<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED NOVEMBER 30, 1999, 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 number 0-11380
-------
STAFF BUILDERS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2650500
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1983 MARCUS AVENUE, LAKE SUCCESS, NEW YORK 11042
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(516) 750-1600
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Class A Common Stock and Class B Common Stock
outstanding on January 13, 2000 was 23,327,652 and 304,145 shares, respectively.
<PAGE> 2
STAFF BUILDERS, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - 2
November 30, 1999 and February 28, 1999
Condensed Statements of Consolidated Operations - Three and nine 3
months ended November 30, 1999 and 1998
Condensed Statements of Consolidated Cash Flows - Nine months ended 4
November 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 5-6
Pro Forma Condensed Consolidated Statement of Operations - Three 7-9
and Nine Months Ended November 30, 1999 and Notes
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 10-12
RESULTS OF OPERATIONS
Factors Affecting the Company's Future Performance 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13-14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15-17
</TABLE>
<PAGE> 3
STAFF BUILDERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, 1999 FEBRUARY 28, 1999
(UNAUDITED) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
ASSETS:
Current Assets
Cash and cash equivalents $ 436 $ 685
Accounts receivable, net of allowance for doubtful
accounts of $1,850 and $1,915, respectively 25,108 31,778
Prepaid expenses and other current assets 869 796
------- -------
Total current assets 26,413 33,259
Fixed Assets, net of accumulated depreciation
of $1,200 and $934, respectively 3,195 1,600
Intangible Assets, net of accumulated amortization
of $1,232 and $2,181, respectively 11,571 24,340
Other Assets 201 365
------- -------
TOTAL $41,380 $59,564
======= =======
LIABILITIES:
Current Liabilities:
Accounts payable and accrued expenses $8,700 $ 6,953
Accrued payroll and related expenses 4,650 3,525
Short-term debt 13,921 24,305
Income taxes payable 40 1,286
Other current liabilities -- 65
------- -------
Total current liabilities 27,311 36,134
------- -------
Long-term Debt 57 57
------- -------
Other Liabilities -- 56
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock - $.01 par value;
50,000,000 shares authorized; 23,324,351 and
23,307,129 shares outstanding at November 30, 1999
and February 28, 1999, respectively 233 233
Class B Common Stock - $.01 par value;
1,554,936 shares authorized; 307,443 and 312,251
shares outstanding at November 30, 1999 and February
28, 1999, respectively 3 3
Additional paid-in capital 13,559 22,312
Retained earnings 217 769
------- -------
Total stockholders' equity 14,012 23,317
------- -------
TOTAL $41,380 $59,564
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
STAFF BUILDERS, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(Restated- (Restated-see
see Note 1) Note 1)
<S> <C> <C> <C> <C>
REVENUES:
Service revenues:
Medical staffing $27,870 $24,161 $86,403 $68,230
Information technology staffing 1,330 8,474 18,399 24,023
------- ------- ------- -------
Total service revenues 29,200 32,635 104,802 92,253
Sale of licensees and fee, net -- 43 13 176
------- ------- ------- -------
Total revenues 29,200 32,678 104,815 92,429
------- ------- ------- -------
COSTS AND EXPENSES:
Operating costs 23,078 25,573 81,461 71,518
General and administrative expenses 7,478 5,206 20,203 15,361
Amortization of intangible assets 388 171 439 511
Interest expense 455 407 1,754 1,079
Interest (income) (7) (15) (13) (43)
Other (income) expense, net (37) 95 162 205
Relocation expenses 250 -- 250 --
Spin-off related expenses 1,071 -- 1,071 --
------- ------- ------- -------
Total costs and expenses 32,676 31,437 105,327 88,631
------- ------- ------- -------
(LOSS) INCOME BEFORE BENEFIT (PROVISION) FOR (3,476) 1,241 (512) 3,798
INCOME TAXES
BENEFIT (PROVISION) FOR INCOME TAXES 1,071 (529) (40) (1,638)
------- ------- ------- -------
NET (LOSS) INCOME $(2,405) $ 712 $ (552) $ 2,160
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES:
Basic 23,632 23,458 23,632 23,420
======= ======= ======= =======
Diluted 23,632 23,458 23,632 23,420
======= ======= ======= =======
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Basic $ (.10) $ .03 $ (.02) $ .09
======= ======= ======= =======
Diluted $ (.10) $ .03 $ (.02) $ .09
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
STAFF BUILDERS, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net (loss) income $ (552) $ 2,160
