<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 January 31, 1997
-----------------------------------
[_] 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
January 31, 1997.
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED JANUARY 31, 1997
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements (unaudited) of
SunStar Healthcare, Inc. and Subsidiaries........... 1
Consolidated Balance Sheets......................... 1
Consolidated Statements of Operations
3 months ended January 31, 1997..................... 2
Consolidated Statements of Operations
6 months ended January 31, 1997..................... 3
Consolidated Statements of Cash Flows............... 4
Notes to Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 7
Part II. Other Information................................... 10
Item 6. Exhibits and Reports on Form 8-K.................... 10
Signatures .................................................... 11
i
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Item 1. Consolidated Financial Statements (unaudited) of SunStar Healthcare,
Inc. and Subsidiaries
Consolidated Balance Sheets
January 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Assets July 31, 1996 January 31, 1997
------ ------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $5,993,609 5,324,976
Patients accounts receivable, less allowance for
doubtful of approximately $110,000 and $217,000
respectively 181,556 211,604
Due from Medicare 38,448
Other receivables 62,438
Prepaid expenses and other assets 150,949 269,457
Deferred taxes 38,700 38,700
---------- ---------
Total current assets 6,403,262 5,907,175
Furniture, equipment and leasehold improvements, net 229,403 325,766
Goodwill, net 387,562 366,395
Restricted cash 280,000 280,000
Deposits and other assets 175,360 161,914
Deferred taxes 23,900 23,900
---------- ---------
Total assets $7,499,487 7,065,150
========== =========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Accounts payable and accrued expenses 315,894 302,956
Unearned premium - Medicare 159,521 149,149
Capital lease obligations, current 16,144 22,227
Income taxes payable 13,639
---------- ---------
Total current liabilities 505,198 474,332
Capital lease obligations, noncurrent 16,540 80,684
---------- ---------
Total liabilities 521,738 555,015
Shareholders' equity
Preferred stock, par value $.001 per share,
1,000,000 shares authorized, no shares outstanding
Common stock, par value $.001 per share,
10,000,000 shares authorized, 2,395,000 shares
issued and outstanding 2,395 2,395
Additional paid-in capital 7,193,852 7,163,800
Unearned compensation from stock options (195,313) (162,761)
Retained earnings (deficit) (23,185) (493,300)
---------- ---------
Total shareholders' equity 6,977,749 6,510,134
---------- ---------
Total liabilities and shareholders' equity $7,499,487 7,065,150
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended January 31, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Patient service revenue $1,229,564 $1,197,359
Cost and expenses:
Cost of patient related services 799,335 924,365
General and administrative 580,574 714,227
Amortization of intangibles 7,184 13,086
---------- ----------
Total operating expenses 1,387,093 1,651,678
---------- ----------
Income (loss) from operations (157,529) (454,319)
Interest income 1,904 63,879
---------- ----------
Income (loss) before income taxes (155,625) (390,440)
Provision for income taxes 10,500
---------- ----------
Net income (loss) $ (166,125) $ (390,440)
========== ==========
Net income (loss) per share $(.14) $(.14)
Weighted average shares outstanding 1,208,750 2,705,108
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the six months ended January 31, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Patient service revenue $2,446,601 $2,488,893
Cost and expenses:
Cost of patient related services 1,577,731 1,829,573
General and administrative 910,434 1,255,566
Amortization of intangibles 21,167 21,397
---------- ----------
Total operating expenses 2,509,332 3,106,537
---------- ----------
Income (loss) from operations (62,731) (617,644)
Interest income 3,691 133,851
---------- ----------
Income (loss) before income taxes (59,040) (483,792)
Provision for income taxes 52,500 (13,677)
---------- ----------
Net income (loss) $ (111,540) $ (470,115)
========== ==========
Net income (loss) per share $(.09) $(.17)
Weighted average shares outstanding 1,208,750 2,705,108
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended January 31, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(111,540) (470,115)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 66,135 76,590
Provision for doubtful accounts 0 107,320
Deferred taxes -
Noncash compensation 184,895 32,552
Operating expenses and income taxes
funded by National Home Health Care, Corp. 65,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 42,368 (137,368)
Decrease (increase) in other receivables (51,000) (62,438)
Decrease (increase) in due from Medicare 38,448
Decrease (increase) in prepaid expenses and
other assets (42,610) (105,062)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (33,022) 43,736
--------- ----------
Net cash provided by (used in) operating
activities 120,226 (476,337)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (9,512) (151,787)
--------- ----------
Net cash (used in) investing activities (9,512) (151,787)
Cash flows from financing activities:
Principal payments under capital lease obligations (10,639) (10,457)
Adjustment of initial public offering expenses (30,053)
Shareholder distributions (98,438)
--------- ----------
Net cash (used in) financing activities (109,077) (40,509)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,637 (668,633)
Cash and cash equivalents, beginning of period 216,440 5,993,609
--------- ----------
Cash and cash equivalents, end of period $ 218,077 5,324,976
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,057 $ 2,740
========= ==========
</TABLE>
4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1997
(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. During December 1996, the company recognized $30,052 of
additional offering expenses as a reduction to additional paid in
capital. As of January 31, 1997 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.
