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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File Number 1-10751
STAR MULTI CARE SERVICES, INC.
(Name of Registrant in its charter)
New York 11-1975534
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Walt Whitman Road, Huntington Station, NY 11746
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (631) 423-6689
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of each exchange on which registered
Common Stock, par value $.001 per share Nasdaq SmallCap Market System
- - --------------------------------------- ------------------------------
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 7, 2000 the aggregate market value of the Common Stock of Star
Multi Care Services, Inc. held by non-affiliates, (1,780,203 shares) was
$2,447,779 (based upon the closing price of the Common Stock on such date on the
Nasdaq SmallCap Market).
As of September 7, 2000, the Registrant had 1,916,347 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Definitive Proxy Statement for the 2000 Annual Meeting
of Shareholders of the company are incorporated by reference into Part III
hereof.
PART I
Item 1. Description of Business
General Background and History
Star Multi Care Services, Inc. (the "Company") is in the business of providing
professional and paraprofessional home health care personnel services to
elderly, ill and physically challenged individuals in their homes, and to a
lesser extent the Company provides health care facility staffing services for
hospitals and skilled nursing facilities. The Company is licensed and / or
certified in five states to provide a full array of health care personnel
services, which include Registered Nurses, Licensed Practical Nurses, Home
Health Aide, Nurse Aide, and Personal Care Aide services. In some states the
Company is also licensed and / or certified to provide Physical Therapy, Speech
Therapy, Occupational Therapy, Respiratory Therapy, and Medical Social Work
services.
The Company was established in 1938 in Brooklyn, New York and was purchased by
present management in 1986 at which time the primary focus of the organization
was the provision of facility staffing and private duty nursing services. After
the Company was acquired management successfully secured, in 1989, New York
State Department of Health approval as a Licensed Home Care Services Agency.
This expanded the Company's scope of services into the home care market.
Management initiated an IPO in 1991 with the Company becoming publicly traded on
the NASDAQ SmallCap Market, and in 1995 the Company began trading on the NASDAQ
National Market. On November 11, 1999 the Company reverted to trading on the
NASDAQ SmallCap Market. In addition, the Company has maintained accreditation by
the Joint Commission on Accreditation of Health Care Organizations (JCAHO) since
1992 and was awarded in May 1999 Joint Commission Accreditation with
Commendations, attesting to the Company's commitment to the delivery of high
quality health care services.
The Company maintains 15 licensed offices within the five States it operates in,
which include New York (4 offices), New Jersey (5 offices), Pennsylvania (4
offices), Ohio (1 office), and Florida (1 office). Additionally, Star also
currently maintains as a provision of State licensing and contracting
requirements Medicare Certified Home Health Agency operations in the states of
Pennsylvania and Ohio. Star maintains full functionality for service provision
across the Company 7 days a week 24 hours a day. Combined through these offices
Star employs over 5,000 full-time and part-time employees and services over
7,500 clients annually. The Company also maintains corporate facilities in
Florida for payroll / billing / collection data processing, with the principal
executive offices of the Company being located in Huntington Station, New York.
The Company grew through a series of acquisitions that began in 1992 with the
acquisition of certain assets from Unity Healthcare Holding Company, Inc. and
its subsidiaries (Unity). This expanded the Company's operations within its
existing New York and the adjacent New Jersey markets by adding new contract
rights for provision of home care services. In addition, the Unity acquisition
added new operations in the state of Florida, which included both, Medicare
certified (later discontinued in 1999) and licensed operations in South Florida.
In 1993, the Company further expanded its home care operations in New York
through the acquisition of certain assets of DSI Health Care Services, Inc.
(DSI). This acquisition added new contract relationships within the County of
Nassau with facility based Certified Home Health Care Agencies, Long Term Home
Health Care Programs, and Hospices as well as expanded the Company's existing
Medicaid operations within the County.
In May of 1995, the Company acquired certain assets of Long Island Nursing
Registry, Inc. ("LINR"), which again augmented its existing operations in Nassau
County by both adding new contracts and expanding existing contract
relationships. The acquisition of LINR expanded Company operations into the new
markets of Suffolk and Onondaga (Syracuse Area) Counties for provision of
contract Medicaid Personal Care Services, Medicaid Skilled Nursing Services and
a variety contracts with facility based Certified Home Health Agencies, Long
Term Home Health Care Programs, and Hospice Programs. However, the Company
formally withdrew from the Syracuse market on May 1, 1999 by closing this office
in conjunction with its consolidation and restructuring initiatives. The
acquired assets of LINR included all of the fixed assets, certain of the
contract and intellectual property rights and all of the records, Customer and
Personnel lists, files, and books with respect to or in connection with the
health care business conducted by LINR. Finally, this acquisition added depth
into the Company's operational, clinical, and information system management
staff.
In August of 1996, the Company and AMSERV Health Care, Inc. consummated a merger
whereby the Company acquired control of Amserv, which resulted in Amserv
becoming a wholly owned subsidiary of the Company. This acquisition
significantly expanded the Company within the northern and central New Jersey
markets by adding five new office locations in New Jersey. Amserv
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Health Care of New Jersey, Inc. is a provider of Medicaid and Medicaid Waiver
reimbursed paraprofessional services, as well as contract services with
Certified Home Health Agencies and Hospice Programs. Amserv Health Care of New
Jersey, Inc. also maintains a skilled professional nursing division. In
addition, this acquisition also brought the Company in Ohio operating under the
name of Amserv Health Care of Ohio, Inc., d/b/a Central Star Home Health
Services which provides Medicaid and Medicaid Waiver paraprofessional services
as well as facility staffing services for professional nursing staff. The office
also provides some limited Medicare reimbursed services.
On September 9, 1997 the Company consummated an Agreement and Plan of Merger
with Extended Family Care Corporation (EFCC). The Agreement between the Company
and EFCC provided for the merger of EFCC Acquisition Corp. (Merger Sub), a New
York Corporation and a wholly-owned subsidiary of the Company, with EFCC, with
EFCC merging with and into the Merger Sub. The EFCC acquisition added to the
Company's existing New York and New Jersey operations as well as expanded these
operations by introducing new service contracts that were similar to and
compatible with existing paraprofessional contracts in these regions.
Additionally, the Company added new market operations in Allentown,
Pennsylvania. This particular office predominantly specializes in the provision
of skilled Pediatric Nursing services. This office is both Medicaid approved and
Medicare certified.
Current Acquisitions
On May 8, 2000 the Company through a subsidiary corporation, EFCC Acquisition
Corp. d/b/a Extended Family Care, acquired certain assets of the Pennsylvania
offices of US Home Care. The acquisition expanded the Company's existing
operations in Pennsylvania by adding three new locations in Philadelphia,
Lancaster and Pittsburgh. The acquisition introduced the Company into three new
major markets in Pennsylvania and added approximately $5 million in revenue.