Adjustments to reconcile net (loss) income to net
cash from (used in) operating activities:
Depreciation of fixed assets 227 154
Amortization of intangibles 439 511
Allowance for doubtful accounts 524 186
Deferred income taxes -- (779)
Change in operating assets and liabilities:
Accounts receivable 646 (11,081)
Other assets 235 (761)
Accounts payable and accrued expenses 209 2,409
Accrued payroll and related expenses 414 2,020
-------- --------
Net cash from (used in) operating activities 2,142 (5,181)
-------- --------
CASH FLOWS FROM (USED) INVESTING ACTIVITIES:
Purchases of fixed assets (1,909) (385)
Sale of net assets of Chelsea:
Goodwill-net 12,369 --
Accounts receivable and other assets-net 4,185 --
Acquisition of business -- (225)
-------- --------
Net cash from (used in) in investing activities 14,645 (610)
-------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Reduction in bank debt (12,380) (2,876)
Decrease in notes payable (56) (138)
(Decrease) increase in intercompany loan (4,600) 7,877
-------- --------
Net cash (used in) from financing activities (17,036) 4,863
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (249) (928)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 685 1,718
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 436 $ 790
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,754 $ 1,079
======== ========
Cash paid during the period for income taxes $ 40 $ 200
======== ========
Increase in goodwill resulting from assumption of liabilities
in connection with acquisition of business $ -- $ 669
======== ========
Decrease in additional paid in capital from assumption of
liabilities as a result of the spin-off $ 4,153 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
STAFF BUILDERS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SPIN-OFF TRANSACTION AND FINANCIAL STATEMENTS - Staff Builders, Inc.
("Staff Builders" or "the Company") separated its home health care
business from its existing medical staffing business during October
1999. To accomplish this separation of its businesses, Staff Builders'
Board of Directors established a new, wholly-owned subsidiary, Tender
Loving Care Health Care Services, Inc. ("TLC"), which acquired 100% of
the outstanding capital stock of the Staff Builders subsidiaries
engaged in the home health care business. The spin-off was effected
through a pro rata distribution to Staff Builders' stockholders of all
the shares of common stock of TLC owned by Staff Builders ("the
Distribution"). The Distribution was made by issuing one share of TLC
common stock for every two shares of Staff Builders Class A and Class B
common stock outstanding on October 12, 1999 ("the Record Date"). Based
upon the 23,619,388 shares of Staff Builders common stock which was
outstanding on the Record Date, 11,809,694 shares of TLC common stock
was distributed to holders of Staff Builders Class A and Class B common
stock on or about October 20, 1999. The medical staffing business
remained with Staff Builders.
On October 13, 1999, Staff Builders received notice from the Securities
and Exchange Commission that its Registration Statement on Form 10 was
cleared from further comments. Further on October 20, 1999, Staff
Builders received consent from its current lending institution to
complete the spin-off transaction. Since after the Distribution, TLC
owned a majority of the operations, employees and assets of the
historical business of Staff Builders, the Distribution was treated as
a "reverse spin-off" for financial reporting purposes under generally
accepted accounting principles. Accordingly, the historical condensed
consolidated financial statements contained in this quarterly report
have been restated to reflect a change in the reporting entity and the
financial position and results of operations include only the medical
staffing business owned by the Company's wholly-owned subsidiary, ATC
Healthcare Services, Inc. ("ATC") and the information technology
staffing business owned by the Company's majority owned subsidiary,
Chelsea Computer Consultants, Inc. ("Chelsea") through September 17,
1999 (the date Chelsea was sold).
On September 17, 1999, the Company sold its entire interest in Chelsea
for total consideration of $18.2 million, including a post-closing net
asset book value adjustment. The cash received of $17.5 million was
used to pay off approximately $8.4 million of borrowings under the
Company's acquisition line of credit, approximately $4 million of
borrowings under the Company's revolving line of credit and $500
thousand paid to a former principal of Chelsea. The remaining $4.6
million of cash was used to pay down TLC's revolving line of credit.
