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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, 1998
[ ] 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.
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(Name of Registrant in its charter)
New York 11-1975534
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(State or other jurisdiction of (I.R.S. Employer
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 Nasdaq National Market System
$.001 per share ------------------------------------------
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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 September 10, 1998 the aggregate market value of the Common Stock of Star
Multi Care Services, Inc. held by non-affiliates, (3,750,391 shares) was
$4,453,589 (based upon the average bid and asked prices of the Common Stock on
such date on the Nasdaq National Market System).
As of September 10, 1998, the Registrant had 5,228,122 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Definitive Proxy Statement for the 1998 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
General
Star Multi Care Services, Inc. (the "Company") is in the business of
providing professional and para-professional home health care personnel services
to elderly, ill and physically challenged individuals in their homes, and to a
lesser extent the Company provides health care facility staffing services for
hospitals and nursing homes. The Company is licensed and / or certified in five
states to provide a full array of health care personnel services, which include
registered nurses, licensed practical nurses, home health aide,nurse aide, and
personal care aide services. In some states the Company is also licensed and /
or certified to provide physical therapy, speech therapy, occupational therapy,
respiratory therapy, and medical social work services.
Star maintains 15 licensed offices within the five States it operates
in, which include New York (5 offices), New Jersey (5 offices), Pennsylvania (1
office), Ohio (1 office), and Florida (3 offices). Additionally, Star also
maintains certified home health agency operations in Florida, Pennsylvania, and
Ohio. The Florida certified operations maintains a separate office facility
while the Pennsylvania and Ohio certified operations are conducted from common
office facilities with the licensed office in that region. Star maintains full
functionality for service provision across the Company 7 days a week 24 hours a
day. Combined through these offices Star employs approximately 5,000 full-time
and part-time employees and services over 10,000 clients annually.
The Company was established and has been in business since 1938 and was
purchased by present management in 1987 at which time the primary focus of the
organization was the provision of facility staffing and private duty nursing
services. After the Company was acquired, management successfully secured, in
1989, New York State Department of Health approval as a licensed home care
services agency in the five boroughs of New York City. This expanded the
Company's scope of services into the home care market. In 1991, the Company
expanded its licensed operations to Nassau County, New York and in 1992 became
an approved provider of medicaid personal care services in Nassau County. In
addition, the Company was accredited by the Joint Commission on Accreditation of
Health Care Organizations (JCAHO) in 1992, attesting to the Company's commitment
to quality.
The Company grew through a series of acquisitions that began in 1992
with the acquisition of certain assets from Unity Healthcare Holding Company,
Inc. and its subsidiaries (Unity). This expanded the Company's operations within
its existing New York and the adjacent New Jersey markets by adding new contract
rights for provision of home care services. In addition, the Unity acquisition
added new operations in the state of Florida that included certification to
provide services and receive reimbursement under the Medicare program in the
counties of Broward, Dade, and Monroe. The Company also added non-certified
licensed operations in the state of Florida through this acquisition.
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In 1993, the Company further expanded its home care operations in
Nassau County, New York, through the acquisition of certain assets of DSI Health
Care Services, Inc. (DSI). This acquisition added new contract relationships
within Nassau County with facility based certified home health care agencies,
long term home health care programs, and hospices as well as expanded the
Company's existing Medicaid operations within the County.
In May of 1995, the Company acquired certain assets of Long Island
Nursing Registry, Inc. ("LINR") which again augmented its existing operations in
Nassau County by adding new contracts and expanding existing contract
relationships. The acquisition of LINR expanded Company operations into the new
markets of Suffolk and Onondaga (Syracuse Area) counties for provision contract
Medicaid personal care services, Medicaid skilled nursing services and a variety
of contracts with facility based certified home health agencies, long term home
health care programs, and hospice programs. The acquired assets included all of
the fixed assets, certain of the contract and intellectual property rights and
all of the records, customer and personnel lists, files, and books with respect
to or in connection with the health care business conducted by LINR. Finally,
this acquisition added an expand depth in operational, clinical, and information
system management staff.
In August of 1996, the Company and Amserv Health Care, Inc. ("Amserv")
consummated a merger whereby the Company acquired control of Amserv, which
resulted in Amserv becoming a wholly owned subsidiary of the Company. This
acquisition expanded the Company within the New Jersey market by adding five new
office locations in New Jersey and as well as adding new market operations with
one office in Ohio. Amserv Health Care of New Jersey, Inc., a wholly owned
subsidiary of Amserv, is a provider of Medicaid and Medicaid waiver reimbursed
para-professional services, contract services with certified home health
agencies and hospice programs, as well as, a provider of both home care and
facility staffing services for skilled professional nursing services. Amserv
Health Care of Ohio, Inc., a wholly owned subsidiary of Amserv, provides similar
services and is both Medicaid approved and Medicare certified.
In the current reporting year, the Company completed one acquisition.
On September 9, 1997 the Company consummated an Agreement and Plan of Merger
dated January 3, 1997 (the "Merger Agreement") with Extended Family Care
Corporation ("EFCC"). The Merger Agreement between the Company and EFCC provided
for 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 the Merger Sub. Upon completion of the Merger each share of EFCC Common
Stock, par value $.01 per share (the "EFCC Common Stock"), which was issued and
outstanding immediately prior to the effective time of the Merger ("Effective
Time") was converted into the right to receive the following consideration: (a)
cash equal to (x) $2,400,000 divided by (y) the number of shares of EFCC Common
Stock issued and outstanding prior to the Effective Time increased by the number
of additional shares of EFCC Common Stock that would have to be issued and
outstanding immediately prior to the Effective Time that which EFCC Share Number
shall not be less than 37,600,000; and (b) the amount of shares of Common Stock
of the Company equal to: (1) such number of shares of the Company's Common Stock
as had an aggregate market price, calculated in accordance with the terms of the
Merger Agreement, equal to $4,850,000 divided by (2) the EFCC Share Number.
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The EFCC acquisition added to the Company's existing New York and New
Jersey operations as well as expanded these operations by introducing new
service contracts that were similar to and compatible with existing
para-professional contracts in these regions. Additionally, the Company added
new market operations in the state of Pennsylvania in the Allentown area. This
particular office predominately specializes in the provision of skilled
pediatric nursing services. This office is both Medicaid approved and Medicare
certified.
The following table sets forth the Company's net revenues for Home Care
and Hospital Staffing services for the fiscal years ended May 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
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1998 1997 1996
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<S> <C> <C> <C>
Net Revenue
Home Care $56,265,019 $52,022,482 $47,897,228
Hospital Staffing 1,484,801 940,783 1,265,706
Percentage of Net Revenues
Home Care 97% 98% 97%
Hospital Staffing 3% 2% 3%
</TABLE>
Organizational Restructuring Changes
The Company has been confronted with a variety of regulatory and
reimbursement changes as well as internal and governmental audit findings which
necessitated that the Company implement an internal operating restructuring both
in the areas of information technology and personnel over the last 12 months.
All field offices were placed on the same operating software for client
intake, scheduling, personnel and clinical database management, billing and
compliance. The Company chose an industry tested and respected product for front
office operations that is compatible with future regulatory and accreditation
requirements. This front office software product will transmit data to our
Resource Center into one new accounting system, which collects all financial,
accounting and general ledger data. At the present time approximately one half
of the offices are transmitting data to the Resource Center in this format, with
full integration of all offices anticipated by November 1998.
Another component of the Company's restructuring plan, included the
accounting, operational and clinical management team which has been modified or
replaced to include known industry professionals with a variety of health care
skills and expertise. This included the Resource Center which is responsible for
payroll, billing and collection activities for the organization which was
restructured in its entirety by reducing staff by more than 40% as the result of
automation and job description
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efficiencies, while simultaneously initiating new operational policies and
procedures designed to insure accuracy and integrity in work processes.
Finally from a compliance perspective management implemented a three tier
compliance structure which includes a:
Corporate Patient Care Committee, which reviews and establishes new policy and
procedures, and reviews internal audit findings by department and branch.
Regional Quality Improvement Audit Committees, which conduct a series of
operational, financial, clinical, and personnel audits across all offices and
departments. These audits test all regulatory and operational aspects of these
areas with all findings reported to the Corporate Compliance Director.
Corporate Compliance Program, which provides for a Director of Corporate
Compliance who reports directly to the Board of Directors. This program provides
an additional layer of internal audits, investigation and reporting on all
aspects of operation.
Customer Base
The Company has four types of customers, which form the base of its
referral source. The customer base includes federal and state funded public
assistance programs (Medicare, Medicaid), other third party payers
(subcontracts), insurance companies and private pay customers.
A substantial portion of the Company's revenues are derived from home
health care services provided to patients who are eligible for Medicaid and
Medicare services referred to the Company through contract or subcontract
relationships. The Company maintains state and/or county approval and/or
contracts in New York, New Jersey, Ohio, and Pennsylvania for provision of
professional and para-professional Medicaid services which include registered
nurse, licensed practical nurse,home health aide, personal care aide,
homemaking, and live-in companion services. Each state maintains its own initial
approval and annual reapproval criteria, which are subject to audit or
accreditation processes. These services are reimbursed directly by state and/or
local government and represent a combination of federal, state and local
funding. Clients are referred to the Company by physicians, hospital discharge
planning departments, and community based medical service organizations. The
majority of the business in the states of New York, New Jersey, Ohio, and
Pennsylvania is Medicaid reimbursed. If a contract were to be lost or an annual
approval/accreditation not secured, it could have a material and adverse effect
on the Company's operating results.
