SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended May 31, 1997
[_] 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 1-10751
STAR MULTI CARE SERVICES, INC.
(Name of small business issue in its charter)
New York 11-1975534
(State or other jurisdiction of (I.R.S. Employer
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incorporation or organization) Identification No.)
99 Railroad Station Plaza, Hicksville, New York 11801
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (516) 938-2016
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of each exchange on which registered
Common Stock, par value $.001 per share Nasdaq National Market System
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Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
On August 27, 1997 the aggregate market value of the Common Stock of Star Multi
Care Services, Inc. held by non-affiliates (2,580,790 shares) was $12,323,272
(based upon the average bid and asked prices of the Common
Stock on such date on the Nasdaq National Market System).
As of August 27, 1997, the Registrant had 4,112,478 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders of the Company are incorporated by reference into Part III
hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Star Multi Care Services, Inc. (the "Company") is in the business of
providing placement services of registered and licensed nurses and home health
aides to patients for care at home ("Home Care") and, to a lesser extent,
temporary health care personnel recruiting to hospitals and nursing homes
("Hospital Staffing"). In addition, the Company maintains registries of
registered nurses, licensed practical nurses, nurses' aides, certified home
health aides and certified personal care workers from which personnel are
recruited on a per diem basis to meet the requirements of the Company's clients.
Prior to its acquisition by present management in 1987, the Company's
business related primarily to providing private duty nurses to patients in
hospitals and staffing to hospitals. Under its current management, the Company
expanded its Hospital Staffing arrangements to nursing homes and additional
hospitals to provide licensed nurses on a per diem basis for general staff. In
1988, the Company further extended its Hospital Staffing business to include
providing licensed practical nurses and nurses' aides. In 1989, the Company
began providing Home Care services in New York City pursuant to a license from
the New York State Health Department. In 1990, the Company expanded its Home
Care services to include transportation of patients from hospital to home in
ambulettes, arrangements to purchase and supply equipment and pharmaceuticals,
as prescribed by the patients' physicians, and home infusion care. In 1991, the
Company was licensed by the New York State Department of Health to operate an
office in Nassau County, New York.
In 1992, the Company expanded its existing Home Care business through
the acquisition of certain assets from Unity Healthcare Holding Company, Inc.
and its subsidiaries ("Unity"), including contract rights to provide Home Care
services through various hospitals, community agencies and other institutional
health care providers. These contract rights complemented the existing home
health care businesses of the Company in areas such as New Jersey and New York
where the Company already operated. In addition, in these locations, the Company
obtained from Unity client referral lists to further expand existing operations.
In addition to expanding the Company's existing regional business,
the Unity acquisition added new operations to the Company in new locations. The
Company acquired Unity's Florida operations, which included certification to
receive reimbursement from Medicare and Medicaid in Broward and Dade Counties.
Most of such Medicare and Medicaid reimbursed operations are located in Dade
County. The Company also acquired the assets representing Unity's operations in
Florida that do not have Medicare and Medicaid certification, but which operate
under state license.
In 1993, the Company further expanded its existing Home Care business
through the acquisition of certain assets of DSI Health Care Services, Inc.
("DSI") including contract rights to provide Home Care services through various
hospitals, community agencies and other institutional health care providers.
These contract rights complimented the Company's existing Home Care businesses
in the Long Island, New York area.
In May 1995, the Company acquired certain assets of Long Island
Nursing Registry, Inc. ("LINR") thereby further expanding its Home Care
business. LINR provided nursing and other skilled health care services with both
Medicaid and non-Medicaid reimbursement eligibility compatible with the business
of the Company. LINR maintains offices and does business under the Company's
name in the Long Island area and as Comprehensive Care America in the Syracuse,
New York area. The acquired assets included all of the fixed
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assets, certain of the contract and intellectual property rights and all of the
records, lists, files and books (including certain customer and personnel lists)
with respect to or in connection with the health care business conducted by
LINR. The acquisition expanded the Company's New York market area into Suffolk
County, augmented its presence in Nassau County and gave it significant market
share in central New York.
During the fiscal years ended May 31, 1995, 1996 and 1997, 62%, 59%
and 59%, respectively, of the Company's revenues were attributable to Medicare,
Medicaid and other state and federal government payments. Historically, a
greater portion of the Company's revenues have been derived from Home Care
services and a lesser portion of such revenues have been derived from Hospital
Staffing. The Company believes that this is a result of changing social and
economic attitudes toward the de-institutionalization of patients as well as the
Company's changing customer base.
In August 1996, the Company and AMSERV HEALTHCARE INC. ("Amserv")
consummated a merger whereby the Company acquired control of Amserv and Amserv
became a wholly-owned subsidiary of the Company. Amserv operates in a
one-industry segment as a health care service company. Amserv provides Home Care
services to individuals from its six branch offices in New Jersey and Ohio. Home
Care services provided by Amserv include personal care, such as assistance with
the activities of daily living (e.g., eating, walking and grooming), and skilled
nursing services, such as wound care and assistance with medications, injections
and patient education.
The following table sets forth the Company's net revenues for Home
Care and Hospital Staffing services for the fiscal years ended May 31, 1995,
1996 and 1997:
Fiscal Year Ended May 31,
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1997 1996 1995
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Net Revenue
Home Care 52,022,482 $47,897.228 $36,744,824
Hospital Staffing 940,783 1,265,706 1,685,211
Percentage of Net Revenues
Home Care 98% 97% 96%
Hospital Staffing 2% 3% 4%
ACQUISITION OF EXTENDED FAMILY CARE CORPORATION
On January 3, 1997, an Agreement and Plan of Merger (the "Merger
Agreement"), between the Company and EFCC, providing for the merger (the
"Merger") of EFCC Acquisition Corp. ("Merger Sub"), a New York corporation and a
wholly-owned subsidiary of the Company, with EFCC, with EFCC merging with and
into Merger Sub and the cessation of EFCC's separate existence, and the
transactions contemplated thereby. Upon consummation of the Merger, each share
of EFCC Common Stock, par value $.01 per share (the "EFCC Common Stock"), which
is issued and outstanding immediately prior to the effective time of the Merger
(the "Effective Time"), except those held by shareholders of EFCC who validly
and properly demand and perfect dissenters' rights under the New York Business
Corporation Law (the "BCL"), will be converted into the right to receive the
following consideration (the "Merger Consideration"): (a) cash equal to: (i)
$2,400,000 divided by (ii) the number of shares of EFCC Common Stock issued and
outstanding immediately prior to the Effective Time increased by that number of
additional shares of EFCC Common Stock that would have to be issued and
outstanding immediately prior to the Effective Time assuming that no
shareholders of TPC Home Care Services, Inc. ("TPC"), an 83% owned subsidiary of
EFCC, validly and properly demand and perfect, pursuant to the BCL,
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dissenters' rights in the proposed merger of the Company with and into EFCC (the
"EFCC Share Number"), which EFCC Share Number shall not be less than 37,600,000;
and (b) an amount of shares of Common Stock of the Company equal to: (i) such
number of shares of the Company's Common Stock as has an aggregate market price,
calculated in accordance with the terms of the Merger Agreement, equal to
$4,850,000; divided by (ii) the EFCC Share Number.
In conjunction with the Merger Agreement, the Company and EFCC have
entered into a consulting agreement pursuant to which the Company has rendered
to EFCC, by and through such of its officers, employees and agents as the
Company, in its sole discretion, designates from time to time, consulting
services with respect to the management and operation of EFCC.
The Company and EFCC have also entered into a management agreement
pursuant to which the Company has agreed to act as manager of EFCC.
HOME CARE SERVICES
A substantial portion of the revenues from the Company's Home Care
business relates to services provided to patients referred to the Company by
physicians, county medical services, community organizations, hospital social
service workers, nurses, insurance companies and health maintenance organization
networks ("HMOs"). Other patients are referred through such sources as the
patient's family. The remaining revenues attributable to the Company's Home Care
business are received as a result of subcontracting arrangements with certified
home health agencies ("primary contractors") that are authorized to receive
reimbursement from Medicare and Medicaid in the States of New York and Florida.
The Company provides Home Care nurses and paraprofessionals,
including registered nurses, licensed practical nurses, certified home health
aides, certified personal care workers and companions. These individuals are
temporary employees of the Company who work for the Company as needed. As of
August 22, 1997, the Company's roster of Home Care personnel included
approximately 3,000 nurses and health care paraprofessionals.
It is the Company's policy that all of its Home Care nurses and
paraprofessionals meet certain licensing, certification and other requirements.
Upon registering with the Company for temporary employment, the Company's Home
Care nurses and paraprofessionals are required to attend inservice classes given
by the Company. The Company conducts ongoing inservice training for its nurses
and paraprofessionals both to meet New York State Department of Health and New
York State Licensing Board continuing education requirements and to fulfill the
Company's own additional quality assurance goals. The Company is implementing
similar requirements in Florida. These classes and inservice trainings, each of
which typically lasts three hours, are offered bi-weekly. They are taught by
health care professionals selected by the Company for their expertise in their
fields, including nurses, physical therapists, social workers and occasionally
physicians.
When the Company admits a new patient for service, the Company's
Director of Nursing confers with the patient's physician and other medical and
health care professionals (collectively, the patient's "health care team") to:
obtain physician's orders; acquire a detailed description of the patient's
medical problem; determine the patient's specific Home Care requirements (the
"protocol"), including the plan of treatment and pharmaceutical services,
products and equipment which will be needed; and determine the type of
personnel, the number of hours and shifts required. The Director of Nursing
and/or a nursing supervisor first visits the patient to conduct a personal
examination and assessment in order both to verify all information received from
the referral source and to select the appropriate Home Care personnel to care
for the patient.