The balance of the sales price of approximately $700 thousand is
included in the balance sheet at November 30, 1999 under the caption
prepaid expenses and other current assets. There was no material gain
or loss from this transaction.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of only normal and recurring accruals) necessary to present fairly the
financial position of Staff Builders and its subsidiary (ATC) as of
November 30, 1999 and February 28, 1999, the results of operations for
the three and nine months ended November 30, 1999 and 1998 and the cash
flows for the nine months ended November 30, 1999 and 1998. Certain
prior period amounts have been reclassified to conform with the
November 1999 presentation.
5
<PAGE> 7
The results for the three and nine months ended November 30, 1999 and
1998 are not necessarily indicative of the results for an entire year.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the Staff Builders' audited financial
statements as of February 28, 1999 and for the year then ended.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Basic and diluted
earnings per share was calculated for all periods in accordance with
the requirements of Statement of Financial Accounting Standards No.
128, "Earnings per Share."
The shares used in computing basic earnings per share were 23,631,797
and 23,419,887 shares for the nine months ended November 30, 1999 and
1998, respectively. The shares used in computing diluted earnings per
share were 23,631,797 and 23,419,887 shares for the nine months ended
November 30, 1999 and 1998, respectively. The shares used in computing
basic earnings per share were 23,631,797 and 23,458,041 for the three
months ended November 30, 1999 and 1998, respectively. The shares used
in computing diluted earnings per share were 23,631,797 and 23,458,041
shares for the three months ended November 30, 1999 and 1998,
respectively. Options and warrants have been excluded in the
calculation of earnings per share for the above periods since their
effect would be antidilutive.
3. SHORT TERM DEBT - On September 24, 1999, the Company entered into an
amended and restated loan and security agreement with a bank ("Loan
Agreement") which expires on February 29, 2000. The Loan Agreement
permits the Company to borrow up to 75% of eligible accounts
receivable, up to the maximum amount of $15 million. The borrowings
under the credit facility bear interest at 2.0% over the prevailing
prime lending rate (such rate being 8.5% as of November 30, 1999). In
addition, the Company is required to pay a monthly collateral
management fee of $3 thousand and .375% per annum of the daily unused
portion of the credit facility. The Company paid bank fees of $170
thousand in connection with the execution of the Loan Agreement and
facility fees of $131 thousand on November 30, 1999. The Company is
required to pay an additional $206 thousand of facility fees by January
31, 2000.
4. PROVISION FOR INCOME TAXES - The benefit (provision) for income taxes
for all periods presented has been computed using the effective rate
for income taxes as if the Company filed tax returns on a stand alone
basis. The actual historical tax returns of the Company which were
filed for the fiscal year ended February 28, 1999 included losses
generated by TLC and only minimal state tax liabilities were incurred.
Additionally, the tax return of the Company which will be filed for the
fiscal year ending February 29, 2000 will also include TLC's losses up
to October 20, 1999 (the date of the Distribution) and these losses
will be sufficient to eliminate any federal taxable income generated by
the Company.
5. CONTINGENCIES - Although the Company cannot estimate the ultimate cost
of its open legal matters with precision, it maintains a loss
contingency accrual for the aggregate estimated amount to settle such
matters. At November 30, 1999, the Company has identified contingent
liabilities of approximately $11.9 million on certain obligations of
TLC for which TLC has indemnified the Company in connection with the
Distribution. In management's opinion, if TLC is unable to satisfy
these obligations as they come due, it will result in a material
adverse effect on the Company's consolidated financial position,
liquidity and results of operations.
6
<PAGE> 8
STAFF BUILDERS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 1999
On September 17, 1999, the Company sold its entire interest in Chelsea for total
consideration of $18.2 million, including a post-closing net asset book value
adjustment. The cash received of $17.5 million was used to pay off approximately
$8.4 million of borrowings under the Company's acquisition line of credit,
approximately $4 million of borrowings under the Company's revolving line of
credit and $500 thousand paid to a former principal of Chelsea. The remaining
$4.6 million of cash was used to pay down TLC's revolving line of credit.
