<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File Number 1-10751
STAR MULTI CARE SERVICES, INC.
(Name of Registrant 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, NY 11746
-------------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (631) 423-6689
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Title of Each Class Name of each exchange on which registered
<S> <C>
Common Stock, par value $.001 per share Nasdaq SmallCap Market System
--------------------------------------- -----------------------------------------
</TABLE>
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 28, 2000 the aggregate market value of the Common Stock of Star
Multi Care Services, Inc. held by non-affiliates, (1,564,958 shares) was
$1,956,198 (based upon the closing price of the Common Stock on such date on the
Nasdaq SmallCap Market).
As of September 28, 2000, the Registrant had 1,780,843 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
Position Held with the Directors
Name Age Company Since
---- --- ---------------------- ---------
Stephen Sternbach 44 Chairman of the Board of 1987
Directors, President and Chief
Executive Officer
Charles Berdan+*x 50 Director 1994
John P. Innes II+*x 65 Director 1991
Matthew Solof+*x 46 Director 1992
Gary L. Weinberger 50 Director 1996
Gregory Turchan 41 Senior Vice President, Secretary, 1998
Chief Operating Officer, and
Director
+ Member of Compensation Committee
* Member of Stock Option Committee
x Member of Audit Committee
STEPHEN STERNBACH
Stephen Sternbach has been the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since 1987. From 1978 to
1986, Mr. Sternbach was associated with Automated Data Processing, Inc. ("ADP"),
a provider of information services where he held several marketing positions and
ultimately the position of Director of Sales. Mr. Sternbach has served on the
Board of Trustees of the Long Island Chapter of the National Multiple Sclerosis
Society since 1996. Mr. Sternbach earned a Masters Degree in Public
Administration from Syracuse University and a B.A. in Industrial Relations &
Personnel Administration from Ithaca College.
GREGORY TURCHAN
Gregory Turchan was elected Senior Vice President, Chief Operating
Officer and a member of the Board of Directors of the Company on May 20, 1998.
Previously, he had served as Vice President-Operations of the Company since
1996. Mr. Turchan was originally employed by the Company in 1995 to assist in
the transition of an acquisition by the Company. Prior to 1995, Mr. Turchan
served as an officer of Long Island Nursing Registry, Inc., a home health care
provider acquired by the Company in 1995.
JOHN P. INNES II
John P. Innes II has been a director of the Company since 1991. Since
September 1997 he has been Chairman, President and Chief Executive Officer of US
Clearing House Corporation and the ACH Processing Company, an electronic funds
transfer company. For several months beginning in May of 1996, he was Special
Counsel to ValuJet Airlines. He has acted as a private investor and consultant
since July 1994. Previously, he was the Chairman of Commonwealth
<PAGE>
Associates, an investment bank, from January 1992 to June 1994. Mr. Innes also
has served as Managing Director of Sabre Insurance Company, a casualty insurance
company (1986-1991), President of Boxhall Group, Inc., a holding company for
Sabre Insurance Company (1986-1991), Vice Chairman of the Board of Directors of
Wheeling-Pittsburgh Steel Corporation, an integrated steel manufacturing company
(1987-1990) and a private investor and consultant (1990-1992).
CHARLES BERDAN
Charles Berdan became a director of the Company in April 1994. Since
January 1999, Mr. Berdan has served as Regional Sales Manager for LearnFrame, an
online training company. From April 1994 through June 1998, Mr. Berdan has
served as a sales executive for Automatic Data Processing, Inc., a provider of
information services. From January 1993 to September 1993, Mr. Berdan was a Vice
President of the Senior Bulletin, a newspaper, which the Company purchased in
September 1993.
MATTHEW SOLOF
Matthew Solof has been a director of the Company since November 1992.
Since 1991, he has been the President and Chief Executive Officer of AMI Group,
a real estate development and acquisition company, and President and Chief
Executive Officer of Mercantile Mortgage Association, a mortgage lending
company. Since 1996 he has been President and Chief Executive Officer of Landco
Mortgage Bankers, Inc., a New York State licensed mortgage banker. From 1983 to
1992, Mr. Solof was a trader at IRV Companies, a firm which specialized in oil
trading, and from 1981 to 1991, he was President and Chief Executive Officer of
Matthew Solof Trading Company, a firm which also specializes in oil trading.
GARY L. WEINBERGER
Gary L. Weinberger has been engaged in the private practice of
orthodontics for more than 20 years. In addition, Dr. Weinberger is engaged as a
consultant on financial planning and management. Dr. Weinberger is a member of
the International Board of Standards and Practices for Financial Planners, the
International Association of Financial Planners, and the American Association of
Orthodontists.
Meetings of the Board of Directors
----------------------------------
During the Company's last fiscal year, its Board of Directors held four
(4) meetings and acted on eight (8) occasions by unanimous written consent
without a meeting.
The Stock Option Committee of the Board of Directors consists of
Messrs. John P. Innes II, Matthew Solof and Charles Berdan. The function of this
committee, which held no meetings during the past fiscal year and acted two
times by unanimous written consent without meeting, to administer the Company's
stock option plans.
The Audit Committee of the Board of Directors consists of Messrs. John
P. Innes II, Matthew Solof and Charles Berdan and its function is to nominate
independent auditors, subject to approval by the Board of Directors, and to
examine and consider matters related to the audit of the Company's accounts, the
financial affairs and accounts of the Company, the scope of the independent
auditors' engagement and their compensation, the effect on the Company's
financial statements of any proposed changes in generally accepted accounting
principles, disagreements, if any, between the Company's independent auditors
and management, and matters of concern to the independent auditors resulting
from the audit, including the results of the independent auditors' review of
internal accounting controls. The Audit Committee held no meetings during the
past fiscal year.
<PAGE>
The Compensation Committee of the Board of Directors consists of
Messrs. John P. Innes II, Matthew Solof and Charles Berdan and its function is
to fix the salaries, bonuses and other compensation arrangements of the
executive officers of the Company, and it also has the authority to examine,
administer and make recommendations to the Board with respect to benefit plans
and arrangements (other than the stock option plans which are administered by
the Stock Option Committee) of the Company and its subsidiaries. The
Compensation Committee held one (1) meeting during the past fiscal year.
The Compliance Committee of the Board of Directors consists of Messrs.
Charles Berdan, Gary L. Weinberger and Gregory Turchan. The function of this
committee, which had one meeting during the past fiscal year, is to examine and
consider matters relating to regulatory and managerial compliance.
The Board of Directors has no standing nominating committee.
Each incumbent director attended at least 75% of the meetings of the
Board of Directors and the committee on which he served which were held while he
was serving as a director and/or committee member during the Company's last
fiscal year.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
No members of the Compensation Committee has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
its common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission ("SEC") and each exchange on which the
Company's securities are registered. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all ownership forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain persons that no Form 5 was required for
those persons, the Company believes that, during the year ended May 31, 2000,
its officers, directors and greater than ten- percent shareholders complied with
all applicable Section 16 filing requirements, except for filing a Form 5 to
reflect the grant of stock options on December 28, 1999. Such Form 5 will be
filed within ten business days of the date hereof.
