SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
OR
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 1-14382
SUNSTAR HEALTHCARE, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 59-3361076
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
231 East New Haven Avenue, Melbourne, Florida 32901
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number Including Area Code: 407-724-0200
---------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of June 28, 1996
was 2,395,000.
<PAGE>
SUNSTAR HEALTHCARE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED APRIL 30, 1996
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1996 and July 31, 1995
(unaudited) 3-4
Consolidated Statements of Operations for the three
months ended April 30, 1996 and April 30, 1995 and nine
months ended April 30, 1996 and April 5 30, 1995
(unaudited)
Consolidated Statements of Cash Flows for the nine
months ended April 30, 1996 and April 30, 1995
(unaudited) 6
Notes to Consolidated Financial 7-8
Statements
Item 2. Management's Discussion and Analysis 9-12
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
-2-
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
April 30, July 31,
1996 1995
ASSETS --------- --------
Current assets:
Cash $77,392 $216,440
Accounts receivable-less
allowance for doubtful 182,085 209,724
accounts of $79,000
Prepaid offering costs 145,638 ---
Due from parent 56,850 ---
Prepaid expenses and 59,987 63,543
other assets
Deferred taxes 27,000 27,000
-------- --------
Total current assets 548,952 516,707
Furniture, equipment and leasehold
improvements, net 202,140 260,081
Goodwill, net 398,247 429,895
Restricted cash 30,000 30,000
Deposits and other assets 35,939 36,119
Deferred taxes 7,900 7,900
--------- ----------
TOTAL $1,223,178 $1,280,702
========== ==========
(continued)
-3-
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
UNAUDITED
April 30, July 31,
1996 1995
--------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued $313,428 $210,318
expenses
Capital lease obligations- 17,372 21,858
current --------- ---------
Total current liabilities 330,800 232,176
Capital lease obligations- --- 11,580
noncurrent
Total liabilities 330,800 243,756
--------- --------
Equity:
Shareholder's net investment --- 1,036,946
Preferred stock, par value $.001
per share, 1,000,000 shares
authorized, no shares issued
Common stock, par value $.001
per share, 10,000,000
authorized, 900,000 shares 900 ---
issued and outstanding
Additional paid-in capital 1,099,792 ---
Unearned compensation (208,314) ---
---------- ---------
Total equity 892,378 1,036,946
---------- ---------
TOTAL $1,223,178 $1,280,702
========== ==========
See accompanying notes to consolidated financial statements
-4-
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
April 30, April 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Patient service revenue $1,174,484 $1,276,697 $3,621,085 $3,713,770
---------- ---------- ---------- ----------
Cost and expenses:
Cost of revenue 860,720 875,733 2,438,451 2,642,563
General and 400,626 351,279 1,126,165 1,047,542
administrative
Compensation expense 13,021 --- 197,916 ---
Amortization of 10,582 13,983 31,749 41,948
intangibles --------- --------- ---------- ----------
Total operating 1,284,949 1,240,995 3,794,281 3,732,053
expenses ---------- ---------- ---------- ----------
Income (loss) from (110,465) 35,702 (173,196) (18,283)
operations
Interest income 914 1,146 4,605 4,858
--------- --------- ---------- ----------
Income (loss) from (109,551) 36,848 (168,591) (13,425)
operations before
taxes
Provision (benefit) for (24,400) 21,000 28,100 2,600
income taxes --------- --------- --------- ---------
NET INCOME (LOSS) ($85,151) $15,848 ($196,691) ($16,025)
========= ========= ========== ==========
Pro forma net (loss) ($0.07) ($0.16)
per share ========== ==========
Pro forma average
number of shares 1,208,750 1,208,750
outstanding
</TABLE>
See accompanying notes to consolidated financial statements
-5-
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the nine months ended
April 30,
-------------------------
1996 1995
----------- ------------
Cash flows from operating activities:
Net (loss) ($144,191) ($16,025)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 99,101 94,227
Noncash compensation 197,916 ---
Operating expenses and income taxes
funded by parent 46,850 21,350
Changes in operating assets and liabilities:
Decrease (increase) in accounts 27,639 (27,624)
receivable
(Increase) in prepaid offering costs (145,638)
(Increase) in due from parent (56,850) ---
Decrease (increase) in prepaid
expenses and and other assets 3,376 (13,909)
Increase (decrease) in accounts
payable and accrued expenses 103,110 (289,540)
----------- ----------
Net cash provided by (used in) 131,313 (231,521)
operating activities ----------- ----------