Organizational Restructuring Changes
The Company and industry in general continues to be confronted with a variety of
Medicare and Medicaid reimbursement methodology, service authorization, and
regulatory changes as well as governmental audit processes which has
necessitated the Company to continue to modify its internal operating structure
over the last 2 years. This restructuring included;
o Senior and middle management personnel changes.
o General staff consolidations and reductions.
o The physical relocation of the Accounting and Human Resources Departments from
Florida to the executive offices in New York.
o The closing of under performing office operations and facilities.
o Discontinuation of certain significant Medicare operations in Florida.
o Discontinuation of certain under performing low margin contracts.
o Implementation of standardized automated operating systems across the Company.
o Implementation of a Corporate Compliance Program.
Over the last two years the Company also initiated and completed the
consolidation of certain licensed offices in both Florida and New York. The
licensed offices located in Miami Lakes and Lake Worth were consolidated and
centralized into the Company's Hollywood office to increase operational
efficiency in the region and reduce cost. Simultaneously, the Company terminated
certain under performing low margin managed care contracts in the region to
increase the regional operating margin. Additionally, the Company effective
February 26, 1999 discontinued Medicare Certified Home Health Agency operations
in Florida due to changes in the Medicare reimbursement and authorization
methodologies. In May 1999 the Company closed its Syracuse office due to cost
containment considerations. Potential consolidations, under performing offices
and contracts will continue to be evaluated in the future.
Effective January 1, 1999 the Company successfully completed an, 18 month,
automation restructuring project by placing all offices on the same operating
software for client intake, scheduling, personnel, clinical data base
management, billing and compliance. The system downloads data to the Resource
Center into a standard accounting package for payroll, billing, collection,
financial and general ledger processing. These changes marked a significant
transition from multiple operating systems to one integrated standardized
operating system. The Company's systems were successfully Y2K compliant on all
levels without issue.
The Company continues to maintain a three-tier Corporate Compliance structure,
which includes:
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1. Corporate Patient Care Committee which meets quarterly to review and
establish new policies and procedures, and reviews internal audit findings by
department and branch;
2. Regional Quality Improvement Audit Committees, which conduct a series of
operational, financial, clinical and personnel audits across all offices and
departments. These audits test all regulatory and operational aspects with
all findings reported to the Director of Corporate Compliance.
3. The Corporate Compliance Program provides an additional layer of internal
audits, investigation, and reporting. The program provides for a Director of
Corporate Compliance who operates under the direction of and reports directly
to the Company's Board of Directors.
Customer Base
The Company maintains four types of customers, which form the base of its
referral source. The customer base includes Federally and State funded public
assistance programs (Medicare, Medicaid), other third party payers
(subcontracts), insurance companies and private pay customers.
A substantial portion of the Company's revenues are derived from home health
care services provided to patient's who are eligible for Medicaid services
referred to the Company through contract or subcontract relationships. The
Company maintains State and / or County approval and / or contracts in New York,
New Jersey, Ohio, and Pennsylvania for provision of professional and
paraprofessional Medicaid services which include Registered Nurse, Licensed
Practical Nurse, Home Health Aide, Personal Care Aide, Homemaking, and Live-in
Companion services. Each State maintains its own initial approval and annual
re-approval criteria, which are subject to audit and / or accreditation
processes. These services are reimbursed directly by State and / or local
government and represent a combination of federal, state and local funding.
Clients are referred to the Company by physicians, hospital discharge planning
departments and community based medical service organizations. The majority of
the business in the states of New York, New Jersey, Ohio, and Pennsylvania is
Medicaid reimbursed. If a contract were to be lost or an annual approval /
accreditation not secured it could have a material and adverse effect on the
Company's operating results.
Although the Company discontinued Medicare operations in the State of Florida it
is still federally certified to provide Medicare reimbursed Certified Home
Health Agency services in the states of Ohio and Pennsylvania. However, the
Company conducts limited (Less than 1%.) Medicare reimbursed business in
Pennsylvania and Ohio with such services being limited to predominantly clients
who are receiving other forms of reimbursed services and temporarily qualify for
acute Medicare reimbursed services.
During the fiscal years ended May 31, 2000, 1999, and 1998, 70%, 67% and 61%
respectively of the Company's revenue were attributable to Medicaid, other
governmental programs for the aged and Medicare. The reason for the increase in
the most recent fiscal year is that the Company eliminated certain
non-performing contractual relationships with other payers and the general trend
in service hour authorization reduction for subcontract relationships.
The Company's next largest customer base is derived from other third party
payers which consist of subcontracting relationships for provision of personnel
with community and facility based organizations that are reimbursed directly by
Medicaid and Medicare. This type of subcontract relationship is maintained with
Certified Home Health Agencies, Long Term Home Health Care Programs, Hospice
Programs, Health Maintenance Organizations (HMOs), and Case Management
Organizations. Referrals and reimbursement for client care initiates from these
facilities, which in turn are reimbursed by Medicare or Medicaid. This source
has accounted for 16%, 15% and 24% of revenue for fiscal years 2000, 1999, and
1998 respectively.
The insurance segment of the Company's business represented 13%, 14% and 18% of
the Company's revenue in 2000, 1999, and 1998, respectively. This business is
made up of a mix of Long Term Care Insurance, Workers Compensation Insurance,
Commercial HMO Insurance, Preferred Provider Organizations (PPO), and general
health insurance policies that provide a home health care service benefit.
Insurance referrals can come directly through contractual relationships with
insurance companies, network alliances, physicians, and hospital based discharge
planners.
Private pay customers have represented approximately 1% of revenue in each of
the last three fiscal years. These clients for a variety of reasons choose to
pay privately because the client is ineligible for public assistance programs,
chooses to supplement services provided by Medicare or an insurance program, or
have elected to pay part or all of their care out of pocket. These customers
come predominantly through referrals from physicians, hospital discharge
planners, and community based organizations.
4
Marketing and Sales
The Company maintains marketing and sales activities in each of the five states
it operates in and concentrates its efforts through the use of regional
marketing/sales teams comprised of field service office administration and sales
representatives. The office Administration educates the sales staff regarding
new identified targets, regulatory changes and new service programs. The Company
believes in the use of office specific Operational Plans for the management and
marketing of regional sales. The individual Office Operational Plan format
provides for the comprehensive approach to office growth, marketing, and
recruitment, as well as the clinical and fiscal operation of each office. The
plan objective is to maximize internal growth and assure clinical / fiscal
integrity. The plan serves as the framework for development of a continual
process for Quality and Performance Improvement in all areas of responsibility
including marketing. The marketing component of the plan identifies all
potential referral sources and establishes a systematic referral source contact
strategy across the marketing and office staff. The plan is continually
reassessed by management and refined to ensure success, and serves as an
evaluation tool to identify strengths as well as areas needing organizational
support.
The Company maintains regional sales staff that focuses on the sales and
marketing component goals of these plans. The Company targets the key
representatives of the contracting institutions, hospital discharge planning
departments, insurance companies, community based facilities, and physicians to
secure contractual and referral relationships. Representatives visit targeted
facilities and programs, while maintaining the Company's presence with existing
referral sources and acting as the first line of communication with new referral
sources. Beyond the traditional personnel services offered by the industry the
Company offers facility staffing, Shared Aide Team Model services, Skilled High
Tech Nursing and Pediatric Nursing specialty services. From an operational
perspective the Company markets quality benchmarks as demonstrated by its Joint
Commission accreditation (JCAHO), and a full functioning Corporate Compliance
Program. The sales representatives are supported by print and radio advertising,
direct mailing, and attendance at trade shows and regional health care
functions.
