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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 FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT SUBJECT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________.
Commission File Number: 0-11380
STAFF BUILDERS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 11-2650500
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1983 MARCUS AVENUE, LAKE SUCCESS, NY 11042
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 358-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [ ]
The aggregate market value of the voting stock (Class A and Class B Common
Stock, assuming conversions of Class B Common Stock into Class A Common Stock on
a share for share basis) held by non-affiliates of the registrant based on the
closing price of such stock on May 28, 1999, was $9,578,978.
The number of shares of Class A Common Stock and Class B Common Stock
outstanding on May 28, 1999 was 23,311,035 and 308,353 shares, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
GENERAL
Staff Builders, Inc. ("Staff Builders" or the "Company") is a Delaware
corporation which was incorporated in New York in 1978 and reincorporated in
Delaware in May 1983. Unless the context otherwise requires, all references to
the "Company" include the Company and its subsidiaries. The Company is a leading
national provider of home health care and supplemental staffing services.
SPIN-OFF TRANSACTION
On March 22, 1999, the Company's Board of Directors approved a plan to
separate its home health care business from its supplemental staffing business
and to create a separate, publicly-traded company engaged exclusively in
providing home health care services. To accomplish this separation of its
businesses, the Company's Board of Directors established a new, wholly-owned
subsidiary, Tender Loving Care Health Care Services, Inc. ("TLC"), which will
acquire 100% of the outstanding capital stock of the Staff Builders subsidiaries
engaged in the home health care business. The spin-off will be effected through
a pro rata distribution to Staff Builders' stockholders of all the shares of
common stock of TLC owned by Staff Builders. The distribution will be made by
issuing one share of TLC common stock for every two shares of Staff Builders
common stock outstanding on the record date of the spin-off. Based upon the
23,619,388 shares of Staff Builders common stock outstanding on May 28, 1999,
the Company estimates that 11,809,694 shares of TLC common stock will be
distributed to holders of Staff Builders common stock. Staff Builders'
supplemental staffing business will remain with Staff Builders. The completion
of the spin-off is subject to the satisfaction of certain conditions, including
obtaining certain regulatory approvals and bank financing for each of Staff
Builders and TLC.
The Board of Directors believes that the spin-off is in the best
interests of Staff Builders and its stockholders. One of the principal benefits
of the spin-off should be to create a separate and distinct identity for the
supplemental staffing business of Staff Builders. This separation should allow
financial analysts and institutional investors to better understand that
business. It also should enhance Staff Builders' ability to obtain financing
outside an environment of tighter government regulation of the home health care
industry and reduced government reimbursement for the provision of home health
care services.
On April 14, 1999, the Company caused TLC to file a Registration
Statement on Form 10 with the Securities and Exchange Commission to register the
shares of TLC common stock to be issued in the spin-off under the Securities
Exchange Act of 1934, as amended.
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HOME HEATH CARE BUSINESS
GENERAL
The Company is a leading national provider of home health care
services. The Company has 125 home health care locations in 26 states and the
District of Columbia, and has master franchise licenses in Japan, Spain and
Brazil. Staff Builders owns and operates 71 of its offices and 54 of these
offices are operated by 31 licensees.
OPERATIONS
The Company provides a wide range of home health care services. Its
licensed personnel provide skilled nursing services, including cardiac care,
pulmonary management, wound management, maternal health, behavioral health care,
infusion therapy administration, hospice support, and extensive patient and
family education. Additional professional services include physical therapy,
occupational therapy, speech therapy and medical social services. The Company
also provides paraprofessional home health aide services and other unlicensed
personnel services to assist patients with activities of daily living.
Home health care service revenues were $310.3 million, $451.1 million
and $436.6 million in the fiscal year ended February 28, 1999 ("fiscal 1999"),
the fiscal year ended February 28, 1998 ("fiscal 1998") and the fiscal year
ended February 28, 1997 ("fiscal 1997"), respectively. Approximately 69% of the
Company's home health care service revenues in fiscal 1999 were generated by
licensees as compared to 87% in fiscal 1998. As of February 1999, the portion of
revenues generated by licensees approximated 61%.
Clients' requests for home health care are typically received at a
local office and all skilled home health care services are provided pursuant to
the orders of the patient's physician. Generally, after a referral is received,
the director of clinical services will schedule a physical assessment in order
to identify the patient's care needs. Home care services are rendered in
accordance with the plan of care as prescribed by a physician.
During the intake process, the Company contacts third-party payors to
confirm the extent of Medicare or Medicaid eligibility or insurance coverage.
The primary payment sources for home health care are Medicare, Medicaid,
insurance, individuals, and state and local government health programs.
In five locations, the Company operates hospices in accordance with the
Federal Medicare program. Hospice services include a full range of medical and
nursing services as well as spiritual and emotional support, specialized pain
management and bereavement counseling with interdisciplinary support for
patients and their families, where patients are expected to live less than six
months.
The quality and reputation of the Company's health care personnel
and operations is critical to the Company's success. The Company
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maintains uniform quality assurance programs for its home health care
operations, including its consumer hotline and service evaluation system in
which patients are asked by the Company to rate the quality of care provided.
These programs are administered at the national and local levels. The Company's
clinical staff conduct periodic on-site reviews to determine compliance with all
regulations.
In addition to the on-site reviews conducted by Company personnel, the
Company seeks to maintain and improve the quality of its home health care
operations by seeking accreditation from the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"). Currently, the Company has approximately
100 offices which have been accredited by JCAHO, of which 31 were accredited
with commendation.
The Company has developed the Staff Builders Clinical Outcomes and
Resource Evaluation System ("SCORES"TM). SCORES is a clinical management process
that identifies and analyzes patient potential for variances upon admission to
home care, customizes a transdisciplinary plan of care and quantifies clinical
outcomes and resource utilization.
The Company has developed a number of proprietary disease-specific
programs designed to be used in the home. These programs include the areas of
asthma, cardiac care, diabetes, hospice, maternity, behavioral health,
rehabilitative services, pain management and wound care.
The Company offers its home health care services on a national and
local basis. Each office seeks to retain strong local identification in order to
best respond to prevailing market conditions and cultivate local referrals. The
Company provides support including brochures, training seminars and materials to
assist in developing patient care programs as needed within each community.
Local efforts principally involve communicating with hospital discharge
planners, nursing management, physicians and other individuals at hospitals,
nursing homes and other health care facilities to advise them of the array of
services available from the Company.
Due to changes in health care reimbursement, insurance companies and
health maintenance organizations have become more involved in directing services
for those to whom they provide coverage. The Company has sought to adapt to the
increased role of these organizations in patient referrals. The Company provides
services to members of health maintenance organizations or policy holders of
insurance companies at negotiated rates. The Company believes that some of these
organizations, as a result of their strict guidelines, centralized
administration and geographic diversity, retain the Company because of its
ability to consistently offer quality services on a national basis. Moreover,
the Company believes that its ability to offer patients a wide variety of home
health care services will provide it with a competitive edge in obtaining
additional business from these organizations.
The Company's information systems provide for the input of information
at the branch office (including payroll, billing and other administrative
functions) for its home health care operations which connects directly to its
corporate headquarters in Lake Success, NY.
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Generally, bills are rendered, payroll is processed and collections are received
at the corporate headquarters or at lock-boxes.
REIMBURSEMENT
Revenues generated from the Company's home health care services are
paid by insurance carriers, health maintenance organizations, individuals,
Medicare, Medicaid and other state and local government health insurance
programs. During fiscal 1999, approximately 19% of the Company's home health
care revenues represented reimbursement from insurance carriers, health
maintenance organizations and individuals; 43% came from Medicare; and 36% came
from Medicaid and other local government health programs. Medicare is a
Federally funded program available to persons with certain disabilities and
persons of age 65 or older. Medicaid, a program jointly funded by Federal and
state governments, and other local government health care programs is designed
to pay for certain health care and medical services provided to low income
individuals without regard to age.
The Company has 87 offices in 26 states and the District of Columbia
which are certified to provide home health care services to Medicare patients.
Medicare reimburses the Company for covered items and services at the lower of
the Company's cost, as determined by Medicare regulations, or cost limits
established by the Federal government. The Company submits all Medicare claims
to a single insurance company acting as a fiscal intermediary which processes
claims on behalf of the Federal government. The Balanced Budget Act of 1997 (the
"BBA") resulted in significant changes to cost based reimbursement for Medicare
home health care providers. Although the BBA retains a cost based reimbursement
system, the cost limits were reduced and new per-beneficiary limits were set for
home health care providers. The BBA provides for an interim payment system
("IPS") which became applicable for the Company on March 1, 1998 and will remain
in effect until the adoption of a new prospective payment system scheduled to be
effective for all home health care agencies on October 1, 2000. The Health Care
Financing Administration ("HCFA") committed to this revised schedule in a report
presented to Congress dated February 4, 1999. The effect of the changes under
IPS is to reduce the limits for the amount of costs that are reimbursable to
home health care providers under the Medicare program. Recently, management
moved proactively to prepare the Company for the impact of IPS and for long-term
growth. As a result, the Company implemented a corporate-wide restructuring and
cost reduction program.
As of February 28, 1999, the Company has 50 offices which participate
in Medicare's periodic interim payments ("PIP") program. Under PIP, the Company
receives regular bi-weekly payments based on past Medicare activity of
participating offices, which are adjusted quarterly for actual levels of
activity. As presently amended by the BBA, the PIP program will terminate for
all home health care agencies on or after October 1, 2000. Offices which are not
participating in the PIP program receive payment for services upon submission of
individual claims.
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The Company is also reimbursed for covered items by Medicaid. The
Company has approximately 85 home health care offices in 22 states and the
District of Columbia which are approved to provide services to Medicaid
recipients. Medicaid reimbursement procedures vary from state to state.
GOVERNMENT REGULATION
The Company's home health care business is subject to extensive and
frequently changing regulation by Federal, state and local authorities. This
regulation includes state licensing, obtaining a Certificate of Need ("CON") in
certain states, and Federal and state eligibility standards for certification as
a Medicare and Medicaid provider. The imposition of more stringent regulatory
requirements or the denial or revocation of any license or permit necessary for
the Company to operate in a particular market could have a material adverse
effect on the Company's operations.
