10-K 1 form10k_12196.txt FORM 10-K (YEAR END MAY 31, 2003) ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended May 31, 2003 [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________ Commission File Number 1-10751 STAR MULTI CARE SERVICES, INC. -------------------------------------------------------------------------------- (Name of Registrant in its charter) New York 11-1975534 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 33 Walt Whitman Road, Huntington Station, NY 11746 -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Issuer's telephone number, including area code: (631) 423-6689 ------------------ Securities registered pursuant to Section 12(b) of the Exchange Act: Title of Each Class Name of each exchange on which registered Common Stock, par value $.001 per share NASD OTC Bulletin Board --------------------------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Exchange Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On September 12, 2003 the aggregate market value of the Common Stock of Star Multi Care Services, Inc. held by non-affiliates equaled 791,792 shares with a market value of $63,634 (based upon the closing price of the Common Stock on such date on the NASD OTC Bulletin Board). As of September 12, 2003, the Registrant had 16,208,676 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL BACKGROUND AND HISTORY Star Multi Care Services, Inc. (the "Company") is in the business of providing professional and paraprofessional home health care personnel services to elderly, ill and physically challenged individuals in their homes, and to a lesser extent the Company provides health care facility staffing services for hospitals and skilled nursing facilities. As of the close of the Company's fiscal year the Company was licensed and / or certified in five states to provide a full array of health care personnel services, which included Registered Nurses, Licensed Practical Nurses, Home Health Aide, Nurse Aide, and Personal Care Aide services. In some states the Company was also licensed and / or certified to provide Physical Therapy, Speech Therapy, Occupational Therapy, Respiratory Therapy, and Medical Social Work services. The Company was established in 1938 in Brooklyn, New York and was purchased by present management in 1986 at which time the primary focus of the organization was the provision of facility staffing and private duty nursing services. After the Company was acquired management successfully secured, in 1989, New York State Department of Health approval as a Licensed Home Care Services Agency. This expanded the Company's scope of services into the home care market. Management initiated an IPO in 1991 with the Company becoming publicly traded on the NASDAQ SmallCap Market, and in 1995 the Company began trading on the NASDAQ National Market. On November 11, 1999 the Company reverted to trading on the NASDAQ SmallCap Market, and on July 10, 2002, it began trading on the NASD OTC Bulletin Board. In addition, the Company has maintained accreditation by the Joint Commission on Accreditation of Health Care Organizations (JCAHO) since 1992 and was most recently awarded in May 2002 Joint Commission Accreditation with Commendations, attesting to the Company's commitment to the delivery of high quality health care services. In conjunction with the Premier Asset Purchase Agreement, the New York and New Jersey locations / operations of the Company were fully transferred to Premier. At fiscal year end, the Company maintained 5 licensed offices within the three remaining states it operates in, which include Pennsylvania (3 offices), Ohio (1 office), and Florida (1 office). In the Ohio and Pennsylvania locations, the Company also maintains as a provision of State licensing and contracting requirements Medicare Certified Home Health Agency operations in these states. Star maintains full functionality for service provision across the Company 7 days a week, 24 hours a day. As of the fiscal year end, the Company employs over 450 full-time and part-time employees and services over 1,000 clients annually. Additionally, the Company also has its corporate facilities and executive offices in Huntington Station, New York. Historically, the Company grew through a series of acquisitions that began in 1992 with the acquisition of certain assets from Unity Healthcare Holding Company, Inc. and its subsidiaries (Unity). This expanded the Company's operations within its existing New York and the adjacent New Jersey markets by adding new contract rights for provision of home care services. In addition, the Unity acquisition added new operations in the state of Florida, which included both, Medicare certified (later discontinued in 1999) and licensed operations in South Florida. In 1993, the Company further expanded its home care operations in New York through the acquisition of certain assets of DSI Health Care Services, Inc. (DSI). This acquisition added new contract relationships within the New York County of Nassau with facility based Certified Home Health Care Agencies, Long Term Home Health Care Programs, and Hospices as well as expanded the Company's existing Medicaid operations within the County. In May of 1995, the Company acquired certain assets of Long Island Nursing Registry, Inc. ("LINR"), which again augmented its existing operations in Nassau County by both adding new contracts and expanding existing contract relationships. The acquisition of LINR expanded Company operations into the new markets of Suffolk and Onondaga (Syracuse Area) Counties (NY) for provision of contract Medicaid Personal Care Services, Medicaid Skilled Nursing Services and a variety contracts with facility based Certified Home Health Agencies, Long Term Home Health Care Programs, and Hospice Programs; however, the Company formally withdrew from the Syracuse market on May 1, 1999 by closing this office in conjunction with its consolidation and restructuring initiatives. In August 1996, the Company and AMSERV Health Care, Inc. consummated a merger whereby the Company acquired control of Amserv, which resulted in Amserv becoming a wholly owned subsidiary of the Company. This acquisition significantly expanded the Company within the northern and central New Jersey markets by adding new office locations in New Jersey. Amserv Health Care of New Jersey, Inc. was a provider of Medicaid and Medicaid Waiver reimbursed paraprofessional services, as well as contract services with Certified Home Health Agencies and Hospice Programs. In addition, this acquisition also brought the Company operations in Ohio operating under the name of Amserv Health Care of Ohio, Inc., d/b/a Central Star Home Health Services. This subsidiary company provides Medicaid and Medicaid Waiver paraprofessional services as well as facility staffing services for professional nursing staff. The office is also Medicare Certified but currently provides no Medicare reimbursed services. On September 9, 1997 the Company consummated an Agreement and Plan of Merger with Extended Family Care Corporation (EFCC). The Agreement between the Company and EFCC provided for the merger of EFCC Acquisition Corp. (Merger Sub), a New York Corporation and a wholly-owned subsidiary of the Company with EFCC, with EFCC merging with and into the Merger Sub. At the time, the EFCC acquisition added to the Company's existing New York and New Jersey operations as well as expanded these operations by introducing new service contracts that were similar to and compatible with existing paraprofessional contracts in these regions. Additionally, the Company added new market operations in Allentown, Pennsylvania. This particular office predominantly specializes in the provision of skilled Pediatric Nursing services. This office is both Medicaid approved and Medicare certified. 2 On May 8, 2000, the Company through a subsidiary corporation, EFCC Acquisition Corp. d/b/a Extended Family Care, acquired certain assets of the Pennsylvania offices of US Home Care. The acquisition expanded the Company's existing operations in Pennsylvania by adding three new locations in Philadelphia, Lancaster and Pittsburgh. The acquisition introduced the Company into three new major markets in Pennsylvania and added approximately $5 million in revenue. The Philadelphia office was subsequently closed in December 2000. SALE OF EXISTING OPERATIONS On July 3, 2001, the Company entered into Purchase Agreement with Premier Home Healthcare Services, Inc. ("Premier") to acquire selected assets of the Company's wholly owned subsidiary, Amserv Healthcare of New Jersey, Inc., operating the New Jersey operations of the Company and the New York operations of the Company, with an aggregate purchase price of $5.5 million, $4.0 million and $1.5 million for the New Jersey and New York operations, respectively. Sale of the New Jersey Assets was completed on August 31, 2001 subject to a post closing adjustment to the purchase price based upon certain revenue thresholds. Additionally, on August 31, 2001, the Company entered into a Management Agreement with Premier for management and operation of the Company's New York operations pending New York State regulatory approval and the Company's stockholder approval. Upon receipt of all necessary approvals, the sale of the Company's New York operations will be completed. The purchase price of the New York operations was also subject to adjustment based upon certain revenue thresholds. In the interim period between the effective date of the Management Agreement with Premier and the closing of the New York operations, the Company borrowed $800,000 from Premier which was secured by the assets that Premier was to purchase in the form of a non-recourse promissory note. Additionally, under the terms of the Purchase Agreement with Premier, Star had retained the account receivables of the New York and New Jersey operations, equal to approximately $4.5 million. Subsequent to the execution of the Purchase Agreement with Premier and the closing of the New Jersey Assets in August 2001, the Company determined that shareholder approval was not required for consummation of the sale of the New York operations of the Company. As the Company has received New York State regulatory approval for the sale of the New York operations and to facilitate the closing of the sale of the these assets without shareholder approval, the Company agreed to a consensual foreclosure of the New York operations by Premier, whereby all of the assets related to the Company's New York operations were transferred to Premier. Upon the completion of this consensual foreclosure, the New York operations were transferred to Premier, in the same manner had a closing actually occurred, with no additional liability incurred by the Company. This foreclosure was completed by the end of 2002. The Company used the proceeds from the transaction with Premier to pay-off and terminate its credit facility with Healthcare Finance Group, Inc. ("HFG"). The Company paid HFG a total of $4.4 million in debt obligations and fees. ORGANIZATIONAL RESTRUCTURING CHANGES Although the Company had implemented organizational restructuring plans over the 1999 and 2000 fiscal years in response to industry related reimbursement and regulatory changes, the Company again initiated additional restructuring activities in fiscal year 2001. This was done in response to: (1) continued service volume shrinkage across the industry in all areas of reimbursement including Medicare, Medicaid and commercial insurance; (2) the Company's need to improve profitability in order to reduce financial obligation liabilities, and (3) the Company's inability to secure adequate numbers of personnel to expand client service volume due to an industry wide personnel shortage. The restructuring activities were initiated and completed in the Company's second quarter. These restructuring activities included; o Senior and middle management personnel changes. o General staff consolidations and reductions. o The closure of all non-profitable, marginally profitable and under performing divisions and locations. o The elimination of under performing, low margin and poor paying contracts. In the 1999 and 2000 fiscal years, the Company also initiated and completed the consolidation of certain licensed offices in both Florida and New York. The licensed offices located in Miami Lakes and Lake Worth were consolidated and centralized into the Company's Hollywood office to increase operational efficiency in the region and reduce cost. Simultaneously, the Company terminated certain under-performing low margin managed care contracts in the region to increase the regional operating margin. Additionally, the Company, effective February 26, 1999, discontinued Medicare Certified Home Health Agency operations in Florida due to changes in the Medicare reimbursement and authorization methodologies. In May 1999 the Company closed its Syracuse office due to cost containment considerations. Effective January 1, 1999, the Company successfully completed an 18 month, automation restructuring project by placing all offices on the same operating software for client intake, scheduling, personnel, clinical data base management, billing and compliance. The system downloads data to the Resource Center into a standard accounting package for payroll, billing, collection, financial and general ledger processing. These changes marked a significant transition from multiple operating systems to one integrated standardized operating system. The Company continues to upgrade these systems to the most recent releases available. The Company continues to maintain a three-tier Corporate Compliance structure, which includes: 1. Corporate Patient Care Committee which meets quarterly to review and establish new policies and procedures, and reviews internal audit findings by department and branch; 2. Regional Quality Improvement Audit Committees, which conduct a series of operational, financial, clinical and personnel audits across all offices and departments. These audits test all regulatory and operational aspects with all findings reported to the Director of Corporate Compliance. The Corporate Compliance Program provides an additional layer of internal audits, investigation, and reporting. The program provides for a Director of Corporate Compliance who operates under the direction of and reports directly to the Company's Board of Directors. 3 CUSTOMER BASE The Company maintains four types of customers, which form the base of its referral source. The customer base includes Federally and State funded public assistance programs (Medicaid), other third party payors (subcontracts), insurance companies and private pay customers. A substantial portion of the Company's revenue is derived from home health care services provided to patients who are eligible for Medicaid and Aging related services referred to the Company through contract or subcontract relationships. The Company maintained State and / or County approval and / or contracts in New York, New Jersey, Ohio, and Pennsylvania for provision of professional and paraprofessional Medicaid services which include Registered Nurse, Licensed Practical Nurse, Home Health Aide, Personal Care Aide, Homemaking, and Live-in Companion services. Each State maintain(ed/s) its own initial approval and annual re-approval criteria, which are subject to audit and / or accreditation processes. These services are reimbursed directly by State and / or local government and represent a combination of federal, state and local funding. Clients are referred to the Company by physicians, hospital discharge planning departments and community based medical service organizations. The majority of the business in the states of New York, New Jersey, Ohio, and Pennsylvania was/is Medicaid reimbursed. If a contract was to be lost or an annual approval / accreditation not secured, it could have a material and adverse effect on the Company's operating results. Although the Company discontinued Medicare operations in the State of Florida, it is still federally certified to provide Medicare reimbursed Certified Home Health Agency services in the states of Ohio and Pennsylvania; however, the Company conducts no Medicare reimbursed business in these states. During the fiscal years ended May 31, 2003, 2002, and 2001, 65%, 70% and 63%, respectively, of the Company's revenue was attributable to Medicaid programs. The Company's next largest customer base is derived from other third party payors which consist of subcontracting relationships for provision of personnel with community and facility based organizations that are reimbursed directly by Medicaid or other governmental services, and insurance companies. This source has accounted for 33%, 28% and 40% of revenue for fiscal years 2003, 2002, and 2001, respectively. Private pay customers have represented approximately 1% - 2% of revenue in each of the last three fiscal years. These clients for a variety of reasons choose to pay privately because the client is ineligible for public assistance programs, chooses to supplement services provided by Medicare or an insurance program, or have elected to pay part or all of their care out of pocket. These customers come predominantly through referrals from physicians, hospital discharge planners, and community based organizations. MARKETING AND SALES The Company maintained marketing and sales activities in each of the five states it operated in and concentrated its efforts through the use of regional marketing/sales teams comprised of field service office administration and sales representatives. The office Administration educated the sales staff regarding new identified targets, regulatory changes and new service programs. The Company believes in the use of office specific Operational Plans for the management and marketing of regional sales. Post Premier acquisition marketing activities are conducted by the Office Administrator of each facility. The offices utilize a formal Operational Plan. The individual Office Operational Plan format provides for the comprehensive approach to office growth, marketing, and recruitment, as well as the clinical and fiscal operation of each office. The plan objective is to maximize internal growth and assure clinical / fiscal integrity. The plan serves as the framework for development of a continual process for Quality and Performance Improvement in all areas of responsibility including marketing. The marketing component of the plan identifies all potential referral sources and establishes a systematic referral source contact strategy across the marketing and office staff. The plan is continually reassessed by management and refined to ensure success, and serves as an evaluation tool to identify strengths as well as areas needing organizational support. The Company's office staff focuses on the sales and marketing component goals of these plans. The Company targets the key representatives of the contracting institutions, hospital discharge planning departments, insurance companies, community based facilities, and physicians to secure contractual and referral relationships. Representatives visit targeted facilities and programs, while maintaining the Company's presence with existing referral sources and acting as the first line of communication with new referral sources. Beyond the traditional personnel services offered by the industry the Company offers facility staffing, Shared Aide Team Model services, Skilled High Tech Nursing and Pediatric Nursing specialty services. From an operational perspective the Company markets quality benchmarks as demonstrated by its Joint Commission accreditation (JCAHO), and a full functioning Corporate Compliance Program. The sales representatives are supported by print and radio advertising, direct mailing, and attendance at trade shows and regional health care functions. COMPETITION The home health care and facility staffing industry has a variety of local, regional and national organizations, which comprise the Company's competition base. The Company has numerous competitors in each of the markets it serves, however, regulatory and reimbursement changes are causing consolidation within the industry at this time. Smaller local and regional operations are finding it increasingly difficult to remain in the market. Companies similar in size to Star or larger regionally based companies have emerged to be viewed by the Company as its major competitors. Competition is based on the quality of care provided to clients, the ability to obtain personnel to deliver the authorized service and the price structure offered by the organization. The Company believes that it has developed and maintains high quality standards through its operational, clinical, and compliance policies, procedures and activities. Additionally, the Company maintains an aggressive recruitment and training philosophy, which has proven effective. Cost effectiveness in operation, achieved through improved automation platforms, new service delivery models, and economies of scale have enabled the Company to be aggressive in its pricing structures while maintaining strong operating margins. 4 GOVERNMENT REGULATIONS, LICENSING AND AUDITS The Company's business is subject to substantial and frequently changing regulations by Federal, State, and Local authorities, which require significant compliance responsibilities by the Company. Each State in which the Company operates, maintains its own form of licensing standards and may maintain Certificate of Need (CON) specific to the State that are above the minimum standard requirements established by the Federal government for participation in the Medicaid program. The imposition of more restrictive regulatory requirements or the denial or revocation of any license, certification, Medicaid approval, or permit necessary for operation in a particular market could have a material adverse effect on the Company's operations. In addition, any future expansion into new markets would require the Company to comply with all licensing, and / or CON requirements and other regulations pertinent to that jurisdiction. As of the close of fiscal year 2003, the Company continues to maintain all applicable licenses and certifications in the states of Pennsylvania, Ohio, and Florida. As a provider of services under some state Medicaid programs, the Company is required by the Federal Health Care Financing Administration and / or state Health Departments to prepare cost reports reflecting annual expenditures and development of capital expenditure plans. The regulatory agencies of the states in which the Company operates require compliance with certain regulations and standards with respect to health care personnel records, client records, nursing and administrative supervision, incident and complaint monitoring and follow-up, and the establishment of professional advisory boards. Additionally, both Federal and State Anti-kickback regulations exist which are complied with. With participation in the Medicaid program, the Company is subject to survey and audit of operational, clinical and financial records with respect to proper applications of general regulations governing operation, cost reporting criteria, and other payment formulas. These audits can result in retroactive adjustments for payments received from these programs resulting in either amounts due to governmental agencies from the Company or amounts due to the Company as adjustments from the governmental agency. LIABILITY INSURANCE The Company's employees and subcontractors routinely make decisions that can have significant medical consequences to the patients in their care. As a result, the Company is exposed to substantial liability in the event of negligence or wrongful acts of its personnel. The Company maintains medical professional liability insurance providing for coverage in a maximum amount of $1,000,000 per claim, subject to a limitation of $3,000,000 for all claims in any single year. In addition, the Company requires that each independent contractor it refers to institutions for employment supply a certificate of insurance evidencing that such person maintains medical professional liability insurance providing for coverage of no less than $1,000,000 per claim. There can be no assurance, however, that the Company will be able to maintain its existing insurance at an acceptable cost or obtain additional insurance in the future, as required. There can be no assurance that the Company's insurance will be sufficient to cover liabilities resulting from claims that may be brought in the future. A partially or completely uninsured claim, if successfully asserted and of significant magnitude, could have a material adverse effect on the Company and its financial condition. EMPLOYEES At the end of fiscal 2003, the Company employed 53 permanent and part time office and administrative employees. The Company also has a roster of temporary professional and paraprofessional employees (including registered nurses, licensed practical nurses, home health aides, personal care aides and nurses' aides). The Company treats all such persons as employees. The Company currently has no union contracts with any of its employees and believes that its relationship with its employees and independent contractors is good. The Company pays its temporary employees at wages that it believes are competitive within industry standards. RECRUITMENT OF PERSONNEL Recruitment of adequate numbers of temporary personnel continues to be increasingly difficult in the home health industry resulting from a variety of market forces. The previously strong economic environment, coupled with a moderate to low reimbursement rate structure has hampered the industry in general in recruiting adequate numbers of personnel to provide authorized services. Field service personnel wages and benefit packages are below average as compared to other service type industries outside of health care. Although the downward economy should result in an influx of personnel available to the industry, this trend has yet to occur. To address this issue, the Company has focused on higher margin business or attempted to negotiate revised contractual rate agreements with existing referral sources in an effort to permit the Company to offer increased wage and benefit packages to its temporary employees. Additionally, the Company's focus has been on filling all monthly office-training programs, development of off-site recruitment initiatives and training locations, and recruitment of professional nursing personnel. This project was implemented in March 2000 and has been moderately successful, although future success of the program cannot be guaranteed. ITEM 2. DESCRIPTION OF PROPERTY DESCRIPTION OF PROPERTY The Company leased at the end of fiscal 2003, a total of 6 facilities in four states. The Company believes that its existing leases will be negotiated as appropriate as they expire, or that alternative properties can be leased on acceptable terms. The Company relocated its Resource Center from Florida to its Corporate headquarters in New York in an effort to reduce operational costs. The Company also believes that its present facilities are well maintained and are suitable for it to maintain existing operations. 5 The following table describes the location and current use of each of the Company's leased facilities as of May 31, 2003: LOCATION DESCRIPTION -------- ----------- New York Facilities Corporate Executive Offices, Huntington Station Finance and Administration Florida Facilities Pembroke Pines Nursing and Paraprofessional Services Ohio Facilities Mansfield Nursing and Paraprofessional Services Pennsylvania Facilities Allentown, Lancaster, Pittsburgh Nursing and Paraprofessional Services ITEM 3. LEGAL PROCEEDINGS On July 16, 1998, the Company was advised that an audit of Star Multi Care Services of Florida, Inc. (d/b/a American Health Care Services) ("American"), the Company's Florida Medicare agency, was commenced by the Office of Audit Services, Office of Inspector General of the United States Department of Health and Human Services. This audit was conducted in conjunction with the United States Attorney's Office for the Southern District of Florida and involved a review of claims for home health services submitted by American Health Care Services during 1995 and 1996. On July 11, 2001 the Company entered into a Settlement Agreement with United States Department of Justice and the Office of Inspector General of the Department of Health and Human Services. In order to avoid the delay, uncertainty, inconvenience, and the expense of protracted litigation of the claims, both parties mutually agreed upon a settlement amount of $1.0 million payable by Star no later than November 8, 2001. The agreement was subsequently amended to permit an extension of payment and, in April 2003, the obligation was satisfied in full. On May 10, 1999 the Company entered into a Settlement Agreement with the State of New York, whereby the State of New York will discharge and forever release the Company, including its officers, directors and employees, for any further liability regarding the Company's submission of claims for or receipt of Medicaid payments for home health care services for the audited period of 1992 through 1996. The Attorney General stated in his press release that the Company has fully cooperated with the State's investigation and immediately remedied the problems the Attorney General's office pointed out by improving its personnel training procedures and submitting revised cost reports. The terms of this Settlement Agreement provided for: (a) No admission by Star of any criminal or civil liability, guilt, wrongdoing or unacceptable practice, or a determination of guilt of any violation of any Federal, State or Local statute, rule or regulation. (b) The Company agreed to pay to New York State the total sum of $1,167,177, with an initial payment of $200,000. The balance was payable over four years at 9% interest. This obligation was satisfied in full in May 2003. Except as otherwise provided in this Annual Report on Form 10-K, there are no legal proceedings to which the Company is currently a party, or to which any of its property is subject, that could possibly have a material adverse effect upon the Company. Further, the Company knows of no legal proceeding pending or threatened against any director or officer of the Company in their capacity as such. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to November 11, 1999, the Company's Common Stock was quoted on the Nasdaq National Market System, under the symbol "SMCS", and from November 11, 1999 through July 10, 2002, has been traded on the Nasdaq SmallCap market, under the symbol "SMCS", and thereafter has been traded on the NASD OTC Bulletin Board under the symbol "SMCS". Until June 7, 1996, the Company's Common Stock was also listed on the Pacific Stock Exchange. The following table sets forth the high and low sales prices per share for the Common Stock during the periods indicated on the Nasdaq National Market System or the Nasdaq SmallCap Market. 6 PERIOD HIGH LOW ------ ------ ------ Year ended May 31, 2001 $ 6.75 $ 4.12 First Quarter 4.31 1.88 Second Quarter 2.34 1.62 Third Quarter 1.80 1.39 Fourth Quarter Year ended May 31, 2002 First Quarter $ 2.42 $ 1.80 Second Quarter 1.70 0.56 Third Quarter 0.71 0.39 Fourth Quarter 0.85 0.41 Year ended May 31, 2003 First Quarter $ 0.20 $ 0.69 Second Quarter 0.14 0.03 Third Quarter 0.13 0.05 Fourth Quarter 0.13 0.05 As of September 12, 2003, the Company had 16,208,676 shares of Common Stock outstanding and 734 shareholders of record. The Company did not pay cash dividends on its Common Stock during any of the past three fiscal years. It is the present policy of the Company to retain earnings, if any, to finance the development and growth of its business. In addition, the Company's agreement with its lender prohibits the payment of cash dividends without the lender's prior consent. On July 10, 2002, the Nasdaq Stock Market notified the Company that it did not meet the maintenance criteria regarding the minimum market value of the public float of at least $1 million, or a minimum shareholders' equity of $2.5 million, for continued listing on the Nasdaq SmallCap Market. Accordingly, the Company's stock has been delisted from Nasdaq, but is traded on the NASD OTC Bulletin Board. On July 24, 2002, the Company entered into a Securities Purchase and Exchange Agreement with the holder of the Series A 8% Convertible Preferred Stock whereby all of the outstanding and unconverted Series A 8% Convertible Preferred Stock, including the accrued and unpaid dividends from the Series A Preferred Stock was exchanged for 477 shares Series B 7% Convertible Preferred Stock, with each share valued at $1,000, or a total of $477,000. The terms of the Series B 7% Convertible Preferred Stock differs to the terms of the Series A 8% Convertible Preferred Stock as follows: (i) the dividend on the preferred stock is 7% per annum as compared to 8% on the Series A, (ii) the conversion price is equal to the lesser of: (a) 125% of the market price three trading days immediately preceding the closing date, or (b) the market price of the Company's common stock discounted by 71% of the market rate, as compared to 70% for the Series A, (iii) as the Company was not listed on The Nasdaq SmallCap Market at the time of the issuance of the Series B stock, there is no limitation on the total percentage of common stock that may be issues upon conversion as compared to the number of outstanding common stock shares that existed at the time of issuance of the Series B shares. The Series A shares had a 20% limitation to comply with The Nasdaq Marketplace Rules. ITEM 6. SELECTED FINANCIAL DATA The statement of operations for the years ended May 31, 2003, 2002, 2001, 2000, and 1999 and balance sheet data as of May 31, 2003, 2002, 2001, 2000, and 1999 as set forth below have been derived from the audited financial statements of the Company and should be read in conjunction with those financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. In addition, the selected financial data should be read in conjunction with "Description of Business -- General" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7

