<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended July 31, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 1-14382
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SUNSTAR HEALTHCARE, INC.
(Name of small business issuer in its charter)
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DELAWARE 59-3361076
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
300 International Parkway, Suite 230, Heathrow, Florida 32746
(Address of principal executive offices/Zip Code)
(407)304-1066
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock NASDAQ-Small-Cap Market and Boston
Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 requirements for the 90 past days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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-KSB
or any amendment to this form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $4,728,536
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The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on October 27, 1997, was $5,694,984 (based on the
average closing bid and asked prices of the Registrant's Common Stock on October
27, 1997 of $4.375 and $4.75 respectively).
<PAGE>
As of September 30, 1997, 2,395,000 shares of the Registrant's Common Stock
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were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual Meeting Part III
Transitional Small Business Disclosure Format (check one): YES NO X
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_____________________________________________________________________
<PAGE>
PART I
Item 1. Business
Sunstar Healthcare, Inc. (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") (which had as its wholly-owned
subsidiary, Boro Medical Corp.) 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 held by it, and Brevard and First
Health became direct, wholly-owned subsidiaries of the Company.
On May 15, 1996, the Company completed an initial public offering (the
"Offering") pursuant to the Securities Act of 1933, as amended, which resulted
in the issuance of 1,300,000 shares of Common Stock, par value $.001 (the
"Common Stock"). The Offering yielded net proceeds to the Company of
$5,230,372. On June 7, 1996, the underwriters in the Offering exercised their
over-allotment option in full to purchase additional shares of Common Stock,
resulting in the Company's sale of an additional 195,000 shares of Common Stock,
par value $.001, and realization of $853,125 in net proceeds.
The Company is a managed health care company whose wholly-owned
subsidiaries, Brevard, First Health and SunStar Health Plan, Inc. ("SHP",
formerly known as Boro Medical Corp.) (hereinafter collectively referred to as
the "Company") provide primary health care services through seven primary care
centers located in central Florida and comprehensive health care benefits to
individuals, families, small and large employer groups in its service areas
through its Health Maintenance Organization ("HMO") contracts. As of October
15, 1997 the Company was approved to offer its HMO products in Brevard, Orange,
Osceola, Seminole, Lake, Polk, Hernando, Volusia, Indian River, St. Lucie,
Marion, Citrus and Sumter Counties. During the next eighteen months, the
Company intends to expand its HMO target markets to include additional counties
in central, northern and southern Florida with the intention of providing HMO
products statewide. The Company will also seek to further serve the Medicare-
eligible population in such markets by offering comprehensive health care
coverage through a contract with the Health Care Financing Administration
("HCFA").
The Company's HMO products provide comprehensive health care benefits to
enrollees, including ambulatory and inpatient physician services,
hospitalization, pharmacy, dental, optical, mental health, ancillary diagnostic
and therapeutic services. In general, a fixed monthly enrollment fee covers all
HMO services, although the benefit plans require co-payments and/or deductibles
in addition to the basic enrollee premium. Although a primary care physician
assumes overall responsibility for the coordination of care, the Company offers
its members access to its network of physicians without the need of a referral
from the members' primary care physician.
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The Company currently offers primary health care services through its
primary health care centers on a contractual and a fee-for-service basis. The
primary health care services are delivered by eleven board certified or board
eligible primary care physicians employed by the Company. The Company's primary
health care operations consist primarily of medical treatment and care typically
furnished in a family practitioner's office. The Company has provider
agreements with third-party payors, such as Humana Health Care Plans, CAC/United
Healthcare Plans of Florida, Inc. and Blue Cross Blue Shield of Florida, which
are health maintenance organizations operating in the State of Florida. Pursuant
to such agreements, the Company receives a fixed amount, or "capitated" fee, for
each participating enrollee per month, regardless of utilization. The Company
also has a prepaid cost reimbursement contract with the Health Care Financing
Administration of the federal government ("HCFA"), pursuant to which the Company
also provides prescribed primary health care to Medicare beneficiaries who
enrolled directly with the Company prior to January 1, 1996.
For the year ended July 31, 1997, medical services provided under the
Company's contracts with HCFA, capitation with outside HMOs, its own HMO
products, and on a fee-for-service basis accounted for approximately 38%, 34%,
2% and 25%, respectively, of the Company's revenues.
The Company's objective is to continue to establish relationships with
qualified physicians, hospitals and other health care providers who are willing
to provide medical services to members of managed care organizations at a
reasonable cost. The Company believes that these efforts will enable it to
provide a variety of low-cost managed health care products to attract
individuals and employer groups willing to enroll in the Company's HMO.
The Company's strategy and preliminary and future expansion plans may be
subject to change as a result of numerous factors, including progress or delays
in the Company's expansion efforts, changes in market conditions, new or
different opportunities which may become available to the Company in the future
and competitive conditions.
PRIMARY HEALTH CARE OPERATIONS.
The Company currently employs eleven board certified or board eligible
primary care physicians. These family practitioners, pediatricians and general
internists are responsible for providing and coordinating health care services
to patients and are required to maintain local hospital admitting privileges in
order to provide continuity of medical care. The Company's physicians provide
medical services in accordance with quality assurance standards established by
the American Medical Association and are continually monitored in accordance
with the Company's quality improvement programs. The Company also employs one
family nurse practitioner in its primary care operations.
The Company enters into a one-year employment agreement with each of its
employed physicians and other practitioners which is automatically renewable,
subject to early termination upon three months' prior written notice. The
agreements require physicians to devote their full
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time to the Company's business , to obtain and maintain professional licenses
and include provisions which prohibit the employee from competing and soliciting
and from disclosing proprietary information. The agreements also provide for
guaranteed annual salaries plus incentive performance bonuses. The Company
obtains and maintains professional malpractice insurance for each of its
physicians.
COMMERCIAL HEALTH MAINTENANCE ORGANIZATION ("HMO") OPERATIONS
On February 24, 1997 the Company was granted a license to offer its HMO
products in its initial service area in Brevard County, Florida. Concurrent
with the Company's objective to rapidly expand its network service areas, the
Company was approved by the State of Florida Agency for Health Care
Administration ("AHCA") on May 23, 1997 to expand its service area to include
Orange, Osceola and Seminole counties. On September 2, 1997 the Company was
approved by AHCA to expand its service area to include Hernando, Lake, Polk and
Volusia counties. On October 3, 1997 the Company was approved by AHCA to expand
its service area to include Indian River, St. Lucie, Marion, Citrus and Sumter
counties. As of October 15, 1997 the Company had over 2,000 physicians and 20
hospitals contracted to deliver services under the HMO and approximately 2,800
members enrolled in the Company's HMO products.
REVENUE SOURCES AND REIMBURSEMENT.
The Company currently offers health care services on a contractual, pre-
paid and fee-for-service basis. The following table sets forth for the periods
indicated the approximate revenues and percentages of revenues derived from the
Company's various revenue sources.
<TABLE>
<CAPTION>
For the Fiscal Years Ended July 31,
1996 1997
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<S> <C> <C> <C> <C>
HCFA $1,993,889 39.2% $1,782,401 37.7%
Capitation Agreement 1,561,283 30.8% 1,595,112 33.7%
Fee-For-Service 1,393,892 27.4% 1,164,088 24.6%
Prepaid Health Clinic 131,786 2.6% 101,673 2.2%
HMO Products 0 0.0% 85,262 1.8%
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$5,080,850 100.0% $4,728,536 100.0%
</TABLE>
HCFA Agreement.
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The Company has a prepaid cost reimbursement contract with HCFA, pursuant
to which the Company provides prescribed primary care services to Medicare
beneficiaries who enrolled directly with the Company prior to January 1, 1996.
The Company currently provides medical services to approximately 2,400 Medicare
enrollees through its five primary care centers in Brevard county. Medicare
enrollees pay a nominal annual enrollment fee without monthly premiums,
deductibles or copayments for medical services. The Company may bill Medicare
patients for services not covered by the Company's agreement with HCFA.
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Pursuant to the terms of the agreement with HCFA, the Company is paid a
monthly premium in advance for each Medicare beneficiary enrolled by the
Company. Payments under the agreement are based on costs incurred in connection
with medical services and are subject to year-end adjustments. The Company is
subject to governmental audit to ensure the basis of medical costs incurred. To
date, no adjustments have been made under the HCFA contract and the Company has
never been subject to audit.
The Company's agreement with HCFA is automatically renewable on a yearly
basis unless either party elects not to renew. HCFA may terminate the agreement
at any time in the event that the Company fails to perform its obligations under
the agreement or fails to comply with applicable laws and regulations or
undergoes a change of ownership. HCFA may audit the Company to determine the
quality of medical care and compliance by the Company under the terms of the
agreement and applicable law.
Pursuant to recent amendments to the Social Security Act, effective January
1, 1996, the Company is prohibited from enrolling Medicare beneficiaries who are
not members of employer groups or unions under its agreement with HCFA until it
establishes Medicare HMO operations. Such limitation may prevent the Company
from enrolling certain new Medicare beneficiaries and increasing revenues under
its contract with HCFA in the foreseeable future.
Agreements with Health Maintenance Organizations.
- ------------------------------------------------
The Company also has provider agreements with several HMOs including Humana
Healthcare Plans, United Healthcare Corporation and Blue Cross Blue Shield of
Florida, pursuant to which the Company provides primary health care services for
approximately 7,600 HMO enrollees. Under such agreements, the Company generally
receives a fixed amount, or "capitated" fee, for each participating enrollee per
month, regardless of utilization. Under certain circumstances, the Company is
entitled to collect coinsurance obligations and deductibles from HMO enrollees,
and is entitled to bill enrollees for medical services not provided by contract.
Agreements with HMOs are generally short-term and contain short-term
cancellation provisions. On September 30, 1997, the Company received
notification that three of its provider agreements with Humana Health Care
Plans, an HMO ("Humana") will terminate effective November 30, 1997, and two
other provider agreements with Humana will terminate effective March 30, 1998.
Revenue from these agreements amounted to approximately $376,000 for the year
ended July 31, 1997. It is estimated that revenue will decrease by $190,000 in
fiscal 1998 as a result of these terminations. However, to mitigate such
decrease in revenue, the Company has entered into a provider agreement with
another HMO in the same market area anticipating that an indeterminate number of
former Humana members will enroll with the other HMO in order to retain the
primary care physicians they had through Humana. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity."
Fee-for-Service.
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The Company offers health care services on a fee-for-service basis,
pursuant to which the Company receives payments for medical services from
individuals, private insurance companies,
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workers' compensation programs, municipalities, other self-insured groups and
government assistance programs such as Medicare and Medicaid.
Medicare is a federally funded and administered program that provides
health care payments for most persons who are 65 years of age or older and
entitled to retirement benefits. Medicare payments are based on a standard fee
schedule used by HCFA. For the year ended July 31, 1997, the Company provided
medical services on a fee-for-service basis to Medicare beneficiaries through
its seven primary care facilities, which accounted for approximately 6% of the
Company's revenues.
Medicaid is funded jointly by the federal and state governments and covers
indigent patients. The Company has entered into an agreement with the AHCA to
provide primary care services to Medicaid patients. The Company must accept
reimbursement from Medicaid as payment in full for medical services provided.
For the year ended July 31, 1997, the Company provided medical services to
Medicaid patients through its seven primary care centers which are qualified
under state law to receive reimbursement under federal and state Medicaid
guidelines. During such year, Medicaid services accounted for approximately 2%
of the Company's revenues.
Prepaid Health Clinic.
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The Company has provided medical services to subscribers pursuant to a
prepaid health clinic license issued by the Florida Department of Insurance.
This license permits the Company to provide certain primary health care coverage
to individuals for a fixed monthly premium. For the year ended July 31, 1997,
through its five centers in Brevard County, the Company had approximately 400
subscribers participating in the prepaid health clinic operations. As a
condition of the Company receiving its license to operate as an HMO, the Company
will no longer offer its prepaid health clinic product as of September 1, 1997.
COMPETITION.
The managed health care industry is highly competitive. The Company's
primary care centers currently compete with other providers of primary health
care services, including primary care centers, regional hospitals and physician
practice groups. Many of such competitors offer a broader range of primary
health care services than the Company and have extensive relationships with
group specialty practices. The Company currently competes primarily on the basis
of reputation, quality of care and physician support.
The managed health care industry has experienced significant changes in
recent years, primarily due to rising health care costs. Employer groups have
demanded a variety of health care options, such as traditional indemnity
insurance, HMOs, point of service plans and preferred provider options, offered
either through third parties or by self-funding. The Company's HMO operations
compete with providers of all of these products, including CAC/United Healthcare
Plans of Florida Inc., Humana Healthcare, Blue Cross/Blue Shield of Florida and
PCA Health Plan, most of which have substantially greater financial, management,
personnel and other resources than the Company. The Company also will be
required to respond to various
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competitive factors affecting the health care industry generally, including new
medical technologies which may be introduced, general trends relating to demand
for health care services, regulatory, economic and political factors, changes in
patient demographics and competitive pricing strategies by health maintenance
organizations and other health care plans. The Company may be subject to
significant competition in any new geographic areas it may enter, with respect
to any products it may offer and with respect to any commercial and governmental
health care programs developed. There can be no assurance that the Company will
be able to compete successfully.
INSURANCE.
The Company and its physicians may be exposed to potential professional
liability claims by patients as a result of the negligence or other acts of
physicians. Claims of this nature, if successful, could result in substantial
damage awards to claimants which may exceed the limits of any applicable
insurance coverage. The Company could become liable for the negligent acts of
physicians, as well as negligence in recruiting and selecting physicians. The
Company currently maintains malpractice liability insurance with limits of
$3,000,000 in the aggregate and $1,000,000 per occurrence and requires
physicians to maintain malpractice liability insurance in amounts which it deems
adequate for the types of medical services provided. There can be no assurance,
however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a reasonable
cost. In the event of a partially or completely uninsured successful claim
against the Company, the Company's business and financial condition would be
materially adversely affected.
In addition, the Company carries "stop-loss" reinsurance to reimburse it
for costs resulting from catastrophic injuries or illnesses to its HMO members.
Premiums for these policies are reported as medical expense and insurance
recoveries, if any, are recorded as a reduction of medical expenses. Under the
excess loss reinsurance policies, recoveries are made for claims of each
enrollee or each covered dependent of each enrollee, on an annual basis, in
excess of the deductible established in the policy subject to certain
limitations. The deductible under the policy for commercial health care claims
is currently $50,000. There can be no assurance, however, that such insurance
will be sufficient to cover potential claims or that adequate levels of coverage
will be available in the future at a reasonable cost.