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In a typical Home Care case, the Company's nurse or paraprofessional
assigned to the case visits the patient on a prescribed schedule to administer
the protocol and to provide other general care to the patient. Often the nurse
or paraprofessional spends the entire day with the patient. All of the Home Care
cases are supervised by a nursing supervisor to ascertain whether any problems
have arisen in connection with the services. Home Care services provided on a
subcontracting basis for a primary contractor are supervised only by the primary
contractor. The Company's personnel are instructed to remain in continuous
contact with the patient's health care team.
The Company has contracted with the Departments of Social Services in
Nassau, Suffolk and Onondaga Counties in New York to provide and be reimbursed
for custodial services under Medicaid. The Company is a direct provider for
skilled nursing services through Medicaid in New York State.
Approximately 37% of the Company's revenues from Home Care services
are paid by insurance carriers. Payments for the Company's Home Care services
typically are made by assignment of insurance benefits from the patient, by the
primary contracting organization or by the patient. Once a claim is submitted to
an insurer, the insurer generally is required to act upon that claim within 60
days. The Company typically receives payments from 60 to 180 days after its
services are rendered, although such time period is sometimes greater.
Accordingly, the Company is often required to carry accounts receivable over
substantial periods of time and to utilize a line of credit to meet its ongoing
expenses. Medicaid claims are billed weekly and are usually paid in 60 to 90
days.
The Company was surveyed by the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") and, in February 1996, was found to meet the
requirements for accreditation. JCAHO, which is the accrediting body for
hospitals, is associated with the provision of quality services and its
accreditation is vital to the Company's contractual business. The Company's
accreditation expires in February 1999, at which time the Company must be
resurveyed for the following three-year term.
HOSPITAL STAFFING
The Company provides temporary (or "per diem") nursing placement
services to hospitals, nursing homes, clinics and other health-related
institutions that make use of supplemental staffing for emergencies, vacations
and peak periods. These personnel are supervised directly by the institutions,
with the Company acting solely as an employment agency matching the requirements
of the institutions with the names and skills of persons listed in its
registries.
The personnel placed by the Company with hospitals and other health
and medical institutions include registered nurses, licensed practical nurses,
nurses' aides and other health care paraprofessionals. The Company's nurses and
nurses' aides placed in hospitals must meet the competency requirements
determined by the Company and by the facility. Temporary health care personnel
are recruited in the local market in which the Company offers its temporary
personnel services.
Some of the hospitals in New York City that have utilized the
Company's Hospital Staffing services include Methodist Hospital and Maimonides
Medical Center.
COMPETITION
The temporary health care personnel market is highly fragmented and
significant competitors are often localized in particular geographic markets.
The Company's largest competitors include the Olsten Company and Staff Builders.
Management of the Company believes that, given the high current level of demand
for the types of services provided by the Company, significant additional
competition can be expected to develop in the future.
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Some of the companies with which the Company presently competes have
substantially greater financial and other resources than the Company. The
Company also competes with many other smaller temporary medical staffing
agencies. The Company expects that it will compete with other temporary health
care services providers in the future if and when they enter the Company's
existing geographic markets, as well as in any new geographic market the Company
may enter.
The Company's success to date has depended, to a significant degree,
on its ability to recruit qualified personnel. These persons may be registered
with, and may accept placements from or through competitors of the Company. The
Company periodically experiences intense competition from other companies in
recruiting qualified health care personnel for its temporary health care
operations because the United States health care industry, at times, faces
shortages of qualified personnel. The Company believes it is able to compete
successfully for personnel by aggressive recruitment through newspaper
advertisements, flexible work schedules and competitive compensation
arrangements. There can be no assurance, however, that the Company will be able
to continue to attract and retain qualified personnel. The inability to either
attract or retain such qualified personnel would have a material adverse effect
on the Company's business.
MARKETING AND SALES
Prior to its recently completed acquisition of Amserv, which expanded
the geographic area serviced by the Company, the Company marketed its temporary
health care services in the New York metropolitan area, the central New York
area and in Broward and Dade Counties, Florida. As a result of the acquisition
of Amserv, these marketing activities also include New Jersey and Ohio. The
Company's services are marketed by a team of personnel headed by the Chief
Operating Officer of the Company. The Company promotes its services through
print advertising, direct mail efforts focused on health care institutions and
field sales calls. The Company makes periodic mailings to approximately 50
hospitals and 75 nursing homes in the New York City metropolitan area. In
addition, in the New York metropolitan area and in Florida, representatives of
the Company periodically visit or telephone medical facilities to establish or
maintain relationships with individuals in those institutions who are
responsible for staffing, discharge of patients and personnel recruitment. The
Company's representatives also attend health care functions and trade shows to
further enhance the Company's marketing efforts. The Company intends to continue
these marketing programs and to increase its marketing staff in the future as
its business so requires, especially in view of the recent acquisition of
Amserv.
The Company has acquired the necessary expertise, through its
acquisition of LINR, to provide Shared Aide Services ("Shared Aide"). Shared
Aide, which is a task-oriented, patient-specific care plan designed to condense
the amount of hours caregivers must devote to patients, has recently been
adopted as a cost cutting mechanism by New York State. The New York State
Department of Social Services, in consultation with the New York State
Department of Health, has developed agency specific cost savings for each
certified home health agency. A portion of the cost savings are to be achieved
through development and implementation of Shared Aide.
The Company believes it is one of the few providers in New York State
with the expertise and experience required to offer Shared Aide. To date, Shared
Aide has not constituted a material portion of the Company's business. However,
the Company intends to market this service in an effort to generate increased
revenues from this developing area of home health care.
CUSTOMERS
The Company has four types of customers: public assistance agencies,
other third party payers, insurance companies and private pay customers.
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During the fiscal years ended May 31, 1995 1996 and 1997, 62%, 59%
and 59%, respectively, of the Company's revenues were attributable to Medicare,
Medicaid and other state and federal government payments. A number of states
have reduced funding for health care services or have placed certain limits on
reimbursable expenses. There can be no assurance that additional state
legislatures and Congress will not further reduce funding or impose additional
limits on reimbursements, particularly with respect to expenses to be reimbursed
through Medicaid. Such reductions in funding and limits on reimbursement, if
enacted, could have a material adverse effect on the Company's operating
results. The Company's business in Nassau County, Suffolk County and Onondaga
County New York are tied directly to a contract between the Company and the
Department of social services in each of these respective counties. A portion of
the Company's business would be lost should any of these contracts be
terminated. The contracts are renewable on an annual basis. The contracts with
Nassau, Suffolk and Onondaga Counties have been in existence for 5, 13 and 3
years, respectively. The Company has no reason to believe that any of these
contracts will not be renewed in the future, however, there is no assurance that
the contract will be renewed.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant a Medicaid contract to any accredited home health care agency. New
business is obtained through referrals from physicians, county medical services,
community organizations, hospital social service workers, nurses, insurance
companies and the patient's family.
Other third party payers, such as hospitals and other health care
institutions, provided 22%, 22% and 20% of total Company revenues, in 1997, 1996
and 1995, respectively. The third party payor subcontracts with the Company for
Home Care services. These contracts are generally non-exclusive.
The insurance segment of The Company's business represented
approximately 16%, 15% and 14% of The Company's total revenues in 1997, 1996 and
1995, respectively. This business is dependent upon the insurer's decision to
enter into various preferred provider networks ("PPO") HMOs. The insurance
segment has become more closely linked to associations with various PPOs and
HMOs. Therefore, the Company will have to develop alliances with such networks
or risk the loss of business.
Private pay customers represented approximately 1% of the Company's
revenues in 1997, 1996 and 1995. These customers have determined, for a variety
of reasons, including ineligibility of public assistance, or insurance benefits,
to personally pay for the Home Care services provided by the Company. These
customers are referred to the Company from a variety of sources.
GOVERNMENT REGULATIONS AND LICENSING
The Company's business is subject to substantial and frequently
changing regulations by Federal, state and local authorities which imposes a
significant compliance responsibilities on the Company. The Company, among other
things, must comply with state licensing and certificate of need ("CON")
requirements as well as Federal and state eligibility standards for
certification as a Medicare and Medicaid provider. The imposition of more
stringent regulatory requirements or the denial or revocation of any license or
permit necessary for the Company to operate in a particular market could have a
material adverse effect on the Company's operations. In addition, the Company
will be required to comply, to the extent applicable, with the licensing and/or
CON requirements and other regulations in any jurisdiction in which it may plan
to provide services in the future.
The Company, as a provider of services under the Medicare and
Medicaid programs is required by the Health Care Financing Administration
("HCFA") to receive reimbursement for services from Medicare and Medicaid. In
order for one to participate as a home health agency in the Medicare and
Medicaid program, HCFA requires, among other things, the preparation of annual
budgets and capital expenditure plans. The health
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regulatory agencies of the states in which the Company operates require
satisfaction of certain standards with respect to personnel, services and
supervision and the establishment of a professional advisory group that includes
at least one physician, one registered nurse and other representatives from
related disciplines or consumer groups. Applicable state "anti-kickback"
regulations, in general, provide that the Company may not make certain payments
in order to receive referrals of patients. In addition, Federal "anti-kickback"
regulations provide similar restrictions for health care providers to the extent
they are certified to participate in the Medicare and Medicaid programs. The
Company does not believe that compliance with applicable state and Federal
"anti-kickback" regulations has a material impact on the Company's business and
operations.
The Company is licensed to provide home healthcare services and
durable medical equipment in the five boroughs of New York City, Nassau,
Suffolk, Westchester, Oswego, Oneida, Onondaga, Cayuga, Madison, Jefferson and
Herkimer Counties in New York State and in the state of Florida. It is also
licensed in the aforementioned locations as a temporary help services firm to
provide personnel on a per diem basis for hospital staffing. The Company
believes that it has all licenses necessary to operate its business as currently
conducted in New York and Florida. In Broward and Dade Counties in Florida, the
Company also maintains a Certified Home Health Agency which allows the Company
to participate in both the Medicare and Medicaid programs. Amserv is also
licensed to provide health care services in New Jersey and Ohio, with the Ohio
office also maintaining certification to provide Medicare reimbursed services.
