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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, 1998
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.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2650500
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1983 Marcus Avenue, Lake Success, NY 11042
(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. X
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 21, 1998, was
$34,168,250.
The number of shares of Class A Common Stock and Class B Common Stock
outstanding on May 21, 1998 was 22,189,358 and 1,053,607 shares,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10,11,12 and 13 will be included in
the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders, which will be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this report is filed,
and which information is incorporated herein by reference.
PART I
ITEM 1. BUSINESS
General
Staff Builders, Inc. 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. As of February 28,
1998, the Company had 244 offices at 228 locations in 36 states and
the District of Columbia, as well as master franchise licenses in
Japan, Spain and Indonesia. Of these offices, 40 were owned and
operated by the Company and 204 were operated by 78 franchisees,
through which services were provided by approximately 42,000
caregivers. Franchisees include 64 home health care and 35
supplemental staffing franchisees, of which 21 operate a separate
home health care and supplemental staffing franchise. The Company's
locations include 41 locations which were added from 34
acquisitions made during the three years ended February 28, 1998.
Reimbursement Reductions and Related Restructuring
In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("BBA"), resulting
in significant changes to cost based reimbursement for Medicare
home health care providers. Although the new legislation enacted
by Congress presently retains a cost based reimbursement system,
the cost limits have been reduced for fiscal years which began on
or after October 1, 1997 and a new per-beneficiary limit is
effective for fiscal years which began after such date. The BBA
provides two payment systems -- an interim payment system ("IPS")
which is effective for the Company beginning March 1, 1998 until
the adoption of the successor payment system which is a new
prospective payment system scheduled to be effective for fiscal
years beginning on or after October 1, 1999. The effect of the
changes under IPS is to reduce the limits for the amount of costs
that are reimbursable to home health care providers under the
Medicare program.
During the fourth quarter of the year ended February 28,
1998 (fiscal 1998), management moved proactively to prepare the
Company for the impact of IPS and for long-term growth. As a
result, the Company implemented a corporate-wide 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 non-recurring charge in the fourth quarter of
fiscal 1998 of $33.4 million. This accounting charge included a
$24.5 million write-off of goodwill and intangible assets and $8.9
million of other restructuring costs. The other restructuring
costs included $1.0 million for employee severance arrangements and
the closure, consolidation or reduction in the size of operating
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locations, $6.3 million for the write-down of certain home health
care related investments and receivables, $1.2 million of
litigation related costs and $0.4 million of other costs. The
write-off of goodwill and intangible assets is required under the
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of."
Home Health Care
Operations
The Company provides a wide range of home health care
services by its health care personnel. Skilled nursing services
which include cardiac care, pulmonary management, wound management,
maternal health, behavioral health care, infusion therapy
administration, hospice support, and extensive patient and family
education are rendered by licensed personnel. Additional
professional services include physical therapy, occupational
therapy, speech therapy and medical social services. The Company
also provides para-professional home health aide services and other
unlicensed personnel services, assisting patients with activities
of daily living.
The Company's home health care services are provided
through 198 offices in 35 states, of which 35 are owned and
operated by the Company and 163 are operated by 64 franchisees.
Approximately 87% of the Company's home health care service
revenues in fiscal 1998 were generated by franchisees. Home health
care service revenues were $451.1 million, $436.6 million and
$378.4 million in fiscal 1998, 1997 and 1996, respectively.
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 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 ten 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 personnel
and operations is critical to the Company's success. The Company
maintains uniform quality assurance programs for its home health
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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 150 offices
which have been accredited by JCAHO, approximately 50 of which 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. SCORESTM is currently being used in 30
locations and the Company plans to significantly expand the number
of locations using SCORESTM during the current fiscal year.
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 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
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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. Generally, bills are rendered, payroll is processed
and collections are received at the corporate headquarters or at
lock-boxes.
Home health care services, including hospice and
management consulting services provided to hospital-based home
health agencies, accounted for approximately 87%, 91% and 93% of
revenues for fiscal 1998, the year ended February 28, 1997 (fiscal
1997) and the year ended February 29, 1996 (fiscal 1996),
respectively.
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 1998,
approximately 15% of the Company's home health care revenues
represented reimbursement from insurance carriers, health
maintenance organizations and individuals; 60% came from Medicare;
and 23% 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 123 locations 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. As of February 28, 1998, the Company has 70
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
home health care providers effective for fiscal years beginning on
or after October 1, 1999. Offices which are not participating in
the PIP program receive payment for services upon submission of
individual claims.
The Company is also reimbursed for covered items by
Medicaid. The Company has approximately 130 home health care
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offices in 30 states 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. Such regulation imposes a significant
compliance burden on the Company, including state licensing and
Certificate of Need ("CON") requirements 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. In addition, the
Company will be required to comply with the licensing and/or CON
requirements and applicable regulations in the jurisdictions in
which it plans to provide services, except for the states of
Colorado, Massachusetts, Michigan and Ohio which have neither CON
nor licensure requirements.
The Federal government and all states in which the
Company currently operates regulate various aspects of the
Company's business. Home health agency certification by the Health
Care Financing Administration ("HCFA") is required to receive
reimbursement for services from Medicare. The Company has 164
offices in 32 states and the District of Columbia which provide
services covered by Medicare. HCFA requires, as conditions of
participation as a home health agency in the Medicare program,
among other things, the satisfaction of certain standards with
respect to: personnel, services and supervision; the preparation
of annual budgets and capital expenditure plans; 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,
thereby permitting the office to 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
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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 15 offices in New York State which are
LHCSAs. Such offices accounted for approximately 12% of the
Company's revenues in fiscal 1998. 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 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 $376
million, $361 million and $315 million in fiscal 1998, 1997 and
1996, respectively.
ATC Supplemental Staffing
The Company's supplemental staffing operations provide
clients with registered nurses, licensed practical nurses, medical
technicians and other personnel. Health care institutions use
supplemental staffing to cover for peak periods, vacations,
emergencies and permanent positions for which they have openings.
The majority of the Company's supplemental staffing
services are provided through ATC Healthcare Services, Inc.
("ATC"), a wholly-owned subsidiary, with 46 offices in 19 states of
which five are owned and operated by the Company and 41 are
operated by 35 franchisees. The ATC supplemental staffing service
revenues were $67.3 million, $42.4 million and $30.5 million in
fiscal 1998, 1997 and 1996, respectively. Fiscal 1998 and 1997 ATC
revenues included $17.5 million and $8.5 million, respectively,
resulting from the acquisition in September 1996 of a provider in
the metropolitan New York area. Additionally, fiscal 1998 ATC
revenues included $4.5 million resulting from the acquisition in
September 1997 of Nursing Management Services (USA), Inc. ("NMS"),
an affiliate of an U.K. based company. NMS provides nursing
professionals for long-term assignments away from the
professional's permanent domicile, often referred to as "travel
nurses."
Local offices are generally familiar with the
operations, procedures and policies of the institutions in their
service areas and use this knowledge in providing the training and
orientation to their personnel. Accordingly, the supplemental
staffing personnel provided are able to assume responsibility
quickly and work effectively with permanent staff members.
The ATC division operates its own information systems
network (including payroll, billing and other administrative
functions) for its operations which connects its field offices with
its corporate headquarters in Atlanta, GA. Generally, bills are
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rendered, payroll is processed and collections are received at the
Atlanta headquarters or at its own designated lock-boxes. ATC
requires limited resources from the Company's Lake Success, NY
corporate headquarters.
ATC Supplemental staffing operations accounted for
approximately 13%, 9% and 7% of total Company service revenues in
fiscal 1998, 1997 and 1996, respectively.
Franchise Program
The Company utilizes an unique form of franchising
whereby it licenses independent companies or contractors to
represent the Company within a designated territory using the
Company's trade names and service marks. The Company owns all
necessary health care related permits and licenses and, where
required, CON's for operation of franchise offices. All direct
service employees are employed by the Company. These franchisees
(licensees) recruit direct service personnel, 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 direct service
personnel, administers all payroll withholdings and payments, bills
the customers and receives and processes the accounts receivable.
The franchisees are responsible for providing an office and paying
related expenses for administration including rent, utilities and
costs for administrative personnel. All revenues and related
direct costs are included in the Company's consolidated service
revenues and operating costs.
The initial franchise term granted by the Company is
generally ten years. A franchisee has the option to extend for an
additional five-year term, subject to the franchisee adhering to
the operating procedures and quality control standards established
by the Company. The initial franchise fee is currently $29,500 for
home health care and $19,500 for the ATC supplemental staffing
operations. When converting independently owned agencies into
franchises, 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 U.S. franchisees based upon a defined formula of gross
profit generated. Generally, the Company pays the franchisee 60% of
the gross profit attributable to the non-Medicare operations of the
franchise. The payment to the Company's franchisees related to
Medicare operations is adjusted for cost limitations and
reimbursement of allowable Medicare costs. For fiscal 1998, 1997
and 1996, total franchisee distributions of approximately
$93million, $89 million and $75 million, respectively, were
included in the Company's general and administrative expenses.
The Company is subject to Federal and certain state laws
that govern the offer and sale of franchises. The Company is also
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subject to a number of state laws that regulate certain substantive
aspects of the franchisor-franchisee relationship. 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 Company
is required by the Federal Trade Commission to furnish to
prospective franchisees a current franchise offering disclosure
document. The Company has used a Uniform Franchise Offering
Circular ("UFOC") to satisfy this disclosure obligation. In
addition, in certain states the Company is required to register or
file its UFOC with such states and to provide prescribed
disclosures. As of February 28, 1998, the Company was permitted to
offer home health care franchises in 39 states and ATC supplemental
staffing franchises in 45 states.
The Company is required to update its UFOC annually or
upon the occurrence of certain material events. The occurrence of
any such material events may from time to time require the Company
to stop offering and selling franchises until the document is so
updated.
The Company has implemented its franchise program to
permit it to quickly penetrate new markets and realize economies of
scale. The program also enables the Company to maintain stable
local management by reducing personnel turnover.
The Company has an international franchise program using
the Staff Builders name and service marks. In October 1997, the
Company signed a Master License Agreement with Japan Welfare
Service Corporation ("JWS"), a home health care company based in
Tokyo, Japan. Under this agreement, the Company granted rights to
develop home health care agencies throughout Japan using Staff
Builders' home health expertise and franchise model. The Company
has received $1.2 million in a master license fee of which $502,000
was included in the Company's fiscal 1998 sales of franchises and
fees, net. The Company will receive royalty payments based upon
JWS' service revenues during the 20 year term of this agreement.
Additionally, the Company has separate master franchise licenses in
Spain and Indonesia.
Of the Company's 244 field offices, 204 were operated by
78 franchisees pursuant to the terms of a franchise agreement with
the Company. The locations operated by franchisees contributed
approximately $446 million, $398 million and $334 million, or
approximately 86%, 83% and 82% of the Company's service revenues in
fiscal 1998, 1997 and 1996, respectively.
Recruiting and Training
The Company and its franchisees recruit home health care
and supplemental staffing personnel 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
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needed, and are paid for the actual number of hours worked or
visits made.
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 and supplemental staffing
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'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 $26 million per
claim, subject to a limitation of $26 million for all claims in any
single year. 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 and
supplemental staffing 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
and supplemental staffing 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 personnel to meet demands for services.
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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 is competitive with others in the industry.
During fiscal 1998, no single client or group contract accounted
for ten percent or more of the consolidated revenues.
Service Marks
The Company believes that its service marks, Staff
Builders, Staffline, the stick figure logo, Tender Loving Care
and the ATC logo have significant value and are important to the
marketing of its services. These names and marks are registered as
service marks with the United States Patent and Trademark Office.
