SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 3, 1997
STAR MULTI CARE SERVICES, INC.
(Exact Name of Registrant as specified in its Charter)
New York 1-10751 11-1975534
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
33 Walt Whitman Road, Huntington Station, NY 11746
(Address of Principal Executive Offices) (Zip Code)
(516) 423-6688
(Registrant's Telephone Number, Including Area Code)
<PAGE>
Item 5. Other Events
SUPPLEMENTAL FINANCIAL STATEMENTS
---------------------------------
Star Multi Care Services, Inc. (the "Company"), has restated its
financial statements for the years ended May 31, 1996 (the "Supplemental
Consolidated Financial Statements"). The Supplemental Consolidated Financial
Statements give effect to the business combination of the Company and AMSERV
HEALTHCARE SERVICES, INC., accounted for as a pooling of interests. Accordingly,
these Supplemental Consolidated Financial Statements supersede the Consolidated
Financial Statements filed as part of the Company's Annual Report on Form
10-KSB, dated August 29, 1996. A copy of the Supplemental Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations is included in this report.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
RESULTS OF OPERATIONS
Year Ended May 31, 1996 Compared to Year Ended May 31, 1995
Net revenues increased $10,732,899 or 28% to $49,162,934 for the
fiscal year ended May 31, 1996 over net revenues of $38,430,035 for the fiscal
year ended May 31, 1995. Approximately 53% of the increase was due to the
acquisition of certain assets of Long Island Nursing Registry ("LINR") (see Note
2 to the Supplemental Consolidated Financial Statements included elsewhere in
this report). LINR was exclusively involved in the business of providing
placement services of registered and licensed nurses and home health aids to
patients for care at home ("Home Care"). The remainder of the increase was due
to a general upward trend in Home Care. Net revenues from Home Care increased by
$10,313,394 or 41% while net revenues from Hospital Staffing decreased by
$419,505 or 25%.
The Company's decreased revenues from temporary health care personnel
recruiting to hospitals and nursing homes ("Hospital Staffing") resulted from a
general decline in demand for these services.
The Company's decided shift towards Home Care mirrors a changing
social and economic attitude toward the de-institutionalization of patients. Due
to the long hospital stays of some terminally ill patients and the greater costs
associated with institutional treatment plans, the Company believes that the
industry (i.e. hospital, insurance companies and home care agencies) trend is to
find ways to care for patients in the home. The Company continues to devote its
resources toward the growth in Home Care and believes this upward trend will
continue in the future. Home Care revenues represented approximately 98% of 1996
net revenues and Hospital Staffing represented approximately 2% of 1996 net
revenues.
Gross profit margin percentages for the fiscal years ended May 31,
1996 and 1995 were 35%.
Selling, General and Administrative expenses ("SG&A") as a percentage
of net revenues were 30% in both 1996 and 1995.
Net income increased by $331,238 or 41% to $1,143,259 for the fiscal
year ended May 31, 1996 over net income of $812,021 for the fiscal year ended
May 31, 1995. The increase occurred primarily because of the increased revenues
from Home Care.
-3-
<PAGE>
The Company's effective tax rate for 1996 was 33% as compared to 38%
in 1995. The decrease in the effective tax rate is due to the reversal of the
valuation allowance that fully reserved net deferred tax assets at May 31, 1995
that is now judged more likely than not to be realized.
Year Ended May 31, 1995 Compared to Year ended May 31, 1994
Net revenues increased $8,735,857 or 29% to $38,430,035 for the
fiscal year ended May 31, 1995 over net revenues of $29,694,178 for the fiscal
year ended May 31, 1994. Approximately 27% of the increase was due to a full
year of operations of the Company's North Central division, which was acquired
in June 1994. (See Note 2 to the Supplemental Consolidated Financial Statements
included elsewhere in this report). Approximately 20% of the increase was due to
the acquisition of certain assets of DSI Health Care Services in November 1993.
(See Note 2 to the Supplemental Consolidated Financial Statements included
elsewhere in this report). The remaining increase was due to a general upward
trend in the Home Care business which required the opening of new locations
which were in operation for all of fiscal 1995 and 1994. Net revenues from Home
Care increased $9,923,240 or 37% while net revenues from Hospital Staffing
decreased by $1,187,383 or 41%.
The Company's decreased revenues from Hospital Staffing resulted from
a general decline in demand for these services.
The Company's decided shift towards Home Care mirrors a changing
social and economic attitude toward the de-institutionalization of patients. Due
to the long hospital stays of some terminally ill patients and the greater costs
associated with institutional treatment plans, the Company believes that the
industry (i.e. hospital, insurance companies and home care agencies) trend is to
find ways to care for patients in the home. The Company continues to devote its
resources toward the growth in Home Care and believes this upward trend will
continue in the future. Home Care revenues represented approximately 95% of 1996
net revenues and Hospital Staffing represented approximately 5% of 1995 net
revenues.
Gross profit margin percentages for the fiscal years ended May 31,
1995 and 1994 were 35%.
SG&A as a percentage of net revenues were 30% in both 1995 and 1994.
Income from continuing operations increased by $400,490 or 112% to
$758,036 for the fiscal year ended May 31, 1995 over income from continuing
operations of $357,546 for the fiscal year ended May 31, 1994. The increase
occurred primarily because of the increased revenues from Home Care.
During fiscal 1994, the Company discontinued operation of its
temporary nursing services business and recorded a loss from discontinued
operations of $710,636 and an after-tax loss on
-4-
<PAGE>
the anticipated disposal of discontinued operations of $1,167,949. During fiscal
1995, the temporary nursing services business was sold and after recognizing the
1994 writedown, an after-tax gain of $30,302 was recognized. The 1995 gain
resulted from the difference between the actual and estimated loss on the
disposal. See Note 7 of the Notes to Supplemental Consolidated Financial
Statements included elsewhere in this report for additional details.
The Company's effective tax rate for 1995 was 38% as compared to 44%
in 1994. The decrease in the effective tax rate is due to the result of the tax
benefit from measuring cumulative temporary differences in connection with the
disposal of the temporary nursing services business which reversed in fiscal
1995, and growth of the Company's business in Florida which has a lower rate
than New York, as well as the use of certain federal tax credits.
In October 1994, a subsidiary of the Company received from the
Internal Revenue Service ("IRS") a formal report proposing an adjustment in
taxes of $1,222,220 for the years 1989 through and including 1993. On October
12, 1995, that subsidiary signed a closing agreement with the IRS providing for
zero tax liability. The subsidiary agreed to treat all skilled nurses providing
Hospital Staffing services as employees for federal employment tax purposes
commencing January 1, 1996. As skilled Hospital Staffing services currently
represent only 5% of revenues, this change is not expected to have a significant
impact on earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1996, cash and cash equivalents were $1,881,979 as
compared with $1,496,792 at May 31, 1995.