New York State requires the approval by the Public Health Council of
the New York State Department of Health ("NYPHC") of any change in the
"controlling person" of an operator of a licensed health care services agency (a
"LHCSA"). Control of an entity is presumed to exist if any person owns, controls
or holds the power to vote 10% or more of the voting securities of such entity.
To the extent the Company may seek to acquire control of a LHCSA, the Company
would have to be granted the approval of the NYPHC prior to exercising control
over such LHCSA. The NYPHC approved the application to permit the Company's
control over EFCC pursuant to the Merger Agreement on June 27, 1997.
Under current reimbursement regulations under Medicare and Medicaid,
funds received under Medicare and Medicaid programs are subject to audit with
respect to proper application of the various payment formulas and regulations.
These audits can result in retroactive adjustment of payments received from
these programs, resulting in either amounts due to the government agency from
the Company or amounts due to the Company from the governmental agency.
The Company is subject to surveys and audits by various governmental
agencies.
The Company has a Medicaid audit pending with the State of New York.
The Company does not anticipate that any material adjustment will result form
such audit, however, there can be no assurance that this audit will be resolved
satisfactorily in favor of the Company. In addition, the Company has agreed to
submit its books and record to a voluntary survey to be performed by the State
of New York with respect to Medicaid patients. There can be no assurance that
this voluntary review will be resolved satisfactorily in favor of the Company.
In May 1997, the Company was advised that an audit of American Health
Care Services ("American"), the Company's Medicare agency, by the Office of
Audit Services, Office of Inspector General of the United States Department of
Health and Human Services which had been forwarded to the Medicare intermediary
assigned to administer Medicare payments in Florida has been referred to the
Civil Division of the United States Attorney for the Southern District of
Florida. The Company has been advised by its regulatory counsel that they have
been in contact with the Assistant United States Attorney assigned to the
matter, and they do not know at this time the extent of the Company's liability,
if any. Regulatory counsel has also advised the Company that the Company
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could pursue claims against third parties (e.g., subcontractors and licensed
home health agencies) for a portion of any liability of the Company. Management
anticipates that this matter should be satisfactorily
resolved.
In December 1996, a survey by state and federal regulatory agencies
was conducted at American. The findings of the initial survey indicated that a
follow-up survey was warranted. The findings of the survey, held in March 1997,
were favorable, and the Company was orally advised that only minor deficiencies
existed. The final written report, confirming the surveyor's findings, has been
received by the Company and confirmed the surveyor's verbal representations.
LIABILITY INSURANCE
The Company's employees and independent contractors routinely make
decisions which can have significant medical consequences to the patients in
their care. As a result, the Company is exposed to substantial liability in the
event of negligence or wrongful acts of its personnel. The Company maintains
medical professional liability insurance providing for coverage in a maximum
amount of $1,000,000 per claim, subject to a limitation of $10,000,000 for all
claims in any single year. In addition, the Company requires that each
independent contractor it refers to institutions for employment supply a
certificate of insurance evidencing that such person maintains medical
professional liability insurance providing for coverage of no less than
$1,000,000 per claim. There can be no assurance, however, that the Company will
be able to maintain its existing insurance at an acceptable cost or obtain
additional insurance in the future, as required. Although, to date, no claim has
been asserted against the Company, there can be no assurance that the Company's
insurance will be sufficient to cover liabilities resulting from claims that may
be brought in the future. A partially or completely uninsured claim, if
successfully asserted and of significant magnitude, could have a material
adverse effect on the Company and its financial condition.
EMPLOYEES
As of August 22, 1997, the Company had approximately 190 permanent
employees. The Company also has a roster of temporary professional and
paraprofessional employees (including registered nurses, licensed practical
nurses, certified home health aides, certified personal care workers and nurses'
aides). In the past, certain of the Company's registered nurses were compensated
on an independent contractor basis. However, the Company currently treats such
persons as employees. The Company has no union contracts with any of its
employees and believes that its relationship with its employees and independent
contractors is good. The Company pays its temporary employees at rates that it
believes are competitive.
ITEM 2. DESCRIPTION OF PROPERTY
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The Company leases a total of 19 facilities in four states. The
Company believes that its existing leases will be renegotiated as they expire or
that alternative properties can be leased on acceptable terms. The Company also
believes that its present facilities are well maintained and are suitable for it
to continue its existing
operations.
The following table describes the location and current use of each of
the company's leased facilities as of August 22, 1997:
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LOCATION DESCRIPTION
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New York Facilities
New York City (two facilities) Nursing and Paraprofessional Services
Nassau County (two facilities) Corporate Offices and Nursing and
Paraprofessional Services
Suffolk County (three facilities) Nursing and Paraprofessional Services
Upstate (three facilities) Nursing and Paraprofessional Services
New Jersey Facilities
Edison Administration and Nursing and
Paraprofessional Services
Elizabeth Nursing and Paraprofessional Services
Fairlawn Nursing and Paraprofessional Services
South Orange Nursing and Paraprofessional Services
Union City Nursing and Paraprofessional Services
Florida Facilities
Palm Beach Nursing and Paraprofessional Services
Broward Nursing and Paraprofessional Services
Dade Administration and Nursing and
Paraprofessional Services
Ohio Facility
Mansfield Nursing and Paraprofessional Services
ITEM 3. LEGAL PROCEEDINGS
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A lawsuit was filed on November 14, 1996 in San Diego Superior Court
(Case No. 705475), by Eugene J. Mora against Amserv, the Company, William
Fellerman and Stephen Sternbach. Mr. Mora alleges that he was the President and
Chief Executive Officer of Amserv at the time of the merger between Amserv and
the Company and that his employment contract with Amserv was breached when he
was terminated by Amserv and the Company following the Merger.
The complaint, which is for an aggregate of $2,500,000, alleges that
pursuant to his employment contract, upon termination he would be entitled to
five years of continued salary at $298,000 per year; an annual car allowance of
$450 per month for the five year period; payment for unutilized vacation days
for a total of $112,000; the cash value of a whole life policy of life
insurance, which premiums had been paid by Amserv, for an approximate value of
$350,000; and approximately $48,000 in various fringe benefits. Mr. Mora further
alleges that he had a contract which would result in him being hired as a
consultant upon termination and this too was breached. Under this allegation,
Mr. Mora seeks damages for two years consulting fee at $129,200 per year. Mr.
Mora also seeks punitive damages, penalties and reimbursement of attorneys'
fees.
The Company does not believe that this matter will result in a
material adverse impact on it.
Except as otherwise provided in this Annual Report on Form 10-K,
there are no legal proceedings to which the Company is currently a party or to
which any of its property is subject, and the Company knows of no legal
proceeding pending or threatened against either the Company or any director or
officer of the Company in his or her capacity as such.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended May 31, 1997 through the
solicitation of proxies or otherwise.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "SMCS". Until June 7, 1996, the Company's Common Stock was also
listed on the Pacific Stock Exchange.
The following table sets forth the high and low sales prices per
share for the Common Stock during the periods indicated on the Nasdaq National
Market.
PERIOD HIGH LOW
------ ---- ---
Year ended May 31, 1996
First Quarter $4.375 $3.500
Second Quarter 7.375 4.188
Third Quarter 8.125 5.500
Fourth Quarter 7.500 5.125
Year ended May 31, 1997
First Quarter $10.938 $5.938
Second Quarter 7.250 5.813
Third Quarter 7.000 5.500
Fourth Quarter 6.000 4.250
Year ended May 31, 1998
First Quarter $6.000 $4.500
As of August 27, 1997, the Company had 4,112,478 shares of Common
Stock outstanding and 503 shareholders of record.
The Company did not pay cash dividends on its Common Stock during
either of the two years ended May 31, 1997 and 1996. It is the present policy of
the Company to retain earnings, if any, to finance the development and growth of
its business. In addition, the Company's agreement with its bank lender
prohibits the payment of cash dividends without the bank's prior consent.
-12-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The statement of operations for the years ended May 31, 1997, 1996,
1995, 1994 and 1993 and balance sheet data as of May 31, 1997, 1996, 1995, 1994
and 1993 as set forth below have been derived from the audited financial
statements of the Company and should be read in conjunction with those financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K. In addition, the selected financial data should be read in conjunction
with "Description of Business -- General" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------
May 31
---------------------------------------------------------------
1997 1996 1995(2)(3) 1994(4) 1993(5)
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(1)
Net Revenues $ 52,963 $ 49,163 $ 38,430 $ 29,694 $ 23,428
Income from Operations 3,180 1,832 1,251 576 118
Other Income (Expense) (159) (120) (21) 67 130
Merger Transaction Costs (2,808) __ __ __ __
Income (Loss) from Continuing Operations 126 1,143 758 358 135
Income (Loss) from Discontinued Operations -- -- -- (711) (359)
Gain (Loss) on Disposal of Discontinued -- -- 30 (1,168) --
Operations
Cumulative Effect of Change in Accounting -- -- 24(6) 65(7) --
Principle
Net Income (Loss) 126 $ 1,143 $ 812 $ (1,456) $ (224)
Income Per Share
Income (Loss) from Continuing Operations $ .03 $ 0.27 $ 0.19 $ 0.10 $ 0.04
Income (Loss) from Discontinued Operation -- -- -- (0.19) (0.10)
Gain (Loss) on Disposal of Discontinued -- -- 0.01 (0.32) --
Operations
Cumulative Effect of Change in Accounting -- -- 0.01 0.02 --
Principle
Net Income $ .03 $ 0.28 $ 0.22 $ (0.41) $ (0.06)
Shares Used in Computing Per Share 4,217 4,212 3,989 3,705 3,802
Amounts
BALANCE SHEET DATA: (1)
Cash and Cash Equivalents $ 139 $ 1,882 $ 1,497 $ 1,069 $ 2,334
Working Capital 9,545 9,415 6,774 5,525 6,650
Total Assets 20,360 19,369 16,798 14,196 13,436
Total Long-Term Obligations 2,945 3,604 2,156 832 115
Redeemable Preferred Stock -- 341 683 -- --
Shareholders' Equity 13,071 12,045 10,622 9,577 11,201
Current Ratio 3.23 3.79 3.03 2.46 4.14
Cash Dividend Declared Per Common Share $ -- $ -- $ -- $ -- $ --
</TABLE>
-13-
<PAGE>
(1) In August 1996, STAR acquired AMSERV HEALTHCARE SERVICES, INC. ("Amserv")
in a transaction accounted for as a pooling-of-interests, accordingly, all
periods presented have been restated to include the accounts and operations
of Amserv for the periods prior to the acquisition.