~~Year~~YEAR ~~Ended~~ENDED MAY 31 ------------------------------------------------------------- ~~May~~2003 312002 2001 2000 1999 -------- -------- -------- -------- --------~~---------------------~~ ~~2002 2001 2000 1999 1998~~ (~~1) (~~IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA (4) Net Revenue $ 10,475 $ 15,077 $ 38,679 $ 39,206 $ 47,108 ~~$ 49,335~~ Income (Loss) from Operations (118) (1,732) (7,985) 103 (1,316) ~~(3,367)~~ Other Income (Expense) (134) (364) (773) (731) (652) ~~(438)~~ Loss from Continuing Operations (1,328) (2,638) (8,759) (628) (1,322) ~~(2,622)~~ Extraordinary Item, net ~~1,553~~-- -- -- -- -- Loss from Discontinued Operations (4) -- -- (1,000) (36) (145) ~~(1,537)~~ Loss on Disposal of Discontinued Operations (6) -- -- -- -- (88) -- Net Loss (1,328) (1,085) (9,759) (664) (1,556) Income (4Loss) Per Share (3) Loss from Continuing Operations $ (.37) $ (3.21) $ (14.21) $ (1.17) $ (2.28) Loss from Discontinued Operation $ -- $ -- $ (1.62) $ (0.06) $ (0.24) Loss on Disposal of Discontinued Operations -- -- -- $ -- (0.15) Extraordinary Item $ -- $ 1.85 $ 0 $ 0 $ 0 Net Loss $ (.37) $ (1.36) $ -- $ (1.23) $ (2.67) Shares Used in Computing Per Share Amounts 3,~~159~~767 842 619 579 582 BALANCE SHEET DATA: Cash and Cash Equivalents $ 190 $ 74 $ 10 $ 321 $ 1,734 Working Capital 1,327 1,471 (6,023) 3,696 6,068 Total Assets 4,758 5,729 15,457 24,430 28,171 Total Long-Term Obligations 0 0 312 5,784 7,601 Redeemable Preferred Stock -- -- -- -- -- Shareholders' Equity 965 2,216 2,880 12,658 13,388 Current Ratio 0.65 0.58 0.51 1.62 1.85 Cash Dividend Declared Per Common Share $ -- $ -- $ -- $ -- $ --

