<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, 1998
-------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from __________ to __________.
Commission file number 1-14382
-------------------------
SUNSTAR HEALTHCARE, INC.
(Name of small business issuer in its charter)
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
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 _____
-----
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. [X]
State issuer's revenues for its most recent fiscal year $9,079,072
---------
The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on October 30, 1998, was $6,649,613 (based on the
---------
average closing bid and asked prices of the Registrant's Common Stock on October
30, 1998 of $3.50 and $4.00 respectively).
----
As of October 30, 1998, 2,919,330 shares of the Registrant's Common Stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1998 Annual Meeting are
incorporated by reference in Part III. The Company's Proxy Statement will be
filed within 120 days after July 31, 1998.
Transitional Small Business Disclosure Format (check one): YES ___ NO X
---
________________________________________________________________________________
<PAGE>
PART I
ITEM 1. BUSINESS
Sunstar Healthcare, Inc. ("SunStar" or the "Company") was incorporated
under the laws of the State of Delaware in December 1995 by National Home Health
Care Corp. ("NHHC"), a publicly-held Delaware corporation. In January 1996,
NHHC, then the sole shareholder of the Company, contributed to SunStar all of
the outstanding capital stock of its wholly owned subsidiaries First Health,
Inc. ("First Health") and Brevard Medical Center, Inc. ("Brevard"), which
included all of the outstanding capital stock of Brevard's wholly owned
subsidiary, SunStar Health Plan, Inc. ("SHP") (formerly known as Boro Medical
Corp.). Subsequently, the Company restructured its subsidiaries such that
Brevard, First Health and SHP all became direct, wholly-owned subsidiaries of
SunStar. Except where the context otherwise indicates, the Company, First
Health, Brevard and SHP collectively are referred to herein as "SunStar" or as
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.
On July 16, 1998, the Company completed a Private Placement (the "Private
Placement") under Rule 506 of Regulation D pursuant to which the Company sold
474,330 shares of previously unissued Common Stock. The Private Placement
resulted in net proceeds to the Company of $1,355,251.
The Company is a managed healthcare company whose wholly owned subsidiary,
SHP, provides comprehensive healthcare benefits to individuals, families and
small and large employer groups in its service areas through its health
maintenance organization ("HMO") contracts. As originally organized, the Company
also operated seven outpatient primary care medical centers (the "Medical
Centers") located in central Florida. On April 15, 1998, the Company sold
substantially all of the assets of the Medical Centers, pursuant to an Asset
Purchase Agreement ("Asset Purchase Agreement"), thereby completing the
Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of the Medical Centers has permitted the Company to focus its
full attention and resources on the rapid expansion of SHP.
On February 24, 1997, SHP was awarded an HMO Certificate of Authority by
the Department of Insurance in the State of Florida ("DOI") and began accepting
its first HMO members effective May 1, 1997. Commencing from an initial service
area of a single county in eastern central Florida, SunStar has subsequently
received eight approvals from the Florida Agency for Healthcare Administration
("AHCA") to expand its service territory to 52 counties in central, northern,
southwestern and southeastern Florida, including the metropolitan areas of
Tampa, Orlando, Jacksonville, Sarasota, Naples, Fort Meyers, Miami, Fort
Lauderdale and Palm Beach. During the next twelve months, the Company intends to
expand its HMO target markets with the intention of providing HMO products
statewide. On January 13, 1998, SunStar filed an application to become a
contracting party with the Healthcare Financing Administration ("HCFA") to
provide HMO health service benefits to Medicare beneficiaries residing in
Florida.
The Company's HMO products provide comprehensive healthcare 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 in addition to the
basic enrollee premium. These co-payments are made directly to the provider of
services by the member. 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
member's primary care physician.
1
<PAGE>
As of November 1, 1998 the Company served approximately 55,000 enrolled
plan members in 52 counties. The Company has established a growing distribution
network of more than 5,500 brokers and 100 general agencies to market its HMO
products. The Company has also established a comprehensive delivery system of
contractual providers numbering approximately 15,000 physicians and 125
hospitals. The Company outsources all billing, enrollment and claims processing
functions through a third party administrator which provides a dedicated SunStar
team with whom the Company maintains close contact for coordination and control.
The Company's objective is to continue to establish relationships with
qualified physicians, hospitals and other healthcare providers who are willing
to provide quality 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 healthcare products to attract individuals
and employer groups willing to enroll in the Company's HMO. The Company has
focused initially on enrolling medically underwritten individuals in central and
northern Florida. Currently, the Company is entering the small group and large
group markets with a suite of tailored products and is in the process of
extending and improving upon its service area throughout the State of Florida.
Upon obtaining HCFA approval, the Company will also expand its HMO product
offerings to the Medicare market.
The Company's strategy and preliminary and future expansion plans may be
subject to change as a result of numerous factors, including the Company's
ability to raise capital, progress or delays in the Company's expansion efforts,
changes in market conditions, competitive conditions and new or different
opportunities which may become available to the Company in the future.
HCFA AGREEMENT.
SHP also has a prepaid cost reimbursement contract with HCFA, pursuant to
which the Company provides prescribed primary healthcare services to Medicare
beneficiaries who enrolled directly with the Company prior to January 1, 1996.