The registration of the Staff Builders service mark will remain
in effect through February 14, 1999, 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 service mark will remain in effect through August 1,
1999. The registration of the stick figure logo service mark will
remain in effect through August 16, 1998. The registration of the
Tender Loving Care service mark will remain in effect through
January 8, 2005. The ATC and design service mark will remain in
effect through January 9, 2000. 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 business.
Personnel and Employees
The Company has approximately 42,000 individuals who
render home health care and medical staffing services and, at
February 28, 1998, the Company employed approximately 2,850 full-
time administrative and management personnel.
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.
Approximately 2,450 of the Company's administrative
employees were located at the Company's branch offices, 380 were
located at its corporate headquarters in Lake Success, NY, and 24
were located at its medical staffing division headquarters in
Atlanta, Georgia. The decrease of approximately 400 administrative
personnel to 2,850 at February 28, 1998 from 3,250 at February 28,
1997 is primarily due to the Company's preparatory steps taken in
the fourth quarter of fiscal 1998 related to IPS as well as the
closing of approximately 30 locations during fiscal 1998.
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ITEM 2. PROPERTIES
The Company's corporate headquarters consists of
approximately 64,000 square feet of leased office space and 5,000
square feet of storage space in Lake Success, New York. The lease
for the corporate headquarters expires on September 30, 2003 and
provides for current annual rent of approximately $1.4 million,
which increases annually by three percent.
The Company maintains its supplemental staffing division
headquarters in Atlanta, Georgia. The lease for approximately
9,500 square feet of office space expires on May 31, 2000 and
provides for a current annual rent of approximately $126,000.
Approximately 6,000 square feet of the office space is sublet to a
subtenant unaffiliated with the Company at an annual rental of
approximately $70,000 with annual increases of 4.5 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 leases substantially all of its branch
office locations from landlords unaffiliated with the Company or
any of its executive officers or directors. Most of these leases
are for a specified term, although several of them are month-to-
month leases. As of February 28, 1998, there were 228 offices
including 40 operated by the Company and 188 operated by 78
franchisees; 8 of these franchise offices sublease the office space
from the Company and the remaining franchise offices are owned by
franchisees or are leased by the franchisee 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.
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.
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 an accrued loss
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contingency at February 28, 1998 for the aggregate, estimated
amount to settle such matters. This accrual, totalling
approximately $1.2 million, was included in the Company's non-
recurring charge recorded in the fourth quarter of fiscal 1998
under restructuring costs. In the opinion of management, the
outcome of pending litigation will not have a material adverse
effect on the Company's consolidated financial condition, liquidity
or results of operations.
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 1998.
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
listed on the Nasdaq National Market under the symbol "SBLI" as was
its common stock prior to the recapitalization.
High Low
Fiscal Year Ended February 28, 1997
1st quarter ended May 31, 1996 $ 3.94 $ 2.50
2nd quarter ended August 31, 1996 4.50 2.88
3rd quarter ended November 30, 1996 3.63 2.25
4th quarter ended February 28, 1997 3.13 2.19
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
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 21, 1998, there were approximately 280 holders
of record of Class A Common Stock (including brokerage firms
holding stock in "street name" and other nominees) and 465 holders
of record of Class B Common Stock.
-13-
(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.
-14-
ITEM 6.
SELECTED FINANCIAL DATA (in thousands, except per share data)
Years Ended
February February February February February
28, 1998 28, 1997 29, 1996 28, 1995 28, 1994
CONSOLIDATED OPERATIONS DATA:
Revenues $519,704 $480,355 $410,160 $325,111 $246,082
Costs and expenses:
Operating costs 332,739 301,508 256,719 201,365 152,824
General and administrative expenses 176,783 170,290 146,382 113,893 86,082
Amortization of intangible assets 2,807 2,623 1,823 1,237 884
Interest expense 3,600 1,601 948 1,237 2,189
Interest income (1,358) (896) (976) (796) (605)
Other (income) expense, net (818) (1,487) 1,791 (22) 36
Restructuring costs 33,447 - - - -
Total costs and expenses 547,200 473,639 406,687 316,914 241,410
Income (loss)
before income taxes (27,496) 6,716 3,473 8,197 4,672
Provision (benefit) for income taxes (5,864) 2,955 1,459 3,462 1,308
Net income (loss) $(21,632) $ 3,761 $ 2,014 $ 4,735 $ 3,364
Income (loss) applicable to
common stockholders $(21,632) $ 3,761 $ 2,014 $ 4,735 $ 3,954
Income (loss) per common share:
Basic $ (.90) $ .16 $ .09 $ .21 $ .24
Diluted $ (.90) $ .15 $ .08 $ .20 $ .23
Cash dividends per common share $ - $ - $ - $ - $ -
Weighted average common shares
outstanding:
Basic 23,939 23,668 23,598 22,389 16,412
Diluted 23,939 24,577 25,504 24,053 17,504
CONSOLIDATED BALANCE SHEET DATA:
Total assets $150,401 $156,172 $120,527 $103,486 $ 87,310
Working capital 14,312 27,245 12,007 22,038 26,855
Current portion of long-term debt 8,596 5,071 1,655 1,208 827
Long-term debt and other liabilities 40,293 37,998 9,611 9,186 14,021
Total liabilities 112,032 96,706 65,217 51,135 48,035
Stockholders' equity 38,369 59,466 55,310 52,351 40,976
SUPPLEMENTAL DISCLOSURE:
The following information is provided to disclose net income and income per common share
before restructuring costs:
Net income before
restructuring costs $ 3,274 $ 3,761 $ 2,014 $ 4,735 $ 3,364
Income per common
share before restructuring costs $ .14 $ .16 $ .09 $ .21 $ .24
Certain prior period amounts have been reclassified to conform with the fiscal 1998 presentation.
-15-
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.
Results of Operations
Years Ended February 28, 1998 ("Fiscal 1998"), February 28, 1997
("Fiscal 1997") and February 29, 1996 ("Fiscal 1996")
Revenues. Total revenues increased by $39.3 million or
8.2% to $519.7 million in fiscal 1998 from $480.4 million in fiscal
1997. The increase included $24.9 million in revenues generated by
the Company's ATC supplemental staffing division to $67.3 million
in fiscal 1998 from $42.4 million in fiscal 1997. The increase in
ATC revenues 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 ATC revenues included $4.5 million resulting from the
September 1997 acquisition of a provider of nursing services
whereby nursing professionals render services in long-term
assignments, away from the professional's permanent domicile, often
referred to as "travel nurses." The Company's health care revenues
increased by $14.5 million or 3.3% to $451.1 million in fiscal 1998
from $436.6 million in fiscal 1997. This increase included $28.4
million primarily due to acquisitions made during fiscal 1997 which
are 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 franchises 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 franchise model.
Total revenues increased by $70.2 million or 17.1% to $480.4
million in fiscal 1997 from $410.2 million in fiscal 1996. This
increase included $24.6 million of revenues from acquisitions made
in fiscal 1997. Additionally, revenues from acquisitions made in
fiscal 1996 which are included in the full fiscal 1997 period and
continued expansion of the Company's franchise program to new
locations resulted in increased revenues of $19.0 million in fiscal
1997. Locations which were included for the entire two fiscal
periods generated increased revenues of $26.6 million, or 7%, in
fiscal 1997 over fiscal 1996.
-16-
The increase in Medicare and Medicaid revenues during the
three years ended February 28, 1998 results from the Company's
continued response to increasing market demand for patient care due
to demographic trends and the progressive movement of care from
institutions to patients' homes. In order to be certified by the
Health Care Finance Administration as a home health agency which
may participate in the Medicare program, among other things, a
location must satisfy certain operational standards with respect to
the number and qualifications of personnel, service levels and
related supervision as well as meet certain financial standards
with respect to the preparation of annual budgets and capital
expenditure plans.
The Company's service revenues consist of the following:
($ in millions)
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Home health care and other $451 $437 $379
ATC supplemental staffing 67 42 30
Total service revenues $518 $479 $409
The Company receives payment for its home health care
services from several sources. The following are the Company's
home health care service revenues by payment source:
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Medicare 60.1% 61.0% 62.3%
Medicaid and other local
government programs 23.1 21.7 21.0
Insurance and individuals 15.1 15.4 14.5
Other 1.7 1.9 2.2
Total 100.0% 100.0% 100.0%
The change in revenue mix reflects the majority of the
Company's revenue increase from its ATC supplemental staffing
division in fiscal 1998, while the growth of its home health care
operations was slower than in prior years. The reduced rate of
growth in home health care primarily resulted from the effect of
more restrictive payments made for home health care by insurance
carriers and managed care organizations.
The service revenues attributable to franchise offices
increased to 86% in fiscal 1998 from 83% in fiscal 1997 and from
82% in fiscal 1996. The increase in revenues attributable to
franchise offices was due to the increase in the number of
locations operated by franchisees from 126 locations operated by 70
franchisees as of March 1, 1995 to 188 locations operated by 78
-17-
franchisees as of February 28, 1998. The Company has expanded its
operations in additional markets primarily through the recruitment
of new franchisees. These increases include the growth of the
Company's supplemental staffing franchises from 26 offices of which
seven were franchises at March 1, 1995 to 46 offices of which 42
were franchises at February 28, 1998.
Operating Costs. Operating costs were 64.2%, 62.9% and
62.8% of service revenues in fiscal 1998, 1997 and 1996,
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 increase in operating costs as a
percentage of service revenues has increased primarily due to the
increase in ATC 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 16.0%, 15.9%
and 14.6% of direct service wages in fiscal 1998, 1997 and 1996,
respectively.
The cost of contracted services represents 6.6%, 6.5% and
8.1% of service revenues in fiscal 1998, 1997 and 1996,
respectively.
The revenues, operating costs and resultant gross margins
generated by the Company's franchise and Company-owned locations
are as follows:
($ in millions)
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Total revenues - Franchise $446 $398 $334
Total revenues - Company-Owned 74 82 76
Total revenues $520 $480 $410
Operating costs - Franchise $285 $248 $207
Operating costs - Company-Owned 48 54 50
Operating costs $333 $302 $257
Gross margin - Franchise $161 $150 $127
Gross margin - Company-Owned 26 28 26
Gross margin $187 $178 $153
The gross margin percentages generated by Company-owned
locations are lower than those for franchise locations primarily as
a result of a proportionately higher volume of home health care
services which have lower gross margin percentages.
-18-
General and Administrative Expenses. General and
administrative expenses increased by $6.5 million or 3.8% in fiscal
1998 to $176.8 million as compared to $170.3 million in fiscal 1997
and increased by $23.9 million or 16.3% in fiscal 1997 as compared
to $146.4 million in fiscal 1996.
These costs expressed as a percentage of service revenues
were 34.1%, 35.5% and 35.8% in fiscal 1998, 1997 and 1996,
respectively. The increase in general and administrative expenses
in fiscal 1998 was primarily due to the increase in ATC
supplemental staffing expenses of approximately $3.7 million and an
increase in corporate and regional home health care expenses of
approximately $2.4 million. The increase in the ATC supplemental
staffing expenses is due to the expansion of that division. The
increase in ATC general and administrative expenses include
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. The increase
in corporate and regional expenses of $2.4 million, or 6.2% over
the prior year, is 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.
The increase in general and administrative expenses in
fiscal 1997 was due to approximately $13.2 million resulting from
expansion of the Company's franchise program for the amounts
distributed to new franchisees which were added in fiscal 1997 and
the addition of new franchise locations during fiscal 1996 which
were included in the entire fiscal 1997 period. Additionally, an
increase of approximately $3.4 million resulted from locations
operated by the Company and acquired in fiscal 1997 and locations
added during fiscal 1996 which were included in the entire fiscal
1997 period. Further, approximately $4.3 million was incurred in
fiscal 1997 to expand the capabilities of the Company's information
systems and to develop specialized programs to augment the
Company's home health care operations.