The Federal government and all states in which the Company currently
operates regulate various aspects of the Company's business. HCFA must certify
home health agencies that seek to receive reimbursement for services from
Medicare. As conditions of participation in the Medicare program, HCFA requires,
among other things, the satisfaction of certain standards with respect to:
personnel and their supervision; services and the documentation thereof; and the
establishment of a professional advisory group that includes at least one
physician, one registered nurse and other representatives from related
disciplines or consumer groups.
Certain states require a provider of home health care services to
obtain a license before rendering services. Some states, including many of the
states in which the Company presently operates, maintain CON legislation
requiring an office to file an application that must be approved by the
appropriate state authority before certain health care services can be provided
in an area. Approval is dependent upon, among other things, good character and
competence, financial capability and a demonstration that the need exists for
such services. In states having a CON requirement, HCFA will grant Medicare
certification to an office (so that the office may provide services covered by
Medicare) only if the office has obtained a CON.
New York State requires the approval by the Public Health Council of
the New York State Department of Health ("NYPHC") of any change in the
"controlling person" of an operator of a licensed health care services agency
(an "LHCSA"). Control of an entity is presumed to exist if any person owns,
controls or holds the power to vote 10% or more of the voting securities of such
entity. A person seeking approval as a controlling person of an operator of a
LHCSA must file an application for NYPHC approval within 30 days of becoming a
controlling person, and pending a decision by the NYPHC, such person may not
exercise control over the LHCSA. The Company has 10 offices in New York State
which are LHCSAs. Such offices accounted for approximately 11% of the Company's
revenues in fiscal 1999. If any person should become the owner or holder, or
acquire control, of the right to vote 10% or more of the common stock of the
Company, such person could not exercise control of
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the Company's LHCSAs until such ownership, control or holding has been approved
by the NYPHC.
The Company's home health care revenues generated from Medicare,
Medicaid and other local government programs were $247 million, $376 million and
$361 million in fiscal 1999, 1998 and 1997, respectively.
FRANCHISE PROGRAM
The Company's home health care business utilizes a unique form of
franchising whereby it licenses independent companies or contractors
("licensees") to represent the Company within a designated territory using the
Company's trade names and service marks. Of the Company's 125 field offices, 54
are operated by 31 home health care licensees pursuant to the terms of a
franchise agreement with the Company. The Company's franchise program has
permitted it to quickly penetrate new markets and realize economies of scale.
The program also has enabled the Company to maintain stable local management by
reducing personnel turnover.
The Company owns all necessary health care related permits and licenses
and, where required, CON's for operation of home health care franchise offices.
The Company employs all direct service employees. The licensees recruit direct
service personnel for the Company, solicit orders and assign Company personnel,
including registered nurses, therapists and home health aides, to service the
Company's clients. The Company pays and distributes the payroll for the
Company's direct service personnel, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The licensees are responsible for providing an office and paying
related expenses for administration including rent, utilities and costs for
administrative personnel. The Company includes all revenues and related direct
costs in its consolidated service revenues and operating costs.
Generally, the Company grants a ten year initial franchise term. A
licensee has the option to extend for an additional five-year term, subject to
the licensee adhering to the operating procedures and quality control standards
established by the Company. The initial license fee is currently $29,500. When
converting independently owned agencies into licensees, the Company negotiates
the terms of the conversion on a transaction-by-transaction basis depending on
the size of the agency, the nature of the agency's business and the location of
the agency.
The Company pays a distribution or commission to its domestic home
health care licensees based upon a defined formula of gross profit generated.
Generally, the Company pays the licensee 60% of the gross profit attributable to
the non-Medicare operations of the franchise. The Company adjusts the payment to
the licensees related to Medicare operations for cost limitations and
reimbursement of allowable Medicare costs. For fiscal 1999, 1998 and 1997, total
home health care licensee distributions of approximately $38.3 million, $84.1
million and $82.4 million, respectively, were included in the Company's general
and administrative expenses.
The Company has an international home health care franchise program
using the Staff Builders name and service marks. The Company has a
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master license agreement with licensees in Japan and Brazil under which
royalties are paid to the Company by the licensee for certain services provided
by the Company for the transfer of home health care technology from the Company
to the licensee. The term of the Japanese master license agreement is five years
with a five-year additional term which may be exercised by the Company. The
existing agreement in Japan will expire on October 27, 2002. The Company
received an initial license fee of $1.2 million under the terms of this
Agreement. In the case of the Brazilian master license agreement, it has a
25-year term with an additional ten-year renewal term exercisable by the
licensee. The Company received a master license fee of $80,000 from its
Brazilian licensee. The Company also has a separate master license in Spain.
The Company is currently not offering any home health care franchises.
However, if in the future the Company should offer and sell franchises, such
offers and sales will be subject to Federal and certain state franchise laws. If
the Company fails to comply with the franchise laws, rules and regulations of a
particular state relating to offers and sales of franchises, the Company will be
unable to engage in offering or selling franchises in or from such state. To
offer and sell franchises, the Federal Trade Commission requires the Company to
furnish to prospective licensees a current franchise offering disclosure
document. The Company has used a Uniform Franchise Offering Circular ("UFOC") to
satisfy this disclosure obligation. The Company must update its UFOC annually or
upon the occurrence of certain material events. If a material event occurs, the
Company must stop offering and selling franchises until the UFOC is updated. In
addition, certain states require the Company to register or file its UFOC with
such states and to provide prescribed disclosures. The Company is also subject
to a number of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship.
PERSONNEL; RECRUITING AND TRAINING
The Company's home health care division has approximately 30,000
individuals who render home health care services and employs approximately 1,600
full time administrative and management personnel. Approximately 1,200 of these
administrative employees are located at the branch offices and 400 are located
at the corporate headquarters in Lake Success, NY.
The Company screens caregivers to ensure that they meet all licensing
requirements and the Company's eligibility standards. This screening process
includes skills testing, reference checking, professional license verification,
personal interviews and a physical examination. In addition, new employees
receive an orientation on the Company's policies and procedures prior to their
initial assignment. The Company is not a party to any collective bargaining
agreement and considers its relationship with its employees to be satisfactory.
The home health care division and its licensees recruit home health
care principally through referrals from other personnel, newspaper
advertisements and direct mail solicitations to nursing, paramedical and other
recruiting sources. A large percentage of these personnel are employed only when
needed, and are paid for the actual number of hours worked or visits made.
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The Company has standardized procedures for recruiting, interviewing,
testing and reference checking prospective personnel. All nurses and therapists
must be licensed by the appropriate licensing authorities. Substantially all
unlicensed health care personnel must be certified either through a
state-approved certification program or must have had previous experience in
providing direct patient care in a hospital, nursing home or in the home. After
selection, applicants receive instruction in the Company's procedures and
policies. Subsequently, they are included on a list of personnel eligible for
placement. The Company has an in-service training program for its home health
personnel which satisfies the requirements for certification required by certain
states.
In addition to health care personnel recruited and trained by the
Company, the Company contracts with third parties to meet its personnel
requirements. These contracted personnel must meet the same qualifications
required of Company personnel.
INSURANCE
The Company maintains various insurance policies which cover its
businesses. The Company's employees make decisions which can have significant
medical consequences to the patients in their care. As a result, the Company is
exposed to substantial liability in the event of negligence or wrongful acts of
its personnel. The Company maintains medical professional and general liability
insurance providing for coverage in a maximum amount of up to $26 million per
claim, subject to a limitation of $26 million for all claims in any single year.
Also, the Company maintains errors and omissions and professional liability
insurance. In addition, franchisees are required to maintain general liability
insurance providing for coverage of at least $1 million.
COMPETITION
Although there are national home health care companies, the industry is
highly fragmented and competitors are often localized in particular geographical
markets. In general, there has been a trend toward consolidation in the health
care industry which is expected to continue, especially in light of the Federal
Medicare program's reductions in cost limits and establishment of per
beneficiary limits. The Company expects that it will continue to compete with
the national organizations as well as local providers including home health care
providers owned or otherwise controlled by hospitals. Some of the entities with
which the Company competes have substantially greater resources. In addition,
the Company's operations depend, to a significant degree, on its ability to
recruit qualified health care personnel and the Company faces competition from
other companies in recruiting. Generally, there is a shortage of qualified
health care personnel and, as a result, the Company, from time to time, has
experienced difficulties in obtaining health care personnel to meet demands for
services.
The Company believes that prompt service, price, quality and range of
services offered are the principal competitive factors which enable it to
compete effectively. The Company believes that its rate structure
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is competitive with others in the industry. During fiscal 1999, no single client
or group contract of the home health care business accounted for ten percent or
more of the Company's home health care revenues.
SERVICE MARKS
The Company believes that its service marks, Staff Builders(R),
Staffline(R), the stick figure logo and Tender Loving Care(R) have significant
value and are important to the marketing of its home health care services. These
names and marks are registered as service marks with the United States Patent
and Trademark Office. The registration of the Staff Builders(R) service mark
will remain in effect through February 14, 2009, with respect to home care and
hospital staff relief, and through June 28, 2006 with respect to temporary
personnel for business and industry. The registration of the Staffline(R)
service mark will remain in effect through August 1, 2009. The registration of
the stick figure logo service mark will remain in effect through August 16,
2008. The registration of the Tender Loving Care(R) service mark will remain in
effect through January 8, 2005. Each of these marks is renewable for additional
ten-year periods, provided the Company continues to use them in the ordinary
course of business. The Company also owns other federally registered marks for
names used in connection with its home health care business.
SUPPLEMENTAL STAFFING BUSINESS
GENERAL
The Company's supplemental staffing services are provided through its
wholly-owned subsidiary, ATC Healthcare Services, Inc. ("ATC"), which provides
medical staffing services (the "Medical Staffing Division"), and the Company's
81.8% owned subsidiary, Chelsea Computer Consultants, Inc. ("Chelsea"), which
provides information technology staffing services (the "IT Staffing Division").
The Company acquired ATC in July 1994. In September 1996, the Company
purchased 20.9% of the outstanding common stock of Chelsea and
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purchased an additional 60.9% in October 1997. ATC and Chelsea (together with
their subsidiaries) comprise the Company's supplemental staffing business.