(2) In May 1995, STAR acquired certain assets of Long Island Nursing Registry,
Inc. in a transaction accounted for as a purchase.
(3) In June 1994, STAR acquired certain assets of North Central Personnel, Inc.
in a transaction accounted for as a purchase.
(4) In November 1993, STAR acquired certain assets of DSI Health Care Services,
Inc. in a transaction accounted for as a purchase.
(5) In August 1992, STAR acquired certain assets of Unity Care Services,
Inc.-New York Medicaid Operations in a transaction accounted for as a
purchase.
(6) Effective July 1994, STAR adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." See Note 3 of STAR's Notes to
Consolidated Financial Statements.
(7) Effective June 1, 1993, STAR adopted SFAS No. 109, "Accounting for Income
Taxes." See Note 9 of STAR's Notes to Consolidated Financial Statements.
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
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.
This discussion contains forward-looking statements that are subject
to a number of known and unknown risks that, in addition to general economic,
competitive and other business conditions, could cause actual results,
performance and achievements to differ materially from those described or
implied in the forward-looking
statements.
RESULTS OF OPERATIONS
On August 23, 1996, the Company completed a merger (the "Amserv
Merger"), accounted for as a pooling of interests, with AMSERV HEALTHCARE, INC.
("Amserv"), a health care service company that provides home care services,
including personal care, such as assistance with the activities of daily living
(e.g., eating, walking and grooming), and skilled nursing services, such as
wound care and assistance with medications, injections and patient education, in
New Jersey and Ohio. In accordance with the terms of the Amserv Merger, each
share of common stock of Amserv, outstanding immediately prior to consummation
of the Amserv Merger, was converted into .4090 shares of common stock of STAR. A
total of 1,410,731 shares of STAR Common Stock were issued upon consummation of
the Amserv Merger. The Company also assumed all outstanding options and other
rights to acquire Amserv stock. The following results of combined operations
include the operations of both the Company and Amserv.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
Net revenues increased $3,800,331 or 8% to 52, 963,265 for the fiscal
year ended May 31, 1997 over net revenues of $49,162,934 for the fiscal year
ended May 31, 1996. The increase was due to a general upward trend in the Home
Care business. Net revenues from Home Care increased by $4,125,254 or 9% while
net revenues from Hospital Staffing decreased by 324,923 or 3%. 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., hospitals, 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 1997
net revenues and Hospital Staffing represented approximately 2% of 1997 net
revenues.
Gross profit margin percentages for the fiscal years ended May 31,
1997 and 1996 were 35%.
Selling, General and Administrative expenses ("SG&A") as a percentage
of net revenues 28% in 1997 as compared with 30% in 1996. Such decrease is
principally attributable to the increase revenues from Home Care, being absorbed
by existing back office overhead.
Income from operations increased by $1,347,666 or 74% to $3,179,953
for the fiscal year ended May 31, 1997 over $1,832,287 for the fiscal year ended
May 31, 1996. Such increase is primarily attributable to increased
revenues and stabilization of costs, mainly back office overhead.
-15-
<PAGE>
The Company incurred a one-time charge of $2,808,224 for acquisition
costs, legal fees and restructuring expenses associated with the Amserv Merger,
which contributed to a net income for the fiscal year ended May 31, 1997 of
$125,619 compared to net income of $1,143,259 for the fiscal year ended May 31,
1996.
The Company's effective tax rate for 1997 was 41% as compared to 33%
in 1996. The increase in effective tax rate is due to the reversal of valuation
allowances or deferred tax assets in 1996 that reduced the Company's effective
tax rate in 1996 below statutory rates.
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 Consolidated Financial Statements included elsewhere in this report).
LINR was exclusively involved in the business of providing Home Care. The
remainder of the increase was due to a general upward trend in Home Care. Net
revenues from Home Care increased by $11,152,404 or 30% 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.
Home Care revenues represented approximately 97% of 1996 net revenues
and Hospital Staffing represented approximately 3% of 1996 net revenues.
Gross profit margin percentages for the fiscal years ended May 31,
1996 and 1995 were 35%.
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.
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 reversed 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 20% 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 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.
-16-
<PAGE>
Home Care revenues represented approximately 96% of 1996 net revenues
and Hospital Staffing represented approximately 4% of 1995 net revenues.
The Gross profit margin percentage for each of the fiscal years ended
May 31, 1995 and 1994 was 35%.
SG&A as a percentage of net revenues was 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 for hospital staffing business and recorded a loss
from discontinued operations of $710,636 and an after-tax loss on the
anticipated disposal of discontinued operations of $1,167,949. During fiscal
1995, the temporary nursing services for hospital staffing 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 8 of the Notes to 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.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1997, cash and cash equivalents were $139,400 as
compared with $1,881,979 at May 31, 1996. The decrease is attributable to the
Company's repayment of a portion of its revolving credit line, redemption of
Class B preferred shares and significant purchases of property and equipment.
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, 1997 and May 31, 1996, the Company's accounts
receivable balances were $11,260,446 and 9,611,169, respectively, representing
21% and 22% 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, 1997 and May 31, 1996. During fiscal 1997 and 1996, accounts
receivable turnover was approximately 71 days .
Borrowings under the Company's revolving line of credit decreased
$658,000 during the year ended May 31, 1997. The Company currently has available
a revolving credit line with a bank which allows for maximum borrowings of
$8,000,000. This revolving credit line expires on October 31, 1998 and is
subject to renewal. However, as the Company's business expands, additional
financing may be required. Outstanding borrowings under the revolving credit
line at May 31, 1997 were $2,622,000 as compared to $3,280,000 at May 31, 1996.
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
-17-
<PAGE>
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.
On January 3, 1997, the Company entered into an Agreement and Plan of
Merger (the"Merger Agreement"), as amended on April 6, 1997, to acquire Extended
Family Care Corporation ("EFCC"), a health care service company which provides
home care services in New Jersey, New York and Pennsylvania. In accordance with
the Merger Agreement, subject to the vote on and appointment of the Merger
Agreement, each share of Common Stock of EFCC outstanding immediately prior to
the consummation of the Merger will be converted into approximately .0287 shares
of Common Stock of the Company. In addition, the Company will pay $.0638 per
share (rounded to the nearest ten thousandth of a share) of Common Stock of EFCC
outstanding immediately prior to the Merger (assuming 37,600,000 shares of EFCC
common stock are outstanding immediately prior to effectiveness of the merger).
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,
1997. 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.
-18-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements of the Company identified below are
contained in this Report on the pages indicated:
STAR MULTI CARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Holtz Rubenstein & Co., LLP, Independent F-2
Certified Public Accountants
Report of Ernst & Young LLP, Independent Certified Public Accountants F-3
Consolidated balance sheets as of May 31, 1997 and 1996 F-4
Consolidated statements of income for the three years ended May 31, 1997 F-5
Consolidated statement of shareholders' equity F-6
for the three years ended May 31, 1997
Consolidated statements of cash flows for the three years ended
May 31, 1997 F-7
Notes to consolidated financial statements F-8 - F-20
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Star Multi Care Services, Inc.
Hicksville, New York
We have audited the accompanying balance sheets of Star Multi Care Services,
Inc. as of May 31, 1997 and 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended May 31, 1997. 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 total revenues constituting 26% in 1996 and 30% in
1995 of the related consolidated totals. Those statements were audited by other
auditors whose report has 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 the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Star Multi Care Services, Inc. at
May 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.