The Company is also federally certified to provide certified home
health agency services for which the Company is directly reimbursed by Medicare.
The Company maintains this certification in the states of Florida, Ohio, and
Pennsylvania, with client referrals coming from physicians, hospital discharge
planning departments, and community based medical service organizations.
During the fiscal years ended May 31, 1998, 1997, and 1996, 61%, 59%,
and 59%, respectively of the Company's revenue were attributable to Medicare,
Medicaid and other
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governmental programs. The increase in the most recent fiscal year is
attributable to the full impact of the Amserv operations and approximately nine
months of the EFCC operations in fiscal year 1998.
The Company's next largest customer base is derived from other third
party payers which consist of subcontracting relationships for provision of
personnel with community and facility based organizations who are reimbursed
directly by Medicaid, Medicare, and to some extent insurance. This type of
subcontract relationship is maintained with certified home health agencies, long
term home health care programs, hospice programs, health maintenance
organizations ("HMOs"), and Case Management Organizations. Referrals and
reimbursement for client care comes directly from these facilities that in turn
are reimbursed by Medicare, Medicaid, or insurance companies. This source has
accounted for 19%, 24% and 25% of revenue for fiscal years 1998, 1997, and 1996
respectively.
The insurance segment of the Company's business represented 18%, 16%
and 15% of the Company's revenue in 1998, 1997, and 1996, respectively. This
business is made up of a mix of long term care insurance, workers' compensation
insurance, HMO, preferred provider organizations ("PPO"), and general health
insurance policies which provide a home health care service benefits. Insurance
referrals can come directly through contractual relationships with insurance
companies, network alliances, physicians, and hospital based discharge planners.
Private pay customers have represented approximately 2%, 1% and 1% of
the Company's revenue in 1998, 1997, and 1996, respectively. These clients for a
variety of reasons which include ineligibility for public assistance or to
supplement services provided by Medicare or insurance programs have elected to
pay part or all of their care out of pocket. These customers come predominantly
through referrals from physicians, hospital discharge planners, and
community-based organizations.
Marketing and Sales
The Company maintains marketing activities in each of the five states
it operates in and concentrates its efforts through the use of regional
marketing teams. The Company believes in the use of office specific operational
plans for the management and marketing of regional sales. The individual office
operational plan format provides for the comprehensive approach to office
growth, marketing, and recruitment, as well as the clinical and fiscal operation
of each office. The plan objective is to maximize internal growth and assure
clinical/fiscal integrity. The plan serves as the framework for development of a
continual process for quality and performance improvement in all areas of
responsibility including marketing. The marketing component of the plan
identifies all potential referral sources and establishes a systematic referral
source contact strategy across the marketing and office staff. The plan is
continually reassessed and refined to ensure success, and serves as an
evaluation tool to identify strengths as well as areas needing organizational
support.
Star maintains regional marketing staff that focus on the sales and
marketing component goals of these plans. Star markets to the key
representatives of the contracting institutions, hospital discharge planning
departments, insurance companies, community-based facilities, and physicians to
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secure contractual and referral relationships. Representatives visit targeted
facilities and programs maintaining the Company presence with existing referral
sources and acting as the first line of communication with new referral sources.
Beyond the traditional personnel services offered by the industry the Company
offers facility staffing, Shared Aide Team Model services and a Pediatric
specialty program. From an operational perspective the Company markets quality
benchmarks as demonstrated by its Joint Commission accreditation (JCAHO) and a
full functioning Corporate Compliance Program. The marketing representatives are
supported by print and radio advertising, direct mailing, and attendance at
trade shows and regional health care functions.
Competition
The home health care and facility staffing industry has a variety of
local, regional and national organizations, which comprise the Company's
competition base. The Company has numerous competitors in each of the markets it
serves, however regulatory and reimbursement changes are causing consolidation
within the industry at this time. Smaller local and regional operations are
finding it increasingly difficult to remain in the market. Larger national
companies with substantially greater financial resources are continued to be
viewed by the Company as its major competitors.
Competition is based both on the quality of care provided to clients
and the price structure offered by the organization. The Company believes that
it has developed and maintains high quality standards through its operational,
clinical, and compliance policies, procedures and activities. Cost effectiveness
in operation, achieved through improved automation platforms, new service
delivery models, and economies of scale has enabled the Company to be aggressive
in its pricing structures.
Government Regulations, Licensing and Audits
The Company's business is subject to substantial and frequently
changing regulations by federal, state, and local authorities, which require
significant compliance responsibilities by the Company. Each state in which the
Company operates maintains its own form of licensing standards and may maintain
Certificate of Need ("CON") or other Medicare requirements specific to the state
which are above the minimum standard requirements established by the federal
government for participation in the Medicaid and Medicare programs. The
imposition of more restrictive regulatory requirements or the denial or
revocation of any license, certification, Medicaid or Medicare approval, or
permit necessary for operation in a particular market could have a material
adverse effect on the Company's operations. In addition, any future expansion
into new markets would require the Company to comply with all licensing, and/or
CON requirements and other regulations pertinent to that jurisdiction.
The Company maintains all applicable licenses for provision of home
care and facility staffing services in the states of New York, New Jersey,
Pennsylvania, Ohio, and Florida. In addition, the Company maintains Medicare
Certification in certain offices and counties in the states of Ohio,
Pennsylvania, and Florida, with Florida maintaining CON requirements. As a
provider of services
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under the Medicare as well as some state Medicaid programs the Company is
required by the U.S. Health Care Financing Administration and/or state health
departments to prepare cost reports reflecting annual expenditures and
development of capital expenditure plans. The regulatory agencies of the states
in which the Company operates require compliance with certain regulations and
standards with respect to health care personnel records, client records, nursing
and administrative supervision, incident and complaint monitoring and follow-up,
and the establishment of professional advisory boards. Additionally, both
federal and state Anti-kickback regulations exist which must be complied with.
With participation in the Medicare and Medicaid programs the Company is
subject to survey and audit of operational, clinical and financial records with
respect to proper applications of general regulations governing operation, cost
reporting criteria, and other payment formulas. These audits can result in
retroactive adjustments for payments received from these programs resulting in
either amounts due to governmental agencies from the Company or amounts due to
the Company as adjustments from the governmental agency.
Effective in January 1998, the Company was required to comply with a
new payment formula or reimbursement under the Medicare program. This payment
formula, termed the Interim Payment System ("IPS"), for Medicare was developed
by the U.S. Health Care Financing Administration (HCFA) to serve as a middle
step, as the government moved from a cost based reimbursement system to a
episodic disease based Prospective Payment System (PPS). In addition, to the
imposition of IPS, which set per patient limits on Medicare home care
reimbursements, HCFA also revised regional cost limits which combined with IPS
had a significant effect in reducing revenue and reimbursement for the Company's
Florida based certified home health agency from approximately $8.4 million in
revenue during the fiscal year ended May 31, 1998, to approximately $5.4 million
in corresponding reimbursement and revenue for fiscal year ended May 31, 1999.
The Company has restructured its Florida Medicare operation to function under
both the IPS and the revised cost limits. However, congressional debate over the
appropriateness and fairness of retroactive establishment and imposition of
regulations associated with IPS and the changes in the cost limits could bring
further modification and or adjustments that may have a material adverse effect
on the Company's operations.
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. There can be no assurance that
the Company's insurance will be sufficient to cover liabilities resulting from
claims that may be
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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 September 11, 1998, the Company had approximately 260 permanent
employees. The Company also has a roster of temporary professional and
para-professional 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
The Company leases a total of 16 facilities in five 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 September 11, 1998:
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<TABLE>
<CAPTION>
Location Description
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<S> <C>
New York Facilities
Brooklyn Nursing and Para-professional Services
Hicksville Corporate Offices and Nursing and Para-professional Services
Long Beach Nursing and Para-professional Services
Huntington Nursing and Para-professional Services
Syracuse Nursing and Para-professional Services
New Jersey Facilities
Edison Administration and Nursing and Para-professional Services
Elizabeth Nursing and Para-professional Services
Elmwood Park Nursing and Para-professional Services
South Orange Nursing and Para-professional Services
Union City Nursing and Para-professional Services
Florida Facilities
Lake Worth Nursing and Para-professional Services
Hollywood Nursing and Para-professional Services
Miami Lakes (License) Administration and Nursing and Para-professional Services
Miami Lakes (Certified) Administration and Nursing and Para-professional Services
Ohio Facility
Mansfield Nursing and Para-professional Services
Pennsylvania Facility
Allentown Nursing and Para-professional Services
</TABLE>
Item 3. Legal Proceedings
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 (the "Mora Action"). Mr. Mora alleged 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, alleged 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
alleged that he had a contract which would
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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.
On March 4, 1998, before the Court, the parties in the Mora Action settled this
suit under the following terms: (a) the Company shall make payments to Mr.