The nature of the Company's business requires weekly payments to its
personnel at the time they render services, while it receives payment for
services rendered over an extended period of time (60 to 180 days or longer),
particularly when the payor is an insurance company, medical institution or
governmental unit. At May 31, 1996 and May 31, 1995, the Company's accounts
receivable balances were $9,611,169 and $6,715,907, respectively, representing
20% and 17% of the Company's net revenues for each of the respective years then
ended. Accounts receivable represent a substantial portion of current and total
assets at May 31, 1996 and May 31, 1995. During fiscal 1996, accounts receivable
turnover was approximately 65 days while during fiscal 1995 turnover was 63
days, an increase of 2 days.
Borrowings under the Company's revolving line of credit increased
approximately $800,000 during the year ended May 31, 1995 and further increased
by $1,530,000 during the year ended May 31, 1996. The increase in borrowings
during the year ended May 31, 1995 were used to partially fund the initial
acquisition of assets from LINR in May 1995. The increase in borrowings during
the period ended May 31, 1996 were used to help fund the increase in accounts
receivable resulting primarily from the Company's acquisition of LINR. The
Company currently has available a revolving credit line with a bank which allows
for maximum borrowing of $6,000,000. This revolving credit line expires on
October 31, 1997 and is subject to renewal.
-5-
<PAGE>
However, as the Company's business expands, additional financing may be
required. Outstanding borrowings under the revolving credit line at May 31, 1996
were $3,280,000 as compared to $1,750,000 at May 31, 1995.
As a result, the Company feels that its current financial condition
is sufficient in order to permit the Company to meet its financial requirements
for at least the ensuing twelve months.
The Company intends to meet its long-term liquidity needs through
available cash, cash flow and, if necessary, the Company's bank line of credit.
To the extent that such sources are inadequate, the Company will be required to
seek additional financing. In such event, there can be no assurance that
additional financing will be available to the Company on satisfactory terms.
In May 1993, one of the Company's subsidiaries received from the
Department of Labor ("DOL") a formal report proposing an adjustment in the
amount of $73,000 as a result of an employment tax audit. In January 1994,
another of the Company's subsidiaries received from the DOL a formal report
proposing an adjustment in the amount of $33,000.
The Company prevailed before the hearing examiner in the latter of
these cases, which decision is presently being appealed by the DOL, and the
Company is vigorously defending its position. The Company did not prevail in the
former case and is currently appealing that decision. Management believes that
an unfavorable outcome in either or both of these appeals would not materially
affect the financial position of the Company.
Other than the matters described above, the Company does not
anticipate any extraordinary material commitments for capital expenditures for
the Company's current fiscal year. The Company believes that cash generated from
operations, together with borrowings available under its existing line of
credit, will be sufficient to meet its short-term and long-term liquidity needs.
The Company is continually exploring possible acquisitions of
compatible companies in the health care business. If any such acquisition were
to be made with available cash, the Company's long-term liquidity would depend
to a greater extent on cash flow and the line of credit.
INFLATION AND SEASONALITY
The rate of inflation was insignificant during the year ended May 31,
1996. In the past, the effects of inflation on personnel costs 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 near
future. The Company continually reviews its costs in relation to the pricing of
its services.
The Company's business is not seasonal.
-6-
<PAGE>
STAR MULTI CARE SERVICES, INC.
REPORT ON SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1996
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Holtz Rubenstein & Co., LLP,
Independent Certified Public Accountants F-2 - F-3
Report of Ernst & Young LLP, Independent
Certified Public Accountants F-4
Report of Deloitte & Touche LLP, Independent
Certified Public Accountants F-5
Supplemental consolidated balance sheets as of
May 31, 1996 and 1995 F-6
Supplemental consolidated statements of operations
for the three years ended May 31, 1996 F-7
Supplemental consolidated statement of shareholders' equity
for the three years ended May 31, 1996 F-8
Supplemental consolidated statements of cash flows
for the three years ended May 31, 1996 F-9
Notes to supplemental consolidated financial statements F-10 - F-24
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Star Multi Care Services, Inc.
Hicksville, New York
We have audited the accompanying supplemental balance sheets of Star Multi Care
Services, Inc. as of May 31, 1996 and 1995 and the related supplemental
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 1996. The supplemental
financial statements give retroactive effect to the merger of Star Multi Care
Services, Inc. and AMSERV HEALTHCARE, INC. on August 23, 1996, which has been
accounted for as a pooling of interests as described in Notes 1a and 2a to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Star Multi Care Services, Inc.
after financial statements covering the date of consummation of the business
combination are issued. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of AMSERV HEALTHCARE, INC., which statements reflect total assets
constituting 34% in 1996 and 39% in 1995, and total revenues constituting 26% in
1996, 30% in 1995 and 25% in 1994 of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for AMSERV
HEALTHCARE, INC., is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
F-2
<PAGE>
In our opinion, based upon our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Star Multi Care
Services, Inc. at May 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 1996, after giving retroactive effect to the merger with AMSERV
HEALTHCARE, INC., in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
/s/ Holtz Rubenstein & Co., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 19, 1996 (except for Notes 1a, 2a and 8,
as to which the date is August 23, 1996)
F-3
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
AMSERV HEALTHCARE INC.