Competition
The home health care and facility staffing industry has a variety of local,
regional and national organizations, which comprise the Company's competition
base. The Company has numerous competitors in each of the markets it serves,
however, regulatory and reimbursement changes are causing consolidation within
the industry at this time. Smaller local and regional operations are finding it
increasingly difficult to remain in the market. Similar sized or larger
regionally based companies have emerged to be viewed by the Company as its major
competitors.
Competition is based on the quality of care provided to clients, the ability to
obtain personnel to deliver the authorized service and the price structure
offered by the organization. The Company believes that it has developed and
maintains high quality standards through its operational, clinical, and
compliance policies, procedures and activities. Additionally, the Company
maintains an aggressive recruitment and training philosophy, which has proven
effective. Cost effectiveness in operation, achieved through improved automation
platforms, new service delivery models, and economies of scale have enabled the
Company to be aggressive in its pricing structures while maintaining strong
operating margins.
Government Regulations, Licensing and Audits
The Company's business is subject to substantial and frequently changing
regulations by Federal, State, and Local authorities, which require significant
compliance responsibilities by the Company. Each State, in which the Company
operates maintains its own form of licensing standards and may maintain
Certificate of Need (CON) or other Medicare requirements specific to the State
that are above the minimum standard requirements established by the Federal
government for participation in the Medicaid and Medicare programs. The
imposition of more restrictive regulatory requirements or the denial or
revocation of any license, certification, Medicaid or Medicare approval, or
permit necessary for operation in a particular market could have a material
adverse effect on the Company's operations. In addition, any future expansion
into new markets would require the Company to comply with all licensing, and /
or CON requirements and other regulations pertinent to that jurisdiction.
The Company maintains all applicable licenses for provision of home care and
facility staffing services in the states of New York, New Jersey, Pennsylvania,
Ohio, and Florida. In addition, the Company maintains Medicare Certification in
certain offices and counties in the states of Ohio and Pennsylvania. As a
provider of services under Medicare as well as some state Medicaid programs the
Company is required by the Federal Health Care Financing Administration and / or
state Health Departments to
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prepare cost reports reflecting annual expenditures and development of capital
expenditure plans. The regulatory agencies of the states in which the Company
operates require compliance with certain regulations and standards with respect
to health care personnel records, client records, nursing and administrative
supervision, incident and complaint monitoring and follow-up, and the
establishment of professional advisory boards. Additionally, both Federal and
State Anti-kickback regulations exist which are complied with.
With participation in the Medicare and Medicaid programs the Company is subject
to survey and audit of operational, clinical and financial records with respect
to proper applications of general regulations governing operation, cost
reporting criteria, and other payment formulas. These audits can result in
retroactive adjustments for payments received from these programs resulting in
either amounts due to governmental agencies from the Company or amounts due to
the Company as adjustments from the governmental agency.
Effective in January 1998, the Company was required to comply with a new payment
formula for reimbursement under the Medicare program. This payment formula,
termed the Interim Payment System (IPS), for Medicare was developed by the
federal Health Care Financing Administration (HCFA) to serve as a middle step as
the government moved from a cost based reimbursement system to a episodic
disease based Prospective Payment System (PPS). In addition, to the imposition
of IPS, which set per patient limits on Medicare home care reimbursements, HCFA
also revised regional cost limits which combined with IPS had a material effect
in reducing revenue and reimbursement for the Company's Florida based Certified
Home Health Agency. As a result, the Company elected to discontinue provision of
Medicare services in its Florida operation effective February 26, 1999 and
subsequently dissolved this Florida based subsidiary.
Liability Insurance
The Company's employees and subcontractors routinely make decisions that can
have significant medical consequences to the patients in their care. As a
result, the Company is exposed to substantial liability in the event of
negligence or wrongful acts of its personnel. The Company maintains medical
professional liability insurance providing for coverage in a maximum amount of
$1,000,000 per claim, subject to a limitation of $3,000,000 for all claims in
any single year. In addition, the Company requires that each independent
contractor it refers to institutions for employment supply a certificate of
insurance evidencing that such person maintains medical professional liability
insurance providing for coverage of no less than $1,000,000 per claim. There can
be no assurance, however, that the Company will be able to maintain its existing
insurance at an acceptable cost or obtain additional insurance in the future, as
required. There can be no assurance that the Company's insurance will be
sufficient to cover liabilities resulting from claims that may be brought in the
future. A partially or completely uninsured claim, if successfully asserted and
of significant magnitude, could have a material adverse effect on the Company
and its financial condition.
Employees
As of September 2000, the Company employed 182 permanent office and
administrative employees. The Company also has a roster of temporary
professional and paraprofessional employees (including registered nurses,
licensed practical nurses, home health aides, personal care aides and nurses'
aides). The Company treats all such persons as employees. The Company currently
has no union contracts with any of its employees and believes that its
relationship with its employees and independent contractors is good. The Company
pays its temporary employees at wages that it believes are competitive within
industry standards.
6
Recruitment of Personnel
Recruitment of adequate numbers of temporary personnel has become increasingly
difficult in the home health industry resulting from a variety of market forces.
The currently strong economic environment, coupled with a moderate to low
reimbursement rate structure has hampered the industry in general in recruiting
adequate numbers of personnel to provide authorized services. Field service
personnel wages and benefit packages are below average as compared to other
service type industries outside of health care.
To address this issue the Company has focused on higher margin business or
attempted to negotiate revised contractual rate agreements with existing
referral sources in an effort to permit the Company to offer increased wage and
benefit packages to its temporary employees.
Additionally, the Company recently hired regional recruitment staff that is
responsible to take a grass roots approach to recruitment of professional and
paraprofessional personnel. These individuals focus on filling all monthly
office training programs, development of off-site recruitment initiatives and
training locations, recruitment of bilingual staff, and professional nursing
personnel. This project was implemented in March 2000 and has thus far proven
successful, although future success of the program cannot be guaranteed.
Item 2. Description of Property
Description of Property
The Company leases a total of 19 facilities in five states. The Company believes
that its existing leases will be negotiated as appropriate as they expire, or
that alternative properties can be leased on acceptable terms. The Company also
believes that its present facilities are well maintained and are suitable for it
to maintain existing operations.