Mora's law firm for Mr. Mora's legal fees in the amount of $210,000 payable in
four installments, (b) the Company shall make payments to Mr. Mora totaling
$1,454,100 in thirty-eight monthly installments, (c) all stock options
previously issued to Mr. Mora shall be terminated and replaced with one stock
option providing Mr. Mora the right to purchase up to 90,000 shares of the
Company's common stock at the fair market price as of March 3, 1998, (d) release
by the Company of any claims the Company has to any funds previously paid to Mr.
Mora under his Employment Agreement and Consulting Agreement, (e) reimbursement
by the Company of all medical expenses incurred by Mr. Mora for a period of
forty-three months from March 3, 1998, (f) the Company shall provide medical
insurance for Mr. Mora and his spouse for the remainder of Mr. Mora's life, (g)
assignment of the key man insurance policy insuring the life of Mr. Mora,
subject to the outstanding loan of $413,881.22, (h) Mr. Mora shall enter into a
modification of the previous non-compete agreement with the Company in
exchange for the forgiveness of a debt of approximately $400,000 owed the
Company. The debt will be forgiven in equal increments in the years 2002, 2003,
2004 and 2005, (i) assignment by Mr. Mora to the Company of a whole life policy,
including any cash value, (j) the Mora Action shall be dismissed with prejudice.
In February 1998, Star Multi Care Services, Inc. (the "Company") was
advised by its regulatory counsel that jurisdiction with respect to a previously
disclosed audit (the "1997 Audit") of Star Multi Care Services of Florida, Inc.
d/b/a American Health Care Services, the Company's Medicare agency, by the
Office of Audit Services of the Office of Inspector General of the United States
Department of Health and Human Services, which had previously been forwarded to
the Civil Division of the United States Attorney for the Southern District of
Florida (the "US Attorney") by the Medicare intermediary assigned to administer
Medicare payments in Florida, has been relinquished by the US Attorney to the
Medicare intermediary for recovery of an administrative overpayment.
The Company has been informed that the Medicare intermediary has assessed
an administrative overpayment against the Company in the amount of $1,248,747
based on the 1997 Audit. The Company has appealed the administrative overpayment
determination by pursuing administrative and judicial remedies. Such appeal
could result in elimination or reduction of the overpayment amount. The
Company's regulatory counsel has also advised that the Company has claims
against third-parties (e.g., subcontractors and licensed home health agencies)
for a portion of any liability of the Company in connection with such
administrative overpayment. The Company has established a reserve, in the period
ended February 28, 1998, for $1.25 million, in connection with the
administrative overpayment. Management expects this matter to be satisfactorily
resolved.
On July 16, 1998, Star was advised that an audit of American Health Care
Services, Star's Medicare agency, was being commenced by the Office of Audit
Services, Office of Inspector General of the United States Department of Health
and Human Services. This audit was being conducted in conjunction with the
United States Attorney's Office for the Southern District of Florida and
involved a review of claims for home health services submitted by American
Health Care Services during 1995 and 1996. A similar audit commenced during May
of 1997 for its submitted claims during 1993. Star has been advised by Broad and
Cassel ("Regulatory Counsel") that they have been in contact with
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the Office of Inspector General and the Assistant United States Attorney
assigned to this matter, and there is no way to determine at this time the
extent of Star's liability. Regulatory Counsel has advised Star that it may
litigate or appeal any determination of liability and pursue claims against
third parties (e.g., subcontractors and licensed home health agencies) for a
portion of any liability of Star. Management anticipates that this matter should
be satisfactorily resolved. This is grounded upon the advice of Regulatory
Counsel to the Company as to the (1) the resolution of similar types of audits
or claims based upon their experience in the health care industry, handling
appeals of these determinations and dealing with similar matters before the
Office of Inspector General and the Department of Justice, even though there has
not been a final determination of liability, and there can be no assurance as to
the ultimate liability; and (2) the fact that Star will have the right, whether
or not this audit or claim is resolved in whole or in part in Star's favor, to
appeal or litigate any liability, determination and pursue a claim against
third-party independent contractors and other parties that may have rendered
services to Star, even though there is no assurance that any such claims would
ultimately be collectible.
In August 1995, the Office of the New York State Deputy Attorney
General for Medicaid Fraud Control initiated a personnel, clinical and billing
investigation for the years 1992 through 1995. On December 3, 1997, the Company
was advised by its counsel that the investigation, which was previously reported
as pending, may be expanded through 1997 and that the Company was a target of a
criminal investigation. In response to this, the Company conducted its own
internal investigation and has revised its systems and has voluntarily disclosed
the results of its internal investigation to the Office of the New York State
Deputy Attorney General for Medicaid Fraud Control. The Company has established
a reserve of $1,000,000 in connection with this matter. The amount accrued has
been based upon information learned to date, additional information may be
learned in the future which would require the Company to modify this amount.
The Company discovered errors in certain cost reports that had been
previously submitted by the Company to the New York State Department of Social
Services during the years 1993-1995, the basis of which served to determine the
Medicaid reimbursement rates in respect of the Company for the years 1994-1996.
Amended cost reports containing the correct data were submitted to the New York
State Department of Health (the "DOH") in February 1998, which are expected to
result in the DOH's retroactive recalculation of the Company's Medicaid
reimbursement rate and imposition of a substantial overpayment assessment
against the Company. The Company established a reserve, in the period ended
February 28, 1998, for $660,000, in connection with this overpayment assessment.
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 that could possibly have a material adverse
effect upon the Company, and the Company knows of no legal proceeding pending or
threatened against any director or officer of the Company in his or her capacity
as such.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended May 31, 1998 through the
solicitation of proxies or otherwise.
-12-
<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, 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 $ 6.125 $4.094
Second Quarter 6.500 4.625
Third Quarter 6.000 3.875
Fourth Quarter 4.125 2.000
Year ended May 31, 1999
First Quarter $ 2.813 $1.438
As of September 10, 1998, the Company had 5,228,122 shares of Common
Stock outstanding and 730 shareholders of record.
The Company did not pay cash dividends on its Common Stock during
either of the two years ended May 31, 1998 and 1997. 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.
-13-
<PAGE>
Item 6. Selected Financial Data
The statement of operations for the years ended May 31, 1998, 1997,
1996, 1995 and 1994 and balance sheet data as of May 31, 1998, 1997, 1996, 1995
and 1994 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
------------------------------------------------------------
1998(1) 1997 1996 1995(3)(4) 1994(5)
--------- ------ ------ ------------ --------
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2)
Net Revenues $ 57,750 $ 52,963 $ 49,163 $ 38,430 $ 29,694
Income (Loss) from Operations (5,579) 3,180 1,832 1,251 576
Other Income (Expense) (454) (159) (120) (21) 67
Merger Transaction Costs -- (2,808) -- -- --
Income (Loss) from Continuing Operations (4,159) 126 1,143 758 358
Income (Loss) from Discontinued Operations -- -- -- -- (711)
Gain (Loss) on Disposal of Discontinued Operations -- -- -- 30 (1,168)
Cumulative Effect of Change in Accounting Principle -- -- -- 24(7) 65(8)
Net Income (Loss) (4,159) 126 $ 1,143 $ 812 $ (1,456)
Income Per Share(9)
Income (Loss) from Continuing Operations $ (0.84) $ .03 $ 0.27 $ 0.20 $ 0.10
Income (Loss) from Discontinued Operation -- -- -- -- (0.19)
Gain (Loss) on Disposal of Discontinued Operations -- -- -- 0.01 (0.32)
Cumulative Effect of Change in Accounting Principle -- -- -- 0.01 0.02
Net Income (loss) $ (0.84) $ .03 $ 0.27 $ 0.22 $ (0.41)
Shares Used in Computing Per Share Amounts 4,972 4,207 4,273 3,773 3,705
BALANCE SHEET DATA: (2)
Cash and Cash Equivalents $ 1,867 $ 139 $ 1,882 $ 1,497 $ 1,069
Working Capital 750 9,545 9,415 6,774 5,525
Total Assets 29,870 20,300 19,369 16,798 14,196
Total Long-Term Obligations 1,066 2,945 3,604 2,156 832
Redeemable Preferred Stock -- -- 341 683 --
Shareholders' Equity 14,433 13,071 12,045 10,622 9,577
Current Ratio 1.05 3.23 3.79 3.03 2.46
Cash Dividend Declared Per Common Share $ -- $ -- $ -- $ -- $ --
</TABLE>
-14-
<PAGE>
- ---------------------------
(1) In September 1997, Star acquired EFCC Acquisition Corp. in a transaction
accounted for as a purchase.
(2) 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.
(3) In May 1995, STAR acquired certain assets of Long Island Nursing Registry,
Inc. in a transaction accounted for as a purchase.
(4) In June 1994, STAR acquired certain assets of North Central Personnel, Inc.
in a transaction accounted for as a purchase.
(5) In November 1993, STAR acquired certain assets of DSI Health Care Services,
Inc. in a transaction accounted for as a purchase.
(6) In August 1992, STAR acquired certain assets of Unity Care Services,
Inc.-New York Medicaid Operations in a transaction accounted for as a
purchase.
(7) Effective July 1994, STAR adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
(8) Effective June 1, 1993, STAR adopted SFAS No. 109, "Accounting for Income
Taxes."
(9) Effective January 1, 1998, STAR adopted SFAS No. 128, "Earnings Per Share."