5
<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
405,000 common shares issuable upon the exercise of options granted to
directors, key employees and consultants 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.
6
<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 JANUARY 31
(unaudited)
1996 1997
---- ----
<S> <C> <C>
Patient service revenue $1,229,564 $1,197,359
Income (loss) from continuing
operations $(166,125) (390,440)
Income (loss) from continuing
operations per common share $(0.14) $(0.14)
Total Assets $1,276,958 $7,065,150
Total Equity $1,076,863 $6,510,134
</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 January 31, 1997 compared to quarter ended January 31, 1996
On February 27, 1997, SunStar Health Plan, Inc., a wholly owned subsidiary
of SunStar Healthcare, Inc. was awarded its HMO Certificate of Authority in the
State of Florida. The net loss of $(390,440) for the quarter ended January 31,
1997, is consistent with management's expectations and the estimates provided in
the companys offering statement with respect to the costs associated with the
achievement of this HMO license.
Net income decreased by $224,315 to $(390,440) for the quarter ended
January 31, 1997 from a loss of $(166,125) for the quarter ended 1996. This
decrease resulted from (i) a decrease of approximately $(32,205) in patient
service revenues; (ii) a net increase in operating expenses of approximately
$(264,586) (iii) increased interest income of $61,975; and (iv) a decrease in
income tax provision of $10,500.
Patient service revenue decreased by approximately $32,205 to $1,197,359 at
January 31, 1997 from $1,229,564 at January 31, 1996 primarily due to a
continued decline in Medicare service revenues and revenues received from the
company's prepaid health clinic contract. The company is precluded from
marketing to any new Medicare enrollees until it achieves a commercial base of
at least 5,000 members through the HMO. A Medicare risk contract is anticipated
to be filed with the State in fiscal 1998.
7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Patient related services increased by $125,030 to $924,365 at January 31,
1997 from $799,335 at January 31, 1996. Patient related services as a
percentage of total income increased to 77% at January 31, 1997 compared to 65%
at January 31, 1996 primarily as a result of replacement positions which were
filled in calendar year 1996 but were vacant for most of the quarter ended
January 31, 1996.
General and administrative expenses of $714,227 for the second quarter
ended January 31, 1997, increased by $133,653 over $580,574 of such expenses in
the second quarter of 1996. The increase represents additional expenses
related to development costs necessary to tranform the company into an HMO.
Liquidity.
At January 31, 1997, the Company had working capital of $5,432,843 as
compared to working capital of $370,005 at January 31, 1996. The Company has
historically financed its working capital requirements through cash flow from
operating activities. The substantial increase in working capital at January
31, 1997 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 $(476,337) for the six months
ended January 31, 1997, as compared to net cash provided by operating activities
of $120,226 for the six months ended January 31, 1996. The cash used by
operating activities was attributable to depreciation and amortization charges
of $76,590; a net increase in accounts receivable of $(30,048); an increase in
other receivables of $(62,438); an increase in prepaid expenses and other assets
of $(105,062); noncash compensation expense of $32,552; a decrease in the amount
due from Medicare of $38,448; an increase in other liabilities of $43,736 and a
year to date loss of $(470,115).
Net cash used in investing activities for the six months ended January 31,
1997 was approximately $151,787, primarily as a result of furniture, equipment
and leasehold improvements associated with the relocation of the SunStar
administrative offices. This compares to a $9,512 change for the six months
ended January 31, 1996.
Net cash used in financing activities for the six months ended January 31,
1997 was $40,509 as compared to net cash used in financing activities of
$109,077 for the period ended January 31, 1996. This difference is attributable
to $98,438 of shareholder distributions which occured in the period ended
January 31, 1996 and a $30,053 adjustment to offering proceeds which was made in
December of 1996.
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 whther 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 $135,000 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
8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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.
HMO development costs will continue to be incurred by SunStar in fiscal
years 1997 and 1998 to establish arrangements with physicians, hospitals, and
other health care providers as well as develop marketing and other growth
strategies necessary to operate and maintain HMO operations in accordance with
statutory requirements (which shall include the costs of key employees' salaries
and expenses).
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 further devlop
new primary care physician relationships, either contractually or otherwise, 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.
9
<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
10
<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: 3/14/97 /s/ Jack Shields
--------------------------- ------------------------------
Jack Shields
Vice President and
Chief Financial Officer
SUNSTAR HEALTHCARE, INC.
Date: 3/14/97 /s/ David Jesse
--------------------------- ------------------------------
David Jesse
Executive Vice President and
Chief Operating Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR JANUARY
31, 1997 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> JAN-31-1997
<CASH> 5,325
<SECURITIES> 0
<RECEIVABLES> 491
<ALLOWANCES> 217
<INVENTORY> 0
<CURRENT-ASSETS> 5,907
<PP&E> 1,628
<DEPRECIATION> 1,302
<TOTAL-ASSETS> 7,065
<CURRENT-LIABILITIES> 474
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 6,508
<TOTAL-LIABILITY-AND-EQUITY> 7,065
<SALES> 1,197
<TOTAL-REVENUES> 1,197
<CGS> 924
<TOTAL-COSTS> 1,652
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (64)
<INCOME-PRETAX> (390)
<INCOME-TAX> 0
<INCOME-CONTINUING> (390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (390)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