The following unaudited pro forma condensed consolidated statements of
operations of the Company for the three and nine months ended November 30, 1999
are based on the historical condensed consolidated financial statements of Staff
Builders included elsewhere in this quarterly report as adjusted to give effect
to the sale of Chelsea as if it occurred on the first day of each respective
period.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The Pro Forma Statements
do not purport to represent what the Company's financial position and result of
operations would actually have been had the sale of Chelsea occurred on such
dates or to project the Company's financial position or results of operations
for any future period.
7
<PAGE> 9
STAFF BUILDERS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
NINE
MONTHS PRO FORMA
NOVEMBER 30, ADJUSTMENTS
1999 (A) PRO FORMA
------------ ----------- ------------
<S> <C> <C> <C>
REVENUES:
Medical staffing $ 86,403 $ -- $86,403
Information technology staffing 18,399 (18,399)(B)
-------- -------- -------
--
Total service revenues 104,802 (18,399) 86,403
Sale of licensees and fee, net 13 -- 13
-------- -------- -------
Total revenues 104,815 (18,399) 86,416
-------- -------- -------
COSTS AND EXPENSES:
Operating costs 81,461 (14,286)(B) 67,175
General and administrative expenses 20,203 (1,747)(B) 18,456
Amortization of intangible assets 439 (220)(B) 219
Interest expense 1,754 (126)(B) 1,628
Interest (income) (13) 2 (B) (11)
Other expense, net 1,483 (16)(B) 1,467
-------- -------- -------
Total costs and expenses 105,327 (16,393) 88,934
-------- -------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES (512) (2,006) (2,518)
(PROVISION) BENEFIT FOR INCOME TAXES (40) 802 (C) 762
-------- -------- -------
NET LOSS $ (552) $ (1,204) $(1,756)
======== ======== =======
LOSS PER COMMON SHARE:
Basic $ (0.02) $ (0.07)
======== =======
Diluted $ (0.02) $ (0.07)
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 23,632 23,632
======== =======
Diluted 23,632 23,632
======== =======
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) The following pro forma adjustments reflect the sale of Chelsea.
(B) Pro forma adjustments to remove assets, liabilities, revenues and
expenses of Chelsea and to record the entire sales transaction including related
selling expenses.
(C) Pro forma adjustments to give effect to the computation of income
taxes as if separate income tax returns were filed.
8
<PAGE> 10
STAFF BUILDERS, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
THREE MONTHS PRO FORMA
NOVEMBER 30, ADJUSTMENTS
1999 (A) PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
Medical staffing $ 27,870 $ -- $ 27,870
Information technology staffing 1,330 (1,330)(B) --
-------- ------- --------
Total service revenues 29,200 (1,330) 27,870
Sale of licensees and fee, net -- -- --
-------- ------- --------
Total revenues 29,200 (1,330) 27,870
-------- ------- --------
COSTS AND EXPENSES:
Operating costs 23,078 (1,008)(B) 22,070
General and administrative expenses 7,478 (185)(B) 7,293
Amortization of intangible assets 388 388
Interest expense 455 (20)(B) 445
Interest (income) (7) (7)
Other (income) expense, net 1,284 1,284
-------- ------- --------
Total costs and expenses 32,676 (1,203) 31,475
-------- ------- --------
LOSS BEFORE PROVISION INCOME TAXES (3,476) (127) (3,603)
BENEFIT FOR INCOME TAXES 1,071 45 (C) 1,116
-------- ------- --------
NET LOSS $ (2,405) $ (82) $ (2,487)
======== ======= ========
LOSS PER COMMON SHARE:
Basic $ (0.10) $ (0.11)
======== ========
Diluted $ (0.10) $ (0.11)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 23,632 23,632
======== ========
Diluted 23,632 23,632
======== ========
</TABLE>
Notes to Pro Forma Condensed Consolidated Financial Statements
(A) The following pro forma adjustments reflect the sale of Chelsea.
(B) Pro forma adjustments to remove assets, liabilities, revenues and
expenses of Chelsea and to record the entire sales transaction including related
selling expenses.