GOVERNMENT REGULATION.
The health care industry and physician medical practices are subject to
extensive, stringent and frequently changing federal, state and local
regulation, which is interpreted by regulatory authorities with broad
discretion. The extensive regulatory framework applicable to physicians'
practices imposes significant compliance burdens and risks on the Company.
Various federal and state laws regulate the relationship between providers
of health care services and physicians, including employment or service
contracts, and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes ("fraud and
abuse laws"), which prohibit the payment, receipt, solicitation or offering of
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any direct or indirect remuneration intended to induce the referral of Medicare
or Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment. Violations of these provisions may result
in civil and criminal penalties and/or exclusion from participation in the
Medicare and Medicaid programs and from state programs containing similar
provisions relating to referrals of privately insured patients. These laws have
been interpreted broadly to include the payment of anything of value to
influence the referral of Medicare or Medicaid business. These regulations set
forth certain "safe harbors," representing business relationships and payments
that can safely be undertaken without violation of the fraud and abuse laws.
The "Stark" amendments of the Social Security Act provide, with certain
exceptions, that if a physician has a "financial interest" in an entity (which
may consist of either an ownership interest or a compensation arrangement), the
physician is prohibited from making a referral to the entity for the provision
of certain "designated health services" for which payment may be made by
Medicare or Medicaid. In April 1992, the State of Florida adopted the Patient
Self-Referral Act of 1992, which prohibits referrals for certain designated
health services by a health care provider to a facility in which such provider
has an ownership interest. This law prohibits any claim for payment for services
furnished pursuant to a prohibited referral, and requires a refund if an
unlawful payment was made. Florida legislation also imposes, with certain
exceptions, a cap on the fees charged by all providers of designated health
services.
In addition, state laws, although varied, generally prohibit a commercial
enterprise, such as the Company, from engaging in the practice of medicine or
otherwise exercising control or influencing the medical judgments or decisions
of physicians, and prohibit physicians from "fee-splitting" with non-physicians.
Florida law does not currently contain such a prohibition.
The federal government and the State of Florida have each enacted statutes
extensively regulating the activities of health maintenance organizations that
are applicable to the Company's operations. Among the areas regulated are the
scope of benefits required to be made available to members, the manner in which
member rates are structured, procedures for review of quality assurance,
enrollment requirements, composition of policy making bodies to assure member
representation, the interrelationship between health maintenance organizations
and their health care providers, licensure and financial condition. Under
federal regulations, services to members must be provided substantially on a
fixed prepaid basis, without regard to the actual degree of utilization of
services. Although premiums established by a health maintenance organization may
vary from account to account through composite rate factors and special
treatment of certain broad classes of enrollees, traditional experience rating
of accounts (i.e., setting premiums for a group account based on that group's
part use of health care services) is not permitted under federal regulations. In
Florida, health maintenance organizations must also comply with certain other
provisions of state health and insurance laws, including the licensing of
salespersons and maintenance of a minimum statutory net worth requirement
(liquid tangible assets less liabilities). The Company must file periodic
reports with, and will be subject to periodic review by, the federal and state
licensing authorities which regulate the Company.
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The Company believes, based on advice of counsel, that it is in compliance
with all federal, state and local laws, rules and regulations applicable to its
operations and has obtained all licenses necessary to conduct its business.
Amendments to existing statutes and regulations, adoption of new statutes and
regulations and the Company's expansion into new operations and jurisdictions
could require the Company to obtain additional licenses, modify its arrangements
with physicians or otherwise alter methods of operations at costs that could be
substantial. There can be no assurance that the Company will be able, for
financial or other reasons, to comply with applicable laws and regulations and
licensing requirements. Failure to comply with applicable laws and regulations
and licensing requirements would subject the Company and its physicians to civil
remedies, including significant fines, penalties, injunctions and expulsion from
participation in Medicare and Medicaid programs, as well as possible criminal
sanctions, which would have a material adverse effect on the Company.
Several proposals have recently been made by federal and state government
officials that may lead to substantial health care reforms, including the
implementation of a government-directed national health care system and
stringent health care cost-containment measures. Adoption of such a system or
cost controls could further limit reimbursement for medical services. Past
congressional actions have resulted in changes in Medicare and Medicaid
reimbursement rates, and the Company believes that it is likely that Congress
will, over the next several years, substantially limit the growth of Medicare
and Medicaid expenditures. Significant uncertainty exists as to the status of
reimbursement and there can be no assurance that health care insurers and other
third-party payors will continue to cover certain medical services or reimburse
such services at current levels. Any significant reduction of health care
insurance coverage for medical services could have a material adverse effect on
the Company's business and prospects.
EMPLOYEES.
The Company currently employs 95 persons, including 3 executive officers,
11 physicians, 1 nurse practitioner, 19 medical assistants and 61 other persons
engaged in operations management, administrative, and clerical capacities. None
of the Company's employees are represented by a union. The Company believes that
its employee relations are good.
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ITEM 2. PROPERTY.
The Company occupies its primary care centers under third-party lease
agreements. Its executive offices are currently on a month-to-month lease. The
following table sets forth the location, approximate annual rent, use of each
location and expiration date of each lease:
<TABLE>
<CAPTION>
Approx. Approx. Lease
Location SQ. FEET RENT USE EXPIRATION DATE
- ------------------- -------- -------- --------------------- ------------------
<S> <C> <C> <C> <C>
Deltona, FL 2,500 $44,000 Primary Care Center April 30, 1998
South Daytona, FL 2,200 30,000 Primary Care Center October 31, 1997
Melbourne, FL 1,600 15,000 Administrative Office Month to month
Melbourne, FL 2,900 50,000 Primary Care Center September 30, 2000
Heathrow, FL(1) 6,200 54,000 Executive Office Month-to-Month
Palm Bay, FL 3,800 40,000 Primary Care Center December 31, 1999
Merritt Island, FL 2,680 29,000 Primary Care Center December 31, 1999
Satellite Beach, FL 2,580 67,000 Primary Care Center August 31, 2001
Titusville, FL 3,200 58,000 Primary Care Center June 30, 1998
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</TABLE>
(1) In October 1997, the Company relocated its executive offices to Heathrow,
Florida from its former leased offices in Longwood, Florida due to a fire
that occurred on October 24, 1997 at the Longwood location during repairs
being made to the roof by a roofing contractor. Although certain of the
Company's furniture and fixtures were damaged, the Company was able to
continue uninterrupted operation of its business and relocate to new
facilities. The Company is currently negotiating a short-term lease for
these new facilities. For a period of the lesser of one year or until the
Company relocates to permanent space, the Company's insurance carrier will
cover lease payments that exceed the lease payments under the former lease
for the Longwood facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Subsequent Event."
Although the Company believes that its primary care centers are adequate
for its existing operations, the Company regularly evaluates the adequacy of
each primary care center. Each lease which expires in fiscal 1998 contains a
renewal provision giving the Company the option to renew the subject lease. The
Company expects to renew, or find other suitable locations for, all leases which
will expire during fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company is a
party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the Company's shareholders for approval during
the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
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The Company's Common Stock is traded on the NASDAQ Small-Cap Market under
the symbol "SUNS". The following are the high and low closing bid prices as
provided by NASDAQ in the NASDAQ-Small Cap Market.
<TABLE>
<CAPTION>
1996 1997
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Period Ended High Low Quarter Ended High Low
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<S> <C> <C> <C> <C> <C>
October 31, 1996 5 3-1/4
January 31, 1997 5-7/8 3
April 30, 1997 7-1/4 3-3/4
July 31, 1996 8-1/2 4-3/8 July 31, 1997 6-1/2 3-3/4
</TABLE>
The quotations represent prices between dealers in securities, they do not
include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.
Holders.
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The approximate number of holders of record of the Company's Common Stock
at October 15, 1997 is 22. However, the Company estimates that there were 1,149
beneficial holders of the Company's Common Stock as of that date.
Dividends.
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No cash dividends have been declared by the Company. The Company currently
anticipates that all of its earnings will be retained for development of the
Company's business, and does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be at the discretion of
the Company's Board of Directors and will depend upon, among other things, the
Company's future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions, and such other factors as
the Board of Directors may deem relevant.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"FORWARD-LOOKING" INFORMATION
This report on Form 10-KSB contains certain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which represent the Company's expectations and
beliefs, including, but not limited to statements concerning the Company's
expected growth. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward looking statements, which
speak only as of the date such statement was made. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors, including the Company's ability to forge
satisfactory relationships with physician groups and provider networks and
enroll sufficient numbers of HMO members; sources for sufficient additional
capital to meet the Company's growth and operations; the failure to properly
manage growth and successfully integrate additional physician groups and
providers; changes in economic conditions; demand for the Company's products;
and, changes in the competitive and regulatory environment. Future events and
actual results could differ materially from those expressed in, contemplated by,
or underlying any such forward-looking statements.
THE FOLLOWING ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF JULY 31, 1997
AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE YEARS ENDED JULY 31, 1996 AND
1997 SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
GENERAL.
On February 24, 1997, SHP was awarded its HMO Certificate of Authority in
the State of Florida. SHP accepted its first HMO members effective May 1, 1997
in its initial service area of Brevard County, Florida. During the fiscal year
ended July 31, 1997 ("fiscal 1997"), SHP accelerated its plans to enter markets
that are under-served by managed health care. Thus, SHP has rapidly expanded
and been approved by the State of Florida Agency for Health Care Administration
("AHCA") to offer its HMO products in Orange, Osceola, Seminole, Hernando, Lake,
Polk, Volusia, Indian River, St. Lucie, Marion, Citrus and Sumter Counties,
Florida. As a result of this accelerated growth, development costs have also
been accelerated in the areas of advertising, marketing and materials, personnel
and related expenses. SHP intends to continue this rapid expansion throughout
the State of Florida and has targeted more than forty additional counties for
its HMO products over the next eighteen months. SHP has over 2,000 physicians
and 20 hospitals in its current service areas contracted under the HMO. As of
October 1, 1997, the Company enrolled 2,800 members and has estimated annualized
HMO premium revenues of approximately $2,700,000. The net loss for fiscal 1997
is consistent with management's expectations and estimates provided in the
Company's Offering statement with respect to the costs associated with the
attainment of SHP's HMO license and the related start-up and development costs
of an HMO.
11
<PAGE>
GENERAL FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
1996 1997
---------- ----------
<S> <C> <C>
Patient service revenue $ $ 4,728,536
Income (loss) from continuing operations (222,468) (1,631,165)
Income (loss) from continuing
operations per common share (.15)(1) (.68)
Total Assets 7,499,487 6,370,849
Long term obligations 16,540 108,521
</TABLE>
_________________
(1) Gives effect to weighted average Common Stock and weighted incremental
shares relating to Common Stock equivalents (options granted and warrants
exercised) at July 31, 1996. (See sections entitled "Employment
Agreements" and "Stock Option Plan".)
Results of Operations.
- ---------------------
Fiscal 1997 compared to year ended July 31, 1996 ("fiscal 1996").
Patient service revenue declined by approximately $352,000 from $5,081,000
in fiscal 1996 to $4,729,000 in fiscal 1997. This decrease is attributable to a
decline in revenues generated by the Company's primary care center operations of
$437,000, offset by an $85,000 increase in revenues derived from the Company's
HMO products, which commenced in the fourth quarter of fiscal 1997. The
decrease in revenues from primary care center operations is the result of a
$230,000 decline in fee-for-service revenue, a $30,000 decrease in prepaid
health clinic revenue and a decrease in HCFA revenue of $211,000, offset
slightly by a $34,000 increase in capitation revenue. Management believes that
the decline in fee-for-service revenue is a trend reflective of the shift within
the health care industry from fee-for-service based business toward managed
care. Prepaid health clinic revenue decreased due to a decline in subscribers,
as SHP began phasing out this product as a result of SHP receiving its license
to operate as an HMO. Effective September 1, 1997, SHP no longer offers its
prepaid health clinic product. The decline in HCFA revenue is due to amendments
to the Social Security Act, effective January 1, 1996, which prohibits SHP from
enrolling Medicare beneficiaries who are not members of employer groups or
unions until it establishes Medicare HMO operations. It is anticipated that a
Medicare risk contract will be filed with HCFA during the fiscal year ended July
31, 1998. Although the Company had anticipated a loss of capitation revenues in
fiscal 1997 from fiscal 1996, these revenues increased slightly as a result of
changes in the Company's provider agreements with a certain HMO. As a result
of the
12
<PAGE>
changes, the Company realized higher reimbursement rates per enrollee, although
the actual number of enrollees declined.
As a result of the Company achieving its objective of obtaining an HMO
Certificate of Authority on February 24, 1997 and commencing the enrollment of
its members effective May 1, 1997, the Company, for the first time, realized
$85,000 in HMO premium revenues in fiscal 1997. The Company anticipates that
HMO premium revenues will rapidly increase over the next eighteen month period
as the Company will continue to implement its accelerated growth plan. However,
there can be no assurance that such growth will occur as rapidly as the Company
expects.
Costs of patient related services as a percentage of revenues increased
from 66% in fiscal 1996 to 72% in fiscal 1997. This increase is attributable to
a decline in revenues that was not offset by a corresponding decline in patient
related costs. As the costs to operate the Company's primary care centers are
relatively fixed, the decline in revenues decreased fiscal 1997 operating
margins. In addition, the Company incurred new medical costs related to its HMO
products of $135,000. These costs were directly attributable to the Company
establishing reserves for its small membership in its new HMO products. The
Company anticipates that as HMO premium revenues increase, the amount of reserve
required as a percentage of HMO revenue will decrease. However, there can be no
assurance that such revenue growth or a decline in reserves as a percentage of
revenue will occur as the Company expects.
General and administrative expenses increased by $1,415,000 or 183% from
$1,705,000 in fiscal 1996 to $3,120,000 in fiscal 1997. The increase is
primarily the result of an increase in salaries and related benefits of
approximately $625,000, an increase in professional and outsourcing fees of
$250,000, increased advertising expenses of $194,000, an increase in occupancy
and related costs of approximately $207,000 and an increase in HMO enrollment
materials and related costs of $139,000. These expenses were primarily incurred
in connection with the Company's accelerated expansion into additional Florida
markets, the development of marketing materials and increased infrastructure and
personnel to effect the Company's transformation into an HMO.
Compensation expense decreased from $211,000 in fiscal 1996 to $65,000 in
fiscal 1997 as the result of the granting of stock options related to certain
contractual agreements in fiscal 1996.
Interest income increased $198,000 or 367% from $54,000 in fiscal 1996 to
$252,000 in fiscal 1997 as the result of the Company realizing $6,082,000 in
proceeds from its initial public stock offering in May 1996.
