
defined formula of gross profit generated. For Fiscal 1995, 1994 and 1993,
total franchisee distributions of approximately $56.9 million, $40.5 million,
and $30.1 million, respectively, were included in the Company's general and
administrative expenses.
The Company has implemented its franchise program to permit it to quickly
penetrate new markets and realize economies of scale. This program also enables
the Company to maintain stable local management by reducing personnel turnover.
CASH
Cash includes certificates of deposit and commercial paper purchased with a
maturity of less than three months.
F-6
<PAGE>
FIXED ASSETS
Fixed assets, primarily consisting of office equipment, furniture and
fixtures, leased equipment and leasehold improvements, are depreciated on a
straight-line basis over the estimated useful lives of the assets or terms of
the related lease, whichever is shorter. The estimated useful life of office
equipment and furniture and fixtures is seven years and leasehold improvements
and other equipment is five years.
INTANGIBLE ASSETS
The excess of the purchase price and related acquisition costs over the
fair market value of the net assets of the businesses acquired is amortized on a
straight-line basis over periods ranging from fifteen to forty years.
Intangible assets also include customer lists, trademarks and noncompete
agreements, which are amortized over a four to fifteen-year period on a
straight-line basis. The accumulated amortization as of February 28, 1995 and
1994 was $6,532 and $5,342, respectively. Management evaluates the
recoverability of intangible assets based on projections of future earnings, on
an undiscounted basis, attributable to the assets acquired.
REVENUE RECOGNITION FROM SALES AND LICENSING OF FRANCHISES
Revenues generated from the sales and licensing of franchises and initial
franchise fees are recognized when the Company has performed substantially all
of its obligations under its franchise agreements and when collectibility of
such amounts is reasonably assured. In circumstances where a reasonable basis
does not exist for estimating collectibility of the proceeds of the sales of
franchises and initial franchise fees, such proceeds are deferred and recognized
as collections are made, utilizing the cost recovery method (see Note 2).
INCOME TAXES
Deferred income taxes result from timing differences between financial and
income tax reporting which primarily include the deductibility of certain
expenses in different periods for financial reporting and income tax purposes.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes" during the fourth quarter of Fiscal 1993,
effective March 1, 1992. The impact on the Company's financial statements of
the adoption of SFAS 109 was not material (see Note 8).
F-7
<PAGE>
2. FRANCHISE OPERATIONS
Prior to June 1990, the Company recorded revenues relating to the sale of
certain assets, the sale of rights to establish and operate franchised
businesses and initial franchise fees. The Company received notes and cash in
connection with these franchise sales. The notes generally bear interest at the
prevailing prime lending rate plus three percent and are generally payable over
a term of ten years. The balance of these notes receivable at February 28, 1995
and 1994 amounted to $1,459 and $1,639, of which $138 and $173 are included in
Prepaid Expenses and Other Current Assets and $1,321 and $1,466 are included in
Other Assets, respectively.
Subsequently, the Company generated certain franchise sales and licensing
income for which the related notes receivable will be recognized as income as
cash is collected or as it becomes evident that the franchisees have the ability
to pay. These notes also generally bear interest at the prevailing prime
lending rate plus three percent and are generally payable over a period of ten
years. At February 28, 1995 and 1994, the outstanding notes amounted to $5,328
and $6,154, respectively, and are included in Other Assets, net of deferred
income reflected as a valuation reserve for financial reporting purposes of
$4,971 and $5,761, respectively. During Fiscal 1995 and 1994, $381 and $178,
respectively, of these notes were collected and included in revenues. During
Fiscal 1993, $588 of notes receivable previously deferred were recognized as
income based on management's belief that the franchisees have the ability to
pay.
Sales of franchises and fees, net include $480, $498 and $71 of initial
franchise fees for the years ended February 28, 1995, 1994 and 1993,
respectively. The remaining amounts represent charges to franchisees for the
use of Company assets including customer and employee lists. The Company has
performed substantially all of its obligations as required under the terms of
its franchise agreements.
General and administrative expenses include reserves and write-offs of
notes receivable from franchisees of $400 and $600 in Fiscal 1994 and 1993,
respectively. There was no expense incurred in Fiscal 1995 related to reserves
and write-offs of notes receivable.