Amortization of Intangible Assets. Amortization of
intangible assets was approximately $2.8 million in fiscal 1998 as
compared to $2.6 million in fiscal 1997 and $1.8 million in fiscal
1996. The increases are primarily due to acquisitions made in
those periods.
Interest Expense. Interest expense was approximately
$3.6 million in fiscal 1998 as compared to $1.6 million in fiscal
1997 and $900 thousand in fiscal 1996. The increase in interest
expense in fiscal 1998 over fiscal 1997 was primarily due to an
increase in the level of borrowings under the Company's revolving
line of credit and under its acquisition line. On October 30,
1997, the Company borrowed $12.6 million under the acquisition line
-19-
to purchase an additional 60.9% of the outstanding common stock of
Chelsea Computer Consultants, Inc. ("Chelsea"), a provider of
information technology services to clients in the financial
services, communications, manufacturing and other industries.
Together with the 20.9% of the common stock of Chelsea purchased
for $2.1 million in September 1996, the Company owns 81.8% of the
outstanding common stock of Chelsea.
The increase in interest expense in fiscal 1997 over fiscal
1996 was primarily due to an increase in the level of borrowings
under the Company's revolving line of credit and increases in the
amount of capital leases and other interest bearing debt.
Interest Income. Interest income includes interest on
franchise notes receivable of $481 thousand, $527 thousand and $788
thousand in fiscal 1998, 1997 and 1996, 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 $564 thousand
and $243 thousand in fiscal 1998 and 1997, respectively.
Other (Income) Expense, Net. Other (income) expense, net
in fiscal 1998 includes income from the Company's investment in
Chelsea of $326 thousand and gain on the sale of several offices of
$313 thousand. Fiscal 1997 income includes approximately $1.2
million resulting from the sale of a Company division. Fiscal 1996
expense included approximately $1.6 million to provide for the
costs to close two divisions, $358 thousand in costs associated
with the Company's recapitalization and $165 thousand for
settlement of litigation.
Restructuring Costs. In the fourth quarter of fiscal
1998, the Company recorded a pre-tax non-recurring charge of $33.4
million. This accounting charge included a $24.5 million write-off
of goodwill and intangible assets and $8.9 million of other
restructuring costs. See Note 2 to the consolidated financial
statements, "Reimbursement Reductions and Related Restructuring."
Provision (Benefit) for Income Taxes. The provision
(benefit) for income taxes reflects an effective rate of 21%, 44%
and 42% in fiscal 1998, 1997 and 1996, respectively. The (benefit)
for income taxes in fiscal 1998 results from the non-recurring
charge for restructuring costs. Excluding the effect of this
charge, the effective rate was 45% in fiscal 1998.
Net Income (Loss). Net (loss) for fiscal 1998 was
$(21.6) million, or $(.90) per share, compared to net income in
fiscal 1997 of $3.76 million, or $.16 per share, and net income of
$2.01 million, or $.09 per share, in fiscal 1996. Before the non-
recurring charge for restructuring costs, the net income in fiscal
1998 was $3.27 million, or $.14 per share.
-20-
Liquidity and Capital Resources
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, under which it can borrow up to
an aggregate amount of $50 million. The secured credit facility
expires on July 31, 2000. The Company is permitted to borrow up to
75% of eligible receivables up to the maximum amount of the credit
facility less amounts outstanding under the acquisition line of
credit and any outstanding letters of credit. Eligible receivables
are defined principally as trade accounts receivable which have
been outstanding for less than 120 days. Long-term and short-term
liquidity will be enhanced to the extent that the accounts
receivable on which the Company is not permitted to borrow are
reduced and by shortening the amount of time that its accounts
receivable are outstanding. As of February 28, 1998, the
acquisition line of credit provided for borrowings up to $15
million without collateral to finance acquisitions, provided that
the sum of all borrowings do not exceed $50 million.
Subsequent to February 28, 1998, an amendment was made to the
credit facility which increased the maximum available amount of the
acquisition line of credit from $15 millon to $25 million and
expanded the purpose to include stock repurchases in amounts up to
$10 million. From March 6 to May 21, 1998, the Company purchased
and retired a total of 897,400 shares of its common stock at a cost
of $1.85 million. No repurchases were made in fiscal 1998. During
fiscal 1997 and 1996, the Company purchased and retired a total of
541,000 shares of its common stock at a cost of $1.4 million.
At February 28, 1998, the Company had $17.6 million
outstanding under the revolving line of credit and $11.8 million
outstanding under the acquisition line of credit. The acquisition
line of credit is being repaid in 48 monthly installments of $263
thousand which began on December 1, 1997. The average daily
balance outstanding under the revolving line of credit was
approximately $19.1 million, $6.3 million, and $1.4 million in
fiscal 1998, 1997 and 1996, respectively. The increase in average
daily borrowings in fiscal 1998 over fiscal 1997 was primarily due
to the increase in the average amount of accounts receivable
outstanding during fiscal 1998 over the prior year.
At February 28, 1998 and 1997, the amounts available for
borrowing under the credit facility were $18.6 million and $31.4
million, respectively. The decrease in availability is due to the
$11.8 million outstanding under the acquisition line of credit at
February 28, 1998. No amounts were outstanding under the
acquisition line of credit as of February 28, 1997 or for any time
prior thereto.
Trade accounts receivable at the end of fiscal 1998,
1997, and 1996 were outstanding for an average of approximately 58,
57 and 48 days, respectively. As of February 28, 1998, the Company
has 70 offices which participate in Medicare's periodic interim
-21-
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 volume. As
presently amended by the Balanced Budget Act of 1997, the PIP
program will terminate for home health care providers effective for
fiscal years beginning on or after October 1, 1999.
The Company funds the operating costs for all Company
owned and franchise locations as well as all regional and corporate
general and administrative expenses. Operating costs primarily
consist of direct service salaries paid on a weekly cycle. Each
franchisee funds its own general and administrative expenses. The
Company pays a distribution or commission to its franchisees, based
upon a percentage of gross profit generated by the franchise,
within 25 to 45 days after each month-end. Some of the
administrative personnel for franchise locations are obtained
contractually from the Company for which the related cost is
deducted from monthly distributions or commissions paid.
The Company has several agreements under which it leases
computer and other capital equipment through September 2002. The
net carrying value of the assets under these leases was
approximately $7.1 million at February 28, 1998 and 1997.
At February 28, 1998, the Company's debt obligations due
within the next twelve months were approximately $8.6 million.
There are various proposals under development to enact
health care reform on a national, state and local level. It is not
possible currently to predict the cash flow impact, if any, which
any such changes may have on the Company.
The Company expects that its existing working capital,
cash from operations and its credit facilities will be sufficient
to meet its needs for at least the next twelve months.
Impact of Year 2000 Computer Issue
The year 2000 issue is the result of computer programs
which were written using two digits rather than four to define the
applicable year. The Company is currently taking steps to adapt
its computer systems to accommodate the year 2000 issue. The
Company is utilizing both internal and external resources to
reprogram or replace its computer software for year 2000
modifications. The Company anticipates that modifications to
existing software and investments being made in new software will
provide compliance with the requirements to handle the year 2000
issue with no significant operational concerns. However, there is
no guarantee that the Company's expected results will be achieved
and actual results could differ materially from those expected
results. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area. System maintenance and
modification costs to existing software will be expensed as
incurred. The costs associated with externally developed computer
software that is year 2000 compliant will be capitalized and
amortized over the software's estimated useful life. The costs to
modify and replace existing software cannot be reasonably
determined at this time.
-22-
Effect of Inflation
The rate of inflation was immaterial during the 1998
fiscal year. 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 June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires that changes in comprehensive income be shown in financial
statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective for fiscal
years beginning after December 15, 1997. Management has not yet
evaluated the effects of this change on the Company's financial
statement disclosures.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for reporting information about operating
segments. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS
No. 131 becomes effective for fiscal years beginning after December
15, 1997. Management has not yet evaluated the effect of this
change on the Company's financial statement disclosures.
In April 1998, the FASB adopted Statement of Position No. 128,
"Reporting on the Costs of Start-Up Activities" ("SOP No. 128")
which requires that costs previously capitalized as start-up costs
will be expensed as incurred. SOP No. 128 becomes effective for
fiscal years beginning after December 15, 1998, with earlier
application encouraged. Management does not expect the adoption of
SOP No. 128 to have a material effect on the Company's consolidated
financial statements.
Forward Looking Statements
Certain statements in this report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
typically identified by their inclusion of phrases such as "the
Company anticipates", "the Company believes" and other phrases of
similar meaning. These forward looking statements are based on the
Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance or achievements of
the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-
looking statements. The potential risks and uncertainties which
could cause actual results to differ materially from the Company's
expectations include the impact of further changes in the Medicare
-23-
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; and changes
in laws and interpretations of laws or regulations relating to the
health care industry.
GOVERNMENT REGULATION. As a home health care provider, the Company
is subject to extensive and changing state and Federal regulations
relating to the licensing and certification of its offices and the
sale and delivery of its products and services. The Federal
government and Medicare fiscal intermediaries have become more
vigilant in their review of Medicare 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. In August 1997, Congress enacted and President
Clinton signed into law the Balanced Budget Act of 1997 ("BBA"),
resulting in significant changes to cost based reimbursement for
Medicare home health care providers. Although the new legislation
enacted by Congress retains a cost based reimbursement system, the
cost limits have been reduced for fiscal years which began on or
after October 1, 1997 and a new per-beneficiary limit is effective
for fiscal years which began after such date. The BBA provides
two payment systems -- an interim payment system ("IPS") which is
effective for the Company beginning March 1, 1998 until the
adoption of the successor payment system which is a new prospective
payment system scheduled to be effective for fiscal years beginning
on or after October 1, 1999. The effect of the changes under IPS
is to reduce the limits for the amount of costs that are
reimbursable to home health care providers under the Medicare
program. The Company anticipates a possible decrease in aggregate
net revenues during the course of the next fiscal year due
principally to reductions in the limits for the amount of costs
that are reimbursable in connection with the provision of Medicare
services. The Company cannot quantify the full effect of IPS on
the Company's future performance because certain components of
health care reform legislation, such as the per-beneficiary limit,
require annual data which will not be known until a final
assessment by Medicare and/or its fiscal intermediary is completed
for each annual period.
-24-
As Congress and state reimbursement entities assess
alternative health care delivery systems and payment methodologies,
the Company cannot predict which additional reforms may be adopted
or what impact they may have on the Company. Additionally,
uncertainties relating to the nature and outcomes of health care
reforms have also generated numerous realignments, combinations and
consolidations in the health care industry which may also have an
adverse impact on the Company's business strategy and results of
operations. The Company expects that in addition to industry
consolidation generally, there may be consolidations within Staff
Builders' company-owned and franchised locations, with the likely
result that there will be fewer offices by the end of the next
fiscal year.
BUSINESS CONDITIONS. The Company must continue to establish and
maintain close working relationships with physicians and physician
groups, managed care organizations, hospitals, clinics, nursing
homes, social service agencies and other health care providers.
There can be no assurance that the Company will continue to
establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the
increasing market demand for the type of services offered.
ATTRACTION AND RETENTION OF FRANCHISEES AND EMPLOYEES. Maintaining
quality franchisees, managers and branch administrators will play
a significant part in the future success of the Company. The
Company's professional nurses and other health care personnel are
also key to the continued provision of quality care to the
Company's patients . The possible inability to attract and retain
qualified franchisees, skilled management and sufficient numbers of
credentialed health care professionals and para-professionals could
adversely affect the Company's operations and quality of service.