OPERATIONS
Supplemental staffing revenues were $125.1 million, $74.5 million and
$42.8 million in fiscal 1999, 1998 and 1997, respectively. Revenue increased
because of acquisitions, granting of additional licenses and the consolidation
of revenues of the IT Staffing Division.
The Company provides medical supplemental staffing to health care
facilities through its network of 58 offices in 27 states, of which 54 are
operated by 41 licensees and four are owned and operated by the Company. The
Medical Staffing Division offers a skills list of qualified health care
associates in over 55 job categories ranging from the highest level of specialty
nurses including critical care, neonatal and labor and delivery, to medical
administrative staff, including third party billers, administrative assistants,
claims processors, collection personnel and medical records clerks. The nurses
provided to clients include registered nurses, licensed practical nurses and
certified nursing assistants. Allied health staffing includes mental health
technicians, a variety of therapists (including speech, occupational and
physical), radiology technicians and phlebotomists.
Clients rely on the Company to provide a flexible labor force to meet
fluctuation in census and business and help the facility acquire a specifically
needed skill. The Company's medical staffing professionals also fill in for
absent employees and enhance a client's core staff with temporary workers during
peak seasons.
Clients benefit from their relationship with the Company because of its
expertise in providing properly skilled medical staffing employees to a facility
in an increasingly tight labor market. The Medical Staffing Division has
developed a skills checklist to provide even more information concerning a
prospective employee's skill level. Clients also benefit from no longer having
to concern themselves with the payment of employee wages, benefits, payroll
taxes, workers compensation, and unemployment insurance.
The Medical Staffing Division also operates a Travel Nurse Program
whereby qualified nurses, physical therapists and occupational therapists are
recruited on behalf of clients who require such services on a long-term basis.
These individuals are recruited from foreign countries, primarily Great Britain,
to perform services on a long-term basis in the United States.
The Medical Staffing Division contracts with a management entity for
the recruitment of the foreign nurses. The management entity must arrange for
the nurses' and therapists' immigration, licensing certifications as well as
their living accommodations while employed in the United States.
Presently, there is a freeze on visa activity for foreign nurses
because the program for the admission of foreign nurses expired in the fall of
1995. Recently, the House of Representatives passed a bill to
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authorize work visas for up to 500 qualified foreign nurses annually for four
years and sent the bill to the Senate.
When the Company first acquired the Medical Staffing Division in 1994,
its client base was composed predominantly of hospitals. Currently, the Medical
Staffing Division has expanded its client base to include nursing homes,
physician practice management groups, managed care facilities, insurance
companies, surgery centers, community centers and schools. By diversifying its
client list, the Company lessens the risk that regulatory or industry sector
shifts in staffing usage will materially affect the Company's medical staffing
revenues.
Approximately 20% of the supplemental staffing revenues are
attributable to an ATC franchise operation located in Long Island, NY operated
by a corporation, the majority of the stock of which is owned by two family
members of one of the Company's executive officers.
The Company, through its IT Staffing Division, provides trained
information technology ("IT") professionals to clients who lack the in-house
personnel or skills necessary to accomplish IT objectives. The demand for those
professionals has increased dramatically due to rapid technological change,
substantial economic growth and mass change issues, such as the adoption of a
common currency in the European Union and the Year 2000 issue.
The IT Staffing Division provides flexible staff augmentation services,
generally for client-managed projects, to fill short and long-term or
specialized technology skill set needs. Because the IT Staffing Division has a
pool of full-time employees, it can generally provide qualified candidates to
clients within 24 hours of receiving requests for staffing. The Company provides
a "vendor-on-premises" at seven sites where large numbers of its IT
professionals are working, and plans to provide more in the future. The
"vendor-on-premises" acts as a liaison between the client and the Company, and
is trained to recognize areas where improvements could be made in the service to
the IT Staffing Division's clients, and to act quickly to effectuate the
improvements.
The IT Staffing Division's clients include financial service,
communications, manufacturing, consulting intermediaries and other clients that
outsource IT functions to third party vendors. The Company serves clients in
diverse industries which helps mitigate cyclical effects in any one industry or
market. The IT Staffing Division derives an additional level of diversification
by working with many different operating divisions within a given client.
During fiscal 1999, no single client of the supplemental staffing
business accounted for more than 10% of the revenues of the Company's
supplemental staffing business.
FRANCHISE PROGRAM
The Medical Staffing Division's franchise program is one of the core
differentiating factors between the Company and most of its
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competition. The program grants each franchisee, or licensee, a vested interest
in the success of both his or her individual branch as well as the Company as a
whole. After paying an initial franchise fee of $19,500 in exchange for his or
her own exclusive territory determined based on demographic, economic and
competitive studies, a franchise owner generally is paid a royalty effectively
equal to approximately 60% of gross profit. The licensee has the right to
develop the territory to its fullest potential. For example, a licensee can open
a satellite office in the area if he believes there will be an appropriate
return on the investment. The franchise owner also handles marketing and
recruiting within the assigned territory. The corporate office works closely
with the licensee to ensure the best approach and strategy for the franchise and
the profitability of the location. All locations must be approved by the Company
prior to signing a lease. Various management reports are provided to the offices
to assist them with ongoing analysis of their medical staffing operations.
For fiscal 1999, 1998 and 1997, total medical staffing licensee
distributions of approximately $12.3 million, $8.8 million and $6.2 million,
respectively, were included in the Company's general and administrative
expenses.
The Company grants a ten-year initial franchise term. The licensee has
an option to extend the term for two additional five-year renewal terms, subject
to the licensee adhering to the operating procedures and conditions for renewal
set forth in the franchise agreement. When the Company converts an independently
owned medical staffing business into a franchise, the Company negotiates the
terms of the conversion on a transaction-by-transaction basis, depending on the
size of the business and the location.
Sales of franchises are subject to compliance with Federal and certain
state franchise laws. If the Company fails to comply with the franchise laws,
rules and regulations of the particular state relating to offers and sales of
franchises, the Company will be unable to engage in offering or selling
franchises in or from such state. To offer and sell franchises, the Federal
Trade Commission requires the Company to furnish to prospective licensees a
current franchise offering disclosure document. The Company has used a UFOC to
satisfy this disclosure obligation. The Company must update its UFOC annually or
upon the occurrence of certain material events. If a material event occurs, the
Company must stop offering and selling franchises until the UFOC is updated. In
addition, certain states require the Company to register or file its UFOC with
such states and to provide prescribed disclosures. The Company is required to
obtain an effective registration of its franchise disclosure document in New
York State. Presently, the Company is filing a response to a comment letter sent
by the State of New York. The Company expects approval by New York immediately
upon its receipt and review of the Company's response to the comment letter.
Approval by New York State will enable the Company to offer the medical staffing
franchise in 38 states.
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PERSONNEL; RECRUITING AND TRAINING
The Company's supplemental staffing division employs approximately
4,000 individuals who render medical staffing services, approximately 380
individuals who render information technology staffing services and
approximately 140 full time administrative and management personnel.
Approximately 86 of these administrative employees are located at the branch
offices and 54 are located at the supplemental staffing administrative offices
in Atlanta, Georgia and New York City, New York.
The Company screens supplemental staffing personnel to ensure that they
meet all eligibility standards. This screening process includes skills testing,
reference checking, professional license verification, personal interviews and a
physical examination. In addition, new employees receive an orientation on the
Company's policies and procedures prior to their initial assignment. The Company
is not a party to any collective bargaining agreement and considers its
relationship with its supplemental staffing employees to be satisfactory.
It is essential to recruit and retain a qualified staff of medical
staffing associates who are available to be placed on assignment as needed.
Besides advertising in the local classifieds and conducting local public
relations projects, the Company's Medical Staffing Division offers a variety of
benefit programs to assist in recruiting high quality medical staffing
professionals. This package provides employees access to medical, dental, life
and disability insurance, a 401(k) plan, opportunities for Continuing Education
Credits ("CEUs"), partnerships with various vendors for discount programs (e.g.,
uniforms, vacations and cruises, credit cards, appliances and cars), recognition
programs and referral bonus programs. In addition, the Company provides its
Medical Staffing Division licensees a full-service human resources department to
support the Medical Staffing Division offices with policies and procedures as
well as the day-to-day issues of the field staff.
As of February 28, 1999, the IT Staffing Division employed
approximately 380 IT professionals in the United States, over 90% of whom were
recruited from the Philippines, Singapore, Australia, New Zealand and the Middle
East.
Because the Company's IT staffing business involves the delivery of
professional IT services, its success depends upon its ability to attract,
motivate and retain highly skilled individuals who possess the technical skills
and experience necessary to deliver the services. The Company's IT Staffing
Division recruits IT professionals globally, principally through traditional
advertising in newspaper and trade publications, the internet, job fairs,
networking through seminars, user group meetings, local recruiting symposia at
overseas hotels, referrals from other personnel and an ongoing data base of
applicants.
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Management from the IT Staffing Division's New York office makes
several international trips per year for recruiting purposes. The Company uses
its Manila office in the Philippines, and intends to use other foreign offices
when opened, to follow up on contacts initiated through the above-mentioned
methods. In addition, the Company employs a local agent in Manila as a
recruiting coordinator who helps to identify possible candidates and recruits
and interviews these individuals.
Once the IT professionals arrive in the U.S., they frequently train on
a work site (free of charge to the client) for a one to two week period before
commencing work at the site. In addition, the IT Staffing Division provides
training programs at the Company's offices in New York City using manuals and
the Company's staff. Through its Quality Management System, the IT Staffing
Division monitors its IT professionals' performance and aids their development
as necessary. Clients evaluate individual IT professionals three months after
they commence work, and after that, annually. If an IT professional gets a low
rating in, for example, communication skills, the IT Staffing Division may send
the IT professional to English language courses. The IT Staffing Division
employs an instructor to provide ongoing English training one to two times per
week after working hours.
In addition to their training, IT professionals receive a strong
benefits package from the Company (relocation expenses averaging $7,500,
including a $3,000 cash advance; medical, dental, long and short-term disability
and life insurance; legal representation; temporary housing; 401-K plan;
internet access; laptop computer; assistance procuring credit cards; and loans
to relocate families from their countries of origin). Management believes that
the hiring of foreign-born IT professionals leads to longer retention periods.