Item 11. Executive Compensation
The following table provides information with respect to all
compensation paid or accrued by the Company during the three most recent fiscal
years ended May 31, to those Executive officers of the Company whose salary and
bonus for fiscal 1999 exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- -----------------------------------------------------------------
Other Awards
Name and Annual Restricted ------
Principal Compen- Stock Securities LTIP All Other
Position Year Salary($) Bonus($) sation Awards Underlying Options(#) Payments($) Compensation
-------- ---- --------- -------- ------ ------ --------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Sternbach 2000 $275,917 $ 25,000 -- -- 201,294 $ 27,000(1) $ 15,125(4)
Chief Executive Officer, 1999 $270,676 $ 25,000 -- 45,848 $ 52,000(2)
President and 1998 $257,250 -- -- -- $ 35,000(3) $288,941(4)
Chairman of the Board
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- -----------------------------------------------------------------
Other Awards
Name and Annual Restricted ------
Principal Compen- Stock Securities LTIP All Other
Position Year Salary($) Bonus($) sation Awards Underlying Options(#) Payments($) Compensation
-------- ---- --------- -------- ------ ------ --------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory Turchan 2000 $151,635 $15,000 64,211
Senior Vice President, 1999 $129,101 $12,500 12,210
Secretary and 1998 $121,627
Chief Operating Officer
</TABLE>
(1) Represents $27,000 credited by the Company to a book reserve account as
contingent deferred compensation for the benefit of Mr. Sternbach
pursuant to a Non-Qualified Retirement and Death Benefit Agreement
between the Company and Mr. Sternbach.
(2) Represents $25,000 of income recognized upon partial forgiveness of
debt owed by Mr. Sternbach and $27,000 credited by the Company to a
book reserve account as contingent deferred compensation for the
benefit of Mr. Sternbach pursuant to a Non-Qualified Retirement and
Death Benefit Agreement between the Company and Mr. Sternbach.
(3) Represents $35,000 credited by the Company to a book reserve account as
contingent deferred compensation for the benefit of Mr. Sternbach
pursuant to a Non-Qualified Retirement and Death Benefit Agreement
between the Company and Mr. Sternbach.
(4) Represents monies earned by Mr. Sternbach upon the exercise of stock
options previously granted.
(5) Options repriced on September 14, 1998 to 110% of the fair market value
on such date, or $1.2375.
(6) Options repriced on September 14, 1998 to the fair marke value on such
date, or $1.125.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realized Value at
Assumed Annual
Rates of Stock
Price
Appreciation
for Option Term
----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date 5% 10%
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Sternbach 100,647 36.9% $1.375 12/27/04 $104,472 $269,231
Gregory Turchan 32,211 11.8% $1.25 12/27/04 $34,144 $148,895
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
<PAGE>
The following table contains information concerning the number and
value, at May 31, 2000, of the exercised and unexercised options held by Messrs.
Sternbach and Turchan
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options Held at Fiscal In-the-Money Options Held at
Acquired on Value Year-End Fiscal Year-End
Name Exercise (#) Realized ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
---- ------------ ------------ --------------------------- ------------------------------
<S> <C> <C> <C> <C>
Stephen 0 0 201,294/0 $50,324
Sternbach
Gregory 0 0 64,422/0 $20,132
Turchan
</TABLE>
(1) Fair market value of underlying securities (the closing price of the
Company's Common Stock on the Nasdaq National Market) at fiscal year
end (May 31, 2000), minus the then effective exercise price.
Employment Agreements and Termination of Employment and Change in Control
Arrangements.
The Company has an employment agreement with Stephen Sternbach dated as
of December 3, 1995 (the "Sternbach Employment Agreement"). The Sternbach
Employment Agreement has a term of five years and provides for an initial annual
salary of $250,000 (subject to annual increase by the amount of the increase in
the Consumer Price Index from the immediate preceding year) plus a bonus of 6%
of the Company's net profit before taxes in excess of $1,200,000, not to exceed
an aggregate annual bonus of $500,000. The Sternbach Employment Agreement
provides that after a Change in Control (as defined in the Sternbach Employment
Agreement) of the Company has occurred, if either Mr. Sternbach terminates his
employment within six months after he has obtained actual knowledge of the
Change in Control or the Company (or any successor thereto) terminates his
employment with the Company within one year after the Change in Control, Mr.
Sternbach will be entitled to receive (i) his salary, bonuses, awards,
perquisites and benefits including, without limitation, benefits and awards
under the Company's stock option plans and pension and retirement plans and
programs, accrued through the date Mr. Sternbach's employment with the Company
is terminated and (ii) a lump-sum payment in cash equal to 2.99 times Mr.
Sternbach's base amount.
On June 21, 2000, the Board of Directors of the Company renewed the
employment agreement with Stephen Sternbach originally dated as of December 3,
1995, as amended, for an additional five year term (the "Renewed Sternbach
Employment Agreement"). The Renewed Sternbach Employment Agreement provides for
an annual salary of $280,813.52, his base salary prior to renewal (subject to
annual increase by the amount of the increase in the Consumer Price Index from
the immediate preceding year) plus a bonus of 6% of the Company's net profit
before taxes in excess of $1,200,000. The Renewed Sternbach Employment Agreement
provides that after a Change in Control (as defined in the Sternbach Employment
Agreement) of the Company has occurred, if either Mr. Sternbach terminates his
employment within six months after he has obtained actual knowledge of the
Change in Control or the Company (or any successor thereto) terminates his
employment with the Company within one year after the Change in Control, Mr.
Sternbach will be entitled to receive (i) his salary, bonuses, awards,
perquisites and benefits including, without limitation, benefits and awards
under the Company's stock option plans and pension and retirement plans and
programs, accrued through the date Mr. Sternbach's employment with the Company
is terminated and (ii) a lump-sum payment in cash equal to 2.99 times Mr.
Sternbach's base amount.
<PAGE>
In addition, the Renewed Sternbach Employment Agreement terminated the
Non-Qualified Retirement and Death Benefit Agreement dated February 1, 1994
Instead, the Renewed Sternbach Employment Agreement provides for an annual
contribution by the Company to an investment vehicle of Mr. Sternbach's choice
equal to ten percent (10%) of his wages and will no longer be deemed deferred
compensation. Additionally, the Company shall continue to pay the premiums of a
life insurance policy, owned by Mr. Sternbach, insuring his life for $1.2
million. The cash value of this policy was assigned to Mr. Sternbach.
The Company and Mr. Sternbach are also parties to a Consulting
Agreement (the "Sternbach Consulting Agreement") pursuant to which the Company
has agreed to retain Mr. Sternbach as a consultant for a period of two years
from the time that his employment with the Company terminates. Pursuant to the
Sternbach Consulting Agreement, the Company has agreed to pay Mr. Sternbach
$150,000 per year and he will be entitled to participate in the health insurance
and similar benefits which the Company provides to any of its other consultants.
Compensation Committee Report
-----------------------------
Overview and Philosophy
-----------------------
The Compensation Committee of the Board of Directors is composed of
three directors, Messrs. Berdan, Innes and Solof. The Compensation Committee is
responsible for developing and making recommendations to the Board of Directors
with respect to the Company's executive compensation policies. The Compensation
Committee's executive compensation philosophy (which is intended to apply to all
members of the Company's management, including its Chief Executive Officer) is
to provide competitive levels of compensation, integrate managements' pay with
achievement of the Company's performance goals, reward above average corporate
performance, recognize individual initiative and achievement and assist the
Company in attracting and retaining qualified management.