During Fiscal 1993, one of the franchisees was acquired by a corporation
owned by a family member of one of the Company's officers. The purchase price
for the franchise included the assumption of a note payable to the Company of
$845 of which $813 remains outstanding at February 28, 1995. The note bears
interest at three percent above the prevailing prime lending rate and matures in
2009.
F-8
<PAGE>
During Fiscal 1994, two of the Company's executive officers each acquired a
portion of two franchises. In one transaction, the purchase price paid to the
former franchisee included the assumption of a note payable to the Company of
$300, under which principal payments are scheduled to begin on October 1, 1995.
In the other transaction, the Company issued a $75 advance on expenses which is
being repaid with interest at 3% over the prevailing prime lending rate, of
which $66 remains outstanding at February 28, 1995.
3. ACQUISITIONS
On July 22, 1994, the Company acquired the stock of ATC Services
Incorporated ("ATC"), an Atlanta, Georgia based provider of medical staffing
services, for aggregate consideration of approximately $8.7 million which
resulted in goodwill and intangibles of approximately $5.7 million. The
consideration consisted of approximately 2.5 million shares of the Company's
common stock and approximately $300 in related acquisition costs. In November
1994, ATC acquired certain assets and the operations of seven additional medical
staffing locations for aggregate cash consideration of $800, which resulted in
goodwill of approximately $700. These acquisitions were accounted for as
purchase transactions.
On July 2, 1993, the Company acquired the assets of the Albert Gallatin
Visiting Nurse Association, Inc. and the stock of Albert Gallatin Services
Corporation for aggregate consideration of approximately $1.9 million including
cash paid of $493. This acquisition was accounted for as a purchase and
resulted in goodwill of approximately $1.9 million.
The results of operations of the acquired companies are included in the
accompanying consolidated financial statements subsequent to their respective
dates of acquisition. Revenues, net income and earnings per share, on an
unaudited pro-forma basis for the year ended February 28, 1995, if the Fiscal
1995 acquisitions had occurred on March 1, 1994, would have approximated $343
million, $4.9 million and $.19, respectively. Revenues, net income and earnings
per share on an unaudited pro-forma basis for the year ended February 28, 1994,
if the Fiscal 1995 and 1994 acquisitions had occurred on March 1, 1993, would
have approximated $295 million, $3.7 million and $.17, respectively. Revenues,
net income and earnings per share on an unaudited pro-forma basis for the year
ended February 28, 1993, if the Fiscal 1995 and 1994 acquisitions had occurred
on March 1, 1992, would have approximated $260 million, $2.8 million and $.13,
respectively.
Additionally, the Company acquired certain assets, consisting primarily of
employee and customer lists, of other home heath care providers in Fiscal 1995
and 1994 for aggregate consideration of approximately $3,147 and $712,
respectively. The Fiscal 1995 consideration was paid in cash and the Fiscal
1994 consideration included $532 of cash and $180 of notes payable (see Note 7).
These acquisitions consisted of seven and five separate health care entities in
Fiscal 1995 and Fiscal 1994, respectively, and were accounted for as purchase
transactions.
F-9
<PAGE>
In connection with the Fiscal 1995 and 1994 acquisitions, consideration
paid was as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Fair value of assets acquired...... $5,559 $6,163
Liabilities assumed................ 1,603 5,138
----- -----
Total consideration for
assets and stock................. $3,956 $1,025
----- -----
----- -----
</TABLE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1995 1994
------- ------
<S> <C> <C>
Equipment under capital leases
(see Note 7)..................... $ 3,147 $3,928
Office equipment, furniture
and fixtures..................... 6,293 3,579
Leasehold improvements............. 578 865
Land and building.................. 106 51
------ -----
Total, at cost..................... 10,124 8,423
Less accumulated depreciation
and amortization................. 4,398 5,215
------ -----
Fixed assets, net.................. $ 5,726 $3,208
------ -----
------ -----
</TABLE>
During the year ended February 28, 1995, the Company wrote-off fully
depreciated fixed assets of approximately $2.1 million.
5. ACCRUED EXPENSES
Accrued expenses include $5,460 and $3,468 at February 28, 1995 and 1994,
respectively, of accrued franchise distributions. These amounts represent
distributions earned by the franchisees based upon a percentage of the gross
profit generated.