The following table describes the location and current use of each of the
Company's leased facilities as of September 2000:
Location Description
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New York Facilities
Brooklyn Nursing and Paraprofessional Services
Hicksville Nursing and Paraprofessional Services
Long Beach Nursing and Paraprofessional Services
Huntington Station Nursing and Paraprofessional Services
Huntington Station Corporate Executive Offices
Coram Recruitment Location
Riverhead Recruitment Location
New Jersey Facilities
Edison Nursing and Paraprofessional Services
Elizabeth Nursing and Paraprofessional Services
Elmwood Park Nursing and Paraprofessional Services
South Orange Nursing and Paraprofessional Services
Union City Nursing and Paraprofessional Services
Florida Facilities
Hollywood Nursing and Paraprofessional Services
Miramar Data Processing, Payroll, Billing, Collections
Ohio Facilities
Mansfield Nursing and Paraprofessional Services
Pennsylvania Facilities
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Allentown Nursing and Paraprofessional Services
Pittsburgh Nursing and Paraprofessional Services
Lancaster Nursing and Paraprofessional Services
Philadelphia Nursing and Paraprofessional Services
Item 3. Legal Proceedings
In February 1998, the Company was informed that the Medicare intermediary
assigned to administer Medicare payments in Florida had assessed an
administrative overpayment against the Company in the amount of $1,248,747 based
on the 1997 Audit. The Company appealed the administrative overpayment
determination by pursuing administrative and judicial remedies. The Company had
established a reserve, in the period ended February 28, 1998, for $1.25 million,
in connection with the administrative overpayment.
In preparation of its administrative appeal, the Company's Regulatory Counsel
retained an expert to review the government's statistical methods used in
assessing the overpayment against the Company. The expert has advised the
Company's Regulatory Counsel that the statistical sampling procedures used by
the government indicate significant errors and based upon these findings and in
consultation with Regulatory Counsel, the management of the Company reversed the
reserve of $1.25 million as of May 31, 1999.
On February 29, 2000 the Company was successful with its appeal. An
Administrative Law Judge overturned the Medicare intermediary's assessment of
$1.25 million and determined that the Company was not liable for any portion of
the overpayment. This decision was subsequently appealed by the government and
permanently dismissed in favor of the Company.
On July 16, 1998, the Company was advised that an audit of Star Multi Care
Services of Florida, Inc. (d/b/a American Health Care Services) ("American"),
the Company's Florida Medicare agency, was commenced by the Office of Audit
Services, Office of Inspector General of the United States Department of Health
and Human Services. This audit was conducted in conjunction with the United
States Attorney's Office for the Southern District of Florida and involved a
review of claims for home health services submitted by American Health Care
Services during 1995 and 1996. This audit is similar to the audit noted above
and at this time remains unresolved with the extent of any potential liability
remaining undetermined.
Regulatory Counsel has advised American that it may litigate or appeal any
determination of liability and pursue claims against third parties (e.g.,
subcontractors and licensed home health agencies) for a portion of any liability
of American. Management anticipates that this matter should be satisfactorily
resolved. This is grounded upon the advice of Regulatory Counsel to the Company
as to the (1) the resolution of similar types of audits or claims based upon
their experience in the health care industry, handling appeals of these
determinations and dealing with similar matters before the Office of Inspector
General and the Department of Justice, even though there has not been a final
determination of liability, and there can be no assurance as to the ultimate
liability; and (2) the fact that American will have the right, whether or not
this audit or claim is resolved in whole or in part in American's favor, to
appeal or litigate any liability, determination and pursue a claim against
third-party independent contractors and other parties that may have rendered
services to American, even though there is no assurance that any such claims
would ultimately be collectible.
In August 1995, the Office of Deputy Attorney General for Medicaid Fraud Control
initiated a personnel, clinical and billing investigation for the years 1992
through 1995. On December 3, 1997, the Company was advised by its counsel that
the investigation, which was previously reported as pending, may be expanded
through 1997 and that the Company was a target of a criminal investigation. In
response to this, the Company conducted its own internal investigation and
revised its systems and has voluntarily disclosed the results of its internal
investigation to the Office of Deputy Attorney General for Medicaid Fraud
Control. The Company had established a reserve of $1,000,000 in connection with
this matter. The amount accrued had been based upon information learned to date.
The Company discovered errors in certain cost reports that had been previously
submitted by the Company to the New York State Department of Social Services
during the years 1993-1995, the basis of which served to determine the Medicaid
reimbursement rates in respect of the Company for the years 1994-1996. Amended
cost reports containing the correct data were submitted to the New York State
Department of Health (the "DOH") in February 1998, which were expected to result
in the DOH's retroactive recalculation of the Company's Medicaid reimbursement
rate and imposition of a substantial overpayment assessment against the
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Company. The Company established a reserve, in the period ended February 28,
1998, for $660,000, in connection with this overpayment assessment.
On May 10, 1999 the Company entered into a Settlement Agreement with the State
of New York whereby the State of New York will discharge and forever release the
Company, including its officers, directors and employees, for any further
liability regarding the Company's submission of claims for or receipt of
Medicaid payments for home health care services for the audited period of 1992
through 1996, as discussed above. The Company had previously accrued $1.66
million for this claim, but subsequently settled this claim for $532,823 less
than the initial accrual. The Attorney General stated in his press release that
the Company has fully cooperated with the State's investigation and immediately
remedied the problems the Attorney General's office pointed out by improving its
personnel training procedures and submitting revised cost reports.
The terms of this Settlement Agreement provided for:
(a) No admission by Star of any criminal or civil liability, guilt,
wrongdoing or unacceptable practice, or a determination of guilt of any
violation of any Federal, State or Local statute, rule or regulation.
(b) The Company agreed to pay to New York State the total sum of $1,167,177,
with an initial payment of $200,000. The balance shall be payable over
four years at 9% interest.
As of May 31, 2000 the outstanding principal balance was $751,425.
Except as otherwise provided in this Annual Report on Form 10-K, there are no
legal proceedings to which the Company is currently a party or to which any of
its property is subject that could possibly have a material adverse effect upon
the Company, and the Company knows of no legal proceeding pending or threatened
against any director or officer of the Company in his or her capacity as such.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters
Prior to November 11, 1999, the Company's Common
Stock is quoted on the Nasdaq National Market System, under the symbol "SMCS",
and thereafter, has been traded on the Nasdaq SmallCap market, under the symbol
"SMCS". Until June 7, 1996, the Company's Common Stock was also listed on the
Pacific Stock Exchange.
The following table sets forth the high and low sales prices per
share for the Common Stock during the periods indicated on the Nasdaq National
Market System.
Period High Low
Year ended May 31, 1998
First Quarter $ 18.375 $ 12.282
Second Quarter 19.50 13.875
Third Quarter 18.00 11.625
Fourth Quarter 12.375 6.00
Year ended May 31, 1999
First Quarter $ 8.439 $ 3.75
Second Quarter 5.625 3.375
Third Quarter 6.75 3.75
Fourth Quarter 6.00 3.375
Year ended May 31, 2000
First Quarter $ 3.938 $ 2.07
Second Quarter 3.78 2.25
Third Quarter 5.875 1.25
Fourth Quarter 7.625 1.813
As of September 7, 2000 the Company had 1,916,347 shares of Common Stock
outstanding and 734 shareholders of record.
The Company did not pay cash dividends on its Common Stock during any of the
three years ended May 31, 2000, 1999 and 1998. It is the present policy of the
Company to retain earnings, if any, to finance the development and growth of its
business. In addition, the Company's agreement with its lender prohibits the
payment of cash dividends without the lender's prior consent.