The objectives of the Company's executive compensation program are to:
Support the achievement of desired Company performance.
* Provide compensation that will attract and retain superior
talent and reward performance.
The executive compensation program provides an overall level of
compensation opportunity that is competitive within the health care industry, as
well as with a broader group of companies of comparable size and complexity.
Executive Officer Compensation
------------------------------
The Company's executive officer compensation is comprised of base
salary, annual cash bonus and long-term incentive compensation in the form of
stock options and various benefits, including medical plans generally available
to employees of the Company.
It is the philosophy of the Compensation Committee that compensation of
executive officers should be closely aligned with the financial performance of
the Company. Accordingly, benefits are provided through stock option incentives
and bonuses which are generally consistent with the goal of coordinating the
rewards to management with a maximization of shareholder return. In reviewing
Company performance, consideration is given to the Company's earnings. Also
taken into account are
<PAGE>
external economic factors that effect results of operations. An attempt is also
made to maintain compensation within the range of that afforded like executive
officers at companies whose size and business is comparable to that of the
Company.
CEO Compensation
----------------
In the case of Stephen Sternbach, the Chief Executive Officer, the
Compensation and Stock Option Committee evaluates the Company's mid and long
range strategic planning and its implementation as well as the considerations
impacting the compensation of executive officers generally which are described
above. Mr. Sternbach was awarded a bonus of $25,000 for the year ended May 31,
2000, that will be paid in fiscal 2000-2001.
Benefits
--------
The Compensation Committee endorses the position that equity ownership
by management is beneficial in aligning managements' and shareholders' interest
in the enhancement of shareholder value. Stock options were granted at exercise
prices equal to the market value of the Company's Common Stock on the date of
grant.
The Company provides to executive officers medical benefits that
generally are available to Company employees. The amount of perquisites, as
determined in accordance with the rules of the Securities and Exchange
Commission relating to executive compensation, did not exceed 10% of salary for
fiscal 2000.
Compensation of Directors
The Company's non-employee directors are paid a fee of $750 for each
Board of Directors meeting which they attend. They are not paid any additional
fee for serving on any committees of the Board of Directors. However, in
September 1998 and May 1999, the outside directors were granted a non-statutory
stock option for the right to purchase up to 1,667 and 3,334 shares,
respectively, of common stock of the Company.
Performance Graph
-----------------
Set forth below is a graph comparing the yearly change in the
cumulative shareholder return of the Company's Common Stock with the National
Association of Securities Dealers Automated Quotation Market Index and a peer
group index of five competing companies for the same period. The comparison
assumes $100 was invested at the close of business on May 31, 2000 in the
Company's Common Stock and in each of the comparison groups, and assumes
reinvestment of dividends. The Company paid no cash dividends during the
periods.
<PAGE>
CUMULATIVE TOTAL SHAREHOLDER RETURNS
(Dividends Reinvested)
<TABLE>
<CAPTION>
Year Ending
Base
Period
Company Name/Index 5/31/95 5/31/96 5/30/97 5/29/98 5/28/99 5/31/00
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
STAR MULTI CARE SERVICES 100.00 197.94 133.67 72.40 37.13 18.56
NASDAQ - U.S. 100.00 141.15 158.37 201.08 277.03 395.93
PEER GROUP 100.00 65.77 58.91 40.13 23.52 18.20
Peer Group Companies
================================================================================================================
IN HOME HEALTH, INC.
NEW YORK HEALTH CARE, INC.
TRANSWORLD HEALTHCARE INC
GENTIVA HEALTH SERVICES
</TABLE>
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
[GRAPH POINTS TO COME]
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is the ownership of the Company's Common Stock at
September 28, 2000: (i) the only persons or groups who were owners of record or
were known by the Company to beneficially own on September 28, 2000 more than 5%
of the outstanding shares of Common Stock; (ii) each director and nominee for
director of the Company; (iii) each executive officer named in the Summary
Compensation Table under the caption "Executive Compensation" below; and (iv)
all directors and executive officers of the Company as a group. The Company
understands that, except as noted below, each beneficial owner has sole voting
and investment power with respect to all shares attributable to such owner.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership* of Class (1)
------------------- ---------- ------------
<S> <C> <C>
Stephen Sternbach
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746 396,903(2) 20.2%
Charles Berdan
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746 3,498(3) .3%
John P. Innes II
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746, 4,998(4) .3%
Matthew Solof
33 Fairbanks Boulevard
Woodbury, NY 11797 4,998(4) .3%
Gary L. Weinberger
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746 4,998(4) .3%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership* of Class (1)
------------------- ---------- ------------
<S> <C> <C>
Gregory Turchan
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746 64,422(5) 3.53%
All directors and executive
officers of the Company as a group
(6 persons) 284,208 23.67%
</TABLE>
----------
* All share amounts in this Proxy Statement have been adjusted to take
into account the stock dividends effectuated on May 30, 1995, January
12, 1996 and November 4, 1996, respectively, and the 1 for 3 reverse
stock split effective on December 13, 1999.
(1) Shares subject to options are considered outstanding only for the
purpose of computing the percentage of outstanding Common Stock which
would be owned by the optionee if the options were so exercised, but
(except for the calculation of beneficial ownership by all executive
officers and directors as a group) are not considered outstanding for
the purpose of computing the percentage of outstanding Common Stock
owned by any other person.
(2) Includes 39,868 shares of the Company's Common Stock owned by the
Stephen Sternbach Family Trust; Mr. Sternbach disclaims beneficial
ownership with respect to these shares. Also includes 201,294 shares of
the Company's Common Stock which Mr. Sternbach has a currently
exercisable option to purchase pursuant to the Company's 1992 Stock
Option Plan.
(3) Includes options to purchase 3,498 shares of the Company's common stock
granted under the Company's 1997 Non-Employee Director Stock Option
Plan.
(4) Includes options to purchase 4,998 shares of the Company's common stock
granted under the Company's 1997 Non-Employee Director Stock Option
Plan.
(5) Includes options to purchase 64,422 shares of the Company's common
stock granted under the Company's 1992 Stock Option Plan.
Item 13. Certain Relationships and Related Transactions
None
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this Report:
2. Financial Statement Schedules
3. Exhibits: The following Exhibits are filed as a part of this Report:
Exhibit No. Description
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.)
4.1 Registration Rights Agreement between the Company and the Shaar Fund
Ltd. dated April 26, 1999.
5.1 Legal opinion of Muenz & Meritz, P.C.
9. (a) Sternbach Proxy
(b) Voting Trust Agreement dated as of June 20, 1996 by and among
EFCC, Coss, Arbor, the Voting Trustee of the Issuer and
Kaufman.
10. (a) *Form of Indemnification Agreement between the Company and
Stephen Sternbach.
(b) Employment Agreement, dated as of December 3, 1995 between the
Company and Stephen Sternbach. (Incorporated by reference to
Exhibit 10.(x) to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended February 29, 1996.)
(c) * The Company's 1991 Incentive Stock Option Plan
(d) The Company's 1992 Incentive Stock Option Plan (as amended and
restated September 13, 1993). (Incorporated by reference to
Exhibit 10 (h) to the Company's Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to the Company's 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10.(z) to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
February 29, 1996.)