Pursuant to the Asset Purchase Agreement, the Company has agreed to transfer the
existing HCFA contract held by SHP to the buyer subject to HCFA approval, thus,
related HCFA revenues and program costs have been reported in discontinued
operations.
The Company currently provides medical services pursuant to the HCFA
agreement to approximately 2,000 Medicare enrollees through Brevard Medical
Care, Inc. ("BMC"). Medicare enrollees pay a nominal annual enrollment fee
without monthly premiums, deductibles or copayments for primary care services.
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 estimated 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. The Company's 1996 HCFA cost report was recently audited and no
material adjustments were made.
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. HCFA has notified the Company that the
existing contract under Section 1833 of 42 Code of Federal Regulations will not
be renewed after December 31, 1998 as a result of the Company obtaining its HMO
license. However, the Company has applied for a cost contract under Section 1876
of 42 Code of Federal Regulations in order to continue to service the 2,000
enrollees in Brevard County. There can be no assurance that such application
will be approved.
2
<PAGE>
PREPAID HEALTH CLINIC.
The Company also provided medical services to subscribers pursuant to a
prepaid health clinic license issued by the DOI. This license permitted the
Company to provide certain primary healthcare coverage to individuals for a
fixed monthly premium. As a condition of the Company receiving its license to
operate as an HMO, the Company no longer offers its prepaid health clinic
product effective September 1, 1997.
COMPETITION.
The managed healthcare industry is very competitive and has experienced
significant changes in recent years, primarily due to rising healthcare costs.
Employer groups have demanded a variety of healthcare 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 competes with providers of all of these products, including United
Healthcare of Florida, Inc., Humana Medical Plan, Inc., Prudential Healthcare,
Inc., Health Options, Inc. and CIGNA Healthcare of Florida, Inc., most of which
have substantially greater financial, management, marketing, personnel and other
resources than the Company. Additional competitors may enter the Company's
markets in the future. The Company must respond to various competitive factors
affecting the healthcare industry, including trends relating to demand for
healthcare services, regulatory, economic and political factors, changes in
patient demographics and competitive pricing strategies by HMOs and other
healthcare plans. The Company will face 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 healthcare programs developed.
As a result of these factors, premium pricing has been competitive, which has
contributed to instances in the State of Florida whereby HMOs have experienced
significant operating losses over the past several years. The Company may not be
able to compete successfully in any such market.
INSURANCE.
Although the Company has sold the Medical Centers, the Company could under
certain circumstances become liable for negligent acts performed by employees of
the Medical Centers while such centers were owned and operated by the Company.
While the Company may be indemnified by the buyer of the Medical Centers, or is
otherwise insured, against liability for such acts, the Company could be subject
to potential professional liability claims to the extent that such claims exceed
the limits of any applicable insurance coverage.
As an HMO operator, the Company could become liable for the negligent acts
of physicians and for negligence in recruiting and selecting physicians. The
Company currently maintains managed care professional 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. However, such insurance may
not be sufficient to cover potential claims, and adequate levels of coverage may
not be available in the future at a reasonable cost. A partially or completely
uninsured successful claim against the Company could have a material adverse
effect on the Company's business and financial condition.
The Company insures its malpractice risks on a claims-made basis. The
Company has secured claims-made coverage from August 1, 1997 through April 15,
1998, with retroactive coverage through July 1, 1993. The Company does not
accrue for possible losses attributable to incidents which may have occurred and
not been identified under the Company's incident reporting system because the
amount, if any, is not readily estimable.
The Company also 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 HMO medical costs and insurance recoveries,
if any, are recorded as a reduction of HMO medical costs. Under the excess loss
reinsurance policies, the Company recovers 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.
3
<PAGE>
GOVERNMENT REGULATION.
The healthcare industry is subject to extensive, stringent and frequently
changing federal and state regulation, which is interpreted by regulatory
authorities with broad discretion. The federal government and the State of
Florida have each enacted statutes extensively regulating the activities of HMOs
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 HMOs and their healthcare
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 an HMO 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 healthcare services) is not
permitted under federal regulations.
In Florida, HMOs must also comply with certain other provisions of state
health and insurance laws, including the licensing of salespersons and
maintenance of subscriber grievance procedures, insolvency protection and
minimum statutory financial requirements. Pursuant to Section 641 of the Florida
Insurance Code, SHP is required to maintain a minimum capital surplus in an
amount which is the greater of $500,000 or 10% of total liabilities. Effective
September 30, 1998, the capital surplus requirement increased to an amount which
is the greater of $800,000 or 10% of total liabilities or 1% of annualized
premium. 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 DOI. Pursuant
to the Florida Administrative Code, the DOI may require an HMO to submit a
corrective action plan in the event that net income before taxes over the past
four quarterly reporting periods is less than 2% of total revenue. 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.
The Company believes 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 healthcare reforms, including the
implementation of a government-directed national healthcare system and stringent
healthcare 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 healthcare insurers and other third-party
payors will continue to cover certain medical services or reimburse such
services at current levels. Any significant reduction of healthcare insurance
coverage for medical services could have a material adverse effect on the
Company's business and prospects.
NASDAQ LISTING REQUIREMENTS.
