<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1997
------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
-------------- --------------
Commission file number 1-14382
----------------
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
Delaware 59-3361076
-------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
300 International Pkwy, Ste 230, Heathrow, Florida 32746
------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
(407) 304-1066
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 2,445,000 shares of the Registrant's common stock outstanding as of
December 1, 1997.
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1997
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES................................. 1
Consolidated Balance Sheet........................................ 1
Consolidated Statements of Operations............................. 2
Consolidated Statements of Cash Flows............................. 3
Notes to Consolidated Financial Statements........................ 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 7
PART II. OTHER INFORMATION................................................. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 11
SIGNATURES....................................................................... 12
</TABLE>
i
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF SUNSTAR HEALTHCARE,
INC. AND SUBSIDIARIES
Consolidated Balance Sheet
October 31, 1997
(unaudited)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $4,194,826
Patients accounts receivable, less allowance for doubtful
accounts of approximately $125,000 149,868
Prepaid expenses and other assets 422,590
Deferred taxes 53,000
Other receivables 87,229
----------
TOTAL CURRENT ASSETS 4,907,513
Other Assets:
Furniture, equipment and leasehold improvements, net 430,322
Goodwill, net 335,614
Restricted cash 280,000
Deposits and other assets 155,563
Deferred taxes 47,000
----------
TOTAL $6,156,012
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 586,435
Medical claims payable 494,934
Estimated settlement Medicare 190,628
Unearned premium - Medicare 124,920
Unearned premium - HMO 148,849
Capital lease obligations, current 35,279
----------
TOTAL CURRENT LIABILITIES 1,581,045
Capital lease obligations, noncurrent 100,435
----------
TOTAL LIABILITIES 1,681,480
Shareholders' equity
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized, no shares outstanding -0-
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 2,395,000 shares issued and outstanding 2,395
Additional paid-in capital 7,163,800
Unearned compensation from stock options (113,933)
Retained earnings (deficit) (2,577,730)
----------
TOTAL SHAREHOLDERS' EQUITY 4,474,532
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,156,012
==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended October 31, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenues:
Primary care center $1,291,535 $1,020,218
HMO premiums -0- 474,653
Investment income 69,972 59,094
---------- ----------
Total revenues 1,361,507 1,553,965
Operating expenses:
Primary care center 849,029 727,990
HMO medical costs -0- 548,460
Selling, general and administrative 597,520 1,164,919
Compensation expense -0- 16,276
Amortization of intangibles 8,311 19,700
---------- ----------
Total operating expenses 1,454,860 2,477,345
Income (loss) before income taxes (93,353) (923,380)
Provision for income taxes 13,677 -0-
---------- ----------
Net income (loss) $ (79,676) $ (923,380)
========== ==========
Net income (loss) per share $ (0.03) $ (0.39)
Weighted average shares outstanding 2,395,000 2,395,000
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended October 31, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (79,676) $ (923,380)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 37,009 49,184
Provision for doubtful accounts 15,006 -0-
Deferred taxes (6,691) -0-
Noncash compensation -0- 16,276
Changes in operating assets and liabilities:
Decrease (increase) in accounts and other receivables (111,668) 50,622
Decrease (increase) in prepaid expenses and other assets (123,239) (140,263)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (46,504) 26,075
Increase (decrease) in medical claims payable -0- 401,076
Increase (decrease) in unearned premium - Medicare (4,667) 124,920
Increase (decrease) in estimated settlement - Medicare 110,275 59,593
Increase (decrease) in unearned premium - HMO -0- 89,636
---------- ----------
Net cash provided by (used in) operating activities (210,155) (246,261)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (43,363) (75,557)
---------- ----------
Net cash used in investing activities (43,363) (75,557)
Cash flows from financing activities:
Principal payments under capital lease obligations (5,671) (9,033)
---------- ----------
Net cash used in financing activities (5,671) (9,033)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259,189) (330,851)
Cash and cash equivalents, beginning of period 5,993,609 4,525,677
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,734,420 $4,194,826
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR INTEREST $ 1,079 $ 3,997
========== ==========
NON CASH INVESTING AND FINANCING ACTIVITIES
FURNITURE AND EQUIPMENT ACQUIRED UNDER CAPITAL LEASE OBLIGATIONS $ 78,699 $ -0-
========== ==========
FURNITURE AND EQUIPMENT DISPOSALS SUBJECT TO INSURANCE RECOVERY $ 0 $ 59,222
========== ==========
</TABLE>
3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 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 selling, 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.
