<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1996
-----------------------------------
[ ] 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. AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
Delaware 59-3361076
------------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
521 East State Road 434, Longwood, Florida 32750
------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 339-4997
-------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the 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. X Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 2,395,000 shares of the Registrant's common stock outstanding as of
October 31, 1996.
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1996
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements (unaudited) of
SunStar Healthcare, Inc. and Subsidiaries..............1
Consolidated Balance Sheet.............................1
Consolidated Statements of Operations..................2
Consolidated Statements of Cash Flows..................3
Notes to Consolidated Financial Statements.............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................6
Part II. Other Information......................................9
Item 6. Exhibits and Reports on Form 8-K.......................9
Signatures...........................................................10
i
<PAGE>
SUNSTAR HEATHCARE, INC. AND SUBSIDIARIES
Item 1. Consolidated Financial Statements (unaudited) of SunStar Healthcare,
Inc. and Subsidiaries
Consolidated Balance Sheet
October 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets:
Cash and cash equivalents $5,734,420
Patients accounts receivable, less allowance for doubtful
of approximately $125,000 216,981
Other receivables 61,237
Prepaid expenses and other assets 332,451
Deferred taxes 49,352
----------
Total current assets 6,394,442
Other Assets:
Furniture, equipment and leasehold improvements, net 328,399
Goodwill, net 379,290
Restricted cash 280,000
Deposits and other assets 155,484
Deferred taxes 20,000
----------
Total $7,557,614
==========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 288,738
Unearned premiums 154,854
Unearned premium - Medicare 110,275
Capital lease obligations, current 28,370
Income taxes payable (38)
----------
Total current liabilities 582,198
Capital lease obligations, noncurrent 77,342
----------
Total liabilities 659,541
Shareholders' equity
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized, no shares outstanding -0-
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 2,395,000 shares issued and outstanding 2,395
Additional paid-in capital 7,193,852
Unearned compensation from stock options (195,313)
Retained earnings (deficit) (102,861)
----------
Total shareholders' equity 6,898,073
----------
Total liabilities and shareholders' equity $7,557,614
==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Consolidated Statements of Operations
For the three months ended October 31, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Patient service revenue $1,217,037 $1,291,535
Cost and expenses:
Cost of patient related services 778,396 739,495
General and administrative 329,860 707,053
Amortization of intangibles 13,983 8,311
---------- ----------
Total operating expenses 1,122,239 1,454,859
---------- ----------
Income (loss) from operations 94,798 (163,325)
Interest income 1,787 69,972
---------- ----------
Income (loss) before income taxes 96,585 (93,353)
Provision for income taxes (42,000) 13,677
---------- ----------
Net income (loss) $ 54,585 $ (79,676)
========== ==========
Net income (loss) per share $0.05 $(0.03)
Weighted average shares outstanding 1,208,750 2,699,482
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended October 31, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 54,585 $ (79,676)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 36,349 37,009
Provision for doubtful accounts -0- 15,006
Deferred taxes -0- (6,691)
Operating expenses and income taxes
funded by National Home Health Care, Corp. 48,250
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 26,007 (50,431)
Decrease (increase) in other receivables (61,237)
Decrease (increase) in capitalized HMO
startup costs (60,021)
Decrease (increase) in prepaid expenses and
other assets (19,509) (63,218)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (44,931) 59,104
-------- ----------
Net cash provided by (used in) operating
activities 100,751 (210,155)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (1,636) (43,363)
-------- ----------
Net cash used in investing activities (1,636) (43,363)
Cash flows from financing activities:
Principal payments under capital lease obligations (5,166) (5,671)
Shareholder distributions (89,318)
-------- ----------
Net cash used in financing activities (94,484) (5,671)
-------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,631 (259,189)
Cash and cash equivalents, beginning of period 216,440 5,993,609
-------- ----------
Cash and cash equivalents, end of period 221,071 $5,734,420
======== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 782 $ 1,079
======== ==========
</TABLE>
Non cash investing and financing activities
During the quarter the company incurred capital lease obligations
of $78,699 in connection with lease agreements to acquire furniture
and equipment.