We have audited the accompanying consolidated balance sheets of AMSERV
HEALTHCARE INC. as of May 31, 1996 and June 24, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from June 25, 1995 to May 31, 1996 and the year ended June 24, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of AMSERV HEALTHCARE INC. for the year
ended June 30, 1994, were audited by other auditors whose report dated October
7, 1994, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the May 31, 1996 and June 24, 1995 financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of AMSERV HEALTHCARE INC. at May 31, 1996 and June 24, 1995, and the
consolidated results of its operations and its cash flows for the period from
June 25, 1995 to May 31, 1996 and for the year ended June 24, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
August 8, 1996
except for Note 6 and 13, as to which the date is
August 23, 1996
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
AMSERV HEALTHCARE INC.:
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of AMSERV HEALTHCARE INC. and subsidiaries (the "Company") for
the year ended June 30, 1994 (none of which are presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations of AMSERV HEALTHCARE INC. and
subsidiaries and their cash flows for the year ended June 30, 1994 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 7, 1994
F-5
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
----------------------------
ASSETS (Note 5) 1996 1995
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,881,979 $ 1,496,792
Short-term investments (Note 3) 100,000 1,392,021
Accounts receivable, net of allowance for doubtful
accounts of $808,000 and $493,264 at
May 31 1996 and 1995, respectively (Note 14) 9,611,169 6,715,907
Prepaid expenses and other current assets 800,665 346,629
Deferred income taxes (Note 9) 400,015 160,000
------------ ------------
Total current assets 12,793,828 10,111,349
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $706,818 and $519,896 at May 31, 1996 and
1995, respectively 766,480 648,154
NOTES RECEIVABLE FROM OFFICER (Note 12) 100,517 109,717
INTANGIBLE ASSETS, net (Note 4) 5,197,778 5,548,763
OTHER ASSETS 510,487 380,233
------------ ------------
$ 19,369,090 $ 16,798,216
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
- ---------------------------------------
AND SHAREHOLDERS' EQUITY
------------------------
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,329,826 $ 1,454,732
Accounts payable and other accrued expenses 1,530,138 1,065,637
Net liabilities of discontinued operations (Note 7) 98,081 391,770
Income taxes payable (Note 9) 295,647 300,440
Current maturities of long-term debt (Note 6) 125,000 125,000
------------ ------------
Total current liabilities 3,378,692 3,337,579
------------ ------------
LONG-TERM LIABILITIES:
Revolving credit line (Note 5) 3,280,000 1,750,000
Long-term debt (Note 6) 250,000 375,000
Deferred income taxes (Note 9) 39,909 --
Other long-term liabilities 33,970 30,859
------------ ------------
Total long-term liabilities 3,603,879 2,155,859
------------ ------------
REDEEMABLE PREFERRED STOCK: (Note 8)
Preferred stock, $.01 par value;
authorized 3,000,000 shares:
Class A; issued and outstanding 341,435 shares -- 3,414
Class B; issued and outstanding 130,071 shares 1,301 --
Additional paid-in capital 340,135 679,456
------------ ------------
Total redeemable preferred stock 341,436 682,870
------------ ------------
COMMITMENTS AND CONTINGENCY (Notes 2, 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 10, 11, and 12)
Preferred stock, $1.00 par value, 5,000,000
shares authorized -- --
Common stock, $.001 par value, 10,000,000
shares authorized; 3,820,358 and
3,604,050 shares issued, respectively 3,820 3,604
Additional paid-in capital 13,288,607 11,882,682
Subscription receivable (397,782) (198,440)
Unrealized (loss) on short-term investments (6,000) (14,564)
Deficit (564,640) (772,452)
Treasury stock, 137,500 common shares at
May 31, 1996 and 1995 (278,922) (278,922)
------------ ------------
Total shareholders' equity 12,045,083 10,621,908
------------ ------------
$ 19,369,090 $ 16,798,216
============ ============
</TABLE>
See notes to supplemental consolidated financial statements
F-6
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
May 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES, net (Note 14) $ 49,162,934 $ 38,430,035 $ 29,694,178
------------ ------------ ------------
OPERATING EXPENSES (Notes 12, 16 and 17)
Costs of revenues 31,943,356 24,854,524 19,333,452
Selling, general and administrative 14,634,533 11,569,405 9,057,610
Depreciation and amortization 752,758 755,449 726,978
------------ ------------ ------------
47,330,647 37,179,378 29,118,040
------------ ------------ ------------
INCOME FROM OPERATIONS 1,832,287 1,250,657 576,138
INTEREST (EXPENSE) INCOME, net (120,184) (20,583) 67,240
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,712,103 1,230,074 643,378
PROVISION FOR INCOME TAXES (Note 9) 568,844 472,038 285,832
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,143,259 758,036 357,546
DISCONTINUED OPERATIONS: (Note 7)
Loss from discontinued operations, net of income
taxes of ($282,401) -- -- (710,636)
Gain (loss) on disposal of discontinued operations,
net of income taxes of $168,211 in 1995 and
($77,110) in 1994 -- 30,302 (1,167,949)
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,143,259 788,338 (1,521,039)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Notes 3 and 9) -- 23,683 65,000
------------ ------------ ------------
NET INCOME (LOSS) $ 1,143,259 $ 812,021 $ (1,456,039)
============ ============ ============
NET INCOME PER COMMON SHARE:
Primary:
Income from continuing operations and before cumulative
effect of accounting change $ .29 $ .20 $ .10
Loss from discontinued operations -- -- (.20)
Gain (loss) on disposal of discontinued operations -- .01 (.33)
Cumulative effect of change in accounting principle -- .01 .02
------------ ------------ ------------
Net income (loss) $ .29 $ .22 $ (.41)
============ ============ ============
Assuming full dilution:
Income from continuing operations and before
cumulative effect of accounting change $ .28 $ .20 $ .10
Loss from discontinued operations- -- -- (.20)
Gain (loss) on disposal of discontinued operations -- .01 (.33)
Cumulative effect of change in accounting principle -- .01 .02
------------ ------------ ------------
Net income (loss) $ .28 $ .22 $ (.41)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 3,996,993 3,772,926 3,529,377
============ ============ ============
Assuming full dilution 4,011,503 3,798,581 3,529,377
============ ============ ============
</TABLE>
See notes to supplemental consolidated financial statements
F-7
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Note 10)
[TABLE 1 0F 2]
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED RETAINED
------------------- PAID-IN SUBSCRIPTION (LOSS) ON EARNINGS
SHARES PAR VALUE CAPITAL RECEIVABLE INVESTMENTS (DEFICIT)
------ --------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1993, as previously reported 1,445,000 $ 1,445 $ 4,842,513 $ -- $ -- $ 171,738
Pooling of interest with AMSERV Healthcare, Inc.
(Note 2) 1,204,311 1,204 6,107,556 -- -- 181,129
---------- ------- ------------ --------- -------- -----------
Balance, May 31, 1993, as adjusted 2,649,311 2,649 10,950,069 -- -- 352,867
Purchase of treasury stock -- -- -- -- -- --
Stock split 722,500 723 (723) -- -- --
Net loss -- -- -- -- -- (1,456,039)
---------- ------- ------------ --------- -------- -----------
Balance, May 31, 1994 3,371,811 3,372 10,949,346 -- -- (1,103,172)
Purchase of treasury stock -- -- -- -- -- --
Exercise of stock options 19,000 19 36,145 -- -- --
Exercise of stock options on pooled company including
income tax benefit 84,892 85 416,018 (198,440) -- --
Stock dividend 128,347 128 481,173 -- -- (481,301)
Cumulative effect of change in accounting principle -- -- -- -- (23,683) --
Change in unrealized loss on short-term investments -- -- -- -- 9,119 --
Net income -- -- -- -- -- 812,021
---------- ------- ------------ --------- -------- -----------
Balance, May 31, 1995 3,604,050 3,604 11,882,682 (198,440) (14,564) (772,452)
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. -- -- -- -- -- 136,262
Exercise of stock options 17,287 17 40,611 -- -- --
Exercise of stock options on pooled company including
income tax benefit 62,931 63 293,741 (199,342) -- --
Stock dividend 136,090 136 1,071,573 -- -- (1,071,709)
Change in unrealized loss on short-term investments -- -- -- -- 8,564 --
Net income -- -- -- -- -- 1,143,259
---------- ------- ------------ --------- -------- -----------
Balance, May 31, 1996 3,820,358 $ 3,820 $ 13,288,607 $(397,782) $ (6,000) $ (564,640)
========== ======= ============ ========= ======== ===========
</TABLE>
[TABLE 2 OF 2]
<TABLE>
<CAPTION>
TREASURY STOCK TOTAL
----------------- SHAREHOLDERS'
SHARES VALUE EQUITY
------ ----- ------
<S> <C> <C> <C>
Balance, May 31, 1993, as previously reported 45,000 $(105,000) $ 4,910,696
Pooling of interest with AMSERV Healthcare, Inc.