-25-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STAFF BUILDERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of February 28, 1998
and February 28, 1997 F-2
Consolidated Statements of Operations
for the Years ended February 28, 1998, February
28, 1997 and February 29, 1996 F-3
Consolidated Statements of Stockholders' Equity
for the Years ended February 28, 1998, February
28, 1997 and February 29, 1996 F-4
Consolidated Statements of Cash Flows
for the Years ended February 28, 1998, February
28, 1997 and February 29, 1996 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
FEBRUARY 28, 1998, FEBRUARY 28, 1997
AND FEBRUARY 29, 1996
II - Valuation and Qualifying Accounts F-23
All other schedules were omitted because they are not required, not
applicable or the information is otherwise shown in the financial
statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Staff Builders, Inc.:
We have audited the accompanying consolidated balance sheets of Staff
Builders, Inc. and subsidiaries (the "Company") as of February 28, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
February 28, 1998. Our audits also included the financial statement schedule
listed in the Table of Contents. These financial statements and the
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Staff Builders, Inc. and
subsidiaries at February 28, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended February 28, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche, LLP
Jericho, New York
April 20, 1998
F-1
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
February 28,
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 1,931 $ 2,006
Accounts receivable, net of allowance
for doubtful accounts of $3,600
and $2,800, respectively 76,668 77,103
Deferred income taxes 3,081 1,855
Prepaid expenses and other current assets 4,371 4,989
Total current assets 86,051 85,953
FIXED ASSETS, net 11,548 12,082
INTANGIBLE ASSETS, net 26,995 51,022
INVESTMENT IN UNCONSOLIDATED AFFILIATE 15,125 2,125
OTHER ASSETS 10,682 4,990
TOTAL $150,401 $156,172
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,039 $ 14,429
Accrued expenses 18,871 17,466
Accrued payroll and payroll related expenses 27,233 21,742
Current portion of long-term debt 8,596 5,071
Total current liabilities 71,739 58,708
LONG-TERM DEBT 36,293 35,449
OTHER LIABILITIES 4,000 2,549
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock - - -
Class A Common Stock - $.01 par value;
50,000,000 shares authorized; 23,009,247 and
22,343,970 outstanding at February 28, 1998
and February 28, 1997, respectively 230 223
Class B Common Stock - $.01 par value;
1,554,936 shares authorized; 1,056,356 and
1,462,361 outstanding at February 28, 1998
and February 28, 1997, respectively 10 15
Preferred stock, 10,000 shares authorized;
Class A - $1.00 par value; 666 2/3 shares
outstanding at February 28, 1998 and
February 28, 1997 1 1
Additional paid-in capital 73,692 73,159
Accumulated deficit (35,564) (13,932)
Total stockholders' equity 38,369 59,466
TOTAL $150,401 $156,172
See notes to consolidated financial statements
F-2
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended
February February February
28, 1998 28, 1997 29, 1996
REVENUES:
Service revenues:
Home health care $451,098 $436,599 $378,419
ATC supplemental staffing 67,331 42,430 30,454
Total service revenues 518,429 479,029 408,873
Sales of franchises and fees, net 1,275 1,326 1,287
Total revenues 519,704 480,355 410,160
COSTS AND EXPENSES:
Operating costs 332,739 301,508 256,719
General and administrative expenses 176,783 170,290 146,382
Amortization of intangible assets 2,807 2,623 1,823
Interest expense 3,600 1,601 948
Interest income (1,358) (896) (976)
Other (income) expense, net (818) (1,487) 1,791
Restructuring costs 33,447 - -
Total costs and expenses 547,200 473,639 406,687
INCOME (LOSS) BEFORE INCOME TAXES (27,496) 6,716 3,473
PROVISION (BENEFIT) FOR INCOME TAXES (5,864) 2,955 1,459
NET INCOME (LOSS) $(21,632) $ 3,761 $ 2,014
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.90) $ .16 $ .09
Diluted $ (.90) $ .15 $ .08
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 23,939 23,668 23,598
Diluted 23,939 24,577 25,504
See notes to consolidated financial statements
F-3
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Preferred Additional
Common Stock Stock Paid-In Accumulated
Shares Amount Class A Capital Deficit Total
Balances, March 1, 1995 22,937,049 $229 $1 $71,828 $(19,707) $ 52,351
Additional common stock in
connection with a 1987 acquisition 1,360 - -
Common stock issued - exercise of
stock options, net of 683,054 shares
used to pay for shares and
withholding taxes, net of related
tax benefits of $772 437,681 4 405 409
Exercise of common stock warrants 398,016 4 1,126 1,130
Common stock issued-employee
stock purchase plan 149,214 2 429 431
Purchase and retirement of common stock (386,000) (4) (1,021) (1,025)
Net Income 2,014 2,014
Balances, February 29, 1996 23,537,320 235 1 72,767 (17,693) 55,310
Additional common stock in
connection with a 1987 acquisition 4,870 - -
Common stock issued-exercise of
stock options, net of 15,232 shares
used to pay for shares 23,768 - 29 29
Exercise of common stock warrants 160,680 2 193 195
Common stock issued-employee
stock purchase plan 234,693 2 579 581
Purchase and retirement of common stock (155,000) (1) (409) (410)
Net Income 3,761 3,761
Balances, February 28, 1997 23,806,331 238 1 73,159 (13,932) 59,466
Additional common stock in
connection with a 1987 acquisition 171 - - -
Exercise of stock options 5,000 - 11 11
Common stock issued-employee
stock purchase plan 254,101 2 522 524
Net (Loss) (21,632) (21,632)
Balances, February 28, 1998 24,065,603 $240 $1 $73,692 $(35,564) $ 38,369
See notes to consolidated financial statements
F-4
STAFF BUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
February February February
28, 1998 28, 1997 29, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(21,632) $ 3,761 $ 2,014
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization of fixed assets 3,791 2,757 2,120
Amortization of intangibles and other assets 2,807 2,623 1,823
Write-off of investments and other deferred charges 1,198 - -
Write-off of goodwill and intangible assets 24,540 - -
Earnings of unconsolidated affiliate (326) - -
Increase (decrease) in other long term liabilities 424 (758) 477
Allowance for doubtful accounts 800 600 450
Deferred income taxes (6,838) 548 (1,013)
Gain on sale of assets (290) (1,247) -
Change in operating assets and liabilities:
Accounts receivable (1,019) (23,443) 3,993
Prepaid expenses and other current assets 455 (1,193) (1,447)
Accounts payable 2,611 4,977 (1,139)
Accrued expenses 6,703 (6,587) 13,889
Income taxes payable - 62 (1,098)
Other assets 226 (1,529) (10)
Net cash provided by (used in)
operating activities 13,450 (19,429) 20,059
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (3,724) (8,202) (7,981)
Investment in unconsolidated affiliate (12,732) (2,125) -
Purchase of fixed assets (1,023) (2,334) (1,127)
Proceeds from disposal of assets 855 775 14
Net cash used in investing activities (16,624) (11,886) (9,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan 524 581 431
Proceeds from exercise of stock options 11 29 409
Proceeds from exercise of warrants - 195 1,130
Purchase and retirement of common stock - (410) (1,025)
Increase (decrease) in borrowings
under revolving line of credit (3,978) 21,565 (6,461)
Proceeds from acquisition line of credit 12,625 - -
Proceeds from other note payable - 5,727 -
Payment of notes payable and other
long-term liabilities (6,083) (3,076) (1,247)
Net cash provided by (used in) financing
activities 3,099 24,611 (6,763)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (75) (6,704) 4,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,006 8,710 4,508
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,931 $ 2,006 $ 8,710
SUPPLEMENTAL DATA:
Cash paid for:
Interest $ 3,343 $ 1,081 $ 806
Income taxes, net $ 2,344 $ 1,867 $ 3,485
Fixed assets purchased through
capital lease agreements $ 2,351 $ 4,770 $ 2,425
See notes to consolidated financial statements
F-5
STAFF BUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1998 ("Fiscal 1998"), FEBRUARY 28, 1997
("Fiscal 1997") AND FEBRUARY 29, 1996 ("Fiscal 1996")
(Dollars in Thousands, Except Where Indicated Otherwise and, for Per
Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Staff Builders, Inc. ("Staff Builders" or the "Company") is
a national provider of home health care personnel and supplemental
staffing to health care institutions.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Staff Builders and its wholly-owned subsidiaries. The
Company maintains its records on a fiscal year ending the last day in
February. All material intercompany accounts and transactions have
been eliminated. Certain prior period amounts have been reclassified
to conform with the fiscal 1998 presentation.
A majority of the Company's service revenues are derived
under an unique form of franchising where it licenses independent
companies or contractors to represent the Company within a designated
territory using the Company's trade names and service marks. These
franchisees recruit direct service personnel and 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 direct service personnel who are
all employees of the Company, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The franchisees are responsible for providing an office
and paying related expenses for administration including rent,
utilities and costs for administrative personnel.
The Company owns all necessary health care related permits
and licenses and, where required, certificates of need for operation
of franchise offices. The revenues generated by the franchise
operations along with the related accounts receivable belong to the
Company. The revenues and related direct costs are included in the
Company's consolidated service revenues and operating costs.
The Company pays a distribution or commission to the
franchisees based on a defined formula of gross profit generated.
Generally, the Company pays the franchisee 60% of the gross profit
attributable to the non-Medicare operations of the franchise. The
payment to the Company's franchises related to Medicare operations is
adjusted for cost limitations and reimbursement of allowable Medicare
costs.
For fiscal 1998, 1997 and 1996, total franchisee
distributions or commissions of approximately $92.9 million, $88.6
F-6
million and $75.4 million, respectively, were included in the
Company's general and administrative expenses.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, revenues and expenses as well as the disclosure of
contingent assets and liabilities in the financial statements. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include certificates of deposit
and commercial paper purchased with a maturity of less than three
months.
Fixed Assets
Fixed assets, primarily consisting of equipment, furniture
and fixtures, and leasehold improvements, are stated at cost and
depreciated over the estimated useful lives of the assets using the
straight-line method. The estimated useful lives of the related assets
are generally five to seven years.
Goodwill and Intangible Assets
The excess of the purchase price and related acquisition
costs over the fair market value of the net assets of the businesses
acquired is amortized on a straight-line basis over periods ranging
from five to forty years. Intangible assets include customer lists,
which are being amortized over five years on a straight-line basis.
In fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This Statement requires that certain assets be reviewed for impairment
and, if impaired, remeasured at fair value, whenever events or changes
in circumstances indicate that the carrying amount of the asset may
not be recoverable. In the fourth quarter of fiscal 1998, the Company
wrote off $24.5 million of goodwill and intangible assets. This
amount primarily resulted from the Company's assessment of the adverse
change in health care reform (See Note 2).
The accumulated amortization as of February 28, 1998 and
February 28, 1997, was $10,413 and $9,126, respectively.
Additionally, during fiscal 1998 and 1997, the Company wrote off
$1,206 and $659 of fully amortized intangible assets, respectively.
Revenue Recognition
Revenues generated from the sales and licensing of
franchises and initial franchise fees are recognized when the Company
has performed substantially all of its obligations under its franchise
F-7
agreements and when collectibility of such amounts is reasonably
assured. In circumstances where a reasonable basis does not exist for
estimating collectibility of the proceeds of the sales of franchises
and initial franchise fees, such proceeds are deferred and recognized
as collections are made, utilizing the cost recovery method (see Note
3).
Medicare reimburses the Company for covered items and
services at the lower of the Company's cost, as determined by
Medicare, cost limits established by the Federal government, or the
amount charged by the Company. Revenues generated from Medicare
services are recorded when services are provided at an estimated
reimbursement rate. Certain factors used to develop these rates are
subject to review and adjustment by the appropriate governmental
authorities and may result in additional amounts due to or due from
the Company. Management reduces revenues by its estimate of the amount
of net adjustments which should ultimately occur. Adjustments, if any,
are recorded to these estimates in the period during which they arise.