The Company's shares of Common Stock which were registered in the Offering
are traded on the NASDAQ Small-Cap Market. Continued trading of the Common Stock
on the NASDAQ Small-Cap Market is conditioned upon the Company meeting certain
criteria. The National Association of Securities Dealers ("NASD"), which
administers NASDAQ, currently requires, among other things, that for the
continued listing of the Company's Common Stock on the NASDAQ Small-Cap Market,
the Company must have: (a) either $2,000,000 in net tangible assets (total
assets, excluding goodwill, minus total liabilities), $35,000,000 market
capitalization or $500,000 net income (in the last fiscal year or two of the
last three fiscal years); (b) a public float of 500,000 shares having a market
value of at least $1,000,000; (c) a minimum bid price of not less than $1 per
share; (d) two market makers; and (e) at least 300 round lot shareholders
(holders of 100 shares or more).
4
<PAGE>
As of July 31, 1998, the Company was in compliance with these standards, but
there can be no assurances that the Company will continue to meet such
standards. If the Company fails to meet any of these criteria, the Common Stock
could be delisted from trading on the NASDAQ Small-Cap Market, which delisting
could adversely affect the trading market for the Common Stock. In such event,
trading in the Common Stock would be conducted in the over-the-counter market
known as the NASD OTC Electronic Bulletin Board, or the "pink sheets", whereupon
trading in the Company's securities would be subject to the "Penny Stock"
regulations. As a result, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, the Company's Common
Stock.
EMPLOYEES.
The Company currently employs 71 persons, including 3 executive officers, 1
physician and 67 other persons engaged in operations management, administrative
and clerical capacities. None of the Company's employees are represented by a
union or subject to a collective bargaining agreement. The Company believes that
its employee relations are good.
ITEM 2. PROPERTY.
The Company is headquartered in the metropolitan area of Orlando, Florida,
where it leases an aggregate of approximately 9,500 square feet pursuant to a
three year lease. Administrative, marketing, customer support and medical
support services are located in this space. Although the Company believes that
its facilities are adequate for its existing operations, the Company regularly
evaluates the adequacy of these facilities in light of its growth and expansion
plans.
The following table sets forth the location, approximate square footage,
approximate annual rent, use of each location and expiration date of each lease:
<TABLE>
<CAPTION>
APPROX.
APPROX. ANNUAL LEASE
LOCATION SQ. FEET RENT USE EXPIRATION DATE
- --------------- ---------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C>
Heathrow, FL 9,500 $181,000 Executive Office Oct. 31, 2000
Miami, FL 375 $ 7,400 Provider Relations Office Dec. 31, 2000
</TABLE>
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.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
- -------------------
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>
1997 1998
------------------ -----------------
Quarter Ended High Low Quarter Ended High Low
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
October 31, 1996 5.00 3.25 October 31, 1997 5.25 4.00
January 31, 1997 5.875 3.00 January 31, 1998 5.25 2.75
April 30, 1997 7.25 3.75 April 30, 1998 5.25 3.75
July 31, 1997 6.50 3.75 July 31, 1998 5.25 3.63
</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.
- --------
The approximate number of holders of record of the Company's Common Stock
at November 9, 1998 is 87. However, the Company estimates that there were
approximately 1,000 beneficial holders of the Company's Common Stock as of that
date.
Dividends.
- ----------
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.
Sale of Unregistered Securities
- -------------------------------
On July 16, 1998, the Company completed the Private Placement of 474,330
shares of previously unissued Common Stock, at a per share price of $3.375,
resulting in net proceeds to the Company of $1,355,251. The Common Stock issued
in the Private Placement was not registered with the Securities and Exchange
Commission under the Securities Act and was offered and sold solely to
"accredited investors" in reliance on exemptions from registration provided in
Section 4(2) and Section 4(6) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. The Private Placement was not underwritten. The
Company entered into a Placement Agent Agreement with H.J. Meyers & Co., Inc.
(the "Placement Agent") pursuant to which the Placement Agent received 10% of
the aggregate value of the Common Stock issued in the Private Placement and is
being issued 150,000 warrants to purchase 150,000 shares of Common Stock at
$4.00 per share which expire in 4 years. The Placement Agent also received a
non-accountable expense allowance of 3% of the Private Placement proceeds. Under
the terms of the Private Placement, the Company agreed to use its reasonable
best efforts to file and obtain effectiveness of a registration statement under
the Securities Act covering the resale of the shares issued in the Private
Placement no later than 90 days after the closing of the Private Placement. If
the registration statement is not declared effective by the Securities and
Exchange Commission within such 90 day period other than by reason of delay of a
selling shareholder or its counsel or the activity or inactivity of the
Securities and Exchange Commission, then the Company is obligated to pay cash
equal to 1% of the aggregate subscription price of the Private Placement for the
first month of such delay and 2% of such aggregate subscription price for each
month of delay thereafter; provided, however, that in calculating the period of
any delay, there shall be excluded any delays attributable to the failure by a
selling shareholder to review the registration statement in a reasonably prompt
manner.
6
<PAGE>
All expenses incurred in any registration of these shares will be paid by the
Company, but the Company will not be liable for any underwriter discounts or
commissions, brokerage fees or stock transfer taxes incurred with respect to the
shares or for the fees and expenses of counsel for any selling shareholder. As
of the date of this report, the Company is awaiting certain information from its
selling shareholders, and upon the receipt of this information, the Company
intends to file a registration statement covering these shares as promptly as
practicable.