(Note 2) -- -- 6,289,889
--------- --------- ------------
Balance, May 31, 1993, as adjusted 45,000 (105,000) 11,200,585
Purchase of treasury stock 90,000 (167,985) (167,985)
Stock split -- -- --
Net loss -- -- (1,456,039)
--------- --------- ------------
Balance, May 31, 1994 135,000 (272,985) 9,576,561
Purchase of treasury stock 2,500 (5,937) (5,937)
Exercise of stock options -- -- 36,164
Exercise of stock options on pooled company including
income tax benefit -- -- 217,663
Stock dividend -- -- --
Cumulative effect of change in accounting principle -- -- (23,683)
Change in unrealized loss on short-term investments -- -- 9,119
Net income -- -- 812,021
--------- --------- ------------
Balance, May 31, 1995 137,500 (278,922) 10,621,908
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. -- -- 136,262
Exercise of stock options -- -- 40,628
Exercise of stock options on pooled company including
income tax benefit -- -- 94,462
Stock dividend -- -- --
Change in unrealized loss on short-term investments -- -- 8,564
Net income -- -- 1,143,259
--------- --------- ------------
Balance, May 31, 1996 137,500 $(278,922) $ 12,045,083
========= ========= ============
</TABLE>
See notes to supplemental consolidated financial statements
F-8
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
May 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,143,259 $ 812,021 $(1,456,039)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 511,736 196,309 255,446
Depreciation and amortization 722,609 755,449 902,406
Deferred income taxes (200,106) (12,765) (11,000)
AMSERV fiscal year conversion 136,262 -- --
Loss on disposal of equipment -- 47,286 45,078
(Gain) loss on disposal of discontinued operations -- (30,302) 1,167,949
Cumulative effect of change in accounting principles -- (23,683) (65,000)
Write-off of intangibles -- -- 137,616
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (3,406,998) (357,874) (1,746,575)
Prepaid expenses and other assets (584,290) 122,811 (134,455)
Valuation allowance (16,902) -- --
Increase (decrease) in liabilities:
Accounts payable and accrued payroll and expenses 257,250 369,760 243,632
Income taxes payable (4,793) 104,903 140,653
Other liabilities (14,544) 238,812 94,122
Loss contracts and unfavorable leases -- -- (44,000)
----------- ----------- -----------
Total adjustments (2,599,776) 1,410,706 985,872
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,456,517) 2,222,727 (470,167)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (992,999) (1,586,285) (497,125)
Proceeds from sale of short-term investments 2,310,486 880,000 268,750
Purchase of intangibles (82,403) (14,829) --
Repayment on note receivable from officer 9,200 15,506 4,777
Purchase of property and equipment (307,547) (398,332) (152,545)
Business acquisitions -- (1,215,770) (1,469,839)
Payment of costs related to discontinued operations (293,689) (508,587) --
Proceeds from sale of discontinued operations -- 813,941 --
Cash received on notes receivable -- 50,411 191,504
Proceeds from sale of property and equipment -- 31,851 4,034
Payment of earnout advance -- (500,000) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 643,048 (2,432,094) (1,650,444)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit line 1,530,000 800,000 950,000
Repayment of long-term debt (125,000) (166,666) --
Proceeds from the exercise of stock options 135,090 253,827 --
Redemption of Class A preferred shares -- (170,718) --
Redemption of Class B preferred shares (341,434) -- --
Repayment of note payable -- (73,349) (57,238)
Issuance of note payable -- -- 130,587
Purchase of treasury stock -- (5,937) (167,985)
----------- ----------- -----------
Net cash provided by financing activities 1,198,656 637,157 855,364
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH 385,187 427,790 (1,265,247)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year 1,496,792 1,069,002 2,334,249
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,881,979 $ 1,496,792 $ 1,069,002
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 858,932 $ 526,784 $ 218,294
=========== =========== ===========
Interest paid $ 280,000 $ 117,289 $ 40,421
=========== =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements
F-9
<PAGE>
STAR MULTI CARE SERVICES, INC
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BASIS OF PRESENTATION
The supplemental consolidated financial statements of Star Multi Care
Services, Inc. have been prepared to give retroactive effect to the merger with
AMSERV HEALTHCARE, INC. ("AMSERV") on August 23, 1996, which has been accounted
for as a pooling of interests as described in Note 2. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Star Multi Care
Services, Inc. after financial statements covering the date of consummation of
the business combination are issued.
b. DESCRIPTION OF BUSINESS
The Company is principally engaged in providing temporary health care
personnel, including registered nurses, licensed practical nurses, nurses' aides
and respiratory therapists to hospitals, nursing homes, extended care facilities
and in-home patients in Florida, Ohio and the New York City metropolitan area.
c. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Star
Multi Care Services, Inc. and its subsidiaries (the "Company"), all of which are
wholly-owned. All significant intercompany transactions and accounts have been
eliminated.
d. REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Net revenue is recorded at the estimated net realizable amount from
patients, third- party payors and others for services rendered. A provision for
doubtful accounts is made for revenue estimated to be uncollectible and is
adjusted periodically based upon management's evaluation of current industry
conditions, historical collection experience and other relevant factors which,
in the opinion of management, deserve recognition in estimating the allowance
for doubtful accounts.
e. INVESTMENTS IN DEBT AND EQUITY SECURITIES
In July 1994, the Company has adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company has classified its investment securities as
available-for-sale and has recorded unrealized holding gains and losses as a
separate component of stockholders' equity. The cumulative effect of the change
in accounting principle resulted in an after-tax increase to income for
unrealized losses of $23,683 at June 1, 1994.
F-10
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
f. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The carrying amount of
assets and related accumulated depreciation and amortization are removed from
the accounts when such assets are disposed of, and the resulting gain or loss is
included in operations. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the remaining life of the lease or the life of the
improvements.
g. INTANGIBLE ASSETS
Intangible assets are stated at acquisition cost and are being
amortized on a straight- line basis over their estimated useful lives.
h. CONTRACTUAL ADJUSTMENTS
Under Medicare, Medicaid and other cost-based reimbursement programs,
the Company is reimbursed for services rendered to covered program patients as
determined by reimbursement formulas. The differences between established
billing rates and the amounts reimbursable by the programs and patient payments
are recorded as contractual adjustments and deducted from revenues.
Retroactively calculated third-party contractual adjustments are
accrued on an estimated basis in the period the related services are rendered.