6. ACCRUED PAYROLL RELATED EXPENSES
Accrued payroll related expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Accrued insurance ................. $ 5,531 $ 4,773
Accrued payroll taxes .............. 3,048 2,326
Other .............................. 1,690 1,343
------ ------
Total .............................. $10,269 $ 8,442
------ ------
------ ------
</TABLE>
F-10
<PAGE>
7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Borrowings under a secured revolving
line of credit(a)................. $ 6,461 $11,555
Obligations under capital leases(b). 2,290 1,824
Rent escalation liability(c)........ 769 663
Notes payable in connection
with acquisitions(d).............. 301 709
Other............................... 510 -
------ ------
Total............................... 10,331 14,751
Less current portion................ 1,267 827
------ ------
Long-term liabilities(e)............ $ 9,064 $13,924
------ ------
------ ------
</TABLE>
(a) The Company has a secured credit facility which expires on July 31, 1997.
The credit facility consists of a revolving line of credit and an acquisition
line of credit, under which the Company can borrow up to an aggregate amount of
$25 million.
Amounts borrowed under the credit facility are collateralized by a pledge
of all the stock of the Company's subsidiaries, by all accounts receivable and
by liens on substantially all other assets of the Company and its subsidiaries.
The agreement contains certain financial covenants which, among other things,
(i) require the maintenance of a specified minimum defined level of working
capital, effective net worth, net income, current ratio and the ratio of senior
debt to effective net worth, (ii) limit the amount of capital expenditures, and
(iii) prohibit the declaration or payment of cash dividends.
The amount available for borrowing under the credit facility was
approximately $13.8 million at February 28, 1995. The maximum amounts borrowed
under the credit facility for the years ended February 28, 1995 and 1994 were
$16.9 million and $17.0 million, respectively, and the average interest rates
for the periods then ended were 7.53% and 8.25%, respectively.
The Company is permitted to borrow up to 75% of eligible accounts
receivable, up to the maximum amount of the credit facility less amounts
outstanding under the acquisition line of credit. The acquisition line of
credit provides for borrowings up to $7.5 million without collateral to finance
acquisitions, provided that the sum of all borrowings do not exceed $25 million.
Each amount borrowed under the acquisition line of credit is subject to the
Bank's approval and must be repaid over twelve to forty-eight months as
determined by the Bank, at one percent over prime. There have been no
borrowings under the acquisition line of credit.
F-11
<PAGE>
For the period March 1, 1994 through September 30, 1994, funds were
borrowed at the prevailing prime lending rate on the first $7.0 million of daily
borrowings and at 2.25% over the prevailing prime rate for borrowings in excess
of $7.0 million. Effective October 1, 1994, the Bank reduced the interest rate
on borrowings under the revolving line of credit to the prevailing prime lending
rate, such prime rate being 9.00% at February 28, 1995. A commitment fee on the
unused portion of the credit facility is payable at the rate of .375% per annum,
which was reduced effective October 1994 from .5% per annum. Additionally, an
annual collateral management fee of $75 is payable, which was reduced from $150
in August 1994.
(b) At February 28, 1995, the Company had capital lease agreements for
computers and other equipment through September 2002. The net carrying value of
the assets under capital leases was approximately $2.5 million and $1.4 million
at February 28, 1995 and 1994, respectively, and such amounts are included in
Fixed Assets.
(c) The Company entered into a new Corporate headquarters operating lease which
requires scheduled rent increases from December 1994 through September 30, 2003.
At February 28, 1995, the Company has a rent escalation liability of $769
resulting from accrued rent expense, which is recognized on a straight-line
basis over the life of the lease, in excess of payments made.
(d) In connection with acquisitions made in Fiscal 1994 and 1993, the Company
issued notes payable aggregating $530, which bear interest at rates ranging from
7% to 8%. Such notes mature at dates through October 2003. During Fiscal 1995,
payments of $89 were made on these notes and $319 was paid on notes related to
acquisitions prior to Fiscal 1993.