-15-
<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. [See Forward Looking Statements]
The Company is subject to significant external factors which could
significantly impact its business, including changes in Medicare reimbursement,
government fraud and abuse initiatives and other such factors which are beyond
the control of the Company. These factors, as well as, future changes in
reimbursement and changes in interpretations of regulations, could cause future
results to differ materially from historical trends.
In 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget
Act"). The Budget Act established an Interim Payment System (the "IPS") that
provided for the lowering of reimbursement limits for home health visits. For
cost reporting periods beginning on or after October 1, 1997, Medicare
reimbursed home health agencies will have their costs limits determined as the
lesser of (i) their actual costs, (ii) cost limits based on 105% of median costs
of freestanding home health agencies, or (iii) an agency-specific per-patient
costs limits, based on 98% of 1994 costs adjusted for inflation. The new IPS
cost limits will apply to the Company for the cost reporting period beginning
January 1, 1998. During the three months ended December 1997, various
regulations and interpretations of the Budget Act were published which enabled
the Company to calculate the potential impact on reimbursement of the new IPS
cost limits. After analysis it was determined that these new limits will reduce
reimbursement to the Company for the Medicare services it provides. During the
year ended May 31, 1998, the Company developed a restructuring plan to
aggressively respond to the new reductions in Medicare reimbursement by
fundamentally reshaping the Company for long-term growth in the changing
environment. After giving effect to restructuring efforts undertaken during the
year ended May 31, 1998, combined with service utilization adjustments projected
for 1998, the Company expects to reduce costs to meet the reimbursement
shortfalls without any further material adverse effect to the Company.
-16-
<PAGE>
Results of Operations
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Net revenues increased $4,786,555 or 9% to 57,749,820 for the fiscal
year ended May 31, 1998 over net revenues of $52,963,265 for the fiscal year
ended May 31, 1997. This increase was primarily attributable to the acquisition
of Extended Family Care Corporation and growth in the New Jersey and Florida
branches of the Company offset by a reduction of approximately $1,800,000 from
American Healthcare Services, the certified home health agency in Florida, due
to a reduction in per beneficiary costs limits established by Medicare effective
for cost reporting periods beginning January 1, 1998.
Gross profit margin percentage for the fiscal year ended May 31, 1998
was 33% compared to 35% for the year ended May 31, 1997. The decrease in the
gross profit percentage was primarily attributable to an increase in the rates
utilized to accrue for workers' compensation claims, a shift in allocating a
greater percentage of workers' compensation expense to costs of revenue to
reflect the occurrence of workers' compensation claims, and a reduction in
visits performed and revenues generated by the Company's Medicare certified
agency in Florida with gross profit margins of approximately 45%.
Selling, General and Administrative expenses ("SG&A") as a percentage
of net revenues was 31% during the year ended May 31, 1998 compared to 27%
during the year ended May 31, 1997. The increase in selling, general, and
administrative expenses as a percentage of net revenues is attributable to, (i)
an increase in the reserve for the self funded health and dental plan, (ii) an
increase in the reserve for the self funded workers' compensation plan, (iii) a
reduction in the overhead allocation to the Company's Medicare certified agency
in Florida, (iv) increases in costs such as staffing in credit, collections and
billing management information systems, human resources, accounting and key
management positions within the Company to support the Company's current and
anticipated future growth , and (v) increased costs associated with implementing
the Company's new policy and procedures over credit, collections, and billing
functions, and increases in other operating expenses resulting from the growth
in revenues. In effort to reduce operating costs the Company recorded a
restructuring and termination charge during the year ended May 31, 1998.
Provision for doubtful accounts as a percentage of net revenues for the
year ended May 31, 1998 was 3% compared to 1% for the year ended May 31, 1997. A
charge of approximately $1,024,000, in excess of the regular provision amount
was taken in the year ended May 31, 1998 to increase the allowance for doubtful
accounts and reflects a more conservative position taken on accounts in excess
of 180 days. The revision in the estimate for the Provision for Doubtful
Accounts was considered necessary by the Company because the collection of these
accounts had been slower than anticipated. The Company also increased the bad
debt provision rate for accounts receivable aged less than 180 days,
necessitated by billing and collection difficulties that continued into early
1998.
Regulatory costs and related expenses for the year ended May 31, 1998
of $3,280,511 were recorded and consist of (i) a charge of $1,250,000 to reserve
for an administrative
-17-
<PAGE>
overpayment assessed by the Medicare intermediary related to the Company's
Medicare certified agency, (ii) a charge of $660,000 for overpayments
assessments by the New York State Department of Health relating to discovered
errors in previously filed costs reports for the 1993 through 1995 periods which
are the basis for the Company's Medicaid reimbursement rates for the 1994
through 1996 period, (iii) a charge of $1,000,000 to reserve for a potential
audit adjustment by the office of New York State Deputy Attorney General for
Medicaid Fraud Control, and (iv) $370,511 for legal fees related to the above
matters.
Impairment of intangible assets of $380,008 for the year ended May 31,
1998 were recorded and consist of a charge to income for the write down of
various intangible assets related to the Company's Medicare operations in
Florida and the discontinuance of certain contracts related to a previously
completed acquisition.
Restructuring and termination expenses of $362,718 for the year ended
May 31, 1998 were recorded and consist of a charge to income relating to the
Company's plan to restructure and consolidate several of its operating locations
and administrative functions within specific geographic areas.
Operating (loss) income for the year ended May 31, 1998, decreased to
($5,578,521) from $3,179,953. This decrease was attributable to increases in the
reserve for self funded workers' compensation and medical and dental plans,
increases in selling, general and administrative expenses, increases in the
provision for doubtful accounts, charges for regulatory costs, contractual
adjustments and related expenses, charges for the impairment of various
intangible assets, and charges for restructuring and termination.
The Company's effective tax rate for 1998 was 31% as compared to 41% in
1997. The decrease in the effective tax rate is due to non-deductible goodwill
in connection with the EFCC acquisition and adjustments to prior year tax
liabilities that reduced the Company's effective tax rate in 1998 below
statutory rates.
Net (loss) income for the year ended May 31, 1998 decreased to
($4,159,236) compared to $125,619 for the year ended May 31, 1997. The decrease
is primarily attributable to the loss from operations, increased interest
expense from additional borrowings associated with the acquisition of Extended
Family Care Corporation.
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 26%. The Company's
decreased revenues from Hospital Staffing resulted from a general decline in
demand for these services.
-18-
<PAGE>
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 was 27% in 1997 as compared with 29% in 1996. Such decrease is
principally attributable to the increase revenues from home care, being absorbed
by existing back office overhead.
Operating income 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.
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"). 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.
-19-
<PAGE>
Gross profit margin percentages for the fiscal years ended May 31, 1996
and 1995 were 35%.
SG&A as a percentage of net revenues was 29% in 1996 as compared with
30% in 1995. Such decrease is principally attributable to the increase revenues
from home care, being absorbed by existing back office overhead.
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.
Liquidity and Capital Resources
As of May 31, 1998, cash and cash equivalents were $1,867,286 as
compared with $139,400 at May 31, 1997. The increase is attributable to
overpayments from Medicare of approximately $1,140,000 which resulted from
changes associated with the reimbursement structure of Medicare reflected by
both changes in IPS and regional cost limits. The entire $1,140,000 has been
recouped by Medicare as of this date.
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 payer is an insurance company, medical institution or
governmental unit. At May 31, 1998 and May 31, 1997, the Company's accounts
receivable balances were $10,108,879 and $11,260,466, respectively, representing
18% and 21% 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, 1998 and May 31, 1997. Accounts receivable turnover was
approximately 68 days during the year ended May 31, 1998 compared to 72 days for
the year ended May 31, 1997. The decrease in accounts receivable turnover days
is primarily attributable to the increase in the allowance for doubtful
accounts.
The Company currently has a line of credit with a bank which allows for
borrowings of up to $8,000,000 (the "Credit Agreement"). Pursuant to the Credit
Agreement, the amount the Company may borrow is limited up to 80 percent of
eligible receivables under 120 days old. The Credit Agreement provides for the
lender to receive a security interest in all of the assets of the Company and
its subsidiaries. As of May 31, 1998, the formula equaled approximately
$6,596,000 and the outstanding balance of the funds advanced to the Company
pursuant to the Credit Agreement, as of such date, was $6,207,852. To date,
total borrowings under the Credit Agreement equal $6,207,852.
-20-
<PAGE>
At May 31, 1998, the Company was in violation of certain financial
covenants contained in the line of credit agreement. On September 11, 1998, the
bank waived compliance with the covenant violations preconditioned upon the
Company meeting certain terms and conditions and has prohibited any future
advances which otherwise would have become available under the terms of the
credit facility. The Company has reclassified borrowings owed as of May 31, 1998
as a current liability.
The Credit Agreement expires on October 31, 1998 and will not be
renewed. The Company is presently negotiating its financing needs with several
sources and has received a non-binding letter of intent from an alternative
financing source to replace the line of credit agreement. The Company has
reclassified the bank debt as current liability because of the technical default
of the Credit Agreement.
The Company intends to meet its long-term liquidity needs through
available cash, cash flow and, a new credit facility. To the extent that such
sources are inadequate, the Company will be required to seek additional
financing. In such event, there can be no assurance that additional financing
will be available to the Company on satisfactory terms.