/s/ HOLTZ RUBENSTEIN & CO., LLP
-------------------------------
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 18, 1997
F-2
<PAGE>
Report of Ernest & 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-3
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 139,400 $ 1,881,979
Short-term investments (Note 3) -- 100,000
Accounts receivable, net of allowance for doubtful
accounts of $650,000 and $808,000 at May 31,
1997 and 1996, respectively (Note 15) 11,260,466 9,611,169
Prepaid expenses and other current assets (Notes 4 and 21) 1,406,328 800,665
Income taxes receivable 73,738 --
Deferred income taxes (Note 10) 950,015 400,015
------------ ------------
Total current assets 13,829,947 12,793,828
PROPERTY AND EQUIPMENT, net (Note 5) 1,200,018 766,480
NOTES RECEIVABLE FROM OFFICER (Note 13) 93,353 100,517
INTANGIBLE ASSETS, net (Note 6) 4,954,334 5,197,778
OTHER ASSETS 222,805 510,487
------------ ------------
$ 20,300,457 $ 19,369,090
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 3,017,009 $ 1,608,480
Accounts payable 958,312 1,022,165
Accrued expenses 184,293 229,319
Net liabilities of discontinued operations (Note 8) -- 98,081
Income taxes payable (Note 10) -- 295,647
Current maturities of long-term debt 125,000 125,000
------------ ------------
Total current liabilities 4,284,614 3,378,692
------------ ------------
LONG-TERM LIABILITIES:
Revolving credit line (Note 7) 2,622,000 3,280,000
Long-term debt 125,000 250,000
Deferred income taxes (Note 10) -- 39,909
Other long-term liabilities 197,795 33,970
------------ ------------
Total long-term liabilities 2,944,795 3,603,879
------------ ------------
REDEEMABLE PREFERRED STOCK (Note 9) -- 341,436
------------ ------------
COMMITMENTS AND CONTINGENCY (Notes 7, 16 and 17)
SHAREHOLDERS' EQUITY: (Notes 2, 11, 12, and 13)
Preferred stock, $1.00 par value, 5,000,000 shares authorized -- --
Common stock, $.001 par value, 10,000,000 shares authorized;
4,214,335 and 3,820,358 shares issued, respectively 4,214 3,820
Additional paid-in capital 15,431,833 13,288,607
Subscription receivable (397,782) (397,782)
Unrealized (loss) on short-term investments -- (6,000)
Deficit (1,688,295) (564,640)
Treasury stock, 137,500 common shares
at May 31, 1997 and 1996 (278,922) (278,922)
------------ ------------
Total shareholders' equity 13,071,048 12,045,083
------------ ------------
$ 20,300,457 $ 19,369,090
============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
May 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES, net (Note 15) $ 52,963,265 $ 49,162,934 $ 38,430,035
------------ ------------ ------------
OPERATING EXPENSES (Notes 13, 17 and 18)
Costs of revenues 34,532,140 31,943,356 24,854,524
Selling, general and administrative 14,594,798 14,634,533 11,569,405
Depreciation and amortization 656,374 752,758 755,449
------------ ------------ ------------
49,783,312 47,330,647 37,179,378
------------ ------------ ------------
OPERATING INCOME 3,179,953 1,832,287 1,250,657
INTEREST EXPENSE, net (159,110) (120,184) (20,583)
MERGER TRANSACTION COSTS (2,808,224) -- --
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 212,619 1,712,103 1,230,074
PROVISION FOR INCOME TAXES (Note 10) 87,000 568,844 472,038
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 125,619 1,143,259 758,036
DISCONTINUED OPERATIONS: (Note 8)
Gain on disposal of discontinued operatio
net of income taxes of $168,211 in 199 -- -- 30,302
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 125,619 1,143,259 788,338
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 3) -- -- 23,683
------------ ------------ ------------
NET INCOME $ 125,619 $ 1,143,259 $ 812,021
============ ============ ============
NET INCOME PER COMMON SHARE:
Primary:
Income from continuing operations $ .03 $ .27 $ .19
Gain on disposal of discontinued
operations -- -- .01
Cumulative effect of change in
accounting principle -- -- .01
------------ ------------ ------------
Net income $ .03 $ .27 $ .21
============ ============ ============
Assuming full dilution:
Income from continuing operations $ .03 $ .27 $ .19
Gain on disposal of discontinued
operations -- -- .01
Cumulative effect of change in
accounting principle -- -- .01
------------ ------------ ------------
Net income $ .03 $ .27 $ .21
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Primary 4,205,547 4,196,843 3,961,572
============ ============ ============
Assuming full dilution 4,216,985 4,212,078 3,988,510
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TABLE 1 OF 3
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional
Par Paid-in Subscription
Shares Value Capital Receivable
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, May 31, 1994, as previously reported 2,167,500 $ 2,168 $ 4,841,790 $ --
Pooling of interest with Amserv Healthcare, Inc. (Note 2) 1,204,311 1,204 6,107,556 --
------------ ------------ ------------ ------------
Balance, May 31, 1994, as adjusted 3,371,811 3,372 10,949,346 --
Purchase of treasury stock -- -- -- --
Exercise of stock options 19,000 19 36,145 --
Exercise of stock options on pooled company
including income tax benefit 84,892 85 416,018 (198,440)
Stock dividend 128,347 128 481,173 --
Cumulative effect of change in accounting principle (Note 3) -- -- -- --
Change in unrealized loss on short-term investments -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 1995 3,604,050 3,604 11,882,682 (198,440)
Adjustment to conform fiscal year of
AMSERV Healthcare, Inc. (Note 2) -- -- -- --
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 --
Change in unrealized loss on short-term investments -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 1996 3,820,358 3,820 13,288,607 (397,782)
Shares issued under Employee Stock Purchase Plan 12,119 12 72,702 --
Exercise of stock options including income tax benefit 184,837 185 767,447 --
Issuance of stock for services 8,451 8 53,992 --
Stock dividend 188,570 189 1,249,085 --
Change in unrealized loss on short-term investments -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 1997 4,214,335 $ 4,214 $ 15,431,833 $ (397,782)
============ ============ ============ ============
</TABLE>
TABLE 2 OF 3
<TABLE>
<CAPTION>
Unrealized Retained Treasury Stock
(Loss) on Earnings ---------------------------
Investments (Deficit) Shares Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, May 31, 1994, as previously reported $ -- $ 657,618 135,000 $ (272,985)
Pooling of interest with Amserv Healthcare, Inc. (Note 2) -- (1,760,790) -- --
------------ ------------ ------------ ------------
Balance, May 31, 1994, as adjusted -- (1,103,172) 135,000 (272,985)
Purchase of treasury stock -- -- 2,500 (5,937)
Exercise of stock options -- -- -- --
Exercise of stock options on pooled company
including income tax benefit -- -- -- --
Stock dividend -- (481,301) -- --
Cumulative effect of change in accounting principle (Note 3) (23,683) -- -- --
Change in unrealized loss on short-term investments 9,119 -- -- --
Net income -- 812,021 -- --
------------ ------------ ------------ ------------
Balance, May 31, 1995 (14,564) (772,452) 137,500 (278,922)
Adjustment to conform fiscal year of
AMSERV Healthcare, Inc. (Note 2) -- 136,262 -- --
Exercise of stock options -- -- -- --
Exercise of stock options on pooled company
including income tax benefit -- -- -- --
Stock dividend -- (1,071,709) -- --
Change in unrealized loss on short-term investments 8,564 -- -- --
Net income -- 1,143,259 -- --
------------ ------------ ------------ ------------
Balance, May 31, 1996 (6,000) (564,640) 137,500 (278,922)
Shares issued under Employee Stock Purchase Plan -- -- -- --
Exercise of stock options including income tax benefit -- -- -- --
Issuance of stock for services -- -- -- --
Stock dividend -- (1,249,274) -- --
Change in unrealized loss on short-term investments 6,000 -- -- --
Net income -- 125,619 -- --
------------ ------------ ------------ ------------
Balance, May 31, 1997 $ -- $ (1,688,295) 137,500 $ (278,922)
============ ============ ============ ============
</TABLE>
TABLE 3 OF 3
Total
Shareholders'
Equity
------------
Balance, May 31, 1994, as previously reported $ 5,228,591
Pooling of interest with Amserv Healthcare, Inc. (Note 2) 4,347,970
------------
Balance, May 31, 1994, as adjusted 9,576,561
Purchase of treasury stock (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 (Note 3) (23,683)
Change in unrealized loss on short-term investments 9,119
Net income 12,021
------------
Balance, May 31, 1995 10,621,908
Adjustment to conform fiscal year of
AMSERV Healthcare, Inc. (Note 2) 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 12,045,083
Shares issued under Employee Stock Purchase Plan 72,714
Exercise of stock options including income tax benefit 767,632
Issuance of stock for services 54,000
Stock dividend --
Change in unrealized loss on short-term investments 6,000
Net income 125,619
------------
Balance, May 31, 1997 $ 13,071,048
============
See notes to consolidated financial statements
F-6
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
May 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 125,619 $ 1,143,259 $ 812,021
----------- ----------- -----------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 479,640 511,736 196,309
Depreciation and amortization 656,374 722,609 755,449
Deferred income taxes (589,909) (200,106) (12,765)
AMSERV fiscal year conversion -- 136,262 --
Loss on disposal of equipment -- -- 47,286
Gain on disposal of discontinued operations -- -- (30,302)
Cumulative effect of change in accounting principles -- -- (23,683)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,128,937) (3,406,998) (357,874)
Prepaid expenses and other assets (263,981) (584,290) 122,811
Income tax receivable (73,738) -- --
Valuation allowance -- (16,902) --
Increase (decrease) in liabilities:
Accounts payable and accrued payroll and expenses 1,299,650 257,250 369,760
Income taxes payable (295,647) (4,793) 104,903
Other liabilities 163,825 (14,544) 238,812
----------- ----------- -----------
Total adjustments (752,723) (2,599,776) 1,410,706
----------- ----------- -----------
Net cash (used in) provided by operating activities (627,104) (1,456,517) 2,222,727
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (992,999) (1,586,285)
Proceeds from sale of short-term investments 106,000 2,310,486 880,000
Purchase of intangibles (179,763) (82,403) (14,829)
Repayment on note receivable from officer 7,164 9,200 15,506
Purchase of property and equipment (666,705) (307,547) (398,332)
Business acquisitions -- -- (1,215,770)
Payment of costs related to discontinued operations (98,081) (293,689) (508,587)
Proceeds from sale of discontinued operations -- -- 813,941
Cash received on notes receivable -- -- 50,411
Proceeds from sale of property and equipment -- -- 31,851
Payment of earnout advance -- -- (500,000)
----------- ----------- -----------
Net cash (used in) provided by investing activities (831,385) 643,048 (2,432,094)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from revolving credit line (658,000) 1,530,000 800,000
Repayment of long-term debt (125,000) (125,000) (166,666)
Proceeds from the issuance of stock under option plans 840,346 135,090 253,827
Redemption of preferred shares (341,436) (341,434) (170,718)
Repayment of note payable -- -- (73,349)
Purchase of treasury stock -- -- (5,937)
----------- ----------- -----------
Net cash (used in) provided by financing activities (284,090) 1,198,656 637,157
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,742,579) 385,187 427,790
CASH AND CASH EQUIVALENTS, beginning of year 1,881,979 1,496,792 1,069,002
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 139,400 $ 1,881,979 $ 1,496,792
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 604,000 $ 858,932 $ 526,784
=========== =========== ===========
Interest paid $ 235,000 $ 280,000 $ 117,289
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Nature of operations
The Company is principally engaged in providing temporary health
care personnel, including registered nurses, licensed practical nurses,
certified home health aides, nurses' aides and respiratory therapists to
hospitals, nursing homes, extended care facilities and in-home patients in
Florida, Ohio, New Jersey, upstate New York and the New York City metropolitan
area.
b. 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.
c. 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.