The Company reduced its Medicare revenues by $3 million in the third
quarter of fiscal 1996 for which the related amount of the third party
payor settlement liability is included in accrued expenses, due to a
revision in the methodology used to allocate corporate overhead.
Income Taxes
Deferred income taxes result from timing differences
between financial and income tax reporting which primarily include the
deductibility of certain expenses in different periods for financial
reporting and income tax purposes.
Earnings per Share
The Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share, effective with fiscal years
ending after December 15, 1997. Earnings per share amounts for all
periods have been restated to conform to the SFAS No. 128
requirements.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, franchise
notes receivable, obligations under capital leases and notes payable
and other liabilities related to acquisitions approximate fair value.
2. REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("BBA"), resulting in
significant changes to cost based reimbursement for Medicare home
health care providers. Although the new legislation enacted by
Congress presently retains a cost based reimbursement system, the cost
F-8
limits have been reduced for fiscal years which began on or after
October 1, 1997 and a new per-beneficiary limit is effective for
fiscal years which began after such date. The BBA provided for two
payment systems -- an interim payment system ("IPS") which is
effective for the Company from March 1, 1998 until the adoption of the
successor payment system which is a new prospective payment system
scheduled to be effective for fiscal years beginning on or after
October 1, 1999. The effect of the changes under IPS is to reduce the
limits for the amount of costs that are reimbursable to home health
care providers under the Medicare program.
During the fourth quarter of fiscal 1998, management moved
proactively to prepare the Company for the impact of IPS and for long-
term growth. As a result, the Company implemented a corporate-wide
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 non-recurring charge in the fourth
quarter of fiscal 1998 of $33.4 million. This accounting charge
included a $24.5 million write-off of goodwill and intangible assets
and $8.9 million of other restructuring costs. The other
restructuring costs included $1.0 million for employee severance
arrangements and the closure, consolidation or reduction in the size
of operating locations, $6.3 million for the write-down of certain
home health care related investments and receivables, $1.2 million of
litigation related costs and $0.4 million of other costs. The write-
off of goodwill and intangible assets is required under SFAS No.
121.
3. FRANCHISE OPERATIONS
Franchise notes receivable generally bear interest at the
prevailing prime lending rate plus three percent and are generally
payable over a term of ten years. The balance of these notes
receivable at February 28, 1998 and February 28, 1997 amounted to
$1,734 and $1,953, net of deferred income reflected as a valuation
reserve for financial reporting purposes of $4,387 and $5,600,
respectively. The net balances of these notes at February 28, 1998
and February 28, 1997 include $306 and $302 in Prepaid Expenses and
Other Current Assets and $1,428 and $1,651 in Other Assets,
respectively. During fiscal 1998, fiscal 1997 and fiscal 1996, $473,
$444 and $526, respectively, of notes receivable previously not
recognized into income were collected and included in revenues.
Sales of franchises and fees, net include $792, $827 and
$761 of initial franchise fees for fiscal 1998, 1997 and 1996,
respectively. The initial franchise fees received in fiscal 1998,
1997 and 1996 include $135, $488 and $507 for health care franchises
and $155, $339 and $254 for supplemental staffing franchises,
respectively. Further, these initial franchise fees include $502 of
a license fee received from its master license agreement with a home
health care company based in Tokyo, Japan. In March 1998, the Company
received the remaining balance of the master license fee totalling
$1.2 million. Under its 20 year agreement, the Company will receive
periodic royalty payments based upon the Japanese company's service
F-9
revenues. The remaining amounts primarily represent charges to
franchisees for the use of Company assets including customer and
employee lists. The Company has performed substantially all of its
obligations as required under the terms of its franchise agreements.
Interest income on franchise notes receivable is included
in other income.
In September 1996, in connection with the acquisition of a
supplemental staffing business (see Note 4), a corporation acquired
the rights to operate this business as a franchise and paid a fee of
$75 to the Company. A majority of the stock of this corporation is
owned by two family members of one of the Company's executive
officers.
In April 1992, one of the Company's franchises was acquired
by a corporation owned by a family member of one of the Company's
executive officers. The purchase price for the franchise included the
assumption of a note payable to the Company of $845 of which $687
remains outstanding at February 28, 1998. The note bears interest at
the prevailing prime lending rate and matures in 2009.
Two of the Company's officers own a portion of three
franchises. One of these officers owns a portion of a franchise for
which a note payable was issued to the company of $300 of which $241
remains outstanding at February 28, 1998. The other Company officer
owns a portion of two franchises for which liabilities to the Company
of $21 and $29, respectively, remain outstanding at February 28, 1998.
4. ACQUISITIONS
During fiscal 1998, 1997 and 1996, the Company made
numerous acquisitions for which consideration was paid in cash, the
issuance of notes payable and the assumption of certain liabilities.
The transactions were accounted for as purchases and, accordingly, the
results of operations of the acquired businesses are included in the
accompanying consolidated financial statements from their respective
dates of acquisition.
In fiscal 1998, the Company acquired the assets of nine
businesses, consisting of seven home health care and two supplemental
staffing operations, which added six locations. The aggregate
consideration included cash paid of approximately $3.7 million and
liabilities assumed of approximately $1.3 million.
In fiscal 1997, the Company acquired the assets of 19
businesses, consisting of 17 home health care and two supplemental
staffing operations, which added 33 locations. The aggregate
consideration included net cash paid of $8.2 million, the issuance of
notes payable of $3.1 million and liabilities assumed of $1.0 million.
In fiscal 1996, the Company acquired the assets of 13
businesses and the stock of one business, all consisting of home
health care providers, which added 30 locations. The aggregate
consideration included cash paid of $8.0 million, the issuance of
notes payable of $4.5 million and liabilities assumed of $1.0 million.
F-10
The effect of the fiscal 1998 acquisitions on revenue, net
loss and net loss per share on an unaudited pro forma basis for fiscal
1998 is not material. Revenues, net income and earnings per share,
on an unaudited pro forma basis for the year ended February 28, 1997,
if the fiscal 1998 and fiscal 1997 acquisitions had occurred on March
1, 1996, would have approximated $500 million, $4.9 million and $.20,
respectively. Revenues, net income and earnings per share on an
unaudited pro forma basis for the year ended February 29, 1996, if the
fiscal 1997 and 1996 acquisitions had occurred on March 1, 1995, would
have approximated $448 million, $2.6 million and $.10, respectively.
In connection with the fiscal 1998 and fiscal 1997
acquisitions, assets acquired and consideration paid was as follows:
1998 1997
Fair value of assets acquired $ 4,904 $12,310
Net cash paid for acquired
assets and stock (3,724) (8,202)
Liabilities assumed and notes
payable issued for acquisitions $ 1,180 $ 4,108
5. FIXED ASSETS
Fixed assets consist of the following:
February 28,
1998 1997
Equipment under capital leases
(see Note 9) $11,196 $ 9,972
Office equipment, furniture
and fixtures 7,344 7,053
Leasehold improvements 1,089 1,000
Land and buildings 106 181
Total, at cost 19,735 18,206
Less accumulated depreciation
and amortization 8,187 6,124
Fixed assets, net $11,548 $12,082
During fiscal 1998 and 1997, the Company wrote off fully
depreciated fixed assets of approximately $1.7 million and $1.4
million, respectively.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On October 30, 1997, the Company purchased 60.9% of the
outstanding common stock of Chelsea Computer Consultants, Inc.
("Chelsea") for a total of $12.4 million plus purchase related costs
of $300. The Company utilized $12.6 million under its acquisition
line of credit to fund this purchase (See Note 9). Chelsea is a
provider of information technology services to clients in the
financial services, communications, manufacturing and other
industries. Together with the 20.9% of the common stock of Chelsea
purchased for $2.1 million in September 1996, the Company owns 81.8%
of the outstanding common stock of Chelsea. The Company is actively
engaged in the selling process of its majority position in Chelsea and
F-11
will evaluate offers and believes that its majority control over
Chelsea will be temporary; accordingly, the Company has accounted for
Chelsea as an unconsolidated subsidiary. The excess of the Company's
cost of its investment over its pro rata share of the net fair value
of assets acquired is being amortized on a straight-line basis. The
Company performed certain consulting services for Chelsea amounting
to $700 and $500 in fiscal 1998 and 1997, respectively, which are
included in service revenues.
7. ACCRUED EXPENSES
Accrued expenses include $6,877 and $7,424 at February 28, 1998
and February 28, 1997, respectively, of accrued franchise
distributions. Also included in accrued expenses at February 28, 1998
and February 28, 1997 was $7,330 and $7,372, respectively, reflecting
the Company's third-party payor settlement liability.
8. ACCRUED PAYROLL AND PAYROLL RELATED EXPENSES
Accrued payroll and payroll related expenses consist of the
following:
February 28,
1998 1997
Accrued payroll $ 8,131 $ 8,142
Accrued insurance 10,381 5,447
Accrued payroll taxes 4,755 5,002
Other 3,966 3,151
Total $27,233 $21,742
9. LONG-TERM DEBT
Long-term debt consists of the following:
February 28,
1998 1997
Borrowings under a secured revolving
line of credit(a) $17,587 $21,565
Borrowings under acquisition
line of credit (a) 11,836 -
Obligations under capital leases(b) 6,606 6,768
Notes payable and other liabilities
related to acquisitions(c) 5,225 6,749
Other note payable (d) 3,635 5,438
Total 44,889 40,520
Less current portion 8,596 5,071
Long-term debt(e) $36,293 $35,449
(a) 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, under which the Company can borrow up to
an aggregate amount of $50 million. The Company has $11.8 million
outstanding at February 28, 1998 under its acquisition line of credit
which bears interest at .75% over the prevailing prime rate or at the
Company's option, at the London Interbank Offered Rate (LIBOR) plus
2.75%. The acquisition line of credit is being repaid in 48 monthly
installments of $263 which began on December 1, 1997. The secured
credit facility expires on July 31, 2000.
F-12
Amounts borrowed under the revolving line of the credit are
collateralized by a pledge of all the stock of the Company's
subsidiaries, by all accounts receivable and by liens on substantially
all other assets of the Company and its subsidiaries. The agreement
contains certain financial covenants which, among other things, (i)
require the maintenance of a specified minimum defined level of book
net worth, a minimum ratio of net income before depreciation and
amortization to the sum of payments made for long term debt, unfunded
capital expenditures, stock repurchases and permitted acquisitions,
and a maximum ratio of senior debt to book net worth, (ii) limit the
amount of unfunded capital expenditures, and (iii) prohibit the
declaration or payment of cash dividends. Based upon the non-recurring
charge recorded in the fourth quarter of fiscal 1998 (See Note 2), the
Company has obtained an amendment with its bank to provide relief from
the terms of those covenants which required a specified level of net
worth and net income before depreciation and amortization.
At February 28, 1998 and 1997, the amounts available for
borrowing under the credit facility were $18.6 million and $31.4
million, respectively. The decrease in availability is due to the
$11.8 million outstanding under the acquisition line of credit at
February 28, 1998. No amounts were outstanding under the acquisition
line of credit as of February 28, 1997 or for any time during fiscal
1997. The maximum amounts borrowed under the credit facility for
fiscal 1998 and 1997 were $37.0 million and $26.4 million,
respectively, including $24.6 million outstanding under the revolving
line of credit and $12.4 million outstanding under the acquisition
line of credit in fiscal 1998. No amounts were borrowed under the
acquisition line of credit in fiscal 1997. The maximum amount
outstanding under the revolving line of credit portion of the facility
was $28.1 million in fiscal 1998. The average interest rates were
8.50% and 7.96%, in fiscal 1998 and 1997, respectively.