______________________ (3) Effective January 1, 1998, STAR adopted SFAS No. 128, "Earnings Per Share." (4) Effective February 1999, STAR adopted a plan to abandon its Medicare business provided by one of its subsidiaries, Star Multi Care Services of Florida, d/b/a American Health Care Services as such operations of American have been shown as discontinued for all periods presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis provides information, which the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto, appearing elsewhere herein. All references to years or year ends are to the Company's fiscal periods, which end on May 31. This discussion contains forward-looking statements that are subject to a number of known and unknown risks that, in addition to general economic, competitive and other business conditions, could cause actual results, performance and achievements to differ materially from those described or implied in the forward-looking statements [See Forward Looking Statements]. The Company is subject to significant external factors that could have a significant impact on its business, including changes in Medicaid reimbursement, government fraud and abuse initiatives, and other such factors that are beyond the control of the Company. These factors, as well as future changes in reimbursement methodologies and new or changes in interpretations of regulations, could cause future results to differ materially from historical trends. CRITICAL ACCOUNTING POLICIES The consolidated financial statements of the Company include accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the Company's consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical 8 accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses. Revenue Recognition Net patient service revenue is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. A provision for doubtful accounts is made for revenue estimated to be uncollectible and is adjusted based upon management's evaluation of current industry conditions, historical collection experience and other relevant factors which, in the opinion of management, deserve recognition in estimating the allowance for doubtful accounts. Under Medicaid, Medicare and other cost-based reimbursement programs, the Company is reimbursed for services rendered to covered program patients as determined by reimbursement formulas. Laws and regulations governing the Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Goodwill and Intangible Assets Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, was being amortized on a straight-line basis over the expected future periods to be benefited, ranging from five to forty years. Effective June 1, 2002, we adopted SFAS No. 142, which eliminates amortization of goodwill and intangible assets deemed to have indefinite lives, and requires these assets to be subject to annual impairments tests. Intangible assets consist of customer contracts acquired in connection with our business acquisitions. We completed the annual impairment test required by SFAS No. 142 during the first quarter of fiscal 2003 by comparing the fair value of our reporting units with their carrying values. We also reassessed the useful lives of other intangibles that are amortized. As of June 1, 2002 we concluded that the fair values of the reporting units exceeded the carrying values of the reporting units. Therefore, no impairment charge was recognized in fiscal 2003 and no changes were made to the useful lives of our intangibles. Considerable management judgment is necessary to estimate the fair value of our reporting units, which may be impacted by future actions taken by us and our competitors and the economic environment in which we operate. These estimates affect the balance of Goodwill and Intangible Assets on our Consolidated Balance Sheets and Operating Expenses on our Consolidated Statements of Operations and Comprehensive (Loss) Income. Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for stock-based employee compensation plans and reports pro forma disclosures in its Form 10-K filings by estimating the fair value of options issued and the related expense in accordance with SFAS No. 123. Under this method, compensation cost is recognized for awards of shares of common stock or stock options to directors, officers and employees of the Company only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the grantee must pay to acquire the stock. RESULTS OF OPERATIONS Year Ended May 31, 2003 Compared to Year Ended May 31, 2002 Net revenue for the year ended May 31, 2003 decreased $4,602,350 or 31% to $10,474,784, compared to $15,077,134 for the year ended May 31, 2002. This decrease was primarily attributable to the sale and closing of the Company's New York and New Jersey facilities in August 2001, offset in part by the growth in remaining office revenue for the comparable nine month periods following these closings. Revenue for the nine months ended May 31, 2003 was $8,085,431, as compared to revenue of $7,092,934 for the nine months ended May 31, 2002. Gross profit margin percentages for the years ended May 31, 2003 and 2002 were comparable at 35.6% and 35.4%, respectively. Increasing costs, primarily workers' compensation, are placing greater pressure on gross margins; however, the Company anticipates that it will be able to maintain comparable margins prospectively through delivery of high quality service and reasonable increases in its contract rates. Selling, General and Administrative expenses ("SG&A"), decreased to $3,398,230 in 2003, from $6,299,390 in 2002. As a percentage of net revenue, SG&A decreased to 32.4% in 2003, as compared with 41.8% in 2002. The aforementioned decrease in revenue base has placed additional pressure on controlling overhead expenses; however, the Company diligently seeks and pursues every available opportunity to continue to reduce overhead. Interest expense for 2003 was $134,239, as compared to $676,848 for 2002. The decrease is primarily the result of a decrease in outstanding borrowings, commensurate with the aforementioned decrease in revenue and, to a lesser extent, a decrease in the interest rate on outstanding borrowings. Year Ended May 31, 2002 Compared to Year Ended May 31, 2001 Net revenue for the year ended May 31, 2002 decreased $23,602,240 or 61.0% to $15,077,134, compared to $38,679,374 for the year ended May 31, 2001. This decrease was primarily attributable to the sale and closing of the Company's New 9 York and New Jersey facilities, as well as the closing of one of its Pennsylvania facilities and, to a lesser extent, the elimination of poor margin contracts in its remaining five facilities. Gross profit margin percentages for the years ended May 31, 2002 and 2001 were 35.4% and 33.3%, respectively. The increase in the gross profit margin is primarily attributable to an elimination of low profit margin contracts. Selling, General and Administrative expenses as a percentage of net revenue was 41.8% in 2002, as compared with 26.2% in 2001. This percentage increase is principally attributable to the aforementioned significant decrease in net revenue. Although the Company continues to restructure its overhead in an effort to achieve profitable operations, certain restructuring efforts have lagged behind the corresponding decline in revenue. Provision for doubtful accounts decreased from $5,531,259 in 2001 to a recovery of $(19,229) in 2002. The Company has historically experienced a 1.5% to 2% annual write off; however, following the decision to sell the New York and New Jersey operations and discontinue business with the related payors, coupled with the relocation of the Company's billing and collection function to New York, it was believed that a significant portion of the related accounts receivable would ultimately prove uncollectible. Accordingly, an additional provision of approximately $4.7 million was made against related accounts receivable of approximately $9.9 million. The principal reason for the Company's belief that these accounts receivable would prove uncollectible was that upon deciding to relocate the billing function, it was determined that the initial billing of these services, principally Medicaid, lacked proper documentation necessary for payment. Once this was discovered, the time period for which resubmissions could be made had lapsed. The accounts receivable for which the fourth quarter provision was made all arose during fiscal 2001. Management was unable to foresee the potential losses from these accounts receivable prior to the end of the fiscal year. Interest expense for 2002 was $676,848, as compared to $773,432 for 2001. The decrease is primarily the result of a decrease in the interest rate on outstanding borrowings resulting from the Company's renegotiated credit facility with a new lender and a reduction in the borrowings by the Company. DISCONTINUED OPERATIONS In February 1999, the Company formally adopted a plan to liquidate its Medicare business being provided by one of its subsidiaries, Star Multi Care Services of Florida, Inc d/b/a American Health Care Services. Decreasing utilization, together with decreasing reimbursement rates and increasing costs, forced management to cease operations with its providers July 1, 1999. The Company liquidated its assets and discharged its liabilities through an assignment for benefit of creditors under Florida state law, and the Company was formally dissolved on August 23, 2000. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2003, cash and cash equivalents were $189,952, an increase of $115,717 from $74,235 as of May 31, 2002. The Company intends to keep its outstanding borrowings under its Credit Facility at a minimum and, therefore, keeps its available cash at a minimum; however, large lockbox receipts in the last few days of the year were unavailable for sweep by the Company's lender, and remained as cash balances. On August 1, 2001, the Company entered into a $2 million, 3-year credit facility (the "Credit Facility") with G.E. Capital Healthcare Financial Services, Inc. (formerly Heller Healthcare Finance, Inc.) The Credit Facility provides for the Company to borrow up to 85% of eligible accounts receivable (as defined) that are aged less than 150 days, at a borrowing rate of prime Plus 1%. Excluded from the borrowing base were the accounts receivable from the New York and New Jersey operations that were retained by the Company as part of the Premier transaction. All of the assets of the Company collateralize the Credit Facility. The Company is required to maintain tangible net worth (as defined) in excess of $(800,000). At May 31, 2003, tangible net worth (as defined) was $(669,894). At May 31, 2003, the outstanding loan balance was $1,907,298, as compared to $990,254 at May 31, 2002. The Company has experienced significant losses over the past several years. Continued losses would ultimately exhaust the proceeds from the sale of the New York and New Jersey operations and from the Company's Credit Facility; however, significant sales and marketing efforts have finally resulted in a steady increase in weekly revenue from approximately $185,000 per week as of August 31, 2002 to approximately $240,000 per week at May 31, 2003. As the cash flow of the Company began to improve significantly, Stephen Sternbach, the Company's President and Chief Executive Officer, and Matthew Solof, a former Director, provided loans of an additional $350,000, to ensure the Company's continued positive cash flow. The Company has since repaid $36,000 of these loans. Further improving the cash flow of the Company was the satisfaction of the Company's obligations under Medicare and New York State Medicaid settlements in March 2003 and May 2003, respectively. Payments under these obligations amounted to approximately $638,000 in 2003. The Company believes that the recent turnaround in its profitability will enable it to utilize its remaining deferred tax assets. The Company does not anticipate any extraordinary material commitments for capital expenditures during its current fiscal year. The Company believes that can meet its cash requirements for the next twelve months through its operations and its existing credit sources. CONTRACTUAL OBLIGATIONS The following table presents the Company's expected cash requirements for contractual obligations outstanding as of May 31, 2003. 10 =============================================================================== PAYMENTS DUE BY PERIOD =============================================================================== Less than 1-3 3-5 More than Contractual Obligation Total 1 Year Years Years 5 Years ---------------------- ---------- ---------- ---------- ---------- ---------- ---------------------- ---------- ---------- ---------- ---------- ---------- Operating leases $441,000 $197,000 $232,000 $12,000 -- ---------------------- ---------- ---------- ---------- ---------- ---------- Other 702,000 281,000 421,000 -- -- ---------------------- ---------- --------------------- ---------- ---------- ---------------------- ---------- ---------- ---------- ---------- ---------- Total $1,143,000 $478,000 $653,000 $12,000 $ -- ====================== ========== ========== ========== ========== ========== INFLATION AND SEASONALITY The rate of inflation was insignificant during the year ended May 31, 2003. In the past, the effects of inflation on personnel costs have been offset by the Company's ability to increase its charges for services rendered. The Company anticipates that it will be able to continue to do so in the near future. The Company continually reviews its costs in relation to the pricing of its services. The Company's business is not seasonal. FORWARD LOOKING STATEMENTS Certain statements in this report on Form 10-K constitute" forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are typically identified by their inclusion of phrases such as "the Company anticipates", "the Company believes" and other phrases of similar meaning. These forward-looking statements are based on the Company's current expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. The potential risks and uncertainties that could cause actual results to differ materially from the Company's expectations include the impact of further changes in the Medicaid reimbursement system; government regulation; health care reform; pricing pressures from third-party payors, including managed care organizations; and changes in laws and interpretations of laws or regulations relating to the health care industry. GOVERNMENT REGULATION. As a home health care provider, the Company is subject to extensive and changing state and federal regulations relating to the licensing and certification of its offices and the sale and delivery of its products and services. The federal government and Medicare fiscal intermediaries have become more vigilant in their review of Medicare and Medicaid reimbursements to home health care providers generally, and are becoming more restrictive in their interpretation of those costs for which reimbursement will be allowed to such providers. Changes in the law and regulations as well as new interpretations enforced by the relevant regulatory agencies could have an adverse effect on the Company's operations and the cost of doing business. THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed for its services primarily by the 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 revenue 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. As Congress and state reimbursement entities assess alternative health care delivery systems and payment methodologies, the Company cannot predict which additional reforms may be adopted or what impact they may have on the Company. Additionally, uncertainties relating to the nature and outcomes of health care reforms have also generated numerous realignments, combinations and consolidations in the health care industry that may also have an adverse impact on the Company's business strategy and results of operations. The Company expects continued industry consolidation. BUSINESS CONDITIONS. The Company must continue to establish and maintain close working relationships with physicians and physician groups, managed care organizations, hospitals, clinics, nursing homes, social service agencies and other health care providers. There can be no assurance that the Company will continue to establish or maintain such relationships. The Company expects as consolidation occurs that competition will intensify in future periods given the increasing market demand for the type of services offered and the necessity to maximize service volume due to anticipated operating margin decline. ATTRACTION AND RETENTION OF EMPLOYEES. Maintaining quality managers and branch administrators will play a significant part in the future success of the Company. The Company's professional nurses and other health care personnel are also key to the continued provision of quality care to the Company's patients. The health care industry in general is experiencing both a professional and paraprofessional shortage. The possible inability to attract and retain qualified skilled management and sufficient numbers of credentialed health care professionals and para-professionals could adversely affect the Company's operations and quality of service. ITEM 9A. CONTROLS AND PROCEDURES. The Registrant carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that 11 evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Registrant's disclosure controls and procedures as of May 31, 2003 were effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms. There were no changes in the Registrant's internal control over financial reporting that occurred during the quarter ended May 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT STEPHEN STERNBACH Stephen Sternbach has been the Chairman of the Board of Directors, President and Chief Executive Officer of the Company since 1987. From 1978 to 1986, Mr. Sternbach was associated with Automated Data Processing, Inc. ("ADP"), a provider of information services where he held several marketing positions and ultimately the position of Director of Sales. Mr. Sternbach has served on the Board of Trustees of the Long Island Chapter of the National Multiple Sclerosis Society since 1996. Mr. Sternbach earned a Masters Degree in Public Administration from Syracuse University and a B.A. in Industrial Relations & Personnel Administration from Ithaca College. CHARLES BERDAN Charles Berdan became a director of the Company in April 1994. Presently, Mr. Berdan is a sales executive with People Management located in South Plainfield, New Jersey. Prior thereto, he served as Regional Sales Manager for LearnFrame, an online training company. From April 1994 through June 1998, Mr. Berdan has served as a sales executive for Automatic Data Processing, Inc., a provider of information services. From January 1993 to September 1993, Mr. Berdan was a Vice President of the Senior Bulletin, a newspaper, which the Company purchased in September 1993. Mr. Berdan is a Class III director and will stand for re-election to the Board of Directors at the 2004 Annual Meeting of Shareholders. MATTHEW SOLOF Matthew Solof has been a director of the Company since November 1992. Since 1991, he has been the President and Chief Executive Officer of AMI Group, a real estate development and acquisition company, and President and Chief Executive Officer of Mercantile Mortgage Association, a mortgage lending company. Since 1996 he has been President and Chief Executive Officer of Landco Mortgage Bankers, Inc., a New York State licensed mortgage banker. From 1983 to 1992, Mr. Solof was a trader at IRV Companies, a firm which specialized in oil trading, and from 1981 to 1991, he was President and Chief Executive Officer of Matthew Solof Trading Company, a firm which also specializes in oil trading. Mr. Solof resigned from the Board of directors in September 2002. GARY L. WEINBERGER Gary L. Weinberger has been engaged in the private practice of orthodontics for more than 20 years. In addition, Dr. Weinberger is engaged as a consultant on financial planning and management. Dr. Weinberger is a member of the International Board of Standards and Practices for Financial Planners, the International Association of Financial Planners, and the American Association of Orthodontists. Mr. Weinberger resigned from the Board of Directors in July 2002. MEETINGS OF THE BOARD OF DIRECTORS ---------------------------------- During the Company's last fiscal year, its Board of Directors held one (1) meeting and acted four (4) times through unanimous written consent. As there are presently only two members of the Board of Directors, the Stock Option Committee, the Audit Committee, the Compliance and the Compensation of the Board of Directors were not elected by the Board of Directors this past fiscal year. The Board of Directors has no standing nominating committee. Each incumbent director attended at least 75% of the meetings of the Board of Directors and the committee on which he served which were held while he was serving as a director and/or committee member during the Company's last fiscal year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ----------------------------------------------------------- No members of the Compensation Committee have a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. 12 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of its common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission ("SEC") and each exchange on which the Company's securities are registered. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all ownership forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain persons that no Form 5 was required for those persons, the Company believes that, during the year ended May 31, 2003, its officers, directors and greater than ten-percent shareholders complied with all applicable Section 16 filing requirements. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE

~~Annual Compensation Long Term Compensation ------------------- -------------------------------------------------------------- Other Awards~~ Name and Annual Restricted ~~------~~ Principal ~~Compen-~~Compensation Stock Securities LTIP All Other Position Year Salary($) Bonus($) ~~sation~~ Awards Underlying Options(#) Payments($) Compensation --------~~---~~ ---- --------- -------- -------- ---------- -----------~~----------~~ ----------- ------------ Stephen Sternbach ~~2002~~2003 $275,529 $0 -- -- 0 $0 Chief Executive Officer, 2002 $275,529 $0 -- -- 100,000 $32,660.40 (21) ~~Chief~~President ~~Executive~~and ~~Officer,~~ 2001 $289,956 $ 0 -- -- 0 ~~President~~$0 ~~and~~Chairman ~~2000~~of ~~$275,917~~the Board David Schoenberg 2003 $25109,~~000~~231 --Chief ~~67,098~~Financial Officer 2002 $2725,000~~(1)~~ ~~Chairman~~2001 ~~of the Board~~$0

___________________ (1) Represents forgiveness of note owed to Company. Option/SAR Grants in Last Fiscal Year

Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ---------------------------------------------------------------------------------------------~~---------------~~ (a) (b) (c) (d) (e) (f) (g) Number of % of Total Securities Options/SARs Underlying Granted to Exercise Options/SARs Employees in ~~Exercise~~ or Base Expiration Name Granted (#) Fiscal Year Price ($/Sh) Date 5% 10% ---------------------------------------------------------------------------------------------~~---------------~~ ~~Stephen~~David ~~Sternbach~~Schoenberg ~~100~~50,000 ~~71.4~~100% $.4514 ~~02/~~10/27/07 $128,~~433~~933 $2711,~~473~~274

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table contains information concerning the number and value, at May 31, 2003, of the exercised and unexercised options held by Mr. Sternbach.

Name Shares Value Number of Securities ~~Underlying Unexercised~~ Value of Unexercised ~~Shares~~Acquired ~~Options~~Realized ~~Held~~Underlying atUnexercised ~~Fiscal~~ In-the-Money Options Held aton ~~Acquired~~($) onOptions ~~Value~~Held ~~Year-End~~at Fiscal at Fiscal Year-End (1) ~~Name~~ Exercise ~~(#)~~Year-End ~~Realized~~ (~~$) (~~Exercisable/Unexercisable) (#) (Exercisable/Unexercisable) ---- ------------- -------- -------- --------------------------- --------------------------- Stephen Sternbach 0 0 151,112/0 $0 David Schoenberg 0 0 0/50,000 0 ----------------- -------- -------- --------------------------- ---------------------------

(1) Fair market value of underlying securities (the closing price of the Company's Common Stock on the NASD OTC Bulletin Board) at fiscal year end (May 31, 2003), minus the then effective exercise price. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS. The Company has an employment agreement with Stephen Sternbach dated as of December 3, 1995 (the "Sternbach Employment Agreement"). The Sternbach Employment Agreement has a term of five years and provides for an initial annual salary of $250,000 (subject to annual increase by the amount of the increase in the Consumer Price Index from the immediate preceding year) plus a bonus of 6% of the Company's net profit before taxes in excess of $1,200,000, not to exceed an aggregate annual bonus of $500,000. The Sternbach Employment Agreement provides that after a Change in Control (as defined in the Sternbach Employment Agreement) of the Company has occurred, if either Mr. Sternbach terminates his employment within six months after he has obtained actual knowledge of the Change in Control or the Company (or any successor thereto) terminates his employment with the Company within one year after the Change in Control, Mr. Sternbach will be entitled to receive (i) his salary, bonuses, awards, perquisites and benefits including, without limitation, benefits and awards under the Company's stock option plans and pension and retirement plans and programs, accrued through the date Mr. Sternbach's employment with the Company is terminated and (ii) a lump-sum payment in cash equal to 2.99 times Mr. Sternbach's base amount. 13 On June 21, 2000, the Board of Directors of the Company renewed the employment agreement with Stephen Sternbach originally dated as of December 3, 1995, as amended, for an additional five year term (the "Renewed Sternbach Employment Agreement"). The Renewed Sternbach Employment Agreement provides for an annual salary of $280,813.52, his base salary prior to renewal (subject to annual increase by the amount of the increase in the Consumer Price Index from the immediate preceding year) plus a bonus of 6% of the Company's net profit before taxes in excess of $1,200,000. The Renewed Sternbach Employment Agreement provides that after a Change in Control (as defined in the Sternbach Employment Agreement) of the Company has occurred, if either Mr. Sternbach terminates his employment within six months after he has obtained actual knowledge of the Change in Control or the Company (or any successor thereto) terminates his employment with the Company within one year after the Change in Control, Mr. Sternbach will be entitled to receive (i) his salary, bonuses, awards, perquisites and benefits including, without limitation, benefits and awards under the Company's stock option plans and pension and retirement plans and programs, accrued through the date Mr. Sternbach's employment with the Company is terminated and (ii) a lump-sum payment in cash equal to 2.99 times Mr. Sternbach's base amount. On October 6, 2001, Mr. Sternbach voluntarily waived the cost of living increase that was scheduled to go into affect and further reduced his salary to $275,500 from $290,080. Additionally, in October 2002, he again waived the cost of living increase that was scheduled to go into affect. In addition, the Renewed Sternbach Employment Agreement terminated the Non-Qualified Retirement and Death Benefit Agreement dated February 1, 1994 Instead, the Renewed Sternbach Employment Agreement provides for an annual contribution by the Company to an investment vehicle of Mr. Sternbach's choice equal to ten percent (10%) of his wages and will no longer be deemed deferred compensation. Additionally, the Company shall continue to pay the premiums of a life insurance policy, owned by Mr. Sternbach, insuring his life for $1.2 million. The cash value of this policy was assigned to Mr. Sternbach. The Company and Mr. Sternbach are also parties to a Consulting Agreement (the "Sternbach Consulting Agreement") pursuant to which the Company has agreed to retain Mr. Sternbach as a consultant for a period of two years from the time that his employment with the Company terminates. Pursuant to the Sternbach Consulting Agreement, the Company has agreed to pay Mr. Sternbach $150,000 per year and he will be entitled to participate in the health insurance and similar benefits which the Company provides to any of its other consultants. COMPENSATION COMMITTEE REPORT ----------------------------- Overview and Philosophy ----------------------- The Company's executive compensation philosophy (which is intended to apply to all members of the Company's management, including its Chief Executive Officer) is to provide competitive levels of compensation, integrate managements' pay with achievement of the Company's performance goals, reward above average corporate performance, recognize individual initiative and achievement and assist the Company in attracting and retaining qualified management. The objectives of the Company's executive compensation program are to: Support the achievement of desired Company performance. * Provide compensation that will attract and retain superior talent and reward performance. The executive compensation program provides an overall level of compensation opportunity that is competitive within the health care industry, as well as with a broader group of companies of comparable size and complexity. Executive Officer Compensation ------------------------------ The Company's executive officer compensation is comprised of base salary, annual cash bonus and long-term incentive compensation in the form of stock options and various benefits, including medical plans generally available to employees of the Company. It is the philosophy of the Company that compensation of executive officers should be closely aligned with the financial performance of the Company. Accordingly, benefits are provided through stock option incentives and bonuses which are generally consistent with the goal of coordinating the rewards to management with a maximization of shareholder return. In reviewing Company performance, consideration is given to the Company's earnings. Also taken into account are external economic factors that effect results of operations. An attempt is also made to maintain compensation within the range of that afforded like executive officers at companies whose size and business is comparable to that of the Company. CEO Compensation ---------------- In the case of Stephen Sternbach, the Chief Executive Officer, the Board of Directors evaluates the Company's mid and long range strategic planning and its implementation as well as the considerations impacting the compensation of executive officers generally which are described above. Mr. Sternbach was awarded a bonus of $25,000 for the year ended May 31, 2000, that will be paid in fiscal 2000-2001. 14 Benefits -------- The Company endorses the position that equity ownership by management is beneficial in aligning managements' and shareholders' interest in the enhancement of shareholder value. Stock options were granted at exercise prices equal to the market value of the Company's Common Stock on the date of grant. The Company provides to executive officers medical benefits that generally are available to Company employees. The amount of perquisites, as determined in accordance with the rules of the Securities and Exchange Commission relating to executive compensation, did not exceed 10% of salary for fiscal 2000. COMPENSATION OF DIRECTORS The Company's non-employee directors are paid a fee of $750 for each Board of Directors meeting that they attend. They are not paid any additional fee for serving on any committees of the Board of Directors. PERFORMANCE GRAPH ----------------- Set forth below is a graph comparing the yearly change in the cumulative shareholder return of the Company's Common Stock with the National Association of Securities Dealers Automated Quotation Market Index and a peer group index of five competing companies for the same period. The comparison assumes $100 was invested at the close of business on May 31, 1998 in the Company's Common Stock and in each of the comparison groups, and assumes reinvestment of dividends. The Company paid no cash dividends during the periods. COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS

------------------------ FISCAL YEAR ENDING --------------------- COMPANY/INDEX/MARKET 5/~~30/1997 5/~~29/1998 5/28/1999 5/31/2000 5/31/2001 5/31/2002 5/30/2003 Star Multi Care Services 100.00 5451.1728 2725.7864 136.8934 3.4315 1.7023 Customer Selected Stock List 100.00 6865.8357 4536.3785 2573.9418 51121.7330 85165.18 NASDAQ Market Index 100.00 ~~126~~137.9777 ~~174~~196.9290 ~~250~~125.0059 ~~159~~96.4644 ~~122~~95.4578

The Custom Selected Peer Stock List is made up of the following securities: ALLIED HEALTHCARE INTL GENTIVA HEALTH SVCS NATIONAL HOME HLTH CARE NEW YORK HEALTH CARE INC ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below is the ownership of the Company's Common Stock at September 12, 2003: (i) the only persons or groups who were owners of record or were known by the Company to beneficially own on September 12, 2003 more than 5% of the outstanding shares of Common Stock; (ii) each director and nominee for director of the Company; (iii) each executive officer named in the Summary Compensation Table under the caption "Executive Compensation" below; and (iv) all directors and executive officers of the Company as a group. The Company understands that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner. 15 Amount and Nature Name and Address of Beneficial Percent of Beneficial Owner Ownership* of Class (1) ---------------------------------- ----------------- ----------- Stephen Sternbach c/o Star Multi Care Services, Inc. 33 Walt Whitman Road Huntington Station, NY 11746 7,810,059 (2) 47.7% ---------------------------------- ----------------- ----------- Charles Berdan c/o Star Multi Care Services, Inc. 33 Walt Whitman Road 18,502 (3) .1% Huntington Station, NY 11746 ---------------------------------- ----------------- ----------- Matthew Solof 33 Fairbanks Boulevard 7,772,418 (4) 47.9% Woodbury, NY 11797 ---------------------------------- ----------------- ----------- Gary L. Weinberger c/o Star Multi Care Services, Inc. 33 Walt Whitman Road 20,002 (3) .1% Huntington Station, NY 11746 ---------------------------------- ----------------- ----------- David Schoenberg c/o Star Multi Care Services, Inc. 33 Walt Whitman Road Huntington Station, NY 11746 50,000 (5) .3% ---------------------------------- ----------------- ----------- All directors and executive officers of the Company as a group (5 persons) 15,670,981 95.4% __________ * All share amounts in this table have been adjusted to take into account the stock dividends effectuated on May 30, 1995, January 12, 1996 and November 4, 1996, respectively, and the 1 for 3 reverse stock split effective on December 13, 1999 and on January 25, 2001. (1) Shares subject to options are considered outstanding only for the purpose of computing the percentage of outstanding Common Stock which would be owned by the optionee if the options were so exercised, but (except for the calculation of beneficial ownership by all executive officers and directors as a group) are not considered outstanding for the purpose of computing the percentage of outstanding Common Stock owned by any other person. (2) Includes 15,521 shares of the Company's Common Stock owned by the Stephen Sternbach Family Trust and by his spouse; Mr. Sternbach disclaims beneficial ownership with respect to these shares. Also includes 151,112 shares of the Company's Common Stock which Mr. Sternbach has a currently exercisable option to purchase pursuant to the Company's 1992 Stock Option Plan. (3) Exclusively includes stock options granted the Company's common stock granted under the Company's 1997 Non-Employee Director Stock Option Plan. (4) Includes options to purchase 30,002 shares of the Company's common stock granted under the Company's 1997 Non-Employee Director Stock Option Plan. (5) Exclusively includes stock options granted pursuant to the Company's 1992 Stock Option Plan. 16 Equity Compensation Plan Information

Equity Number of Weighted-average Number Compensation Plans securities to be exercise price of securities Approved by issued upon outstanding remaining Security Holders exercise of options, warrants available for outstanding and rights future issuance options, warrants under equity and rights compensation plans (excluding securities reflected in column (a) (a) (b) (c) Star Multi Care Services, Inc. 291,822 $ 2.63 54,599 1992 Stock Incentive Plan 1995 Star Multi Care Services Employee Stock Purchase Plan 0 0 35,515 1997 Star Multi Care Services Non-employee Director 70,614 $ 3.50 10,611