(C) Pro forma adjustments to give effect to the computation of income
taxes as if separate income tax returns were filed.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of Staff Builders
results of operations and financial condition. This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements appearing in
Item 1. All amounts referred to in this section are stated in thousands unless
otherwise indicated.
RESULTS OF OPERATIONS
Total revenues decreased by $3,478 or 11% for the three months ended November
30, 1999 to $29,200 from $32,678 for the three months ended November 30, 1998.
The decrease in total revenues for the three months ended November 30, 1999 was
a result of the sale of Chelsea on September 17, 1999 and accordingly, only 17
days of Chelsea revenue which amounted to $1,330 was included in such quarter,
compared to $8,474 of Chelsea revenue in the comparable prior quarter, a
decrease of 84%. Excluding the effects of the Chelsea sale, medical staffing
revenue increased 15% for the three months ended November 30, 1999 to $27,870
from $24,161 for the three months ended November 30, 1998. Also, during the
three months ended November 30, 1999, management recorded a $1 million charge to
revenue for potential sales allowances. For the nine months ended November 30,
1999 ("the 1999 period"), total revenues increased by $12,386 or 13% to $104,815
from $92,429 for the nine months ended November 30, 1998 ("the 1998 period").
The increase in total revenues for the 1999 period was primarily due to an
increase in medical staffing revenues of $18,173, or 27%, to $86,403 in the 1999
period from $68,230 in the 1998 period. This was partially offset by a decrease
in Chelsea revenue of 23% from $24,023 for the nine months ended November 30,
1998 to $18,399 for the nine months ended November 30, 1999. This decrease
resulted from the sale of Chelsea.
Operating costs (the direct costs of providing services) were 79% and 78% of
total revenues for the three months ended November 30, 1999 and 1998, and 78%
and 77% for the nine months ended November 30, 1999 and 1998, respectively.
Medical staffing direct operating costs as a percentage of related revenues were
78% for both the 1999 and 1998 periods.
General and administrative expenses increased by $2,272, or 44%, to $7,478 for
the three months ended November 30, 1999 from $5,206 for the three months ended
November 30, 1998. For the nine months ended November 30, 1999, general and
administrative expenses increased by $4,842, or 32%, to $20,203 from $15,361 for
the nine months ended November 30, 1998. The increase in general and
administrative expenses for the three and nine months ended November 30, 1999 as
compared to the same periods in the prior year is primarily a result of the
expansion of the Company. Also, during the three months ended November 30, 1999,
management recorded $1 million in additional bad debt expense.
Interest expense was approximately $455 and $407 for the three months ended
November 30, 1999 and 1998, and $1,754 and $1,079 for the nine months ended
November 30, 1999 and 1998, respectively. The increase in interest expense for
the three and nine months ended November 30, 1999 as compared to the same
periods in the prior year is due to increased borrowings under the secured
revolving lines of credit, together with higher interest rates on such
borrowings.
Spin-off related expenses were $1,071 for the three months ended November 30,
1999 and consist principally of legal, professional and bank fees related to the
spin-off of TLC from the Company. Relocation expenses of $250 were also recorded
in the three months ended November 30, 1999 and represent costs incurred and
estimated to move the Company's headquarters from Atlanta, Georgia to Lake
Success, New York.
10
<PAGE> 12
The benefit for income taxes of $1,071 for the three months ended November 30,
1999, results from applying the effective rate for income taxes to the net loss
for the nine months ended November 30, 1999.
The provision for income taxes for the remaining periods have been computed
using the effective rate for income taxes as if the Company filed tax returns on
a stand alone basis. The actual historical tax returns of the Company which were
filed for the fiscal year ended February 28, 1999 included losses generated by
TLC and only minimal state tax liabilities were incurred. Additionally, the tax
return of the Company which will be filed for the fiscal year ending February
29, 2000 will also include TLC's losses through October 20, 1999 (the spin-off
date) and these losses will be sufficient to eliminate any federal taxable
income generated by the Company.
The loss before income taxes for the three months ended November 30, 1999 was
$3,476 and resulted principally from the additional $1 million charge for sales
allowances, $1,071 in spin-off related expenses, $1 million additional bad debt
expense and $250 for relocation expenses. Excluding these charges, the loss
before income taxes for the three months ended November 30, 1999 would have been
$155.