On September 9, 1997, the Company acquired Extended Family Care
Corporation ("EFCC") a Health Care Service Company which provides Home care
services in New Jersey, New York, and Pennsylvania. The Company paid $2,400,000
in cash and $4,850,000 in stock for EFCC.
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.
Inflation and Seasonality
The rate of inflation was insignificant during the year ended May 31,
1998. 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.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries to represent years. For example, the year
"1998" would be represented by "98." These systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The company believes that its internal systems are Year 2000
compliant or will be upgraded or replaced in connection with previously planned
changes to information systems prior to the need to comply
-21-
<PAGE>
with Year 2000 requirements without material cost or expense. The anticipated
costs of any Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to the
availability or cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties. In addition,
there can be no assurance that Year 2000 compliance problems will not be
revealed in the future which could have a material adverse affect on the
company's business, financial condition and results of operations. Many of the
Company's customers and suppliers may be affected by Year 2000 issues that may
require them to expend significant resources to modify or replace their existing
systems. This may result in those customers having reduced funds to purchase the
Company's products or in those suppliers experiencing difficulties in producing
or shipping key components to the Company on a timely basis or at all.
Forward Looking Statements
Certain statements in this report on Form 10-K constitute"
forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by
their inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward looking statements
are based on the Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The potential risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations include the impact of further changes in the Medicare
reimbursement system, including any changes to the current IPS and/or the
ultimate implementation of a prospective payment system; government regulation;
health care reform; pricing pressures from third-party payors, including managed
care organizations; retroactive Medicare audit adjustments; and changes in laws
and interpretations of laws or regulations relating to the health care industry.
GOVERNMENT REGULATION. As a home health care provider, the Company is subject to
extensive and changing state and federal regulations relating to the licensing
and certification of its offices and the sale and delivery of its products and
services. The federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare and Medicaid reimbursements to home
health care providers generally, and are becoming more restrictive in their
interpretation of those costs for which reimbursement will be allowed to such
providers. Changes in the law and regulations as well as new interpretations
enforced by the relevant regulatory agencies could have an adverse effect on the
Company's operations and the cost of doing business.
THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed
for its services primarily by the Medicare/Medicaid programs, insurance
companies, managed care companies and other third-party payors, the
implementation of alternative payment methodologies for any of these payors
could have an impact on revenues and profit margins.
-22-
<PAGE>
Generally, managed care companies have sought to contain costs by reducing
payments to providers. Continued cost reduction efforts by managed care
companies could adversely affect the Company's results of operations.
HEALTH CARE REFORM. In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("BBA"), resulting in
significant changes to cost based reimbursement for Medicare home health care
providers. Although the new legislation enacted by Congress retains a cost based
reimbursement system, the cost limits have been reduced for fiscal years which
began on or after October 1, 1997 and a new per-beneficiary limit is effective
for fiscal years which began after such date. The BBA provides two payment
systems -- an IPS which is effective for the Company beginning January 1, 1998
until the adoption of the successor payment system which is a new prospective
payment system tentatively scheduled to begin in late 1999. The effect of the
changes under IPS is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare program. The
Company anticipates a possible decrease in aggregate net revenues during the
course of the next fiscal year due principally to reductions in the limits for
the amount of costs that are reimbursable in connection with the provision of
Medicare services. The Company cannot quantify the full effect of IPS on the
Company's future performance because certain components of health care reform
legislation, such as the per-beneficiary limit, require annual data which will
not be known until a final assessment by Medicare and/or its fiscal intermediary
is completed for each annual period.
As Congress and state reimbursement entities assess alternative health
care delivery systems and payment methodologies, the Company cannot predict
which additional reforms may be adopted or what impact they may have on the
Company. Additionally, uncertainties relating to the nature and outcomes of
health care reforms have also generated numerous realignments, combinations and
consolidations in the health care industry which may also have an adverse impact
on the Company's business strategy and results of operations. The Company
expects that in addition to industry consolidation generally, there may be
consolidations within the Company's locations, with the likely result that there
will be fewer offices by the end of the next fiscal year.
BUSINESS CONDITIONS. The Company must continue to establish and maintain close
working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the increasing
market demand for the type of services offered and the necessity to maximize
service volume due to anticipated operating margin decline.
ATTRACTION AND RETENTION OF EMPLOYEES. Maintaining quality managers and branch
administrators will play a significant part in the future success of the
Company. The Company's professional nurses and other health care personnel are
also key to the continued provision of quality care to the Company's patients .
The possible inability to attract and retain qualified skilled management and
sufficient numbers of credentialed health care professionals and
para-professionals could adversely affect the Company's operations and quality
of service.
PART III
-23-
<PAGE>
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.
-24-
<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:
<TABLE>
<CAPTION>
Page
----------
<S> <C>
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, 1998 and 1997 F-4
Consolidated statements of operations for the three years ended May 31, 1998 F-5
Consolidated statement of shareholders' equity
for the three years ended May 31, 1998 F-6
Consolidated statements of cash flows for the three years ended May 31, 1998 F-7
Notes to consolidated financial statements F-8 - F-19
</TABLE>
2. Financial Statement Schedules
None.
3. Exhibits: The following Exhibits are filed as a part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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.
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(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.
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(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.)
(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
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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.
</TABLE>
- -------------------
* 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 dated February 19, 1998.
-28-
<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 September 14, 1998 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:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Stephen Sternbach President, Chairman of the Board September 14, 1998
------------------------------- of Directors and Chief Executive Officer
Stephen Sternbach
/s/ William Fellerman Principal Financial and Accounting Officer, September 14, 1998
------------------------------- Director
William Fellerman
/s/ John P. Innes, II Director September 14, 1998
-------------------------------
John P. Innes, II
/s/ Matthew Solof Director September 14, 1998
-------------------------------
Matthew Solof
/s/ Charles Berdan Director September 14, 1998
-------------------------------
Charles Berdan
/s/ Melvin Katten Director September 14, 1998
-------------------------------
Melvin Katten
Director September 14, 1998
-------------------------------
Gary L. Weinberger
Director September 14, 1998
-------------------------------
Ivan Kaufman
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Gregory Turchan Senior Vice President and September 14, 1998
------------------------------- Chief Operating Officer and
Gregory Turchan Director
</TABLE>
-30-
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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, 1998 and 1997 F-4
Consolidated statements of operations
for the three years ended May 31, 1998 F-5
Consolidated statement of shareholders'
equity for the three years ended May 31, 1998 F-6
Consolidated statements of cash flows for
the three years ended May 31, 1998 F-7
Notes to consolidated financial statements F-8 - F-19
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Star Multi Care Services, Inc.
Hicksville, New York
We have audited the accompanying consolidated balance sheets of Star Multi Care
Services, Inc. as of May 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended May 31, 1998. 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
revenues constituting 26% in 1996 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,
1998 and 1997, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended May 31, 1998, in conformity with
generally accepted accounting principles.
/s/HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 24, 1998 (except for Note 7, as to
which the date is September 11, 1998)
F-2
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
AMSERV HEALTHCARE INC.