The provision (benefit) for income taxes decreased from a provision of
$29,000 in fiscal 1996 to a (benefit) of $51,000 in fiscal 1997. This result is
primarily attributable to the Company recording a current federal tax (benefit)
in fiscal 1997 as compared to a current federal tax provision in fiscal 1996.
13
<PAGE>
As a result of the foregoing, the net loss increased to $(1,631,000) in
fiscal 1997 from $(222,000) in fiscal 1996.
Financial Condition, Liquidity and Capital Resources.
- -----------------------------------------------------
At July 31, 1997, the Company had working capital of $4,225,000 as compared
to working capital of $5,898,000 at July 31, 1996. The decline in working
capital from fiscal 1996 is attributable primarily to the development and
marketing costs incurred in order to transform SHP into an HMO.
Net cash used by operating activities was $(1,226,000) for fiscal 1997, as
compared to net cash provided by operating activities of $300,000 for fiscal
1996. The decline in cash flow from operating activities of $1,526,000 is
primarily attributable to the increased net loss of $1,409,000 in fiscal 1997
over fiscal 1996.
Net cash used in investing activities for fiscal 1997 was approximately
$(180,000), primarily as a result of purchases of furniture, equipment and
leasehold improvements associated with the development of the Company's new
administrative offices and replacement of medical office equipment. Net cash
used in investing activities in fiscal 1996 was $(285,000) and was the result of
a purchase of a $250,000 Certificate of Deposit to satisfy the Florida
Department of Insurance net worth requirement for the SHP's Company's Prepaid
Health Clinic license.
Net cash used in financing activities for fiscal 1997 was $(62,000) as
compared to net cash provided by financing activities of $5,762,000 for fiscal
1996. Cash used in financing activities in fiscal 1997 relates to principal
payments under capital lease obligations of $32,000 and a $30,000 adjustment to
the Offering proceeds realized in fiscal 1996. Cash provided by financing
activities during fiscal 1996 primarily represents proceeds received from the
Offering of the Company's Common Stock on May 15, 1996. As of September 30,
1997, proceeds from the Offering of approximately $1,542,000 have been used as
working capital to finance the HMO development effort. An additional $291,000
of the Offering proceeds have been used to purchase furniture, equipment and
leasehold improvements.
Humana Health Care Plans ("Humana"), an HMO, has seven service agreements
with the Company (five of which are with the Company's subsidiary, Brevard (the
"Humana/Brevard Agreements") and two of which are with the Company's subsidiary
First Health (the "Humana/First Health Agreements"). Humana has announced its
intention to terminate the five Humana/Brevard Agreements in fiscal 1998, three
of which will be terminated effective November 30, 1997 and two of which will be
terminated effective March 30, 1998. Management estimates that, as a result of
these contract terminations, revenue will decrease by approximately $190,000 in
fiscal 1998. However, management believes that upon Humana's termination of the
Humana/Brevard agreements, an indeterminate number of Humana members that are
currently being treated by Brevard physicians will change their coverage to
another HMO in the same market area and with whom Brevard has recently entered
into an agreement to provide primary health care services to such former Humana
members. The Company anticipates that such an arrangement will afford the
Company the opportunity to recover revenue that would otherwise be
14
<PAGE>
lost upon termination of the Humana/Brevard agreements since the Company
believes that an indeterminate number of former Humana members, desiring to
retain their physician-patient relationships, will continue to seek treatment
from Brevard's primary care physicians. However, in spite of the Company's
efforts to minimize the financial impact that may result from the termination of
the Humana/Brevard Agreements, there can be no assurance that the Company will
recover any amount of lost revenue resulting therefrom.
Effective November 1, 1997, the method of payment under the two
Humana/First Health Agreements changed from capitation to a fee schedule.
Although management believes that there will be no significant adverse financial
impact on the Company as a result of this change, there can be no assurance that
an adverse impact will not result.
During the next fiscal year, the Company's liquidity will be affected by
continued accelerated HMO development, marketing and operation. As an HMO, SHP
is required to maintain a minimum capital surplus in an amount which is the
greater of $500,000 or 10% of total liabilities pursuant to Section 641 of the
Florida Insurance Code. At June 30, 1997, SHP's unaudited quarterly statutory
financial statements reflect an actual surplus of $3,246,000. The Company's
cash balances are 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.
HMO development costs will continue to be incurred by SH in fiscal 1998 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 employee's 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), it is possible that the Company's
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 develop new provider relationships, either contractually
or otherwise, and pay salaries for additional personnel. The Company
anticipates that it will make additional capital expenditures associated with,
among other things, furniture, leasehold improvements and office equipment. The
Company expects to pay salaries for additional marketing, development 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. The net proceeds from such offering,
approximating $6,000,000, have been and
15
<PAGE>
will continue to 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 accelerated timetable for, its
proposed expansion), that remaining offering proceeds will be sufficient to
satisfy its net tangible asset requirements as governed by Nasdaq and other
equity requirements as governed by certain regulatory entities including,
without limitation, the Florida Department of Insurance, AHCA and HCFA into the
third quarter of fiscal 1998. However, during fiscal 1998, the Company intends
to seek additional capital to further fund the HMO development and expansion and
continue to satisfy the aforesaid net tangible asset and equity requirements.
Such additional capital may be accomplished through equity or debt financings.
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. Additional equity financing may involve
substantial dilution to the interests of the Company's stockholders.
Subsequent Event.
- ----------------
In October 1997, the Company relocated its offices to Heathrow, Florida
from its former leased offices in Longwood, Florida due to a fire that occurred
on October 24, 1997 at the Longwood location during repairs being made to the
roof by a roofing contractor. The fire did not have a material effect on the
Company or its operations. Although certain of the Company's furniture and
fixtures were damaged, the Company was able to replace same, relocate to new
facilities and continue uninterrupted operation of its business. Although the
Company expects to enter into a short-term lease for its current Heathrow
facilities, the Company anticipates relocating its executive offices to another
office complex in Heathrow which is currently under construction with completion
anticipated in April 1998. The space to be occupied and terms of the lease for
the premises under construction are currently being negotiated. The Company's
insurance carrier will cover replacement costs for furniture and equipment, as
well as, for a period of one year, lease payments in excess of the lease
payments under the former lease for the Longwood facility.
ITEM 7. FINANCIAL STATEMENTS.
Filed as part of this report are audited financial statements for the years
ended July 31, 1996 and 1997 commencing at page F-1.
ITEM 8. CHANGES IN ACCOUNTANTS.
Richard A. Eisner & Company, LLP, was previously the principal accountant
for the Company. On August 27, 1996, that firm's appointment as principal
accountant was terminated and KPMG Peat Marwick, LLP, was engaged as principal
accountant. The decision to change accountants was approved by the Board of
Directors and ratified by the shareholders at the annual meeting of the
shareholders held on December 16, 1996.
16
<PAGE>
In connection with the audit of the fiscal year ended July 31, 1995 and the
subsequent interim period through August 27, 1996, there were no disagreements
with Richard A. Eisner & Company, LLP, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to its satisfaction would have caused it to
make reference in connection with its opinion to the subject matter of the
disagreement.
The audit report of Richard A. Eisner & Company, LLP, on the consolidated
financial statements of the Company and subsidiaries as of and for the year
ended July 31, 1995, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.
Information concerning the directors, executive officers and significant
employees of the Company is contained in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year ended July 31, 1997. Such
information is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information concerning executive compensation is contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A within 120 days after the close of the fiscal year ended July
31, 1997. Such information is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of certain beneficial
owners and management is contained in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year ended July 31, 1997. Such
information is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions is
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the close
of the fiscal year ended July 31, 1997. Such information is hereby incorporated
by reference.
17
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Filed as part of this 10-K annual report are audited financial statements
for the years ended July 31, 1996 and 1997.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended July 31, 1997.
18
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
July 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
July 31, 1997
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheet at July 31, 1997 F-2
Consolidated Statements of Operations for the years
ended July 31, 1996 and 1997 F-3
Consolidated Statement of Changes in Shareholders'
Equity for the cumulative period from August 1, 1995
to July 31, 1997 F-4
Consolidated Statements of Cash Flows for the years
ended July 31, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6 - 21
</TABLE>
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
SunStar Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. and Subsidiaries (the Company) as of July 31, 1997, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the two-year period ended July 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SunStar Healthcare,
Inc. as of July 31, 1997, and the results of its operations and its cash flows
for each of the years in the two-year period ended July 31, 1997, in conformity
with generally accepted accounting principles.
/s/
KPMG Peat Marwick LLP
Jacksonville, Florida
September 16, 1997
F-1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
July 31, 1997
<TABLE>
<CAPTION>
Assets 1997
------ -----------
<S> <C>
Current assets:
Cash and cash equivalents $ 4,525,677
Patients accounts receivable, less allowance for doubtful
accounts of approximately $125,000 161,685
Due from Medicare -
Prepaid expenses and other assets 298,235
Deferred taxes (note 5) 53,000
Other receivables 66,813
-----------
Total current assets 5,105,410
Furniture, equipment and leasehold improvements, net (note 2) 443,587
Goodwill, net (note 3) 346,004
Restricted cash (note 8(c)) 280,000
Deposits and other assets 148,848
Deferred taxes (note 5) 47,000
-----------
Total 6,370,849
===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 560,360
Medical claims payable 93,858
Unearned premium - Medicare 131,035
Unearned premium - HMO 59,213
Capital lease obligations, current (note 4) 36,226
Total current liabilities 880,692
Capital lease obligations, noncurrent (note 4) 108,521
-----------
Total liabilities 989,213
-----------
Shareholders' equity (note 1(a), 6 and 8):
Shareholder's net investment -
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
Additional paid-in capital 7,163,800
Unearned compensation from stock options (130,209)
Accumulated deficit (1,654,350)
-----------
Total shareholders' equity 5,381,636
-----------
Commitments and contingencies (note 8)
Total liabilities and shareholders' equity $ 6,370,849
===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Patient service revenue $5,080,850 4,728,536
---------- ----------
Cost and expenses:
Cost of patient related services 3,371,131 3,426,767
General and administrative 1,704,748 3,119,787
Compensation expense (note 8(b)) 210,937 65,104
Amortization of intangibles 42,333 51,143
---------- ----------
Total operating expenses 5,329,149 6,662,801
---------- ----------
Income (loss) from operations (248,299) (1,934,265)
Interest income 54,431 252,100
---------- ----------
Income (loss) before income taxes (193,868) (1,682,165)
Provision for income taxes (note 5) 28,600 (51,000)
---------- ----------
Net income (loss) $ (222,468) (1,631,165)
========== ==========
Net income (loss) per share
(note 1(d)) $(.15) $(.68)
Weighted average shares
outstanding (note 1(d)) 1,478,269 2,395,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
Unearned
Compensation
Shareholders' Additional From
Net Common Paid-in Stock Accumulated
Investment Stock Capital Options Deficit Total
------------- ------ ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1995 $1,036,946 - - - - 1,036,946
Net loss (199,283) - - - (23,185) (222,468)
Net equity transactions with
National Home Health
Care Corp. (note 6) (131,163) (131,163)
Conversion of National Home
Health Care Corp. net
investment to
common stock (note 1(b)) (706,500) 900 705,600 - - -
Issuance of stock (note 1(a)) - 1,495 6,082,002 - - 6,083,497
Compensatory stock options
granted (note 8 (b)) - - 406,250 (406,250) - -
Amortization of compensatory
stock options (note 8 (b)) - - - 210,937 - 210,937
------------- ------ ----------- --------- ----------- -----------
Balance, July 31, 1996 $ - 2,395 7,193,852 (195,313) (23,185) 6,977,749
Net loss - - - - (1,631,165) (1,631,165)
Stock issuance costs (note 1(a)) - - (30,052) - - (30,052)
Amortization of compensatory
stock options (note 8 (b)) - - - 65,104 - 65,104
------------- ------ ---------- --------- ----------- -----------
Balance, July 31, 1997 $ 2,395 7,163,800 (130,209) (1,654,350) 5,381,636
============= ===== ========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (222,468) (1,631,165)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 132,592 163,543
Provision for doubtful accounts 225,000 15,000
Deferred taxes (27,700) (37,400)
Noncash compensation 210,937 65,104
Operating expenses and income taxes
funded by National Home Health Care, Corp. 165,068
Gain on the sale of fixed assets - (3,473)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (196,832) (61,942)
(Increase) decrease in prepaid expenses and other assets (226,647) (129,970)
(Increase) decrease in due from Medicare (38,448) 38,448
Increase in accounts payable,
accrued expenses and other liabilities 119,215 230,827
Increase in medical claims payable - 93,858
Increase (decrease) in unearned premium - Medicare 159,521 (28,486)
Increase in unearned premium - HMO - 59,213
---------- ----------
Net cash provided by (used in) operating activities 300,238 (1,226,443)
---------- ----------
Cash flows from investing activities:
Purchase of furniture, equipment and
leasehold improvements (35,377) (183,221)
Proceeds from sale of furniture, equipment
and leasehold improvements - 3,473
Purchase of certificate of deposit, restricted (250,000) -
---------- ----------
Net cash used in investing activities (285,377) (179,748)
---------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligations (24,958) (31,689)
Initial public offering 6,083,497 (30,052)
Shareholder distributions (296,231) -
---------- ----------
Net cash provided by (used in) financing activities 5,762,308 (61,741)
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,777,169 (1,467,932)
Cash and cash equivalents, beginning of period 216,440 5,993,609
---------- ----------
Cash and cash equivalents, end of period 5,993,609 4,525,677
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 5,168 10,447
========== ==========
Noncash investing and financing activities
(notes 1(a), 4, 6 and 8)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1997
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Organization
------------
SunStar Healthcare, Inc. (SunStar or 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
Center, 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. Throughout fiscal 1997,
SunStar's management was active in developing and obtaining
certification for its health maintenance organization (HMO) product. On
February 24, 1997, SHP was issued a Certificate of Authority by the
Insurance Department of the State of Florida to operate an HMO in
various counties throughout Florida in accordance with the provisions of
Chapter 641, Florida Statutes. Costs associated with the development of
SunStar's HMO, including management salaries and benefits,
administrative and other indirect costs have been reflected as general
and administrative expense in the accompanying financial statements.
SunStar 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.
F-6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(a) Organization, continued
-----------------------
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 1997, the
Company paid $30,052 of additional stock issuance costs related to the
Offering which has been reflected as a reduction of paid-in capital in
the accompanying financial statements.
(b) Basis of Presentation
---------------------
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 1996 financial statements reflect the results of operations 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 after the
aforementioned reorganization. The 1997 financial statements reflect the
results of operations, financial condition and cash flows of the Company
after the reorganization.