LIQUIDITY AND CAPITAL RESOURCES
On September 24, 1999, the Company entered into an amended and restated loan and
security agreement with a bank ("Loan Agreement") which expires on February 29,
2000. The Loan Agreement permits the Company to borrow up to 75% of eligible
accounts receivable, up to the maximum amount of $15 million. The borrowings
under the credit facility bear interest at 2.0% over the prevailing prime
lending rate (such rate being 8.5% as of January 17, 2000). In addition, the
Company is required to pay a monthly collateral management fee of $3 and .375%
per annum of the daily unused portion of the credit facility. The Company paid
bank fees of $170 in connection with the execution of the Loan Agreement and
facility fees of $131 on November 30, 1999. The Company is required to pay an
additional $206 of facility fees by January 31, 2000.
On September 17, 1999, the Company sold its entire interest in Chelsea for total
consideration of $18,200, including a post-closing net asset book value
adjustment. The cash received of $17,500 was used to pay off approximately
$8,400 of borrowings under the Company's acquisition line of credit,
approximately $4,000 of borrowings under the Company's revolving line of credit
and $500 paid to a former principal of Chelsea. The remaining $4,600 of cash was
used to pay down TLC's revolving line of credit. The balance of the sales price
of approximately $700 is included in the balance sheet at November 30, 1999
under the caption prepaid expenses and other current assets. There was no
material gain or loss from this transaction.
The Company is currently negotiating with its existing lender to increase the
maximum amount of its credit facility and/or increase the borrowing base
percentage of eligible receivables as well as extend the terms of the agreement.
The Company is also exploring additional financing alternatives with several
other lenders. However, there can be no assurance that the Company's lender will
increase amounts available for borrowing under its existing credit facility
and/or extend the term. Also, there can be no assurance that alternate financing
sources can be obtained on terms satisfactory to the Company. Although the
Company currently has a working capital deficiency of approximately $898 at
November 30, 1999, such deficiency is a result of the classification of its bank
indebtedness as current. Currently, the Company has been able to meet its
obligations as they become due and believes it will continue to do so in the
near future.
11
<PAGE> 13
However, if the Company is required to pay any material amounts as a result of
its being contingently liable for leases and other agreements in connection with
the spin-off of TLC, this will have a material adverse effect on the Company.
The Company has been indemnified in connection with these contingent liabilities
as part of the spin-off of TLC.
YEAR 2000
The Company has made upgrades to its computer systems and equipment supporting
its financial and human resources functions. The installation of these upgrades
was completed during December 1999. The Company experienced no significant
operational problems with respect to complying with Y2K requirements.
FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are typically identified by the inclusion of phrases
such as "the Company anticipates", "the Company believes" and other phrases of
similar meaning. These forward-looking statements are based on the Company's
current expectations. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The potential risks and uncertainties which could
cause actual results to differ materially from the Company's expectations
include the pricing pressures from third-party payors, difficulties in
attracting and retaining quality licensees and employees and inability to obtain
financing on satisfactory terms.
BUSINESS CONDITIONS - The Company must continue to establish and maintain close
working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the increasing
market demand for the type of services offered.
ATTRACTION AND RETENTION OF LICENSEES AND EMPLOYEES - Maintaining quality
licensees will play a significant part in the future success of the Company. The
Company's professional nurses and other health care personnel are also key to
the continued performance of the Company. The possible inability to attract and
retain qualified licensees, and sufficient numbers of credentialed health care
professionals and para-professionals could adversely affect the Company's
operations and quality of service.
SATISFACTORY FINANCING - Staff Builders' working capital deficiency as of
November 30, 1999 was $898. The Company's credit facility expires February 29,
2000. Although the Company is in the process of seeking new financing, there can
be no assurance that a new credit facility will be available by February 29,
2000.
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PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
On October 9, 1999, Chase Equipment Leasing Co. commenced an action against the
Company and subsidiaries of the Company and subsidiaries of TLC in Supreme
Court, New York County, Commercial Division due to the failure to make scheduled
payments on certain equipment leases ("Leases"). Plaintiff has accelerated all
amounts due under the Leases and is seeking to recover the accelerated amounts
totaling $1,203,741, attorneys fees and costs. In connection with the spin-off,
TLC is required to indemnify the Company for liabilities arising under this
action which relate to equipment which is leased to TLC or any of its
subsidiaries. The Company and TLC are attempting to negotiate a settlement of
this matter.