(f) The Company's Employee Stock Purchase Plan, as amended on
December 15, 1995. (Incorporated by reference to Exhibit
10.(y) to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract (Incorporated by
reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of the Company among
Stephen Sternbach, Renee the Company and Leonard
Taubenblatt dated December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care License.
<PAGE>
Exhibit No. Description
(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.)
(u) Lease dated December 7, 1998 between Lighthouse Hicksville
Limited Partnership, a New York limited partnership, and Star
Multi Care Services, Inc., a Delaware corporation, for the
Company's office space in Hicksville incorporated to the
Company's Form 10-Q for period ended November 30, 1998 as
Exhibit 10.1 therein.
(v) Securities Purchase Agreement between the Company and the
Shaar Fund, Ltd. dated April 26, 1999 filed as Exhibit 10(v)
in Form S-3/Amendment 2 filed December 14, 1999 filed as
Exhibit 10(w) in Form S-3/Amendment 2 filed December 14, 1999.
(w) Common Stock Purchase Warrant issued to the Shaar Fund, Ltd
pursuant to the Securities Purchase Agreement between the
Company and the Shaar Fund, Ltd. dated April 26, 1999.
(x) WAIVER AND AMENDMENT dated as of September 13, 1999 to the
Receivables Purchase and Transfer Agreement, dated November 9,
1998, by and among Star Multi Care Services, Inc., each of the
parties named on Schedule I thereto (each, including he
Primary Servicer, a "Provider" and, collectively, the
"Providers") and SMCS Care, LLC, and to the Loan and Security
Agreement, dated as of November 9, 1998 between the SMCS Care,
LLC and Daiwa Healthco-3 LLC incorporated by reference to the
Company's Form 10-Q for period ended November 30, 1999 as
Exhibit 10.1 therein.
(y) WAIVER AND AMENDMENT dated as of September 12, 2000 (this
"Amendment"), to the Receivables Purchase and Transfer
Agreement, dated as of November 9, 1998 (as amended, modified
or supplemented from time to time in accordance with its
terms, the "RPTA"), by and among Star Multi
<PAGE>
Care Services, Inc., a New York corporation (the "Primary
Servicer"), each of the parties named on Schedule I thereto
(each, including the 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") incorporated by reference to the Form 10-K for
fiscal year end May 31, 2000 as Exhibit 10(y) therein.
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. previously filed.
(b) Consent of Ernst & Young LLP. previously filed
(c) Consent of Muenz & Meritz, P.C. included in Exhibit 5.1.
previously filed.
-------------------
* 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.
None
<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,
hereunto duly authorized.
Date October 3, 2000 STAR MULTI CARE SERVICES, INC.
By /s/ Stephen Sternbach
--------------------------------
Stephen Sternbach,
Chairman of the Board,
President and
Chief Executive Officer
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 Chairman of the Board of Directors, October 3, 2000
----------------------- President and Chief Executive Officer
Stephen Sternbach
/s/ John P. Innes, II Director October 3, 2000
-----------------------
John P. Innes, II
/s/ Matthew Solof Director October 3, 2000
-----------------------
Matthew Solof
/s/ Charles Berdan Director October 3, 2000
-----------------------
Charles Berdan
/s/ Gary L. Weinberger Director October 3, 2000
-----------------------
Gary L. Weinberger
/s/ Gregory Turchan Senior Vice President, Secretary
----------------------- and Chief Operating Officer October 3, 2000
Gregory Turchan
</TABLE>
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
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, 2000 and 1999 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended May 31, 2000. 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Star Multi Care
Services, Inc. as of May 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 2000, in conformity with generally accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 28, 2000 (except for Note 6
for which the date is
September 12, 2000)
F-2
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
------------------------------------
ASSETS (Note 6) 2000 1999
------ -------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 321,465 $ 1,734,421
Accounts receivable, net of allowance for doubtful
accounts of $1,378,000 and $2,640,000 at May 31,
2000 and 1999, respectively (Notes 6 and 13) 8,274,520 9,767,549
Prepaid expenses and other current assets 326,636 349,053
Deferred income taxes (Note 7) 762,000 1,399,000
-------------- --------------
Total current assets 9,684,621 13,250,023
PROPERTY AND EQUIPMENT, net (Note 3) 1,312,754 1,732,455
INTANGIBLE ASSETS, net (Note 4) 10,970,886 11,252,311
DEFERRED INCOME TAXES (Note 7) 2,242,000 1,735,000
OTHER ASSETS 220,228 201,759
-------------- --------------
$ 24,430,489 $ 28,171,548
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 2,423,322 $ 3,074,708
Accounts payable 451,283 841,962
Accrued expenses (Note 5) 519,810 671,153
Due to Medicare (Notes 8 and 18) 2,593,324 2,593,324
-------------- --------------
Total current liabilities 5,987,739 7,181,147
-------------- --------------
LONG-TERM LIABILITIES:
Revolving credit line (Note 6) 4,848,883 6,225,484
Other long-term liabilities (Notes 5 and 15) 935,221 1,375,932
-------------- --------------
5,784,104 7,601,416
-------------- --------------
COMMITMENTS AND CONTINGENCY (Notes 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 9, 10, 11 and 15)
Convertible preferred stock - aggregate liquidation value
$575,000; $1.00 par value, 5,000,000 shares authorized;
575 shares issued 575 575
Common stock, $.001 par value, 5,000,000 shares authorized;
1,839,666 and 1,798,288 shares issued, respectively 1,840 1,799
Additional paid-in capital 21,562,763 21,466,881
Subscription receivable (397,782) (397,782)
Deficit (8,118,059) (7,403,566)
Treasury stock, 79,099 and 45,833 common shares
at May 31, 2000 and 1999, respectively, at cost (390,691) (278,922)
-------------- --------------
Total shareholders' equity 12,658,646 13,388,985
-------------- --------------
$ 24,430,489 $ 28,171,548
============== ==============
</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,
--------------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
<S> <C> <C> <C>
REVENUES, net (Note 13) $ 39,206,990 $ 47,108,677 $ 49,335,530
-------------- --------------- --------------
OPERATING EXPENSES (Notes 11, 15 and 17)
Costs of revenues 27,313,523 32,718,139 34,341,973
Selling, general and administrative 10,209,179 12,610,794 13,494,731
Depreciation and amortization 1,035,143 1,106,952 910,659
Provision for doubtful accounts 545,315 1,580,224 1,561,874
Regulatory costs and related expenses - - 2,030,511
Impairment of intangible assets - 186,946 -
Restructuring and termination expenses - 222,615 362,718
--------------- --------------- --------------
39,103,160 48,425,670 52,702,466
--------------- --------------- --------------
OPERATING INCOME (LOSS) 103,830 (1,316,993) (3,366,936)
INTEREST EXPENSE, net (731,948) (652,714) (438,140)
--------------- --------------- --------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (628,118) (1,969,707) (3,805,076)
PROVISION (BENEFIT) FOR
INCOME TAXES (Note 8) - (647,000) (1,183,000)
--------------- --------------- --------------
LOSS FROM CONTINUING OPERATIONS (628,118) (1,322,707) (2,622,076)
--------------- --------------- --------------
DISCONTINUED OPERATIONS: (Note 18)
Loss from discontinued operations, net of
tax benefit of $-0-, $65,000 and $690,000
for 2000, 1999 and 1998, respectively (36,373) (145,008) (1,537,160)