We have audited the accompanying consolidated balance sheets of AMSERV
HEALTHCARE INC. as of May 31, 1996 and June 24, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from June 25, 1995 to May 31, 1996 and the year ended June 24, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of AMSERV HEALTHCARE, INC. for the year
ended June 30, 1994, were audited by other auditors whose report dated October
7, 1994, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the May 31, 1996 and June 24, 1995 financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of AMSERV HEALTHCARE INC. at May 31, 1996 and June 24, 1995, and the
consolidated results of its operations and its cash flows for the period from
June 25, 1995 to May 31, 1996 and for the year ended June 24, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
San Diego, California
August 8, 1996
except for Note 6 and 13, as to which the date is
August 23, 1996
F-3
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
------------------------------------
ASSETS (Note 7) 1998 1997
------ -------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,867,286 $ 139,400
Accounts receivable, net of allowance for doubtful
accounts of $1,872,000 and $650,000 at May 31,
1998 and 1997, respectively (Notes 6 and 14) 10,108,879 11,260,466
Prepaid expenses and other current assets (Note 3) 382,899 1,406,328
Income taxes receivable 1,225,946 73,738
Deferred income taxes (Note 8) 1,537,000 950,015
-------------- --------------
Total current assets 15,122,010 13,829,947
PROPERTY AND EQUIPMENT, net (Note 4) 1,999,924 1,200,018
NOTES RECEIVABLE FROM OFFICER (Note 12) 86,260 93,353
INTANGIBLE ASSETS, net (Note 5) 11,857,698 4,954,334
DEFERRED INCOME TAXES (Note 8) 619,000 -
OTHER ASSETS 185,715 222,805
-------------- --------------
$ 29,870,607 $ 20,300,457
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit line (Note 7) $ 6,207,852 $ -
Accrued payroll and related expenses (Note 15) 3,214,207 3,017,009
Accounts payable 1,018,322 958,312
Accrued expenses 339,142 184,293
Deferred revenues 1,017,287 -
Accrued regulatory costs (Note 6) 2,450,000 -
Current maturities of long-term debt 125,000 125,000
-------------- --------------
Total current liabilities 14,371,810 4,284,614
-------------- --------------
LONG-TERM LIABILITIES:
Revolving credit line (Note 7) - 2,622,000
Long-term debt - 125,000
Other long-term liabilities (Note 15) 1,065,770 197,795
-------------- --------------
Total long-term liabilities 1,065,770 2,944,795
-------------- --------------
COMMITMENTS AND CONTINGENCY (Notes 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 10, 11, 12 and 15)
Preferred stock, $1.00 par value, 5,000,000 shares authorized - -
Common stock, $.001 par value, 10,000,000 shares authorized;
5,362,780 and 4,214,335 shares issued, respectively 5,363 4,214
Additional paid-in capital 20,951,899 15,431,833
Subscription receivable (397,782) (397,782)
Deficit: (5,847,531) (1,688,295)
Treasury stock, 137,500 common shares
at May 31, 1998 and 1997 (278,922) (278,922)
-------------- --------------
Total shareholders' equity 14,433,027 13,071,048
-------------- --------------
$ 29,870,607 $ 20,300,457
============== ==============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
May 31,
--------------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
REVENUES, net (Note 14) $ 57,749,820 $ 52,963,265 $ 49,162,934
--------------- --------------- --------------
OPERATING EXPENSES (Notes 12, 15 and 17)
Costs of revenues 38,946,668 34,532,140 31,943,356
Selling, general and administrative 17,835,131 14,115,158 14,122,797
Depreciation and amortization 961,431 656,374 752,758
Provision for doubtful accounts 1,561,874 479,640 511,736
Regulatory costs and related
expenses (Note 6) 3,280,511 - -
Impairment of intangible assets (Note 9) 380,008 - -
Restructuring and termination expenses 362,718 - -
--------------- --------------- -------------
63,328,341 49,783,312 47,330,647
--------------- --------------- --------------
OPERATING (LOSS) INCOME (5,578,521) 3,179,953 1,832,287
INTEREST EXPENSE, net (453,721) (159,110) (120,184)
MERGER TRANSACTION COSTS - (2,808,224) -
--------------- --------------- -------------
(LOSS) INCOME BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (6,032,242) 212,619 1,712,103
(BENEFIT) PROVISION FOR
INCOME TAXES (Note 8) (1,873,006) 87,000 568,844
--------------- --------------- --------------
NET (LOSS) INCOME $ (4,159,236) $ 125,619 $ 1,143,259
=============== =============== ==============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $(.84) $ .03 $ .29
===== ===== =====
Diluted $(.84) $ .03 $ .27
===== ===== =====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 4,972,207 3,969,910 3,920,863
========= ========= =========
Diluted 4,972,207 4,206,861 4,272,669
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional
Par Paid-in
Shares Value Capital
------------- --------- ----------------
<S> <C> <C> <C>
Balance, May 31, 1995 3,604,050 $ 3,604 $ 11,882,682
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
Stock dividend (Note 10) 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
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 (Note 10) 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
Shares issued under Employee Stock Purchase Plan 5,584 6 26,077
Exercise of stock options including income tax benefit 168,701 169 499,963
Issuance of stock in connection with EFCC merger (Note 2) 974,160 974 4,849,026
Issuance of stock options (Note 14) - - 145,000
Net loss - - -
------------ --------- ----------------
Balance, May 31, 1998 5,362,780 $ 5,363 $ 20,951,899
============ ========= =================
<CAPTION>
Unrealized Retained
Subscription (Loss) on Earnings
Receivable Investments (Deficit)
-------------- ----------- ------------
<S> <C> <C> <C>
Balance, May 31, 1995 $ (198,440) $ (14,564) $ (772,452)
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 (199,342) - -
Stock dividend (Note 10) - - (1,071,709)
Change in unrealized loss on short-term investments - 8,564 -
Net income - - 1,143,259
------------ --------- ------------
Balance, May 31, 1996 (397,782) (6,000) (564,640)
Shares issued under Employee Stock Purchase Plan - - -
Exercise of stock options including income tax benefit - - -
Issuance of stock for services - - -
Stock dividend (Note 10) - - (1,249,274)
Change in unrealized loss on short-term investments - 6,000 -
Net income - - 125,619
------------ --------- ------------
Balance, May 31, 1997 (397,782) - (1,688,295)
Shares issued under Employee Stock Purchase Plan - - -
Exercise of stock options including income tax benefit - - -
Issuance of stock in connection with EFCC merger (Note 2) - - -
Issuance of stock options (Note 14) - - -
Net loss - - (4,159,236)
------------ --------- ------------
Balance, May 31, 1998 $ (397,782) $ - $ (5,847,531)
============ ========= ============
<CAPTION>
Treasury Stock
--------------------------- Total
Shareholders'
Shares Value Equity
----------- ------------ ---------------
<S> <C> <C> <C>
Balance, May 31, 1995 137,500 $ (278,922) $ 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 (Note 10) - - -
Change in unrealized loss on short-term investments - - 8,564
Net income - - 1,143,259
---------- ------------ --------------
Balance, May 31, 1996 137,500 (278,922) 12,045,083
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 (Note 10) - - -
Change in unrealized loss on short-term investments - - 6,000
Net income - - 125,619
---------- ------------ -------------
Balance, May 31, 1997 137,500 (278,922) 13,071,048
Shares issued under Employee Stock Purchase Plan - - 26,083
Exercise of stock options including income tax benefit - - 500,132
Issuance of stock in connection with EFCC merger (Note 2) - - 4,850,000
Issuance of stock options (Note 14) - - 145,000
Net loss - - (4,159,236)
---------- ------------ -------------
Balance, May 31, 1998 137,500 $ (278,922) $ 14,433,027
========== ============ =============
</TABLE>
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,
-------------------------------------------
1998 1997 1996
------------- ------------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (4,159,236) $ 125,619 $ 1,143,259
------------- ------------- -------------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Provision for doubtful accounts 1,561,874 479,640 511,736
Depreciation and amortization 961,431 656,374 722,609
Deferred income taxes (1,000,985) (589,909) (200,106)
AMSERV fiscal year conversion - - 136,262
Impairment of intangible assets 380,008 - -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 597,561 (2,128,937) (3,406,998)
Prepaid expenses and other assets 1,095,943 (263,981) (584,290)
Income tax receivable (1,152,208) (73,738) -
Valuation allowance - - (16,902)
Increase (decrease) in liabilities:
Accounts payable and accrued payroll and expenses 1,278,163 1,299,650 257,250
Deferred revenues 1,017,287 - -
Income taxes payable - (295,647) (4,793)
Other liabilities 795,255 163,825 (14,544)
------------- ------------- -------------
Total adjustments 5,534,329 (752,723) (2,599,776)
------------- ------------- -------------
Net cash provided by (used in) operating activities 1,375,093 (627,104) (1,456,517)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments - - (992,999)
Proceeds from sale of short-term investments - 106,000 2,310,486
Purchase of intangibles - (179,763) (82,403)
Repayment on note receivable from officer 7,093 7,164 9,200
Purchase of property and equipment (999,665) (666,705) (307,547)
Business acquisitions, net of cash acquired (2,786,702) - -
Payment of costs related to discontinued operations - (98,081) (293,689)
------------- ------------- -------------
Net cash (used in) provided by investing activities (3,779,274) (831,385) 643,048
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from revolving credit line 3,585,852 (658,000) 1,530,000
Repayment of long-term debt (125,000) (125,000) (125,000)
Proceeds from the issuance of stock under option plans 671,215 840,346 135,090
Redemption of preferred shares - (341,436) (341,434)
------------- ------------- -------------
Net cash provided by (used in) financing activities 4,132,067 (284,090) 1,198,656
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,727,886 (1,742,579) 385,187
CASH AND CASH EQUIVALENTS, beginning of year 139,400 1,881,979 1,496,792
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 1,867,286 $ 139,400 $ 1,881,979
============= ============= =============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 118,000 $ 604,000 $ 858,932
============= ============= =============
Interest paid $ 440,000 $ 235,000 $ 280,000
============= ============= =============
</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, 1998
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, Pennsylvania, 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. Net income (loss) per common share and per common and common
equivalent share
Net income (loss) per common share and per common and common equivalent
share is based upon weighted average common and common equivalent shares
outstanding. Common equivalent shares include the dilutive effect of stock
options, if any.