The credit facility bears interest at the prevailing prime
lending rate and, at the Company's option, borrowings may bear
interest based upon the London Interbank Offered Rate (LIBOR) plus
1.50% to 2.25%. At February 28, 1998, $18 million of borrowings under
the revolving line of credit were bearing interest at the LIBOR
option, which was 7.875%, and borrowings in excess thereof were
bearing interest at the prime rate which was 8.50%. Additionally, $11
million of borrowings under the acquisition line of credit were
bearing interest at the LIBOR option, which was 8.375%, and borrowings
in excess thereof were bearing interest at .75% over the prime rate.
A commitment fee on the unused portion of the credit facility is
payable at the rate of .375% per annum, together with an annual
collateral management fee of $85.
The Company is permitted to borrow up to 75% of eligible accounts
receivable, up to the maximum amount of the credit facility less
amounts outstanding under the acquisition line of credit and any
outstanding letters of credit. As of February 28, 1998, the
acquisition line of credit provided for borrowings up to $15 million
without collateral to finance acquisitions, provided that the sum of
all borrowings do not exceed $50 million. Amounts borrowed under the
acquisition line of credit are subject to the Bank's approval and must
be repaid over twelve to forty-eight months as determined by the Bank,
at .75% over prime or, at the Company's option, at LIBOR plus 2.75%.
F-13
Subsequent to February 28, 1998, an amendment was made to the
credit facility which increased the maximum available amount of the
acquisition line of credit from $15 million to $25 million and
expanded the purpose to include stock repurchases in amounts up to a
new $10 million sublimit under the facility. From March 6 to May 21,
1998, the Company purchased and retired a total of 897,400 shares of
its common stock at a cost of $1.85 million. No repurchases were made
in fiscal 1998. During fiscal 1997 and 1996, the Company purchased
and retired a total of 541,000 shares of its common stock at a cost
of $1.4 million.
(b) At February 28, 1998, the Company had capital lease agreements
for computers and other equipment through September 2002. The net
carrying value of the assets under capital leases was approximately
$7.1 million at February 28, 1998 and February 28, 1997, and such
amounts are included in Fixed Assets.
(c) At February 28, 1998, the Company had a balance of notes payable
related to acquisitions of $5.2 million. The notes payable bear
interest at 4.0% to 8.25% and have maturity dates through September
2010.
(d) The Company has a secured term loan which bears interest at 6.69%
and requires monthly payments of $176 through December 1999.
(e) Repayments of long-term debt at February 28, 1998 are due as
follows:
Obligations
Under
Capital Other
Years Ending February Leases Debt Total
1999 $2,644 $ 5,952 $ 8,596
2000 2,250 5,086 7,336
2001 1,406 20,911 22,317
2002 304 2,646 2,950
2003 2 290 292
Thereafter - 3,398 3,398
Total $6,606 $38,283 $44,889
10. OTHER LIABILITIES
Other liabilities consist of the following:
February 28,
1998 1997
Accrued litigation (a) $1,168 $ -
Accrued acquisition cost (b) 700 -
Rent escalation liability (c) 883 982
Other 1,249 1,567
Total $4,000 $2,549
(a) At February 28, 1998, the Company has an accrued loss
contingency for the aggregate, estimated amount to settle open
legal matters.
F-14
(b) In connection with the Company's September 1997 acquisition of
a provider of travel nurse services, the Company is liable to pay
additional amounts based upon the attainment of certain gross
margin levels. The Company's estimate of such amounts at February
28, 1998 is $1,124, of which $424 is included in accrued expenses.
(c) The lease on the Company's corporate headquarters requires
scheduled rent increases through September 30, 2003. A rent
escalation liability is recorded for the amounts required to record
the expense of this lease on a straight-line basis over the life of
the lease, in excess of payments made. The balance of this
liability was $982 and $1,049 at February 28, 1998 and 1997 of
which $99 and $67, respectively, was included in accrued expenses.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Current:
Federal $ 1,051 $1,709 $1,829
State 377 558 643
Deferred (7,292) 688 (1,013)
Total $(5,864) $2,955 $1,459
The deferred tax assets (liabilities) at February 28, 1998
and February 28, 1997 are comprised of the following:
February 28,
1998 1997
Current:
Allowance for doubtful
accounts receivable $1,215 $ 903
Nondeductible accruals 1,866 952
Current 3,081 1,855
Non-Current:
Goodwill and intangible assets 5,623 -
Revenue recognition 409 464
Accelerated depreciation (972) (516)
Other assets (liabilities) 305 (196)
Non-current 5,365 (248)
Total $8,446 $1,607
The non-current deferred tax assets (liabilities) are
included in Other Assets and Long-Term Liabilities on the
accompanying balance sheets.
F-15
The following is a reconciliation of the effective
income tax rate to the Federal statutory rate:
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Federal statutory rate 34.0% 34.0% 34.0%
State and local income taxes,
net of Federal income
tax benefit 3.8 7.6 8.7
Write-off of goodwill and
intangible assets (12.3) (0.2) -
Tax credits - (0.4) (3.9)
Goodwill amortization (1.1) 4.6 8.9
Reversal of prior year
accrual (1.8) (2.3) (7.4)
Other (1.3) 0.7 1.7
Effective rate 21.3% 44.0% 42.0%
12. COMMITMENTS AND CONTINGENCIES
Approximate minimum annual rental commitments for the
remaining terms of the Company's noncancellable operating leases
relating to office space and equipment rentals are as follows:
Years Ending February
1999 $ 4,044
2000 3,249
2001 2,298
2002 1,556
2003 1,505
Thereafter 1,304
Total $13,956
Certain leases require additional payments based upon property
tax and maintenance expense escalations.
Aggregate rental expense for fiscal 1998, 1997 and 1996
approximated $4,823, $3,967 and $3,409, respectively.
The Company has entered into employment or consulting
agreements with several officers and other individuals which
require minimum aggregate payments of approximately $3,459, $2,310,
$1,951, $1,490 and $1,684 over the next five fiscal years.
Agreements with two executives provide, in the event of their
death, for the continued payment of their compensation to their
beneficiaries for the duration of their agreements. Additionally,
certain officers have entered into agreements which provide that in
the event of change in control of, and the discontinuance of such
employee's employment, the Company will pay a lump sum amount of
2.99 times the average annual compensation paid to the employee
during the five-year period immediately preceding the date of the
discontinuance of employment.
F-16
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.
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 an accrued loss
contingency at February 28, 1998 for the aggregate, estimated
amount to settle such matters (See Note 10). In management's
opinion, settlement of these actions will not have a material
adverse effect on the Company's consolidated financial position,
liquidity or results of operations. Accrued expenses include $120
at February 28, 1998 which represents the estimated amount of
liability claims payable. Such amount represents the deductible
amount for which the Company is liable, net of payments by the
Company's insurers which are probable of realization, estimated at
approximately $1.3 million.
13. STOCKHOLDERS' EQUITY
Common Stock - Recapitalization and Voting Rights
During fiscal 1996, the shareholders approved a plan of
recapitalization by which the existing Common Stock, $.01 par
value, was reclassified and converted into either Class A Common
Stock, $.01 par value per share, or Class B Common Stock, $.01 par
value per share. Prior to the recapitalization, shares of common
stock that were held by the beneficial owner for at least 48
consecutive months were considered long-term shares, and, were
entitled to ten votes for each share of stock. Pursuant to the
recapitalization, long-term shares were converted into Class B
Common Stock and short-term shares (beneficially owned for less
than 48 months) were converted into Class A Common Stock. As a
result of the recapitalization, 1,554,936 shares of Class B common
stock were issued.
A holder of Class B Common Stock is entitled to ten votes for
each share and each share is convertible into one share of Class A
Common Stock (and will automatically convert into one share of
Class A Common Stock upon any transfer subject to certain limited
exceptions). Except as otherwise required by the Delaware General
Corporation Law, all shares of common stock vote as a single class
F-17
on all matters submitted to a vote by the stockholders.
The recapitalization included all outstanding options and
warrants to purchase shares of common stock which were converted
automatically into options and warrants, to purchase an equal
number of shares of Class A Common Stock.
Stock Options
The Company has adopted the disclosure provisions of the
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). Accordingly, no compensation
expense has been recognized for the stock option plans. Had the
Company recorded compensation expense for the stock options based
on the fair value at the grant date for awards in fiscal years
ended 1998, 1997 and 1996 consistent with the provisions of SFAS
123, the Company's net income (loss) and net income (loss) per
share would have reflected to the following pro forma amounts:
February February February
28, 1998 28, 1997 29, 1996
Net income (loss)
-as reported $(21,632) $ 3,761 $ 2,014
Net income (loss)
-pro forma (22,075) 3,708 2,008
Basic earnings per share
-as reported ( 0.90) .16 .09
Basic earnings per share
-pro forma ( 0.92) .16 .09
Diluted earnings per share
-as reported ( 0.90) .15 .08
Diluted earnings per share
-pro forma ( 0.92) .15 .08
Because the SFAS 123 method of accounting has not been applied
to options granted prior to March 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected
in future years.
The fair value of each option grant is estimated on the date
of grant using the Black Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal
years 1998, 1997 and 1996, respectively: expected volatility of
56%, 48% and 48%; risk-free interest rate averaging 5.8%, 7.1% and
7.1%; and expected lives of 10 years for all.
During the year ended February 28, 1994 ("fiscal 1994"), the
Company adopted a stock option plan (the "1993 Stock Option Plan")
under which an aggregate of one million shares of common stock are
reserved for issuance upon exercise of options thereunder. Options
granted under this plan may be incentive stock options ("ISO's") or
non-qualified options ("NQSO's"). This plan replaces the 1986 Non-
Qualified Plan ("1986 NQSO Plan") and the 1983 Incentive Stock
Option Plan ("1983 ISO Plan") which terminated in 1993 except as to
options then outstanding. Employees, officers, directors and
consultants are eligible to participate in the plan. Options are
granted at not less than the fair market value of the common stock
at the date of grant.
F-18
A total of 1,308,000 stock options were granted under the 1993
Stock Option Plan, at prices ranging from $2.28 to $3.87, of which
951,000 remain outstanding at February 28, 1998. A summary of
activity under the 1993 Stock Option Plan, the 1986 NQSO Plan and
the 1983 ISO Plan is as follows:
Options
for Shares Price per Share
Options outstanding at
February 28, 1995 3,664,865 $1.63 to $6.38
Granted 31,000 $2.63 to $2.94
Exercised (1,120,735) $1.75 to $3.00
Terminated (72,100) $2.19 to $4.00
Options outstanding at
February 29, 1996 2,503,030 $1.63 to $6.38
Granted 222,500 $2.50 to $3.19
Exercised (39,000) $2.27
Terminated (213,500) $2.19 to $6.38
Options outstanding at
February 28, 1997 2,473,030 $1.63 to $6.13
Granted 414,000 $2.28 to $2.50
Exercised (5,000) $2.19
Terminated (392,750) $2.19 to $4.00
Options outstanding at
February 28, 1998 2,489,280 $1.63 to $6.13
Included in the outstanding options are 627,091 ISO's and
1,809,358 NQSO's which were exercisable at February 28, 1998. The
remaining options to purchase 52,831 shares become exercisable at
various dates through March 2000.
