<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED August 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 1-10751
STAR MULTI CARE SERVICES, INC.
(Exact Name of Registrant as specified in its charter)
New York 11-1975534
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Walt Whitman Road, Huntington Station, New York 11746
--------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 423-6689
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 15, 1999:
Class Number of Shares
----- ----------------
Common Stock, $0.001 par value 5,402,306
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX
Page
Part I - Financial Information
Item 1
Consolidated Balance Sheets as of August 31, 1999 and May 31, 1999...... 3
Consolidated Statements of Operations for the three months
ended August 31, 1999 and 1998....................................... 4
Consolidated Statements of Cash Flows
for the three months ended August 31, 1999 and 1998 ................ 5
Notes to Consolidated Financial Statements ............................. 6-7
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7-13
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K ....................................... 13
Signatures.............................................................. 14
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
------------ ------------
Unaudited Audited
<S> <C> <C>
ASSETS:
- -------
Current Assets:
Cash and cash equivalents $ 1,431,617 $ 1,734,421
Accounts receivable, less allowance for doubtful accounts
of $2,667,209 and $2,640,000 at August 31, 1999 and
May 31, 1999, respectively 9,273,646 9,767,549
Prepaid expenses and other current assets 320,934 349,053
Deferred income taxes 1,336,511 1,399,000
------------ ------------
Total current assets 12,362,708 13,250,023
------------ ------------
Property and equipment, net of accumulated depreciation of
$1,953,839 and $1,844,000 at August 31, 1999 and May 31,
1999, respectively 1,655,772 1,732,455
Notes receivable from officer 45,660 48,910
Intangible assets, net of accumulated amortization 11,111,789 11,252,311
Deferred income taxes 1,735,000 1,735,000
Other assets 171,419 152,849
------------ ------------
$ 27,082,348 $ 28,171,548
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accrued payroll and related expenses $ 2,398,615 $ 3,074,708
Accounts payable 816,850 841,962
Accrued expenses 626,513 671,153
Due to Medicare 2,593,324 2,593,324
------------ ------------
Total current liabilities 6,435,302 7,181,147
------------ ------------
Long-Term Liabilities:
Revolving credit line 5,991,384 6,225,484
Other long-term liabilities 1,186,974 1,375,932
------------ ------------
Total long-term liabilities 7,178,358 7,601,416
------------ ------------
Commitments and Contingencies:
Shareholders' equity
Preferred stock, $1.00 par value per share, 5,000,000 shares
authorized 575 575
Common stock, $.001 par value per share, 10,000,000 shares
authorized; 5,402,306 and 5,394,863 issued, respectively 5,395 5,395
Additional paid-in capital 21,463,285 21,463,285
Subscription receivable (397,782) (397,782)
Deficit (7,323,863) (7,403,566)
Treasury stock 137,500 common shares at August 31, 1999
and May 31, 1999 (278,922) (278,922)
------------ ------------
Total shareholder's equity 13,468,688 13,388,985
------------ ------------
$ 27,082,348 $ 28,171,548
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues $ 10,412,500 $ 12,959,585
Operating costs and expenses:
Costs of revenue 7,145,302 9,051,552
Selling, general and administrative 2,571,751 2,992,812
Depreciation and amortization 249,859 242,720
Provision for doubtful accounts 154,603 197,731
------------ ------------
10,121,515 12,484,815
------------ ------------
Income from operations 290,985 474,770
Interest expense, net (161,181) (140,951)
------------ ------------
Income before provision for income taxes 129,804 333,819
(Provision) for income taxes (48,027) (156,895)
------------ ------------
Income from continuing operations 81,777 176,924
------------ ------------
Discontinued operations:
Income (loss) from discontinued operations, net
of applicable income tax (benefit) provision of
$5,536 and ($39,432) for 1999 and 1998
respectively 9,426 (44,466)
------------ ------------
Net income 91,203 132,458
============ ============
Basic income per common share:
Income from continuing operations 0.02 0.04
Income (loss) from discontinued operations 0.00 (0.01)
------ ------
Net income $ 0.02 $ 0.03
====== ======
Diluted income per common share:
Income from continuing ooperations 0.02 0.04
Income (loss) from discontinued operations 0.00 (0.01)
------ ------
Net income $ 0.02 $ 0.03
====== ======
Weighted average number of common shares:
Basic 5,259,234 5,237,514
========= =========
Diluted 5,259,234 5,237,514
========= =========
See accompanying notes to consolidated financial statements.