Revisions to estimated contractual adjustments are recorded based upon audits by
third-party payors, as well as other communications with third-party payors such
as desk reviews, regulation charges and policy statements. These revisions are
made in the year such amounts are determined.
i. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents.
j. INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Temporary differences and
carryforwards giving rise to deferred taxes primarily relate to the allowance
for doubtful accounts, depreciation and subsidiary net operating loss
carryforwards.
k. NET INCOME PER SHARE
Net income per share has been computed by dividing net income by the
weighted average number of common stock and common stock equivalents outstanding
during each period. Common stock equivalents represents the dilutive effect of
the assumed exercise of certain outstanding options and warrants.
F-11
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
l. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company in order
to reduce the impact of changes in interest rates. The Company does not hold or
issue derivative financial instruments for trading purposes. Income and expenses
are recorded in the same category as that arising from the related asset or
liability being hedged. Gains realized on termination of interest rate swap
contracts are deferred and amortized over the remaining terms of the original
swap agreement. Costs of interest rate cap contracts are amortized over the
lives of the contracts.
m. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted account ing principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
n. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's
financial statements to conform with the classifications used in 1996.
2. MERGERS AND ACQUISITIONS:
a. MERGER
In February 1996, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with AMSERV. On August 23, 1996 AMSERV was merged with
and into the Company. Under terms of the Agreement, each share of AMSERV common
stock was exchanged for .4090 shares of the Company's common stock. The Company
also assumed all outstanding options and other rights to acquire AMSERV stock.
Approximately 1,360,000 shares of the Company's common stock were exchanged for
all of the outstanding stock of AMSERV. The merger qualified as a tax-free
reorganization and was accounted for as a pooling of interests, and accordingly,
the accompanying supplemental financial statements have been restated to include
the accounts and operations of AMSERV for all periods prior to the merger.
AMSERV changed its year end to May 31 for fiscal 1996, utilized a
52/53 week fiscal year end for fiscal 1995 and a June 30 year end for fiscal
1994. AMSERV's statements of operations for the years ended June 24, 1995 and
June 30, 1994 have been combined with Star's statements of operations for the
fiscal years ended May 31, 1995 and 1994, respectively. In order to conform
AMSERV's year end to Star's fiscal year end, the supplemental consolidated
statement of operation for fiscal year ended May 31, 1996 includes four weeks
(June 1, 1995 to June 24, 1995) for AMSERV which are also included in the
supplemental consolidated statement of operation for fiscal year ended May 31,
1995. Accordingly, an adjustment has been made in fiscal 1996 to retained
F-12
<PAGE>
2. MERGERS AND ACQUISITIONS: (Cont'd)
earnings for the duplication of net loss of ($136,262) for such four week
period. Other results of operations for such four week period of AMSERV include
net revenues of $1,113,322, depreciation and amortization of $30,149, loss
before taxes of ($199,624) and income tax benefit of $63,362.
Separate approximated net revenues and net income/(loss) amounts of
the merged entities for the period prior to the merger are as follows:
YEAR ENDED
MAY 31, 1996
Net revenues:
Star Multi Care Services, Inc. $36,339,000
AMSERV HEALTHCARE, INC 12,823,000
-----------
$49,162,000
===========
Net income:
Star Multi Care Services, Inc. $ 1,046,000
AMSERV HEALTHCARE, INC 97,000
-----------
$ 1,143,000
===========
b. ACQUISITIONS
In May 1995, the Company acquired certain assets of Long Island
Nursing Registry, Inc. ("LINR") for approximately $1,716,000, including
acquisition costs of approximately $100,000. The assets purchased consisted of
customers and patient lists of $1,156,000, nurses lists of $250,000, covenant
not-to-compete of $150,000, furniture and office equipment of $25,000 and
goodwill of $35,000.
In June 1994, the Company acquired substantially all the assets and
property of North Central Personnel, Inc. ("North Central"). The acquisition had
an initial purchase price of $1,553,835. The Company paid $553,835 of the
purchase price with cash, and the balance of $1,000,000 was financed by a
promissory note payable to the seller. The final purchase price is contingent on
an earnout, of which $500,000 was earned in 1995 and $100,000 was earned as of
May 31, 1996. The remaining earnout will not exceed $400,000. The excess of the
purchase price over the valuation of tangible assets was assigned to goodwill
($1,047,000) and a non-competition agreement ($25,000). The earnout advance and
all future earnout payments will be accounted for as additional purchase price
of North Central.
In November 1993, the Company acquired certain assets of DSI Home
Care Services, Inc. for approximately $725,000, including acquisition costs of
$175,000. The assets purchased consisted of customer and patient lists of
$400,000, nurses lists of $120,000, furniture and office equipment of $30,000
and goodwill of $175,000.
The above acquisitions have been accounted for utilizing purchase
accounting principles. Accordingly, the results of operations have been included
in the accompanying consolidated financial statements since the date of
acquisition.
F-13
<PAGE>
3. SHORT-TERM INVESTMENTS:
Short-term investments are recorded at estimated fair market values
at May 31, 1996 and 1995. The Company has classified all of its investments as
available-for-sale securities according to Statement of Financial Accounting
Standards ("SFAS") No. 115. The following table summarizes available-for-sale
securities:
MAY 31, 1996
-----------------------------------------
GROSS
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
-------- -------- ---------
Common stock $110,000 $ 10,000 $100,000
======== ======== ========
MAY 31, 1995
-----------------------------------------
GROSS
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
-------- -------- ---------
Money market/non-gov't securities $ 453,903 $ 2,494 $ 451,409
Tax exempt government bonds 605,020 158 604,862
Common stock 110,000 23,000 87,000
Preferred stock 250,000 1,250 248,750
---------- -------- ----------
Total $1,418,923 $ 26,902 $1,392,021
========== ======== ==========
As a result of the adoption of SFAS No. 115 during the year ended May
31, 1995, the Company records net unrealized holding gains and losses, net of
income tax effects, as a separate component of shareholders' equity. Previously,
unrealized losses had been charged to operations. The cumulative effect of this
change in accounting principle resulted in an after-tax adjustment to earnings
of $23,683 at June 1, 1994.
A net realized loss on sales of available-for-sale securities of
$10,098 was recognized in the year ended May 31, 1996. A net realized gain of
$2,413 was recognized in the year ended May 31, 1995 and a net realized loss of
$11,250 was recognized in the year ended May 31, 1994.