Shareholder's net investment represents NHHC's contribution of its net
investment after giving effect to net income (loss) of SunStar, net
equity transactions with NHHC (see note 6) and certain compensation
charges (see note 8). Effective on May 15, 1996, the balance of this net
investment was converted to common stock issued and additional paid-in
capital (see note 1(a)). The Company separately presents retained
earnings beginning on the effective date of the Offering. The 1996
consolidated financial statements include no provision for interest on
capital of NHHC used by the Company prior to the Offering.
F-7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(c) Revenue Recognition
-------------------
The Company, through its out patient medical centers, recognized
fee-for-service revenues based on net realizable amounts due from
patients and third-party payors at the time medical services are
rendered and capitated fees for participating enrollees from HMO's
during the month of coverage regardless of utilization. Premium revenue
for prepaid health care under the Company's HMO is recognized as earned
on a pro rata basis over the contract period.
Health care costs relating to capitated 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 the
900,000 shares issued by SunStar to NHHC as if such shares were
considered to have been issued at the beginning of the respective
period. Pursuant to the requirements of the Securities and Exchange
Commission, common shares and common equivalent shares issued at prices
below the initial public offering price during the 12 months immediately
preceding the initial public offering have been included in the
calculation of weighted average shares outstanding using the treasury
stock method, as if they were outstanding for all periods presented
whether they are antidilutive or not. Common stock equivalents, except
as discussed above, are not included in the computation of net loss per
share as their effect is antidilutive due to the Company's net losses
attributable to common shares.
(e) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less.
(f) Furniture, Equipment and Leasehold Improvements
-----------------------------------------------
Furniture, equipment and leasehold improvements are stated at cost and
depreciated over estimated useful lives of five to ten years on a
straight-line basis.
F-8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(g) Goodwill
--------
Goodwill resulting from the purchase of certain physician practices is
being amortized over periods of 5 to 20 years on a straight-line basis.
Goodwill is evaluated periodically, on a site-by-site basis, and
adjusted, if necessary, if events and circumstances indicate that an
other than temporary decline in value below the current unamortized
historical cost has occurred. Several factors are used to evaluate
goodwill, including but not limited to: management's plans for future
operations, recent operating results and projected undiscounted cash
flows.
(h) Income Taxes
------------
Prior to May 15, 1996, the Company's operations had been included in the
consolidated income tax returns filed by NHHC. Accordingly, the
provision for federal and state taxes and the related payments or
refunds of tax were determined on a consolidated basis. Income tax
expense in the accompanying financial statements had been estimated
assuming the Company filed separate income tax returns. Related taxes
payable for periods prior to May 15, 1996 are reflected as a
contribution to capital by NHHC. SunStar will file separate tax returns
to reflect results subsequent to May 15, 1996.
Income taxes were accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred taxes
result primarily from the use of accelerated depreciation for tax
purposes and from reserves for uncollectible accounts receivable.
(i) Recently Issued Accounting Pronouncements
-----------------------------------------
In March 1995 and October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of," and Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
respectively. SFAS 121 and SFAS 123 are effective for the Company's
fiscal year ended July 31, 1997.
F-9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(i) Recently Issued Accounting Pronouncements, continued
----------------------------------------------------
The Company's adoption of SFAS 121 during 1997 had no impact on the
accompanying financial statements. The Company will continue to measure
employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," using intrinsic values with appropriate disclosures under
the fair value based method as required by SFAS 123.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings
Per Share." SFAS 128 will be effective for the Company's second quarter
ended January 31, 1998. The Company believes adoption of SFAS 128 will
not have a material impact on its financial statements.
(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
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Such estimates relate primarily to
goodwill, depreciable assets, valuation reserves for accounts receivable
and liabilities for incurred but not reported medical claims.
(2) Furniture, Equipment and Leasehold Improvements
-----------------------------------------------
Furniture, equipment and leasehold improvements at July 31, 1996 and 1997
consist of the following:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Furniture, equipment and fixtures $ 1,482,795
Leasehold improvements 311,016
-----------
1,793,811
Less accumulated depreciation
and amortization (1,350,224)
-----------
Net furniture, equipment and
leasehold improvements $ 443,587
===========
</TABLE>
F-10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Furniture, Equipment and Leasehold Improvements, continued
----------------------------------------------------------
The net book value of furniture and equipment held under capital
leases was approximately $187,000 at July 31, 1997. Depreciation expense
includes depreciation on assets held under capital leases.
(3) Goodwill
--------
Goodwill at July 31, 1997 consists of the following:
1997
----
Balance, beginning of period $387,562
Amortization (41,558)
-------
Balance, end of period $346,004
========
(4) Capital Lease Obligations
-------------------------
At July 31, 1997, approximate future minimum lease payments under
capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
Year ended July 31 Amount
------------------ --------
<S> <C> <C>
1998 $ 50,823
1999 44,683
2000 36,526
2001 35,597
2002 15,897
--------
Total minimum lease payments 183,526
Less amounts representing interest (38,779)
Less amounts due within one year (36,226)
--------
Amounts due after one year $108,521
========
</TABLE>
During 1997, the Company acquired equipment under capital leases for $184,437.
F-11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes
------------
The provision for income taxes for the years ended July 31, 1996 and 1997
consists of:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Current:
Federal $ 50,300 (13,600)
State 6,000
--------
56,300 (13,600)
Deferred tax benefit (27,700) (37,400)
-------- ---------
Total $ 28,600 (51,000)
======== =========
</TABLE>
Deferred tax assets at July 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 605,000
Accounts receivable reserves 45,800
Furniture, equipment and leasehold improvements 12,600
Goodwill and other intangible asset 17,000
Medical claims payable 15,200
Stock option amortization 103,900
Deferred Medicare 49,300
---------
Net deferred tax assets 848,800
Less valuation allowance (705,000)
---------
Net deferred tax assets 143,800
Deferred tax liabilities:
HMO startup costs (38,000)
Other assets (5,800)
---------
Net deferred tax liabilities (43,800)
---------
Net deferred tax asset $ 100,000
=========
</TABLE>
F-12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes, continued
-----------------------
The reconciliation of the statutory tax rate to the effective rate
for the years ended July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Federal statutory rate $(65,900) (571,900)
State taxes, net of federal tax benefit (7,000) (70,200)
Change in valuation allowance 79,800 625,200
Overaccrual of prior year taxes - (13,600)
Other 21,700 (20,500)
-------- --------
$ 28,600 (51,000)
======== ========
</TABLE>
The difference between the tax provision provided for the year ended July
31, 1997 and that expected from applying the U.S. statutory rate to loss
from operations before taxes is primarily attributable to the Company
recording a valuation allowance for deferred tax assets related to net
operating loss (NOL) carryforwards and compensation charges for stock
options to key employees which are not currently deductible for income
taxes. The realization of the tax benefits related to these NOL
carryforwards and stock options is dependent on future earnings and market
conditions and have not been recorded. Management considers net deferred tax
assets resulting from other temporary differences to be realizable based on
anticipated future earnings. NOL carryforwards against future taxable income
were approximately $1,609,000 at July 31, 1997. Such NOLs are scheduled to
expire in 2112.
(6) Net Equity Transactions with NHHC
---------------------------------
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Corporate expense allocation $ 18,750 -
Expenses paid by NHHC on
behalf of the Company 115,626 -
Income taxes 30,692 -
Shareholder distributions (296,231) -
--------- ----------
$(131,163) -
========= ==========
</TABLE>
F-13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Concentration of Credit Risk and Major Payors
---------------------------------------------
Capitation revenue from HMOs as a percentage of patient service revenue
amounted to approximately 31% in 1996 and 34% in 1997.
In addition, approximately 39% in 1996 and 38% in 1997 of patient
service revenue was derived under a federal cost reimbursement contract.
(8) Commitments, Contingencies and Other Matters
--------------------------------------------
(a) Leases
------
The Company rents various medical and office facilities under terms of
several lease agreements which include escalation clauses. The Company
also rents various medical and office facilities pursuant to operating
leases currently subject to monthly renewals at the option of the
Company. At July 31, 1997, minimum annual rental commitments under
noncancelable operating leases are as follows:
1998 $ 326,070
1999 207,877
2000 101,629
2001 72,631
2002 9,636
Rent expense amounted to approximately $329,000 and $389,000 for the
years ended July 31, 1996 and 1997, respectively.
(b) Employment and Consulting Agreements
------------------------------------
In connection with the Offering, the Company agreed to retain the
underwriter as a consultant for a period of two years at a fee of
$18,500 per year. In addition, the Company has granted warrants to the
underwriter to purchase an aggregate of 130,000 shares of common stock
at an exercise price equal to $6.00 per share. The warrants are
exercisable on or after April 15, 1997 and expire on May 15, 2001.
F-14
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(b) Employment and Consulting Agreements, continued
-----------------------------------------------
The Company has entered into an employment agreement with the Company's
President and Chief Executive Officer. The agreement expires on the
second anniversary of the successful completion of the Offering which
became effective on May 15, 1996 (the Effective Date), provided that the
agreement may be renewed for successive one-year periods unless, within
thirty days of the expiration of the agreement, either party notifies
the other of its election not to renew the agreement. The agreement also
provides that for so long as the President remains employed by the
Company, he shall serve as a member of the Company's Board of Directors
and shall have the right to appoint one additional member to the Board
of Directors. The agreement provides for an annual salary of $125,000 in
the first year and $150,000 in the second year, payable commencing on
the Effective Date. The agreement also provides for such bonuses as the
Board of Directors may determine based on performance and other
criteria. The agreement contains a confidentiality provision and a
covenant not to compete with the Company for a period of six months
following termination of employment.
In addition, in January, 1996, the Company granted options to the
President to purchase an aggregate of 250,000 shares of common stock at
an exercise price equal to $.25 per share. The options are currently
exercisable as to one-half of the shares covered thereby and shall be
exercisable as to an additional one-fourth of the shares covered thereby
on January 28, 1998 and 1999, respectively, provided that the President
is employed by the Company on each such date. Commencing two years after
the Effective Date, the Company has agreed to use its best efforts to
file a registration statement under the Securities Act to register the
shares of common stock issuable pursuant to the exercise of such
options.
The Company has also entered into an employment agreement with the
Company's Executive Vice President. The agreement expires on the second
anniversary of the Effective Date, provided that the agreement may be
renewed for successive one-year periods unless, within thirty days of
the expiration of the agreement, either party notifies the other of its
election not to renew the agreement. The agreement provides for an
annual salary of $100,000 in the first year and $135,000 in the second
year, payable commencing on the Effective Date. The agreement also
provides for such bonuses as the Board of Directors may determine based
on performance and other criteria. The agreement contains a
confidentiality provision and a covenant not to compete with the Company
for a period of six months following termination of employment.
F-15
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(b) Employment and Consulting Agreements, continued
-----------------------------------------------
In addition, the Company granted to the Executive Vice President options
to purchase an aggregate of 75,000 shares of the Company's common stock,
of which options to purchase 25,000 shares, at an exercise price of
$0.25 per share, and 16,667 shares, at an exercise price of $4.00 per
share, currently are exercisable. The remaining 33,333 options, which
have been granted pursuant to the Company's 1996 Stock Option Plan (the
Plan) and which have an exercise price of $4.00 per share, shall be
exercisable as to an additional 16,667 of the shares covered thereby on
May 15, 1998 and 1999, respectively, provided that the Executive Vice
President is employed by the Company on such dates. Commencing two years
after the Effective Date, the Company has agreed to use its best efforts
to file a registration statement under the Securities Act to register
the shares of common stock issuable upon exercise of such options.
The Company has entered into a consulting agreement, as of the Effective
Date, with an individual pursuant to which such individual will provide
management consulting services to the Company. The agreement expired on
July 31, 1996. As compensation for all management consulting services
performed under this agreement, the Company has granted to this
individual options to purchase an aggregate of 50,000 shares of common
stock at an exercise price equal to $0.25 per share. All of these
options are currently exercisable.
The Company's granting of options relating to the above agreements
resulted in a charge to operations of approximately $211,000 and $65,000
in the years ended July 31, 1996 and 1997, respectively. Unearned
compensation at July 31, 1997 amounts to approximately $130,000 which is
presented as a reduction of equity. Such unearned amounts will be
accounted for as an expense during the periods in which the related
services are performed.
(c) Regulatory Requirements
-----------------------
Restricted cash consists of funds held as collateral for certain
regulatory requirements. As an HMO licensed in Florida, SunStar Health
Plan, Inc. is required to maintain a minimum capital surplus in an
amount which is the grater of $500,000 or 10% of total liabilities
pursuant to Section 641 of the Florida Insurance Code. The Company is in
compliance with this requirement and had a statutory surplus of
$3,257,000 at July 31, 1997. Dividends are restricted to 10% of
statutory surplus or the entire net operating profits and related net
capital gains derived during the immediately preceding fiscal year
unless prior approval is received from the Insurance Department of the
State of Florida.
F-16
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(d) Stock Option and Benefit Plans
------------------------------
Through the Effective Date, employees of the Company participated in
NHHC's Employee Savings and Stock Investment Plan organized under
Section 401(k) of the Internal Revenue Code. Under the Plan, employees
may have contributed 10% of their salary into the Plan, limited to the
maximum amount allowable under federal tax regulations. The Company
matched employee contributions invested in NHHC common stock up to 5% of
the employees' salary and may also have made additional contributions at
its discretion. In addition to investing in NHHC stock, an employee may
have invested in several mutual funds. The Company's contribution for
the year ended July 31, 1996 amounted to approximately $29,000.
In February 1996, the Board of Directors of SunStar adopted and
SunStar's sole shareholder at that time, NHHC, approved the Plan
pursuant to which 200,000 shares of common stock were reserved for
issuance upon the exercise of options designated as either (i) options
intended to constitute incentive stock options (ISOs) under the Internal
Revenue Code of 1986, as amended, or (ii) nonqualified options. ISOs may
be granted under the Plan to employees and officers of the Company.
Nonqualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company.
The Plan is intended to qualify under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the Exchange Act) and is administered
by a committee of the Board of Directors; provided that the full Board
of Directors currently is administering the Plan. The Board of Directors
or the committee, as the case may be, within the limitations of the
Plan, determines the persons to whom options will be granted, the number
of shares to be covered by each option, whether the options granted are
intended to be ISOs, the duration and rate of exercise of each option,
the exercise price per share and the manner of exercise and the time,
manner and form of payment upon exercise of an option. Unless sooner
terminated, the Plan will expire on February 13, 2006.