The Nasdaq Stock Market notified the Company that it did not meet the
maintenance criteria regarding the minimum market value of the public float of
at least $5 million for continued listing on the Nasdaq's National Market
System. Subsequently, on November 11, 1999 the Company reverted to trading on
the Nasdaq SmallCap Market.
The Board of Directors approved a 1 for 3 reverse split of the Company's common
stock effective December 13, 1999. The Board authorized an amendment to the
Certificate of Incorporation whereby the common stock of Company would be split
in a ratio of one for three and in addition, the total authorized number of
common stock shares was reduced from 10 million to 5 million shares. The par
value of the common remained unchanged at $.001 per share. The amendment to the
Certificate of Incorporation was ratified and approved by the shareholders of
the Company at the 1999 Annual Meeting of Shareholders held on December 1, 1999.
For all periods presented the per share amounts have been restated to reflect
the 1 for 3 reverse split.
On April 30, 1999 the Company completed a private placement by the sale of
$575,000 Series A 8% Convertible Preferred Stock par value $1.00 per share
("Preferred Stock") to the Shaar Fund, Ltd., providing the Company net proceeds,
after fees and expenses, of $500,000. After sixty days, the Preferred Stock may
be converted to common stock equal to the lesser of: (a) 125% of the market
price three trading days immediately preceding the closing date, or (b) 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
10
and have liquidation preference over common shareholders. The Preferred Stock
pays an 8% dividend payable quarterly that may be converted into common stock at
the option of the Company. The investor also received a Common Stock Purchase
Warrant (the "Warrant") for the right to purchase 16,667 common stock shares of
the Company at 115% of the closing bid price on the trading day immediately
preceding the closing date of this sale. The common stock to be issued upon
conversion of Preferred Stock, the common stock to be issued upon exercise of
Warrant, and common stock issued for payment of Preferred Stock dividend shall
be registered by the Company under the Securities Act of 1933. The Company
utilized the proceeds from this sale to satisfy its working capital needs.
Item 6. Selected Financial Data
The statement of operations for the years ended May 31, 2000,
1999, 1998, 1997 and 1996 and balance sheet data as of May 31, 2000, 1999, 1998,
1997 and 1996 as set forth below have been derived from the audited financial
statements of the Company and should be read in conjunction with those financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K. In addition, the selected financial data should be read in conjunction
with "Description of Business -- General" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Year Ended
--------------------------------------------------------------------------
May 31
--------------------------------------------------------------------------
2000 1999 1998(1) 1997 1996
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA (2) (4)
Net Revenues $ 39,206 $ 47,108 $ 49,335 $ 41,857 $ 39,056
Income (Loss) from Operations 103 (1,316) (3,367) 3,161 1,829
Other Income (Expense) (731) (652) (438) (140) (117)
Merger Transaction Costs -- -- -- (2,808) --
Income (Loss) from Continuing Operations (628) (1,322) (2,622) 126 1,143
Income (Loss) from Discontinued Operations (4) (36) (145) (1,537) -- --
Gain (Loss) on Disposal of Discontinued -- (88) -- -- --
Cumulative Effect of Change in Accounting -- -- -- -- --
Net Income (Loss) (664) (1,556) (4,159) 126 1,143
Income Per Share (3)
Income (Loss) from Continuing Operations $ (.39) $ (.76) $ (1.58) $ .09 $ .81
Income (Loss) from Discontinued Operation $ (.02) $ (.08) $ (.93) -- --
Gain (Loss) on Disposal of Discontinued -- $ (.05) -- -- --
Cumulative Effect of Change in Accounting -- -- -- -- --
Net Income (loss) $ (.41) $ (.89) $ (2.51) $ .09 $ .81
Shares Used in Computing Per Share Amounts 1,739 1,748 1,657 1,406 1,404
BALANCE SHEET DATA: (2)
Cash and Cash Equivalents $ 321 $ 1,734 $ 1,867 $ 139 $ 1,882
Working Capital 3,696 6,068 750 9,545 9,415
Total Assets 24,430 28,171 29,870 20,300 19,369
Total Long-Term Obligations 11,771 7,601 1,066 2,945 3,604
Redeemable Preferred Stock -- -- -- -- 341
Shareholders' Equity 12,658 13,388 14,433 13,071 12,045
Current Ratio 1.62 1.85 1.05 3.23 3.79
Cash Dividend Declared Per Common Share $ -- $ -- $ -- $ -- $ --
11
- - -------------------------
(1) In September 1997, Star acquired EFCC Acquisition Corp. in a transaction
accounted for as a purchase.
(2) In August 1996, STAR acquired AMSERV HEALTHCARE SERVICES, INC. ("Amserv")
in a transaction accounted for as a pooling-of-interests, accordingly, all
periods presented have been restated to include the accounts and operations
of Amserv for the periods prior to the acquisition.
(3) Effective January 1, 1998, STAR adopted SFAS No. 128, "Earnings Per Share."
(4) Effective February 1999, STAR adopted a plan to abandon its Medicare
business provided by one of its subsidiaries, Star Multi Care Services of
Florida, d/b/a American Health Care Services as such operations of American
have been shown as discontinued for all periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The following discussion and analysis provides information, which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
This discussion contains forward-looking statements that are subject to a number
of known and unknown risks that, in addition to general economic, competitive
and other business conditions, could cause actual results, performance and
achievements to differ materially from those described or implied in the
forward-looking statements [See Forward Looking Statements].
The Company is subject to significant external factors that could significantly
impact its business, including changes in Medicare and Medicaid reimbursement,
government fraud and abuse initiatives and other such factors that are beyond
the control of the Company. These factors, as well as future changes in
reimbursement methodologies and new or changes in interpretations of
regulations, could cause future results to differ materially from historical
trends.
In 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget Act").
The Budget Act established an Interim Payment System (the "IPS") that provided
for the lowering of reimbursement limits for Medicare home health visit
services. For cost reporting periods beginning on or after October 1, 1997,
Medicare reimbursed home health agency were reimbursed the lesser of; (1) their
actual costs, (2) cost limits based on 105% of median costs of freestanding home
health agencies, or (3) an agency-specific per patient cost limits, based 98% of
1994 costs adjusted for inflation. The new limits were applied to the Company's
Medicare operations in Florida for the cost reporting period beginning January
1, 1998. The new methodology significantly reduced the reimbursement for the
Company's Medicare operations. Although the Company designed and implemented a
restructuring plan for its Medicare operations, based on a variety of factors
including continued decline in Medicare revenues, low operating margins, and the
potential of a future 15% reimbursement reduction in 2000 the Company elected to
discontinue Medicare operations in Florida on February 26, 1999. This combined
with the decrease in subcontract service revenues associated with services
provided to Medicare certified agencies in New York and New Jersey resulted in a
significant decrease in both direct and subcontract Medicare reimbursed revenue.
[See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Discontinued Operations.]
Results of Operations
Year Ended May 31, 2000 Compared to Year Ended May 31, 1999
Net revenues for the year ended May 31, 2000 decreased $7,901,687 or 17% to
$39,206,990, compared to $47,108,677 for the fiscal year ended May 31, 1999.