Loss on disposal, net of tax benefit
of $40,000 for 1999 - (88,320) -
--------------- --------------- --------------
LOSS FROM DISCONTINUED OPERATIONS (36,373) (233,328) (1,537,160)
--------------- --------------- --------------
NET LOSS $ (664,491) $ (1,556,035) $ (4,159,236)
=============== =============== ==============
BASIC LOSS PER COMMON SHARE:
Continuing operations $ (.39) $ (.76) $ (1.58)
Discontinued operations (.02) (.08) (.93)
Loss on disposal - (.05) -
------- ------ --------
Net loss $ (.41) $ (.89) $ (2.51)
====== ====== ========
DILUTED LOSS PER COMMON SHARE:
Continuing operations $ (.39) $ (.76) $ (1.58)
Discontinued operations (.02) (.08) (.93)
Loss on disposal - (.05) -
------- ------ --------
Net loss income $ (.41) $ (.89) $ (2.51)
====== ====== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 1,739,356 1,748,895 1,657,402
========= ========= =========
Diluted 1,739,356 1,748,895 1,657,402
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------ ---------------
Par Par Paid in Subscription
Shares Value Shares Value Capital Receivable Deficit
--------- ------- ------ ----- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1997 1,404,778 $ 1,405 - $ - $15,434,642 $(397,782) $(1,688,295)
Shares issued under Employee
Stock Purchase Plan 1,861 2 - - 26,081 - -
Exercise of stock options
including income tax benefit 56,234 56 - - 500,076 - -
Issuance of stock in connection
with EFCC merger (Note 2) 324,720 325 - - 4,849,675 - -
Issuance of stock options
(Note 14) - - - - 145,000 - -
Net loss - - - - - - (4,159,236)
--------- ------- ------ ----- ----------- ------------ ------------
Balance, May 31, 1998 1,787,593 1,788 - - 20,955,474 (397,782) (5,847,531)
Shares issued under Employee
Stock Purchase Plan 3,616 4 - - 13,229 - -
Exercise of stock options
including income tax benefit 7,079 7 - - 39,004 - -
Issuance of preferred stock
(Note 10) - - 575 575 459,174 - -
Net loss - - - - - - (1,556,035)
--------- ------- ------ ----- ----------- ------------ ------------
Balance, May 31, 1999 1,798,288 1,799 575 575 21,466,881 (397,782) (7,403,566)
Shares issued under Employee
Stock Purchase Plan 5,747 6 - - 6,086 - -
Exercise of stock options
including income tax benefit 30,144 30 - - 70,361 - -
Dividends to preferred
shareholders (Note 9) 5,487 5 - - 19,435 - (50,002)
Acquisition of treasury shares - - - - - - -
Net loss - - - - - - (664,491)
--------- ------- ------ ----- ----------- ------------ ------------
Balance, May 31, 2000 1,839,666 $ 1,840 575 $575 $21,562,763 $(397,782) $(8,118,059)
========= ======= ====== ===== =========== ============ ============
<CAPTION>
Treasury Stock
--------------------- Total
Shareholders'
Shares Value Equity
------- ---------- -------------
<S> <C> <C> <C>
Balance, June 1, 1997 45,833 $(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 45,833 (278,922) 14,433,027
Shares issued under Employee
Stock Purchase Plan - - 13,233
Exercise of stock options
including income tax benefit - - 39,011
Issuance of preferred stock
(Note 10) - - 459,749
Net loss - - (1,556,035)
------- ---------- -------------
Balance, May 31, 1999 45,833 (278,922) 13,388,985
Shares issued under Employee
Stock Purchase Plan - - 6,092
Exercise of stock options
including income tax benefit - - 70,391
Dividends to preferred
shareholders (Note 9) - - (30,562)
Acquisition of treasury shares 33,266 (111,769) (111,769)
Net loss - - (664,491)
------- ---------- -------------
Balance, May 31, 2000 79,099 $(390,691) $ 12,658,646
======= ========== =============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
May 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (664,491) $ (1,556,035) $ (4,159,236)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for doubtful accounts 545,315 1,586,581 1,561,874
Depreciation and amortization 1,040,396 1,276,291 961,431
Deferred income taxes 130,000 (978,000) (1,000,985)
Loss on disposal of assets 168,579 - -
Forgiveness of note receivable from officer - 25,000 -
Impairment of intangible assets - 186,946 380,008
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 947,714 (1,245,251) 597,561
Prepaid expenses and other current assets 22,417 34,270 1,095,943
Income tax receivable - 1,225,522 (1,152,208)
Other assets (18,469) 45,216 7,093
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1,223,970) (2,433,848) 1,278,163
Due to Medicare - 1,576,037 1,017,287
Other liabilities (440,711) 310,162 795,255
------------- ------------- -------------
Total adjustments 1,171,271 1,608,926 5,541,422
------------- ------------- -------------
Net cash provided by operating activities 506,780 52,891 1,382,186
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangibles - (275,898) -
Purchase of property and equipment (120,450) (314,483) (999,665)
Business acquisitions, net of cash acquired (387,399) - (2,786,702)
------------- ------------- -------------
Net cash used in investing activities (507,849) (590,381) (3,786,367)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from revolving credit line (1,376,601) 17,632 3,585,852
Repayment of long-term debt - (125,000) (125,000)
Proceeds from the issuance of stock under option plans 76,483 52,244 671,215
Payment of costs in connection with preferred stock offering - (115,251) -
Proceeds from issuance of preferred stock - 575,000 -
Acquisition of treasury shares (111,769) - -
------------- ------------- -------------
Net cash (used in) provided by financing activities (1,411,887) 404,625 4,132,067
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,412,956) (132,865) 1,727,886
CASH AND CASH EQUIVALENTS, beginning of year 1,734,421 1,867,286 139,400
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 321,465 $ 1,734,421 $ 1,867,286
============= ============= =============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 101,000 $ 55,000 $ 118,000
============= ============= =============
Interest paid $ 771,000 $ 568,000 $ 440,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 2000
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 patient service revenues is reported at estimated net realizable
amounts from patients, third-party payors, and others for services rendered and
includes estimated retroactive revenue adjustments due to future audits,
reviews, and investigations. Retroactive adjustments are considered in the
recognition of revenue on an estimated basis in the period the related services
are rendered, and such amounts are adjusted in future periods as adjustments
become known or as years are no longer subject to such audits, reviews and
investigations. A provision for doubtful accounts is made for revenue estimated
to be uncollectible and is adjusted 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 Medicaid, Medicare and other cost-based reimbursement programs,
the Company is reimbursed for services rendered to covered program patients as
determined by reimbursement formulas. Revenues from Medicaid programs account
for approximately 67% and 70% of the Company's net patient revenue for the years
ended May 31, 2000 and 1999. Laws and regulations governing the Medicaid
programs are extremely complex and subject to interpretation. As a result, there
is at least a reasonable possibility that recorded estimates will change by a
material amount in the near term.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is not a rule or interpretation of the SEC;
however, it represents interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant in administering the
disclosure requirements of the Federal securities laws. The Company does not
believe that the interpretations outlined in SAB 101 will have an impact on the
Company's revenue recognition policies.