Page 4
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended August 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 91,203 $ 132,458
----------- -----------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 154,603 197,731
Depreciation and amortization 249,859 257,466
Deferred income taxes 62,524 117,463
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 339,300 (583,558)
Prepaid expenses and other current assets 28,119 85,392
Other assets (18,570) (47,648)
Increase (decrease) in liabilities:
Accrued payroll and related expenses (676,093) (157,975)
Accounts payable and other accrued expenses (270,245) (133,726)
Due to Medicare -- (1,017,287)
Other liabilities -- (43,636)
----------- -----------
Total adjustments (130,503) (1,325,778)
=========== ===========
Net cash (used in) provided by operating activities (39,300) (1,193,320)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (32,654) (166,664)
Repayment of note receivable from officer 3,250 1,775
----------- -----------
Net cash used in investing activities (29,404) (164,889)
----------- -----------
Cash flows from financing activities:
Repayment of revolving credit line (234,100) --
Repayment of long-term debt -- (31,250)
Proceeds from issuance of common stock -- 39,011
----------- -----------
Net cash provided by (used in) financing activities (234,100) 7,761
----------- -----------
Net (decrease) in cash and cash equivalents (302,804) (1,350,448)
Cash and cash equivalents at beginning of period 1,734,421 1,867,286
----------- -----------
Cash and cash equivalents at end of period $ 1,431,617 $ 516,838
=========== ===========
Supplemental disclosures:
Income taxes paid $ -- $ --
=========== ===========
Interest paid $ 169,293 $ 139,875
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5
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STAR MULTI CARE SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying unaudited interim
consolidated financial statements of Star Multi Care Services, Inc. and its
subsidiaries (the "Company") contain all adjustments necessary to present fairly
the Company's financial position as of August 31, 1999, results of its
operations and cash flows for the three month period ended August 31,1999 and
1998.
The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements included in its Annual Report
on Form 10-K for the fiscal year ended May 31, 1999, which is incorporated
herein by reference. Specific reference is made to this report for the notes to
consolidated financial statements included therein.
The results of operations for the three month period ended August 31,
1999 are not necessarily indicative of the results to be expected for the full
year.
Note 1 - Net Income Per Common Share
Net income per common share and per common and common equivalent share
is based upon weighted average common and common equivalent shares outstanding
during each period. Common equivalent shares include the dilutive effect of
stock options if any.
Note 2: Reclassifications and Use of Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Such amounts include, among others, the allowance for doubtful accounts,
workers' compensation and medical benefit reserves for its Self Funded Plans,
other asset valuation allowances and certain liabilities. Management
periodically re-evaluates the estimates inherent in certain financial statement
amounts and may adjust accordingly.
Note 3: Credit Facility
On November 9, 1998, the Company entered into a $10 million revolving
credit facility (the "Credit Facility") with a new lender. The Credit Facility
permits the Company to borrow up to 80% of eligible accounts receivable (as
defined) that are aged less than 180 days at LIBOR +3%, and the remaining
eligible accounts receivable (as defined) at LIBOR +6%. On April 23, 1999, the
Credit Facility was amended and provided for the lender to reduce the borrowing
base percentage from 80% to 70%. The Credit Facility expires on November 8, 2000
and requires the Company to meet certain financial ratios and covenants,
including current ratio, minimum tangible net worth, debt service coverage and
interest coverage. All the assets of the Company collateralize the Credit
Facility.
Page 6
<PAGE>
On September 13, 1999, the Bank amended the terms of the Credit
Facility. The amended agreement provides for changes to certain financial ratios
and covenants, and increases the interest rate on the line for eligible
receivables from LIBOR +3% to LIBOR +4%, and on the remaining receivables from
LIBOR +6% to LIBOR +7%.