F-17
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(d) Stock Option and Benefit Plans, continued
-----------------------------------------
ISOs granted under the Plan may not be granted at a price less than the
fair market value of the common stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the
voting stock of the Company). The aggregate fair market value of shares
for which ISOs granted to any employee are exercisable for the first
time by such employee during any calendar year (under all stock option
plans of the Company) may not exceed $100,000 and options to purchase no
more than 50,000 shares may be granted under the Plan to any single
optionee in any calendar year. Nonqualified options granted under the
Plan may not be granted at a price less than 90% of the fair market
value of the common stock on the date of grant. Options granted under
the Plan will expire not more than ten years from the date of grant
(five years in the case of ISOs granted to persons holding 10% or more
of the voting stock of the Company). All options granted under the Plan
are not transferable during an optionee's lifetime but are transferable
at death by will or by the laws of descent and distribution. In general,
upon termination of employment of an optionee, all options granted to
such person which are not exercisable on the date of such termination
immediately terminate, and any options that are exercisable terminate 90
days following termination of employment.
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of common stock subject to
options which expire without being exercised or which are canceled as a
result of cessation of employment are available for further grants. No
shares of common stock may be issued to any optionee until the full
exercise price has been paid. The Board of Directors or the committee,
as the case may be, may grant individual options under the Plan with
more stringent provisions than those specified in the Plan.
The Plan provides that each nonemployee director automatically receives,
upon first becoming a nonemployee director, a grant of options to
purchase 7,500 shares of the Company's common stock at an exercise price
equal to the fair market value of the Company's common stock on the date
of grant. The Company granted an aggregate of 37,500 of such options to
nonemployee directors on the Effective Date at $5.00 per share. Each
nonemployee director option will expire five years from the date of
grant.
F-18
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(d) Stock Option and Benefit Plans, continued
-----------------------------------------
SunStar had agreed that for a period of one year from the Offering, it
would not grant any options under the Plan without the prior written
consent of the underwriter, which consent would not be unreasonably
withheld.
The fair value for options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended July 31, 1996 and 1997: risk-free
interest rate of 6.5%; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of .84; and a
weighted-average expected life of the option of 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended July 31, follows:
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Pro forma net loss $(286,341) (1,755,373)
Pro forma loss per share $ (.19) (.73)
</TABLE>
F-19
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(d) Stock Option and Benefit Plans, continued
-----------------------------------------
The weighted average fair value of options granted during the year ended
July 31, 1996 with exercise prices below the market price of the stock
on the date of grant was $1.12. Options granted during the year ended
July 31, 1996 with exercise prices greater than the market price of the
stock on the date of grant have a weighted average fair value of $.57.
The weighted average fair value of options granted during the years
ended July 31, 1996 and 1997 with exercise prices equal to the market
price of the stock on the date of grant was $3.53 and $2.82,
respectively. A summary of the Company's stock option activity, and
related information for the years ended July 31 follows:
<TABLE>
<CAPTION>
1996 1997
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year - $ - 437,500 $1.47
Granted 437,500 1.47 130,000 4.00
Forfeited/canceled - - (75,000) 5.00
------- -------
Outstanding, end of year 437,500 1.47 492,500 1.60
======== =======
Exercisable at end of year 175,000 1.27 280,833 1.46
======== =======
</TABLE>
Exercise prices for options outstanding as of July 31, 1997 ranged from
$0.25 to $5.00. Options exercisable at $0.25 per share totaled 325,000
of which 200,000 were exercisable at July 31, 1997. Options with
exercise prices ranging from $4.00 to $5.00 totaled 167,500 of which
80,833 were exercisable at July 31, 1997. The weighted average remaining
contractual life of options exercisable at $0.25 and $4.00 to $5.00 per
share was 8.52 and 7.40 years, respectively, at July 31, 1997.
F-20
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(e) Other
-----
Common stock reserved for future issuance at July 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Options granted under employment and consulting agreements 325,000
Option granted to a director 20,000
Options granted under the Plan 147,500
Reserved for future grants under the Plan 32,500
Warrants granted to underwriters 130,000
-------
655,000
=======
</TABLE>
(f) Settlement of Complaints
------------------------
In the July 31, 1996 financial statements, the Company included a
$66,000 charge in settlement of certain complaints in general and
administrative expenses.
(g) Malpractice
-----------
The Company insures its malpractice risks on a claims-made basis. The
Company has secured claims-made coverage from August 1, 1996 through
July 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.
The Company carries "stop-loss" reinsurance to reimburse it for costs
resulting from catastrophic injuries or illnesses to its HMO members.
Premiums for these policies are reported as medical expense and
insurance recoveries, if any, are recorded as a reduction of medical
expenses. Under the excess loss reinsurance policies, recoveries are
made for claims of each enrollee or each covered dependent of each
enrollee, on an annual basis, in excess of the deductible established in
the policy subject to certain limitations. The deductible under the
policy for commercial healthcare claims is currently $50,000.
F-21
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNSTAR HEALTHCARE, INC.
By: /s/ Jack W. Shields
--------------------------------
Jack W. Shields
Vice President and
Chief Financial Officer
Dated: November 13, 1997
--
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated:
SIGNATURES TITLE
- ---------- -----
/s/ Warren D. Stowell
- --------------------------- President, Chief Executive Officer, and Chairman
Warren D. Stowell (Principal Executive Officer)
/s/ David A. Jesse
- --------------------------- Executive Vice President, Chief Operating
David A. Jesse Officer, Director
/s/ Jack W. Shields
- --------------------------- Vice President, Chief Financial Officer
Jack W. Shields (Principal Financial and Accounting Officer)
/s/ Frederick H. Fialkow
- --------------------------- Director
Frederick H. Fialkow
/s/ Steven Fialkow
- --------------------------- Director
Steven Fialkow
/s/ Bernard Levine, M.D.
- --------------------------- Director
Bernard Levine, M.D.
/s/ Richard Seidelman, M.D.
- --------------------------- Director
Richard Seidelman, M.D.
<PAGE>
Exhibits required to be filed by Item 601 of Regulation SB are included in
Exhibits to this Report as follows:
Exhibit Exhibit Description
- ------- -------------------
3.1 Certificate of Incorporation*
3.2 By-Laws*
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Form of Warrant Agreement (including Form of Underwriter's
common Stock Purchase Warrant*
4.3 1996 Stock Option Plan*
4.4 Form of 1996 Stock Option Contract**
10.1 Form of Agreement with Humana Health Care Plans*
10.2 Form of Agreement with CAC/United Healthcare Plans of Florida, Inc.*
10.3 Form of Agreement with Blue Cross Blue Shield of Florida*
10.4 Agreement for Health Care Prepayment Plan, dated September 30,
1992, between the Health Care Financing Administration and Boro
Medical Corporation*
10.5 Certificate from State of Florida, Agency for Health Care
Administration certifying Boro Medical Corporation a Healthcare
Provider*
10.6 Form of Employment Agreement, dated as of November 1, 1995,
between the Company and Warren D. Stowell*
10.7 Form of Employment Agreement, dated as of January 10, 1996,
between the Company and David Jesse*
10.8 Form of Employment Agreement, dated as of January 10, 1996,
between the Company and Michael Landau *
10.9 Form of First Amendment to Employment Agreement, dated as of
April 17, 1996 between the Company and Warren D. Stowell**
10.10 Form of First Amendment to Employment Agreement, dated as of
April 17, 1996 between the Company and David Jesse**
<PAGE>
10.11 Lease, dated June 27, 1996, between the Company and Ronald
D. Nutt***
10.12 Agreement for Third Party Administrator Services, dated March 7, 1997,
between Healthplan Services, Inc. and SunStar Health Plan, Inc.****
11. Statement of Per Share Earnings (included in Consolidated Financial
Statements attached to this report)
16.1 Letter on Change in Certifying Accountant****
21.1 List of Subsidiaries*
23.1 Consent of KPMG Peat Marwick LLP****
27. Financial Data Schedule ****
- -------
* Filed as same exhibit reference to Form SB-2 Registration Statement, filed
on February 26, 1996, File No. 333-1650
** Filed as same exhibit reference to Amendment No. 2 to Form SB-2
Registration Statement, filed on May 9, 1996, File No. 333-1650.
*** Filed as same exhibit reference to Form 10-KSB for the fiscal year ended
July 31, 1996.
**** Filed herewith.
<PAGE>
EXHIBIT 10.12
SERVICES AGREEMENT
This Services Agreement (this "Agreement") is entered into by and between
SUNSTAR HEALTH PLAN, INC., a Florida corporation ("SunStar"), and HEALTHPLAN
SERVICES, INC., a Florida corporation ("HPS"), effective as of March 7, 1997
(the "Effective Date").
WHEREAS, SunStar desires that HPS assist and otherwise provide
administrative services to SunStar with respect to a managed care program
sponsored by SunStar; and
WHEREAS, HPS is desirous of performing such services in accordance with the
terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and for other valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, SunStar and HPS hereby agree as follows:
PART 1
------
DEFINITIONS
-----------
Capitalized terms used in this Agreement shall have the meanings ascribed
to them in Exhibit A, which is attached hereto and incorporated herein by
---------
reference.
PART 2
------
CLAIMS ADMINISTRATION
---------------------
2.1 CLAIMS PROCESSING. HPS shall perform the claims services set forth
-----------------
below on behalf of SunStar, in accordance with written procedures reasonably
required by SunStar, using SunStar approved forms.
(a) HPS shall receive and correlate all information necessary to
confirm eligibility for benefits with respect to claims received, and
determine Program benefits due to Enrollees.
(b) HPS shall calculate the amount of benefits payable in connection
with each claim.
(c) HPS shall determine whether the provider submitting each claim is
a SunStar Provider. HPS shall perform such verification using a
provider list supplied by SunStar. HPS shall follow reasonable
SunStar written procedures with respect to any claim received from a
provider that is not a SunStar Provider.
<PAGE>
(d) HPS shall assign a new payment amount to each claim submitted by
a SunStar Provider in accordance with the repricing schedule supplied
by SunStar.
(e) HPS shall pay claims by drafts drawn on a SunStar bank account
established for that purpose, in accordance with written procedures
and controls established by SunStar and submitted to HPS.
(f) HPS shall maintain claims records necessary for the processing of
claims.
(g) HPS shall refer to a designated SunStar representative any issue
relating to claim handling when HPS determines that SunStar's written
claims payment guidelines are not reasonably clear.
(h) Any costs incurred by HPS for obtaining medical records in
connection with the performance of claim services hereunder will be
reimbursed to HPS by SunStar, provided that a designated SunStar
representative has generally approved HPS's requests for such records
(which approval shall not be unreasonably denied).
(i) SunStar will make the final determination as to the payment of
any claim that is denied in whole or in part by HPS and with respect
to which a request for claim review has been made.
(j) SunStar shall reimburse HPS for the cost of providing check stock
to be used by HPS to pay claims on behalf of SunStar.
(k) HPS shall adhere to reasonable preauthorization protocols
developed by SunStar.
2.2 SPECIAL CLAIMS SERVICES. On behalf of SunStar, HPS shall provide the
-----------------------
services set forth below with respect to Enrollee claims, in accordance with the
written policies and procedures reasonably required by SunStar.
(a) HPS shall identify certain claims that may be incorrectly billed,
using criteria developed by one or more recognized experts in the
health care field.
(b) HPS shall investigate, within agreed upon parameters, certain of
such potentially incorrect claims and shall adjust such claims if
appropriate.
(c) HPS shall identify potentially fraudulent practices and refer
such practices to SunStar and/or other parties designated by SunStar.
<PAGE>
(d) HPS shall identify providers that may have improperly billed for
services, or participated in overutilization of services, and shall
implement procedures to monitor such providers' future billing and
utilization practices.
2.3 GENERALLY ACCEPTED CLINICAL STANDARDS. To the extent reasonably
-------------------------------------
required by SunStar, HPS shall utilize Generally Accepted Clinical Standards in
performing services pursuant to this Part 2. For purposes of this Agreement,
------
"Generally Accepted Clinical Standards" shall mean standards of clinical and
billing practice regarding inpatient and outpatient utilization of health care
services, as assessed by one or more recognized experts in the health care
field.
2.4 IRS 1099 FORM. On or before January 31 of each calendar year
-------------
beginning in 1998, HPS shall provide an IRS Form 1099 to each provider to whom
HPS has paid more than $600 on behalf of SunStar during the previous calendar
year.
2.5 REPORTS. HPS shall provide SunStar with monthly electronic
-------
claims, utilization, and eligibility information in HPS's standard format.
2.6 ACCESS TO INFORMATION. HPS shall provide SunStar with on-line access
---------------------
to view HPS computer files that contain information regarding claims processed
by HPS pursuant to this Agreement. HPS shall train designated SunStar
representatives to view HPS's claims processing system using such on-line
technology. At SunStar's reasonable request, HPS shall conduct such training at
SunStar's facility. Initial training shall be at no cost to SunStar. Subsequent
training shall be at SunStar's expense, at HPS's then-prevailing hourly rates.
SunStar shall pay for all equipment used at SunStar's facility to maintain such
on-line viewing access, and shall reimburse HPS for all software and connection
costs associated with such access. An HPS representative shall be generally
available during the business hours of each Business Day to respond to telephone
inquiries from SunStar regarding HPS claims processing services.
PART 3
------
ENROLLMENT DOCUMENTS
--------------------
3.1 IDENTIFICATION CARDS. HPS shall arrange for the printing of all
--------------------
Enrollee identification cards for the Program. The layout of the cards shall be
developed using HPS's form identification card, with such changes thereto as are
mutually agreed upon by the parties. SunStar shall reimburse HPS for all costs
incurred by HPS to develop the layout for such identification cards and to print
such identification cards.
3.2 DISTRIBUTION. As requested by SunStar, HPS shall distribute an
------------
enrollment package to each Member (an "Enrollment Package"), which package shall
include Enrollee identification cards for all Enrollees of such Member, and
other enrollment materials to be provided to HPS by SunStar. SunStar shall
reimburse HPS for all postage and other delivery costs associated with such
distribution.
<PAGE>
PART 4
------
RECORDS
-------
4.1 RECORD RETENTION; DATA. To the extent required by Applicable Law,
----------------------
during the term of this Agreement and for a period of seven (7) years after
termination hereof, HPS shall maintain at its principal administrative office,
in original form or on electronic media, adequate books and records of all
transactions between HPS, SunStar, SunStar Providers, Members, and/or Enrollees
(the "Records"), in accordance with all laws that are specifically applicable to
third party administrators (including but not limited to state laws requiring
that HPS provide state officials with access to such books and records). HPS may
use the data recorded on such Records for any purpose, subject to the provisions
of this Agreement and Applicable Law (including laws protecting confidential
Enrollee information). HPS shall retain full ownership rights over all
compilations, analyses, and reports generated by HPS, as well as all proprietary
technology, software, and other data utilized by HPS in the performance of its
obligations under this Agreement, except to the extent that such compilations,
analysis, and reports are generated specifically for SunStar and contain SunStar
Confidential Information. Such ownership rights shall include, but are not
limited to, all rights associated with publication, trade secrets, copyrights,
trademarks, and patents.