In the third quarter of fiscal 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share
and replaces the presentation of primary earnings per share with basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the consolidated statement of operations for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic earnings per share computation to the numerator and
denominator of the diluted EPS computation. The reconciliation for the years
ended May 31, 1998, 1997 and 1996 are as follows:
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
d. Net income (loss) per common share and per common and common
equivalent share (Cont'd)
<TABLE>
<CAPTION>
For the Year Ended May 31, 1998
---------------------------------------------------------
Income Shares Per Share
--------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Net loss $ (4,159,236) 4,972,207 $ (0.84)
Effect of dilutive securities -
Common stock options - - -
--------------- ------------ --------
Diluted EPS $ (4,159,236) 4,972,207 $ (0.84)
=============== ============ =========
<CAPTION>
For the Year Ended May 31, 1997
---------------------------------------------------------
Income Shares Per Share
--------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income $ 125,620 3,969,910 $ 0.03
Effect of dilutive securities -
Common stock options - 236,951 -
----------- ------------ ------
Diluted EPS $ 125,620 4,206,861 $ 0.03
=========== ============ ======
<CAPTION>
For the Year Ended May 31, 1996
---------------------------------------------------------
Income Shares Per Share
--------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income $ 1,143,259 3,920,863 $ 0.29
Effect of dilutive securities -
Common stock options - 351,806 -
-------------- ------------ ------
Diluted EPS $ 1,143,259 4,272,669 $ 0.27
============== ============ ======
</TABLE>
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. 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, accrued expenses and net operating loss
carryforwards.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
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. 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.
k. Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," an impairment loss is recognized whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
l. New accounting pronouncements
Recent accounting pronouncements issued by the Financial Accounting
Standards Board which the Company is not required to adopt at this time include
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), Statement of Financial Accounting Standard No. 131,
"Disclosure About Segments of an Enterprise" ("SFAS 131") and Statement of
Financial Accounting Standard No. 132, "Disclosure About Pensions and Other
Postretirement Benefits" ("SFAS 132"). The Company intends to comply with the
disclosure requirements of SFAS 130, SFAS 131 and SFAS 132 and does not expect
these pronouncements to have a material effect on the Consolidated Financial
Statements.
m. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1998.
2. MERGERS AND ACQUISITIONS:
a. 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.
AMSERV changed its year end to May 31 for fiscal 1996. 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
F-10
<PAGE>
2. MERGERS AND ACQUISITIONS: (Cont'd)
($136,262) for such four week period. Other results of operations for such four
week period of AMSERV include net revenues of $1,113,322, depreciation and
amortization of $30,149, loss before taxes of ($199,624) and income tax benefit
of $63,362.
b. On September 9, 1997, the Company acquired Extended Family Care
Corporation ("EFCC") through the merger of EFCC into a wholly-owned subsidiary
of the Company. The Company paid $2,400,000 in cash and issued 974,160 shares of
common stock to EFCC shareholders for an aggregate purchase price of
approximately $7,250,000. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of EFCC have been included in the
Company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $6,800,000 is being amortized over 40 years.
The following unaudited pro forma consolidated results of operations
for the years ended May 31, 1998 and 1997 assume the EFCC acquisition occurred
as of June 1, 1996:
<TABLE>
<CAPTION>
1998 1997
-------------- ----------
<S> <C> <C>
Revenues, net $ 62,274,443 $ 60,683,347
Net loss $ (4,819,847) $ (437,494)
Net loss per share:
Basic $(.92) $(.10)
Diluted $(.92) $(.10)
</TABLE>
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
May 31,
------------------------------
1998 1997
--------- --------
<S> <C> <C>
Prepaid insurance $ 223,415 $ 330,809
Deferred acquisition costs - 514,086
Other 159,483 561,433
---------- -------------
$ 382,898 $ 1,406,328
========== =============
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
May 31,
------------------------------------
1998 1997
<S> <C> <C>
Furniture and fixtures $ 929,342 $ 592,270
Computer equipment 1,942,326 1,363,230
Leasehold improvements 97,614 57,691
Other 334,174 130,338
3,303,456 2,143,529
Less accumulated depreciation 1,303,532 943,511
------------- -------------
$ 1,999,924 $ 1,200,018
============= =============
</TABLE>
F-11
<PAGE>
5. INTANGIBLE ASSETS:
Intangible assets are as follows:
<TABLE>
<CAPTION>
May 31,
Amortization ----------------------------------
Period 1998 1997
---------------- -------------- -----------
<S> <C> <C> <C>
Goodwill 25 - 40 $10,408,000 $ 2,942,000
Customer contracts 11 - 15 1,581,000 2,225,000
Covenants not-to-compete 2 - 8 385,000 385,000
Nurses' list 9 - 15 638,000 703,000
Other 2 - 25 385,000 135,000
----------- -----------
13,397,000 6,390,000
Less accumulated amortization 1,539,000 1,436,000
----------- -----------
$11,858,000 $ 4,954,000
=========== ===========
</TABLE>
6. REGULATORY COSTS AND RELATED EXPENSES:
Regulatory costs, and related expenses for the year ended May 31, 1998
consists of the following:
Medicare overpayments (a) $ 1,250,000
Medicaid assessment (b) 1,000,000
Medicaid adjustments (c) 660,000
Legal fees and related expenses 370,511
-------------
$ 3,280,511
=============
(a) In May 1997, the Company was advised that an audit of American
Healthcare 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. In February 1998, the Company was notified by the United States
Attorney that $1,250,000 is payable to Medicare as a result of the audit. The
Company has accrued this amount, and is included in accrued regulatory costs, in
connection with this matter.
(b) In August 1995, the Office of Deputy Attorney General for Medicaid
Fraud Control conducted a review of personnel, clinical and billing records for
the years 1992 through 1995. On December 3, 1997, the company was informed by
its legal counsel that the investigation, which was previously reported as
pending, may be expanded through 1997 and that the Company was a target of a
criminal investigation. Based upon information learned to date and advice from
legal counsel, the Company has accrued $1,000,000, included in accrued
regulatory costs, in connection with this matter.
(c) In fiscal 1998, errors were discovered in certain cost reports that
had been previously submitted to the New York State Department of Social
Services during the years 1993 through 1995. The Company filed amended cost
reports, which is expected to result in a retroactive calculation of the
Medicaid reimbursement rate and the imposition of overpayment assessments
against the Company. The Company has offset the $660,000 overpayment against
existing accounts receivable from Medicaid in connection with this matter.
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, 1998).
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.
The line of credit matures on October 31, 1998. At May 31, 1998, the
Company was in violation of certain financial covenants contained in the line of
credit agreement. On September 11, 1998, the bank waived compliance with the
covenant violations preconditioned upon the Company meeting certain terms and
conditions and has prohibited any future advances which otherwise would have
become available under the terms of the credit facility. The Company has
reclassified borrowings owed as of May 31, 1998 as a current liability.
The Company is presently negotiating its financing needs with several
sources and has received a non-binding letter of intent from an alternative
financing source to replace the line of credit agreement.
8. INCOME TAXES:
The Company files a consolidated U.S. federal income tax return that
includes all 80% or more owned subsidiaries. State tax returns are filed on a
consolidated, or separate basis depending on the applicable laws.
The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------------
1998 1997 1996
--------------- ------------ -----------
<S> <C> <C> <C>
Current:
Federal $ $ (912,021) $ 605,093 $ 551,758
State and local 40,000 71,816 217,192
--------------- ----------- -----------
(872,021) 676,909 768,950
--------------- ------------ -----------
Deferred:
Federal (800,149) (431,641) (197,498)
State (200,836) (158,268) (2,608)
--------------- ------------ -----------
(1,000,985) (589,909) (200,106)
--------------- ------------ -----------
$ (1,873,006) $ 87,000 $ 568,844
=============== =========== ===========
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
May 31,
-----------------------------------
1998 1997
-------------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 683,000 $ 209,715
Accrued expenses 1,110,000 714,127
Tax credits 127,000 -
Net operating loss carryforward 180,000 8,756
Stock compensation 53,000 -
Amortization of intangible assets 112,000 -
Other 2,000 17,417
-------------- ----------
2,267,000 950,015
Deferred tax liabilities:
Depreciation and amortization 111,000 -
-------------- ----------
Net deferred tax assets $ 2,156,000 $ 950,015
============== ==========
</TABLE>
F-13
<PAGE>
8. INCOME TAXES:
A reconciliation between the actual income tax (benefit) expense and
income taxes computed by applying the statutory federal income tax rate to
income before taxes is as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------------
1998 1997 1996
--------------- ---------- ------------
<S> <C> <C> <C>
Computed federal income tax at
statutory rates $ (2,050,963) $ 72,290 $ 582,115
State taxes, net of federal benefit (211,129) 13,608 158,200
Items without tax benefit 106,613 76,500 103,856
Adjustments to prior years' tax liability 262,016 (76,200) -
Valuation allowance - - (335,764)
Tax credits (47,883) - -
Other, net 68,340 802 60,437
--------------- ---------- ------------
$ (1,873,006) $ 87,000 $ 568,844
=============== ========== ============
</TABLE>
9. REIMBURSEMENT REDUCTIONS:
In August 1997, Congress enacted and President Clinton signed into law
the Balanced Budget Act of 1997 ("BBA"), resulting in significant changes to
cost based reimbursement for Medicare home health care providers. Although the
new legislation enacted by Congress presently retained a cost based
reimbursement system, the cost limits have been reduced for fiscal years which
began after such date. The BBA provided for two payment systems - an interim
payment system ("IPS") which is effective for the Company from March 1, 1998
until the adoption of the successor payment system which is a new prospective
payment system scheduled to be effective for fiscal years beginning on or after
October 1, 1999. The effect of the changes under IPS is to reduce the limits for
the amount of costs that are reimbursable to home health care providers under
the Medicare program.
During the third quarter of fiscal 1998, management moved proactively
to prepare the Company for the impact of IPS and for long-term growth. As a
result, the Company implemented a corporate-wide cost reduction program. These
actions, together with the Company's assessment of the impact of health care
reform legislation, resulted in a pre-tax non-recurring charge in the third
quarter of fiscal 1998 approximating $380,000. This accounting charge included a
write-off of goodwill and intangible assets.