The retention period is longer because the Company obtains H-1B visas for its
employees, and if the foreign employees wish to work for another employer in the
United States they must obtain another visa, a lengthy and cumbersome process.
See "Immigration Laws".
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Qualified IT professionals are in great demand worldwide and are likely
to remain a limited resource for the foreseeable future. There can be no
assurance that qualified IT professionals will continue to be available to the
Company in sufficient numbers, that the Company will be successful in retaining
current or future employees, or that the cost of employing such IT professionals
will not increase due to shortages. Failure to attract or retain qualified IT
professionals in sufficient numbers could have a material adverse effect on the
IT Staffing Division's business, operating results and financial condition.
SALES AND MARKETING
The Company begins a marketing education program as soon as a new
medical staffing office becomes operational. This training details the entire
sales process. The program stresses sales techniques, account development and
retention as well as basic sales concepts and skills. Through interactive
lectures, role plays and sales scenarios, participants are immersed in the sales
program.
To provide ongoing sales support, the Company furnishes medical
staffing field offices with a variety of tools. A corporate representative is
continuously available to help with prospecting, customer identification and
retention, sales strategies, and developing a comprehensive office sales plan.
In addition, various guides and brochures have been developed to focus a
branch's attention to critical areas in the sales process. The Company has
developed a web page that provides information to clients, located at
www.atchealthcare.com.
Each licensee in the Medical Staffing Division is responsible for
generating sales in his or her territory. Licensees are taught to do this
through a variety of methods in order to diversify their sales conduits. The
primary method of seeking new business is to call on health care facilities in
the local area. Cold calls and referral are often used to generate leads.
Advertising in yellow page phone books is also utilized. Once granted an
interview, the licensee is instructed to emphasize the key highlights of the
Company.
The Company focuses its IT marketing efforts on businesses with
significant IT budgets and recurring software development needs. Sales methods
include an internet site containing pictures, voice recordings and resumes of IT
professionals (with the possibility for clients to set up interviews); weekly
facsimile transmittals of lists of available IT professionals to 100 users; and
direct calls to clients based on known client needs. Clients also sometimes
accompany the Company's personnel on international recruiting trips in order to
select IT professionals. These methods, along with the possibility for clients
to have telephone and videoconferenced interviews with IT professionals around
the world, allow the Company to "pre-sell" IT professionals to the clients. The
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Company also believes that its pricing structure is lower than average for the
IT staffing industry, due in part to its low overhead, and that this pricing
structure aids the Company's marketing efforts.
The Company gathers market research by communicating with employees,
clients and consultants and by monitoring business and industry sources. These
resources also serve as a prospecting and networking mechanism for locating key
decision makers, securing quality referrals and introductions for the IT
Staffing Division's account team and assessing the competitive circumstances and
barriers to entry at prospective or established clients.
The Company generally employs a top-down approach to account
penetration and development of its IT Staffing Division. The Company endeavors
to establish contacts with Chief Contracting Officers, human resource directors
and other senior management through professional contacts of the Company's
senior management, through referrals by the Company's existing clients, and
through client contacts who move to new employers.
IMMIGRATION LAWS
The Company recruits its IT professionals on a global basis and,
therefore, must comply with the immigration laws in the countries in which it
operates, particularly the United States. Over 99% of the Company's IT
professionals are citizens of other countries.
Most of the IT professionals who provide services to the Company's
clients are present in the United States on an H-1B temporary work visa. The
Immigration and Naturalization Service ("INS") is authorized under current law
to approve no more than 115,000 new petitions for H-1B status in the Federal
government's fiscal year ending September 30, 1999. As of April 30, 1999,
103,753 petitions have been approved. It is expected that the cap will be
reached before the end of June 1999. After the ceiling is reached, no H-B1 visa
petitions will be approved by the INS until the beginning of the next Federal
fiscal year. If the IT Staffing Division were unable to obtain H-1B permits for
its employees in sufficient quantities or at a sufficient rate, its business,
operating results and financial condition could be materially adversely
affected.
Foreign nationals are only permitted to work in the United States on a
H-1B visa status for six consecutive years. After working in the United States
for that length of time, if the alien has not yet become a lawful permanent
United States resident, the alien must leave the United States. The total time
required for the process of permanent residency can vary significantly and may
take more than three years to complete. Since an alien on an H-1B visa may only
remain in the United States for six years, in those instances where the Company
may have hired an alien after he or she had worked for another company for
several years or where he or she did not pursue permanent residency of several
years, the consultant could reach the end of the allotted six years in H-1B visa
status before the permanent residency application process has been completed. In
addition, although the Company recruits
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IT professionals in the Philippines, Singapore, Australia, New Zealand, and
Middle Eastern countries, residency applications by the sponsoring employer are
limited to national quotas. Therefore, if a high number of residency
applications have been granted for certain nationalities, additional residency
applications might not be available for those groups.
Furthermore, Congress and administrative agencies with jurisdiction
over immigration matters have periodically expressed concerns over the levels of
legal and illegal immigration into the United States. These concerns have often
resulted in proposed legislation, rules and regulations aimed at reducing the
number of work permits that may be issued. Any changes in such laws making it
more difficult to hire foreign nationals or limiting the ability of the Company
to retain foreign employees could require the Company to incur additional
unexpected labor costs and expenses and decrease the Company's number of IT
professionals available to its clients. Any such restrictions or limitations on
the Company's hiring practices could have a material adverse effect on the IT
Staffing Division's business, operating results and financial condition. To date
the Company has not experienced difficulties with the governments of the home
countries from which it recruits IT professionals with regards to emigration
matters. However, any such difficulties (for example, restrictions on
emigration), particularly in the Philippines or Singapore, could have a material
adverse effect on the IT Staffing Division's business.
INSURANCE
The Company maintains errors and omissions insurance for the
supplemental staffing division: medical professional and general liability
insurance providing for coverage in a maximum amount of $26 million per claim,
subject to a limitation of $26 million for all claims in any single year, and IT
staffing errors and omissions insurance of $1 million per claim and $1 million
in the aggregate.
The IT Staffing Division also carries general liability insurance with
aggregate coverage of $2.0 million and a $1.0 million limit per occurrence,
crime insurance including employee dishonesty, theft, disappearance and
destruction with aggregate coverage of $2.0 million, as well as umbrella
coverage of $5.0 million for each occurrence and $5.0 million dollars of
aggregate liability. The Company also maintains fidelity bonds covering general
liability, workers compensation claims, employee theft and in some cases errors
and omissions.
COMPETITION
The medical staffing industry is extremely fragmented, with numerous
local and regional providers nationwide providing nurses and other staffing
solutions to hospitals and other health care providers. As HMOs and other
managed care groups expand, so too must the medical staffing companies that
service those customers. In addition, momentum for consolidation is increasing
among smaller players, often venture capital-backed, who are trying to win
regional and even national accounts. Because the staffing industry is dominated
generally by large national providers that do not specialize in medical
staffing, the Medical Staffing Division management believes that its
specialization
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will give it a competitive edge. In addition, its franchise program gives each
franchisee or licensee an incentive to compete actively in his or her local
marketplace. In addition to the Medical Staffing Division's medical staffing
specialty which services the health care community exclusively, the Company
continues to diversify among the medical staffing services it offers, unlike
many of its small regional competitors who focus on nurse staffing only.
The IT services industry is highly competitive and served by numerous
international, national, regional and local firms, all of which are either
existing or potential competitors of the Company. Primary competitors of the
Company's IT Staffing Division include accounting firms, software consulting and
implementation firms, applications software firms, service groups of computer
equipment companies, general management consulting firms, programming companies
and temporary staffing firms and the internal IT staff of the Company's clients.
The Company believes that the principal competitive factors in the IT services
industry include the range of services offered, cost, technical expertise,
responsiveness to client needs, speed in delivering IT solutions, quality of
service and perceived value. Based on the Company's experience in competitive
situations, the Company believes that it competes favorably with respect to
these factors.
The management of the Company believes that the Company's IT Staffing
Division will distinguish itself from its competitors because of lower overhead,
client charges on a time and material, rather than on a fixed price-based basis.
This reduces the risk that the Company will incur large costs and expenses for
which it will not be paid. The Company further distinguishes itself by employing
all of the Company's IT professionals as the IT Staffing Division does not use
independent contractors, leading to stability in the IT Staffing Division's
workforce and the ability to rapidly fulfill client's requests for staffing.
SERVICE MARKS
The Company believes that its service marks Chelsea Computer
Consultants(R)' and the ATC(R) logo have significant value and are important to
the marketing of its supplemental staffing services. These trademarks are
registered with the United States Patent and Trademark Office. The Chelsea
trademark will remain in effect through April 14, 2008 for use with temporary
employment services providing computer consultants and computer technicians and
other temporary employees proficient with computers. The ATC trademark will
remain in effect through January 9, 2000 for use with nursing care services and
health care services. These marks are each renewable for an additional ten year
period, provided the Company continues to use it in the ordinary course of
business.
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ITEM 2. PROPERTIES
The Company's corporate headquarters consists of approximately 65,000
square feet of leased office space and 8,100 square feet of storage space in
Lake Success, New York. The lease for the corporate headquarters expires on
September 30, 2005 and provides for current annual rent of approximately $1.5
million, which increases annually by three percent. The Company believes that
its headquarters office space is sufficient for its immediate needs and that it
will be able to obtain additional space as needed in the future.
The Company's supplemental staffing business leases its administrative
facilities in Atlanta, Georgia and New York City, New York. The Atlanta office
lease for approximately 11,300 square feet of office space expires on May 31,
2000 and provides for a current annual rent of approximately $156,000.
Approximately 6,000 square feet of office space is sublet to a subtenant
unaffiliated with the Company at an annual rental of approximately $73,000 with
annual increases of 4.5 percent. The New York City offices lease approximately
5,500 square feet of office space. These leases expire on May 31, 2000 and
September 30, 2000 and provide for a current annual rental of $140,000. The
Company believes that its supplemental staffing administrative facilities are
sufficient for its needs and that it will be able to obtain additional space as
needed.
The Company's home health care division leases all of its branch office
locations from landlords unaffiliated with the Company or any of its executive
officers or directors. Most of these are for a specified term although several
of them are month-to-month leases. There are currently 125 home health care
offices including 71 operated by the Company and 54 operated by 31 licensees.