This decrease was primarily attributable to a reduction in authorization of
service hours related to the New Jersey Medicaid Program, the reduction of visit
authorizations on Medicare subcontract services provided in New York and New
Jersey, resulting from a general reduction in the Medicare Program, and from the
termination of under performing contracts in the Company's Florida licensed
operations, as well as the discontinuance of the Florida Medicare operations.
Gross profit margin percentages for the fiscal years ended May 31, 2000 and 1999
were 30.3% and 30.5% respectively.
12
Selling, General and Administrative expenses ("SG&A"), as a percentage of net
revenues was 26% in 2000 as compared with 27% in 1999. This decrease is
principally attributable to the Company's restructuring efforts during the past
year.
Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 2000 was 1.4% compared to 3.4% for the year ended May 31, 1999.
Interest expense increased to $731,948 during fiscal 2000 as compared to
$652,714 in fiscal 1999. Interest on the Credit Facility prior to September 14,
1999 was LIBOR plus 3% for 70% of eligible accounts receivable and LIBOR plus 6%
for the remaining 30%. On September 14, 1999 the Credit Facility was amended,
and bears interest at LIBOR plus 4% for 70% of eligible accounts receivable and
LIBOR plus 7% for the remaining eligible accounts receivable. Interest of
$77,412 was paid to New York State on the Medicaid settlement as well as overall
higher interest rates in 2000 as compared to 1999 contributed to the increase in
interest expense.
Operating income for fiscal 2000 increased to $103,830 from a loss of
($1,316,993) for fiscal 1999, an increase of $1,420,823. The increase is
primarily attributable to significant decreases in operating expenses.
Discontinued Operations
In February 1999, the Company formally adopted a plan to liquidate its Medicare,
both the indemnity and HMO business, being provided by one of its subsidiaries,
Star Multi Care Services of Florida, Inc d/b/a American Health Care Services.
Decreasing utilization together with decreasing reimbursement rates and
increasing costs forced management to cease operations with its providers July
1, 1999. The Company liquidated its assets and discharged its liabilities
through an assignment for benefit of creditors under Florida state law, and the
Company was formally dissolved on August 23, 2000. As such, the Company's
financials have been restated for all years presented to segregate the operating
results of this segment as discontinued. Accumulated net deficits of the
subsidiary, American Healthcare, amounted to ($2,690,574) and ($2,653,204) at
May 31, 2000 and 1999 respectively.
As the Company fully reserved for any benefit from the operating loss for fiscal
year ended May 31, 2000, the Company's effective tax rate for 2000 fell to 0%,
as compared to 31% in 1999. At May 31, 2000 the Company had a net operating loss
carry forward for federal income tax purposes.
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Net revenues for the year ended May 31, 1999 decreased $2,226,853 or 5% to
$47,108,677 compared to $49,335,530 for the fiscal year ended May 31, 1998. This
decrease was primarily the result of reductions in Medicare reimbursement rates
that affected contracts the Company had with Certified Home Health Agencies and
Long Term Home Health Care Programs in New York and New Jersey. This together
with Medicaid rate reductions realized during fiscal 1999 reduced Star Multi
Care Services, Inc revenues approximately $4,614,000 or 17% to $21,930,000
compared to $26,545,000 for fiscal year 1998. These reductions were offset by
increases in Amserv Healthcare of New Jersey revenues of approximately
$2,271,000 or 12%. Amserv Healthcare of New Jersey revenues were $20,442,000 and
$18,170,000 for fiscal year 1999 and 1998 respectively. This increase is the
result of an additional three months of billing realized in 1999 as compared to
1998 following the acquisition of EFCC on September 9, 1997.
Gross profit margin percentages for the fiscal years ended May 31, 1999 and 1998
were 30.5% and 30.4% respectively.
Selling, General and Administrative expenses ("SG&A"), as a percentage of net
revenues was 27% for both years ended May 31, 1999 and 1998 respectively. In an
effort to implement cost savings and profitability, the Company's management
team aggressively restructured the staff and information systems to achieve cost
efficiencies during 1999 and 1998.
Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 1999 was 3.4% compared to 3.1% for the year ended May 31, 1998.
Due to the cost constraints and reimbursement reductions being realized
throughout the entire health and home care industries, the Company continues to
realize longer payment cycles of approximately 72 to 90 days. A charge of
approximately $946,000 was taken in the fourth quarter 1999 to increase the
allowance for doubtful accounts and to be consistent with the trend of bad debts
as a percent to total revenues. A charge of $1,024,000, in excess of the regular
provision
13
amount was taken in the year ended May 31, 1998. The Company's allowance for
doubtful accounts reflects a conservative position taken on accounts in excess
of 180 days. The Company continues to implement aggressive collection procedures
and is continually enhancing information systems and internal reporting to
address the more stringent documentation and time frame requirements being
imposed by managed care contracts.
During 1999 the Company appealed the Medicare assessment (i) of $1,250,000 at
the recommendation of legal counsel. Preliminary indications from the Medicare
intermediary and regulatory counsel as to the outcome have been favorable based
upon the results of similar audits in other home-care companies. Therefore it
has been management's decision to reverse the accrual in 1999.
Restructuring and termination expenses were $222,615 and $362,718 for the year
ended May 31, 1999 and 1998 respectively. Charges were consistent with the
Company's plan to restructure and consolidate several of its operating locations
and administrative functions within specific geographic areas. During the fourth
quarter 1999, the Company restructured the accounting staff and relocated the
department from Miramar, Florida to the corporate offices in New York.
Interest expense increased to $652,000 during fiscal 1999 as compared to
$438,140 in fiscal 1998. Interest on the credit facility prior to November 9,
1998 was prime plus 1/4% (8.5% at May 31, 1998). Interest on the new credit
facility subsequent to November 9, 1998 bears interest at LIBOR plus 3% for 80%
of eligible receivables and LIBOR plus 6% for the remaining 20% of eligible
receivables. On April 23, 1999 the Credit Facility was amended to bear interest
at LIBOR plus 3% for 70% of eligible receivables and LIBOR plus 6% for the
remaining 30%. Overall interest rates were higher in 1999 as compared to 1998
contributing to the overall increase in interest expense.
Operating losses for the year ended May 31, 1999 decreased to ($1,316,993) from
($3,366,936) in fiscal year 1998. This decrease was attributable to 1998
one-time regulatory charges of $2,030,511 not incurred in 1999. This decrease
was offset by $196,000 of increased amortization and depreciation costs realized
in 1999. This increase is the result of (i) full year of depreciation on assets
acquired with the EFCC acquisition (ii) amortization of loan costs associated
with the new credit facility and (iii) new information systems put in service
during 1999 attributed to the overall increase in depreciation and amortization.
The Company's effective tax rate of 31% remained consistent for 1999 and 1998
respectively. The effective tax rate remains at 31% due to non-deductible
goodwill in connection with the EFCC acquisition and adjustments to prior year
tax liabilities that reduced the Company's effective tax rate in 1999 and 1998
below statutory rates.