3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Organization
------------
SunStar Healthcare, Inc. (the "Company") was incorporated in December
1995 and issued 875,000 shares (prior to a stock split discussed below)
of common stock. In January 1996, National Home Health Care Corp.
("NHHC"), then the sole shareholder of the Company, contributed to
SunStar 100% of the outstanding capital stock of its wholly-owned
subsidiaries, First Health, Inc. ("First Health") and Brevard Medical
Centers, Inc. ("Brevard"), which included 100% of the outstanding
capital stock of Brevard's wholly-owned subsidiary, SunStar Health Plan,
Inc. ("SHP") (formerly known as Boro Medical Corp.). The Company, First
Health, Brevard and SHP collectively are referred to herein as SunStar.
SunStar provides managed healthcare services pursuant to contractual
arrangements, as well as on a fee-for-service basis, through its
outpatient medical centers in central Florida.
The Company is authorized to issue 10,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred stock, par
value $.001 per share. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by
the Board of Directors. In April 1996, the Board of Directors approved a
1.02857 for one stock split. As a result of the stock split, NHHC holds
900,000 shares of the Company's common stock representing a 37.6%
interest. All share amounts have been retroactively adjusted for all
periods presented.
On May 15, 1996, the Company completed an initial public offering (the
Offering), pursuant to which the Company sold 1,300,000 shares of
previously unissued common stock, par value $.001. The Offering resulted
in net proceeds to the Company of $5,230,372. 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. As of October 31,
1996, the Company had issued 2,395,000 shares of common stock.
(b) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair
presentation of the financial results for the interim periods presented.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain footnote disclosures which would substantially
duplicate the disclosures contained in the audited financial statements
of the Company have been omitted from these interim financial
statements. Although the Company believes that the disclosures presented
below are adequate to make the interim financial statements presented
not misleading, it is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 31, 1996.
4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
The formation of the Company has been accounted for as a reorganization.
Accordingly, the financial statements have been prepared using NHHC's
historical basis in the assets and liabilities of First Health and
Brevard (the Predecessor), including goodwill and other intangibles
recognized by NHHC in the acquisition of certain companies. All
significant intercompany accounts have been eliminated.
The financial statements reflect the results of operations, financial
condition and cash flows of the Company, from the date of its formation,
and the Predecessor, as a component of NHHC, and may not be indicative
of actual results of operations and financial position of the Company
under other ownership. The statements of operations include, in
management's opinion, a reasonable allocation of administrative costs
incurred by NHHC. Such allocation is based on the value of time devoted
by NHHC employees.
(c) Revenue Recognition
-------------------
The Company recognized fee-for-service revenues based on net realizable
amounts due from patients and third-party payors at the time medical
services are rendered. The Company recognizes capitated fee arrangements
from Health Maintenance Organizations (HMOs) on a monthly basis for each
participating enrollee, regardless of utilization; health care costs
relating to capitation fee arrangements from HMOs are recognized as
services are provided. Reimbursement for the Company's participation
under a federal third-party reimbursement contract is based on cost
reimbursement principles and is subject to audit and retrospective
adjustment. The accompanying consolidated financial statements reflect
an estimated settlement for open-year cost reports subject to audit.
(d) Per Share Data
--------------
The Company has reflected in its calculations of earnings per share for
1995 and 1996 the 900,000 shares issued by SunStar to NHHC and the
common shares issuable upon the exercise of 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 earnings per
share are computed to give effect to stock options with exercise prices
below the Offering price using the treasury stock method. In accordance
with Securities and Exchange Commission rules, such effect is also
included in a loss period where the impact of the incremental shares is
antidilutive.