Two of these licensee offices sublease the office space from the Company and the
remaining licensed offices are owned by licensees or are leased by the licensee
from third-party landlords. The Company believes that it will be able to renew
or find adequate replacement offices for leases which are scheduled to expire in
the next twelve months at comparable costs.
The Company's supplemental staffing division leases substantially all
of its branch office locations from landlords unaffiliated with the Company or
any of its executive officers or directors. There are currently 58 supplemental
staffing branch offices including 4 operated by the Company and 54 operated by
41 licensees. One of the supplemental staffing offices operated by the Company
subleases the office space from the home health care division and one licensee
office subleases the office space from the Company. The remaining licensed
offices are owned by licensees or are leased by the licensee from third-party
landlords. The Company believes that it will be able to renew or find adequate
replacement offices for all leases which are scheduled to expire in the next
twelve months at comparable costs.
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ITEM 3. LEGAL PROCEEDINGS
On September 20, 1995, the United States Attorney for the Eastern
District of Pennsylvania alleged that (i) between 1987 and 1989, a corporation,
substantially all assets and liabilities of which were acquired by a subsidiary
of the Company in 1993, submitted false claims to Medicare totaling
approximately $1.5 million and (ii) officers and employees of that corporation
submitted false statements in support of such claims, and made a pre-complaint
civil settlement demand of approximately $4.5 million. The alleged false claims
and false statements were made before the Company acquired that corporation in
1993. There have been significant discussions with the office of the United
States Attorney which the Company believes are likely to lead to an arbitration
within specified parameters.
On June 18, 1998, 6100 Cleveland, Inc., Orsinger Enterprises, Inc., and
First Choice Medical Staffing, Inc., three former home care and staffing
licensees (franchisees) of the Company in Ohio, commenced an action in the
United States District Court for the Northern District of Ohio, Eastern Division
against the Company's subsidiary, Staff Builders International, Inc. The action
sought to recover damages and other relief alleging unpaid royalties, wrongful
termination by the Company of the Franchise Agreement between the Company and
the Plaintiffs, breach of contract and other damages. The Company answered the
complaint and moved for a change of venue. On December 1, 1998, Plaintiffs,
without the required permission of the Court, filed a Second Amended Complaint
alleging in addition to the allegations contained in the prior Complaint, claims
under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), claiming
a series of deliberate and illegal actions designed to put certain Staff
Builders franchisees out of business, as well as claims arising under New York
and Ohio loss of business opportunity statutes. The Second Amended Complaint
seeks money damages in excess of $25 million and a claim for treble damages on
the RICO claim. The Second Amended Complaint added as defendants Staff Builders
Services, Inc., and certain executive officers of the Company. The Company has
moved to dismiss the Second Amended Complaint challenging the legal sufficiency
of the RICO claims and other claims which allege a loss of business
opportunities under New York and Ohio laws. A companion case, 6100 Columbus,
Inc. v. Staff Builders International, Inc. was recently filed alleging breach of
contract only. This case will probably be consolidated with the previous case.
On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc.,
E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care
Services, Inc., former home care licensees (franchisees) of the Company for the
territory comprising certain counties in and around Los Angeles, California and
their holding company, instituted an action against the Company's subsidiaries,
Staff Builders, Inc., Staff Builders International, Inc., Staff Builders
Services, Inc., and certain executive officers of the Company in the Superior
Court for the State of California, County of Los Angeles. The action was removed
to United States District Court for the Central District of California on
December 22, 1998. Plaintiffs filed a First Amended Complaint in the Central
District on January 8, 1999 to challenge the termination of the four franchise
agreements between the Company and certain of the named
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plaintiffs, seeking damages for violations of California franchise law, breach
of contract, fraud and deceit, unfair trade practices, claims under the RICO,
negligence, intentional interference with contractual rights, declaratory and
injunctive relief and a request for an accounting. Plaintiffs seek an
unspecified amount of damages.
Discovery is currently in process.
On July 17, 1998, the Federal government ordered that a complaint filed
by Ali Waris, the former owner of a home health care agency purchased by the
Company in 1993, be unsealed and served upon Staff Builders, Inc. and Targa
Group, Inc., a former licensee (franchisee) of the Company. The government has
elected not to intervene in the action, in which Mr. Waris claimed damages for
alleged violations of the False Claims Act by the Company in connection with
payments made by the Company for consulting services. Following a motion to
dismiss, on March 4, 1999, the Court granted Mr. Waris leave to amend the
Complaint, the amended filing for which was served on the Company on March 31,
1999. The Company intends to file a motion to dismiss the Amended Complaint.
On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly,
Geri-Care Home Health, Inc. and Jacquelyn Klooster, two former home health care
licensees (franchisees) of the Company and their principals in Des Moines and
Sioux City, Iowa, respectively, commenced an action in the United States
District Court for the Southern District of Iowa, Central Division against the
Company's subsidiaries Staff Builders International, Inc., Staff Builders
Services, Inc., Staff Builders, Inc., and certain executive officers of the
Company. The action alleges claims under the RICO, claiming a series of
deliberate and illegal actions designed to defraud Staff Builders' licensees, as
well as claims for negligence, breach of fiduciary duty, breach of contract,
fraudulent misrepresentation and violation of the Iowa franchise law. The
complaint seeks unspecified money damages, a claim for treble damages on the
RICO claims and punitive and exemplary damages.
The Company is a defendant in several civil actions which are routine
and incidental to its business. The Company purchases insurance in such amounts
which management believes to be reasonable and prudent.
Although the Company cannot estimate the ultimate cost of its open
legal matters with precision, it has recorded a loss accrual at February 28,
1999 for the aggregate, estimated amount to resolve such matters. The aggregate
balance of this accrual is $3.1 million at February 28, 1999 and was included in
restructuring costs incurred of $2.2 million and $1.2 million in fiscal 1999 and
1998, respectively, less $300 expended to date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
(A)
MARKET INFORMATION
The Company has outstanding two classes of common equity
securities: Class A Common Stock and Class B Common Stock. These two classes
were created by a recapitalization of the Company's Common Stock that was
completed in October 1995. The Company's Class A Common Stock is traded in the
over-the-counter market and quoted on the OTC Bulletin Board System under the
symbol "SBLI".
The following table sets forth, for the indicated fiscal
periods, the high and low sale prices for the Class A Common Stock for each
quarter during the fiscal year ended February 28, 1998 and February 28, 1999
(through January 29, 1999), as reported by the Nasdaq National Market. Effective
with the close of business on January 29, 1999, the Company's Class A Common
Stock was delisted from the Nasdaq National Market and was immediately
thereafter quoted on the OTC Bulletin Board. Between January 29, 1999 and
February 28, 1999, the bid price of the Class A Common Stock as quoted on the
OTC Bulletin Board did not exceed $.69 or fall below $.09.
HIGH LOW
------ -------
Fiscal Year Ended February 28, 1998
1st quarter ended May 31, 1997 $ 2.94 $ 1.81
2nd quarter ended August 31, 1997 2.84 1.94
3rd quarter ended November 30, 1997 2.81 2.16
4th quarter ended February 28, 1998 2.75 1.53
Fiscal Year Ended February 28, 1999
1st quarter ended May 31, 1998 $ 2.47 $ 1.28
2nd quarter ended August 31, 1998 1.69 .50
3rd quarter ended November 30, 1998 .87 .34
4th quarter ended February 28, 1999 .69 .09
There is no established public trading market for the
Company's Class B Common Stock, which has ten votes per share and upon transfer
is convertible automatically into one share of Class A Common Stock, which has
one vote per share.
(B) HOLDERS
As of May 28, 1999, there were approximately 307 holders of
record of Class A Common Stock (including brokerage firms holding stock in
"street name" and other nominees) and 468 holders of record of Class B Common
Stock.
(C) DIVIDENDS
Since its organization, the Company has not paid any dividends
on its shares of common stock. Management anticipates that for the foreseeable
future all earnings will be retained for use in its business and, accordingly,
it does not intend to pay cash dividends. The Company's current revolving credit
facility prohibits the payment of cash dividends on the common stock.
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ITEM 6.
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
-----------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1999 28, 1998 28, 1997 29, 1996 28, 1995
----------- ----------- ----------- ----------- -----------
CONSOLIDATED OPERATIONS DATA:
Revenues $ 437,588 $ 526,673 $ 480,355 $ 410,160 $ 325,111
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Operating costs 299,057 338,225 301,508 256,719 201,365
General and administrative expenses 148,642 177,761 170,290 146,382 113,893
Amortization of intangible assets 1,314 2,807 2,623 1,823 1,237
Interest expense 4,233 3,706 1,601 948 1,237
Interest income (1,061) (1,358) (896) (976) (796)
Other (income) expense, net 1,991 (419) (1,487) 1,791 (22)
Medicare and Medicaid audit adjustments 29,000 -- -- -- --
Restructuring costs 20,464 33,447 -- -- --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 503,640 554,169 473,639 406,687 316,914
----------- ----------- ----------- ----------- -----------
Income (loss)
before income taxes (66,052) (27,496) 6,716 3,473 8,197
Provision (benefit) for income taxes 7,034 (5,864) 2,955 1,459 3,462
----------- ----------- ----------- ----------- -----------
Income (loss) applicable to
common stockholders $ (73,086) $ (21,632) $ 3,761 $ 2,014 $ 4,735
=========== =========== =========== =========== ===========
Income (loss) per common share:
Basic $ (3.16) $ (.90) $ .16 $ .09 $ .21
=========== =========== =========== =========== ===========
Diluted $ (3.16) $ (.90) $ .15 $ .08 $ .20
=========== =========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 23,162 23,939 23,668 23,598 22,389
=========== =========== =========== =========== ===========
Diluted 23,162 23,939 24,577 25,504 24,053
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 146,505 $ 158,701 $ 156,172 $ 120,527 $ 103,486
Working capital (deficiency) (39,826) 16,085 27,245 12,007 22,038
Current portion of long-term debt 43,460 10,664 5,071 1,655 1,208
Long-term debt and other liabilities 59,082 40,508 37,998 9,611 9,186
Total liabilities 185,864 120,332 96,706 65,217 51,135
Stockholders' equity (deficit) (39,359) 38,369 59,466 55,310 52,351
Staff Builders, Inc. did not pay any cash dividends on its common stock during
any of the periods set forth in the table above.