F-14
<PAGE>
4. INTANGIBLE ASSETS:
Intangible assets are as follows:
MAY 31,
AMORTIZATION ------------------------
PERIOD 1996 1995
------------ ---------- ----------
Goodwill 25 - 37 $2,989,000 $2,895,000
Customer contracts 11 - 15 2,225,000 2,225,000
Covenants not-to-compete 2 - 8 1,100,000 1,125,000
Nurses' list 9 - 15 703,000 703,000
Accreditation and training programs 5 503,000 503,000
Assembled workforce 5 497,000 497,000
Other 2 - 10 127,000 49,000
---------- ----------
8,144,000 7,997,000
Less accumulated amortization 2,946,000 2,448,000
---------- ----------
$5,198,000 $5,549,000
========== ==========
5. REVOLVING CREDIT LINE:
The Company has a $6.0 million line of credit with a bank which bears
interest at 1/4% above the bank's prime lending rate (8 1/4% at May 31, 1996)
and matures on October 31, 1997, at which time it may be converted into a three
year term loan which will bear interest at 1/2% above the bank's prime lending
rate. The facility is renewable at the sole discretion of the bank. All loans
under the line of credit are collateralized by all assets of the Company. The
Company can borrow against the line to the extent of 80% of eligible accounts
receivable (120 days and under, net of contractual allowances).
Under the line of credit agreement, the Company can from time to time
borrow at a rate based on the bank's money market rate (5.31% at May 31, 1996)
plus 2 3/4% for a period no less than three months. At May 31, 1996, $2,900,000
was at the money market rate and the remainder of the outstanding credit line of
$380,000 was at prime plus 1/4%.
6. LONG-TERM DEBT:
Long-term debt consists of a note payable in monthly installments of
$10,417 through May 1999. Interest is payable monthly at 8.5%. The note was
issued in connection with the acquisition discussed in Note 8.
F-15
<PAGE>
6. LONG-TERM DEBT: (Cont'd)
Long-term debt matures as follows:
YEARS ENDING
MAY 31,
------------
1997 $125,000
1998 125,000
1999 125,000
--------
$375,000
========
7. DISCONTINUED OPERATIONS:
On September 20, 1994, the Company signed a Letter of Intent to sell
its temporary nursing services business. As a result, the Company recorded a
fiscal 1994 charge of $1,167,949 (after income tax benefit of $77,110) to
provide for a loss on the disposal of this discontinued operations and the
after-tax estimated operating losses of $149,627 until the estimated date of
disposal. On November 9, 1994, the Company completed this transaction, and sold
substantially all of the fixed and intangible assets of its temporary nursing
services business for $814,000. The related net liabilities for this
discontinued operation are included in the balance sheet under the caption, "Net
liabilities of discontinued operations." The balance remaining unpaid at May 31,
1996 and 1995, relates to various state and local tax and payroll liabilities
that have not been finalized and a remaining severance obligation. The
consolidated statements of operations for the years ended May 31, 1996, 1995 and
1994, exclude sales and expenses for its temporary nursing services business
from captions applicable to continuing operations. Revenues from the
discontinued operation during fiscal 1995 were $3,988,696. Operating results of
the discontinued operation for fiscal 1994 is summarized below:
MAY 31,
1994
------------
Net sales $ 12,022,618
Loss before income taxes $ (993,037)
Income tax benefit $ (282,401)
Loss from discontinued operations $ (710,636)
8. REDEEMABLE PREFERRED STOCK:
In April 1995, the Company issued 426,794 shares of its voting Class
A Redeemable Preferred Stock, which had a redemption value of $2.00 per share,
in exchange for a promissory note payable in connection with the purchase of
North Central and related accrued interest which totalled $853,588 on the date
of the exchange. The preferred shares paid no dividends and could be redeemed at
the option of the holder, in specified installments for cash. On May 29, 1995,
85,359 shares were redeemed for $170,718. On July 6, 1995, the remaining 341,435
Class A Redeemable Preferred Shares were exchanged for 260,141 Class B
Redeemable preferred Shares, with a redemption price of $2.625 per share and an
aggregate redemption value of $682,870. During the current fiscal period,
130,070 shares have been redeemed for $341,434. As of May 31, 1996, the
remaining 130,071
F-16
<PAGE>
8. REDEEMABLE PREFERRED STOCK: (Cont'd)
shares with an aggregate redemption value of $341,436 may be redeemed in
installments of approximately 65,000 shares on or after November 29, 1996 and
May 29, 1997, at the option of the holder. All outstanding Class B shares become
redeemable in the event of default or change of control. As a result of the
merger with AMSERV (Note 2), the holder of the preferred shares called for
redemption, which was paid in full on August 23, 1996. Holders of all classes of
Redeemable Preferred Stock have the same voting rights as common stock.
9. INCOME TAXES:
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
a liability approach to financial accounting and reporting for income taxes. The
effect of adopting SFAS No. 109 on net income for the year ended May 31, 1994
was an increase of $76,000, which includes an increase in net income of $65,000
for the cumulative effect on years prior to June 1, 1993. As permitted under the
standard, the financial statements for the prior year have not been restated.
The provision for income taxes from continuing operations consists of
the following:
YEARS ENDED MAY 31,
-------------------------------------------
1996 1995 1994
--------- --------- ---------
Current:
Federal $ 551,758 $ 314,781 $ 215,832
State and local 217,192 170,022 81,000
--------- --------- ---------
768,950 484,803 296,832
--------- --------- ---------
Deferred:
Federal (197,498) (8,765) (8,000)
State (2,608) (4,000) (3,000)
--------- --------- ---------
(200,106) (12,765) (11,000)
--------- --------- ---------
$ 568,844 $ 472,038 $ 285,832
========= ========= =========
The components of the net deferred tax assets are as follows:
MAY 31,
-----------------------
1996 1995
-------- --------
Deferred tax assets:
Allowance for doubtful accounts $296,772 $201,448
Reserve for discontinued operations 35,099 157,249
Accrued expenses 111,811 102,190
Tax credits 71,973 92,696
Net operating loss carryfoward 11,440 9,060
Other 19,313 26,064
-------- --------
546,408 588,707
-------- --------
F-17
<PAGE>
9. INCOME TAXES:
MAY 31,
--------------------------
1996 1995
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (143,322) (54,069)
Prepaid expenses (42,980) (38,874)
--------- ---------
(186,302) (92,943)
Valuation allowance -- (335,764)
--------- ---------
(186,302) (428,707)
--------- ---------
Net deferred tax asset $ 360,106 $ 160,000
========= =========
A reconciliation between the actual income tax expense and income
taxes computed by applying the statutory federal income tax rate to income
before taxes is as follows:
YEARS ENDED MAY 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Computed federal income tax at
statutory rates $ 582,115 $ 419,035 $ 218,025
State taxes, net of federal benefits 158,200 108,015 53,000
Items without tax benefit 103,856 51,552 32,000
Valuation allowance (335,764) (77,687) 4,922
Other, net 60,437 (28,877) (22,115)
--------- --------- ---------
$ 568,844 $ 472,038 $ 285,832
========= ========= =========
F-18
<PAGE>
10. SHAREHOLDER'S EQUITY:
a. WARRANTS
Pursuant to the Company's common stock offering in May 1991, the
Company issued to the underwriter warrants to purchase 112,922 shares of the
Company's common stock. The warrants, which contain certain anti-dilution
provisions have an exercise price of $4.98 per share. Warrants totalling 11,292
were cancelled in May 1996, the remaining 101,630 warrants were extended until
May 1999.
b. PREFERRED STOCK
On November 23, 1993, shareholders voted to amend the Company's
Certificate of Incorporation to create five million shares of preferred stock,
$1.00 par value, which the Board of Directors has authority to issue from time
to time in series. The Board of Directors also has the authority to fix, before
the issuance of each series, the number of shares in each series and the
designation, preferences, rights and limitations of each series. To date, no
shares of preferred stock have been issued.
c. STOCK DIVIDEND
On December 5, 1995, the Company's Board of Directors approved a
stock dividend on January 12, 1996 for shareholders of record as of December 22,
1995. A total of 136,090 shares of common stock were issued in connection with
the dividend. Common stock has been adjusted for the par value of the shares
issued. Additional paid in capital and retained earnings have been adjusted for
the difference between the fair market value and the par value of the shares.