On October 12, 1999, Key Corp. Leasing, LTD. commenced an action against the
Company in Supreme Court, Suffolk County, due to the failure to make scheduled
payments on certain equipment leases. Some of these leases were with and for the
benefit of certain TLC subsidiaries. Plaintiff has accelerated all amounts due
under the leases and is seeking to recover the accelerated amounts totaling
$3,263,835, attorney's fees and costs and to obtain possession of the
collateral. In connection with the spin-off, TLC is required to indemnify the
Company for liabilities arising under this action which relate to equipment
which is leased to TLC or any of its subsidiaries. The parties are attempting to
negotiate a settlement of the action and to allocate the liability under the
leases between the Company and TLC.
On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc., E.H.L.,
Inc., Phoenix Homelife Nursing (licensees (franchisees) of TLC for the territory
comprising certain counties in and around Los Angeles, California and their
holding company), instituted an action against certain of TLC's subsidiaries,
the Company, and certain executive officers of TLC in the Superior Court for the
State of California, County of Los Angeles. The action was removed to United
States District Court for the Central District of California on December 22,
1998. Plaintiffs filed a First Amended Complaint in the Central District on
January 8, 1999 to challenge the termination of the four franchise agreements
between TLC and certain of the named plaintiffs, seeking damages for violations
of California franchise law, breach of contract, fraud and deceit, unfair trade
practices, claims under the RICO, negligence, intentional interference with
contractual rights, declaratory and injunctive relief and a request for an
accounting. Plaintiffs seek an unspecified amount of damages. Discovery is
currently in process. In connection with the spin-off, TLC is required to
indemnify the Company for liabilities arising under this action.
On December 9, 1999 Prudential Securities Incorporated commenced an action
against the Company and its former subsidiary, Chelsea Computer Consultants, in
Supreme Court, New York County, to recover a fee due upon the sale of Chelsea.
Plaintiff seeks a $500,000 fee plus expenses of $17,000. At November 30, 1999,
such amount is included in accrued expenses in the accompanying condensed
consolidated balance sheet. The Company is attempting to negotiate a settlement
of this matter.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
The Company, a subsidiary, and subsidiaries of TLC have entered into a total of
thirty two (32) equipment leases with Key Corp. Leasing, Ltd. The Company has
failed to make required lease payments after March 1999. The lessor has elected
to accelerate the balance of the payments under the leases totaling
approximately $3.2 million. In connection with the spin-off, to the extent that
the TLC subsidiaries are the lessees of the equipment, TLC is required to
indemnify the Company for such liabilities.
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The Company, a subsidiary, and subsidiaries of TLC have entered into a total of
six (6) equipment leases with Chase Equipment Leasing, Inc. The Company has
failed to make required lease payments after March 1999. The Lessor has elected
to accelerate the balance of the payments under the Leases totaling
approximately $1.2 million. In connection with the spin-off, to the extent that
the TLC subsidiaries are the lessees of the equipment, TLC is required to
indemnify the Company for such liabilities.