Cash flows from investing activities:
Purchase of property, equipment and (9,512) (46,739)
leasehold improvements ----------- ----------
Net cash (used in) investing (9,512) (46,739)
activities ----------- ----------
Cash flows from financing activities:
Principal payments under capital lease (16,066) (14,647)
obligations
Shareholder distributions (245,143) (176,383)
---------- ----------
Net cash (used in) financing (261,209) (191,030)
activities ---------- ----------
NET (DECREASE) IN CASH AND CASH (139,408) (469,290)
EQUIVALENTS
Cash and cash equivalents-beginning of 216,440 548,693
period --------- ----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $77,032 $79,403
========= =========
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $4,577 $6,663
See accompanying notes to consolidated financial statements
-6-
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of Management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine-month periods ended April 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in Amendment 2 to the Company's
Form SB-2 (file no. 333-1650) filed with the Securities and Exchange
Commission on May 9, 1996, covering the Company's initial public offering of
common stock (the "Offering").
NOTE 2 - INITIAL PUBLIC OFFERING
On May 21, 1996, the Company completed the Offering, pursuant to which
the Company sold 1,300,000 shares of common stock, par value $.001. The
Offering resulted in net proceeds to the Company of $5,234,277. On June 7,
1996, the underwriters in the Offering exercised their over-allotment option
to purchase additional shares of common stock, pursuant to which the Company
sold 195,000 shares of common stock, par value $.001, resulting in
additional net proceeds to the Company of $853,125.
The Company was incorporated under the laws of the State of Delaware
in December 1995 by National Home Health Care Corp., a publicly-held
Delaware corporation ("National"), to hold the capital stock of Brevard
Medical Center, Inc. ("Brevard") and First Health, Inc. ("First Health"),
which previously were direct, wholly-owned subsidiaries of National. In
January 1996, National contributed to the Company all of the issued and
outstanding shares of capital stock of Brevard and First Health, which then
became direct, wholly-owned subsidiaries of the Company. National currently
holds 900,000 shares of the Company's common stock, representing
approximately 37.6% of the Company.
-7-
<PAGE>
NOTE 3 - CAPITALIZATION
The following table sets forth the capitalization of the Company at
April 30, 1996, and as adjusted to give effect to the initial public
offering and the exercise of the underwriters over-allotment option.
April 30, 1996
Actual As Adjusted
----------- -------------
Capital lease obligations $17,372 $17,372
----------- ----------
Preferred stock, par value $.001 --- ---
per share 10,000,000 shares
authorized, no shares issued
Common stock, par value $.001 per share, 10,000,000 authorized, 900,000
shares issued and outstanding at April 30, 1996 and 2,395,000 shares issued
and outstanding as
adjusted 900 2,395
Additional paid-in capital 1,099,792 7,185,699
Unearned compensation (208,314) (208,314)
---------- ----------
Total stockholders' equity 892,378 6,979,780
---------- ----------
Total capitalization $909,750 $6,997,152
========== ===========
NOTE 4 - PRO FORMA EARNINGS PER SHARE
Pro forma average number of shares outstanding reflects the 900,000
shares issued by the Company to National and common shares issuable up on
the exercise of the options granted to two employees and a consultant as if
such shares were considered to have been issued at the beginning of the
respective period. The pro forma earnings per shares are computed to give
effect to stock options with exercise prices below the initial public
offering price using the treasury stock method.
-8-
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations and Effects of Inflation
----------------------------------------------
Three Months Ended April 30, 1996 compared to Three Months Ended April
30, 1995
Revenue decreased by approximately $102,000, or 8%, from $1,277,000
for the three months ended April 30, 1995 to $1,175,000 for the three months
ended April 30, 1996. This decrease is attributable to the continued decline
in the Company's fee-for-service revenue, which decreased approximately
$93,000, or 26%, and the decrease in the Company's capitation revenue of
approximately $9,000. Fee-for-service revenue as a percentage of total
revenue decreased from 28% to 23% in the comparable periods. The Company
believes that this trend is the result of a shift in the healthcare industry
towards managed care. The decline in revenues is also attributable to the
closing of a nonprofitable center in the first quarter of the current fiscal
year.