F-7
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
d. Net income (loss) per common share
The basic calculation is determined by dividing net income
attributable to common shares outstanding (the basic numerator) by the weighted
average number of common shares outstanding (the basic denominator) during the
period.
The diluted calculation is determined by adjusting the basic
numerator for any changes in income or loss that would result from the assumed
exercise of potentially issued common shares. Additionally, the basic
denominator is increased to include the additional number of common shares that
would be outstanding if the potentially issued common shares had been issued, if
dilutive. Potentially issued common shares, consisting of options, are not
included in this calculation where the effect of the inclusion would be
anti-dilutive. The treasury stock method is used to reflect the dilutive effect
of outstanding options and warrants. For the years ended May 31, 2000, 1999 and
1998, the effect of any common stock equivalents would have been anti-dilutive.
Net loss available to common shareholders was computed as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
2000 1999 1998
------------- -------------- ---------------
<S> <C> <C> <C>
Net loss $ (664,491) $ (1,556,035) $ (4,159,236)
Dividends on preferred shares (50,002) - -
-------------- -------------- ---------------
Net loss available to common
shareholders $ (714,493) $ (1,556,035) $ (4,159,236)
============= ============== ===============
</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-8
<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. Such estimates primarily relate to accounts receivable
valuation allowances, recoverability of goodwill and regulatory adjustments.
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
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company was required to implement SOP 98-1
for the year ending April 30, 2000. Adoption of SOP 98-1 did not have a material
impact on the Company's financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of
Start-Up Activities." SOP 98-5, provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The Company was
required to implement SOP 98-1 for the year ending April 30, 2000. As the
Company has expensed these costs historically, the adoption of this standard did
not have a significant impact on the Company's results of operations or
financial position.
In 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137 "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters beginning
after June 15, 2000 and therefore will be effective for the Company's fiscal
year 2001. The adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial condition or results of operations.
F-9
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
m. Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the classifications used in 2000.
2. Mergers and Acquisitions:
a. 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 324,720 shares of
common stock to EFCC shareholders for an aggregate purchase price of
approximately $7,250,000. 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.
b. On May 28, 2000, the Company acquired, through a wholly owned
subsidiary, certain assets of the Pennsylvania operations of U.S. HomeCare Corp.
("U.S. HomeCare-Pennsylvania") for $300,000 in cash. The acquisition price was
allocated to contract costs, which is being amortized over a fifteen year
period.
The above acquisitions have been accounted for utilizing purchase
accounting principles. Accordingly, the results of these operations have been
included in the accompanying consolidated financial statements since the dates
of acquisition.
Had the Company referred to in Note 2b been acquired on June 1, 1998,
there would have been no material effect on the consolidated operations of the
Company for the years ended May 31, 2000 and 1999.
3. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
May 31,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Furniture and fixtures $ 630,000 $ 931,000
Computer equipment 2,118,000 2,178,000
Leasehold improvements 128,000 127,000
Other 291,000 341,000
------------- -------------
3,167,000 3,577,000
Less accumulated depreciation 1,854,000 1,844,000
------------- -------------
$ 1,313,000 $ 1,733,000
============= =============
</TABLE>
4. Intangible Assets:
Intangible assets are as follows:
<TABLE>
<CAPTION>
May 31,
Amortization ------------------------------------
Period 2000 1999
---------------- -------------- --------------
<S> <C> <C> <C>
Goodwill 5 - 40 $ 10,073,000 $ 10,073,000
Customer contracts 11 - 15 1,855,000 1,555,000
Covenants not-to-compete 2 - 8 335,000 335,000
Nurses' list 9 - 15 563,000 563,000
Other 2 - 25 740,000 652,000
-------------- --------------
13,566,000 13,178,000
Less accumulated amortization 2,595,000 1,926,000
-------------- --------------
$ 10,971,000 $ 11,252,000
============== ==============
</TABLE>
F-10
<PAGE>
5. Accrued Expenses:
Accrued expenses are as follows:
<TABLE>
<CAPTION>
May 31,
------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Medicaid settlement (a) $ 230,000 $ 242,000
Professional fees 99,000 285,000
Interest 45,000 51,000
Other 146,000 93,000
---------- -----------
$ 520,000 $ 671,000
========== ===========
</TABLE>
(a) 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. In fiscal year 1998, the Company accrued $1,000,000
in connection with this matter.
Additionally, 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 was expected to result in a retroactive calculation of the Medicaid
reimbursement rate and the imposition of overpayment assessments against the
Company. In fiscal year 1998, the Company accrued $660,000 in contemplation of a
settlement and offset the accrual against existing accounts receivable from
Medicaid.
In May 1999, the Company negotiated a $1,167,000 settlement with the
State of New York in connection with these matters. The settlement agreement
provided for an initial payment of $200,000, with the balance payable over four
years at 9% interest per annum. Included in accrued expenses and other long-term
liabilities at May 31, 2000 was $230,000 and $521,000, respectively, and at May
31, 1999 was $242,000 and $751,000, respectively.
6. Revolving Credit Line:
On November 9, 1998, the Company entered into a $10 million revolving
credit facility (the "Credit Facility"). The Credit Facility, as amended,
permits the Company to borrow up to 70% of eligible accounts receivable (as
defined) that are aged less than 180 days at LIBOR+4%, and the remaining
eligible accounts receivable (as defined) at LIBOR+7%. 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.
In connection with entering into the Credit Facility, Star Multi Care
Services, Inc. and certain of its subsidiaries (the "Members") formed SMCS Care,
LLC (a limited liability company) (the "LLC"). The operating agreement of the
LLC provides for its members to sell its eligible receivables to the LLC and
whereby the LLC will borrow from the lender in accordance with the Credit
Facility.
At May 31, 2000, the Company was in violation of certain financial
covenants contained in the credit facility agreement. On September 12, 2000, the
Bank waived compliance with the covenant violations and amended the terms of the
credit facility. The amended agreement provides for changes to certain financial
ratios and covenants. In addition, the amended agreement reduced the maximum
amount of the facility from $10 million to $7 million, reduced the interest rate
from LIBOR + 4% to LIBOR + 3.75%, and increased the borrowing base percentage on
eligible accounts receivable from 80% to 90%. The borrowing base percentage will
be decreased by 1/2% per month through January 2001, when the borrowing base
percentage is equal to 87.5%. The amended facility expires on September 12,
2003.
F-11
<PAGE>
7. Income Taxes:
The Company files a consolidated U.S. federal income tax return that
includes all wholly owned subsidiaries. State tax returns are filed on a
consolidated, or separate basis depending on the applicable laws. At May 31,
2000, the Company has a net operating loss carryforward of approximately
$5,172,000 for federal income tax purposes which may be applied against future
taxable income through 2015.