Use of Proceeds
- ---------------
On May 15, 1996, the Company completed 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, pursuant to which the Company sold 195,000 shares of Common Stock,
resulting in additional net proceeds to the Company of $853,125. The Company
filed Forms SR, "Report of Sales of Securities and Use of Proceeds Therefrom,"
on August 27, 1996, February 24, 1997 and August 23, 1997. As of July 31, 1998,
proceeds from the Offering of approximately $2,571,000 have been directly
invested in SHP and $2,207,000 has been used as working capital to finance the
HMO development effort. An additional $452,000 of the Offering proceeds has been
used to purchase furniture and equipment.
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 DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF
JULY 31, 1998 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE YEARS ENDED JULY
31, 1997 AND 1998 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 by the DOI. 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 the Company believed were under-served by its managed
healthcare competitors. Thus, SHP has rapidly expanded and been approved by
AHCA to offer its HMO products in 52 counties in central, northern, southwestern
and southeastern Florida, including the metropolitan areas of Tampa, Orlando,
Jacksonville, Sarasota, Naples, Fort Meyers, Miami, Fort Lauderdale and Palm
Beach. 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
entire State of Florida over the next twelve months.
7
<PAGE>
As of November 1, 1998, the Company provides coverage to approximately 55,000
members in its current service areas. The Company has established a growing
distribution network of more than 5,500 brokers and 100 general agencies to
market its HMO products. The Company has also established a comprehensive
delivery system of contractual providers numbering approximately 15,000
physicians and 125 hospitals. The net losses for fiscal 1998 and 1997 are
consistent with management's expectations with respect to the costs associated
with the attainment of SHP's HMO license and the related start-up, development
and expansion costs of an HMO.
As originally organized, the Company also provided managed healthcare
services pursuant to contractual arrangements, as well as on a fee-for-service
basis, through its seven primary care Medical Centers in central Florida. On
April 15, 1998, the Company sold substantially all the assets of the Medical
Centers and agreed to assign the existing HCFA contract held by SHP upon
approval by HCFA pursuant to the Asset Purchase Agreement, thereby completing
the Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of its Medical Centers has permitted it to focus its full
attention and resources on the rapid expansion of SHP.
Since accepting its first HMO members in May, 1997, the Company's initial
focus has been on the marketing and sale of its HMO product in the medically
underwritten individual market. The majority of the Company's initial growth
came from the sale of its products in the individual market. The Company's
strategy is to establish a sufficient base of customers for its HMO product in
the individual market within a geographic area, and then to broaden its focus to
the marketing and sale of its HMO products to include the small and large group
markets. The Company has already begun to broaden its focus in several of the
geographic areas in which the Company is currently licensed.
GENERAL FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
1997 1998
------------ ------------
<S> <C> <C>
Total revenues $ 450,048 $ 9,079,072
Loss from continuing operations (1,705,637) (5,389,762)
Discontinued operations 74,472 822,405
Net loss (1,631,165) (4,567,357)
Net loss per common share (.68) (1.85)
Total assets 6,370,849 8,649,518
Long term obligations 108,521 82,939
</TABLE>
Results of Operations.
- ----------------------
Year ended July 31, 1998 ("fiscal 1998") compared to fiscal 1997.
Total revenues increased by approximately $8,629,000 from approximately
$450,000 for fiscal 1997 to approximately $9,079,000 for fiscal 1998. This
increase is attributable to an $8,745,000 increase in revenues generated by the
Company's HMO, which commenced operations in the fourth quarter of fiscal 1997,
coupled with a decline in other revenues of $99,000 and lower interest income of
approximately $17,000.
As a result of the Company obtaining an HMO Certificate of Authority on
February 24, 1997 and commencing the enrollment of its members effective May 1,
1997, the Company realized approximately $8,845,000 and $100,000 in HMO premium
revenues in fiscal 1998 and fiscal 1997, respectively. This HMO premium revenue
increase is consistent with enrolled membership growth to 22,282 at July 31,
1998 from 643 at July 31, 1997. The Company anticipates that HMO premium
revenues will continue to rapidly increase over the next twelve month period as
the Company will further implement its accelerated growth plan.
8
<PAGE>
However, there can be no assurance that such growth will occur as rapidly as the
Company expects.
Other revenues declined as SHP was required to phase out its prepaid health
clinic product as a result of receiving its license to operate as an HMO.
Effective September 1, 1997, SHP no longer offered its prepaid health clinic
product.
HMO medical costs were approximately $7,076,000 for the year ended July 31,
1998, resulting in a medical loss ratio of approximately 80%. HMO medical costs
include amounts accrued for actual claims reported but not paid and estimates of
medical services incurred but not reported. Total medical payments for all dates
of service were approximately $3,463,000, including net reinsurance premiums
paid, in fiscal 1998. The Company incurred HMO medical costs of approximately
$135,000 in fiscal 1997 or a medical loss ratio of approximately 136%. This
reduction of HMO medical costs as a percentage of HMO revenues was directly
attributable to the Company establishing reserves for its small membership in
its new HMO products.