Cost of revenue as a percentage of revenue increased from 69% for the
three months ended April 30, 1995 to 73% for the three months ended April
30, 1996. This increase is the result of the decline of revenue of $102,000,
which was only partially offset by the small decrease in cost of revenue
(much of which is fixed and does not necessarily decrease in direct
proportion to a decline in revenue) of $15,000, or 2% over the comparable
period of 1995.
General and administrative expenses increased by approximately
$49,000, or 14%, primarily as a result of the increased administrative
personnel over the comparable period of 1995. General and administrative
expenses can be expected to increase with the Company's proposed expansion
(which will require the Company to make significant up-front expenditures to
relocate, develop and/or acquire primary care centers and physician
practices and to pay for salaries of additional personnel).
Compensation expense for the three months ended April 30, 1996 is
attributable to the Company granting of options to purchase an aggregate of
325,000 shares of Common Stock to certain officers and directors of the
Company and a consultant to the Company at an exercise price of $.25 per
share.
The Company recorded a tax benefit of $24,400 for the three months
ended April 30, 1996 as compared to a tax provision of $21,000 for the three
months ended April 30, 1995.
As a result of the foregoing, the Company recorded a net loss of
approximately $85,000 for the three months ended April 30, 1995 as compared
to net income of approximately $16,000 for the same period a year earlier.
-9-
<PAGE>
Nine Months Ended April 30, 1996 as Compared To Nine Months Ended April 30,
1995.
Revenue decreased by approximately $93,000, or 2%, from $3,714,000 for
the nine months ended April 30, 1995 to $3,621,000 for the nine months ended
April 30, 1996. This result is attributable to the decline in
fee-for-service revenue of $287,000, or 24%, offset by an increase in
Medicare cost reimbursement revenue of $177,000, or 14% and an increase in
capitation revenue of $17,000, or 1%, over the same period a year earlier.
Cost of revenue as a percentage of revenue declined to 67% for the
nine months ended April 30, 1996 from 71% for the nine months ended April
30, 1995. This decrease is attributable to the reduction in staff physicians
employed in the Company's centers, as well as the closing of a
non-profitable center opened during the nine months ended April 30, 1995.
General and administrative expenses for the nine months ended April
30, 1996 increased by approximately $79,000, or 8%, from the nine months
ended April 30, 1995. Included in general and administrative expenses for
the nine months ended April 30, 1996 is a charge of $51,000 in connection
with the settlement of certain claims. In addition, the Company incurred
increased administrative personnel in the nine months ended April 30, 1996.
Compensation expense for the nine months ended April 30, 1996 is
attributable to the Company granting of options to purchase an aggregate of
325,000 shares of Common Stock to certain officers and directors of the
Company and a consultant to the Company at an exercise price of $.25 per
share.
The Company recorded a tax provision for the nine months ended April
30, 1996 of $28,100 compared to a provision of $2,600 for the nine months
ended April 30, 1995. The provision for the nine months ended April 30, 1996
is the result of recording a compensation charge not currently deductible
for which a tax benefit is dependent on future market conditions and has not
been recorded.
As a result of the foregoing, the Company recorded a net loss for the
nine months ended April 30, 1996 of approximately $197,000 as compared to a
net loss of $16,000 for the nine months ended April 30, 1995.
The rate of inflation had no material effect on operations for the
nine months ended April 30, 1996.
Financial Condition and Capital Resources
-----------------------------------------
At April 30, 1996, the Company had working capital of $218,000 as
compared to working capital of $285,000 at July 31, 1995.
-10-
<PAGE>
On May 21, 1996, the Company completed the Offering and, on June 7,
1996, the underwriters in the Offering exercised their over-allotment option
to purchase additional shares of common stock. See Notes 2 and 3 to the
Company's unaudited consolidated financial statements for the three and nine
months ended April 30, 1996 which describe the Offering and the net proceeds
therefrom.