The provision (benefit) for income taxes from continuing operations
consists of the following:
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- -------------
<S> <C> <C> <C>
Current:
Federal $ (178,000) $ 176,000 $ (709,000)
State and local 48,000 40,000 40,000
----------- ----------- -------------
(130,000) 216,000 (669,000)
----------- ----------- -------------
Deferred:
Federal 173,000 (730,000) (346,000)
State and local (43,000) (133,000) (168,000)
----------- ----------- -------------
130,000 (863,000) (514,000)
----------- ----------- -------------
$ - $ (647,000) $ (1,183,000)
=========== =========== ==============
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
May 31,
-----------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 531,000 $ 964,000
Accrued expenses 521,000 487,000
Tax credits 187,000 -
Net operating loss carryforward 2,824,000 1,654,000
Stock compensation 56,000 56,000
Amortization of intangible assets - 408,000
Other 55,000 150,000
-------------- -------------
4,174,000 3,719,000
Valuation allowance (542,000) (343,000)
-------------- -------------
3,632,000 3,376,000
-------------- -------------
Deferred tax liabilities:
Depreciation and amortization 463,000 242,000
Other 165,000 -
-------------- -------------
628,000 242,000
-------------- -------------
Net deferred tax assets $ 3,004,000 $ 3,134,000
============== =============
</TABLE>
F-12
<PAGE>
7. Income Taxes: (Cont'd)
A reconciliation between the actual income tax expense (benefit) 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,
---------------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Computed federal income tax
at statutory rates $ (214,000) $ (680,000) $ (1,294,000)
State taxes, net of federal benefit (38,000) (120,000) (228,000)
Items without tax benefit 102,000 120,000 107,000
Adjustments to prior years' tax liability (50,000) (88,000) 262,000
Valuation allowance 200,000 185,000 -
Tax credits - - (48,000)
Other, net - (64,000) 18,000
-------------- -------------- --------------
$ - $ (647,000) $ (1,183,000)
============== ============== ==============
</TABLE>
8. Due to Medicare:
Amounts due to Medicare represent periodic interim payments ("PIP")
received from Medicare in excess of the current volume of business. There is no
scheduled repayment of this liability, and on July 1, 1999, the Company ceased
operations of its Medicare business. See Note 18.
9. Shareholders' Equity:
a. Capitalization
On December 13, 1999, the Company effected a 1 for 3 reverse stock
split. All references to number of shares and per share data in the financial
statements and accompanying notes for all periods presented have been restated
to reflect the reverse stock split.
In addition, the Company amended its Certificate of Incorporation and
decreased the amount of authorized common stock from 10,000,000 to 5,000,000
shares. The par value of the common stock remained unchanged at $.001 per share.
b. Preferred stock
The Company has authorized 5,000,000 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.
In April 1999, the Company completed a private placement by the sale of
575 Series A 8% Convertible Preferred Stock for $575,000. After sixty days from
the closing date, the Preferred Stock may be converted to common stock equal to
the lessor of: (i) 125% of the market price of common stock three trading days
immediately preceding the closing date, or (ii) the market price of the
Company's Common stock discounted from 10% to 30%, such discount increasing with
the passage of time. Holders of the preferred shares can convert the stated
value of their shares, in whole or in part, into common stock at a maximum
conversion price of $4.22 per share (136,296 shares), and have liquidation
preference over common shareholders. The Preferred Stock pays an 8% annual
dividend payable quarterly that may be converted to common stock at the option
of the Company. Additionally, holders of the preferred shares received a Common
Stock Purchase Warrant for the right to purchase 16,667 common stock shares of
the Company, expiring April 2001, at 115% of the closing bid price on the
trading day immediately preceding the closing date of this sale.
F-13
<PAGE>
10. Stock Option Plans:
Incentive stock option plans
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 August 2002 and December 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.
Non-Employee Directors Stock Option Plan
The Company has adopted a non-qualified stock option plan for all
non-employee Directors of the Company. The plan is designed to provide an
incentive to Directors and attract and retain the services of experienced and
knowledgeable non-employee Directors. The plan expires on March 25, 2007.
A summary of the Company's various fixed stock option plans as of May 31,
2000, 1999 and 1998, and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Stock Options Shares Price Shares Price Shares Price
------------------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 211,741 $ 7.00 194,646 $10.38 175,224 $ 8.76
Granted 292,841 1.76 142,356 4.08 80,667 10.18
Exercised (30,144) 2.34 (7,079) 5.51 (56,234) 4.76
Canceled (49,103) 6.33 (118,182) 9.15 (5,011) 13.66
---------- -------- --------
Outstanding, end of year 425,335 $ 3.80 211,741 $ 7.00 194,646 $ 10.38
========== ======== ========
Options exercisable at year end 385,300 $ 3.87 148,443 $ 7.43 157,312 $ 10.59
========== ======== ========
Weighted average fair value of
options granted during the year $ .62 $ 0.23 $ 1.02
====== ====== =======
</TABLE>
F-14
<PAGE>
10. Stock Option Plans: (Cont'd)
The following table summarizes information about stock options outstanding at
May 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
---------------- ------------ ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.25 - $2.20 251,030 4.25 $ 1.58 225,863 $ 1.62
$3.38 - $7.32 119,256 4.27 $ 4.10 107,724 $ 4.14
$9.85 - $13.10 36,700 3.13 $ 11.67 36,700 $ 11.67
$15.38 - $19.50 18,349 6.64 $ 16.45 15,013 $ 16.69
</TABLE>
Shares reserved for future issuance at May 31, 2000 are comprised of the
following:
Incentive stock option plans 173,800
Non-employee Directors stock option plan 31,833
Employee stock purchase plan 106,546
Underwriter warrants 16,667
---------
328,846
=========
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 15,264 shares were issued.
In accordance, with APB Opinion No. 25, 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, 2000, 1999 and 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have changed to the following pro forma amounts.
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Net loss, as reported $ (664,491) $ (1,556,035) $ (4,159,236)
Net loss, pro forma (782,173) (1,587,199) (4,178,675)
Basic loss per share, as reported (.41) (.30) (.84)
Basic loss per share, pro forma (.48) (.30) (.84)
Diluted loss per share, as reported (.41) (.30) (.84)
Diluted loss per share, pro forma (.48) (.30) (.84)
</TABLE>
F-15
<PAGE>
10. Stock Option Plans: (Cont'd)
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, 2000, 1999
and 1998.
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Volatility 94.16% 58.00% 58.00%
Risk-Free interest rate 5.25% 5.20% 5.40%
Expected life 1.24 year 1 year 1 year
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
11. Related Party Transactions:
a. 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 14,997 shares of the Company's common stock. The promissory note is secured
by 24,208 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 14,997 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 15,065
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.
b. Services
A former director provided accounting services to the Company for
which he was compensated approximately $146,000 in the year 1998.
F-16
<PAGE>
12. 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
rate debt at May 31, 2000 and 1999 approximates its fair value.
13. 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, 2000 and 1999, approximately 42% and 46%, respectively, of
accounts receivable was due from Medicaid. Credit losses relating to customers
historically have not been significant and within management's expectations.
The Company places its temporary cash investments with high credit
quality financial institutions.
14. Business Risks:
The Company's primary business, offering home health care services, is
heavily regulated at both the federal and state levels. While the Company is
unable to predict what regulatory changes may occur or the impact any particular
change, the Company's operations and financial results could be negatively
affected. Further, the Company operates in a highly competitive industry, which
may limit the Company's ability to price its services at levels that they
believe appropriate. These competitive factors may adversely affect the
Company's financial results.