(e) Malpractice
-----------
The Company insures its malpractice risks on a claims-made basis. The
Company has secured claims-made coverage from August 1, 1996 through
October 31, 1997, with retroactive coverage through July 1, 1993. No
accrual for possible losses attributable to incidents which may have
occurred and not been identified under the Company's incident reporting
system has been made, because the amount, if any, is not readily
estimable.
5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General Financial Information.
<TABLE>
<CAPTION>
Quarter Ended October 31
(unaudited)
1995 1996
---- ----
<S> <C> <C>
Patient service revenue $1,217,037 $1,291,535
Income (loss) from continuing
operations 54,585 (79,676)
Income (loss) from continuing
operations per common share $0.05 $(0.04)
Total Assets $1,244,128 $7,557,614
Total Equity $1,050,463 $6,898,073
</TABLE>
The Company recognizes fee-for-service revenues based on net realizable
amounts due from patients and third-party payors at the time medical services
are rendered. Capitation revenues from HMOs that contract with the Company are
recognized on a monthly basis. Reimbursement under the Company's contract with
HCFA are based on costs incurred in connection with medical services provided
and are subject to audit and retrospective adjustment.
Results of Operations.
Quarter ended October 31, 1996 compared to quarter ended October 31, 1995
For the quarter ended October 31, 1996, the Company incurred a net loss of
$79,676. The loss incurred is consistent with management's expectations with
respect to the costs associated with the development and start-up of an HMO.
Net income decreased by $134,261 to ($79,676) for the quarter ended
October 31, 1996 from $54,585 for the quarter ended 1995. This decrease
resulted from (i) an increase of approximately $74,498 in patient service
revenues; (ii) a net increase in operating expenses of approximately $332,620
(iii) increased interest income of $68,185; and (iv) a decrease in income tax
provision of $55,677.
Patient service revenue increased by approximately $74,498 to $1,291,535 at
October 31, 1996 from $1,217,037 at October 31, 1995 primarily due to $38,520 of
bonus payments and retroactive capitation payments of $37,456 which were
received in the period but had not been previously recognized. Fee-for-service
revenue decreased for the period. Management believes that this decrease in
revenue is a trend reflective of the shift within the healthcare industry from
fee-for-service based business toward managed care.
6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Cost of revenue decreased by $38,901 to $739,495 at October 31, 1996 from
$778,396 at October 31, 1995. Cost of revenue as a percentage of total income
decreased to 57.3% at October 31, 1996 compared to 64% at October 31, 1995. The
decrease in the expense level is due to management's efforts at improved cost
control and expense reduction, combined with the closing of a non-profitable
medical center in the first quarter of fiscal 1996.
General and administrative expenses of $707,053 for the quarter ended
October 31, 1996, increased by $377,193 over $329,860 of such expenses in the
first quarter of 1995. The increase represents: (i) an increase in bad debt
expense of $15,000 caused by an increased provision for doubtful accounts and
additional write-offs to collection; (ii) $48,554 of physician recruiting and
relocation expenses; and (iii) additional annualized salaries of over $400,000
related to employees necessary to complete the transformation of SunStar into
the proposed HMO entity.
Liquidity.
At October 31, 1996, the Company had working capital of $5,812,244 as
compared to working capital of $322,099 at October 31, 1995. The Company has
historically financed its working capital requirements through cash flow from
operating activities. The substantial increase in working capital at October
31, 1996 is attributable primarily to proceeds received from a public offering
of the Company's Common Stock in May, 1996.
Net cash used by operating activities was $210,155 for the first quarter of
1996, as compared to net cash provided by operating activities of $100,751 for
the first quarter, 1995. The cash used by operating activities was attributable
to a net increase in capitalized HMO startup costs of $60,021; an increase in
accounts receivable of $50,431; an increase in other receivables of $61,237; an
increase in prepaid expenses and other assets of $63,218; the quarter's net loss
of $79,676.