Note 4: Discontinued Operations
In February 1999 the Company formally adopted a plan to liquidate its
Medicare, both the indemnity and HMO, business being provided by one of its
subsidiaries, Star Multi Care Services of Florida, Inc. d/b/a American
Healthcare Services. The Company ceased operations effective July 1, 1999. The
consolidated statements of operations for the three month periods ended August
31, 1999 and 1998, respectively, excludes revenue and expense for its Medicare
business on captions applicable to continuing operations. Revenue for the
discontinued operations were $40,953 and $1,133,808 for the three months ended
August 31, 1999 and 1998, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the attached consolidated financial
statements and notes thereto, and with the Company's audited financial
statements and notes thereto for the fiscal year ended May 31, 1999.
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.
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 visit
services. For cost reporting periods beginning on or after October 1, 1997,
Medicare-reimbursed home health agencies were reimbursed 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 cost limit, based
on 98% of 1994 costs adjusted for inflation. The new IPS cost limits were
applied to the Company's Medicare operations in Florida for the cost reporting
period beginning January 1, 1998. The new methodology significantly reduced the
reimbursement for the Company's Medicare operations. Although the Company
designed and implemented a restructuring plan for its Medicare operations, based
on a variety of factors including continued decline in Medicare revenues, low
operating margins, and the potential of a future 15% reimbursement reduction in
2000, the Company elected to discontinue Medicare operations in Florida on
Page 7
<PAGE>
February 26, 1999. This combined with the decrease in subcontract service
revenues associated with services provided to Medicare-certified agencies in New
York and New Jersey, resulted in a significant decrease in both direct and
subcontract Medicare reimbursed revenue. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Discontinued
Operations).
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
"1999" would be represented by "99." 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 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 certainties. 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 the 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.
Results of Operations.
Quarter ended August 31, 1999 compared to quarter ended August 31,
1998.
Net revenues for the quarter ended August 31, 1999 decreased $2,547,085
or 20% to $10,412,500 from $12,959,585 for the quarter ended August 31, 1998.
The decrease in net revenue for the quarter ended August 31, 1999 from the
quarter ended August 31, 1998 is primarily attributable to a reduction in
authorization of service hours related to the New Jersey Medicaid Program, the
reduction of visit authorizations on Medicare subcontract services provided in
New York and New Jersey, resulting from general reductions in the Medicare
Program, and from the termination of underperforming contracts in the Company's
Florida licensed operations.
Gross profit margin increased to 31.4% for the quarter ended August 31,
1999 from 30.2% for the quarter ended August 31, 1998.
Page 8
<PAGE>
Selling, general and administrative costs decreased $421,000 (14.1%) to
$2,572,000 for the quarter ended August 31, 1999, down from $2,993,000 for the
quarter ended August 31, 1998. The decrease in selling, general and
administrative expenses is primarily attributable to the results of the
Company's restructuring efforts during the past year.
Income from continuing operations decreased to $290,985 for the quarter
ended August 31, 1999 from $474,770 for the quarter ended August 31, 1998, a
decrease of $183,785. The decrease in income from continuing operations for the
quarter ended August 31, 1999 from the quarter ended August 31, 1998, is
attributable to decreases in net revenue which was partially offset by decreases
in selling, general and administrative expenses.
Net income for the quarter ended August 31, 1999 decreased to $91,203
from $132,458 for the quarter ended August 31, 1998. The decrease in net income
for the quarter is attributable to the decrease in income from operations which
was partially offset by a lower effective tax rate.
Financial Condition, Liquidity and Capital Resources
As of August 31, 1999 cash and cash equivalents were $1,432,000 as
compared with $1,734,000 at May 31, 1999. The net decrease of $302,000 resulted
primarily from the repayment of long term debt.
The nature of the Company's business requires weekly payments to its
personnel at the time they render services, while it receives payment for
services rendered over an extended period of time (60 to 180 days or longer),
particularly when the payor is an insurance company, medical institution or
governmental unit. Accounts receivable represents a substantial portion of
current and total assets at August 31, 1999 and May 31, 1999.