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ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits
2 Purchase Agreement dated as of September 17, 1999 among MSX
International Engineering Services, Inc., Staff Builders, Inc., Raymond
Sheerin, Michael Altman and Chelsea Computer Consultants, Inc. (A)
3.1 Restated Certificate of Incorporation of the Company, filed July 11,
1988. (B)
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company, filed August 22, 1991. (C)
3.3 Certificate of Amendment to the Restated Certificate Incorporation of
the Company, filed September 3, 1992. (B)
3.4 Certificate of Retirement of Stock of the Company, filed February 28,
1994. (D)
3.5 Certificate of Retirement of Stock of the Company, filed June 3,
1994. (B)
3.6 Certificate of Designation, Rights and Preferences of the Class A
Preferred Stock of the Company, filed June 6, 1994. (B)
3.7 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed August 23, 1994. (B)
3.8 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed October 26, 1995. (E)
3.9 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed December 19, 1995. (F)
3.10 Plan of Recapitalization dated as of May 12, 1995. (F)
3.11 Amended and Restated By-laws of the Company. (B)
10.1 Distribution Agreement, dated as of October 20, 1999, between the
Company and Tender Loving Care Health Care Services, Inc. (G)
10.2 Tax Allocation Agreement, dated as of October 20, 1999, between the
Company and Tender Loving Care Health Care Services, Inc. (G)
10.3 Transitional Services Agreement, dated as of October 20, 1999, between
the Company and Tender Loving Care Health Care Services, Inc. (G)
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10.4 Trademark License Agreement, dated as of October 20, 1999, between
the Company and Tender Loving Care Health Care Services, Inc. (G)
10.5 Sublease, dated as of October 20, 1999, between ATC Heathcare
Services, Inc. and Tender Loving Care Health Care Services, Inc. (G)
10.6 Employee Benefits Agreement, dated as of October 20, 1999 between the
Company and Tender Loving Care Health Care Services, Inc. (G)
10.7 ATC Revolving Credit Loan and Security Agreement dated June 16, 1999,
between ATC Healthcare Services, Inc., ATC Staffing Services, Inc. and
Mellon Bank, N.A. (H)
10.8 First Amendment to ATC Revolving Credit Loan and Security Agreement
dated September 24, 1999 between ATC Healthcare Services, Inc., ATC
Staffing Services, Inc., Staff Builders, Inc., a Delaware corporation,
and Mellon Bank, N.A. (I)
10.9 Amendment, dated as of October 20, 1999, to the Employment
Agreement between the Company and Stephen Savitsky. (I)
10.10 Amendment, dated as of October 20, 1999, to the Employment
Agreement between the Company and David Savitsky. (I)
10.11 Amendment, dated as of October 20, 1999, to the Employment
Agreement between the Company and Dale R. Clift. (I)
10.12 Termination and Release, dated as of October 20, 1999, of the
Employment Agreement between the Company and Willard T. Derr. (I)
10.13 Termination and Release, dated as of October 20, 1999, of the
Employment Agreement between the Company and Renee J. Silver. (I)
10.14 Consulting Agreement, dated as of October 20, 1999, between the
Company and Renee J. Silver. (I)
10.15 Consulting Agreement, dated as of October 20, 1999, between the
Company and Willard T. Derr. (I)
10.16 Second Amendment to ATC Revolving Credit Loan and Security
Agreement, dated October 20, 1999 between ATC Healthcare Services,
Inc., ATC Staffing Services, Inc., Staff Builders, Inc. and Mellon
Bank, N.A. (I)
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NOTES TO EXHIBITS
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(A) Incorporated by reference to the Company's Form 8-K (File No. 0-11380)
filed with the Commission on October 4, 1999.
(B) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the fiscal year ended February 28, 1995 (File No. 0- 11380),
filed with the Commission on May 5, 1995.
(C) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-43728), dated January 29, 1992.
(D) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the fiscal year ended February 28, 1999 (File No. 0-11380),
filed with the Commission on June 11, 1999.
(E) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 31, 1995.
(F) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the fiscal year ended February 28, 1996 (File No. 0-11380),
filed with the Commission on May 13, 1996.
(G) Incorporated by reference to Tender Loving Care Health Care Services,
Inc.'s Form 10-Q (File No. 0-25777) filed with the Commission on October
20, 1999.
(H) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended May 31, 1999 (File No. 0-11380), filed with the
Commission on July 20, 1999.
(I) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended August 31, 1999 (File No. 0-11380) filed with the
Commission on October 20, 1999.
(A) Reports on Form 8-K
The following Form 8-K reports were filed by the Company:
I. Form 8-K filed on October 4, 1999 (sale of Chelsea).
II. Form 8-K filed on October 20, 1999 (spin-off of TLC).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Staff Builders, Inc.
Dated: January 19, 2000 By:
---------------------------------
Stephen Savitsky
Chairman of the Board, President
and Chief Executive Officer
Dated: January 19, 2000 By:
---------------------------------
Joseph Murphy
Vice President, Finance and
Chief Financial Officer
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