10. SHAREHOLDERS' EQUITY:
a. Preferred stock
The Company has authorized 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.
F-14
<PAGE>
10. SHAREHOLDERS' EQUITY: (Cont'd)
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.
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.
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.
11. STOCK OPTION PLANS:
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, 1998, 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.
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------------
1998 1997 1996
--------------- ---------- -------------
<S> <C> <C> <C>
Net (loss) income, as reported $ (4,159,236) $ 125,619 $ 1,143,259
Net (loss) income, pro forma (4,178,675) 92,541 1,093,196
Basic earnings per share, as reported (.84) .03 .29
Basic earnings per share, pro forma (.84) .02 .28
Diluted earnings per share, as reported (.84) .03 .27
Diluted earnings per share, pro forma (.84) .02 .26
</TABLE>
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, 1998, 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 April 1999 and April 2008.
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.
F-15
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
Information as to options granted is summarized as follows:
<TABLE>
<CAPTION>
Exercise
Shares Price
---------- ---------------
<S> <C> <C>
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
Granted 212,000
Canceled and expired (15,032)
Exercised (168,701)
----------
Outstanding, May 31, 1998 553,940 $1.38 - $4.66
==========
</TABLE>
Shares reserved for future issuance at May 31, 1998 are comprised of the
following:
Shares issuable upon exercise of stock
options under the plans 515,725
Shares issuable under the Company's
employee stock purchase plan 316,197
-------
831,922
=======
The weighted-average grant-date fair value of options granted for the
years ended May 31, 1998 and 1997 were $1.02 and $3.93, respectively. In
addition, there was 441,338 options at a weighted-average per share exercise
price of $3.32 per option exercisable at May 31, 1998.
The weighted-average exercise price and remaining contractual life of
options outstanding at May 31, 1998 is $3.37 and 6.2 years, respectively.
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 17,703 shares were issued.
12. RELATED PARTY TRANSACTIONS:
a. Notes receivable from officer
Notes receivable from officer of $86,260 and $93,353 as of May 31, 1998
and 1997, respectively, 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, 1998.
F-16
<PAGE>
12. RELATED PARTY TRANSACTIONS: (Cont'd)
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.
In accordance with the settlement agreement with Mr. Mora (Note 15) the
Company has agreed to forgive the subscription receivable in consideration for
Mr. Mora entering into a covenant not-to-compete agreement with the Company. The
non-compete agreement provides for the Company to forgive the subscription
receivable plus accrued interest in incremental amounts between the years 2002
through 2005 provided that Mr. Mora complies with the non-compete agreement.
c. Services
A director provides accounting services to the Company for which he was
compensated approximately $146,000, $129,000 and $100,000 in the years 1998,
1997 and 1996, respectively.
A former director of AMSERV, provided certain legal services to the
Company. The Company incurred legal fees with such firm of $7,027 for fiscal
year 1996.
13. 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, 1998 and 1997 approximates
its fair value.
14. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable
and temporary cash investments.
The Company provides temporary health care personnel to hospitals,
nursing homes, extended care facilities and in-home patients in Florida, Ohio,
New Jersey, Pennsylvania, upstate New York and the New York City metropolitan
area. At May 31, 1998 and 1997, approximately 44% and 36%, respectively, of
accounts receivable was due from Medicaid and approximately 0% and 9%,
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>
14. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS: (Cont'd)
The Company places its temporary cash investments with high credit
quality financial institutions.
15. 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 $625,000. The agreement also provides
for increases based on the consumer price index increases and certain bonuses
based upon annual pretax income. The Company has an employment agreement, as
amended, with an employee which expires May 1999. The aggregate commitment for
future salary, excluding bonuses is $117,500. The agreement also provides for
certain bonuses based on annual pre-tax income. The aggregate minimum commitment
for future salaries under the agreements is as follows:
Years Ending
May 31,
-------------
1999 $ 367,500
2000 250,000
2001 125,000
----------
$ 742,500
==========
b. Leases
The Company conducts its operations from leased office space under
various operating leases which expire at various dates through 2003. Management
expects that in the normal course of business these leases will be renewed or
replaced by other leases.
As of May 31, 1998 future net minimum rental payments under operating
leases having initial or remaining noncancellable terms in excess of one year
are as follows:
1999 $ 698,000
2000 397,000
2001 298,000
2002 198,000
2003 16,000
----------
$1,607,000
==========
Rental expenses for operating leases for fiscal years ended 1998, 1997
and 1996 were approximately $718,000, $805,000 and $731,000, respectively.
c. Settlement agreement
In March 1998, the Company negotiated a settlement agreement with
Eugene J. Mora ("Mora") the former President and CEO of AMSERV. The agreement
provides for monthly payments of $10,750 commencing in July 1998 through
February 2000 in satisfaction of Mora's consulting agreement and monthly
payments of $26,535 from July 1998 through February 2000 and $37,285 from March
2000 through September 2000 in satisfaction of Mora's employment agreement. The
Company also exchanged Mora's existing stock options for 90,000 new options with
an exercise price of $4.00 per share, the Company recorded a charge to
operations of $145,000 for the issuance of these options. In addition, the
Company reimbursed Mora $210,000 for legal fees. The agreement also provides for
the forgiveness of the subscription receivable of $397,782 plus accrued interest
from Mora (Note 12) in exchange for Mora entering into a covenant not-to-compete
agreement.
F-18
<PAGE>
15. COMMITMENTS: (Cont'd)
c. Settlement agreement (Cont'd)
In accordance with APB Opinion No. 21 "Interest on Receivables and
Payables," the Company has discounted its obligations resulting from the
settlement of Mora's employment agreement. The liability was discounted at a
rate of 9% per annum, and results in a face amount of approximately $1,035,000.
The aggregate minimum commitment under this agreement is as follows:
Years Ending
May 31,
------------
1999 $ 447,420
2000 447,420
2001 447,420
2002 149,140
16. CONTINGENCIES:
The Company is a defendant in several actions which are routine and
incidental to its business.
Although the Company cannot estimate the ultimate cost of its open
legal matters with precision, it has an accrued loss contingency at May 31, 1998
for the aggregate, estimated amount to settle such matters (see Note 6). In
management's opinion, settlement of these actions will not have a material
adverse effect on the Company's consolidated financial position, liquidity or
results of operations.
17. RETIREMENT PLANS:
The Company adopted a 401(k) savings plan in January 1995 covering all
eligible employees. Employees may defer up to 15% of their compensation. The
Company will match 10% of employees' contributions up to 8%. Contributions for
the years ended May 31, 1998, 1997 and 1996 approximated $64,000, $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. The Company terminated the
Plan in November 1997. Contributions to the plan for 1997 and 1996 approximated
$313,000 and $233,000, respectively.
18. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the year ended May 31, 1998, the Company issued 974,160 shares
of common stock in connection with the EFCC merger. During the years ended 1997
and 1996, the Company issued stock dividends which amounted to $1,249,274 and
$1,071,709, 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.
F-19
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- --------------- ----------
<S> <C>
2. (a) Agreement and Plan of Merger among the Company, EFCC Acquisition Corp. and Extended
Family Care Corporation dated as of January 3, 1997. Incorporated by reference 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 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.)
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)
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- --------------- ----------
<S> <C>
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 Starr 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.)
(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.)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- --------------- ----------
<S> <C>
(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. ** Financial Data Schedule.
</TABLE>
- -------------------
* Incorporated by reference to the Company's Registration Statement
on Form S-18 dated May 14, 1991. (Registration No. 33-39697-NY)
** Filed herewith.
-33-
<PAGE>
Exhibit 21
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
7. Star Multi Care Services of Florida, Inc. Florida
8. Star Multi Care Services, Inc. Delaware
9. EFCC Acquisition Corp. New York
-34-
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference into the Registration
Statement on Forms S-8 (Nos. 333-20865, 333-08499, 333-05177, 333-06063 and
33-59056) of Star Multi Care Services, Inc. of our report dated July 24, 1998
(except for Note 7, as to which the date is September 11, 1998) 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, 1998.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
September 11, 1998
-35-
<PAGE>
Exhibit 23(b)
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 cosolidated
financial statements of Amerv Healthcare, Inc. Included in this annual Report on
Form 10-K of Stat 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.
Ernest & Young LLP.
San Diego, California
September 11, 1998
-36-
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,867,286
<SECURITIES> 0
<RECEIVABLES> 11,980,879
<ALLOWANCES> 1,872,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,122,010
<PP&E> 3,303,456
<DEPRECIATION> 1,303,532
<TOTAL-ASSETS> 29,870,607
<CURRENT-LIABILITIES> 14,371,810
<BONDS> 0
0
0
<COMMON> 5,363
<OTHER-SE> 14,427,664
<TOTAL-LIABILITY-AND-EQUITY> 29,870,607
<SALES> 57,749,820
<TOTAL-REVENUES> 57,749,820
<CGS> 38,946,668
<TOTAL-COSTS> 38,946,668
<OTHER-EXPENSES> 961,431
<LOSS-PROVISION> 1,561,874
<INTEREST-EXPENSE> 453,721
<INCOME-PRETAX> (6,032,242)
<INCOME-TAX> 1,873,006
<INCOME-CONTINUING> (4,159,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,159,236)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