Selling, general and administrative expenses increased by approximately
$5,298,000 from approximately $1,997,000 for fiscal 1997 to approximately
$7,295,000 for fiscal 1998, or 80% of total revenues for the current fiscal
year. The increase is primarily the result of an increase in sales and marketing
salaries, benefits and commission expense related to the HMO products of
approximately $1,442,000, increased advertising expenses of approximately
$1,047,000, an increase in professional and outsourcing fees of approximately
$1,093,000, additional administrative salaries and related benefits of
approximately $891,000, an increase in printing, postage and other selling costs
related to HMO operations of approximately $472,000, an increase in occupancy,
insurance, general office and related costs of approximately $221,000, and an
increase of approximately $132,000 in other general and administrative expenses
including costs related to HMO enrollee medical records, benefit statements and
other miscellaneous office expenses. These additional 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.
The Company expects selling, general and administrative expenses as a percentage
of revenues to decrease substantially as HMO membership and premium revenues
grow. However, there can be no assurance that such membership and revenue growth
or a decline in selling, general and administrative expenses as a percentage of
revenues will occur as the Company anticipates.
As a result of the foregoing, the net loss from continuing operations
increased to approximately $5,390,000 for fiscal 1998 compared to approximately
$1,706,000 for fiscal 1997.
Income from discontinued operations increased by $80,000 from $74,000 for
fiscal 1997 to approximately $154,000 for the current year. This increase is
primarily due to a decline in costs of patient related services from 73% of
primary care center revenues for the year ended July 31, 1997 to 72% for the
year ended July 31, 1998 and a decline in selling, general and administrative
expenses as a percentage of primary care center revenues from 25% for fiscal
1997 to 24% for fiscal 1998. Substantially all of the assets of the primary care
Medical Centers were sold on April 15, 1998 for $1,500,000 in cash resulting in
the recognition of a gain on the sale of discontinued operations of
approximately $668,000.
Financial Condition, Liquidity and Capital Resources.
- -----------------------------------------------------
At July 31, 1998, the Company had working capital of approximately
$1,831,000 as compared to working capital of approximately $4,225,000 at July
31, 1997. 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 and the Company's expansion of its initial service area.
Net cash used by operating activities was approximately $46,000 for fiscal
1998 and approximately $1,226,000 for fiscal 1997. Net cash used by operating
activities in the current year was primarily attributable to the loss from
continuing operations of approximately $5,390,000, offset by an increase in the
medical claims payable and reserves for incurred but not reported claims of
approximately $3,689,000, additional cash received related to unearned and
deferred revenues of approximately $1,578,000 and noncash compensation expenses
of approximately $65,000.
9
<PAGE>
Net cash provided by investing activities for fiscal 1998 was approximately
$1,540,000 as a result of proceeds from the sale of discontinued operations and
a restricted certificate of deposit of $1,500,000 and $280,000, respectively,
offset by purchases of new capital items of approximately $242,000. Net cash
used in investing activities for fiscal 1997 was approximately $180,000,
primarily as a result of purchases of furniture and equipment associated with
the development of the Company's new administrative offices and replacement of
medical office equipment.
Net cash provided by financing activities for the year ended July 31, 1998
was approximately $1,328,000 as compared to net cash used in financing
activities of approximately $62,000 for the year ended July 31, 1997. Cash
provided by financing activities during fiscal 1998 primarily represents net
proceeds of approximately $1,355,000 from the Private Placement and $12,500 from
the exercise of common stock options, offset slightly by principal payments
under capital lease obligations of approximately $40,000. Cash used in financing
activities in fiscal 1997 related to principal payments under capital lease
obligations of approximately $32,000 and an adjustment of approximately $30,000
to the Offering proceeds.
The Company has reviewed the Year 2000 problem as it relates to the
Company's internal systems as well as those of its vendors and determined that
it will not have a material impact on its business, operations nor its financial
condition. Nevertheless, the Company's rapid expansion has resulted in an
increasing number of entities with which the Company does business. While the
Company believes that the Year 2000 issue will not have a material impact on the
Company's internal operations or those of its current vendors, there can be no
guarantee that the systems of other unrelated entities on which its systems and
operations rely, or on which its systems and operations may rely in the future,
will be corrected on a timely basis and will not have a material adverse impact
on the Company.
During the next fiscal year, the Company's liquidity will be affected by
continued accelerated HMO development, marketing and operation. Effective
September 30, 1998, SHP is required to maintain a minimum capital surplus in an
amount which is the greater of $800,000 or 10% of total liabilities or 1% of
annualized premium pursuant to Section 641 of the Florida Insurance Code.
At September 30, 1998, SHP's unaudited statutory financial statements reflect an
actual surplus of $1,099,000. 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 1999 to
further establish arrangements with physicians, hospitals, and other healthcare
providers as well as to 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). In
order to support the significant growth of the Company's HMO operations,
additional marketing, development and other personnel were hired throughout
fiscal 1998 to augment the Company's efforts to support and manage this growth.
Expenditures for such employees' salaries and related benefits will continue to
be incurred in the future and may increase as additional personnel are needed to
support further HMO membership growth. In addition, the Company anticipates that
it will make additional capital expenditures associated with, among other
things, furniture and equipment necessary due to personnel increases. There can
be no assurance that the foregoing factors will not adversely affect the
Company's future operating results.