4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair
presentation of the financial results for the interim periods
presented. Pursuant to the rules and regulations of the Securities
and Exchange Commission, certain footnote disclosures which would
substantially duplicate the disclosures contained in the audited
financial statements of the Company have been omitted from these
interim financial statements. Although the Company believes that the
disclosures presented below are adequate to make the interim financial
statements presented not misleading, it is suggested that these
unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1997.
The formation of the Company has been accounted for as a
reorganization. Accordingly, the financial statements have been
prepared using NHHC's historical basis in the assets and liabilities
of First Health and Brevard (the Predecessor), including goodwill and
other intangibles recognized by NHHC in the acquisition of certain
companies. All significant intercompany accounts have been eliminated.
The financial statements reflect the results of operations, financial
condition and cash flows of the Company after the reorganization.
(c) Revenue Recognition
-------------------
The Company, through its primary care centers, recognizes 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 outside HMOs 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 outside
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.
5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
(d) Per Share Data
--------------
Common stock equivalents 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) Furniture, Equipment and Leasehold Improvements
-----------------------------------------------
Furniture, equipment and leasehold improvements are stated at cost and
depreciated over estimated useful lives of three to ten years on a
straight-line basis.
(f) 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.
(g) Malpractice
-----------
The Company insures its malpractice risks on a claims-made basis. The
Company has secured claims-made coverage from August 1, 1997 through
July 31, 1998, 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.
(h) Reclassifications
-----------------
Certain reclassifications have been made to the prior year's financial
statement amounts to conform to the current year's financial statement
presentation.
6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
"FORWARD-LOOKING" INFORMATION
This report on Form 10-QSB 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 OCTOBER 31,
1997 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE QUARTERS ENDED OCTOBER 31,
1997 AND 1996 SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. ALTHOUGH THE
COMPANY BELIEVES THAT THE DISCLOSURES PRESENTED BELOW ARE ADEQUATE TO MAKE THE
INTERIM FINANCIAL STATEMENTS PRESENTED NOT MISLEADING, IT IS SUGGESTED THAT
THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JULY
31, 1997.
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, 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 December
1, 1997, the Company has enrolled approximately 4,200 members. The net loss
for the first quarter of fiscal 1998 is consistent with management's
expectations with respect to the costs associated with the related start-up and
development costs of an HMO.
GENERAL FINANCIAL INFORMATION.
QUARTER ENDED OCTOBER 31
1996 1997
---------- ----------
Total Revenue $1,361,507 $1,553,965
Net loss (79,676) (923,380)
Net loss per common share (.03) (.39)
Total Assets 7,557,614 6,156,012
Long term obligations 77,342 100,435
7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Results of Operations.
- ----------------------
Quarter ended October 31, 1997 compared to quarter ended October 31, 1996
Total revenues increased by approximately $192,000 from $1,362,000 for
the quarter ended October 31, 1996 to $1,554,000 for the quarter ended October
31, 1997. This increase is attributable to $475,000 of revenues generated by the
Company's HMO, which commenced operations in the fourth quarter of fiscal 1997,
coupled with a decline in primary care center operations of $271,000 and lower
interest income of approximately $11,000. The decrease in revenues from primary
care center operations is the result of a $13,000 decline in fee-for-service
revenue, a $29,000 decrease in prepaid health clinic revenue, a decrease in HCFA
revenue of $136,000 and a decrease in capitation revenue of $85,000. Prepaid
health clinic revenue decreased as SHP was required to phase out this product as
a result of 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 a smaller base of Medicare beneficiaries, coupled with a
lower anticipated reimbursement rate for the quarter ended October 31, 1997 when
compared to the quarter ended October 31, 1996. Amendments to the Social
Security Act, effective January 1, 1996, 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. The
decrease in capitation revenues for the quarter was a result of approximately
$76,000 in retroactive capitation and bonus payments received in the first
quarter of 1996 which had not previously been recognized, coupled with a catch
up in establishing an accrual for estimated bonus payments.