Net cash used in investing activities for the first quarter of 1996 was
approximately $43,363, reflecting a purchase of furniture, equipment and
leasehold improvements associated with the relocation of the SunStar
administrative offices. This compares to a $1,636 change in first quarter,
1995.
Net cash used in financing activities for the first quarter, 1996 was
$5,671 as compared to net cash used in financing activities of $ 94,484 for the
first quarter, 1995. This difference is attributable to $89,318 of shareholder
distributions which occured in the first quarter of 1995.
Although, Humana Health Care Plans, a health maintenance organization with
which the Company has a capitated service agreement, has announced its intention
to terminate its operation in Brevard County effective January 1, 1997, it is
uncertain at this time whether Humana will, in fact, continue to market in
Brevard County. However, if Humana Health Care Plans does terminate all of
such operations, Management estimates that capitation revenue will decrease by
approximately $170,000 in fiscal 1997 from fiscal 1996 as a result of a net loss
of capitated members.
During the next fiscal year, the Company's liquidity will be affected by
the proposed HMO establishment and operation. As an HMO, SunStar Health Plan,
Inc. will initially be required to maintain, at least, $1,500,000 in minimum
capital surplus pursuant to Section 641 of the Florida Insurance Code. At
September 13, 1996, SunStar Health Plan, Inc.'s audited financial statements
(which were prepared as part of its pending application for an HMO Certificate
of Authority in the State of Florida) reflect an actual surplus of $2,684,000
which is currently maintained as a cash equivalent of a Money Market Trust Fund
which invests in securities issued or guaranteed by the U.S. Treasury and
repurchase agreements relating to such securities.
7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
HMO development costs will be incurred by SunStar in calendar year 1997 to
establish arrangements with physicians, hospitals, and other health care
providers as well as develop marketing materials and strategies necessary to
operate and maintain HMO operations in accordance with statutory requirements
(which shall include the costs of key employees' salaries and expenses).
Additionally, SunStar will incur expenditures to develop and/or acquire up to
five additional primary care centers outside of Brevard County and to relocate
SunStar's existing medical centers to larger facilities.
Although the Company is unable to predict with any degree of certainty the
effect on the Company of its proposed shift of business focus (e.g., from the
provision of primary care services under provider agreements to the
establishment of commercial HMO operations in Brevard County, Florida), 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 a 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 practices 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 (including telephone and management information systems and
software). 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 conducted an initial public offering in May, 1996 to provide
funds for its expansion plans, and it is anticipated that the net proceeds from
such offering, approximating $6,000,000, will be used to implement such
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 such offering proceeds,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements through the end of its current fiscal year.
There can be no assurance that the offering proceeds 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 proposed HMO operations. In the event that the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of the public offering 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
additional financing will be available to the Company on acceptable terms, or at
all. To the extent that the Company's available cash resources are insufficient
to allow the Company to engage in operations sufficient to generate meaningful
revenues or achieve profitable operations, the inability to obtain additional
financing will have a material adverse effect on the Company.
8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and reports on form 8-K
(a) Exhibits:
NONE
(b) Reports on form 8-K:
NONE
9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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: December 16, 1996 /s/ David A. Jesse
------------------ ----------------------------
David A. Jesse
Executive Vice President and
Chief Operating Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR OCTOBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 5,734
<SECURITIES> 0
<RECEIVABLES> 403
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 6,394
<PP&E> 1,603
<DEPRECIATION> 1,275
<TOTAL-ASSETS> 7,558
<CURRENT-LIABILITIES> 582
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 6,896
<TOTAL-LIABILITY-AND-EQUITY> 7,558
<SALES> 1,292
<TOTAL-REVENUES> 1,292
<CGS> 739
<TOTAL-COSTS> 1,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (70)
<INCOME-PRETAX> (93)
<INCOME-TAX> (14)
<INCOME-CONTINUING> (80)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