4.2 SUNSTAR ACCESS. SunStar retains the right to continuing access to the
--------------
Records needed by SunStar to fulfill all its obligations to SunStar Providers,
Members and Enrollees, subject to the terms of this Agreement and Applicable
Law. All Records maintained by HPS hereunder shall be made available to SunStar
during normal business hours of any Business Day for review, inspection,
examination, and reproduction, provided that SunStar provides HPS with
reasonable notice of its intention to inspect the Records, and provided that
SunStar reimburses HPS for the cost of any reproduction. If HPS is required to
disclose any of such Records to any third party pursuant to Applicable Law, such
disclosure shall be at the expense of SunStar. Upon termination of this
Agreement, as reasonably required by SunStar, HPS shall transfer the Records
within a reasonable time after termination. SunStar shall reimburse HPS for all
costs incurred by HPS to transfer such Records. HPS may retain at its discretion
copies of all or a portion of the Records, subject to the terms of this
Agreement. Upon the reasonable request of SunStar, and at SunStar's expense, HPS
shall destroy all or part of the records, except to the extent prohibited by
Applicable Law.
PART 5
------
SUNSTAR RESPONSIBILITIES
------------------------
5.1 IMPLEMENTATION. Notwithstanding any other provision of this Agreement,
--------------
HPS shall not be obligated to begin performing services hereunder until the
thirtieth calendar day after SunStar provides HPS with all information necessary
for HPS to perform such services, including but not limited to the SunStar
repricing fee schedule and the SunStar Provider list, in an electronic format
acceptable to HPS, or in such other format as is reasonably requested by HPS.
<PAGE>
5.2 ENROLLMENT INFORMATION. At least fifteen (15) Business Days before HPS
----------------------
is required by SunStar to distribute an Enrollment Package to a Member pursuant
to Part 3 above, SunStar shall provide to HPS, in an electronic format
acceptable to HPS, or in such other format as is reasonably requested by HPS:
(i) all enrollment materials that SunStar wishes HPS to distribute to such
Member, other than Enrollee identification cards; and (ii) all information
necessary for HPS to prepare and deliver the Enrollment Package, including the
Member's address and enrollment data.
5.3 NOTICE OF CHANGES. SunStar shall notify HPS of any change in SunStar
-----------------
policies, procedures, benefits, rates, forms, or other aspects of the Program,
and shall provide HPS with such change in an electronic format acceptable to
HPS, or in such other format as is reasonably requested by HPS: (i) at least
Fifteen (15) Business Days before the date on which SunStar requires HPS to
implement such change; and (ii) at least Fifteen (15) Business Days before
SunStar requires that HPS notify Members of such change (whether or not such
notice is required by Applicable Law).
PART 6
------
AUDIT
-----
To the extent required by Applicable Law, or as reasonably required by
SunStar to conduct its business, SunStar shall audit the books and accounts of
HPS relating to all transactions subject to this Agreement. SunStar shall
conduct any audits of HPS services in accordance with generally accepted
auditing principles and pursuant to guidelines to be provided by HPS to SunStar.
SunStar shall provide HPS with reasonable notice of such audits, consistent with
HPS guidelines.
PART 7
------
UNDERWRITING
------------
7.1 APPLICANT PROCESSING. HPS shall perform specified underwriting
--------------------
services on behalf of SunStar in accordance with policies and procedures
approved by SunStar, and shall communicate its underwriting determinations to a
designated SunStar representative. SunStar shall provide HPS with all
information necessary to perform underwriting services with respect to each
applicant. In the event that SunStar has not provided HPS with sufficient
information with respect to an application, HPS will return such application to
SunStar.
7.2 AUTHORITY. SunStar expressly retains sole authority and sole
---------
discretion to establish written underwriting guidelines for review of applicants
for coverage under the Program. HPS shall have authority to implement and apply
SunStar's underwriting guidelines, but may not modify any term or condition of
coverage under the Program or waive any provision thereof except to the extent
required by SunStar. HPS shall refer any questions regarding implementation of
SunStar's underwriting guidelines to SunStar. SunStar shall provide designated
HPS employees with sufficient training with respect to the SunStar underwriting
guidelines.
<PAGE>
PART 8
------
USE OF NAME
-----------
8.1 USE OF NAME. Neither Party shall use any written or oral communication
-----------
that bears the other Party's name, or any other name used by the other Party to
identify any services such other Party provides, including but not limited to
any registered trademark of the other Party, without the other Party's prior
written consent.
8.2 PROGRAM NAME. In providing services to SunStar under this Agreement,
------------
HPS shall use such name as may be selected by SunStar to refer to the Program.
The choice of a Program name is the exclusive right and responsibility of
SunStar.
PART 9
------
COMPENSATION
------------
9.1 SERVICE FEE DEPOSIT. In connection with HPS's implementation of
-------------------
services under this Agreement, SunStar shall pay HPS the nonrefundable Service
Fee Deposit in accordance with the terms of Exhibit B, which is attached hereto
---------
and incorporated herein by reference.
9.2 SERVICE FEE. As compensation to HPS for the services that HPS provides
pursuant to this Agreement, and in addition to the other amounts to be paid by
SunStar to HPS hereunder, SunStar shall pay HPS a Service Fee in accordance with
the terms of Exhibit B hereto.
---------
PART 10
-------
CUSTOMER SERVICE
----------------
10.1 CUSTOMER SERVICE. HPS shall maintain a full-time WATTS line on each
----------------
Business Day (from 8:00 A.M. to 6:00 P.M., Eastern Standard Time, Monday through
Thursday, and 8:00 A.M. to 5:00, P.M., Eastern Standard Time, on Fridays), to
respond to Enrollee and Member requests for information or assistance regarding
enrollment and Premium payments, in accordance with procedures reasonably
required by SunStar. HPS shall not provide any information to Members or
Enrollees regarding SunStar Providers, coverage under any Plan,
preauthorization, or other Enrollee services, and shall forward all such
inquiries to SunStar in accordance with reasonable SunStar procedures.
PART 11
-------
PREMIUM COLLECTION AND COMMISSION PAYMENTS
------------------------------------------
11.1 BILLING. On behalf of SunStar, HPS shall bill each Member for Premium
-------
amounts owed by such Member to SunStar, in accordance with procedures reasonably
required by SunStar.
<PAGE>
11.2 RECEIPT OF PREMIUM PAYMENTS. On behalf of SunStar, HPS shall receive
---------------------------
and credit all Premium payments made by any Member, and shall make all cash
adjustments for Premium refunds and enrollment adjustments, and other required
cash transfers with respect to such Premium payments, in accordance with
procedures reasonably required by SunStar. HPS shall forward Premium refunds to
the appropriate Member. Any Premium payments that are received by HPS shall be
deemed to have been received by SunStar, but the payment of return Premium
amounts by SunStar to HPS shall not be deemed payment to an insured or claimant
until such payment is received by such insured or claimant. Nothing in this
Section 11.2 shall limit any right or remedy of SunStar against HPS resulting
- ------------
from HPS's failure to forward payments to SunStar or to any insured claimant,
including any payment to be forwarded to a Member.
11.3 REMITTANCE. HPS shall immediately remit each Premium payment it
----------
receives from a Member to SunStar by depositing such payment in an interest-
bearing SunStar account at a bank selected by HPS (the "Cash Account"). HPS
shall have sole and exclusive authority to make withdrawals from the Cash
Account. Before the close of the Business Day following the date on which HPS
receives a report indicating that funds have been deposited in the Cash Account
(a "Deposit Report"), HPS shall order the transfer of funds by Automated
Clearing House transfer ("ACH Transfer") to an account specified by SunStar (the
"SunStar Account"). The amount of funds transferred to the SunStar Account
pursuant to the previous sentence shall equal 91% of the amount of funds
deposited in the Cash Account, less the amount necessary for HPS to pay Agent
commissions, as calculated by HPS in accordance with the SunStar Agent
Commission fee schedule, and based on information provided in the Deposit
Report. HPS may use the remaining funds in the Cash Account, including any
accrued interest thereon, for HPS's own purposes, subject to the terms of this
Agreement.
11.4 RECONCILIATION. On or before the last Business Day of each month, HPS
--------------
shall deliver to SunStar a reconciliation report of the Cash Account for the
previous month (the "Reconciliation Report"), which Reconciliation Report shall
set forth: (i) the total amount of Premium payments deposited in the Cash
Account during such month, as adjusted for Premium refunds and other required
cash transfers under this Agreement with respect to such Premium payments (the
"Collected Premium"); (ii) the total amount of funds that HPS transferred to
SunStar during such month with respect to the Collected Premium for such month
(the "Prior Remittance"); and (v) the total amount of funds that SunStar is
entitled to receive with respect to the Collected Premium pursuant to this
Agreement (the "Remittance Due"). At the time HPS delivers the Reconciliation
Report to SunStar, HPS shall: (a) transfer to the SunStar Account (by ACH
Transfer) the amount, if any, by which the Remittance Due for the previous month
exceeds the Prior Remittance with respect to such month; or (b) reduce the
amount of funds that HPS would otherwise transfer to the SunStar Account on that
day (or any subsequent days on which HPS transfers funds to SunStar) by the
amount, if any, by which the Prior Remittance for the previous month exceeds the
Remittance Due with respect to such month. HPS may use the remaining funds in
the Cash Account, including any accrued interest thereon, for HPS's own
purposes, subject to the terms of this Agreement. HPS may offset amounts to be
transferred to the SunStar Account pursuant to this Part 11 by any amount that
-------
SunStar owes to HPS pursuant to this Agreement
<PAGE>
11.5 AGENT COMMISSION PAYMENT. SunStar shall determine the amount of Agent
------------------------
commission payments under the Program, and SunStar shall fund such commission
payments. In addition to withholding 9% of Collected Premium as its service fee,
HPS shall reduce the portion of such Collected Premium to be forwarded to the
SunStar Account by the amount of Agent commissions relating to such Collected
Premium, based on a commission fee schedule determined by SunStar. On behalf of
SunStar, HPS shall pay Agent commissions from such withheld Collected Premium.
HPS shall only be obligated to pay Agent commissions to the extent it has
retained Collected Premium designated to cover such commissions.
11.7 DEPOSITS. Any Premium payment received from a party prior to the
--------
final coverage determination with respect to such party (any "Deposit") shall
not at that time be deemed to be a "Premium" for purposes of this Part 11 or any
-------
other provision of this Agreement. As reasonably required by SunStar, HPS shall
place each applicant's Deposit in an interest-bearing suspense account at a bank
selected by HPS (the "Suspense Account"). HPS shall have sole and exclusive
authority to make withdrawals from the Suspense Account, subject to the terms of
this Agreement. In the event that such applicant is not accepted for coverage
under a Policy, then HPS shall return the Deposit to such applicant in
accordance with procedures reasonably required by SunStar. In the event that
such applicant is accepted for coverage under a Policy in accordance with the
terms of this Agreement, such applicant's Deposit will be deemed to be a
"Premium" for purposes of this Agreement, and will be credited to the Cash
Account. HPS may use any remaining funds in the Suspense Account, including any
accrued interest thereon, for its own purposes, subject to the terms of this
Agreement.
PART 12
-------
RELATIONSHIP OF PARTIES
-----------------------
12.1 CONTRACTUAL RELATIONSHIP. The only relationship between HPS and
------------------------
SunStar is the contractual relationship established by this Agreement. Nothing
contained in this Agreement shall be construed to create the relationship of
employer and employee, or the relationship of principal and agent, between
SunStar and HPS. Each Party's authority shall be limited to that which is
expressly stated in this Agreement. Except as specifically provided elsewhere in
this Agreement, neither Party shall exercise any control over the hours, office
location, rentals, or employees of the other Party.
12.2 SUBCONTRACTS. HPS may subcontract for the performance of services that
------------
HPS is obligated to provide hereunder, subject to the approval of SunStar (which
approval shall not be unreasonably withheld).
12.3 CHANGES IN OBLIGATIONS. In the event that any Applicable Law or any
----------------------
change in the Program (including but not limited to any change in the policies
or procedures of SunStar) results in a material change in the nature or
financial impact of either Party's obligations or compensation hereunder (any
"Material Change"), then such Party may provide the other Party
<PAGE>
with notice of such Material Change, and the Parties shall negotiate in good
faith an amendment to this Agreement that shall set forth the terms under which
each Party shall continue to perform its obligations hereunder. In the event
that the Parties cannot reach agreement on an amendment to this Agreement within
thirty (30) calendar days after the delivery of a Material Change notice
pursuant to this Section 12.3, then either Party may terminate this Agreement in
------------
accordance with Section 17.4 below.
------------
12.4 AMENDMENT OF AGREEMENT. In the event that any Applicable Law requires
----------------------
the Parties to amend this Agreement, then the Parties shall negotiate in good
faith to amend this Agreement in order to comply with such Applicable Law. In
the event that the Parties cannot reach agreement with respect to an amendment
of this Agreement pursuant to this Section 12.4, then either Party may terminate
------------
this Agreement pursuant to Section 17.5 below.
------------
PART 13
-------
COMPLAINTS AND LITIGATION
-------------------------
13.1 NOTICE OF REGULATORY ACTION. Each Party shall promptly notify the
---------------------------
other Party of any complaint to or from any federal or state regulatory agency
of which such Party becomes aware in connection with any transaction covered by
this Agreement. In the event that HPS receives a complaint letter from any state
insurance department, then HPS shall forward such complaint letter to SunStar
promptly in accordance with Applicable Law. SunStar shall be responsible for
responding to any such complaint letters.
13.2 NOTICE OF LITIGATION. Each Party shall promptly notify the other Party
--------------------
of any litigation or attorney's letter threatening litigation of which such
Party becomes aware in connection with any transaction covered by this
Agreement. Each Party shall forward to the other Party promptly any summons or
complaint received by such Party in connection with any matter covered by this
Agreement.