(e) Long-term liabilities maturing subsequent to February 28, 1995 are as
follows:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL OTHER
YEARS ENDING FEBRUARY LEASES DEBT TOTAL
--------------------- ----------- -------- -------
<S> <C> <C> <C>
1996.................... $ 978 $ 463 $ 1,441
1997.................... 802 135 937
1998.................... 574 6,589 7,163
1999.................... 262 133 395
2000.................... 9 142 151
Thereafter.............. 10 579 589
----- ------ ------
2,635 8,042 10,676
Less amount representing
interest ($174 payable
in Fiscal 1996)....... 345 - 345
----- ------ ------
Total................... $2,290 $ 8,042 $10,331
----- ------ ------
----- ------ ------
</TABLE>
F-12
<PAGE>
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
-------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............. $2,208 $2,221 $1,749
State................ 741 698 359
Deferred................ 513 (753) (730)
Reduction of valuation
allowance.............. - (858) (167)
----- ----- -----
Total................... $3,462 $1,308 $1,211
----- ----- -----
----- ----- -----
</TABLE>
The deferred tax assets (liabilities) at February 28, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Current:
Allowance for doubtful
accounts receivable...... $ 453 $ 303
Nondeductible accruals.... 850 955
----- -----
Current................. 1,303 1,258
----- -----
Non-Current:
Revenue recognition....... 261 354
Accelerated depreciation.. (84) (13)
Other assets.............. (21) 12
----- -----
Non-current............. 156 353
----- -----
Total................. $1,459 $1,611
----- -----
----- -----
</TABLE>
The non-current deferred tax assets are included in Other Assets on the
accompanying balance sheets.
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Federal statutory rate....... 34.0% 34.0% 34.0%
State and local income taxes,
net of Federal income
tax benefit................. 6.9 7.5 7.0
Tax credits.................. (0.1) (0.2) (1.0)
Goodwill amortization........ 2.9 3.9 5.0
Reduction in valuation
allowance on deferred
tax assets ................. - (18.4) (4.4)
Reversal of prior year
accrual..................... - - (7.2)
Other........................ (1.5) 1.2 (1.4)
---- ---- ----
Effective rate............... 42.2% 28.0% 32.0%
---- ---- ----
---- ---- ----
</TABLE>
F-13
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
Approximate minimum annual rental commitments for the remaining terms of
the Company's noncancellable operating leases relating to office space and
equipment rentals are as follows:
<TABLE>
<CAPTION>
YEARS ENDING FEBRUARY
---------------------
<S> <C>
1996 ............................ $ 2,969
1997 ............................ 2,548
1998 ............................ 1,839
1999 ............................ 1,586
2000 ............................ 1,348
Thereafter ...................... 4,305
------
Total ........................... $14,595
------
------
</TABLE>
Certain leases require additional payments based upon property tax and
maintenance expense escalations.
Aggregate rental expense for Fiscal 1995, 1994 and 1993 approximated
$2,850, $2,605 and $2,545, respectively.
The Company has entered into employment agreements with several key
officers and personnel which require minimum aggregate payments of approximately
$2,816, $2,516, $1,467, $953 and $1,048, over the next five fiscal years.
During 1993, five-year employment agreements with two executives were amended to
provide, in the event of their death, for the continued payment of their
compensation to their beneficiaries for the duration of their agreements.
Additionally, certain officers have entered into agreements which provide that
in the event of change in control of, and the discontinuance of such employee's
employment with Staff Builders, the Company will pay a lump sum amount of 2.99
times the average annual compensation paid to the employee during the five-year
period immediately preceding the date of the discontinuance of employment.
The Company is a guarantor of a mortgage in the amount of $603 as of
February 28, 1995 through February 2005 arising from the sale of land and a
building in June 1988.
The Company is a defendant in several civil actions which are routine and
incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent. In management's
opinion, after consultation with legal counsel, settlement of these actions
will not have a material adverse effect on the Company's consolidated financial
position, liquidity or results of operations. Accrued expenses include $462 at
February 28, 1995 which represents the estimated amount of liability claims
payable. Such amount represents the deductible amounts for which the Company
is liable net of payments by the Company's insurers which are probable of
realization, estimated at $1,085.
F-14
<PAGE>
10. REDEEMABLE CLASS B PREFERRED STOCK
Pursuant to an agreement between the Company and the holders of the Class B
Preferred Stock, the Company redeemed all of the outstanding shares of the Class
B Preferred Stock. This redemption occurred upon the payment of $5,444 during
the fourth quarter ended February 28, 1994. Such amount was net of a discount
of $900. Income applicable to common stockholders for the year ended February
28, 1994 included the discount, less dividends accrued of $310.