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 30, 2001, Stephen Sternbach, Chief Executive Officer of the Company, loaned the Company $100,000. Mr. Sternbach's loan was secured by the assets of the Company and his security interest was subordinated to the Company's primary lender. The term of the loan was for one year with annual interest at the rate of 14%. On May 17, 2002, this promissory note was amended whereby: (i) the principal amount loaned was increased to $125,000 and amended to permit future additional borrowings; (ii) the term was extended for an additional twelve months from May 17, 2002; and (iii) the interest rate was lowered to 8%. Additional loans to the Company have increased the loan balance to $315,000. On August 26, 2002, Matthew Solof, a shareholder of the Company loaned the Company $50,000. Mr. Solof's loan was secured by the assets of the Company and his security interest was subordinated to the Company's primary lender. The term of the loan was for one year with interest at the rate of 8% per annum. Additional loans to the Company have increased the loan balance to $250,000. 17 STAR MULTI CARE SERVICES, INC. ------------------------------ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Page ---- Independent Auditors' Report F-2 Consolidated balance sheets as of May 31, 2003 and 2002 F-3 Consolidated statements of operations for the three years ended May 31, 2003 F-4 Consolidated statement of shareholders' equity for the three years ended May 31, 2003 F-5 Consolidated statements of cash flows for the three years ended May 31, 2003 F-6 Notes to consolidated financial statements F-7 - F-21 F-1 Independent Auditors' Report ---------------------------- Board of Directors and Shareholders Star Multi Care Services, Inc. Huntington, New York We have audited the accompanying consolidated balance sheets of Star Multi Care Services, Inc. as of May 31, 2003 and 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Multi Care Services, Inc. as of May 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2003, in conformity with accounting principles generally accepted in the United States of America. HOLTZ RUBENSTEIN & CO., LLP Melville, New York August 1, 2003 F-2 STAR MULTI CARE SERVICES, INC. ------------------------------ CONSOLIDATED BALANCE SHEETS ---------------------------

May 31, --------------------------------- 2003 2002 ~~2001~~ ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 74189,~~235~~952 $ 1074,~~511~~235 Accounts receivable, net of allowance for doubtful accounts of $~~200~~315,000 and $5200,~~402,~~000 at May 31, ~~2002~~2003 and ~~2001~~2002, respectively 1,~~613~~976,~~540~~349 41,~~618~~613,~~971~~540 Prepaid expenses and other current assets 83100,~~206~~534 ~~321~~148,~~959~~755 Deferred income taxes ~~206~~199,~~000~~235 1206,~~290,~~000 ------------ ------------ Total current assets 12,~~976~~466,~~981~~070 62,~~241~~042,~~441~~530 PROPERTY AND EQUIPMENT, net 280,573 572,859 GOODWILL 1,~~022~~307,~~021~~444 1,307,444 OTHER INTANGIBLE ASSETS, net 1327,~~659,303~~735 6351,~~221,134~~859 DEFERRED INCOME TAXES 1356,~~404,~~000 1,~~755~~404,000 OTHER ASSETS 20,201 50,647 ~~217,903~~ ------------ ------------ $ 54,~~663~~758,~~790~~023 $ 155,~~457~~729,~~499~~339 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Revolving credit line $ ~~-- $ 3~~1,~~847~~907,~~315~~298 ~~Note~~$ ~~payable -- 300~~990,~~000~~254 Accrued payroll and related ~~expenses~~taxes ~~637~~273,~~908~~058 2234,~~545,358~~194 Accounts payable 299,097 586,629 ~~1,243,222~~ Accrued expenses ~~758~~748,~~368~~285 ~~636~~1,~~180~~227,631 Due Medicare -- 350,000 ~~3,593,324~~ Due officer ~~125~~315,000 ~~100~~125,000 ~~------------~~Due ~~------------~~to ~~Total~~shareholder ~~current liabilities 2~~250,~~457,905~~000 ~~12,265,399~~-- ------------ ------------ ~~LONG-TERM~~Total ~~LIABILITIES:~~current ~~Revolving credit line 990,254 -- Other long-term~~ liabilities ~~-- 311~~3,~~828 ------------ ------------ 990~~792,~~254~~738 ~~311~~3,~~828~~513,708 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Convertible preferred stock, ~~- aggregate liquidation value $325~~5,000,000 shares authorized; $1.00 par value, ~~5,000,000~~-0- ~~shares~~and ~~authorized;~~ 325 ~~and 455~~ shares issued, respectively -- 325 ~~455~~ Common stock, $.001 par value, 520,000,000 shares authorized; 116,~~024~~208,~~021~~676 and ~~701~~1,~~409~~024,021 shares issued, respectively 16,209 1,024 ~~701~~ Additional paid-in capital 21,~~669~~807,~~864~~003 21,~~585~~669,~~317~~864 ~~Subscription~~Deficit ~~receivable --~~ (~~397~~20,~~782~~467,236) ~~Deficit~~ (19,064,891) ~~(17,917,728)~~ Treasury stock, 26,367 common shares at May 31, ~~2002~~2003 and ~~2001~~2002, respectively, at cost (390,691) (390,691) ------------ ------------ Total shareholders' equity 965,285 2,215,631 ~~2,880,272~~ ------------ ------------ $ 54,~~663~~758,~~790~~023 $ 155,~~457~~729,~~499~~339 ============ ============

See notes to consolidated financial statements F-3 STAR MULTI CARE SERVICES, INC. ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------

Years Ended May 31, ------------------------------------------------ 2003 2002 2001 ~~2000~~ ------------ ------------ ------------ REVENUE, net $ 10,474,782 $ 15,077,134 $ 38,679,374 ~~$ 39,206,990~~ ------------ ------------ ------------ OPERATING EXPENSES: Cost of revenue 6,748,346 9,740,216 25,794,229 ~~27,313,523~~ Selling, general and administrative 3,398,228 6,299,390 10,127,989 ~~10,209,179~~ Depreciation and amortization 309,904 788,412 1,006,635 ~~1,035,143~~ Provision for (recovery of) doubtful accounts 136,250 (19,229) 5,531,259 ~~545,315~~ Impairment of assets to be disposed -- -- 4,205,000 -- ------------ ------------ ------------ 10,592,728 16,808,789 46,665,112 ~~39,103,160~~ ------------ ------------ ------------ OPERATING (LOSS (117,946) ~~INCOME~~ (1,731,655) (7,985,738) ~~103,830~~ ------------ ------------ ------------ OTHER INCOME (EXPENSES): Gain on the sale of business -- 312,671 -- -- Interest expense, net (134,239) (676,848) (773,432) ~~(731,948)~~ ------------ ------------ ------------ (134,239) (364,177) (773,432) ~~(731,948)~~ ------------ ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (252,185) (2,095,832) (8,759,170) ~~(628,118)~~ PROVISION FOR INCOME TAXES 1,076,000 542,000 -- -- ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS AND BEFORE EXTRAORDINARY ITEM (1,328,185) (2,637,832) (8,759,170) ~~(628,118)~~ ------------ ------------ ------------ DISCONTINUED OPERATIONS: Loss from discontinued operations, ~~net of~~ tax benefit of $-0-, $-0-, and $-0- -- ~~(1,000,000) (36,373)~~ --~~----------~~ ~~------------ ------------ LOSS FROM DISCONTINUED OPERATIONS --~~ (1,000,000) ~~(36,373) ------------ ------------ ------------~~ EXTRAORDINARY ITEM: Gain on extinguishment of debt, net of income tax of $1,040,000 -- 1,553,324 -- -- ------------ ------------ ------------ NET LOSS $ (1,~~084~~328,~~508~~185) $ (91,~~759~~084,~~170~~508) $ (~~664~~9,~~491~~759,170) ============ ============ ============ LOSS PER COMMON SHARE: Continuing operations $ (30.2137) $ (143.21) $ (114.1721) Discontinued operations -- -- (1.62) ~~(0.06)~~ Extraordinary item -- 1.85 -- -- ------------ ------------ ------------ Net loss $ (10.3637) $ (151.8336) $ (115.2383) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 3,766,911 841,902 619,005 ~~579,785~~ ============ ============ ============ Diluted 3,766,911 841,902 619,005 ~~579,785~~ ============ ============ ============

See notes to consolidated financial statements F-4 STAR MULTI CARE SERVICES, INC. ------------------------------ CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -----------------------------------------------

Common Stock Preferred Stock --------------------------- ---------------------------- Par Par ~~Paid in~~ Shares Value Shares Value ~~Capital~~ --------- --- ------ ------ --- --------- ------------ Balance, June 1, ~~1999~~2000 ~~599~~613,~~429~~222 $ ~~599~~613 575 $ 575 $Exercise ~~21,468,081~~of ~~Shares~~stock ~~issued~~options ~~under Employee Stock Purchase Plan 1~~3,~~916~~334 23 -- -- ~~6,090~~Conversion ~~Exercise~~ of preferred stock ~~options including income tax benefit 10~~83,~~048~~024 1083 --(120) --(120) ~~70,381~~ Dividends to preferred shareholders 1,829 2 -- -- ~~19,438~~Comprehensive ~~Acquisition~~loss ~~of treasury shares~~ -- -- -- -- --Comprehensive ~~Net~~ loss -- -- -- -- -- ---------- --------- --- ------ ------~~---~~ ------------ Balance, May 31, ~~2000~~2001 ~~613~~701,~~222~~409 ~~613~~701 ~~575~~455 ~~575~~455 ~~21,563,990~~Shares ~~Exercise~~issued ofunder ~~stock~~Employee ~~options~~Stock 3Purchase Plan 39,~~334~~326 339 -- -- ~~13,747~~ Conversion of preferred stock 83210,~~024~~670 83211 (~~120~~130) (~~120~~130) 37 Dividends to preferred shareholders 172,~~829~~616 273 -- -- ~~7,543~~Other -- -- -- -- Net loss -- -- -- -- Comprehensive loss -- -- -- -- --- --------- ------------ ------------ ------------ Balance, May 31, ~~2001~~2002 ~~701~~1,~~409~~024,021 ~~701~~1,024 ~~455~~325 ~~455~~325 ~~21,585,317~~Conversion ~~Shares~~of ~~issued~~Series ~~under~~A ~~Employee~~to ~~Stock~~Series ~~Purchase~~B ~~Plan~~preferred ~~39,326~~stock 39 -- -- ~~62,608~~152 152 Conversion of preferred stock ~~210~~15,~~670~~184,655 ~~211~~15,185 (~~130~~477) (~~130~~477) ~~(81)~~ Dividends to preferred shareholders ~~72,616~~-- 73-- -- -- ~~22,020~~Net ~~Other~~loss -- -- -- -- --Comprehensive ~~Net~~ loss -- -- -- -- -- ---------- --------- --- ------ ------~~---~~ ------------ Balance, May 31, ~~2002~~2003 116,~~024~~208,~~021~~676 $ 116,~~024~~209 ~~325~~-- $ ~~325~~-- ~~$ 21,669,864~~ ========= === ====== ====== === ========= ============ Treasury Stock --------------------------- ~~Total~~Paid in Subscription ~~Shareholders'~~Capital Receivable Deficit Shares Value ~~Equity~~ ------------ ------------ ------------ ------------ ------------ Balance, June 1, ~~1999~~2000 $ 21,563,990 $ (397,782) $ (78,~~403~~118,~~566~~059) 1526,~~278~~367 $ (~~278~~390,~~922~~691) $Exercise ~~13,388,985~~of ~~Shares~~stock ~~issued~~options ~~under~~13,747 ~~Employee Stock Purchase Plan~~ -- -- -- -- ~~6,092~~Conversion ~~Exercise~~ of preferred stock ~~options~~37 ~~including income tax benefit~~ -- -- -- -- ~~70,391~~ Dividends to preferred shareholders 7,543 -- (5040,~~002~~499) -- -- ~~(30,562)~~Comprehensive ~~Acquisition~~loss of-- ~~treasury~~-- ~~shares~~-- -- -- ~~11,089~~Comprehensive ~~(111,769) (111,769) Net~~ loss -- -- (~~664~~9,~~491~~759,170) -- -- ~~(664,491)~~ ------------ ------------ ------------ ------------ ------------ Balance, May 31, ~~2000~~2001 21,585,317 (397,782) (817,~~118~~917,~~059~~728) 26,367 (390,691) ~~12,658,646~~Shares ~~Exercise~~issued ofunder ~~stock~~Employee ~~options~~Stock Purchase Plan 62,608 -- -- -- -- ~~13,750~~ Conversion of preferred stock --(81) -- -- -- -- Dividends to preferred shareholders 22,020 -- (4062,~~499~~655) -- -- ~~(32~~Other -- 397,~~954)~~782 -- -- -- Net loss -- -- (91,~~759~~084,~~170~~508) -- -- ~~(9,759,170)~~Comprehensive loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, May 31, ~~2001~~2002 ~~(397~~21,~~782)~~669,864 -- (1719,~~917~~064,~~728~~891) 26,367 (390,691) ~~2,880,272~~Conversion ~~Shares~~of ~~issued~~Series ~~under~~A ~~Employee~~to ~~Stock~~Series ~~Purchase~~B ~~Plan~~preferred stock 151,847 -- -- -- -- ~~62,647~~ Conversion of preferred stock --(14,708) -- -- -- -- Dividends to preferred shareholders -- -- (6274,~~655~~160) -- -- ~~(40,562)~~Net ~~Other~~loss ~~397,782~~-- -- (1,328,185) -- -- ~~397,782~~Comprehensive ~~Net~~ loss -- ~~(1,084,508)~~-- -- -- ~~(1,084,508)~~-- ------------ ------------ ------------ ------------ ------------ Balance, May 31, ~~2002~~2003 $ 21,807,003 $ -- $(1920,~~064~~467,~~891~~236) 26,367 $ (390,691) $============ ~~2,215,631~~============ ============ ============ ============ Total Shareholders' Comprehensive Equity Loss ------------ ------------ Balance, June 1, 2000 $ 12,658,646 $ -- Exercise of stock options 13,750 -- Conversion of preferred stock -- -- Dividends to preferred shareholders (32,954) -- Comprehensive loss -- -- Comprehensive loss (9,759,170) (9,759,170) ------------ ------------ $ (9,759,170) ============ Balance, May 31, 2001 2,880,272 Shares issued under Employee Stock Purchase Plan 62,647 $ -- Conversion of preferred stock -- -- Dividends to preferred shareholders (40,562) -- Other 397,782 -- Net loss (1,084,508) -- Comprehensive loss -- (1,084,508) ------------ ------------ $ (1,084,508) ============ Balance, May 31, 2002 2,215,631 Conversion of Series A to Series B preferred stock 151,999 $ -- Conversion of preferred stock -- -- Dividends to preferred shareholders (74,160) -- Net loss (1,328,185) -- Comprehensive loss -- (1,328,185) ------------ ------------ $ (1,328,185) ============ Balance, May 31, 2003 $ 965,285 ============

See notes to consolidated financial statements F-5 STAR MULTI CARE SERVICES, INC. ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------