The Company currently has available a line of credit with a bank which
allows for borrowings of up to $10,000,000 (the "Credit Facility"). Pursuant to
the Credit Facility, the amount the Company may borrow is limited to 70% of
eligible accounts receivables that are aged less than 180 days at LIBOR +4% and
the remaining eligible receivables at LIBOR +7%. The Credit Facility provides
for the lender to receive a security interest in all of the assets of the
Company and its subsidiaries. As of August 31, 1999, the outstanding loan
balance is $5,991,384. The Credit Facility matures on November 9, 2000. The
Company is not in violation of any of the covenants of the Facility as of August
31, 1999.
The Company intends to meet its long term liquidity needs through
available cash, cash flow and the 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 funding will
be available to the Company on satisfactory terms.
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.
Page 9
<PAGE>
Forward Looking Statements
Certain statements in this report on Form 10-Q constitute"
forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by
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.
This discussion should be read in conjunction with: (i) the attached
consolidated financial statements and notes thereto, (ii) with the Company's
audited financial statements and notes thereto for the fiscal year ended May 31,
1999, and (iii) with the section entitled Forward Looking Statements appearing
in the Company's Form 10-K which is hereby incorporated by reference..
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
10.1 Waiver and Amendment to Receivables Purchase and Transfer
Agreement and Loan and Security Agreement dated
September 13, 1999.
27. Financial Data Schedule
2. Reports on From 8-K.
None
Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR MULTI CARE SERVICES, INC.
October 18, 1999 By: s/ Stephen Sternbach
- ---------------- ------------------------------------
Date Chairman of the Board, President and
Chief Executive Officer
Page 11
</TABLE>
<PAGE>
Exhibit 10.1
WAIVER AND AMENDMENT TO RECEIVABLES PURCHASE AND TRANSFER
AGREEMENT AND LOAN AND SECURITY AGREEMENT
WAIVER AND AMENDMENT dated as of September 13, 1999 (the
"Amendment"), to the Receivables Purchase and Transfer Agreement, dated November
9, 1998, (as amended, modified or supplemented from time to time in accordance
with its terms, the a"RPTA"), by and among Star Multi Care Services, Inc., a New
York corporation (the "Primary Servicer"), each of the parties named on Schedule
I thereto (each, including he Primary Servicer, a "Provider" and, collectively,
the "Providers") and SMCS Care, LLC, a New York limited liability company (the
"Purchaser"), and to the Loan and Security Agreement, dated as of November 9,
1998 (as amended, modified or supplemented from time to time in accordance with
its terms, the "LSA") between the Purchaser as borrower (the "Borrower"), and
Daiwa Healthco- 3 LLC (the "Lender"),
WHEREAS, the parties hereto have agreed to amend certain
provisions of the LSA and RPTA,
WHEREAS, the parties hereto have agreed to waive certain
provisions of the LSA and RPTA,
NOW, THEREFORE, for good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined
herein, all capitalized terms used herein shall have the respective meanings
ascribed to such terms in the RPTA and the LSA.
2. Amendment to RPTA. Subject to the conditions as to
effectiveness set forth in Paragraph 6 of this Amendment, the RPTA is hereby
amended as follows:
(A) For the fiscal quarter ended August 31, 1999 and
thereafter, in Exhibit I of the RPTA, the definition of "Tangible Net Worth"
means, with respect to any Person at any time, the sum of (i) such Person's
capital stock, capital in excess of par or stated value of shares of its capital
stock, retained earnings and any other account which, in accordance with GAAP,
constitutes stockholders' equity, less (ii) treasury stock, minus (iii) the book
value of all assets classified as intangible under GAAP, including, without
limitation, goodwill, deferred taxes, deferred financing costs, trademarks,
trade names, patents, copyrights and licenses, plus $2,650,000.
(B) In Exhibit V of the RPTA, the following sections shall
be amended to read:
(x) Consolidated Tangible Net Worth. The Providers
permit the Consolidated Tangible Net Worth, calculated at the end of each fiscal
quarter of the
<PAGE>
Providers, to be: (i) less than $2,500,000 for each of the quarters through May
31, 1999, (ii) less than $1,810,000 for the quarter ended August 31, 1999, (iii)
less than $1,977,000 for the quarter ended November 30, 1999, (iv) less than
$2,129,000 for the quarter ended February 29, 2000, (v) less than $2,321,000 for
the quarter ended May 31, 2000, and (vi) less than $2,511,000 for the quarter
ended August 31, 2000.