11. STOCKHOLDERS' EQUITY
COMMON STOCK - VOTING RIGHTS
A holder of Staff Builders common stock is entitled, except
in certain circumstances, to ten votes for each share of common stock held by
such person on the record date for a meeting of stockholders if such person has
been the beneficial owner of such shares for a period of at least 48 consecutive
calendar months. Holders of shares which do not meet such criteria, with
certain limited exceptions, are entitled to one vote for each such share.
STOCK OPTIONS
During Fiscal 1994, the Company adopted a stock option plan (the "1993
Stock Option Plan") under which an aggregate of one million shares of common
stock are reserved for issuance upon exercise of options thereunder. Options
granted under this plan may be incentive stock options ("ISO's") or non-
qualified options ("NQSO's"). This plan replaces the 1986 Non-Qualified Plan
("1986 NQSO Plan") and the 1983 Incentive Stock Option Plan ("1983 ISO Plan")
which terminated in 1993 except as to options then outstanding. Employees,
officers, directors and consultants are eligible to participate in the plan.
Options are granted at not less than the fair market value of the common stock
at the date of grant.
A total of 640,500 stock options were granted under the 1993 Stock Option
Plan, at option prices ranging from $2.94 to $3.87, of which 635,500 remain
outstanding at February 28, 1995.
F-15
<PAGE>
A summary of activity under the 1993 Stock Option Plan, the 1986 NQSO Plan
and the 1983 ISO Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS
FOR SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
INCENTIVE STOCK OPTIONS
Options outstanding at
March 1, 1992 1,155,506 $1.75 to $2.27
Granted 563,500 $2.88 to $3.00
Exercised (56,546) $1.75
---------
Options outstanding at
February 28, 1993 1,662,460 $1.75 to $3.00
Granted 579,540 $2.19 to $3.87
Exercised (60,500) $1.93 to $3.00
Terminated (45,550) $2.19 to $3.00
---------
Options outstanding at
February 28, 1994 2,135,950 $1.75 to $3.87
Granted 85,000 $2.94 to $3.62
Exercised (12,450) $2.19 to $3.00
Terminated (23,800) $2.19 to $3.69
---------
Options outstanding at
February 28, 1995 2,184,700 $1.75 to $3.87
---------
---------
NON-QUALIFIED STOCK OPTIONS
Options outstanding at
March 1, 1992 1,109,765 $1.19 to $6.38
Exercised (29,800) $1.44 to $1.75
Terminated (52,300) $1.19 to $5.88
---------
Options outstanding at
February 28, 1993 1,027,665 $1.13 to $6.38
Granted 450,000 $3.00 to $3.75
---------
Options outstanding at
February 28, 1994 1,477,665 $1.31 to $6.38
Granted 25,500 $3.03 to $3.75
Exercised (23,000) $1.31 to $1.75
---------
Options outstanding at
February 28, 1995 1,480,165 $1.75 to $6.38
---------
---------
</TABLE>
Included in the outstanding options are 1,585,484 ISO's and 901,165 NQSO's
which are exercisable at February 28, 1995. The remaining options to purchase
1,178,216 shares become exercisable at various dates through December 1998.
F-16
<PAGE>
During Fiscal 1995, the Company adopted a stock option plan (the "1994
Performance-Based Stock Option Plan") which provides for the issuance of up to
3,400,000 shares of its common stock. Executive officers of the Company and its
wholly owned subsidiaries are eligible for grants. Performance-based stock
options are granted for periods of up to ten years and the exercise price is
equal to the average of the closing price of the common stock for the twenty
consecutive trading days prior to the date on which the option is granted.
Vesting of performance based options is during the first four years after the
date of grant, and is dependent upon increases in the market price of the common
stock.
A total of 2,230,000 stock options were granted under the 1994 Performance-
Based Stock Option Plan at an option price of $3.14. Options for 557,500 are
currently exercisable through 2004 and the remaining 1,672,500 options may
become exercisable prior to October 1998 based upon the market price of the
Company's common stock.
During Fiscal 1994, the Company adopted an Employee Stock Purchase Plan
which provides for the issuance of up to one million shares of its common stock.
The purchase price of the shares is the lesser of 90 percent of the fair market
value at the enrollment date, as defined, or the exercise date. During Fiscal
1995, 139,166 shares were issued under this plan.