Net cash provided by operating activities was $131,000 for the nine
months ended April 30, 1996, as compared to net cash used in operating
activities of $232,000 for the nine months ended April 30, 1995. The
increase in cash provided by operating activities was attributable to an
increase in accounts payable and accrued expenses of $103,000 for the nine
months ended April 30, 1996 as compared to a reduction of $290,000 in the
prior comparable period. Additionally, while the Company incurred a net loss
of $144,000, such loss was offset by a noncash charge for compensation of
198,000 and operating expenses of $47,000 funded by National. Net cash used
in investing activities for the nine months ended April 30, 1996 and 1995
reflect the purchase of equipment. Net cash used in financing activities for
the nine months ended April 30, 1996 and 1995 were $245,000 and $176,000,
respectively, and reflect primarily distributions to National.
The Company intends to shift the focus of its business from the
provision of primary care services under provider agreements to the
establishment and operation of commercial health maintenance organizations
("HMOs") in Brevard county. Although the Company is unable to predict with
any degree of certainty what effect such proposed change in business focus
will have on the Company, it is possible that the Company's proposed HMO
operations could result in increased competition with HMOs operating in the
state of Florida. As a result of such competition, it is possible that
certain HMOs may terminate provider agreements with the Company, which could
result in significant decline in revenues. In addition, the Company's
operating expenses can be expected to increase significantly in connection
with the Company's proposed expansion, which will require the Company to
make significant up-front expenditures to relocate, develop and/or acquire
primary care centers and physician and pay salaries for additional
personnel. The Company anticipates that it will make capital expenditures
associated with, among other things, leasehold improvements and office
equipment. The Company expects to pay salaries for additional financial,
marketing and other personnel to augment the Company's efforts to
successfully manage anticipated growth. There can be no assurance that the
foregoing factors will not adversely affect the Company's future operating
results.
The Company is dependent on and intends to use the proceeds of the
Offering to implement its proposed expansion. The Company anticipates, based
on currently proposed plans and assumptions relating to its operations
(including the costs associated with, and the timetable for, its proposed
expansion), that the proceeds of the Offering, together with projected cash
flow from operations, will be
-11-
<PAGE>
sufficient to satisfy its contemplated cash requirements for approximately
twelve months following the consummation of the Offering. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate
or if the proceeds of the Offering or cash flow prove to be insufficient
(due to unanticipated expenses, difficulties, problems or otherwise), the
Company may be required to seek additional financing. There can be no
assurance that the proceeds of the Offering will be sufficient to permit the
Company to meet its objective of providing low-cost managed healthcare
products to individuals and employers and to otherwise determine the
viability and potential of its proposed HMO operations. In addition, any
implementation of expansion of commercial HMO operations into new geographic
areas and the establishment of Medicare HMO operations will require capital
resources substantially greater than the proceeds of the Offering or
otherwise currently available to the Company. The Company has no current
arrangements with respect to, or sources of, additional financing. There can
be no assurance that additional financing will be available to the Company
on acceptable terms.
-12-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SunStar Healthcare, Inc.
Date: June 28, 1996 /s/ Robert P. Heller
------------------------
Robert P. Heller
Vice President of Finance,
Chief Financial
and Accounting Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 77,392
<SECURITIES> 0
<RECEIVABLES> 261,085
<ALLOWANCES> (79,000)
<INVENTORY> 0
<CURRENT-ASSETS> 548,952
<PP&E> 1,423,718
<DEPRECIATION> (1,221,578)
<TOTAL-ASSETS> 1,223,178
<CURRENT-LIABILITIES> 330,800
<BONDS> 0
0
0
<COMMON> 900
<OTHER-SE> 891,478
<TOTAL-LIABILITY-AND-EQUITY> 1,223,178
<SALES> 3,621,085
<TOTAL-REVENUES> 3,621,085
<CGS> 0
<TOTAL-COSTS> 3,732,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,858)
<INCOME-PRETAX> (168,591)
<INCOME-TAX> 28,100
<INCOME-CONTINUING> (196,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (196,691)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