(y) Consolidated Interest Coverage Ratio. The Providers
permit the Consolidated Interest Coverage Ratio, calculated as of the end of
each fiscal quarter of the Providers for the period of August 30, 1998 to
November 30, 1998, the period of August 30, 1998 to February 28, 1999, the
period of August 30, 1998 to May 31, 1999 to be less than 2.50:1.00, and for
each fiscal quarter thereafter, to be less than 1.80:1.00.
(aa) Consolidated Debt Service Coverage Ratio. The
Providers permit the Consolidated Debt Service Coverage Ratio, calculated as of
the end of each fiscal quarter of the Providers, for the period of August 30,
1998 to November 30, 1998, the period of August 30, 1998 to February 28, 1999,
the period of August 30, 1998 to May 31, 1999 to be less than 1.75:1.00 and for
each fiscal quarter thereafter, to be less than 1.50:1.00
(dd) EBITDA. The Providers permit EBITDA, calculated
as of the fiscal quarter ended August 31, 1999 be less than $475,000, for the
fiscal quarter ended November 30, 1999 to be less than $480,000, for the fiscal
quarter ended February 29, 2000 to be less than $460,000, and for each fiscal
quarter ending May 31, 2000 and ending August 31, 2000 to be less than $515,000.
(ee) Financial Statements. The financial statements
as attached hereto as Attachment I, shall be substantially identical to those
financial statements in the Primary Servicer's Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended May 31, 1999.
3. Amendment LSA. Effective on the date hereof, the LSA is
hereby amended as follows:
(A) Section 1.05 is hereby amended to read:
Section 1.05 Interest and Non-Utilization
Fee. (a) Interest. The Borrower shall pay interest on the Revolving Loan on (i)
each Interest Payment Date and (ii) the Maturity Date (whether by acceleration
or otherwise), in each case, at an interest rate per annum equal to (x) with
respect to that portion of the Revolving Loan equal to the Basic Borrowing
Amount, the LIBO Rate in effect for applicable Interest Period plus 4% and (y)
with respect to that portion of the Revolving Loan that exceeds the Basic
Borrowing Amount (each such portion, an "Overadvance"and the aggregate principal
balance of all such Overadvances from time to time, the "Overadvance Loan"), the
LIBO Rate in effect for the applicable Interest Period plus 7%; provided,
however, that if the Borrower fails to comply with the provisions of clause (r)
of Exhibit IV, each of the foregoing interest rates shall increase by 2%. Once
any portion of the Revolving Loan exceeds the Basic Borrowing Amount and becomes
an Overadvance, such
<PAGE>
portion shall for all purposes hereof be considered an Overadvance
notwithstanding any event which would result in the outstanding principal amount
of the Revolving Loan to be less than the Basic Borrowing Amount.
(b) Default Interest. Notwithstanding
anything to the contrary contained
herein, while any Event of Default
is continuing, interest on the
Revolving Loan shall be payable on
demand at a rate per annum equal to
four percentage points (4.00%) in
excess of the rate then otherwise
applicable to the Revolving Loan.
(c) Non-Utilization Fee. The Borrower
shall pay to the Lender on the
first Funding Date of each month a
fee equal to 0.375% per annum on
the average amount, calculated on a
daily basis, by which the Revolving
Commitment exceeded the Revolving
Loan during the prior Month.
4. Waivers under LSA.
(A) The Lender hereby waives any existing Default or Event
of Default that arose solely as a result of a breach under clause (d) of Exhibit
V of the LSA referring to an Event of Termination under the RPTA specified in
Paragraph 5 of this Amendment.
(B) The Lender hereby waives its rights under the
provisions of Section 3.02(a) and (b) of the LSA solely for the Borrower's
failure to comply with the provisions of clause (d) of Exhibit V of the LSA for
the periods specified in Paragraph 5 of this Amendment.
(C) Except for the specific waivers set above, nothing
herein shall be deemed to be a waiver of any covenant or agreement contained in
the LSA.