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.
d. 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.
e. 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.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONT'D)
f. Intangible assets
Intangible assets are stated at acquisition cost and are being
amortized on a straight-line basis over their estimated useful lives.
g. 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.
h. 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.
i. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations
in accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
j. 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.
k. 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.
l. Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
m. Impairment accounting
In fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This Statement
requires that certain assets be reviewed for impairment and, if impaired,
remeasured at fair value, whenever events or
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONT'D)
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. The adoption of SFAS No. 121 had no material impact on the
Company's financial position or results of operations.
n. New standards
In February 1997, the FASB issued Statement 128, "Earnings Per
Share" ("Statement 128"), which simplifies the standards for computing earnings
per share previously used and makes them comparable to international standards.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997, and earlier application is not permitted. The Company
does not believe that the adoption of this Statement will have a material effect
to its financial statements.
o. Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the classifications used in 1997.
2. MERGERS AND ACQUISITIONS:
a. Merger
On August 23, 1996, pursuant to an agreement and plan of merger
(the "Agreement"), AMSERV Healthcare, Inc. ("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 the obligations under all outstanding options and other rights to
acquire AMSERV stock. Approximately 1,411,000 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 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 and utilized
a 52/53 week fiscal year end for fiscal 1995. AMSERV's statements of operations
for the year ended June 24, 1995 has been combined with Star's statements of
operations for the fiscal year ended May 31, 1995. In order to conform AMSERV's
year end to Star's fiscal year end, the consolidated statement of operation for
fiscal year 1996 includes four weeks (June 1, 1995 to June 24, 1995) for AMSERV
which are also included in the consolidated statement of operation for fiscal
year ended 1995. Accordingly, an adjustment has been made in fiscal 1996 to
retained earnings for the duplication of net loss of ($136,262) for such four
week period. Other results of operations for such four week period of AMSERV
include net revenues of $1,411,000, depreciation and amortization of $30,149,
loss before taxes of ($199,624) and income tax benefit of $63,362.
F-10
<PAGE>
2. Mergers and Acquisitions: (Cont'd)
Separate approximated net revenues and net income amounts of the
merged entities for the period prior to the merger are as follows:
Two Months
Ended Year Ended
July 31, 1996 May 31, 1996
------------ --------------
Net revenues:
Star Multi Care Services, Inc. $ 6,183,000 $ 36,339,000
AMSERV HEALTHCARE, INC. 2,363,000 12,823,000
------------ --------------
$ 8,546,000 $ 49,162,000
============ ==============
Net income:
Star Multi Care Services, Inc. $ 90,000 $ 1,046,000
AMSERV HEALTHCARE, INC. 61,000 97,000
------------ --------------
$ 151,000 $ 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 was contingent
on an earnout, of which $500,000 was earned in 1995, $100,000 was earned in 1996
and the final payment of $100,000 was earned in 1997. The excess of the purchase
price over the valuation of tangible assets was assigned to goodwill
($1,147,000) and a non-competition agreement ($25,000).
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.
3. SHORT-TERM INVESTMENTS:
Short-term investments are recorded at estimated fair market values. The
following table summarizes available-for-sale securities:
May 31, 1996
-------------------------------------------------
Gross Estimated
Unrealized Fair
Cost Losses Value
------------- ------------ -------------
Common stock $ 110,000 $ 10,000 $ 100,000
============= ============ =============
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.
F-11
<PAGE>
3. SHORT-TERM INVESTMENTS: (CONT'D)
A net realized loss 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.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consists of the following:
May 31,
-----------------------
1997 1996
---------- ----------
Prepaid insurance $ 330,809 $ 156,998
Deferred acquisition costs 514,086 254,625
Other 561,433 389,042
---------- ----------
$1,406,328 $ 800,665
========== ==========
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
May 31,
-----------------------
1997 1996
---------- ----------
Furniture and fixtures $ 592,270 $ 533,882
Computer equipment 1,363,230 741,615
Leasehold improvements 57,691 57,665
Other 130,338 140,136
---------- ----------
2,143,529 1,473,298
Less accumulated depreciation 943,511 706,818
---------- ----------
$1,200,018 $ 766,480
========== ==========
6. Intangible Assets:
Intangible assets are as follows:
Amortization May 31,
Period 1997 1996
---------- ---------- ----------
Goodwill 25 - 37 $2,942,000 $2,989,000
Customer contracts 11 - 15 2,225,000 2,225,000
Covenants not-to-compete 2 - 8 385,000 1,100,000
Nurses' list 9 - 15 703,000 703,000
Other 2 - 10 135,000 127,000
---------- ----------
6,390,000 7,144,000
Less accumulated amortization 1,436,000 1,946,000
---------- ----------
$4,954,000 $5,198,000
========== ==========
F-12
<PAGE>
7. REVOLVING CREDIT LINE:
The Company has a $8.0 million line of credit with a bank which bears
interest at 1/4% above the bank's prime lending rate (8 1/2% at May 31, 1997)
and matures on October 31, 1998, 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 requires the Company to meet certain financial ratios and
covenants, including minimum tangible net worth, debt to equity and cash flow
coverage. 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.
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 (5.69% at May 31, 1997)
plus 2 3/4% for a period no less than three months. At May 31, 1997, $1,500,000
was at the money market rate and the remainder of the outstanding credit line of
$1,122,000 was at prime plus 1/4%.
8. DISCONTINUED OPERATIONS:
On November 9, 1994, the Company sold substantially all of the fixed and
intangible assets of its temporary nursing services for hospital staffing
business for $814,000. The consolidated statements of operations for the year
ended May 31, 1995, excludes sales and expenses for its temporary nursing
services for hospital staffing business from captions applicable to continuing
operations. Revenues from the discontinued operation during fiscal 1995 were
$3,988,696.
9. 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 totaled $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 fiscal 1996, 130,070 of the
shares were redeemed for $341,434, and the remaining 130,071 shares have been
redeemed in fiscal 1997 for $341,436.
10. INCOME TAXES:
The provision for income taxes from continuing operations consists of
the following:
Years Ended May 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal $ 605,093 $ 551,758 $ 314,781
State and local 71,816 217,192 170,022
--------- --------- ---------
676,909 768,950 484,803
--------- --------- ---------
Deferred:
Federal (431,641) (197,498) (8,765)
State (158,268) (2,608) (4,000)
--------- --------- ---------
(589,909) (200,106) (12,765)
--------- --------- ---------
$ 87,000 $ 568,844 $ 472,038
========= ========= =========
F-13
<PAGE>
10. INCOME TAXES: (CONT'D)
The components of the net deferred tax assets are as follows:
May 31,
----------------------
1997 1996
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 209,715 $ 296,772
Reserve for discontinued operations -- 35,099
Accrued expenses 714,127 111,811
Tax credits -- 71,973
Net operating loss carryforward 8,756 11,440
Other 17,417 19,313
--------- ---------
950,015 546,408
--------- ---------
Deferred tax liabilities:
Depreciation and amortization -- (143,322)
Prepaid expenses -- (42,980)
--------- ---------
-- (186,302)
--------- ---------
Net deferred tax assets $ 950,015 $ 360,106
========= =========
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,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Computed federal income tax at
statutory rates $ 72,290 $ 582,115 $ 419,035
State taxes, net of federal benefit 13,608 158,200 108,015
Items without tax benefit 76,500 103,856 51,552
Adjustments to prior years' tax liability (76,200) -- --
Valuation allowance -- (335,764) (77,687)
Other, net 802 60,437 (28,877)
--------- --------- ---------
$ 87,000 $ 568,844 $ 472,038
========= ========= =========
11. SHAREHOLDERS' EQUITY:
a. 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.
b. Stock dividend
On September 3, 1996, the Company's Board of Directors approved a
stock dividend on November 4, 1996 for shareholders of record as of October 11,
1996. A total of 188,570 shares of common stock were issued in connection with
the dividend.
F-14
<PAGE>
12. STOCK OPTION PLANS: (CONT'D)
On December 5, 1995, the Company's Board of Directors approved a stock
dividend payable 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.
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.
For all stock dividends, 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.
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.
12. STOCK OPTION PLANS:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation expense
has been recognized for the stock option plans. Had the Company recorded
compensation expense for the stock options based on the fair value at the grant
date for awards in the years ended May 31, 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts.
Years Ended
May 31,
--------------------
1997 1996
---- ----
Net income, as reported $ 125,619 $ 1,143,259
Net income, pro forma 92,541 1,093,197
Primary earning per share, as reported .03 .27
Primary earnings per share, pro forma .02 .26
Fully diluted earnings per share, as reported .03 .27
Fully diluted earnings per share, pro forma .02 .26
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to June 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following range of
weighted-average assumptions used for grants in years ended May 31, 1997 and
1996; expected volatility of 58%; risk free interest rate averaging 5.5%; and
expected lives of 2 to 6 years.
The Company has two 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 shares of common stock. The
purpose of the Plans is to promote the overall financial objectives of the
Company and its shareholders by motivating those persons selected to participate
in the Plans to achieve long-term growth in shareholder equity in the Company
and by retaining the association of those individuals who are instrumental in
achieving this growth. Such options become exercisable at various intervals
based upon vesting schedules as determined by the Compensation Committee. The
options expire between November 1997 and May 2005.
F-15
<PAGE>
12. STOCK OPTION PLANS: (CONT'D)
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, May 31, 1994 845,648 $1.38 - $14.86
Granted 35,355
Exercised (110,285)
Canceled and expired (48,421)
---------
Outstanding, May 31, 1995 722,297 $1.38 - $14.86
Granted 103,217
Canceled and expired (18,861)
Exercised (84,229)
---------
Outstanding, May 31, 1996 722,424 $1.38 - $7.28
Granted 29,500
Canceled and expired (41,414)
Exercised (184,837)
---------
Outstanding, May 31, 1997 525,673 $1.38 - $6.55
=========
Exercisable 513,766
=========
Shares reserved for future issuance at May 31,
1997 are comprised of the following:
Shares issuable upon exercise of stock
options under the plans 699,458
Shares issuable under the Company's
employee stock purchase plan 321,781
---------
1,021,239
=========
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. Since inception of this Plan, a total of 12,119 shares were issued.