The Company conducted the Offering in May 1996 and the Private Placement
offering in July 1998 to provide funds for its growth and expansion plans. The
net proceeds from such offerings, approximating $7,400,000, have been used to
implement such expansion. The Company anticipates, based on currently proposed
plans and assumptions relating to its operations (including the costs associated
with its accelerated expansion), that additional offering proceeds will be
needed to fund ongoing business operations and to satisfy its net tangible asset
requirements as governed by the Nasdaq Small-Cap Market and other equity
requirements as governed by certain regulatory entities including, without
limitation, the Florida Department of Insurance, AHCA and HCFA. Management's
plans include consideration of the sale of additional equity securities under
appropriate market conditions, alliances or other partnership agreements with
entities interested in and resources to support the Company's expansion plans,
or other business transactions which would generate sufficient resources to
assure continuation of the Company's operations.
10
<PAGE>
The Company has retained investment banking advisors and independent
consultants to counsel it on the possible sale of equity securities as well as
to introduce and assist in the evaluation of potential merger and partnering
opportunities. However, no assurance can be given that the Company will be
successful in raising additional capital or entering into a business alliance.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into a business alliance, that the Company will
achieve profitability. If the Company is unable to obtain adequate additional
financing or enter into such business alliance, it will not be able to meet
ongoing business operation needs. 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 existing stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Filed as part of this report are audited financial statements for the years
ended July 31, 1998 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 the
Company's 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.
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.
11
<PAGE>
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, 1998. 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, 1998. 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, 1998. 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, 1998. Such information is hereby incorporated
by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Filed as part of this 10-KSB annual report are audited financial statements
for the years ended July 31, 1998 and 1997.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended July 31, 1998.
12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
July 31, 1998
(With Independent Auditors' Report Thereon)
1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
July 31, 1998
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheet at July 31, 1998 F-2
Consolidated Statements of Operations for the years ended July 31, 1997 and 1998 F-3
Consolidated Statement of Changes in Shareholders' Equity for the years
ended July 31, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended July 31, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - 21
</TABLE>
2
<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, 1998, 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, 1998.
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. and Subsidiaries as of July 31, 1998, and the results of its operations and
its cash flows for each of the years in the two-year period ended July 31, 1998,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 8(e) to the
financial statements, the Company has experienced significant operating losses
and is seeking additional financing to meet its regulatory surplus and working
capital requirements and to fund additional expansion efforts. If the additional
financing is not obtained and the Company fails to meet these regulatory and
capital requirements, there is substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 8(e). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Jacksonville, Florida
September 18, 1998
F-1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
July 31, 1998
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets:
Cash and cash equivalents $ 7,347,784
Premiums receivable 16,094
Prepaid expenses 353,170
Other current assets (note 1(a)) 379,960
Deferred taxes (note 6) 53,000
-------------
Total current asset 8,150,008
Furniture and equipment, net (note 4) 362,483
Deposits and other assets 90,027
Deferred taxes (note 6) 47,000
-------------
Total assets $ 8,649,518
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Medical claims payable $ 3,782,716
Unearned premium - HMO 1,540,209
Unearned premium - Medicare 97,452
Accounts payable and accrued expenses 763,087
Estimated Medicare settlement 103,175
Capital lease obligations, current (note 5) 32,806
-------------
Total current liabilities 6,319,445
Capital lease obligations, noncurrent (note 5) 82,939
-------------
Total liabilities 6,402,384
-------------
Shareholders' equity (notes 1(h) and 8):
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, 2,445,000 shares issued and outstanding 2,445
Common stock subscriptions received, par value
$.001 per share, 474,330 shares 474
Additional paid-in capital 8,531,027
Unearned compensation from stock options (65,105)
Accumulated deficit (6,221,707)
-------------
Total shareholders' equity 2,247,134
-------------
Commitments and contingencies (note 8)
Total liabilities and shareholders' equity $ 8,649,518
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended July 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenues:
HMO premiums $ 99,529 8,844,775
Investment income 249,407 231,743
Other 101,112 2,554
---------- ----------
Total revenues 450,048 9,079,072
---------- ----------
Operating expenses:
HMO medical costs 135,211 7,076,054
Selling, general and administrative (notes 1(a) and 3) 1,997,042 7,295,065
Option based compensation (note 8(c)) 65,104 65,104
Amortization of intangibles 9,328 32,611
---------- ----------
Total operating expenses 2,206,685 14,468,834
---------- ----------
Loss before income taxes (1,756,637) (5,389,762)
Provision for income taxes (note 6) (51,000) -
---------- ----------
Loss from continuing operations (1,705,637) (5,389,762)
Discontinued operations (note 2):
Income from discontinued operations 74,472 154,472
Gain on sale of discontinued operations - 667,933
---------- ----------
Total discontinued operations 74,472 822,405
---------- ----------
Net loss $ (1,631,165) (4,567,357)
========== ==========
Earnings per share (note 1(j))
Loss from continuing operations $ (.71) (2.18)
Discontinued operations $ .03 .33
Net loss $ (.68) (1.85)
Weighted average shares outstanding 2,395,000 2,467,959
</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, 1997 and 1998