Years Ended May 31, -------------------------------------------- 2003 2002 2001 ~~2000~~ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,~~084~~328,~~508~~185) $ (91,~~759~~084,~~170~~508) $ (~~664~~9,~~491~~759,170) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Provision for doubtful accounts 136,250 -- 5,531,259 ~~545,315~~ Depreciation and amortization 309,904 788,412 1,006,635 ~~1,040,396~~ Deferred income taxes 1,054,765 1,435,000 (41,000) ~~130~~Loss on disposal of assets 6,~~000~~506 -- -- Extraordinary item - gain on extinguishment of debt -- (2,593,324) -- -- Gain on sale of business -- (312,671) -- ~~-- Loss on disposal of assets -- -- 168,579~~ Impairment of assets to be disposed -- -- 4,205,000 -- Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable (499,059) 3,005,431 (1,875,710) ~~947,714~~ Prepaid expenses and other current assets ~~195~~48,~~706~~221 130,157 4,677 ~~22,417~~ Other assets 30,446 167,256 2,325 ~~(18,469)~~ Increase (decrease) in liabilities: Accounts payable and accrued expenses (650,175) (2,~~482~~416,~~417~~868) 997,391 ~~(1,223,970)~~ Due Medicare (350,000) (650,000) 1,000,000 -- Other liabilities -- (311,828) (623,393) ~~(440,711)~~ ------------ ------------ ------------ Total adjustments 86,858 (758,435) 10,207,184 ~~1,171,271~~ ------------ ------------ ------------ Net cash (used in) provided by operating activities (1,241,327) (1,842,943) 448,014 ~~506,780~~ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of business, net -- 5,001,274 -- -- Purchase of intangibles -- -- (108,446) -- Purchase of property and equipment -- (25,193) (62,704) ~~(120,450) Business acquisitions net of cash acquired~~ -- -- ~~(387,399)~~ --------~~----~~ ------------ ------------ Net cash provided by (used in) investing activities -- 4,976,081 (171,150) ~~(507,849)~~ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on revolving credit line 917,044 (2,857,061) (1,001,568) (~~1,376,601~~Repayment of) ~~Proceeds~~proceeds from note payable -- (300,000) ~~-- Repayment of note payable (~~300,000) ~~-- --~~ Proceeds from officer's loan 190,000 25,000 100,000 -- Proceeds from issuance of stock under option plans -- 62,647 13,750 ~~76,483~~Proceeds ~~Acquisition~~from ofshareholder ~~treasury~~loans ~~stock~~250,000 -- -- ~~(111,769)~~ ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,357,044 (3,069,414) (587,818) ~~(1,411,887)~~ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 115,717 63,724 (310,954) ~~(1,412,956)~~ CASH AND CASH EQUIVALENTS, beginning of year 74,235 10,511 321,465 ~~1,734,421~~ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 189,952 $ 74,235 $ 10,511 ~~$ 321,465~~ ============ ============ ============ SUPPLEMENTAL DISCLOSURE: Income taxes paid $ ~~22,000~~-- $ 5422,000 $ ~~101~~54,000 ============ ============ ============ Interest paid $ ~~719~~143,000 $ ~~774~~719,000 $ ~~771~~774,000 ============ ============ ============

See notes to consolidated financial statements F-6 STAR MULTI CARE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED MAY 31, 2003 1. Summary of Significant Accounting Policies: ------------------------------------------ a. Nature of operations -------------------- The Company is principally engaged in providing temporary health care personnel, including registered nurses, licensed practical nurses, certified home health aides, nurses aides and respiratory therapists to hospitals, nursing homes, extended care facilities and in-home patients in Florida, Ohio, New Jersey, Pennsylvania, upstate New York and the New York City metropolitan area. On August 31, 2001, the Company sold to Premier Home Health Care Services, Inc. ("Premier") certain assets related to the home health care operation of the Company's New Jersey business, and certain assets related to its home health care operations in New York. (See Note 17.) During fiscal 2002, the Company negotiated a new credit facility and sold its businesses in New York and New Jersey, in an effort to reduce its working capital shortfall. In addition, the Company has continued to restructure and consolidate its operations, in an effort to reduce operating expenses. The continued operations of the Company are dependent upon the Company's ability to generate increased revenue and improved operating results, or by obtaining additional debt financing or equity funds to meet working capital needs. b. Principles of consolidation --------------------------- The consolidated financial statements include the accounts of Star Multi Care Services, Inc. and its subsidiaries (the "Company"), all of which are wholly-owned. All significant intercompany transactions and accounts have been eliminated. c. Revenue recognition and allowance for doubtful accounts ------------------------------------------------------- Net patient service revenue is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. A provision for doubtful accounts is made for revenue estimated to be uncollectible and is adjusted based upon management's evaluation of current industry conditions, historical collection experience and other relevant factors which, in the opinion of management, deserve recognition in estimating the allowance for doubtful accounts. Under Medicaid, Medicare and other cost-based reimbursement programs, the Company is reimbursed for services rendered to covered program patients as determined by reimbursement formulas. Revenue from Medicaid programs account for approximately 65%, 70% and 63% of the Company's net patient revenue for the years ended May 31, 2003, 2002 and 2001, respectively. Laws and regulations governing the Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. F-7 1. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ d. Net income (loss) per common share ---------------------------------- The basic calculation is determined by dividing net income (loss) attributable to common shares outstanding (the basic numerator) by the weighted average number of common shares outstanding (the basic denominator) during the period. The diluted calculation is determined by adjusting the basic numerator for any changes in income or loss that would result from the assumed exercise of potentially issued common shares. Additionally, the basic denominator is increased to include the additional number of common shares that would be outstanding if the potentially issued common shares had been issued, if dilutive. Potentially issued common shares, consisting of options, are not included in this calculation where the effect of the inclusion would be anti-dilutive. The treasury stock method is used to reflect the dilutive effect of outstanding options and warrants. For the years ended May 31, 2003, 2002 and 2001, the effect of any common stock equivalents would have been anti-dilutive. Net loss available to common shareholders was computed as follows:

Years Ended May 31, -------------------------------------------~~-------------~~ 2003 2002 2001 ~~2000~~ -----------~~-----~~ -----------~~---~~ -----------~~----~~ Net loss $(1,328,185) $(1,084,508) $ (9,759,170) ~~$ (664,491)~~ Dividends on preferred shares (74,160) (62,655) (40,499) ~~(50,002)~~ -----------~~----~~ -----------~~---~~ -----------~~----~~ Net loss available to common shareholders $(1,402,345) $(1,147,163) $ (9,799,669) ~~$ (714,493)~~ ===========~~====~~ ===========~~===~~ ===========~~====~~

e. Property and equipment ---------------------- Property and equipment is recorded at cost. The carrying amount of assets and related accumulated depreciation and amortization are removed from the accounts when such assets are disposed of, and the resulting gain or loss is included in operations. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the remaining life of the lease or the life of the improvements. f. Goodwill and intangible assets ------------------------------ In June 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. It also requires, upon adoption of SFAS No. 142, that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. The Company's previous business combinations were accounted for by using the purchase method and, as of June 2002, the net carrying amount of goodwill from prior purchase transactions was approximately $1,307,000. F-8 1. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ f. Goodwill and intangible assets (cont'd) ------------------------------ The initial test for impairment required it to assess whether there was an indication that goodwill was impaired as of the date of adoption of SFAS No. 142. To accomplish this, the Company identified its reporting units and determined the carrying value of each unit, including goodwill and other intangible assets. It then determined the fair value of each reporting unit and compared it with its carrying value. In performing this test in accordance with SFAS No. 142, the Company aggregated the components of the reporting units to the level where operating decisions are made. The Company completed its annual SFAS No. 142 impairment test during the first quarter of fiscal 2003. As of June 1, 2002 it concluded that the fair values of the reporting units exceeded the carrying values of the reporting units. Therefore, no impairment charge was recognized in fiscal 2003 and no changes were made to the useful lives of its intangible. The effect of adoption of SFAS No. 142 on the 2002 and 2001 consolidated results of operations were as follows: Years Ended May 31, ------------------------------- 2002 2001 ------------- ------------- Reported loss before extraordinary item $ (2,637,832) $ (8,759,170) Add back: amortization of goodwill 141,834 38,266 ------------- ------------- Loss before extraordinary item, as adjusted $ (2,495,998) $ (8,720,904) ============= ============= Basic earnings per share: Reported loss before extraordinary item $ (2.96) $ (14.09) Amortization of goodwill 0.17 0.06 ------------- ------------- Basic loss per share, as adjusted $ (2.79) $ (14.03) ============= ============= Diluted earnings per share: Reported loss before extraordinary item $ (2.96) $ (14.09) Amortization of goodwill 0.17 0.06 ------------- ------------- Diluted loss per share, as adjusted $ (2.79) $ (14.03) ============= ============= g. Cash equivalents ---------------- The Company considers all highly liquid financial instruments with a maturity of three months or less when purchased, to be cash equivalents. h. Income taxes ------------ Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Temporary differences and carryforwards giving rise to deferred taxes primarily relate to the allowance for doubtful accounts, depreciation, accrued expenses and net operating loss carryforwards. i. Stock-based compensation ------------------------ The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for stock-based compensation to employees. Stock compensation to non-employees is accounted for at fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"). F-9 1. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ i. Stock-based compensation (cont'd) ------------------------ In accordance with APB Opinion No. 25, no compensation expense has been recognized for the stock option plans. Had the Company recorded compensation expense for the stock options based on the fair value at the grant date for awards in the years ended May 31, 2003, 2002 and 2001 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share would have changed to the following pro forma amounts:

Years Ended May 31, ------------------------------------------------- 2003 2002 2001 ~~2000~~ ------------- ------------- ------------- ~~Computed~~Net ~~federal~~loss, ~~income~~as ~~tax~~reported ~~at statutory rates~~ $ (~~713~~1,~~000~~328,185) $ (31,~~318~~084,~~000~~508) $ (~~214~~9,~~000~~759,170) ~~State~~Net ~~taxes~~loss, ~~net~~pro offorma ~~federal benefit~~ (~~126~~1,~~000~~328,185) (~~586~~1,~~000~~127,508) (389,~~000~~936,997) ~~Items~~Basic ~~without~~loss ~~tax~~per ~~benefit 1~~share,~~170,000~~ ~~1,709,000~~as ~~102,000~~reported ~~Adjustments~~(.37) to(1.36) ~~prior~~(15.83) ~~years'~~Basic ~~tax~~loss ~~liability~~per ~~-- 546~~share,~~000~~ pro forma (~~50,000~~.37) ~~Valuation~~(1.41) ~~allowance~~(16.12) --Diluted ~~1,377,000~~loss ~~200,000~~per ~~Other~~share, ~~net~~as ~~164,000~~reported ~~272,000~~(.37) --(1.36) ~~-----------~~(15.83) ~~-----------~~Diluted ~~---------~~loss $per ~~495~~share,~~000~~ $pro --forma $(.37) --(1.41) ~~=========== =========== =========~~(16.12)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following range of weighted-average assumptions used for grants in years ended May 31, 2002 and 2001. There were no options granted in fiscal 2003. Years Ended May 31, ------------------ 2002 2001 ------- ------- Dividend yield 0.00% 0.00% Volatility 131.00% 128.01% Risk-free interest rate 5.25% 5.25% Expected life 5 years 5 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. j. Use of estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the period. Such estimates primarily relate to accounts receivable valuation allowances, recoverability of goodwill, realization of deferred tax assets and related valuation allowances and regulatory adjustments. Actual results may differ from those estimates. F-10 1. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ k. Impairment of long-lived assets ------------------------------- In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," an impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. l. New accounting pronouncements ----------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charges are depreciated over the useful life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. Certain provisions of this statement related to the classification of gains and losses from extinguishment of debt. In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities and became effective for the Company on January 1, 2003. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. The adoption of SFAS Nos. 143, 145, 146 and 148 did not have a material effect on the financial statements of the Company. In April 2003, the FASB issued SFAS NO. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. F-11 1. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ l. New accounting pronouncements (cont'd) ----------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the impact of Statement Nos. 149 and 150. The Company does not believe that these pronouncements will have a material effect on the financial statements. m. Advertising costs ----------------- Advertising costs, which are expensed as incurred, approximated $0, $18,000 and $35,000 for the years ended May 31, 2003, 2002 and 2001, respectively. n. Reclassifications ----------------- Certain reclassifications have been made to the financial statements for the year ended May 31, 2002 to conform with the classifications used at May 31, 2003. 2. Impairment of Assets to be Disposed of: -------------------------------------- During and subsequent to fiscal 2001, the Company initiated and completed a plan to dispose of its New York and New Jersey offices by way of a sale of these operations (see Note 17.) In connection with this plan of disposal, the Company determined that the carrying value of goodwill associated with these operations exceeded their fair values. Accordingly, a loss of $4,205,000, which is included in operating expenses, and represents the excess of the carrying value of approximately $8,800,000 over the fair value of approximately $4,600,000, was charged to operations in fiscal 2001. 3. Property and Equipment: ---------------------- Property and equipment consists of the following: May 31, ------------------------ 2003 2002 ---------- ---------- Furniture and fixtures $ 435,000 $ 435,000 Computer equipment 1,784,000 1,788,000 Leasehold improvements 115,000 115,000 Other 271,000 271,000 ---------- ---------- 2,605,000 2,609,000 Less accumulated depreciation 2,324,000 2,036,000 ---------- ---------- $ 281,000 $ 573,000 ========== ========== F-12 4. Other Intangibles: ----------------- Other intangible assets consists of the following: May 31, -------------------- 2003 2002 -------- -------- Gross carrying amount: Customer contracts $393,000 $395,000 Accumulated amortization 65,000 43,000 -------- -------- Balance, end of year $328,000 $352,000 ======== ======== The aggregate amortization expense for each of the years ended May 31, 2003, 2002 and 2001 was approximately $21,900. Estimated amortization expense for the five years subsequent to May 31, 2003 is as follows: Years Ending May 31, ------- 2004 $ 26,400 2005 26,400 2006 26,400 2007 26,400 2008 26,400 The remaining weighted-average amortization period as of May 31, 2003 is 11.75 years. Other intangible assets are being amortized using the straight-line method over a period of fifteen years. 5. Accrued Expenses: Accrued expenses are as follows: May 31, ------------------------ 2003 2002 ---------- ---------- Worker's compensation $ 419,000 $ 469,000 Medicaid settlement -- 270,000 Professional fees 82,000 228,000 Interest 14,000 7,000 Other 233,000 254,000 ---------- ---------- $ 748,000 $1,228,000 ========== ========== 6. Revolving Credit Line: --------------------- The Company has a $2,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility permits the Company to borrow up to 85% of eligible accounts receivable (as defined) that are aged less than 150 days at the lender's prime rate (4.25% at May 31, 2003) plus 1%. The Credit Facility, which expires on August 31, 2004, requires the Company to meet certain financial ratios and covenants. All the assets of the Company collateralize the Credit Facility. F-13 6. Revolving Credit Line: (Cont'd) --------------------- On December 30, 2002, the Credit Facility was amended to allow the Company to borrow up to an additional $176,000 in excess of eligible accounts receivable, under substantially the same terms as the basic Credit Facility. This extension, which expires on December 31, 2003, decreases each month by $41,667. The additional advance amount is secured by certain real estate owned by the Company's President and CEO. On June 12, 2003, the Credit Facility was amended again to increase the amount of the revolving credit facility from $2,000,000 to $2,500,000, under substantially the same terms as the original Credit Facility. 7. Due Officer: ----------- The loans payable to the Company's President and CEO, are due on demand and bear interest at 8% per annum. 8. Income Taxes: ------------ The Company files a consolidated U.S. federal income tax return that includes all wholly owned subsidiaries. State tax returns are filed on a consolidated, or separate basis depending on the applicable laws. The provision (benefit) for income taxes from continuing operations consists of the following: Years Ended May 31, --------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Current: Federal $ -- $ -- $ 21,000 State and local 21,235 147,000 20,000 ---------- ---------- ---------- 21,235 147,000 41,000 ---------- ---------- ---------- Deferred: Federal 1,054,765 395,000 (41,000) State and local -- -- -- ---------- ---------- ---------- 1,054,765 395,000 (41,000) ---------- ---------- ---------- $1,076,000 $ 542,000 $ -- ========== ========== ========== At May 31, 2003 the Company had net operating loss carryforwards for tax purposes of approximately $9,040,000. The tax loss carryforwards expire at various dates through 2023. Included in the net operating loss carryforward is approximately $8,700,000 that was subject to Internal Revenue Code Section 382, which placed a limitation on the utilization of the federal net operating loss to approximately $60,000 per year, as a result of a greater than 50% ownership change of Star Multi Care Services, Inc. in fiscal 2003 (see Note 9). F-14 8. Income Taxes: (Cont'd) ------------ The components of the net deferred tax assets are as follows: May 31, --------------------------- 2003 2002 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 123,000 $ 78,000 Accrued expenses -- 117,000 Tax credits 315,000 223,000 Net operating loss carryforward 3,074,000 2,885,000 Other 43,000 12,000 ----------- ----------- 3,555,000 3,315,000 Valuation allowance (3,000,000) (1,337,000) ----------- ----------- 555,000 1,978,000 ----------- ----------- Deferred tax liabilities: Depreciation and amortization -- 368,000 ----------- ----------- -- 368,000 ----------- ----------- Net deferred tax assets $ 555,000 $ 1,610,000 =========== =========== A reconciliation between the actual income tax expense (benefit) and income taxes computed by applying the statutory federal income tax rate to income from continuing operations is as follows:

Years Ended May 31, -------------------------------------------~~--------------------------------------~~ 2003 2002 2001 ~~2000~~ -----------~~------------~~ -----------~~-------------~~ -----------~~-------------~~ ~~Weighted~~Computed ~~Weighted~~federal ~~Weighted~~income ~~Average~~tax ~~Average~~at ~~Average~~statutory ~~Exercise~~rates ~~Exercise~~$ ~~Exercise~~(86,000) ~~Fixed~~$ ~~Stock~~(713,000) ~~Options~~$(3,318,000) ~~Shares~~State ~~Price~~taxes, ~~Shares~~net ~~Price~~of ~~Shares~~federal ~~Price~~benefit ~~-------------------~~(15,000) ~~-------~~(126,000) ~~---------~~(586,000) ~~---------~~Items ~~---------~~without ~~---------~~tax benefit --~~-------~~ ~~Outstanding~~1,170,000 ~~beginning of year 291~~1,~~459~~709,000 $Adjustments ~~6.18~~to ~~141,778~~prior $years ~~11.40~~tax ~~70,580~~liability $-- ~~21.00~~-- ~~Granted 130~~546,000 ~~0.44~~Valuation ~~167,500~~allowance 1~~.98 97~~,~~614~~000,000 ~~5.28 Exercised~~ -- ~~-- (3~~1,~~334)~~377,000 ~~4.13 (10~~Other,~~048)~~ ~~7.02~~net ~~Canceled (129~~177,~~637)~~000 ~~8.43 (14~~164,~~485)~~000 ~~9.11 (16~~272,~~368)~~000 ~~18.99~~ ----------- ----------- ----------- ~~Outstanding, end of year 291,822~~ $ ~~2.63 291~~1,~~459 $ 6.18 141~~076,~~778~~000 $ ~~11.40 ========= ========= ========= Options exercisable at year end 291~~495,~~822~~000 $ ~~2.63~~-- ~~284,648 $ 6.19 128,433 $ 11.61~~ ========= ==~~=======~~ ========= ~~Weighted average fair value of options granted during the year $ 0.39 $ 1.64 $ 1.86~~ ==~~=======~~ ========= ==~~=======~~

9. Shareholders' Equity: -------------------- Capitalization -------------- The Company amended its Certificate of Incorporation to increase the authorized number of common stock shares from 5,000,000 to 20,000,000. The Company has authorized 5,000,000 shares of preferred stock, $1.00 par value, which the Board of Directors has authority to issue from time to time in series. The Board of Directors also has the authority to fix, before the issuance of each series, the number of shares in each series and the designation, preferences, rights and limitations of each series. F-15 9. Shareholders' Equity: (Cont'd) -------------------- Convertible Preferred Stock --------------------------- In April 1999, the Company completed a private placement by the sale of 575 Series A 8% Convertible Preferred Stock ("Series A Preferred") for $575,000. After sixty days from the closing date, the Series A Preferred may be converted to common stock equal to the lessor of: (i) 125% of the market price of common stock three trading days immediately preceding the closing date, or (ii) the market price of the Company's Common stock discounted from 10% to 30%, such discount increasing with the passage of time. Holders of the Series A Preferred can convert the stated value of their shares, in whole or in part, into common stock at a maximum conversion price of $12.66 per share (45,432 shares), and have liquidation preference over common shareholders and Series B Preferred. The Series A Preferred pays an 8% annual dividend payable quarterly that may be converted to common stock at the option of the Company. In fiscal 2003, the Company amended its certificate of incorporation to provide for the creation of a Series B 7% Convertible Preferred Stock ("Series B Preferred"). The Board of Directors approved the authorization of 500 shares of the Series B Preferred with a par value of $1.00. The Series B Preferred pays a 7% annual dividend payable quarterly, and may be converted to common stock equal to the lessor of: (i) 125% of the market price of the common stock, or (ii) the price equal to 71% of the lowest Closing Bid Price of the common stock for the 28 day period prior to the conversion date. Holders of the Series B Preferred have a liquidation preference over common shareholders. On July 24, 2002, the holders of Series A Preferred exchanged all their shares, including accrued and unpaid dividends for 477 shares of Series B Preferred. In October 2002, Stephen Sternbach, CEO of the Company, and Matthew Solof, former director of the Company, purchased all of the remaining issued and outstanding Series B 7% convertible preferred stock from the Shaar Fund Ltd. In March 2003, Sternbach and Solof converted the remaining outstanding Series B preferred stock into 15,149,444 shares of the Company's common stock. The conversion of the preferred shares by Sternbach and Solof resulted in them attaining more than a majority of the outstanding common stock in the Company. 10. Stock Option Plans: ------------------ Incentive stock option plans ---------------------------- The Company has two stock option plans (the "Plans") as adopted and as adjusted for stock dividends. Participants may be granted either Incentive Stock Options or Non-Qualified Stock Options to purchase shares of common stock. The purpose of the Plans is to promote the overall financial objectives of the Company and its shareholders by motivating those persons selected to participate in the Plans to achieve long-term growth in shareholder equity in the Company and by retaining the association of those individuals who are instrumental in achieving this growth. Such options become exercisable at various intervals based upon vesting schedules as determined by the Compensation Committee. The options expire between September 2003 and December 2008. The incentive stock options may be granted to employees and consultants of the Company at a price not less than the fair market value on the date of grant. All such options are authorized and approved by the Board of Directors, based on recommendations of the Compensation Committee. F-16 10. Stock Option Plans: (Cont'd) ------------------ Non-Employee Directors' Stock Option Plan ----------------------------------------- The Company has adopted a non-qualified stock option plan for all non-employee Directors of the Company. The plan is designed to provide an incentive to Directors and attract and retain the services of experienced and knowledgeable non-employee Directors. The plan expires on March 25, 2007. A summary of the Company's various fixed stock option plans as of May 31, 2003, 2002 and 2001, and changes during the years then ended is presented below.

~~Options~~Years ~~Outstanding~~Ended ~~Options~~May ~~Exercisable~~31, 2003 2002 2001 -------------------- ---------------------~~-----~~ ---------------------~~------~~ Weighted ~~Average~~ Weighted Weighted ~~Range~~Average ~~of Remaining~~ Average Average Exercise ~~Number~~Exercise ~~Contractual~~ Exercise ~~Number~~Fixed ~~Exercise~~Stock ~~Price~~Options ~~Outstanding~~Shares ~~Life~~Price Shares Price ~~Outstanding~~Shares Price ---------------- --- ------~~---~~ ----- ------- -----~~-----~~ ------~~-----~~ -----~~---~~ Outstanding, beginning of year 291,822 $ 2.4163 -291,459 $16.7518 ~~220~~141,~~000~~778 4$11.2340 $Granted ~~1.09~~-- ~~220~~-- 130,000 $0.44 167,500 1.0998 ~~$3.75~~Exercised -- $-- -- -- (3,334) 4.13 30Canceled -- -- (129,~~939~~637) 28.7343 $(14,485) 49.1011 30------- ------- ------- Outstanding,~~939~~ $end ~~4.10~~of ~~$6.60~~year 20291,~~000~~822 $ 2.5563 291,822 $ 62.6063 20291,~~000~~459 $ 6.6018 ~~$11.14~~======= -======= ~~$13.61~~======= 20Options exercisable at year end 291,~~327~~822 1$ 2.3663 291,822 $ 112.8863 20284,~~327~~648 $ 116.8819 ======= ======= ======= Weighted average fair value of options granted during the year $~~46.13~~ ~~556~~-- 5$ 0.3439 $ 461.1364 ~~556~~====== $====== ~~46.13~~======

The following table summarizes information about stock options outstanding at May 31, 2003:

~~Years~~Options ~~Ended~~Outstanding ~~May~~Options ~~31,~~Exercisable -------------------------------------------- --------------------------- ~~2002~~Weighted ~~2001~~Average ~~2000~~Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life Price Outstanding Price ----- ----------- ---- ----- ----- ------ ----- $.41 --- ~~Net~~$1.75 ~~loss~~220,000 as3.23 ~~reported~~ $ (1.09 220,~~037,894)~~000 $ ~~(9,759,170)~~1.09 $3.75 ~~(664,491)~~- ~~Net~~$4.13 ~~loss~~30,939 ~~pro~~1.23 ~~forma~~$ ~~(1,080,894)~~4.10 (930,~~936,997)~~939 ~~(782,173)~~$ ~~Basic~~4.10 ~~loss~~$6.60 ~~per share~~20,000 ~~as reported (~~1.~~31)~~55 ~~(15.83)~~$ (16.~~23)~~60 ~~Basic~~20,000 ~~loss~~$ ~~per~~6.60 ~~share,~~$11.14 ~~pro~~- ~~forma~~$13.61 (20,327 1.36) ~~(16.12)~~$ (111.~~44)~~88 ~~Diluted loss per share~~20,327 as$ ~~reported (1~~11.~~31)~~88 ~~(15~~$46.~~83)~~13 (1556 4.~~23)~~34 ~~Diluted~~$ ~~loss~~46.13 ~~per~~556 ~~share,~~$ ~~pro forma (1~~46.~~36) (16.12) (1.44)~~13