Certain prior period amounts have been reclassified to conform with the fiscal
1999 presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein, particularly Note 5 which discusses
operating results by business segment.
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1999 ("FISCAL 1999"), FEBRUARY 28, 1998 ("FISCAL 1998")
AND FEBRUARY 28, 1997 ("FISCAL 1997")
REVENUES. The Company's revenues consist of the following:
($ in millions)
Years Ended
February 28,
---------------------------------------------
1999 1998 1997
------ ------ ------
Home health care and other $310.3 $451.1 $436.6
Supplemental staffing 124.9 74.3 42.4
------ ------ ------
Total service revenues 435.2 525.4 479.0
------ ------ ------
Sales of licensees and fees 2.4 1.3 1.4
------ ------ ------
Total revenues $437.6 $526.7 $480.4
====== ====== ======
Total revenues decreased to $437.6 million in fiscal 1999 compared to
$526.7 million in fiscal 1998. This decrease of $89.1 million, or 16.9%, was a
result of a decrease in the Company's home health care division service revenues
of $140.8 million to $310.3 million in fiscal 1999 from $451.1 million in fiscal
1998. This decrease was partially offset by a 68.0% increase in the Company's
staffing division service revenues of $50.6 million from $74.3 million in fiscal
1998 to $124.8 million in fiscal 1999.
Total revenues increased by $46.3 million to $526.7 million in fiscal
1998 from $480.4 million in fiscal 1997. This increase included an increase of
$14.5 million or 3.3% in the Company's home health care service revenues from
$436.6 million in fiscal 1997 to $451.1 million in fiscal 1998. Additionally,
the Company's supplemental staffing division service revenues increased by $31.9
million or 75.2% from $42.4 million in fiscal 1997 to $74.3 million in fiscal
1998.
HOME HEALTH CARE
The primary reason for the decrease of $140.8 million in the home
health care service revenues in fiscal 1999 over fiscal 1998 was a decrease in
Medicare revenues. This decrease resulted from the negative impact of the
Medicare Interim Payment System ("IPS")
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enacted under the Balanced Budget Act of 1997 ("BBA"). The IPS reduced the
limits for the amount of costs which are reimbursable under the Medicare
program. See Note 2 to the consolidated financial statements.
The increase in home health care revenues of $14.5 million in fiscal
1998 over fiscal 1997 included $28.4 million primarily due to acquisitions made
during fiscal 1997 which were included in the full fiscal 1998 period offset by
a decrease in revenues of $13.9 million resulting from the closing or sale of
approximately 30 locations during fiscal 1998. Included in the Company's fiscal
1998 revenues under sales of licensees and fees, net, is $502 thousand for
license fees earned in connection with a master license agreement with a home
health care company based in Tokyo, Japan. Under the agreement, the Company
granted rights to develop home health care agencies throughout Japan using Staff
Builders' home health expertise and licensee model.
The Company receives payment for its home health care services from several
sources. The following are the Company's home health care division revenues by
payment source:
Years Ended
February 28,
--------------------------------------------
1999 1998 1997
---- ---- ----
Medicare 43.4% 60.1% 61.0%
Medicaid and other local
government programs 36.2 23.1 21.7
Insurance and individuals 19.3 15.1 15.4
Other 1.1 1.7 1.9
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The home health care division has 125 locations as of May 31, 1999 as
compared to 198 and 228 locations as of February 28, 1998 and 1997,
respectively. Included in these locations are 54, 160 and 179 offices which were
operated by 31, 64 and 72 licensees, respectively. The percentage of home health
care division revenues attributable to licensees was 69%, 84% and 82% in fiscal
1999, 1998 and 1997, respectively. The decrease in the number of licensees and
their respective share of business is consistent with the industry as a whole
which has experienced a significant reduction in the number of providers as a
result of the BBA.
SUPPLEMENTAL STAFFING
Revenues for the supplemental staffing division grew to $124.9 million
in fiscal 1999 compared to $74.3 million in fiscal 1998. This increase of $50.6
million, or 68.0% was primarily due to the increase in the number of staffing
office locations from 46 at February 28, 1998 to 58 locations at February 28,
1999, including an increase in the number of licensees which increased from 35
to 41, respectively.
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Also, fiscal 1999 was the first full year in which Chelsea Computer Consultants,
Inc. ("Chelsea") was included in the Company's consolidated results of
operations. Chelsea is the Company's information technology staffing subsidiary
in which the Company acquired a majority interest on October 30, 1997. Chelsea's
revenues were $31.1 million in fiscal 1999 and were $7.0 million from October
30, 1997 through February 28, 1998.
The increase in supplemental staffing revenues of $31.9 million in
fiscal 1998 over fiscal 1997 included $9.0 million resulting from the September
1996 acquisition of a provider in the metropolitan New York area which generated
revenues of $17.5 million and $8.5 million in fiscal 1998 and fiscal 1997,
respectively. Additionally, the increase in supplemental staffing revenues
included $4.5 million resulting from the September 1997 acquisition of a
provider of travel nursing services, whereby nursing professionals render
services in long-term assignments, away from the professional's permanent
domicile.
OPERATING COSTS. Operating costs were 68.7%, 64.4%, and 62.9% of
service revenues in fiscal 1999, 1998 and 1997, respectively. Operating costs
represent the direct costs of providing services to patients or clients,
including wages, payroll taxes, travel costs, insurance costs, medical supplies
and the cost of contracted services. The increases in operating costs as a
percentage of service revenues were primarily due to the increase in
supplemental staffing revenues which have higher direct operating costs as a
percentage of service revenues as compared to home health care revenues.
The payroll fringe costs, consisting primarily of payroll taxes and
workers compensation insurance, represents 15.3%, 16.0%, and 15.9% of direct
service wages in fiscal 1999, 1998 and 1997, respectively. These payroll fringe
costs as a percentage of direct service wages for the home health care division
were 16.9%, 16.8% and 16.3% and for the supplemental staffing division were
12.4%, 12.5% and 13.2%, respectively.
The cost of contracted services represents 6.6%, 6.5% and 8.1% of
related service revenues in fiscal 1999, 1998 and 1997, respectively. Contracted
services consist primarily of physical therapy, occupational therapy, speech
therapy and medical social services utilized in the home health care division.
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The service revenues, operating costs and resultant gross margins
generated by the Company's licensee and company-owned locations are as follows
($ in millions):
HOME HEALTH CARE
Years Ended
February 28,
------------------------------------------
1999 1998 1997
--------- --------- ---------
Total service revenues - Licensee $ 214 $ 379 $ 356
Total service revenues -
Company-Owned 96 72 81
--------- --------- ---------
Total service revenues $ 310 $ 451 $ 437
========= ========= =========
Operating costs - Licensee $ 136 $ 234 $ 216
Operating costs - Company-Owned 64 46 53
--------- --------- ---------
Operating costs $ 200 $ 280 $ 269
========= ========= =========
Gross margin - Licensee $ 78 $ 145 $ 140
Gross margin - Company-Owned 32 26 28
--------- --------- ---------
Gross margin $ 110 $ 171 $ 168
========= ========= =========
SUPPLEMENTAL STAFFING
Years Ended
February 28,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
Total service revenues - Licensee $ 90 $ 65 $ 1
Total service revenues -
Company-Owned 35 9 41
--------- --------- ---------
Total service revenues $ 125 $ 74 $ 42
========= ========= =========
Operating costs - Licensee $ 70 $ 51 $ 1
Operating costs - Company-Owned 29 7 32
--------- --------- ---------
Operating costs $ 99 $ 58 $ 33
========= ========= =========
Gross margin - Licensee $ 20 $ 14 $ --
Gross margin - Company-Owned 6 2 9
--------- --------- ---------
Gross margin $ 26 $ 16 $ 9
========= ========= =========
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by $29.2 million, or 16.4%, in fiscal 1999 to $148.6 million
as compared to $177.8 million in fiscal 1998 and increased by $7.6 million, or
4.5%, in fiscal 1998 as compared to $170.3 million in fiscal 1997. These costs
expressed as a percentage of service revenues were 34.2%, 33.9% and 35.5% in
fiscal 1999, 1998 and 1997, respectively.
The decrease of $29.2 million in fiscal 1999 as compared to fiscal 1998
was the result of a decrease in the general and administrative expenses of the
home health care division of $38.7 million which was partially offset by a $9.5
million increase in such expenses in the supplemental staffing division.
Included in general and administrative expenses is the Company's provision for
doubtful accounts which increased by $5.7 million in fiscal 1999 over fiscal
1998. The provision for doubtful accounts was $5.6 million and $2.5 million in
fiscal 1999 and fiscal 1998 for the home care business segment and $2.8 million
and $0.2 million in fiscal 1999 and fiscal 1998 for the supplemental staffing
business segment, respectively.
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The decrease in the general and administrative expenses of the home
health care division was a result of a reduced number of operating locations and
management's efforts to address the revenue reductions associated with IPS. This
decrease was partially offset by re-engineering costs incurred in connection
with meeting the demands of IPS, including improvement of the home care
division's patient billing, scheduling and accounts receivable functions and
implementing other operating efficiencies.
The general and administrative expenses of the supplemental staffing
division increased from $13.3 million in fiscal 1998 to $22.8 million in fiscal
1999 due to an increase in the number of supplemental staffing licensees and the
increased expenses associated with the first full year of operation of Chelsea.
The increase in general and administrative expenses of $7.6 million in
fiscal 1998 over fiscal 1997 was primarily due to the increase in supplemental
staffing expenses of approximately $4.8 million, including $1.1 million
attributable to the consolidation of Chelsea's general and administrative
expenses from October 30, 1997 to February 28, 1998. The increase in the
supplemental staffing expenses is due to the expansion of that division. The
increase in these general and administrative expenses includes approximately
$900 thousand resulting from the September 1996 acquisition of a provider in the
metropolitan New York area and approximately $500 thousand resulting from the
September 1997 acquisition of a provider of travel nurse services. Additionally,
there was an increase in corporate and regional home health care expenses of
$2.4 million, or 6.2% over the prior year, due to increased support for
expansion of the Company's home health care services, primarily resulting from
acquisitions made in fiscal 1997 which were included in the full fiscal 1998
period.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
was approximately $1.3 million in fiscal 1999 as compared to $2.8 million in
fiscal 1998 and $2.6 million in fiscal 1997. The reduction of $1.5 million in
fiscal year 1999 compared to fiscal year 1998 was primarily the result of the
write-off of goodwill recorded in fiscal year 1998. The home health care
division amortization expense was $1.2 million, $2.5 million and $2.5 million
and the supplemental staffing division amortization expense was $100 thousand,
$300 thousand and $100 thousand in fiscal 1999, 1998 and 1997, respectively.