F-16
<PAGE>
13. RELATED PARTY TRANSACTIONS:
a. Notes receivable from officer
Notes receivable from officer of $93,353 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, 1997.
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 $129,000 in 1997 and $100,000 in each of the years
1996 and 1995.
A former director of AMSERV, provided certain legal services to the
Company. The Company incurred legal fees with such firm of $7,027 and $114,208
for fiscal years 1996 and 1995, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt,
including the current portions, was estimated using a discounted cash
flow analysis, based on the Company's assumed incremental borrowing
rates for similar types of borrowing arrangements. The carrying amount
of variable and fixed rate debt at May 31, 1997 and 1996 approximates
its fair value.
15. 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, Ohio,
New Jersey, upstate New York and the New York City metropolitan area. At May 31,
1997 and 1996, approximately 36% and 30%, respectively, of accounts receivable
was due from Medicaid and approximately 9% and 8%, respectively, of accounts
receivable was due from Medicare. Credit losses relating to customers
historically have not been significant and within management's expectations.
F-17
<PAGE>
15. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:(CONT'D)
The Company places its temporary cash investments with high credit
quality financial institutions.
16. CONTINGENCIES:
The Company is a defendant in a lawsuit filed on November 14, 1996 in
San Diego Superior Court, by Eugene J. Mora the former President and CEO of
AMSERV for alleged breach of contract. The suit asks for damages aggregating
approximately $2,500,000. The Company has accrued approximately $1,670,000,
included in "Accrued Payroll and Related Expenses," in connection with this
matter. The amount accrued is based upon information which has been learned to
date. As this case is in the early stages, additional information may be learned
in the future, which would require the Company to modify this amount. Management
does not believe that this matter will have a material adverse impact on the
Company.
In May 1997, the Company was advised that an audit of American Health
Care Services, Inc., the Company's Medicare agency, by the Office of Audit
Services, Office of Inspector General of the United States Department of Health
and Human Services which had been forwarded to the Medicare intermediary
assigned to administer Medicare payments in Florida had been referred to the
Civil Division of the United States Attorney for the Southern District of
Florida. The Company's Regulatory Counsel has been in contact with the Assistant
United States Attorney assigned to the matter, but is unable to predict the
ultimate costs, if any, that may be incurred by the Company. As such, no
provision has been made in the accompanying financial statements. Regulatory
Counsel has also advised the Company that it is likely the Company will have
claims against third parties (i.e. subcontractors and licensed home health
agencies) for a portion of any liability. Management anticipates that this
matter will be satisfactorily resolved.
17. COMMITMENTS:
a. Employment agreements
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 $929,000. The agreement also provides
for increases based on increases in the consumer price index and certain bonuses
based upon annual pretax income. The Company has an employment agreement with an
employee that expires in May 1999. The aggregate commitment for future salary,
excluding bonuses, is $235,000. The agreement also provides for certain bonuses
based on the Company's annual pre-tax income. The aggregate minimum commitment
for future salaries under the agreements is as follows:
Years Ending
May 31,
1998 $ 383,000
1999 383,000
2000 265,000
2001 133,000
-------------
$ 1,164,000
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.
F-18
<PAGE>
17. COMMITMENTS: (CONT'D)
As of May 31, 1997 future net minimum rental payments under operating
leases having initial or remaining noncancellable terms in excess of one year
are as follows:
1998 $ 846,000
1999 639,000
2000 380,000
2001 288,000
2002 183,000
------------
$ 2,336,000
============
Rental expenses for operating leases for fiscal years ended 1997, 1996
and 1995 were approximately $805,000, $731,000 and $519,000, 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 totaled $166,192 at May 31, 1997 and are payable
through September 1998.
18. 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 years ended May 31, 1997 and 1996 approximated $20,000 and $17,000,
respectively.
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
1997, 1996 and 1995 approximated $313,000, $233,000 and $264,000, respectively.
19. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the years ended May 31, 1997, 1996 and 1995, the Company issued
stock dividends which amounted to $1,249,274, $1,071,709 and $481,301,
respectively. During the year ended May 31, 1997, the Company issued common
stock in exchange for services in the amount of $54,000. During the year ended
May 31, 1996, the Company issued common stock upon the exercise of stock options
in exchange for notes receivable in the amount of $199,342. 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.
20. FINANCIAL INSTRUMENTS:
On March 20, 1996, the Company entered into a two year notional amount
of $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, 1997 approximates $10,000.
F-19
<PAGE>
21. EFCC MERGER:
On January 3, 1997, the Company entered to an agreement and plan of
merger (the "EFCC Merger Agreement") to acquire (the "EFCC Merger") Extended
Family Care Corporation ("EFCC"), a health care service company which provides
home care services in New Jersey, New York and Pennsylvania. Pursuant to the
terms of the EFCC Merger, the Company will pay $2,400,000 in cash and $4,850,000
in stock.
In connection with the EFCC Merger, the Company and EFCC have entered
into a consulting agreement, pursuant to which the Company will render to EFCC
consulting and advisory services in connection with the management, operation
and supervision of EFCC. In consideration for the consulting services rendered
by the Company, EFCC will pay $25,000 per month payable (a) $15,000 in arrears
on the last day of each month and (b) the remaining $10,000 on the earlier of
the closing date or termination of the EFCC Merger Agreement. As of May 31,
1997, $80,000 due from EFCC is included in prepaid and other current assets The
EFCC Merger is subject to approval by the shareholders of both the Company and
EFCC, as well as the satisfaction of certain other conditions and is expected to
be consummated on or before September 15, 1997.
F-20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A.
-19-
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The following financial statements of the Company are
contained in Item 8 of this Report on the pages indicated:
Page
----
Index to Consolidated Financial Statements F-1
Report of Holtz Rubenstein & Co., LLP, Independent
Certified Public Accountants F-2
Report of Ernst & Young LLP, Independent Certified Public Accountants F-3
Consolidated balance sheets as of May 31, 1997 and 1996 F-4
Consolidated statements of income for the three years ended May 31, 1997 F-5
Consolidated statement of shareholders' equity
for the three years ended May 31, 1997 F-6
Consolidated statements of cash flows for the three years
ended May 31, 1997 F-7
Notes to consolidated financial statements F-8 - F-20
2. Financial Statement Schedules
None.
3. Exhibits: The following Exhibits are filed as a part of
this Report:
Exhibit No. Description
2. (a) Agreement and Plan of Merger Among Star Multi
Care Services, Inc., EFCC Acquisition Corp. and
EXTENDED FAMILY CARE CORPORATION, dated as of
January 3, 1997. Incorporated by reference to
Exhibit 2(a) to the Company's Registration
Statement on Form S-4 dated July 29, 1997
(Registration No. 333-32171).
(b) First Amendment to Agreement and Plan of Merger
among the Company, EFCC Acquisition Corp. and
Extended Family Care Corporation, dated as of
April 6, 1997. Incorporated by reference to
Exhibit 2(a) to the Company's Registration
Statement on Form S-4 dated July 29, 1997
(Registration No. 333-32171).
3. (a) * The Company's Certificate of Incorporation
filed April 25, 1961.
(b) * The Company's Certificate of Amendment to
Certificate of Incorporation filed February 22,
1989.
(c) * The Company's Certificate of Amendment to
Certificate of Incorporation filed December 4,
1990.
-20-
<PAGE>
Exhibit No. Exhibit
(d) The Company's Certificate of Amendment to
Certificate of Incorporation filed February 3,
1994. (Incorporated by reference to Exhibit 3
(d) to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1994.)
(e) The Company's Certificate of Change filed March
2, 1995. (Incorporated by reference to Exhibit
3(e) to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1995.)
(f) The Company's By-Laws, as amended on November
18, 1992 and September 13, 1993. (Incorporated
by reference to Exhibit 3 (e) to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended May 31, 1994.)
9. (a) Sternbach Proxy
(b) Voting Trust Agreement dated as of June 20,
1996 by and among EFCC, Coss, Arbor, the Voting
Trustee of the Issuer and Kaufman.
10. (a) * Form of Indemnification Agreement between the
Company and Stephen Sternbach.
(b) Employment Agreement, dated as of December 3,
1995 between the Company and Stephen Sternbach.
(Incorporated by reference to Exhibit 10.(x) to
the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended February 29,
1996.)
(c) * The Company's 1991 Incentive Stock Option Plan
(d) The Company's 1992 Incentive Stock Option Plan
(as amended and restated September 13, 1993).
(Incorporated by reference to Exhibit 10 (h) to
the Company's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to the Company's 1992 Stock
Option Plan. (Incorporated by reference to
Exhibit 10.(z) to the Company's Quarterly
Report on Form 10-QSB for the quarterly period
ended February 29, 1996.)
(f) The Company's Employee Stock Purchase Plan, as
amended on December 15, 1995. (Incorporated by
reference to Exhibit 10.(y) to the Company's
Quarterly Report on Form 10-QSB for the
quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract
(Incorporated by reference to Exhibit 10(j) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of the Company
among Stephen Sternbach, Renee the Company and
Leonard Taubenblatt dated December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care
License.
(k) * New Jersey Employment agency License.
(l) Form of Indemnification Agreement between the
Company and directors and officers.
(Incorporated by reference to Exhibit 10(k) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
(m) Asset Purchase Agreement dated as of November
1, 1991 by and among Unity Care Services, Inc.,
Unity Healthcare Holding Company, Inc. and the
Company. (Incorporated by reference to Exhibit
10 (l) to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1992.)