The following tables summarize information about stock options
outstanding at February 28, 1998:
Options Outstanding
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Life Exercise
Prices Outstanding (In Years) Price
$1.63 to $2.50 1,819,780 4.6 $2.05
$2.51 to $3.50 267,000 6.1 $2.98
$3.51 to $6.13 402,500 5.9 $3.76
2,489,280 5.0 $2.42
Options Exercisable
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Life Exercise
Prices Exercisable (In Years) Price
$1.63 to $2.50 1,817,280 4.6 $2.05
$2.51 to $3.50 216,669 5.5 $3.00
$3.51 to $6.13 402,500 5.9 $3.76
2,436,449 4.9 $2.41
F-19
During the year ended February 28, 1995, the Company adopted
a stock option plan (the "1994 Performance-Based Stock Option
Plan") which provides for the issuance of up to 3,400,000 shares of
its common stock. Executive officers of the Company and its
wholly-owned subsidiaries are eligible for grants. Performance-
based stock options are granted for periods of up to ten years and
the exercise price is equal to the average of the closing price of
the common stock for the twenty consecutive trading days prior to
the date on which the option is granted. Vesting of performance
based options is during the first four years after the date of
grant, and is dependent upon increases in the market price of the
common stock.
A total of 3,330,714 stock options were granted under the 1994
Performance-Based Stock Option Plan, at option prices ranging from
$1.81 to $3.14, of which 3,280,714 remain outstanding at February
28, 1998. Of the outstanding options, 1,115,000 are currently
exercisable through September 2004, an additional 1,115,000 options
may become exercisable through September 2004 and the remaining
1,050,714 may become exercisable through February 2008.
During fiscal 1994, the Company adopted an Employee Stock
Purchase Plan which provides for the issuance of up to one million
shares of its common stock. The purchase price of the shares is
the lesser of 90 percent of the fair market value at the enrollment
date, as defined, or the exercise date. Since inception of this
plan a total of 777,174 shares were issued.
Preferred Stock, Class A
Each issued and outstanding share of Preferred Stock, Class A
is entitled to a noncumulative dividend of $1.00, and has a
preference on liquidation of $1.00. The holders of the Preferred
Stock, Class A do not have any voting rights except on matters
concerning the substantive rights, privileges and preferences of
the Preferred Stock, Class A and on issues related to certain
business combinations.
Common Shares Reserved
The following represents common shares reserved and
available for issuance, at February 28, 1998, for options granted
and outstanding warrants and employee stock purchases:
Available
Reserved for Issuance
1994 Performance-Based Stock
Option Plan 3,280,714 119,286
1993, 1986 and 1983 Stock
Option Plans 2,494,280 -
1993 Employee Stock Purchase Plan - 222,826
Other 45,177 -
Total 5,820,171 342,112
F-20
14. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of the basic
and diluted earnings (loss) per share (In thousands, except per
share amounts):
Years Ended
February February February
28, 1998 28, 1997 29, 1996
Numerator:
Net income (loss) $(21,632) $ 3,761 $ 2,014
Denominator:
Share reconciliation:
Shares used for basic earnings
(loss) per share 23,939 23,668 23,598
Effect of dilutive items:-
Stock options - 864 1,856
Other - 45 50
Shares used for dilutive earnings
(loss) per share 23,939 24,577 25,504
Earnings (loss) per share:
Basic $ (0.90) $ 0.16 $ 0.09
Diluted $ (0.90) $ 0.15 $ 0.08
15. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for fiscal
1998 and 1997 are as follows (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1998
Revenues $130,501 $131,617 $131,262 $126,324
Gross profit $ 46,525 $ 47,548 $ 46,994 $ 45,898
Net income (loss) $ 849 $ 989 $ 975 $(24,445)
Income (loss) per common share:
Basic $ .04 $ .04 $ .04 $ (1.02)
Diluted $ .04 $ .04 $ .04 $ (1.02)
Weighted average number
of common shares:
Basic 23,842 23,910 23,970 24,035
Diluted 24,080 24,246 24,388 24,035
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1997
Revenues $113,421 $114,824 $123,307 $128,803
Gross profit $ 42,803 $ 43,705 $ 45,754 $ 46,585
Net income $ 884 $ 979 $ 989 $ 909
Income per common share:
Basic $ .04 $ .04 $ .04 $ .04
Diluted $ .04 $ .04 $ .04 $ .04
Weighted average number
of common shares:
Basic 23,530 23,614 23,762 23,759
Diluted 24,527 24,826 24,454 24,195
F-21
During the fourth quarter of fiscal 1998, the Company recorded
a pre-tax non-recurring charge of $33.4 million. (See Note 2).
During the fourth quarter ended February 28, 1997, the Company
recorded a gain of approximately $834 from the sale of a closed
division.
The Company reduced its revenues by $3 million in the third
quarter of fiscal 1996 due to a change in the method of allocating
overhead to the Company's Medicare operations. The Company also
recorded charges in other (income) expense, net including $1.6
million during the third quarter of fiscal 1996 for the closure of
two divisions, $165 for settlement of litigation and $358 of costs
associated with the Company's recapitalization (see Note 13).
F-22
SCHEDULE II
STAFF BUILDERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Years Ended
February February February
28, 1998 28, 1997 29, 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period $ 2,800 $ 2,200 $ 1,750
Charged to costs and expenses 4,800 2,740 2,678
Deductions (4,000) (2,140) (2,228)
Balance, end of period $ 3,600 $ 2,800 $ 2,200
ACCUMULATED AMORTIZATION OF
INTANGIBLE ASSETS:
Balance, beginning of period $ 9,126 $ 7,282 $ 6,532
Charged to costs and expenses 2,493 2,503 1,764
Write-off of fully
amortized assets (1,206) ( 659) (1,014)
Balance, end of period $10,413 $ 9,126 $ 7,282
DEFERRED INCOME (NETTED AGAINST
FRANCHISE NOTES RECEIVABLE):
Balance, beginning of period $ 5,600 $ 5,735 $ 5,050
Charged to notes receivable 89 341 1,315
Deductions (1,302) ( 476) ( 630)
Balance, end of period $ 4,387 $ 5,600 $ 5,735
F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no such changes or disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11, 12 and 13
is included in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal
year for which this Report is filed, and which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) Financial Statements and Financial Statement Schedules
The financial statements, including the supporting schedules,
filed as part of the report, are listed in the Table of Contents
to the Consolidated Financial Statements.
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant for the
quarter ended February 28, 1998.
(C) Exhibits
-26-
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Certificate of Incorporation of the
Company, filed July 11, 1988. (A)
3.2 Certificate of Amendment to the Restated
Certificate of Incorporation of the Company,
filed August 22, 1991. (B)
3.3 Certificate of Amendment to the Restated
Certificate of Incorporation of the Company,
filed September 3, 1992. (A)
3.4 Certificate of Retirement of Stock of the
Company, filed February 28, 1994. (C)
3.5 Certificate of Retirement of Stock of the
Company, filed June 3, 1994. (A)
3.6 Certificate of Designation, Rights and
Preferences of the Class A Preferred Stock
of the Company, filed June 6, 1994. (A)
3.7 Certificate of Amendment of Restated
Certificate of Incorporation of the Company,
filed August 23, 1994. (A)
3.8 Certificate of Amendment of Restated
Certificate of Incorporation of the Company,
filed October 26, 1995. (D)
3.9 Certificate of Amendment of Restated
Certificate of Incorporation of the Company,
filed December 19, 1995. (E)
3.10 Plan Of Recapitalization dated as of May 12,
1995. (E)
3.11 Amended and Restated By-Laws of the Company.
(A)
4.1 Specimen Class A Common Stock Certificate.(F)
4.2 Specimen Class B Common Stock Certificate.(G)
4.3 Non-Qualified Option Agreement, dated March 27,
1998 between the Company and Ephraim Koschitzki.
- ---------------------
See Notes to Exhibits
10.1 1983 Incentive Stock Option Plan (incorporated
by reference to Exhibit 18.1 to the Company's
Registration Statement on Form S-18, (File No.
1-83939NY), filed with the Commission on
September 15, 1983).
10.2 Amendment to the 1983 Incentive Stock Option
Plan (adopted on May 15, 1986). (A)
10.3 Amendment to the 1983 Incentive Stock Option
Plan, dated January 1, 1987. (A)
10.4 Amendment to the 1983 Incentive Stock Option
Plan, dated as of December 1, 1987. (A)
10.5 Amendment to the 1983 Incentive Stock Option
Plan, dated as of August 3, 1988. (A)
10.6 Amendment to the 1983 Incentive Stock Option
Plan, dated as of August 8, 1990. (A)
10.7 Amendment to the 1983 Incentive Stock Option
Plan, dated as of October 27, 1995. (H)
10.8 1986 Non-Qualified Stock Option Plan of the
Company. (I)
10.9 First Amendment to the 1986 Non-Qualified
Stock Option Plan, effective as of May 11,
1990. (A)
10.10 Amendment to the 1986 Non-Qualified Stock
Option Plan, dated as of October 27, 1995. (J)
10.11 Resolutions of the Company's Board of
Directors amending the 1983 Incentive Stock
Option Plan and the 1986 Non-Qualified Stock
Option Plan, dated as of June 3, 1991. (A)
10.12 1993 Stock Option Plan of the Company. (A)
10.13 Amended and Restated 1993 Employee Stock
Purchase Plan of the Company. (K)
10.14 Executive Deferred Compensation Plan,
effective as of March 1, 1994. (C)
10.15 Form of Split-Dollar Life Insurance
Agreement. (C)
10.16 1994 Performance-Based Stock Option
Plan of the Company (incorporated by
reference to Exhibit B to the Company's
Proxy Statement, dated July 18, 1994, filed
with the Commission on July 27, 1994.)
- ---------------------
See Notes to Exhibits
10.17 Stock Option Agreement, dated April 22, 1993,
under the Company's 1983 Incentive Stock Option
Plan between the Company and Stephen Savitsky. (A)
10.18 Stock Option Agreement, dated as of March 28,
1990, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.19 Stock Option Agreement, dated as of June 17,
1991, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.20 Stock Option Agreement, dated February 3, 1994,
under the Company's 1993 Stock Option Plan
between the Company and Stephen Savitsky. (A)
10.21 Stock Option Agreement, dated July 1, 1997,
under the Company's 1993 Stock Option Plan
between the Company and Stephen Savitsky. (L)
10.22 Amendment to Stock Option Agreement, dated
April 23, 1998, between the Company and
Stephen Savitsky.
10.23 Stock Option Agreement, dated October 1, 1994,
under the Company's 1994 Performance-Based
Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.24 Stock Option Agreement, dated July 1, 1997,
under the Company's 1994 Performance-Based
Stock Option Plan between the Company and
Stephen Savitsky. (L)
10.25 Stock Option Agreement, dated April 22, 1993,
under the Company's 1983 Incentive Stock
Option Plan between the Company and David
Savitsky. (A)
10.26 Stock Option Agreement, dated as of March 28,
1990, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
David Savitsky. (A)
10.27 Stock Option Agreement, dated as of June 17,
1991, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
David Savitsky. (A)
10.28 Stock Option Agreement, dated February 3,
1994, under the Company's 1993 Stock Option
Plan between the Company and David Savitsky.(A)
- ---------------------
See Notes to Exhibits
10.29 Stock Option Agreement, dated July 1, 1997
under the Company's 1993 Stock Option Plan
between the Company and David Savitsky. (L)
10.30 Amendment to Stock Option Agreement, dated
April 23, 1998, between the Company and
David Savitsky.