INTEREST EXPENSE. Interest expense was approximately $4.2 million in
fiscal 1999 as compared to $3.7 million in fiscal 1998 and $1.6 million in
fiscal 1997. The increases in interest expense in fiscal 1999 over fiscal 1998
and over fiscal 1997 was primarily due to an increase in the level of borrowings
under the Company's secured credit facility. On October 30, 1997, the Company
borrowed $12.6 million under the acquisition line of credit to purchase an
additional 60.9% of the outstanding common stock of Chelsea.
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INTEREST INCOME. Interest income includes interest on franchise notes
receivable of $225 thousand, $481 thousand and $527 thousand in fiscal 1999,
1998 and 1997, respectively. Interest earned on franchise notes receivable is
generally at the prime rate plus three percent. Additionally, the Company earned
interest from funds on deposit for workers compensation premiums of $520
thousand, $564 thousand and $243 thousand in fiscal 1999, 1998 and 1997,
respectively.
OTHER (INCOME) EXPENSE, NET. Other expense of $2.0 million in fiscal
1999 primarily consists of approximately $1.0 million for the reserve for
uncollectible notes receivable, $600 thousand for the write-off of obsolete
fixed assets and $300 thousand to record minority interest expense incurred by
Chelsea. Other (income) expense, net in fiscal 1998 primarily includes
approximately $300 thousand of income from the Company's gain on the sale of
several offices. Fiscal 1997 income includes approximately $1.2 million
resulting from the sale of a Company division.
MEDICARE AND MEDICAID AUDIT ADJUSTMENTS. In the third quarter of fiscal
1999, the Company recorded a charge of $29.0 million to reflect audit
adjustments from both Medicare and Medicaid. Medicare and Medicaid audit
adjustments recorded in fiscal 1999 include Federal and state audit liabilities
arising from some completed audit examinations as well as estimated liabilities
for open audit periods through February 28, 1999. 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 reimbursements to home health care providers generally, and have become
more restrictive in their interpretation of those costs for which reimbursement
will be allowed to such providers. These regulatory agencies have increased the
number of audits performed and have applied a more intensive degree of scrutiny
in the conduct of these audits.
During the quarter ended November 30, 1998, the Medicare fiscal
intermediary completed and issued the results of 88 audits for the fiscal year
ended February 28, 1997, including 25 audits conducted on site at branch
operating locations. These results together with the results of the home office
audit for the year ended February 28, 1997, indicated an aggregate liability of
approximately $9.5 million.
Additionally, the Company has recorded an accrual for third party
liability ("TPL") to state Medicaid agencies which have claimed that the Company
did not follow proper billing procedures in several locations. These state
Medicaid agencies have challenged the eligibility of individuals for whom
services were provided. The related claims are being reviewed by the state
agencies encompassing several prior years for which the Company has
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been paid. The Company has reached a settlement for a portion of its TPL
liability and is continuing to negotiate to resolve amounts payable to these
state agencies. While the Company believes that it will ultimately prevail in
many of these cases, it has accrued for the anticipated losses for those cases
in which it will not prevail. To date, the Company has reached settlement on
$4.6 million of the $11.0 million of TPL provided for in the quarter ended
November 30, 1998. This amount is payable monthly at approximately $250 per
month. The other $6.4 million is a general reserve based upon preliminary
discussions with several states.
The Company continues to appeal many audit issues and has engaged
outside professional advisors to support its positions on these issues. The
Company anticipates that any resolution of these appeals may require up to
several years. The settlement of Medicare and Medicaid liabilities for specific
periods provides a basis for reasonably estimating the liability that may exist
for periods not yet examined or where the examination is in process. The Company
was able to consider the scope of audits being performed by the fiscal
intermediary and the issues raised for such periods, and then use this
information as a basis to estimate the accrual required for audits not yet
performed, or not yet completed. The $29.0 million charge to operations in the
quarter ended November 30, 1998, together with the balance of liabilities
previously established, less amounts expended during the fourth quarter of
fiscal 1999, results in an aggregate liability of $28.1 million for Federal and
state audit adjustments as of February 28, 1999 which includes $17.1 million and
$11.0 million for Federal and state liabilities, respectively.
HEALTH CARE REFORM AND RELATED RESTRUCTURING COSTS.
The BBA resulted in significant changes to cost based reimbursement for
Medicare home health care providers. Although a cost based reimbursement system
remains, the BBA reduced the cost limits and created new per-beneficiary limits.
The BBA provides two payment systems -- IPS which became applicable for the
Company on March 1, 1998 until the adoption of prospective payment system
scheduled to be effective for all home health care agencies after October 1,
2000. The Federal Health Care Financing Administration committed to the revised
schedule in a report presented to Congress dated February 4, 1999. The effect of
the changes under IPS is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare program.
Accordingly, the Company together with many of its licensees have modified their
operations as needed to meet the demands of IPS, including taking steps to
reduce costs and maximize operational efficiencies within the constraints of the
IPS.
During the fourth quarter of fiscal 1998, management prepared the home
health care business segment of the Company for the impact
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of IPS and for long-term growth. As a result, the Company implemented a
corporate-wide restructuring and cost reduction program. These actions, together
with the Company's assessment of the impact of health care reform legislation,
resulted in a pre-tax charge in the fourth quarter of fiscal 1998 of $33.4
million. During the quarter ended November 30, 1998, as a result of the
Company's further operating modifications, including the additional closure and
conversion of many locations from licensed to company-owned operations, the
Company has written off or reserved approximately $4.5 million.
In fiscal 1999, management further evaluated the carrying value of the
Company's goodwill and intangible assets in light of current home health care
industry conditions and its impact on the Company's operations. Such valuation
resulted in an additional write-off of home health care goodwill of $15.3
million leaving a remaining net carrying value of goodwill and intangible assets
as of February 28, 1999 of $5.1 million in its home health care business
segment. The fiscal 1998 write-off of goodwill and intangible assets included
$21.5 million for the home health care segment and $3.0 million for the
supplemental staffing segment. The write-off of goodwill and intangible assets
is required under SFAS No. 121.
In addition to the fiscal 1999 write-off of goodwill, the Company
recorded other home health care restructuring costs aggregating $5.2 million.
These costs included $0.9 million for the closure and reduction in size of some
of the Company's operating locations including the write-off of fixed assets and
the accrual for employee severance payments. Further, restructuring costs
include $2.2 million of litigation related costs, $1.1 million for the write-off
of receivables from converted licensee locations and $0.9 million for the
write-off of home care related investments and receivables. These restructuring
costs reflect the Company's operating modifications in order to meet the demands
of IPS as well as its assessment of the carrying value of goodwill and
intangible assets in light of the deterioration within the home health care
industry and the resultant effect on reduced profitability.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for
income taxes reflects an effective rate of (10.6%), 21.3% and 44.0% in fiscal
1999, 1998 and 1997, respectively.
The provision for income taxes in fiscal 1999 consists of a valuation
allowance of $28.9 million offset by potential tax benefits of $20.2 million
resulting from losses incurred in that period. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits from operating losses and other temporary differences are "more likely
than not" to be realized, as required by SFAS 109. The Company has recorded an
income tax receivable of $1.7 million resulting from the carryback of net
operating losses.
NET INCOME (LOSS). Net (loss) for fiscal 1999 was $(73.1) million, or
$(3.16) per share, compared to net (loss) in fiscal 1998 of $(21.6) million, or
$(.90) per share, and net income of $3.7 million, or $.16 per share, in fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.0 million for the
fiscal year ended February 28, 1999 which consisted primarily of periodic
interim payments received from Medicare of $14.4 million, a net increase in
accounts payable and accrued expenses of $2.4 million and a decrease in trade
accounts receivable of $2.0 million. Offsetting these sources of cash was the
loss from operations requiring cash payments of $5.8 million. The fiscal 1999
loss of $(73.1) million included non-cash items consisting primarily of the
write-off of goodwill, deferred income taxes and other assets aggregating $27.5
million; depreciation, amortization and a net increase to the allowance for
doubtful accounts aggregating $8.6 million; an increase in Medicare and Medicaid
audit liabilities of $29.0 million and an increase in accrued litigation costs
of $2.2 million.
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Net cash used in investing activities was $7.3 million in fiscal 1999,
which consisted of the purchase of fixed assets of $5.0 million and $2.9 million
of cash used to acquire businesses, offset by $0.6 million of proceeds from the
sale of five home health care franchise businesses.
Net cash used in financing activities of $6.5 million in fiscal 1999
included the payment of notes payable and other long-term liabilities of $11.1
million which consisted primarily of $3.1 million paid on the Company's
acquisition line of credit under its secured credit facility, $2.9 million of
capital lease payments, a net reduction of $1.0 million in the line of credit
under which Chelsea borrowed on its accounts receivable and a reduction of $1.9
million in a term loan which matures in December 1999. Additionally, the Company
purchased and retired 5.1 million shares of its common stock at a cost of $4.8
million. Offsetting these items was $9.1 million of cash provided from the
Company's revolving line of credit.
Net cash provided by operating activities was $13.5 million for the
fiscal year ended February 28, 1998, which consisted primarily of an increase in
accounts payable and accrued expenses of $10.4 million and periodic interim
payments received from Medicare of $4.3 million. Net cash used in investing
activities of $16.4 million in fiscal 1998 consisted primarily of cash used for
business acquisitions of $16.2 million, including $12.7 million for the
purchase of 60.9% of the outstanding common stock of Chelsea. Net cash provided
by financing activities of $3.7 million in fiscal 1998 includes proceeds of
$12.6 million from the acquisition line of credit, less $4.0 million of a
decrease in borrowings under the Company's revolving line of credit and $6.1
million for the payment of notes payable and other long-term liabilities. These
payments include $2.3 million of capital lease payments, a reduction of $1.8
million in a term loan and $0.8 million of repayments of the acquisition line
of credit.