5. Waivers under RPTA.
(A) The Purchaser hereby waives any existing Event of
Termination that arose solely as a result of the Providers' failure to comply
with the provisions of: clause (x), (y), (aa) and (bb) of Exhibit V of the RPTA
with respect to the fiscal quarter ended May 31, 1999.
(B) The Purchaser hereby waives its rights under the
provisions of Section 3.02(a) and (b) of the RPTA solely for the Providers'
failure to comply with the provisions of clauses (x), (y), (aa) and (bb) of
Exhibit V of the RPTA for the period specified in Paragraph 5(A) above.
(C) Except for the specific waivers set forth above,
nothing herein shall be deemed to be a waiver of any covenant or agreement
contained in the RPTA.
<PAGE>
6. Conditions Precedent. Notwithstanding any term or provision
of this Amendment to the contrary, Paragraphs 2, 3, 4 and 5 hereof shall not
become effective until the Lender and the Purchaser shall have received
counterparts of this Amendment, duly executed and delivered on behalf of the
Primary Servicer, the Providers, the Purchaser, the Borrower and the Lender.
7. Continued Effectiveness. Nothing herein shall be deemed a
waiver of any covenant (except as contained in Paragraphs 4 and 5 herein), or
agreement contained in, or any Default or Event of Default under the LSA, or any
Event of Termination under the RPTA and each of the parties hereto agrees that,
as amended by this Agreement, all of the covenants and agreements and other
provisions contained in the RPTA, LSA and the other Documents shall remain in
full force and effect from and after the date of this Amendment.
8. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by facsimile shall be
effective as delivery of a manually executed counterpart of this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
BORROWER AND PURCHASER: SMCS CARE, LLC
By:
------------------------------------
Name:
Title:
LENDER: DAIWA HEALTHCO-3 LLC
By:
------------------------------------
Name:
Title:
PROVIDERS: STAR MULTI CARE SERVICES, INC.
By:
------------------------------------
Name:
Title:
<PAGE>
STAR MULTI CARE SERVICES OF FLORIDA, INC.
By:
-------------------------------------
Name:
Title:
AMSERV HEALTHCARE OF OHIO, INC.
By:
-------------------------------------
Name:
Title:
AMSERV HEALTHCARE OF NEW JERSEY, INC.
By:
-------------------------------------
Name:
Title:
EFCC ACQUISITION CORP.
By:
-------------------------------------
Name:
Title:
<PAGE>
ATTACHMENT I
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
------------------------------------
ASSETS (Note 7) 1999 1998
------ -------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,734,421 $ 1,867,286
Accounts receivable, net of allowance for doubtful
accounts of $2,640,000 and $1,872,000 at May 31,
1999 and 1998, respectively (Notes 7 and 14) 9,767,549 10,108,879
Prepaid expenses and other current assets (Note 3) 349,053 382,899
Income taxes receivable - 1,225,946
Deferred income taxes (Note 8) 1,399,000 1,537,000
-------------- --------------
Total current assets 13,250,023 15,122,010
PROPERTY AND EQUIPMENT, net (Note 4) 1,732,455 1,999,924
NOTES RECEIVABLE FROM OFFICER (Note 12) 48,910 86,260
INTANGIBLE ASSETS, net (Note 5) 11,252,311 11,857,698
DEFERRED INCOME TAXES (Note 8) 1,735,000 619,000
OTHER ASSETS 152,849 185,715
-------------- --------------
$ 28,171,548 $ 29,870,607
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit line (Note 7) $ 6,225,484 $ 6,207,852
Accrued payroll and related expenses 3,074,708 3,214,207
Accounts payable 841,962 1,018,322
Accrued expenses (Note 6) 671,153 2,789,142
Due to Medicare (Note 9) 2,593,324 1,017,287
Current maturities of long-term debt - 125,000
-------------- --------------
Total current liabilities 13,406,631 14,371,810
-------------- --------------
LONG-TERM LIABILITIES:
Other long-term liabilities (Notes 6 and 15) 1,375,932 1,065,770
-------------- --------------
COMMITMENTS AND CONTINGENCY (Notes 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 10, 11, 12 and 15)