On April 24, 1995, the Company's Board of Directors approved a stock
dividend payable on May 30, 1995 for shareholders of record as of May 15, 1995.
A total of 128,347 shares of common stock were issued in connection with the
dividend. Common stock has been adjusted for the par value of the shares issued.
Additional paid-in capital and retained earnings have been adjusted for the
difference between the fair market value and the par value of the shares.
On April 12, 1994, the Company's Board of Directors approved a stock
split of the Company's common stock for shareholders of record as of April 29,
1994. A total of 722,500 shares of common stock were issued in connection with
the split. Common stock and additional paid-in capital have been adjusted for
the par value of the additional shares issued.
All references in the accompanying financial statements to the number
of common shares and per share amounts for all periods presented have been
restated to reflect the stock dividends.
11. STOCK OPTION PLANS:
The Company has three stock option plans (the "Plans") as adopted and
as adjusted for stock dividends. Participants may be granted either Incentive
Stock Options or Non-Qualified Stock Options to purchase an aggregate of
1,234,685 shares of common stock. The purpose of the Plans are to promote the
overall financial objectives of the Company and its shareholders by motivating
those persons selected to participate in the Plans to achieve long-term growth
in shareholder equity
F-19
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
in the Company and by retaining the association of those individuals who are
instrumental in achieving this growth. Such options become exercisable at
various intervals based upon vesting schedules as determined by the Compensation
Committee. The options expire between November 1997 and May 2005.
The incentive stock options may be granted to employees and
consultants of the Company at a price not less than the fair market value on the
date of grant. All such options are authorized and approved by the Board of
Directors, based on recommendations of the Compensation Committee.
Information as to options granted is summarized as follows:
EXERCISE
SHARES PRICE
------ -----
Outstanding, June 1, 1993 597,376 $1.44 - $15.60
Granted 254,156
Canceled and expired (46,153)
----------
Outstanding, May 31, 1994 805,379 $1.44 - $15.60
Granted 33,671
Exercised (105,033)
Canceled and expired (46,115)
----------
Outstanding, May 31, 1995 687,902 $1.44 - $15.60
Granted 98,302
Canceled and expired (17,963)
Exercised (80,218)
----------
Outstanding, May 31, 1996 688,023 $1.44 - $7.64
==========
Exercisable 621,297 $1.44 - $7.64
==========
Shares reserved for future issuance at May 31, 1996 are comprised of the
following:
Shares issuable upon exercise of
stock option under the plans 1,222,000
Shares issuable upon exercise of
warrants by underwriter 102,000
Shares issuable under the Company's
employee stock purchase plan 318,000
---------
1,642,000
=========
In November 1995, the Company adopted an Employee Stock Purchase Plan
whereby certain employees can purchase shares of common stock at the lesser of
85% of fair market value of the stock at the beginning or end of the calendar
year.
F-20
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which requires companies to measure employee stock compensation
based on the fair value method of accounting, or to use the intrinsic value
method prescribed in Accounting Principles Board Option No. 25 and to provide
pro forma footnote disclosures under the fair value method in SFAS No. 123. The
Company will adopt the new standard in fiscal 1997 and expects to elect the
continued use of APB Opinion No. 25.
12. RELATED PARTY TRANSACTIONS:
a. NOTES RECEIVABLE FROM OFFICER
Notes receivable from officer of $100,517 represents amounts loaned
by the Company and/or subsidiaries of the Company to the Company's President.
These notes bear interest at 6% and mature August 1, 1998. All interest has been
paid through May 31, 1996.
b. STOCK SUBSCRIPTION RECEIVABLE
On April 20, 1995, the Company accepted a non-recourse promissory
note from the former Chief Executive Officer of AMSERV, Eugene J. Mora, in the
original principal amount of $198,440, bearing interest at a rate of 10% per
annum and maturing in April 2000, and $1,100 in cash for the exercise of options
for 44,990 shares of the Company's common stock. The promissory note is secured
by 72,623 shares of the Company's common stock owned by Mr. Mora. On January 16,
1996, the promissory note was amended to become a recourse promissory note,
secured by 44,990 shares of common stock owned by Mr. Mora, with interest at a
rate of 5.73% per annum. Also on January 16, 1996, the Company accepted an
additional recourse promissory note from Mr. Mora in the original principal
amount of $199,342, bearing interest at a rate of 5.73% per annum and maturing
in January 2001, and $1,105 in cash for the exercise of options for 45,194
shares of the Company's common stock..
c. SERVICES
A director provides accounting services to the Company for which he
was compensated approximately $100,000 in each of the years 1996, 1995 and 1994.
A former director of AMSERV, provided certain legal services to the
Company. The Company incurred legal fees with such firm of $7,027, $114,208 and
$39,272 for fiscal years 1996, 1995 and 1994, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosure about Fair Value of Financial Instruments,
which requires disclosures about the fair value of the Company's financial
instruments. The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term
financial instruments approximate their fair value.
F-21
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: (Cont'd)
Long-Term Debt: The fair value of the Company's long-term debt,
including the current portions, was estimated using a discounted cash
flow analysis, based on the Company's assumed incremental borrowing
rates for similar types of borrowing arrangements. The carrying
amount of variable and fixed rate debt at May 31, 1996 approximates
its fair value.
14. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable
and temporary cash investments.
The Company provides temporary health care personnel to hospitals,
nursing homes, extended care facilities and in-home patients in Florida, New
Jersey and the New York City metropolitan area. At May 31, 1996, approximately
30% of accounts receivable was due from Medicaid and approximately 8% of
accounts receivable was due from Medicare. Credit losses relating to customers
historically have not been significant and within management's expectations.
The Company places it temporary cash investments with high credit
quality financial institutions.