10.31 Stock Option Agreement, dated October 1,
1994, under the Company's 1994 Performance-
Based Stock Option Plan between the Company
and David Savitsky. (A)
10.32 Stock Option Agreement, dated July 1, 1997,
under the Company's 1994 Performance-Based
Stock Option Plan between the Company and
David Savitsky. (L)
10.33 Stock Option Agreement, dated May 26, 1992,
under the Company's 1983 Incentive Stock
Option Plan between the Company and Gary
Tighe. (A)
10.34 Stock Option Agreement, dated April 22, 1993,
under the Company's 1983 Incentive Stock Option
Plan between the Company and Gary Tighe. (A)
10.35 Stock Option Agreement, dated as of April 15,
1991, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
Gary Tighe.(A)
10.36 Stock Option Agreement, dated October 1, 1994,
under the Company's 1994 Performance-Based
Stock Option Plan between the Company and
Gary Tighe.(A)
10.37 Stock Option Agreement, dated June 17, 1991,
under the Company's 1983 Incentive Stock Option
Plan between the Company and Edward Teixeira.
(A)
10.38 Stock Option Agreement, dated May 26, 1992,
under the Company's 1983 Incentive Stock
Option Plan between the Company and Edward
Teixeira. (A)
10.39 Stock Option Agreement, dated as March 28,
1990, under the Company's 1986 Non-Qualified
Stock Option Plan between the Company and
Edward Teixeira. (A)
10.40 Stock Option Agreement, dated as of October 1,
1994, under the Company's 1994 Performance-
Based Stock Plan between the Company and
Edward Teixiera. (A)
- ---------------------
See Notes to Exhibits
10.41 Stock Option Agreement, dated as of September
25, 1996, under the Company's 1993 Stock
Option Plan between the Company and
Edward Teixeira. (M)
10.42 Stock Option Agreement, dated as of February 9,
1998, under the Company's 1994 Performance-
Based Stock Option Plan between the Company
and Dale R. Clift.
10.43 Employment Agreement, dated as of June 1, 1987,
between the Company and Stephen Savitsky. (A)
10.44 Amendment, dated as of October 31, 1991, to the
Employment Agreement between the Company and
Stephen Savitsky. (A)
10.45 Amendment, dated as of December 7, 1992, to the
Employment Agreement between the Company and
Stephen Savitsky. (A)
10.46 Employment Agreement, dated as of June 1, 1987,
between the Company and David Savitsky. (A)
10.47 Amendment, dated as of October 31, 1991, to the
Employment Agreement between the Company and
David Savitsky. (A)
10.48 Amendment, dated as of January 3, 1992, to the
Employment Agreement between the Company and
David Savitsky. (A)
10.49 Amendment, dated as of December 7, 1992, to the
Employment Agreement between the Company and
David Savitsky. (A)
10.50 Employment Agreement, dated as of June 1, 1997,
between Staff Builders, Inc. (NY) and Gary
Tighe. (N)
10.51 Agreement and Release, dated as of February 19,
1998, between Staff Builders, Inc. (NY) and
Gary Tighe.
10.52 Employment Agreement, dated as of December 1,
1996, between Staff Builders, Inc. (NY) and
Edward Teixeira. (M)
10.53 Employment Agreement, dated as of February 9,
1998, between Staff Builders, Inc. (NY) and
Dale R. Clift.
10.54 Agreement and Release, dated as of February 28,
1997, between Staff Builders, Inc. (NY) and
Larry Campbell. (M)
- ---------------------
See Notes to Exhibits
10.55 Amended and Restated Loan and Security
Agreement, dated as of January 8, 1997, between
the Company, its subsidiaries and Mellon Bank,
N.A. (M)
10.56 First Amendment to Amended and Restated Loan
and Security Agreement dated as of April 27,
1998, between the Company, its subsidiaries
and Mellon Bank, N.A.
10.57 Master Lease Agreement dated as of December 4,
1996, between the Company and Chase Equipment
Leasing, Inc. (M)
10.58 Premium Finance Agreement, Disclosure Statement
and Security Agreement dated as of December 26,
1996, between the Company and A.I. Credit Corp.
(M)
10.59 Agreement of Lease, dated as of October 1,
1994, between Triad III Associates and Staff
Builders, Inc. (NY). (A)
10.60 Supplemental Agreement, dated as of January 21,
1994, between General Electric Capital
Corporation, Triad III Associates and Staff
Builders, Inc. (NY) (A)
10.61 Agreement of Lease, dated as of June 19, 1995,
between Triad III Associates and Staff Builders,
Inc. (NY). (E)
10.62 Agreement of Lease, dated as of February 12,
1996, between Triad III Associates and Staff
Builders, Inc. (NY). (E)
10.63 License Agreement, dated as of April 23, 1996,
between Matterhorn One, Ltd. and Staff Builders,
Inc. (NY). (M)
10.64 License Agreement, dated as of January 3, 1997,
between Matterhorn USA, Inc. and Staff Builders,
Inc. (NY) (M)
10.65 License Agreement, dated as of January 16, 1997,
between Matterhorn USA, Inc. and Staff Builders,
Inc. (NY). (M)
10.66 Lease Agreement, dated as of November 4, 1996,
between Airport Landing Center, L.L.C. and
Staff Builders Home Health Care, Inc. (M)
10.67 Asset Purchase Agreement dated as of June 22,
1993, between Albert Gallatin Home Care, Inc
and Albert Gallatin Visiting Nurse Association,
Inc. (C)
- ---------------------
See Notes to Exhibits
10.68 Stock Purchase Agreement, dated as of June 22,
1993, between Staff Builders, Inc. (NY) and
Albert Gallatin Planning and Development
Corporation. (C)
10.69 Stock Purchase Agreement, dated as of August
30, 1995, between Staff Builders Services, Inc.,
MedVisit, Inc. and Roger Jack Pleasant. (E)
10.70 Asset Purchase and Sale Agreement, dated as of
September 1, 1995, between Staff Builders
Services, Inc. and Accredicare, Inc. (E)
10.71 Management and Stock Option Agreement, dated
as of February 29, 1996, between Staff
Builders, Inc. and Time Insurance Company. (M)
10.72 Stock Purchase Agreement and Receipt, dated
as of February 28, 1997, between the Company
and Time Insurance Company. (M)
10.73 Asset Purchase and Sale Agreement, dated as
of September 6, 1996, by and among ATC
Healthcare Services, Inc. and Staff
Builders, Inc. and William Halperin and
All Care Nursing Service, Inc. (O)
10.74 Stock Redemption Agreement, dated as of
March 18, 1997, between the Company and
American HomeCare Management Corp. (M)
10.75 Stock Purchase Agreement by and among
the Company and Raymond T. Sheerin,
Michael Altman, Stephen Fleischner and
Chelsea Computer Consultants, Inc.,
dated September 24, 1996. (L)
10.76 Amendment No. 1 to Stock Purchase
Agreement by and among the Company and
Raymond T. Sheerin, Michael Altman,
Stephen Fleischner and Chelsea Computer
Consultants, Inc., dated October 30, 1997. (L)
10.77 Shareholders Agreement between Raymond T.
Sheerin and Michael Altman and Stephen
Fleischner and the Company and Chelsea
Computer Consultants, Inc., dated
September 24, 1996. (L)
10.78 Amendment No. 1 to Shareholders Agreement
among Chelsea Computer Consultants, Inc.,
Raymond T. Sheerin, Michael Altman and the
Company, dated October 30, 1997. (L)
- ---------------------
See Notes to Exhibits
10.79 Common Stock Purchase Option to purchase
shares of common stock in Chelsea Computer
Consultants, Inc., dated November 19, 1997
between the Company and David Savitsky. (L)
10.80 Common Stock Purchase Option to purchase
shares of common stock in Chelsea Computer
Consultants, Inc., dated November 19, 1997
between the Company and Stephen Savitsky.
(L)
10.81 Indemnification Agreement, dated as of
September 1, 1987, between the Company and
Stephen Savitsky. (A)
10.82 Indemnification Agreement, dated as of
September 1, 1987, between the Company and
David Savitsky. (A)
10.83 Indemnification Agreement, dated as of
September 1, 1987, between the Company and
Bernard J. Firestone. (A)
10.84 Indemnification Agreement, dated as of
September 1, 1987, between the Company and
Jonathan Halpert. (A)
10.85 Indemnification Agreement, dated as of May
2, 1995, between the Company and Donald
Meyers. (M)
10.86 Indemnification Agreement, dated as of
February 10, 1992, between the Company and
Gary Tighe. (A)
10.87 Indemnification Agreement, dated as of May
2, 1995, between the Company and Edward
Teixeira. (A)
10.88 Form of Home Health Care Services Franchise
Agreement. (B)
10.89 Form of Medical Staffing Services Franchise
Agreement (E)
21 Subsidiaries of the Company.
24 Powers of Attorney.
- ---------------------
See Notes to Exhibits
NOTES TO EXHIBITS
(A) Incorporated by reference to the Company's exhibit
booklet to its Form 10-K for the fiscal year ended
February 28, 1995 (File No. 0-11380), filed with
the Commission on May 5, 1995.
(B) Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No.
33-43728), dated January 29, 1992.
(C) Incorporated by reference to the Company's exhibit
booklet to its Form 10-K for the fiscal year ended
February 28, 1994, (File No. 0-11380), filed with
the Commission on May 13, 1994.
(D) Incorporated by reference to the Company's Form
8-K filed with the Commission on October 31, 1995.
(E) Incorporated by reference to the Company's exhibit
booklet to its Form 10-K for the fiscal year ended
February 28, 1996 (File No. 0-11380), filed with
the Commission on May 13, 1995.
(F) Incorporated by reference to the Company's Form
8-A filed with the Commission on October 24, 1995.
(G) Incorporated by reference to the Company's Form
8-A filed with the Commission on October 24, 1995.
(H) Incorporated by reference to the Company's
Registration Statement on Form S-8 (File No.
33-63941), filed with the Commission on
November 2, 1995.
(I) Incorporated by reference to the Company's
Registration Statement on Form S-4, as amended
(File No. 33-9261), dated April 9, 1987.
(J) Incorporated by reference to the Company's
Registration Statement on Form S-8 (File No.
33-63939), filed with the Commission on
November 2, 1995.
(K) Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No.
33-71974), filed with the Commission on
November 19, 1993.
(L) Incorporated by reference to the Company's
Form 10-Q for the quarterly period ended
November 30, 1997 (File No. 0-11380), filed
with the Commission on January 14, 1998.
(M) Incorporated by reference to the Company's
exhibit booklet to its Form 10-K for the fiscal
year ended February 28, 1997 (File No.0-11380),
filed with the Commission on May 27, 1997.
(N) Incorporated by reference to the Company's
Form 10-Q for the quarterly period ended
August 31, 1997 (File No. 0-11380), filed with
the Commission on October 14, 1997.
(O) Incorporated by reference to the Company's Form
10-Q for the quarterly period ended November 30,
1996 (File No. 0-11380), filed with the Commission
on January 14, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STAFF BUILDERS, INC.
By: /S/ STEPHEN SAVITSKY
Stephen Savitsky
Chairman of the Board,
President, and Chief
Executive Officer
Dated: May 27, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
/S/ STEPHEN SAVITSKY Chairman of the Board, May 27, 1998
Stephen Savitsky President and Chief
Executive Officer
(Principal Executive
Officer) and Director
/S/ DAVID SAVITSKY Executive Vice President, May 27, 1998
David Savitsky Chief Operating Officer,
Secretary, Treasurer
and Director
/S/ DALE R. CLIFT Executive Vice President, May 27, 1998
Dale R. Clift Finance and Chief Financial
Officer (Principal Financial
Officer)
/S/ WILLARD T. DERR Sr. Vice President- May 27, 1998
Willard T. Derr Controller (Principal
Accounting Officer)
/S/Bernard J. Firestone Director May 27, 1998
Bernard J. Firestone,
Ph.D.
* Director May 27, 1998
Jonathan Halpert,
Ph.D.
* Director May 27, 1998
Donald Meyers
* By: /S/ STEPHEN SAVITSKY
(Stephen Savitsky,
Attorney-in-Fact)
-27-