STOCK WARRANTS
In connection with a public sale of securities completed in February 1992,
the Company sold warrants to purchase its common stock at $3.00 per share.
During Fiscal 1994, the Company called for redemption of the outstanding public
warrants ("Warrant Redemption"), which resulted in the issuance of 5,060,000
shares of common stock. As a result of the Warrant Redemption, the Company
received net proceeds of $13.7 million.
In connection with the Warrant Redemption, the Company issued to a
financial advisor, for an aggregate of $200, warrants to purchase an additional
200,000 shares of the Company's common stock at $3.20 per share. These warrants
are exercisable through December 31, 1995.
In connection with the February 1992 public sale of securities, the Company
sold to the underwriter and its designees, for an aggregate consideration of
$200, warrants to purchase 200,000 units at an exercise price of $9.90 per unit.
Each unit currently consists of four shares of common stock. The underwriter
warrants are exercisable through January 31, 1997.
During Fiscal 1992, the Company granted warrants for the purchase of
150,000 shares of its common stock at $1.12 per share and 250,000 shares at
$2.08 per share to a financial public relations firm which expire in October
1996 and February 1997, respectively.
F-17
<PAGE>
In connection with the establishment of the Company's revolving line of
credit, the Company issued warrants for the purchase of 250,000 shares of its
common stock at $2.00 per share to a consulting firm. These warrants were
exercised during Fiscal 1995.
CONVERTIBLE PREFERRED STOCK, CLASS A
Each issued and outstanding share of Convertible Preferred Stock,
Class A, is entitled to a noncumulative dividend of $1.00, and has a preference
on liquidation of $1.00. The holders of the Convertible Class A Preferred Stock
do not have any voting rights except on matters concerning the substantive
rights, privileges and preferences of the Class A Preferred Stock and on issues
related to certain business combinations.
COMMON SHARES RESERVED
The following represents common shares reserved and available for issuance,
at February 28, 1995, for options granted and outstanding warrants and employee
stock purchases:
<TABLE>
<CAPTION>
AVAILABLE
RESERVED FOR ISSUANCE
---------- ------------
<S> <C> <C>
1994 Performance-Based Stock Option Plan 2,230,000 1,170,000
1993, 1986 and 1983 Stock Option Plans . 3,664,865 364,500
1993 Employee Stock Purchase Plan ...... - 860,834
Underwriter Unit Warrants .............. 800,000 -
Other Warrants ......................... 600,000 -
Other .................................. 51,581 -
--------- ---------
Total ................................ 7,346,446 2,395,334
--------- ---------
--------- ---------
</TABLE>
12. EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per common and common equivalent share
were computed by dividing the earnings applicable to common stockholders, as
adjusted for the dividends and discount on the Class B Preferred Stock (see Note
10), by the weighted average number of shares of common stock and common stock
equivalents, principally dilutive stock options and warrants, outstanding during
the period.
The Fiscal 1995 and 1994 computations include the additional shares and the
assumed savings of interest expense, net of income taxes, that would have
occurred if all outstanding options and warrants were exercised.
F-18
<PAGE>
The following table presents information necessary to calculate earnings
per share for Fiscal 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
PRIMARY
Shares outstanding:
Weighted average outstanding 22,389 16,412 15,835
Share equivalents 1,684 5,763 238
------ ------ ------
Adjusted outstanding 24,073 22,175 16,073
------ ------ ------
------ ------ ------
Adjusted net income applicable
to common stockholders:
Net income $ 4,735 $ 3,364 $ 2,574
Add net discount (deduct
dividends) on Class B
Preferred Stock (see Note 10) - 590 (400)
------ ------ ------
Net income applicable to
common stockholders 4,735 3,954 2,174
Add interest savings, net
of tax provision - 438 -
------ ------ ------
Adjusted net income applicable
to common stockholders $ 4,735 $ 4,392 $ 2,174
------ ------ ------
------ ------ ------
FULLY DILUTED
Shares outstanding:
Weighted average outstanding 22,389 16,412 15,835
Share equivalents 1,987 5,763 653
------ ------ ------
Adjusted outstanding 24,376 22,175 16,488
------ ------ ------
------ ------ ------
Adjusted net income applicable
to common stockholders:
Net income $ 4,735 $ 3,364 $ 2,574
Add net discount (deduct
dividends) on Class B
Preferred Stock (see Note 10) - 590 (400)
------ ------ ------
Net income applicable to
common stockholders 4,735 3,954 2,174
Add interest savings, net
of tax provision 25 373 -