15. CONTINGENCIES:
The Company in the past treated certain of its nurses and certain
others as independent contractors. The Internal Revenue Service ("IRS") and the
New York State Department of Labor ("DOL") have, in certain cases, determined
that per diem health care workers were employees, and not independent
contractors, of the firm placing them. Two of the Company's subsidiaries have
been selected for an employment tax audit by DOL and another of the Company's
subsidiaries has been selected for an employment tax audit by the IRS.
In October 1994, the subsidiary subjected to the IRS audit received
from the IRS a formal report proposing an adjustment in taxes of $1,222,220 for
years 1989-1993. On October 12, 1995, that subsidiary signed a closing agreement
with the IRS providing for zero tax liability for the years 1989-1995. The
subsidiary has agreed to treat all skilled nurses providing hospital staffing
services as employees for federal employment tax purposes commencing January 1,
1996. As skilled hospital staffing services currently represents only 3% of
revenues this change is not expected to have a significant impact on earnings.
In May 1993, one of the Company's subsidiaries received from the DOL
a formal report proposing an adjustment in the amount of $73,000. In January
1994, the other of the Company's subsidiaries received from the DOL a formal
report proposing an adjustment in the amount of $33,000. The Company prevailed
before the hearing examiner in the latter of these cases, which decision is
presently being appealed by the DOL, and the Company is vigorously defending its
position. The Company did not prevail in the former case and is currently
appealing that decision. Management believes that the possibility of an
unfavorable outcome which would materially affect the financial position and
results of operations of the Company is remote.
F-22
<PAGE>
16. COMMITMENTS:
a. EMPLOYMENT AGREEMENT
The Company has an employment agreement, as amended, with an officer
which expires in December 2000. The aggregate commitment for future salary,
excluding bonuses, under the agreement is $1,125,000. The agreement also
provides for certain bonuses based upon annual pretax income. The Company has an
employment agreement with a former LINR shareholder which expires May 1997. The
aggregate commitment for future salary under the agreement is $100,000. The
aggregate minimum commitment for future salaries under both agreements are as
follows:
YEARS ENDING
MAY 31,
------------
1997 $ 350,000
1998 250,000
1999 250,000
2000 250,000
2001 125,000
----------
$1,225,000
==========
Under the Merger Agreement with AMSERV, Star has agreed to honor the
provisions of certain agreements with AMSERV's chief executive officer. Pursuant
to these agreements, if AMSERV's chief executive officer is terminated without
cause, AMSERV is obligated to pay the chief executive officer the compensation
he earned in the final year of his employment in each of the immediately
following five years and transfer certain life insurance policies owned by the
Company. In 1996, compensation earned by the chief executive officer was
approximately $300,000.
b. LEASES
The Company conducts its operations from leased office space under
various operating leases which expire at various dates through 2002. Management
expects that in the normal course of business these leases will be renewed or
replaced by other leases.
As of May 31, 1996 future net minimum rental payments (net of
sublease income) under operating leases having initial or remaining
noncancellable terms in excess of one year are as follows:
1997 $ 718,000
1998 643,000
1999 587,000
2000 230,000
2001 144,000
2002 75,000
----------
$2,397,000
==========
F-23
<PAGE>
16. COMMITMENTS: (Cont'd)
Rental expenses for operating leases for fiscal years ended 1996,
1995 and 1994 were approximately $731,000, $519,000 and $470,000, respectively.
c. GUARANTY
In connection with the sale of a business in 1992, the Company has
guaranteed certain lease payments. The amount of future lease payments
guaranteed by the Company totalled $290,836 at May 31, 1996 and are payable
through September 1998.
17. RETIREMENT PLANS:
The Company adopted a 401(k) savings plan in January 1995 covering
all eligible employees. Employees may defer up to 15% of their compensation. The
Company will match 10% of employees' contributions up to 8%. Contributions for
the year ended May 31, 1996 approximated $17,000.
A division of the Company has a deferred fringe benefits welfare
compensation plan covering substantially all of its employees. Contributions to
the plan are discretionary and are based on employee compensation. The plan was
amended in November 1995 to increase the vesting period of new entrants. New
entrants vest fully after 10 years of service, and participants prior to the
amendment vest fully after three years of service. Contributions to the plan for
1996, 1995 and 1994 approximated $233,000, $264,000 and $222,000, respectively.
18. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the years ended May 31, 1996 and 1995, the Company issued
stock dividends which amounted to $1,071,709 and $481,301, respectively. During
the years ended May 31, 1996 and 1995, the Company issued common stock upon the
exercise of stock options in exchange for notes receivable in the amount of
$199,342 and $198,440, respectively. During the year ended May 31, 1995, the
Company issued a note payable of $500,000 to finance a portion of the
acquisitions mentioned in Note 2. During the year ended May 31, 1995, the
Company issued $853,588 of Class A redeemable preferred stock in exchange for a
note payable and related accrued interest. During the year ended May 31, 1994.
the Company transferred $80,307 from accounts receivable to notes receivable.
19. FINANCIAL INSTRUMENTS:
On March 20, 1996, the Company entered into a two year notional
amount $1,500,000 interest rate swap with a bank, whereby the Company pays
interest at a fixed rate of 6.16% and receives interest at the three-month
London Interbank Offered Rate ("LIBOR"). The Company is exposed to credit loss
in the event of non-performance by the bank, however the Company does not
anticipate a loss resulting from this credit risk. The fair value of this
financial instrument at May 31, 1996 approximates $10,000.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
April 25, 1997 STAR MULTI CARE SERVICES, INC.
By: /S/ WILLIAM FELLERMAN
-----------------------------
Name: William Fellerman
Title: Chief Financial Officer
CONSENT OF HOLTZ RUBENSTEIN & CO., LLP, INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference into the Registration
Statements on Forms S-8 (Nos. 333-20865, 333-08499, 333-05177, 333-06063 and
33-59056) of Star Multi Care Services, Inc. of our report dated July 19, 1996,
except as to the pooling of interests with AMSERV HEALTHCARE INC., which is as
of August 23, 1996, with respect to the consolidated financial statements of
Star Multi Care Services, Inc. appearing in this Current Report on Form 8-K.
/s/ Holtz Rubenstein & Co., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
April 25, 1997
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated August 8, 1996, except for Notes 6 and
13, as to which the date is August 23, 1996, with respect to the consolidated
financial statements of AMSERV HEALTHCARE INC. included in this Current Report
on Form 8-K of Star Multi Care Services, Inc. to be filed on or about April 25,
1997 and to the incorporation by reference into the Registration Statements on
Form S-8 (Nos. 333-20865, 333-08499, 333-05177, 333-06063 and 33-59056) of Star
Multi Care Services, Inc.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
April 24, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-20865, 333-08499, 333-05177, 333-06063 and 33-59056 of Star Multi Care
Services, Inc. on Forms S-8 of our report dated October 7, 1994 (relating to the
financial statements of AMSERV HEALTHCARE INC. and subsidiaries not presented
separately herein) appearing in this Form 8-K.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
April 25, 1997