PART 14
-------
INDEMNIFICATION AND INSURANCE; PENALTIES
----------------------------------------
14.1 HPS INDEMNIFICATION OF SUNSTAR; PENALTIES. HPS agrees to indemnify and
hold harmless SunStar, and its parents, subsidiaries, affiliates, officers,
agents, and employees, from and against any and all losses, costs, claims,
demands, and damages, including but not limited to attorneys' fees, arising out
of or caused by proven negligence, fraudulent conduct, or embezzlement by HPS,
its officers, agents, or employees. In addition to such indemnification, HPS
agrees to pay SunStar any applicable performance penalties as required by
Exhibit C, which is attached hereto and incorporated herein by reference.
- ---------
14.2 SUNSTAR INDEMNIFICATION OF HPS. Except as set forth in Section 14.1
------------------------------ ------------
above, SunStar agrees to indemnify and hold harmless HPS, and its parents,
subsidiaries, affiliates,
<PAGE>
officers, agents, and employees, from and against any and all losses, costs,
claims, demands, and damages, including but not limited to attorneys' fees,
arising out of or caused by:
(a) any act done or alleged to have been done by SunStar, or any
omission made or alleged to have been made by SunStar, in connection
with the carrying out or performance of their respective obligations
in connection with the Program or this Agreement, and any action or
inaction that is taken or not taken by HPS at the direction or request
of SunStar, or in accordance with SunStar policies and procedures;
(b) proven fraudulent conduct or embezzlement attributable to
SunStar, or its officers, agents or employees; or
(c) the use of any name selected by SunStar to refer to the Program
in accordance with Part 8 of this Agreement.
------
14.3 NOTICE. Any Party entitled to indemnification under this Part 14 shall
------ -------
provide the other Party hereto with prompt notice of the basis of such
indemnification; provided, however, that the failure of the Party entitled to
-------- -------
indemnification to provide such notice shall not preclude the indemnified
Party's right to such indemnification, except to the extent that the
indemnifying Party is prejudiced by such failure or delay in notification.
14.4 LEGAL FEES. In the event that HPS is named as a defendant in any
----------
action relating to HPS's performance of services hereunder, and with respect to
which HPS has notified SunStar that HPS is entitled to indemnification, then
SunStar must pay the outside legal fees incurred by HPS in connection with the
claim. SunStar may undertake the defense of such claim, to the extent agreed
upon by HPS. In the event that it is determined by a tribunal of competent
jurisdiction that HPS is liable to SunStar for the amount of such claim, then
HPS shall reimburse SunStar for the legal fees that SunStar incurred on behalf
of HPS in connection with such claim.
14.5 INSURANCE. During the term of this Agreement, HPS shall maintain
---------
insurance in effect that covers loss by reason of acts of fraud or dishonesty.
Such insurance shall be in an amount of no less than One Million Dollars
($1,000,000). At SunStar's reasonable request, HPS shall cause the issuer of
said insurance policy to deliver to SunStar evidence of the existence of such
policy and shall require the insurer to give HPS sixty (60) calendar days
written notice prior to cancellation of, or any material change in, the policy.
HPS shall provide SunStar with prompt notice of any such change.
PART 15
-------
REGULATORY AND OTHER LIABILITY
------------------------------
15.1 HPS WARRANTIES, REPRESENTATIONS, AND COMPLIANCE. In the conduct of its
-----------------------------------------------
business and the performance of its obligations under this Agreement, HPS
warrants and represents
<PAGE>
to SunStar that it is in compliance with, and shall continue to comply with, all
law that is specifically applicable to third party administrators in the
Enrollment Area (including but not limited to applicable bond requirements).
Where required by Applicable Law, HPS shall hold a certificate of registration
as a third party administrator issued by the department of insurance or other
regulatory body. To the extent required by (and in accordance with the
requirements of) Applicable Law, HPS shall provide written notice to Members and
Enrollees of the terms of this Agreement.
15.2 SUNSTAR WARRANTIES, REPRESENTATIONS AND COMPLIANCE. In the conduct of
--------------------------------------------------
its business and the performance of its obligations under this Agreement,
SunStar warrants and represents to HPS that it is in compliance with, and shall
continue to comply with, all Applicable Law (including but not limited to all
state law requirements that SunStar be authorized and approved to conduct its
business and to administer the Program). Except as otherwise specifically
provided in this Agreement, SunStar shall be solely liable for, and shall comply
with all Applicable Law with respect to, all aspects of the design and
implementation of the Program, including but not limited to: (i) underwriting
criteria; (ii) the rights and obligations of Members and Enrollees; (iii) the
scope of benefits under the Program; (iv) the content of the Enrollment Packages
and Enrollee identification cards; (v) determinations regarding whether health
care services provided to an Enrollee are covered under such Enrollee's Plan;
(vi) the Generally Accepted Clinical Standards used by HPS in its performance of
services pursuant to this Agreement; and (vii) the procedures used by HPS with
respect to potentially fraudulent or improper billing practices. SunStar shall
approve written guidelines to be used by HPS in connection with these matters.
SunStar shall notify HPS of any SunStar obligation under Applicable Law that HPS
is required to perform on behalf of SunStar in accordance with this Agreement.
PART 16
-------
CONFIDENTIAL AND PROPRIETARY INFORMATION
----------------------------------------
16.1 CONFIDENTIAL INFORMATION. For purposes of this Agreement,
------------------------
"Confidential Information" of a Party shall mean any confidential and/or
proprietary information belonging to such Party, including but not limited to
information concerning: (i) the terms of this Agreement and discussions of the
matters described herein; (ii) the business and operations of such Party, such
as the costs to each Party of performing its obligations under this Agreement;
and (iii) SunStar's business activities, including but not limited to rate
schedules, utilization data, or any combination thereof. Notwithstanding the
foregoing, "Confidential Information" shall not include:
(a) information that, at the time of disclosure to the Party
receiving the information (the "Receiving Party"), is in the public
domain;
(b) information that, after disclosure, is published or otherwise
becomes part of the public domain through no fault of the Receiving
Party;
<PAGE>
(c) information that was in the Receiving Party's possession or the
possession of an affiliate of the Receiving Party at the time of
disclosure to the Receiving Party;
(d) information that is received by the Receiving Party in good faith
from an independent source that has no duty of nondisclosure with
respect to the information (or, if such source does have a duty of
nondisclosure, the Receiving Party was unaware of such duty); or
(e) information that the Receiving Party is required by Applicable
Law to disclose to a third party, to the extent of such disclosure.
16.2 PROTECTION OF CONFIDENTIAL INFORMATION. Except as otherwise
--------------------------------------
specifically provided in this Agreement or as agreed to by the Parties, or as
otherwise required by Applicable Law, each Party: (a) shall hold in confidence
and not disclose any Confidential Information which belongs to the other Party,
and shall take such precautions with respect to such Confidential Information as
it normally takes with its own confidential and/or proprietary information; and
(b) shall not use the Confidential Information of the other Party for any
purpose other than the performance of its obligations under this Agreement.
16.3 JUDICIAL PROCEEDINGS. Each Party shall endeavor to keep and assist the
--------------------
other Party's keeping the Confidential Information confidential in judicial or
administrative hearings or proceedings, and shall provide assistance in
obtaining confidential treatment under Applicable Law. If a Party finds it
necessary to disclose any Confidential Information in any such judicial or
administrative hearing or proceeding, the Party shall attempt to disclose such
Confidential Information in camera, or subject to protective order, or on some
other non-public basis.
16.4 MEMBER OR ENROLLEE INFORMATION. HPS shall not supply information
------------------------------
regarding any Member or Enrollee to any party that is not affiliated with HPS or
SunStar, except as may be required by this Agreement or Applicable Law, or as
permitted by such Member or Enrollee.
PART 17
-------
TERM AND TERMINATION
--------------------
17.1 TERM. The term of this Agreement shall commence on the Effective Date,
----
and shall continue until December 31, 1998, and thereafter shall be renewed
automatically for successive terms of one (1) year unless terminated in
accordance with the provisions of this Part 17.
-------
17.2 TERMINATION WITHOUT CAUSE. Either Party may terminate this Agreement
-------------------------
for any reason upon ninety (90) calendar days notice to the other Party;
provided, however, that such notice shall not be delivered to the other Party
- -------- -------
before December 31, 1998 (and no termination pursuant to this Section 17.2 shall
------------
take effect before ninety (90) calendar days after December 31, 1998).
<PAGE>
17.3 TERMINATION FOR CAUSE. In the event that a Termination Event has
---------------------
occurred with respect to a Party (the "Defaulting Party"), then the other Party
may terminate this Agreement upon thirty (30) calendar days written notice to
the Defaulting Party. Such notice shall be given within a reasonable time after
the occurrence of the Termination Event, and shall describe such Termination
Event in reasonable detail. For purposes of this Agreement, the occurrence of
any of the events specified below in this Section 17.3 shall constitute a
------------
"Termination Event" with respect to a Party.
(a) Breach of Agreement. A Termination Event shall be deemed to occur
-------------------
with respect to a Party if such Party Breaches this Agreement, and the
Breach continues for a period of sixty (60) calendar days after such
Party receives written notice of the Breach from the other Party.
Notwithstanding the foregoing, if such Breach is not reasonably
susceptible to correction within such sixty-day period, then a
Termination Event shall not be deemed to have occurred if the Party in
Breach commences and diligently pursues corrective action within such
sixty-day period, and the Breach is cured within a reasonable time
thereafter.
(b) Dissolution; Insolvency. A Termination Event shall be deemed to
-----------------------
occur with respect to a Party upon the occurrence of any of the
following:
(i) the entry of a decree or order for relief of such Party by
a court of competent jurisdiction in any involuntary case
involving such Party under any bankruptcy, insolvency, or other
similar law now or hereafter in effect, or the filing with
respect to such Party of a petition in any such involuntary
bankruptcy or similar case, which petition remains undismissed
for a period of ninety (90) calendar days;
(ii) the appointment of a receiver for such Party or
substantially all the assets of such Party; or
(iii) the commencement by such Party of a voluntary case under
any bankruptcy or insolvency law (or other similar law now or
hereafter in effect), or the dissolution of the business and
operations of such Party necessary for such Party to perform its
obligations hereunder.
17.4 TERMINATION UPON MATERIAL CHANGE. In the event that a Material Change
--------------------------------
Termination Event has occurred, then either Party may terminate this Agreement
upon thirty (30) calendar days written notice to the other Party. For purposes
of this Agreement, a "Material Change Termination Event" shall be deemed to have
occurred if the Parties have been unable to negotiate an amendment to this
Agreement within thirty (30) calendar days after delivery of a Material Change
notice pursuant to Section 17.3 above.
------------
<PAGE>
17.5 TERMINATION UPON FAILURE TO AGREE. In the event that the Parties are
---------------------------------
unable to reach agreement with respect to (i) an amendment of this Agreement in
accordance with Section 12.4 above, or (ii) any matter about which the
------------
Parties are required to agree pursuant to this Agreement, then either Party may
terminate this Agreement upon thirty (30) calendar days notice to the other
Party, unless the Parties reach Agreement with respect to such amendment or such
matter within the thirty-day notice period.
17.6 TERMINATION FOR FAILURE TO PAY. Notwithstanding any other provision of
------------------------------
this Agreement, in the event SunStar fails to pay any fee or other amount owed
to HPS hereunder within twenty (20) calendar days of the date on which HPS
provides SunStar with notice that such amount is past due, then HPS may, at its
sole discretion, terminate this Agreement upon thirty (30) calendar days written
notice to SunStar.
17.7 SUSPENSION OF UNDERWRITING AUTHORITY. To the extent required by
------------------------------------
Applicable Law, SunStar shall have the right to suspend the underwriting
authority of HPS during the pendency of any dispute between the Parties
regarding the cause for termination of this Agreement. SunStar shall fulfill
all of SunStar's lawful obligations with respect to the Program, regardless of
any dispute between SunStar and HPS.
17.8 HPS OBLIGATIONS. In event of termination of this Agreement, all
---------------
obligations of HPS to adjudicate claims or perform any other services hereunder
shall be terminated and extinguished as of the effective date of termination,
except with respect to claims properly filed with and received by HPS prior to
the effective date of termination. However, during the period commencing with
the written notice of termination of this Agreement and ending on the 30th day
after such effective termination date, HPS shall release all SunStar information
to, and fully cooperate with, HPS' successor provider of administrative services
to ensure a successful transition thereof, subject to the terms of this
Agreement.
PART 18
-------
MISCELLANEOUS PROVISIONS
------------------------
18.1 MODIFICATION; WAIVERS. No modification, amendment or waiver of this
---------------------
Agreement, or any part of it, shall be valid unless in writing, signed by the
Party sought to be charged therewith. No waiver of any Breach or condition of
this Agreement shall be deemed to be a waiver of any subsequent Breach or
condition, whether of like or different nature.
18.2 GOVERNING LAW. This Agreement shall be subject to and construed under
-------------
the laws of the State of Florida (but not including the choice of law rules
thereof).
18.3 REFERENCES AND SECTION HEADINGS. Any reference to the singular shall
-------------------------------
include reference to the plural, and vice versa. Part and section headings are
intended for the purpose of description only and shall not be used for purposes
of interpretation of this Agreement.
<PAGE>
All pronouns and variations thereof shall be deemed to refer to the masculine,
feminine, or neuter, as the case may be.
18.4 SEVERABILITY. In the event any court of competent jurisdiction holds
------------
that a particular provision or requirement of this Agreement is in violation of
any Applicable Law, such provision or requirement shall be enforced only to the
extent it is not in violation of such Law or is not otherwise unenforceable, and
all other provisions and requirements of this Agreement shall remain in full
force and effect.
18.5 NOTICES. Any notice, demand or other document required or permitted to
be delivered hereunder shall be in writing and shall be (i) mailed by first-
class, registered or certified United States mail, postage prepaid, (ii)
delivered in person, (iii) sent by telegram, or (iii) transmitted by facsimile,
and shall be addressed to the recipient Party at the address indicated below, or
at such other address as such Party shall indicate in a notice to the other
Party sent in accordance with this Section 18.5:
------------
(a) If to HPS: HealthPlan Services, Inc.
Attention: Phillip S. Dingle
If Delivered By Hand: 3501 Frontage Road
Tampa, Florida 33607
If Delivered By U.S. Mail: P.O. Box 30098
Tampa, Florida 33630-3098
If Delivered By Fax: (813) 287-6629
(b) If to SunStar:
SunStar Health Plan, Inc.
521 East State Road 434
Longwood, FL 32750
Attn: David A. Jesse
If Delivered By Fax:
407/339-4151
Each notice, demand or other document that is delivered in the manner described
above shall be deemed to be sufficiently delivered, given, served, sent,
provided, and received for all purposes at such time as it is delivered to the
addressee (with the return receipt, delivery receipt, affidavit of messenger or,
with respect to a facsimile transmission, the answerback being conclusive, but
not exclusive, evidence of such delivery), or at such time as delivery is
refused upon presentation.