Net losses from continuing operations for the year ended May 31, 1999 decreased
$1,300,000 or 48% to ($1,322,707) compared to ($2,622,076) for the year ended
May 31, 1998. The decrease is primarily attributable to the one time regulatory
charges in 1998 offset with increases in interest expense during 1999. This,
together with increases in depreciation and amortization contributed to the
overall decrease in net losses for 1999.
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Net revenues increased $7,478,404 or 18% to $49,335,530 for the fiscal year
ended May 31, 1998 over net revenues of $41,857,126 for the fiscal year ended
May 31, 1997. This increase was primarily attributable to the acquisition of
EFCC and growth in the New Jersey and Florida branches of the Company.
Gross profit margin percentage for the fiscal year ended May 31, 1998 was 30%
compared to 32% for the year ended May 31, 1997. The decrease in the gross
profit percentage was primarily attributable to an increase in the rates
utilized to accrue for workers' compensation claims, a shift in allocating a
greater percentage of workers' compensation expense to costs of revenue to
reflect the occurrence of workers' compensation claims.
Selling, General and Administrative expenses ("SG&A") as a percentage of net
revenues was 27% during the year ended May 31, 1998 compared to 22% during the
year ended May 31, 1997. The increase in selling, general, and administrative
expenses as a percentage of net revenues is attributable to, (i) an increase in
the reserve for the self funded health and dental plan, (ii) an increase in the
reserve for the self funded workers' compensation plan, (iii) a reduction in the
overhead allocation to the
14
Company's Medicare certified agency in Florida, (iv) increases in costs such as
staffing in credit, collections and billing management information systems,
human resources, accounting and key management positions within the Company to
support the Company's current and anticipated future growth , and (v) increased
costs associated with implementing the Company's new policy and procedures over
credit, collections, and billing functions, and increases in other operating
expenses resulting from the growth in revenues. In effort to reduce operating
costs the Company recorded a restructuring and termination charge during the
year ended May 31, 1998.
Provision for doubtful accounts as a percentage of net revenues for the year
ended May 31, 1998 was 3% compared to 1% for the year ended May 31, 1997. A
charge of approximately $1,024,000, in excess of the regular provision amount
was taken in the year ended May 31, 1998 to increase the allowance for doubtful
accounts and reflects a more conservative position taken on accounts in excess
of 180 days. The revision in the estimate for the Provision for Doubtful
Accounts was considered necessary by the Company because the collection of these
accounts had been slower than anticipated. The Company also increased the bad
debt provision rate for accounts receivable aged less than 180 days,
necessitated by billing and collection difficulties that continued into early
1998.
Regulatory costs and related expenses for the year ended May 31, 1998 of
$2,030,511 were recorded and consist of (i) a charge of $660,000 for
overpayments assessments by the New York State Department of Health relating to
discovered errors in previously filed costs reports for the 1993 through 1995
periods which are the basis for the Company's Medicaid reimbursement rates for
the 1994 through 1996 period, (ii) a charge of $1,000,000 to reserve for a
potential audit adjustment by the office of New York State Deputy Attorney
General for Medicaid Fraud Control, and (iii) $370,511 for legal fees related to
the above matters.
Restructuring and termination expenses of $362,718 for the year ended May 31,
1998 were recorded and consist of a charge to income relating to the Company's
plan to restructure and consolidate several of its operating locations and
administrative functions within specific geographic areas.
Operating (loss) income for the year ended May 31, 1998, decreased to
($3,805,076) from $212,619. This decrease was attributable to increases in the
reserve for self funded workers' compensation and medical and dental plans,
increases in selling, general and administrative expenses, increases in the
provision for doubtful accounts, charges for regulatory costs, contractual
adjustments and related expenses, charges for the impairment of various
intangible assets, and charges for restructuring and termination.
The Company's effective tax rate for 1998 was 31% as compared to 41% in 1997.
The decrease in the effective tax rate is due to non-deductible goodwill in
connection with the EFCC acquisition and adjustments to prior year tax
liabilities that reduced the Company's effective tax rate in 1998 below
statutory rates.
Net (loss) income for the year ended May 31, 1998 decreased to ($2,622,076)
compared to $125,619 for the year ended May 31, 1997. The decrease is primarily
attributable to the loss from operations, increased interest expense from
additional borrowings associated with the acquisition of EFCC. The Company has
restated its prior financial statements to present the operating results of the
American segment as a discontinued operation effective with management's
announcement in February 1999. Total revenues decreased $2,692,000 or 24% to
approximately $8,414,000 and $11,106,000 as of May 31, 1999 and 1998
respectively. Revenue reductions were the result of Implementation of IPS
effective January 1, 1998 (refer to government regulations, licensing, and
audits). The regulatory adjustment for $1,250,000 together with the $380,000 of
intangibles written off during 1998 accounted for the $1,537,000 of losses for
the year ended May 31, 1998.
Liquidity and Capital Resources
As of May 31, 2000 cash and cash equivalents were $321,465 a decrease of
$1,412,956 from $1,734,421 for the year ended May 31, 1999. The Company has
aggressively reduced its revolving credit line by $1,376,601. In addition, 2000
losses have significantly decreased attributable to the one time charges Star
Multi Care Services, Inc had to absorb in 1999 and 1998 associated with legal,
regulatory, and restructuring charges. As of July 1, 1999 the Company has
completed the majority of its restructuring with the completion of the
relocation of the accounting department to New York.
15
Net cash provided by operations increased $453,889 to $506,780 from $52,891 as
compared to May 31, 1999. Gross accounts receivable decreased $2,755,000 due to
the Company's aggressive collection efforts and the write off of uncollectible
accounts receivable.
- - --------------------------------------------------------------------------------
Subsidiary Days Revenue in A/R Total revenues
2000 1999 2000 1999
- - --------------------------------------------------------------------------------
Star Multi Care Services, Inc. 97 90 $15,448 $21,930
Amserv Healthcare of NJ 56 49 18,827 18,170
Amserv Healthcare of Ohio 65 67 2,166 2,554
Extended Family Care 118 121 2,764 2,150
On November 9, 1998, the Company entered into a $10 million revolving credit
facility with Daiwa Securities America, Inc. (the Credit Facility). In
connection with the agreement, 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.
The Credit Facility provides for the LLC to borrow up to 70% of eligible
accounts receivable (as defined) that are aged less than 180 days at LIBOR plus
4%, and the remaining eligible accounts receivable (as defined) at LIBOR plus
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 of the
assets of the Company collateralize the Credit Facility. At May 31, 2000, the
Company was in violation of certain financial covenants and the lender has
granted the Company a waiver for those covenants that were not met.
On September 12, 2000, the Company renegotiated its Credit Facility with its
lender on more favorable terms and extended the Credit Facility for an
additional three years. The material terms of the new Credit Facility are:
1. The Credit Facility was reduced to $7 million from $10 million to more
accurately reflect the Company's actual borrowing needs and to reduce
non-utilization fees.
2. The interest rate was reduced to LIBOR plus 3.75% for the entire Credit
Facility.
3. The Credit Facility will gradually reduce the available borrowing base from
the present 90% of eligible receivables to 87.5% by January 2001.