<TABLE>
<CAPTION>
Unearned
Compensation
Additional From
Common Paid-in Stock Accumulated
Stock Capital Options Deficit Total
-------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
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(h)) - (30,052) - - (30,052)
Amortization of compensatory
stock options (note 8 (c)) - - 65,104 - 65,104
--------- --------- -------- --------- ----------
Balance, July 31, 1997 2,395 7,163,800 (130,209) (1,654,350) 5,381,636
Net loss - - - (4,567,357) (4,567,357)
Stock options exercised (note 1(h)) 50 12,450 - - 12,500
Amortization of compensatory
stock options (note 8 (c)) - - 65,104 - 65,104
--------- --------- -------- --------- ----------
2,445 7,176,250 (65,105) (6,221,707) 891,883
Common stock subscriptions
received (note 1(h)) 474 1,354,777 - - 1,355,251
--------- --------- -------- --------- ----------
Balance, July 31, 1998 $ 2,919 8,531,027 (65,105) (6,221,707) 2,247,134
========= ========= ======== ========== ==========
</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, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,631,165) $(4,567,357)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 163,543 159,955
Provision for doubtful accounts 15,000 -
Deferred taxes (37,400) -
Noncash compensation 65,104 65,104
Gain on sale of discontinued operations - (667,933)
Gain on the sale of furniture and equipment (3,473) (1,224)
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable 4,871 (51,999)
Increase in prepaid expenses (131,546) (197,504)
Increase in other current assets (82,554) (216,388)
Decrease in deposits and other assets 17,318 33,143
Decrease in due from Medicare 38,448 -
Increase in medical claims payable 93,858 3,688,857
Increase in unearned premium - HMO 59,213 1,480,995
(Decrease) increase in unearned premium - Medicare (159,521) 97,452
Increase in accounts payable and accrued expenses 230,826 159,093
Increase (decrease) in estimated settlement - Medicare 131,035 (27,860)
----------- ----------
Net cash used in operating activities (1,226,443) (45,666)
----------- ----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations - 1,500,000
Purchase of furniture and equipment (183,221) (241,585)
Proceeds from sale of furniture and equipment 3,473 1,345
Proceeds from sale of restricted certificate of deposit - 280,000
----------- ----------
Net cash (used in) provided by investing activities (179,748) 1,539,760
----------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligations (31,689) (39,738)
Additional initial public offering expenses (30,052) -
Common stock subscribed - 1,355,251
Exercise of common stock options - 12,500
----------- ----------
Net cash (used in) provided by financing activities (61,741) 1,328,013
----------- ----------
Net (decrease) increase in cash and cash equivalents (1,467,932) 2,822,107
Cash and cash equivalents, beginning of period 5,993,609 4,525,677
----------- ----------
Cash and cash equivalents, end of period $ 4,525,677 7,347,784
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,447 18,585
=========== ==========
</TABLE>
Noncash investing and financing activities (notes 1(h), 5 and 8)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1998
(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
in note 1(h)) 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). Subsequent thereto, the Company restructured its subsidiaries
such that Brevard, First Health, and SHP all became direct, wholly-owned
subsidiaries of SunStar.
SunStar is engaged in providing managed healthcare services in the State
of Florida by operating a health maintenance organization (HMO) through
SHP. As originally organized, the Company also operated seven primary
care medical centers through Brevard and First Health. On April 15, 1998,
the Company sold substantially all the assets of Brevard and First
Health, thereby completing its transformation from a "provider" of
medical services through its primary care medical centers to a "payor"
for medical services by establishing and operating a statewide HMO.
Throughout fiscal 1997, SunStar's management was active in developing and
obtaining certification for its 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 accordance with the provisions of
Chapter 641, Florida Statutes. Effective May 1, 1997, the Company began
accepting its first HMO members. Through October 1, 1998, the Company
has been approved to operate its HMO in 52 counties in the State of
Florida and has accepted members in all of those counties. 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 consolidated financial statements.
The Company has entered into a service agreement with a third party
administrator (TPA) for enrollment and underwriting administration,
claims processing, payment of agent's commissions and premium billing and
collection. Service fees charged to operations under such contract were
$16,078 and $904,141 for the years ended July 31, 1997 and 1998,
respectively. At July 31, 1998, the Company has a receivable of
approximately $289,000 for premiums and collections due from the TPA
which is included in other current assets.
F-6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(b) Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). These
financial statements include the accounts of SunStar, SHP, Brevard and
First Health. All significant intercompany transactions and balances
have been eliminated in consolidation.
As discussed in note 2, effective April 15, 1998, the Company sold
substantially all the assets of Brevard and First Health pursuant to a
single Asset Purchase Agreement. Accordingly, the results of operations
for Brevard and First Health for all periods presented are reported in
the accompanying consolidated statements of operations under discontinued
operations. Pursuant to the Asset Purchase Agreement, the Company has
agreed to assign the existing Health Care Financing Administration (HCFA)
contract held by SHP to the buyer subject to HCFA approval, thus, related
HCFA revenues and program costs have also been included in discontinued
operations in the accompanying consolidated statements of operations for
all periods presented.
(c) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less.
(d) Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost and depreciated over estimated
useful lives of three to ten years on a straight-line basis.
(e) Medical Claims Payable
----------------------
Medical claims payable consist of actual claims reported but not paid and
estimates of medical services incurred but not reported. The medical
claims payable is based on historical data, current enrollment, health
service utilization statistics, premium revenues and other related
information. These accruals are continually monitored and reviewed.
Modification in assumptions for medical costs caused by variances in
actual experience could cause these estimates to change.