Convertible preferred stock - aggregate liquidation value
$575,000; $1.00 par value, 5,000,000 shares authorized;
575 and 0 shares issued, respectively 575 -
Common stock, $.001 par value, 10,000,000 shares authorized;
5,394,863 and 5,362,780 shares issued, respectively 5,395 5,363
Additional paid-in capital 21,463,285 20,951,899
Subscription receivable (397,782) (397,782)
Deficit (7,403,566) (5,847,531)
Treasury stock, 137,500 common shares
at May 31, 1999 and 1998 (278,922) (278,922)
-------------- --------------
Total shareholders' equity 13,388,985 14,433,027
-------------- --------------
$ 28,171,548 $ 29,870,607
============== ==============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
May 31,
--------------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
REVENUES, net (Note 14) $ 47,108,677 $ 49,335,530 $ 41,857,126
--------------- --------------- --------------
OPERATING EXPENSES (Notes 12, 15 and 17)
Costs of revenues 32,718,139 34,341,973 28,245,533
Selling, general and administrative 12,610,794 13,494,731 9,346,385
Depreciation and amortization 1,106,952 910,659 624,248
Provision for doubtful accounts 1,580,224 1,561,874 479,640
Regulatory costs and related expenses (Note 6) - 2,030,511 -
Impairment of intangible assets 186,946 - -
Restructuring and termination expenses 222,615 362,718 -
--------------- --------------- --------------
48,425,670 52,702,466 38,695,806
--------------- --------------- --------------
OPERATING (LOSS) INCOME (1,316,993) (3,366,936) 3,161,320
INTEREST EXPENSE, net (652,714) (438,140) (140,477)
MERGER TRANSACTION COSTS - - (2,808,224)
--------------- --------------- --------------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (1,969,707) (3,805,076) 212,619
(BENEFIT) PROVISION FOR
INCOME TAXES (Note 8) (647,000) (1,183,000) 87,000
--------------- --------------- --------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS (1,322,707) (2,622,076) 125,619
--------------- --------------- --------------
DISCONTINUED OPERATIONS: (Note 18)
Loss from discontinued operations, net of
tax benefit of $65,000, $690,000 and $0
for 1999, 1998 and 1997, respectively (145,008) (1,537,160) -
Loss on disposal, net of tax benefit
of $40,000 for 1999 (88,320) - -
--------------- --------------- --------------
LOSS FROM DISCONTINUED OPERATIONS (233,328) (1,537,160) -
--------------- --------------- --------------
NET (LOSS) INCOME $ (1,556,035) $ (4,159,236) $ 125,619
=============== =============== ==============
BASIC (LOSS) INCOME PER COMMON SHARE:
Continuing operations $(.25) $(.53) $.03
Discontinued operations (.03) (.31) -
Loss on disposal (.02) - -
---- ------ ----
Net (loss) income $(.30) $(.84) $.03
===== ===== ====
DILUTED (LOSS) INCOME PER COMMON SHARE:
Continuing operations $(.25) (.53) $.03
Discontinued operations (.03) (.31) -
Loss on disposal (.02) - -
---- ------ ----
Net (loss) income $(.30) $(.84) $.03
===== ===== ====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 5,246,684 4,972,207 3,969,910
========= ========= =========
Diluted 5,246,684 4,972,207 4,206,861
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<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> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 1,431,617
<SECURITIES> 0
<RECEIVABLES> 11,940,855
<ALLOWANCES> 2,667,209
<INVENTORY> 0
<CURRENT-ASSETS> 12,362,708
<PP&E> 3,609,611
<DEPRECIATION> 1,953,839
<TOTAL-ASSETS> 27,082,348
<CURRENT-LIABILITIES> 12,426,686
<BONDS> 0
0
575
<COMMON> 5,395
<OTHER-SE> 13,462,718
<TOTAL-LIABILITY-AND-EQUITY> 27,082,348
<SALES> 10,412,500
<TOTAL-REVENUES> 10,412,500
<CGS> 7,145,302
<TOTAL-COSTS> 7,145,302
<OTHER-EXPENSES> 249,859
<LOSS-PROVISION> 154,603
<INTEREST-EXPENSE> 161,181
<INCOME-PRETAX> 129,804
<INCOME-TAX> 48,027
<INCOME-CONTINUING> 81,777
<DISCONTINUED> 9,426
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,203
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