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 realized $475,000 in HMO premium
revenues for the quarter ended October 31, 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 primary care center operations as a percentage of primary
care center revenues increased from 66% for the quarter ended October 31, 1996
to 71% for the quarter ended October 31, 1997. This increase is attributable to
a decline in revenues that was not offset by a corresponding decline in center
related costs. As the costs to operate the Company's primary care centers are
relatively fixed, the decline in revenues decreased the operating margins for
the quarter ended October 31, 1997. Accrued HMO medical costs related to the
Company's HMO products were $548,000 for the quarter. These costs were directly
attributable to the Company establishing reserves for its membership in its new
HMO products. Total medical payments for all service dates totaled
approximately $150,000 for the quarter. 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.
Selling, general and administrative expenses increased by $567,000 or
95% from $598,000 for the quarter ended October 31, 1996 to $1,165,000 for the
quarter ended October 31, 1997. The increase is primarily the result of an
increase in salaries and related benefits of approximately $227,000, an increase
in professional and outsourcing fees of $142,000, commission expense related to
the HMO product of $65,000, increased advertising expenses of $73,000, an
increase in occupancy, insurance, general office and related costs of
approximately $12,000 and an increase in printing and postage related to HMO
operations of approximately $37,000. 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.
As a result of the foregoing, the net loss increased to $(923,000) for
the quarter ended October 31, 1997 compared to $(80,000) for the quarter ended
October 31, 1996.
8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Financial Condition, Liquidity and Capital Resources.
- -----------------------------------------------------
At October 31, 1997 the Company had working capital of $3,327,000 as
compared to working capital of $5,812,000 at October 31, 1996. The decline in
working capital from fiscal 1997 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 $(246,000) for the quarter
ended October 31, 1997, as compared to net cash used by operating activities of
$(210,000) for the quarter ended October 31, 1996. Offsetting the net loss of
$(923,000) for the quarter ended October 31, 1997 was an increase in the medical
claims payable and reserves for incurred but not reported claims of $401,000 and
additional cash received related to unearned and deferred revenues of
approximately $274,000.
Net cash used in investing activities for the quarter ended October
31, 1997 was approximately $(76,000) as a result of purchases of new capital
items.
As of October 31, 1997, proceeds from the Offering of approximately
$1,542,000 have been used as working capital to finance the HMO development
effort. An additional $330,000 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 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.
9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
During fiscal 1998 and beyond, 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 September 30, 1997, SHP's unaudited quarterly
statutory financial statements reflect an actual surplus of $2,951,000. 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 SHP 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 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.
10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on form 8-K
(a) Exhibits:
NONE
(b) Reports on form 8-K:
NONE
11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNSTAR HEALTHCARE, INC.
Date: /s/
----------------------------- -----------------------------
Jack Shields
Vice President and
Chief Financial Officer
SUNSTAR HEALTHCARE, INC.
Date: /s/
----------------------------- -----------------------------
David Jesse
Executive Vice President and
Chief Operating Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR OCTOBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 4,195
<SECURITIES> 0
<RECEIVABLES> 275
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 4,908
<PP&E> 1,800
<DEPRECIATION> 1,370
<TOTAL-ASSETS> 6,156
<CURRENT-LIABILITIES> 1,581
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 4,472
<TOTAL-LIABILITY-AND-EQUITY> 6,156
<SALES> 0
<TOTAL-REVENUES> 1,554
<CGS> 0
<TOTAL-COSTS> 2,441
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (923)
<INCOME-TAX> 0
<INCOME-CONTINUING> (923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