Net cash used in operating activities was $19.4 million for the fiscal
year ended February 28, 1997, which consisted primarily of an increase in trade
accounts receivable of $23.8 million offset by net income of $3.8 million. Net
cash used in investing activities of $11.9 million in fiscal 1997 consisted
primarily of cash used for business acquisitions of $10.3 million, including
$2.1 million for the purchase of 20.9% of the outstanding common stock of
Chelsea. Net cash provided by financing activities in fiscal 1997 was $24.6
million, which consisted primarily of an increase in the level of borrowings
under the Company's revolving line of credit of $21.6 million and proceeds from
a term loan of $5.7 million, offset by the payment of notes payable and other
long-term liabilities of $3.1 million.
The Company has a secured credit facility which consists of a revolving
line of credit, an acquisition line of credit and a standby letter of credit
facility. On January 14, 1999, the bank provided the Company with written
notification that, in its opinion, the Company's non-compliance with certain
financial covenants constitutes an event of default under the terms of the
credit facility agreement. Those covenants require the Company to maintain a
minimum level of net worth and a maximum ratio of senior debt to net worth,
failures of which resulted from losses incurred for the three and nine months
ended November 30, 1998. At the time that the bank declared its opinion as to an
event of default, the Company had borrowed $39.4 million under the credit
facility, including $29.7 million and $9.7 million under the revolving line of
credit and the acquisition line of credit, respectively. The bank has advised
Staff Builders that while it has no obligation to provide additional advances as
a result of the non-compliance with certain financial covenants, it is willing
to consider making additional advances to Staff Builders under such conditions
as it may determine. As of May 28, 1999, the Company had borrowed $38.9 million
under the credit facility, including $30.5 million and $8.4 million under the
revolving line of credit and the acquisition line of credit, respectively.
In connection with the bank's notice of default, the maximum aggregate
amount which can be borrowed under the credit facility was reduced from $50
million to $40 million. Additionally, the bank increased the rate of interest on
all borrowings to 2.0% over the prevailing prime lending rate on its revolving
line of credit and 2.75% over the prevailing prime lending rate on its
acquisition line of credit (such prime lending rate being 7.75% as of February
28, 1999). The Company's primary sensitivity to changes in interest rates
results from its secured credit facility. Based on outstanding borrowings at
February 28, 1999, an increase of 1% in the prime rate would have the effect of
increasing annual interest expense by approximately $400 thousand. The Company
has classified its outstanding borrowings as a current liability as of February
28, 1999 because the bank has the option to declare all borrowings under the
credit facility to become immediately due and payable. At February 28, 1999 and
1998, the Company borrowed $35.4 million and $29.4 million, respectively, under
the credit facility.
The Company's working capital deficiency was $(39.8) million at
February 28, 1999. Current liabilities at February 28, 1999 include $22.7
million for Medicare and Medicaid liabilities, $35.4 million of outstanding
borrowings under the secured credit
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facility and $8.1 million for the current portion of other debt obligations.
While the Company cannot accurately determine the required payment dates for its
total Medicare and Medicaid audit liabilities, it has included $34.6 million of
such liabilities in other long term liabilities based upon its current estimate
of when payments would likely become due. In order to pay its current
liabilities in the normal course of business as well as to pay its liabilities
to the Medicare and Medicaid agencies as they become due, the Company is
investigating alternative sources of funding.
The above conditions raise substantial doubt about the ability of the
Company to continue as a going concern. As a result, management of the Company
is pursuing various strategies, including but not limited to, negotiating with
alternative lending sources, deferred payment terms for Medicare and Medicaid
audit liabilities as well as for any repayments of Medicare periodic interim
payment(s) ("PIP") and deferred payment terms for other creditors. Further,
management is implementing an intensified collection effort and has obtained a
deferred payment schedule for the repayment of $19.0 million of excess PIP
payments made to the Company by the Federal government as well as for $6.8
million of audit liabilities assessed to date. Such payment schedule requires
these amounts to be paid in 24 equal monthly installments of approximately $1.1
million beginning in May 1999. As of June 1, 1999 no payments have been made
pursuant to this schedule. Additionally, the Company has obtained favorable
extended payment terms with some of its trade creditors and is continuing to
negotiate extended payment terms with other vendors. Further, the spin-off
described in Note 1 will be completed only if the bank or another lender creates
a separate credit facility for the home health care business under TLC and the
supplemental staffing business retained by Staff Builders, and allocates the
aggregate pre-spin-off debt between those two entities. However, there can be no
assurance that these actions will be successful to provide adequate funds for
the Company's current level of operations and to pay the Company's past-due
obligations.
From March 6, 1998 through October 16, 1998, the Company purchased and
retired a total of 5,088,060 shares of its common stock at a cost of
approximately $4.8 million. No repurchases have been made since October 16,
1998.
YEAR 2000
Many computer systems, applications, information technologies and
equipment containing computer related components (generally "computer systems
and equipment") are unable to differentiate
between the year 2000 and the year 1900 because they were programmed with
two-digit, rather than four digit, date fields. Accordingly, older computer
systems that have time-sensitive applications may not properly recognize the
year 2000 and beyond ("Year 2000 issue"). This could cause system or equipment
shut
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downs, failures or miscalculations resulting in inaccuracies in computer output
or disruptions of operations, including, among other things, inaccurate
processing of financial information and/or temporary inabilities to process
transactions, manufacture products, or engage in similar normal business
activities.
The Company has made upgrades to its computer systems and equipment
controlling its general ledger, accounts payable, payroll and human resources
systems and believes that these systems are largely Year 2000 compliant. The
Company is continuing its upgrades with respect to the front end systems, which
include clinical, scheduling and billing. The Company expects to complete such
upgrades by October 31, 1999. The Company believes that with these upgrades, the
Year 2000 issue will not pose significant operational problems for its computer
systems and equipment. However, if such upgrades are not made or are not
completed in a timely fashion, the Year 2000 issue might have an adverse impact
on the operations of the Company, the precise degree of which cannot be known at
this time.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third party vendors that provide information,
goods and services to the Company and third party customers to which the Company
provides its services. These include financial institutions, companies in
industry, and Federal and state government agencies. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to the Year 2000 issue and if, in particular, the Federal government is not
Year 2000 compliant these failures could adversely affect the Company's ability
to process transactions or engage in similar normal business activities. While
some of these risks are outside of the Company's control, it has instituted
programs, including internal records review to identify key third parties,
assess their level of Year 2000 compliance, update contracts and address any
non-compliance issues.
The total cost of the Year 2000 systems assessment and upgrades is
funded through operating cash flows and leases and the Company is expensing
certain items and capitalizing others. The estimated cost to replace existing
software applications consisting of Lawson software and HBO Corporation systems,
including modifications to accommodate the Year 2000, is approximately $25
million, including the cost of implementation. The actual cost could, however,
exceed this estimate. The Company has not established a contingency plan to deal
with major year 2000 failures, if any, and does not intend to establish a
contingency plan because it is comfortable with progress made to date, although
no assurances can be made.
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EFFECT OF INFLATION
The rate of inflation was immaterial during fiscal 1999. In the past,
the effects of inflation on salaries and operating expenses 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 future, subject to
applicable restrictions with respect to services provided to clients eligible
for Medicare and Medicaid reimbursement. The Company continually reviews its
costs in relation to the pricing of its services.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, FASB adopted Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP No. 98-5") which requires that costs
previously capitalized as start-up costs will be expensed as incurred. SOP No.
98-5 becomes effective for fiscal years beginning after December 15, 1998, with
earlier application encouraged. The adoption of SOP No. 98-5 will not have a
material effect on the Company's consolidated financial statements.
During 1998, FASB issued Statement of Financial Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Company does not expect the adoption of this new accounting pronouncement to
have a material effect, if any, on its financial condition or results of
operations.
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 the
inclusion of phrases such as "the Company anticipates", "the Company believes"
and other phrases of similar meaning. These forward-looking statements are based
on the Company's current expectations. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The potential risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations include the impact of further changes in the Medicare
reimbursement system, including any changes to the current interim payment
system and/or the ultimate implementation of a prospective payment system;
government regulation; health care reform; pricing pressures from third-party
payors, including managed care organizations; retroactive Medicare audit
adjustments; year 2000
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failures; changes in laws and interpretations of laws or regulations relating to
the health care industry; and inability to obtain financing on satisfactory
terms.
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 reimbursements to home health care
providers generally, and are becoming more restrictive in their interpretation
of those costs for which reimbursement will be allowed to such providers.
Changes in the law and regulations as well as new interpretations enforced by
the relevant regulatory agencies could have an adverse effect on the Company's
operations and the cost of doing business.
THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed
for its services primarily by the Medicare/Medicaid programs, insurance
companies, managed care companies and other third-party payors, the
implementation of alternative payment methodologies for any of these payors
could have an impact on revenues and profit margins. 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. The BBA resulted in significant changes to cost based
reimbursement for Medicare home health care providers. Although the BBA retains
a cost based reimbursement system, the cost limits have been reduced and a
per-beneficiary limit has been implemented. The BBA provides for IPS which
became applicable for the Company on March 1, 1998 and will remain in effect
until the adoption of a new prospective payment system scheduled to be effective
for all home health care agencies beginning on October 1, 2000. The effect of
the changes under IPS is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare program. The
Company cannot quantify the full effect of IPS on the Company's future
performance because certain components of health care reform legislation, such
as the per-beneficiary limit, require annual data which will not be known until
a final assessment by Medicare and/or its fiscal intermediary is completed for
each annual period.
As Congress and state reimbursement entities assess alternative health
care delivery systems and payment methodologies, the Company cannot predict
which additional reforms may be adopted or what impact they may have on the
Company. Additionally, uncertainties relating to the nature and outcomes of
health care reforms have also generated numerous realignments, combinations and
consolidations in the health care industry which may also have an
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adverse impact on the Company's business strategy and results of operations. The
Company expects that in addition to industry consolidation generally, there may