(n) Asset Purchase Agreement dated January 30, 1992
by and among Unity Healthcare Holding Company,
Inc., Unity Care Services, Inc. and the
Company. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form
8-K dated May 26, 1992.)
(o) Asset Purchase Agreement dated January 30, 1992
by and between Unity Home Care of Florida, Inc.
and the Company. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on
Form 8-K dated May 26, 1992.)
(p) Employment Agreement dated February 15, 1990,
between Alan Spector and the Company, as
assignee of Unity Home Care of Florida, Inc.
(Incorporated by reference to Exhibit 10(o) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
-21-
<PAGE>
Exhibit No. Exhibit
(q) Asset Purchase Agreement dated November 8, 1993
by and between DSI Health Care Services, Inc.
and Star Multi Care Services of Long Island,
Inc., a wholly owned subsidiary of the Company.
(Incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated
November 22, 1993.)
(r) Asset Purchase Agreement dated as of January 6,
1995, as amended, by and between Long Island
Nursing Registry, Inc. and the Company.
(Incorporated by reference to Exhibit 21 to the
Company's Current Report on Form 8-K dated May
19, 1995.)
(s) Employment Agreement dated May 19, 1995 by and
between the Company and Gregory Turchan.
(Incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K dated
May 19, 1995.)
(t) Loan Agreement dated November 1, 1995 by and
between the Company and Chase Manhattan Bank,
N.A. (Incorporated by reference to Exhibit
10.(w) to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended
November 30, 1995.)
16. (a) Letter dated April 25, 1995, as amended, from
Deloitte & Touche LLP to the Securities and
Exchange Commission. (Incorporated by reference
to EFCC's Current Report on Form 8-K/A dated
March 21, 1995.)
21. ** List of subsidiaries.
23. (a) ** Consent of Holtz Rubenstein & Co., LLP.
(b) ** Consent of Ernst & Young LLP.
27. (a) ** Financial Data Schedule.
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-18 dated May 14, 1991. (Registration No. 33-39697-NY)
(b) Reports on Form 8-K.
During the last quarter of the period covered by this report, the
Company filed a report on Form 8-K on April 29, 1997.
-22-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date August 29, 1997 STAR MULTI CARE SERVICES, INC.
By /s/ Stephen Sternbach
-----------------------------
Stephen Sternbach, President
In accordance with the Exchange Act, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Stephen Sternbach President, Chairman of the August 29, 1997
- ------------------------- Board of Directors and Chief
Stephen Sternbach Executive Officer
/s/ William Fellerman Principal Financial and August 29, 1997
- ------------------------- Accounting Officer, Director
William Fellerman
Director
- -------------------------
John P. Innes, II
/s/ Matthew Solof Director August 29, 1997
- -------------------------
Matthew Solof
/s/ Charles Berdan Director August 29, 1997
- -------------------------
Charles Berdan
/s/ Melvin Katten Director August 29, 1997
- -------------------------
Melvin Katten
/s/ Gary L. Weinberger Director August 29, 1997
- -------------------------
Gary L. Weinberger
-23-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
2. (a) Agreement and Plan of Merger Among Star Multi
Care Services, Inc., EFCC Acquisition Corp. and
EXTENDED FAMILY CARE CORPORATION, dated as of
January 3, 1997. Incorporated by reference to
Exhibit 2(a) to the Company's Registration
Statement on Form S-4 dated July 29, 1997
(Registration No. 333-32171).
(b) First Amendment to Agreement and Plan of Merger
among the Company, EFCC Acquisition Corp. and
Extended Family Care Corporation, dated as of
April 6, 1997. Incorporated by reference to
Exhibit 2(a) to the Company's Registration
Statement on Form S-4 dated July 29, 1997
(Registration No. 333-32171).
3. (a) * The Company's Certificate of Incorporation
filed April 25, 1961.
(b) * The Company's Certificate of Amendment to
Certificate of Incorporation filed February 22,
1989.
(c) * The Company's Certificate of Amendment to
Certificate of Incorporation filed December 4,
1990.
(d) The Company's Certificate of Amendment to
Certificate of Incorporation filed February 3,
1994. (Incorporated by reference to Exhibit 3
(d) to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1994.)
(e) The Company's Certificate of Change filed March
2, 1995. (Incorporated by reference to Exhibit
3(e) to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1995.)
(f) The Company's By-Laws, as amended on November
18, 1992 and September 13, 1993. (Incorporated
by reference to Exhibit 3 (e) to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended May 31, 1994.)
9. (a) Sternbach Proxy
(b) Voting Trust Agreement dated as of June 20,
1996 by and among EFCC, Coss, Arbor, the Voting
Trustee of the Issuer and Kaufman.
10. (a) * Form of Indemnification Agreement between the
Company and Stephen Sternbach.
(b) Employment Agreement, dated as of December 3,
1995 between the Company and Stephen Sternbach.
(Incorporated by reference to Exhibit 10.(x) to
the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended February 29,
1996.)
(c) * The Company's 1991 Incentive Stock Option Plan
(d) The Company's 1992 Incentive Stock Option Plan
(as amended and restated September 13, 1993).
(Incorporated by reference to Exhibit 10 (h) to
the Company's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to the Company's 1992 Stock
Option Plan. (Incorporated by reference to
Exhibit 10.(z) to the Company's Quarterly
Report on Form 10-QSB for the quarterly period
ended February 29, 1996.)
(f) The Company's Employee Stock Purchase Plan, as
amended on December 15, 1995. (Incorporated by
reference to Exhibit 10.(y) to the Company's
Quarterly Report on Form 10-QSB for the
quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract
(Incorporated by reference to Exhibit 10(j) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of the Company
among Stephen Sternbach, Renee the Company and
Leonard Taubenblatt dated December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care
License.
(k) * New Jersey Employment agency License.
(l) Form of Indemnification Agreement between the
Company and directors and officers.
(Incorporated by reference to Exhibit 10(k) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
(m) Asset Purchase Agreement dated as of November
1, 1991 by and among Unity Care Services, Inc.,
Unity Healthcare Holding Company, Inc. and the
Company. (Incorporated by reference to Exhibit
10 (l) to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1992.)
(n) Asset Purchase Agreement dated January 30, 1992
by and among Unity Healthcare Holding Company,
Inc., Unity Care Services, Inc. and the
Company. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form
8-K dated May 26, 1992.)
-24-
<PAGE>
(o) Asset Purchase Agreement dated January 30, 1992
by and between Unity Home Care of Florida, Inc.
and the Company. (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on
Form 8-K dated May 26, 1992.)
(p) Employment Agreement dated February 15, 1990,
between Alan Spector and the Company, as
assignee of Unity Home Care of Florida, Inc.
(Incorporated by reference to Exhibit 10(o) to
the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
(q) Asset Purchase Agreement dated November 8, 1993
by and between DSI Health Care Services, Inc.
and Star Multi Care Services of Long Island,
Inc., a wholly owned subsidiary of the Company.
(Incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated
November 22, 1993.)
(r) Asset Purchase Agreement dated as of January 6,
1995, as amended, by and between Long Island
Nursing Registry, Inc. and the Company.
(Incorporated by reference to Exhibit 21 to the
Company's Current Report on Form 8-K dated May
19, 1995.)
(s) Employment Agreement dated May 19, 1995 by and
between the Company and Gregory Turchan.
(Incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K dated
May 19, 1995.)
(t) Loan Agreement dated November 1, 1995 by and
between the Company and Chase Manhattan Bank,
N.A. (Incorporated by reference to Exhibit
10.(w) to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended
November 30, 1995.)
16. (a) Letter dated April 25, 1995, as amended, from
Deloitte & Touche LLP to the Securities and
Exchange Commission. (Incorporated by reference
to EFCC's Current Report on Form 8-K/A dated
March 21, 1995.)
21. ** List of subsidiaries.
23. (a) ** Consent of Holtz Rubenstein & Co., LLP.
(b) ** Consent of Ernst & Young LLP.
27. (a) ** Financial Data Schedule.
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-18 dated May 14, 1991. (Registration No. 33-39697-NY)
** Filed herewith.
-25-
List of Subsidiaries
Subsidiary State of Incorporation
- ---------- ----------------------
1. Paragon Nurses Registry, Inc. New York
2. Star Registry, Inc. New York
3. AMSERV HEALTHCARE INC. Delaware
4. AMSERV Healthcare of New Jersey, Inc. Delaware
5. AMSERV Healthcare of Ohio, Inc. Delaware
6. AMSERV Medical Products, Inc. Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statements on Forms S-8 (No. 33-20865, No. 333-08499, No. 333-05177 and
333-06063 and 33-59056) of Star Multi Care Services, Inc. of our report dated
July 18, 1997 with respect to the consolidated financial statements of Star
Multi Care Services, Inc. appearing in this Annual Report (Form 10-K) of Star
Multi Care Services, Inc. for the year ended May 31, 1997.
/s/ Holtz Rubenstein & Co., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
August 26, 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 Annual Report on
Form 10-K of Star Multi Care Services, Inc. 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
August 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000874038
<NAME> STAR MULTI CARE SERVICES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 139,400
<SECURITIES> 0
<RECEIVABLES> 11,910,466
<ALLOWANCES> 650,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,829,947
<PP&E> 2,143,529
<DEPRECIATION> 943,511
<TOTAL-ASSETS> 20,300,457
<CURRENT-LIABILITIES> 4,284,614
<BONDS> 2,747,000
0
0
<COMMON> 4,214
<OTHER-SE> 13,066,834
<TOTAL-LIABILITY-AND-EQUITY> 20,300,457
<SALES> 52,963,265
<TOTAL-REVENUES> 52,963,265
<CGS> 34,532,140
<TOTAL-COSTS> 34,532,140
<OTHER-EXPENSES> 656,374
<LOSS-PROVISION> 479,640
<INTEREST-EXPENSE> 159,110
<INCOME-PRETAX> 212,619
<INCOME-TAX> 87,000
<INCOME-CONTINUING> 125,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,619
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