<PAGE>
18.6 ENTIRE AGREEMENT. This Agreement and the attached Exhibits hereto
----------------
contain the whole of the understanding between the Parties hereto relating in
any manner of its subject matter, and any representation, warranty, covenant,
understanding or agreement not contained or incorporated in it by reference
shall be of no force or effect. As of the Effective Date, this Agreement
supersedes all prior proposals, discussions, writings, and agreements between
any of the parties to this Agreement relating the subject matter hereof.
18.7 BINDING AGREEMENT; ASSIGNMENT. This Agreement and all the provisions
-----------------------------
hereof will be binding upon and inure to the benefit of the parties hereto and
their permitted assigns. Neither this Agreement nor any other rights, interests,
or obligations hereunder my be assigned by either Party without the prior
written consent of the other Party hereto, which consent will not be
unreasonably withheld. Any assignment in violation of this Agreement shall be
void and to no effect. Notwithstanding the foregoing, HPS may assign its rights
and obligations hereunder to any corporate affiliate of HPS without the written
consent of SunStar.
18.8 THIRD PARTY BENEFICIARIES. This Agreement shall not, and is not
-------------------------
intended to, confer upon any party, other than the Parties hereto and their
successors and permitted assigns, any rights, remedies, obligations or
liabilities, except as expressly provided herein.
18.9 FORCE MAJEURE. Neither Party shall be liable for any delay or
-------------
failure to perform its obligations under this Agreement arising out of a cause
beyond its control or without its fault or negligence. Such causes may include,
but are not limited to, fires, floods, and natural disasters.
18.10 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
18.12 SURVIVAL. Each applicable provision of Parts 1, 4, 8 through 16,
-------- ------- - - --
Sections 17.8 and 17.9, and this Part 18 of this Agreement, as well as any other
- ------------- ---- -------
provision applicable to the implementation of such provisions, shall survive
termination of this Agreement for any reason, until by its terms it is no longer
applicable.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf as of the Effective Date.
HEALTHPLAN SERVICES, INC.
By: _____________________________________
Name: ___________________________________
Title: __________________________________
SUNSTAR HEALTH PLAN, INC.
By: _____________________________________
Name: ___________________________________
Title: __________________________________
<PAGE>
EXHIBIT A
---------
DEFINITIONS
-----------
"ACH Transfer" shall have the meaning set forth in Section 11.3 of
------------ ------------
this Agreement.
"Agent" shall mean any insurance agent or broker.
-----
"Applicable Law" shall mean any applicable statute, ordinance, rule,
--------------
or regulation of any federal, state, municipal, or other governmental authority.
"Audited Claims" shall have the meaning set forth in Exhibit C
-------------- ---------
hereto.
"Breach" shall mean a Party's failure, or the act of a Party's
------
failing, to perform, observe, or satisfy any applicable obligation under this
Agreement, which failure or failing (i) constitutes a pattern of nonperformance,
and (ii) has a material adverse effect on the efficiency of the Program or the
profits that the other Party hereto realizes from the Program.
"Cash Account" shall have the meaning set forth in Section 11.3 of
------------ ------------
this Agreement.
"Business Day" shall mean any day other than a Saturday, Sunday, or
------------
HPS holiday.
"Collected Premium" shall have the meaning set forth in Section 11.4
----------------- ------------
of this Agreement.
"Confidential Information" shall have the meaning set forth in Section
------------------------ -------
16.1 hereof.
- ----
"Defaulting Party" shall have the meaning set forth in Section 17.3 of
---------------- ------------
this Agreement.
"Deposit" shall have the meaning set forth in Section 11.7 of this
------- ------------
Agreement.
"Deposit Report" shall have the meaning set forth in Section 11.3 of
-------------- ------------
this Agreement.
"Effective Date" shall have the meaning set forth in the Recitals of
--------------
this Agreement.
"Enrollee" shall mean (i) a Member who is an individual, or (ii) an
--------
individual who is covered under a Member's Plan.
"Enrollment Area" shall mean the State of Florida, and/or any other
---------------
area agreed upon by the Parties.
"Enrollment Package" shall have the meaning set forth in Section 3.2
------------------ -----------
of this Agreement.
"Financial Accuracy Rate" shall have the meaning set forth in Exhibit
----------------------- -------
C of this Agreement.
- -
<PAGE>
"Generally Accepted Clinical Standards" shall have the meaning set
-------------------------------------
forth in Section 2.3 of this Agreement.
-----------
"Independent Audit" shall have the meaning set forth in Exhibit C of
----------------- ---------
this Agreement.
"Material Change" shall have the meaning set forth in Section 12.3 of
--------------- ------------
this Agreement.
"Material Change Termination Event" shall have the meaning set forth
---------------------------------
in Section 17.4 of this Agreement.
------------
"Member" shall mean an employer that maintains coverage for its
------
employees, a group that maintains coverage for its members, or an individual
that maintains coverage for himself or herself.
"Party" shall mean either HPS or SunStar.
-----
"Payment Error Amount" shall have the meaning set forth in Exhibit C
-------------------- ---------
of this Agreement.
"Plan" shall mean any agreement or health care plan under which
----
SunStar provides health care coverage to an Enrollee.
"Premium" shall mean any amount that SunStar charges any Member or
-------
Enrollee for participation in the Program.
"Prior Remittance" shall have the meaning set forth in Section 11.4 of
---------------- ------------
this Agreement.
"Processed Claim" shall have the meaning set forth in Exhibit C of
--------------- ---------
this Agreement.
"Program" shall mean the program under which SunStar shall provide
-------
health care coverage to individuals and small groups in the Enrollment Area.
"Receiving Party" shall have the meaning set forth in Section 16.1(a)
--------------- ---------------
of this Agreement.
"Reconciliation Report" shall have the meaning set forth in Section
--------------------- -------
11.4 of this Agreement.
- ----
"Records" shall have the meaning set forth in Section 4.1 of this
------- -----------
Agreement.
"Remittance Due" shall have the meaning set forth in Section 11.4 of
-------------- ------------
this Agreement.
"Service Fee" shall have the meaning set forth in Exhibit B of this
----------- ---------
Agreement.
"Service Fee Deposit" shall have the meaning set forth in Exhibit B of
------------------- ---------
this Agreement.
"SunStar Account" shall have the meaning set forth in Section 11.3 of
--------------- ------------
this Agreement.
<PAGE>
"SunStar Provider" shall mean a provider of services that is
----------------
designated by SunStar as a member of the SunStar provider network.
"Suspense Account" shall have the meaning set forth in Section 11.7 of
---------------- ------------
this Agreement.
"Termination Event" shall have the meaning set forth in Section 17.3
----------------- ------------
of this Agreement.
"Turnaround Time" shall have the meaning set forth in Exhibit C of
--------------- ---------
this Agreement.
<PAGE>
EXHIBIT B
---------
COMPENSATION
------------
I. SERVICE FEE DEPOSIT
-------------------
On or before the Effective Date, SunStar shall pay HPS a nonrefundable
Service Fee deposit of Eighty-Five Thousand Dollars ($85,000) (the Service Fee
Deposit"). Such Service Fee Deposit shall be an advance on future Service Fee
amounts owed to HPS pursuant to Part II below. In the event that the total
-------
Service Fees retained by HPS pursuant to this Agreement are less than Eighty-
Five Thousand Dollars ($85,000), HPS shall retain the balance of such deposit;
in no event shall any portion of the Service Fee Deposit be returned to SunStar.
II. SERVICE FEE
-----------
HPS shall retain a service fee of 9% of all Collected Premium (the "Service
Fee"). HPS shall not be obligated to pay Agent commissions from such Service
Fee.
III. OTHER AMOUNTS OWED
------------------
A. Invoice. For each month during the term of this Agreement, HPS shall
-------
forward to SunStar an invoice setting forth the following information:
(a) the postage costs incurred by HPS on behalf of SunStar during such
month;
(b) the costs incurred by HPS during such month to (i) obtain check stock
to be used to pay claims on behalf of SunStar, and (ii) create
identification cards for SunStar Enrollees; and
(c) an itemization of all other amounts owed by SunStar to HPS with
respect to such month.
B. Payment. SunStar shall pay HPS the amount that SunStar owes to HPS
--------
for each month, as calculated in III(A) above, on or before the thirtieth (30th)
calendar day following SunStar's initial receipt of an invoice with respect to
such amount. In the event that SunStar does not remit payment to HPS when due,
interest will be charged on the fees due HPS at the rate of One and One Half
Percent (1 1/2%) per month, or the maximum rate allowed by law, whichever is
less. SunStar acknowledges that if payments are not received by HPS within ten
(10) calendar days of the due date, HPS may cease providing services pursuant to
this Agreement, and if/when said administrative services are reinstated SunStar
shall pay HPS an additional fee of one month's administration fee for each month
or portion thereof that administrative services were ceased. Each such
additional monthly fee will be equal to the amount of the administration fee for
the last full month for which SunStar paid HPS.
<PAGE>
EXHIBIT C
---------
PERFORMANCE STANDARDS
---------------------
PART A
------
AUDIT
-----
For each quarter during the term of this Agreement, HPS shall audit claims
submitted by Enrollees to determine the Turnaround Time (as defined below) for
each such audited claim, as well as the Financial Accuracy Rate (as defined
below) for such quarter. In conducting such audit, HPS shall use a random
sample of SunStar Enrollee claims that have become Processed Claims during such
quarter. For purposes of this Agreement, a claim shall be deemed to be a
"Processed Claim" when an HPS employee has entered such claim for payment,
prepared an explanation for denial of such claim, or pended such claim for
further review. For purposes of calculating the Turnaround Time or the
Financial Accuracy Rate for any period, "Audited Claims" shall mean the Enrollee
claims audited by HPS to complete such calculation in accordance with this
Exhibit C
- ---------
PART B
------
TURNAROUND TIME
---------------
B.1 CALCULATION OF TURNAROUND TIME. For purposes of this Agreement, the
------------------------------
"Turnaround Time" with respect to any claim shall be equal to the number of
Business Days beginning on (i) the first Business Day after the date on which
such claim is received by HPS, and ending on (ii) the date on which such claim
becomes a Processed Claim.
B.2 PENALTY. If more than Five Percent (5%) of all Audited Claims for a
-------
quarter have a Turnaround Time of greater than Ten (10) Business Days, then HPS
shall pay SunStar a penalty equal to One Percent (1%) of all Service Fees
retained by HPS during such quarter.
PART C
------
FINANCIAL ACCURACY
------------------
C.1 FINANCIAL ACCURACY RATE CALCULATION. For purposes of this Agreement,
-----------------------------------
the "Financial Accuracy Rate" with respect to SunStar for any period means a
percentage equal to 100%, minus a percentage calculated by dividing: (i) the
Payment Error Amount with respect to Audited Claims for such period; by (ii) the
total dollar amount of all such Audited Claims, based on the amount of such
claims as originally submitted. For purposes of this Agreement, the "Payment
Error Amount" for any period means the amount by which the aggregate amount that
HPS paid on behalf of SunStar with respect to Audited Claims for such period
exceeds the amount that HPS was required to pay with respect to such Audited
Claims. For purposes of calculating the Payment Error Amount,
<PAGE>
the amount that HPS is required to pay with respect to any claim shall be deemed
to be equal to the amount that HPS did pay with respect to such claim, unless a
different amount is explicitly required by written instructions from SunStar or
by this Agreement.
C.2 BONUSES/PENALTIES. In the event that the Financial Accuracy Rate with
-----------------
respect to SunStar for any fiscal quarter is less than Ninety-Five Percent
(95%), then HPS shall pay to SunStar a penalty equal to One Percent (1%) of the
total Service Fees retained by HPS pursuant to Exhibit B hereto during such
---------
quarter.
PART D
------
SUNSTAR AUDIT
-------------
SunStar may, at its own expense, conduct up to two audits during any fiscal
year of the Turnaround Time and the Financial Accuracy Rate with respect to
Audited Claims. Any such audit (each an "Independent Audit") shall be conducted
and the resulting report prepared in accordance with generally accepted auditing
standards for electronic data processing audits. If the results of any
Independent Audit are submitted to HPS no later than sixty (60) calendar days
following the end of the period with respect to which the Independent Audit was
conducted, SunStar may make recommendations to HPS based on the results of the
Independent Audit, and the parties shall discuss any such recommendations in
good faith to determine what modifications, if any, HPS should make to improve
the Turnaround Time or the Financial Accuracy Rate for future periods.
PART E
------
CALCULATION OF PERCENTAGES
--------------------------
For purposes of calculating the Turnaround Time percentage and Financial
Accuracy Rate pursuant to this Exhibit C, each percentage shall be calculated in
---------
accordance with HPS auditing procedures.
PART F
------
GRACE PERIOD
------------
Notwithstanding any other provision of this Agreement, HPS shall not pay
any penalty with respect to any quarter until the second quarter after HPS has
begun processing Enrollee claims.
<PAGE>
EXHIBIT 16.1
October 24, 1997
Securities and Exchange Commission
Washington, DC 20549
RE: SunStar Healthcare, Inc. ("The Company")
Ladies and Gentlemen:
We have read Item 8 of the annual report on Form 10-KSB for the Company's fiscal
year ended July 31, 1997 and are in agreement with the statements contained
therein except for the matters relating to KPMG Peat Marwick, LLP as to which we
have no knowledge.
Very truly yours,
Richard A. Eisner & Company, LLP
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
The Board of Directors
SunStar Healthcare, Inc.:
We consent to the incorporation of our report dated September 16, 1997 with
respect to the consolidated financial statements of SunStar Healthcare, Inc. as
of and for the two years ended July 31, 1997 in the Annual Report on Form 10-KSB
for the fiscal year ended July 31, 1997 of SunStar Healthcare, Inc.
KPMG PEAT MARWICK LLP
Certified Public Accountants
Jacksonville, Florida
November 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR JULY 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 4,526
<SECURITIES> 0
<RECEIVABLES> 287
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 5,105
<PP&E> 1,793
<DEPRECIATION> 1,350
<TOTAL-ASSETS> 6,371
<CURRENT-LIABILITIES> 881
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 5,380
<TOTAL-LIABILITY-AND-EQUITY> 6,371
<SALES> 4,729
<TOTAL-REVENUES> 4,729
<CGS> 3,427
<TOTAL-COSTS> 6,663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (252)
<INCOME-PRETAX> (1,682)
<INCOME-TAX> (51)
<INCOME-CONTINUING> (1,631)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,631)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