4. A number of financial covenants were revised to more realistically measure
the Company's financial performance.
5. The lender granted waivers for all of the financial covenants that were
breached in the past fiscal year.
As of May 31, 2000 the borrowing base totaled $5,815,774, and the outstanding
loan balance totaled $4,848,883, as compared to $6,258,727 and $6,225,484,
respectively, as of May 31, 1999.
In May 1999, the Company negotiated a $1,167,177 Settlement Agreement with the
State of New York in connection with the audit conducted by the Office of Deputy
Attorney General for Medicaid Fraud Control and the New York State Department of
Social Services. The Settlement Agreement provided for an initial payment of
$200,000, with the balance payable over four years a 9% interest per annum. At
May 31, 2000 the balance due Medicaid was $751,425. [See Legal Proceedings]
Other than the matters described above, the Company does not anticipate any
extraordinary material commitments for capital expenditures for the Company's
current fiscal year.
The Company intends to meet its long-term liquidity needs through available
cash, cash flow and the Credit Facility. To the extent that such sources are
inadequate, the Company will be required to seek additional financing. In such
event, there can be no assurance that additional financing will be available to
the Company on satisfactory terms.
Other than the matters described above, the Company does not anticipate any
extraordinary material commitments for capital expenditures for the Company's
current fiscal year.
16
Inflation and Seasonality
The rate of inflation was insignificant during the year ended May 31, 2000. In
the past, the effects of inflation on personnel costs have been offset by the
Company's ability to increase its charges for services rendered. The Company
anticipates that it will be able to continue to do so in the near future. The
Company continually reviews its costs in relation to the pricing of its
services.
The Company's business is not seasonal.
Forward Looking Statements
Certain statements in this report on Form 10-K constitute"
forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by
their inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward-looking statements
are based on the Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward- looking statements. The potential risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations include the impact of further changes in the Medicare
and/or Medicaid reimbursement systems, including any changes to the current IPS
and/or the ultimate implementation of a prospective payment system; government
regulation; health care reform; pricing pressures from third-party payor,
including managed care organizations; retroactive Medicare audit adjustments;
and changes in laws and interpretations of laws or regulations relating to the
health care industry.
GOVERNMENT REGULATION. As a home health care provider, the Company is subject to
extensive and changing state and federal regulations relating to the licensing
and certification of its offices and the sale and delivery of its products and
services. The federal government and Medicare fiscal intermediaries have become
more vigilant in their review of Medicare and Medicaid reimbursements to home
health care providers generally, and are becoming more restrictive in their
interpretation of those costs for which reimbursement will be allowed to such
providers. Changes in the law and regulations as well as new interpretations
enforced by the relevant regulatory agencies could have an adverse effect on the
Company's operations and the cost of doing business.
THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed
for its services primarily by the Medicare/Medicaid programs, insurance
companies, managed care companies and other third-party payor, the
implementation of alternative payment methodologies for any of these payor could
have an impact on revenues and profit margins. Generally, managed care companies
have sought to contain costs by reducing payments to providers. Continued cost
reduction efforts by managed care companies could adversely affect the Company's
results of operations.
HEALTH CARE REFORM. In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("B.B.A."), resulting in
significant changes to cost based reimbursement for Medicare home health care
providers. Although the new legislation enacted by Congress retains a cost based
reimbursement system, the cost limits have been reduced for fiscal years which
began on or after October 1,1997 and a new per-beneficiary limit is effective
for fiscal years which began after such date. The B.B.A. provides two-payment
systems -- an IPS that is effective for the Company beginning January 1, 1998
until the adoption of the successor payment system that is a new prospective
payment system tentatively scheduled to begin in late 2000. Although the Company
has discontinued Medicare operations and has minimal direct Medicare revenue,
future changes in Medicare reimbursement could impact revenues associated with
the Company's subcontract relationships with Medicare Certified Home Health
Agencies in New York and New Jersey. The Company cannot quantify the full effect
of proposed anticipated Medicare reimbursement changes on the Company's future
performance because certain components of the new reimbursement methodology have
not been fully quantified and finalized at this point in time.
As Congress and state reimbursement entities assess alternative
health care delivery systems and payment methodologies, the Company cannot
predict which additional reforms may be adopted or what impact they may have on
the Company. Additionally, uncertainties relating to the nature and outcomes of
health care reforms have also generated numerous realignments, combinations and
consolidations in the health care industry that may also have an adverse impact
on the
17
Company's business strategy and results of operations. The Company expects
continued industry consolidation.
BUSINESS CONDITIONS. The Company must continue to establish and maintain close
working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects as
consolidation occurs that competition will intensify in future periods given the
increasing market demand for the type of services offered and the necessity to
maximize service volume due to anticipated operating margin decline.
ATTRACTION AND RETENTION OF EMPLOYEES. Maintaining quality managers and branch
administrators will play a significant part in the future success of the
Company. The Company's professional nurses and other health care personnel are
also key to the continued provision of quality care to the Company's patients.
The health care industry in general is experiencing both a professional and
paraprofessional shortage. The possible inability to attract and retain
qualified skilled management and sufficient numbers of credentialed health care
professionals and para-professionals could adversely affect the Company's
operations and quality of service.
18
STAR MULTI CARE SERVICES, INC.
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 2000
STAR MULTI CARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----------
Independent Auditors' Report F-2
Consolidated balance sheets as of May 31, 2000 and 1999 F-3
Consolidated statements of operations for the three
years ended May 31, 2000 F-4
Consolidated statement of shareholders' equity
for the three years ended May 31, 2000 F-5
Consolidated statements of cash flows for the three
years ended May 31, 2000 F-6
Notes to consolidated financial statements F-7 - F-20
F-1
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
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
May 31,
------------------------------------
ASSETS (Note 6) 2000 1999
------ -------------- --------------
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
-------------- --------------
11,771,843 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
============== ==============
See notes to consolidated financial statements
F-3
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
May 31,
--------------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
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
========= ========= =========
See notes to consolidated financial statements
F-4
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Preferred Stock
------------------ ---------------
Par Par Paid in Subscription
Shares Value Shares Value Capital Receivable Deficit
--------- ------- ------ ----- ----------- ------------ ------------
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)
========= ======= ====== ===== =========== ============ ============
Treasury Stock
--------------------- Total
Shareholders'
Shares Value Equity
------- ---------- -------------
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
======= ========== =============
See notes to consolidated financial statements
F-5
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
May 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
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
============= ============= =============
See notes to consolidated financial statements
F-6
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
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:
Years Ended May 31,
--------------------------------------------------------
2000 1999 1998
------------- -------------- ---------------
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)
============= ============== ===============
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
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
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:
May 31,
-----------------------------------
2000 1999
------------- -------------
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
============= =============
4. Intangible Assets:
Intangible assets are as follows:
May 31,
Amortization ------------------------------------
Period 2000 1999
---------------- -------------- --------------
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
============== ==============
F-10
5. Accrued Expenses:
Accrued expenses are as follows:
May 31,
------------------------------
2000 1999
---------- -----------
Medicaid settlement (a) $ 230,000 $ 242,000
Professional fees