------ ------ ------
Adjusted net income applicable
to common stockholders $ 4,760 $ 4,327 $ 2,174
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
13. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for Fiscal 1995 and 1994 are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------
May August November February
31, 1994 31, 1994 30, 1994 28, 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................... $ 72,577 $ 76,038 $ 85,085 $ 91,411
Gross profit ..................... $ 26,725 $ 30,134 $ 32,325 $ 34,562
Net Income ....................... $ 814 $ 1,178 $ 1,263 $ 1,480
Income per common share:
Primary ....................... $ .04 $ .05 $ .05 $ .06
Fully diluted ................. $ .04 $ .05 $ .05 $ .06
Weighted average number
of common shares:
Primary........................ 23,103 23,708 25,042 24,463
Fully diluted ................. 23,123 23,804 26,244 25,936
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------
May August November February
31, 1993 31, 1993 30, 1993 28, 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................... $ 54,740 $ 59,698 $ 64,473 $ 67,171
Gross profit ..................... $ 20,371 $ 22,590 $ 24,501 $ 25,796
Net Income ....................... $ 733 $ 901 $ 1,061 $ 669
Income per common share:
Primary ....................... $ .04 $ .05 $ .06 $ .07
Fully diluted ................. $ .04 $ .04 $ .06 $ .07
Weighted average number
of common shares:
Primary........................ 16,481 17,134 18,827 21,747
Fully diluted ................. 16,716 18,943 18,827 21,747
</TABLE>
The quarterly earnings per share amounts were calculated on a discrete
basis and therefore may not aggregate to the year to date earnings per share
amounts.
Income per common share for the fourth quarter ended February 28, 1994
includes $790 which represents a discount obtained through early retirement of
the preferred stock issue, less dividends accrued during the period (see
Note 10).
F-20
<PAGE>
SCHEDULE II
STAFF BUILDERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period.................................................. $ 1,400 $ 1,200 $ 1,000
Charged to costs and expenses................................................. 2,431 2,400 2,352
Deductions.................................................................... (2,081) (2,200) (2,152)
--------- --------- ---------
Balance, end of period........................................................ $ 1,750 $ 1,400 $ 1,200
--------- --------- ---------
--------- --------- ---------
ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS:
Balance, beginning of period.................................................. $ 5,342 $ 4,485 $ 3,865
Charged to costs and expenses................................................. 1,190 857 763
Deductions.................................................................... -- -- (143)
--------- --------- ---------
Balance, end of period........................................................ $ 6,532 $ 5,342 $ 4,485
--------- --------- ---------
--------- --------- ---------
DEFERRED INCOME (NETTED AGAINST FRANCHISE NOTES RECEIVABLE):
Balance, beginning of period.................................................. $ 5,761 $ 5,693 $ 7,745
Charged to notes receivable................................................... 402 390 700
Deductions.................................................................... (1,192) (322) (2,752)
--------- --------- ---------
Balance, end of period........................................................ $ 4,971 $ 5,761 $ 5,693
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3 to its
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
STAFF BUILDERS, INC.
By: /s/ Stephen Savitsky
--------------------------
Stephen Savitsky
Chairman of the Board,
President and Chief
Executive Officer
Dated: September 1, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 to Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen Savitsky Chairman of the Board, September 1, 1995
--------------------- President and Chief
Stephen Savitsky Executive Officer
(Principal Executive
Officer) and Director
/s/ David Savitsky Executive Vice President, September 1, 1995
--------------------- Chief Operating Officer,
David Savitsky Secretary, Treasurer and
Director
/s/ Gary Tighe Senior Vice President, September 1, 1995
--------------------- Finance and Chief
Gary Tighe Financial Officer
(Principal Financial and
Accounting Officer)
* Director September 1, 1995
---------------------
Bernard J. Firestone,
Ph.D.
<PAGE>
Signature Title Date
--------- ----- ----
* Director September 1, 1995
---------------------
Jonathan Halpert,
Ph.D.
* Director September 1, 1995
---------------------
Donald Meyers
*By: /s/ Stephen Savitsky
---------------------------
(Stephen Savitsky,
Attorney-in-Fact)