Shares reserved for future issuance at May 31, 2003 are comprised of the following: Incentive stock option plans 268,988 Non-employee Directors stock option plan 22,834 Employee stock purchase plan 35,515 ------- 327,337 ======= F-17 10. Stock Option Plans: (Cont'd) ------------------ Non-Employee Directors' Stock Option Plan (cont'd) ----------------------------------------- In November 1995, the Company adopted an Employee Stock Purchase Plan whereby certain employees can purchase shares of common stock at the lesser of 85% of fair market value of the stock at the beginning or end of the calendar year. Since inception of this Plan, a total of 5,088 shares were issued. 11. Related Party Transactions: -------------------------- a. Stock subscription receivable ----------------------------- On April 20, 1995, the Company accepted a non-recourse promissory note from the former Chief Executive Officer of AMSERV, Eugene J. Mora, in the original principal amount of $198,440, bearing interest at a rate of 10% per annum and maturing in April 2001, and $1,100 in cash for the exercise of options for 4,999 shares of the Company's common stock. The promissory note is secured by 8,069 shares of the Company's common stock owned by Mr. Mora. On January 16, 1996, the promissory note was amended to become a recourse promissory note, secured by 4,999 shares of common stock owned by Mr. Mora, with interest at a rate of 5.73% per annum. Also on January 16, 1996, the Company accepted an additional recourse promissory note from Mr. Mora in the original principal amount of $199,342, bearing interest at a rate of 5.73% per annum and maturing in January 2002, and $1,105 in cash for the exercise of options for 5,022 shares of the Company's common stock. In fiscal 2002, the Company sold certain assets related to its New Jersey operations. The Company's New Jersey business arose primarily as a result of the Company's acquisition of AMSERV in 1995. As a result, the Company wrote-off the value of the non-compete in connection with the disposition of its New Jersey business, as they deemed if not have any value subsequent to the disposition of its New Jersey business. The write-off was included as part of the gain on sale of business. In accordance with the settlement agreement with Mr. Mora, the Company agreed to forgive the subscription receivable in consideration for Mr. Mora entering into a covenant not-to-compete agreement with the Company. Accordingly during fiscal 2002, the Company wrote off the subscription receivable and increased intangible assets by the amount of the note receivable and the unpaid accrued interest in the aggregate amount of $440,000. b. Due to shareholder ------------------ Due to shareholder, represents loans due on demand which bear interest at 8% per annum. 12. Fair Value of Financial Instruments: ----------------------------------- The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: CURRENT ASSETS AND CURRENT LIABILITIES: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate their fair value. F-18 12. Fair Value of Financial Instruments: (Cont'd) ----------------------------------- LONG-TERM DEBT: The fair value of the Company's long-term debt, including the current portions, was estimated using a discounted cash flow analysis, based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of variable rate debt at May 31, 2003 and 2002 approximates its fair value. 13. Concentrations of Credit Risk and Major Customers: ------------------------------------------------- Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of trade accounts receivable and temporary cash investments. The Company provides temporary health care personnel to hospitals, nursing homes, extended care facilities and in-home patients. At May 31, 2003 and 2002, approximately 65% and 40%, respectively, of accounts receivable was due from Medicaid. Credit losses relating to customers historically have not been significant and within management's expectations. The Company places its temporary cash investments with high credit quality financial institutions. 14. Business Risks: -------------- The Company's primary business, offering home health care services, is heavily regulated at both the federal and state levels. While the Company is unable to predict what regulatory changes may occur or the impact of any particular change, the Company's operations and financial results could be negatively affected. Further, the Company operates in a highly competitive industry, which may limit the Company's ability to price its services at levels that they believe appropriate. These competitive factors may adversely affect the Company's financial results. 15. Commitments: ----------- a. Employment agreement -------------------- The Company has an employment agreement, as amended, with an officer which expires in December 2005. The aggregate commitment for future salary, excluding bonuses, under the agreement is $1,264,000. The agreement also provides for increases based on the consumer price index increases and certain bonuses based upon annual pretax income. The aggregate minimum commitment for future salaries under the agreement is as follows: Years Ending May 31, ------- 2004 $ 280,800 2005 280,800 2006 140,400 ------------- $ 702,000 ============= b. Leases ------ The Company conducts its operations from leased office space under various operating leases which expire at various dates through 2008. F-19 15. Commitments: (Cont'd) ----------- b. Leases (cont'd) ------ As of May 31, 2003 future net minimum rental payments under operating leases having initial or remaining noncancellable terms in excess of one year are as follows: Years Ending May 31, ------- 2004 $ 197,000 2005 140,000 2006 67,000 2007 25,000 2008 12,000 ------------- $ 441,000 ============= Rental expenses for operating leases for fiscal years ended 2003, 2002 and 2001 were approximately $195,000, $576,000, and $621,000, respectively. 16. Contingencies: ------------- The Company is a defendant in several actions which are routine and incidental to its business. In management's opinion, settlement of these actions will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. 17. Gain on Sale of Business: ------------------------ On July 3, 2001 the Company entered into an agreement with Premier Home Health Care Services, Inc. ("Premier") to sell selected assets and home health care operations of the Company's New Jersey ("NJ Assets") and New York ("NY Assets") operations for an aggregate sales price of $5.5 million, subject to a post closing adjustment based upon certain revenue thresholds. The allocation of the sales price was $4.0 million for the NJ Assets, and $1.5 million for the NY Assets, respectively. During fiscal 2002, the Company completed the sale of the NY and NJ Assets for an adjusted sales price of $5,250,000, and recognized a gain of approximately $313,000 on the sale, net of various transaction costs. 18. Extraordinary Item: ------------------ In February 1999, the Company adopted a plan to discontinue its Medicare business provided by one of its subsidiaries, Star Multi Care Services of Florida, Inc d/b/a American Health Care Services. The subsidiary ceased operations on July 1, 1999, and in connection with its Medicare business, the subsidiary was overpaid $2,593,324 by Medicare through its final date of operation and was included in due Medicare on the balance sheet. The subsidiary liquidated its assets and discharged its liabilities through an assignment for benefit of creditors under Florida State law, and the subsidiary was dissolved. In connection with the dissolution and liquidation of the subsidiary, the Company has recorded an extraordinary gain of approximately $1,553,000 (net of income taxes of $1,040,000) for the extinguishment of the debt related to the Medicare overpayments made to the subsidiary. This gain has been presented as an extraordinary item for the year ended May 31, 2002. F-20 19. Discontinued Operations: ----------------------- In February 1999, the Company adopted a plan to abandon its Medicare business being provided by one of its subsidiaries, American Health Care Services ("American") in the State of Florida. The Company ceased operations effective July 1, 1999. The Company liquidated its assets and discharged its liabilities through an assignment for the benefit of creditors proceeding. Accordingly, the operating results of American have been segregated from continuing operations and reported as a separate line item on the statement of operations. Operating results (exclusive of any corporate charges or interest expense and the aforementioned provisions) from discontinued operations for May 31, 2001 are as follows: Revenue, net $(1,000,000) ----------- Costs and expenses: Costs of revenue -- Selling, general and administrative -- Depreciation and amortization -- ----------- Operating loss (1,000,000) Other deductions -- ----------- Loss before income taxes (1,000,000) Income tax benefit -- ----------- Net loss $(1,000,000) =========== 20. Supplementary Information - Statement of Cash Flows: --------------------------------------------------- During the years ended May 31, 2002 and 2001, the Company issued 72,616, and 1,829 shares of common stock in satisfaction of $22,093 and $7,545, respectively, of dividends to preferred shareholders. 21. Selected Quarterly Financial Results (Unaudited): ------------------------------------------------

~~Years~~Fiscal Quarter Ended ~~May 31,~~ ------------------------------------------------------------ August 31, November 30, February 28, May 31, 2002 ~~2001~~2002 ~~2000~~2003 2003 --------- ------ --- ----------- ----------~~-----~~ ~~Dividend~~(In ~~yield~~thousands ~~0.00%~~except ~~0.00%~~per ~~0.00%~~share ~~Volatility~~data) ~~131~~Revenue, net $ 2,389 $ 2,562 $ 2,688 $ 2,836 Operating income (loss) (106) (4) 14 (22) Net loss (135) (38) (1,017) (138) Income (Loss) Per Share: Basic (.~~00%~~14) ~~128~~(.~~01%~~03) 94(.~~16%~~99) ~~Risk-Free~~(.02) ~~interest~~Diluted ~~rate~~(.14) 5(.~~25%~~03) 5(.~~25%~~99) 5(.~~25%~~02) ~~Expected~~Weighted ~~life~~Average 5Shares ~~years~~Outstanding: 5Basic ~~years~~1,011,815 1~~.24~~,032,865 ~~years~~1,032,865 12,020,374 ========= ========= ========= ========== Diluted 1,011,815 1,032,865 1,032,865 12,020,374 ========= ========= ========= ==========

Income (loss) per share is computed independently for each of the quarters presented. Therefore, the sums of the quarterly income (loss) per share do not necessarily equal the total for the year. F-21 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statement Schedules appear before the Index of Exhibits. 3. Exhibits: The following Exhibits are filed as a part of this Report: Exhibit No. Description 3. (a) * The Company's Certificate of Incorporation filed April 25, 1961. (b) * The Company's Certificate of Amendment to Certificate of Incorporation filed February 22, 1989. (c) The Company's Certificate of Amendment to Certificate of Incorporation filed December 4, 1990. (d) The Company's Certificate of Amendment to Certificate of Incorporation filed February 3, 1994. (Incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1994.) (e) Amended and Restated By-laws adopted by the Board of Directors on February 11, 2002 file as Exhibit 3.1 to Form 10-Q for the period ended February 28, 2002. 10. (a) * Form of Indemnification Agreement between the Company and Stephen Sternbach. (b) Employment Agreement, dated as of December 3, 1995 between the Company and Stephen Sternbach. (Incorporated by reference to Exhibit 10.(x) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 29, 1996.) (c) * The Company's 1991 Incentive Stock Option Plan (d) The Company's 1992 Incentive Stock Option Plan (as amended and restated September 13, 1993). (Incorporated by reference to Exhibit 10 (h) to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1994.) (e) Amendment No. 1 to the Company's 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10. (z) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 29, 1996.) (f) The Company's Employee Stock Purchase Plan, as amended on December 15, 1995. (Incorporated by reference to Exhibit 10. (y) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 26, 1996.) 18 (g) Form of Incentive Stock Option Contract (Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993.) (h) Form of Indemnification Agreement between the Company and directors and officers. (Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.) (i) LOAN AND SECURITY AGREEMENT dated August 31, 2001, by and among STAR MULTI CARE SERVICES, INC., AMSERV HEALTH CARE OF OHIO, INC., AMSERV HEALTH CARE OF NEW JERSEY, INC., and EFCC ACQUISITION CORP. and HELLER HEALTHCARE FINANCE, INC. (j) Revolving Credit Note dated August 31, 2001 for $2.0 million payable by Star Multi Care Services, Inc., Amserv Healthcare of Ohio, Amserv Healthcare of New Jersey, Inc. and EFCC Acquisition Corp. to Heller Healthcare Finance, Inc. (k) Amendment No. 1 dated December 19, 2001 of the LOAN AND SECURITY AGREEMENT dated August 31, 2001, by and among STAR MULTI CARE SERVICES, INC., AMSERV HEALTH CARE OF OHIO, INC., AMSERV HEALTH CARE OF NEW JERSEY, INC., and EFCC ACQUISITION CORP. and HELLER HEALTHCARE FINANCE, INC. 21. List of subsidiaries, previously filed. 23. (a) Consent of Holtz Rubenstein & Co., LLP. previously filed. (b) Consent of Muenz & Meritz, P.C. included in Exhibit 5.1. previously filed. 31.1 Certification by Stephen Sternbach pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification by David Schoenberg pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32.1 Certification by Stephen Sternbach pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by David Schoenberg pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ___________________ * Incorporated by reference to the Company's Registration Statement on Form S-18 dated May 14, 1991. (Registration No. 33-39697-NY) (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated January 25, 2003 reporting under Item 1. Changes in Control of the Registrant. The Company reported that Matthew Solof, an individual investor and Stephen Sternbach, Chairman of the Board, President and Chief Executive Officer of the Company, provided notice to the Company that they each wished to convert all of the 234.5 shares of Series B 7% Convertible Preferred Stock (the "Preferred Stock") they hold respectively, into common stock of the Company. Mr. Solof's and Mr. Sternbach's holdings of Preferred Stock were each convertible into 7,574,722 shares of common stock of the Company. The Current Report stated that upon the issuance of this common stock pursuant to this conversion, each would hold over 45% of the outstanding shares of the Company. 19 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. Date September 15, 2003 STAR MULTI CARE SERVICES, INC. By /s/ Stephen Sternbach ------------------------ Stephen Sternbach, Chairman of the Board, President and Chief Executive Officer In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Stephen Sternbach Chairman of the Board, President September 15, 2003 --------------------- and Director Stephen Sternbach /s/ Charles Berdan Director September 15, 2003 --------------------- Charles Berdan /s/ David Schoenberg Chief Financial Officer September 15, 2003 --------------------- David Schoenberg 20 INDEX OF EXHIBITS Exhibit No. Description ----------- ----------- 3. (a) * The Company's Certificate of Incorporation filed April 25, 1961. (b) * The Company's Certificate of Amendment to Certificate of Incorporation filed February 22, 1989. (c) The Company's Certificate of Amendment to Certificate of Incorporation filed December 4, 1990. (d) The Company's Certificate of Amendment to Certificate of Incorporation filed February 3, 1994. (Incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1994.) (e) Amended and Restated By-laws adopted by the Board of Directors on February 11, 2002 file as Exhibit 3.1 to Form 10-Q for the period ended February 28, 2002. 10. (a) * Form of Indemnification Agreement between the Company and Stephen Sternbach. (b) Employment Agreement, dated as of December 3, 1995 between the Company and Stephen Sternbach. (Incorporated by reference to Exhibit 10. (x) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 29, 1996.) (c) * The Company's 1991 Incentive Stock Option Plan (d) The Company's 1992 Incentive Stock Option Plan (as amended and restated September 13, 1993). (Incorporated by reference to Exhibit 10 (h) to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1994.) (e) Amendment No. 1 to the Company's 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10. (z) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 29, 1996.) (f) The Company's Employee Stock Purchase Plan, as amended on December 15, 1995. (Incorporated by reference to Exhibit 10. (y) to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended February 26, 1996.) (g) Form of Incentive Stock Option Contract (Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993.) (h) Form of Indemnification Agreement between the Company and directors and officers. (Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.) (i) LOAN AND SECURITY AGREEMENT dated August 31, 2001, by and among STAR MULTI CARE SERVICES, INC., AMSERV HEALTH CARE OF OHIO, INC., AMSERV HEALTH CARE OF NEW JERSEY, INC., and EFCC ACQUISITION CORP. and HELLER HEALTHCARE FINANCE, INC. (j) Revolving Credit Note dated August 31, 2001 for $2.0 million payable by Star Multi Care Services, Inc., Amserv Healthcare of Ohio, Amserv Healthcare of New Jersey, Inc. and EFCC Acquisition Corp. to Heller Healthcare Finance, Inc. (k) Amendment No. 1 dated December 19, 2001 of the LOAN AND SECURITY AGREEMENT dated August 31, 2001, by and among STAR MULTI CARE SERVICES, INC., AMSERV HEALTH CARE OF OHIO, INC., AMSERV HEALTH CARE OF NEW JERSEY, INC., and EFCC ACQUISITION CORP. and HELLER HEALTHCARE FINANCE, INC. 21. List of subsidiaries, previously filed. 23. (a) Consent of Holtz Rubenstein & Co., LLP. previously filed. (b) Consent of Muenz & Meritz, P.C. included in Exhibit 5.1. previously filed. 31.1 Certification by Stephen Sternbach pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification by David Schoenberg pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32.1 Certification by Stephen Sternbach pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by David Schoenberg pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ___________________ * Incorporated by reference to the Company's Registration Statement on Form S-18 dated May 14, 1991. (Registration No. 33-39697-NY) 21

Years Ended May 31, -------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Revenue, net $ -- $(1,000,000) $ 40,953 ----------- ----------- ----------- Costs and expenses: Costs of revenue -- -- 623 Selling, general and administrative -- -- 64,862 Depreciation and amortization -- -- 5,254 ----------- ----------- ----------- -- -- 70,739 ----------- ----------- ----------- Operating loss -- (1,000,000) (29,786) Other deductions -- -- (6,587) ----------- ----------- ----------- Loss before income taxes -- (1,000,000) (36,373) Income tax benefit -- -- -- ----------- ----------- ----------- Net loss $ -- $(1,000,000) $ (36,373) =========== =========== ===========

Fiscal Quarter Ended ------------------------------------------------------------------ August 31, November 30, February 28, May 31, 2001 2001 2002 2002 ------------ ------------ ------------ ------------ (In thousands except per share data) Revenue, net $ 7,984 $ 2,370 $ 2,288 $ 2,435 Operating Loss (63) (809) (705) (95) Loss Before Extraordinary Item (532) (886) (831) (342) Extraordinary Item 1,608 -- -- (55) Net Income (Loss) 1,076 (886) (831) (397) Basic Income (Loss) Per Share: Loss Before Extraordinary Item (0.80) (1.16) (0.98) (0.38) Extraordinary Item 2.38 -- -- (0.06) Net Income (Loss) 1.58 (1.16) (0.98) (0.44) Diluted Income (Loss) Per Share: Loss Before Extraordinary Item (0.78) (1.16) (0.98) (0.38) Extraordinary Item 2.32 -- -- (0.06) Net Income (Loss) 1.54 (1.16) (0.98) (0.44) Weighted Average Shares Outstanding: Basic 675,042 770,860 858,954 995,611 ============ ============ ============ ============ Diluted 694,033 770,860 858,954 995,611 ============ ============ ============ ============

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