15. Commitments:
a. Employment agreement
The Company has an employment agreement, as amended, with an officer
which expires in December 2001. The aggregate commitment for future salary,
excluding bonuses, under the agreement is $375,000. The agreement also provides
for increases based on the consumer price index increases and certain bonuses
based upon annual pretax income. The aggregate minimum commitment for future
salaries under the agreements is as follows:
Years Ending
May 31,
-------------
2001 $ 125,000
2002 73,000
----------
$ 198,000
==========
F-17
<PAGE>
15. Commitments: (Cont'd)
b. Leases
The Company conducts its operations from leased office space under
various operating leases which expire at various dates through 2005. Management
expects that in the normal course of business these leases will be renewed or
replaced by other leases.
As of May 31, 2000 future net minimum rental payments under operating
leases having initial or remaining noncancellable terms in excess of one year
are as follows:
Years Ending
May 31,
-------------
2001 $ 638,000
2002 572,000
2003 361,000
2004 233,000
2005 72,000
-------------
$ 1,876,000
=============
Rental expenses for operating leases for fiscal years ended 2000, 1999
and 1998 were approximately $662,000, $798,000 and $718,000, 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 $37,285 through September 2001 in satisfaction
of Mora's employment agreement. The Company also exchanged Mora's existing stock
options for 30,000 new options with an exercise price of $12.00 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 11) in exchange for Mora entering
into a covenant not-to-compete agreement.
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,
-------------
2001 $ 447,420
2002 447,420
2003 149,140
F-18
<PAGE>
16. Contingencies:
a. The Company is a defendant in several actions which are routine and
incidental to its business. 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.
b. The Company is the subject of an examination by the Civil Division of
the Department of Justice for Medicare claims for the period July 1995 through
December 1996. A review of a sample of those claims is being conducted, and no
determination of any liability has been made. Management intends to vigorously
defend any ultimate determination of liability, and believes any settlement of
this examination will not have a material effect on the consolidated financial
position, liquidity or result of operations.
17. Retirement Plans:
The Company had a 401(k) savings plan covering all eligible employees
which it terminated in December 1998. Contributions for the years ended May 31,
2000, 1999 and 1998 approximated $-0-, $31,000 and $64,000, respectively.
18. Discontinued Operations:
In February 1999, the Company adopted a plan to abandon its Medicare
business being provided by one of its subsidiaries, American Health Care
Services ("American") in the State of Florida. The Company ceased operations
effective July 1, 1999. The Company plans to liquidate its assets and discharge
its liabilities through an assignment for the benefit of creditors proceeding.
Accordingly, the operating results of American, including provisions for
estimated losses during the phase-out period of approximately $128,000 have been
segregated from continuing operations and reported as a separate line item on
the statement of operations.
The Company has restated its prior financial statements to present the
operating results of the American segment as a discontinued operation.
Operating results (exclusive of any corporate charges or interest expense
and the aforementioned provisions) from discontinued operations are as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues, net $ 40,953 $ 1,985,624 $ 8,414,290
--------------- -------------- ---------------
Costs and expenses:
Costs of revenues 623 1,834,361 4,604,695
Selling, general and administrative 64,862 1,104,431 4,340,394
Regulatory costs and adjustments - (1,250,000) 1,250,000
Depreciation and amortization 5,254 169,339 50,772
Impairment of intangible assets - - 380,008
Restructuring and termination expense - 335,211 -
--------------- -------------- ---------------
70,739 2,193,342 10,625,869
--------------- -------------- ---------------
Operating (loss) income (29,786) (207,718) 2,211,579
Other deductions (6,587) (2,290) (15,581)
--------------- -------------- ---------------
Loss before income taxes (36,373) (210,008) (2,227,160)
Income tax benefit - (65,000) (690,000)
--------------- -------------- ---------------
Net loss $ (36,373) $ (145,008) $ (1,537,160)
=============== ============== ===============
</TABLE>
F-19
<PAGE>
Exhibit Index
Exhibit No. Exhibit
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.
(e) 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.)
4.1 Registration Rights Agreement between the Company and the Shaar Fund
Ltd. dated April 26, 1999.
5.1 Legal opinion of Muenz & Meritz, P.C.
9. (a) Sternbach Proxy
(b) Voting Trust Agreement dated as of June 20, 1996 by and among
EFCC, Coss, Arbor, the Voting Trustee of the Issuer and
Kaufman.
10. (a) *Form of Indemnification Agreement between the Company and
Stephen Sternbach.
(b) Employment Agreement, dated as of December 3, 1995 between the
Company and Stephen Sternbach. (Incorporated by reference to
Exhibit 10.(x) to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended February 29, 1996.)
(c) * The Company's 1991 Incentive Stock Option Plan
(d) The Company's 1992 Incentive Stock Option Plan (as amended and
restated September 13, 1993). (Incorporated by reference to
Exhibit 10 (h) to the Company's Annual Report on Form 10- KSB
for the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to the Company's 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10.(z) to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
February 29, 1996.)
(f) The Company's Employee Stock Purchase Plan, as amended on
December 15, 1995. (Incorporated by reference to Exhibit
10.(y) to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract (Incorporated by
reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of the Company among
Stephen Sternbach, Renee the Company and Leonard
Taubenblatt dated December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care License.
(k) * New Jersey Employment agency License.
(l) Form of Indemnification Agreement between the Company and
directors and officers. (Incorporated by reference to Exhibit
10(k) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992.)
(m) Asset Purchase Agreement dated as of November 1, 1991 by and
among Unity Care
<PAGE>
Exhibit No. Exhibit
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.)
(u) Lease dated December 7, 1998 between Lighthouse Hicksville
Limited Partnership, a New York limited partnership, and Star
Multi Care Services, Inc., a Delaware corporation, for the
Company's office space in Hicksville incorporated to the
Company's Form 10-Q for period ended November 30, 1998 as
Exhibit 10.1 therein.
(v) Securities Purchase Agreement between the Company and the
Shaar Fund, Ltd. dated April 26, 1999 filed as Exhibit 10(v)
in Form S-3/Amendment 2 filed December 14, 1999 filed as
Exhibit 10(w) in Form S-3/Amendment 2 filed December 14, 1999.
(w) Common Stock Purchase Warrant issued to the Shaar Fund, Ltd
pursuant to the Securities Purchase Agreement between the
Company and the Shaar Fund, Ltd. dated April 26, 1999
(x) WAIVER AND AMENDMENT dated as of September 13, 1999 to the
Receivables Purchase and Transfer Agreement, dated November 9,
1998, by and among Star Multi Care Services, Inc., each of the
parties named on Schedule I thereto (each, including he
Primary Servicer, a "Provider" and, collectively, the
"Providers") and SMCS Care, LLC, and to the Loan and Security
Agreement, dated as of November 9, 1998 between the SMCS Care,
LLC and Daiwa Healthco-3 LLC incorporated by reference to the
Company's Form 10-Q for period ended November 30, 1999 as
Exhibit 10.1 therein.
(y) WAIVER AND AMENDMENT dated as of September 12, 2000 (this
"Amendment"), to the Receivables Purchase and Transfer
Agreement, dated as of November 9, 1998 (as amended, modified
or supplemented from time to time in accordance with its
terms, the "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 the
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")
incorporated by reference to the Form 10-K for fiscal year end
May 31, 2000 as Exhibit 10(y) therein.
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. previously filed.
(b) Consent of Ernst & Young LLP. previously filed
(c) Consent of Muenz & Meritz, P.C. included in Exhibit 5.1.
previously filed.
-------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-18 dated May 14, 1991. (Registration No. 33-39697-NY)