F-7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(f) Revenue Recognition
-------------------
Premium revenue under the Company's HMO is recognized as earned on a pro
rata basis over the contract period. 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. As discussed in note 1(b), the Company has agreed to
assign the reimbursement contract to the buyer subject to HCFA approval.
Accordingly, related revenues and program costs have been reflected in
discontinued operations in the accompanying consolidated financial
statements.
(g) Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
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 liabilities for medical claims payable and temporary differences
between the tax and financial statement recognition of option based
compensation expense.
(h) Equity Transactions
-------------------
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 30.8% interest. All
share amounts have been retroactively adjusted for all periods presented.
F-8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(h) Equity Transactions, 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. In November 1997, a consultant
exercised stock options to purchase 50,000 shares of common stock at $.25
per share.
On July 16, 1998, the Company completed a Regulation D, Rule 506, Private
Placement (the Private Placement) pursuant to which the Company sold
474,330 shares of previously unissued common stock, par value $.001,
resulting in net proceeds to the Company of $1,355,251. Common stock
sold pursuant to the private placement was issued on August 31, 1998.
Under the terms of the Private Placement, the Company has agreed to
effect the registration and sale of the 474,330 shares issued on behalf
of the Private Placement shareholders within 90 days of the Private
Placement, subject to extensions for various causes. The Company intends
to complete the registration required under the Private Placement as soon
as practical following the filing of its form 10-KSB for the year ended
July 31, 1998.
(i) Accounting for Stock-Based Compensation
---------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (SFAS 123). SFAS 123 requires the fair value of
stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement, or
be disclosed as a pro forma effect on net income and earnings per share
in the footnotes to the Company's consolidated financial statements. The
Company has elected to adopt SFAS 123 on a disclosure basis only and will
continue to measure 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.
F-9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(j) Per Share Data
--------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," during the quarter ended January 31, 1998 and,
accordingly, has restated all prior periods to conform with the
applicable provisions. Common stock options are not included in the
computation of diluted earnings per share as their effect is antidilutive
due to the Company's net losses attributable to common shares.
(k) Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS 130) and Statement of Financial Accounting Standards No.
131 "Disclosure about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 130 requires all items that meet the definition of
components of comprehensive income be reported in the consolidated
financial statements for the period in which they are recognized and is
effective for fiscal years beginning after December 15, 1997. SFAS 131
provides for the disclosure of financial information desegregated by the
way management organizes the segments of the enterprise for making
operating decisions and is effective for fiscal years beginning after
December 15, 1997. The Company intends to adopt the provisions of SFAS
130 and SFAS 131 during fiscal year 1999 and has not determined the
impact, if any, of the adoption of these pronouncements on the Company's
consolidated financial statement disclosure.
(l) 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 depreciable
assets, valuation reserves for deferred tax assets and liabilities for
incurred but not reported medical claims.
(m) Reclassification
----------------
Certain amounts presented for 1997 have been reclassified to conform with
the presentation adopted for 1998.
F-10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Discontinued Operations
-----------------------
On April 15, 1998, the Company sold substantially all the assets of its
primary care medical centers, Brevard and First Health, pursuant to a single
Asset Purchase Agreement, to Brevard Medical Care, Inc. for $1,500,000.
Pursuant to the Asset Purchase Agreement, the Company has agreed to assign
the existing HCFA contract held by SHP to the buyer subject to HCFA
approval. The assets sold consisted primarily of accounts receivable,
furniture, equipment and leasehold improvements and capital lease
commitments associated with these assets as well as physician and other
payor agreements.
Assets excluded from the sale consist of cash and cash equivalents. The
Company retained substantially all obligations and liabilities which arose
from or in connection with operations prior to the sales transaction, except
for those capital lease commitments previously discussed.
The results of operations for Brevard and First Health and HCFA revenues
and program costs for all periods presented are reported in the accompanying
consolidated statements of operations under discontinued operations.
Information with respect to discontinued operations for the years ended
July 31, 1997 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Revenues $ 4,544,852 3,069,322
Expenses 4,470,380 2,914,850
--------- ---------
Income from discontinued operations $ 74,472 154,472
========= =========
</TABLE>
The Company will utilize previously generated net operating loss
carryforwards to offset the tax effect of the sale and, as such, has not
recognized any tax expense or benefits resulting from the sale.
F-11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Related Party Transaction
-------------------------
SunStar is engaged in providing managed healthcare services by operating an
HMO through SHP. The Company has entered into a management contract with SHP
for the provision of administrative and marketing services. Management fees
charged to SHP under such contract were $16,078 and $1,325,660 for the years
ended July 31, 1997 and 1998, respectively. As discussed in note 1(a), costs
associated with the development of the Company's HMO, including management
salaries and benefits, administrative and other indirect costs have been
reflected as selling, general and administrative expense in the accompanying
consolidated financial statements.
(4) Furniture and Equipment
-----------------------
Furniture and equipment at July 31, 1998 consist of the following:
Furniture and equipment $ 469,049
Less accumulated depreciation (106,566)
--------
Net furniture and equipment $ 362,483
=======
The net book value of furniture and equipment held under capital leases was
approximately $122,000 at July 31, 1998. Depreciation expense includes
depreciation on assets held under capital leases.
(5) Capital Lease Obligations
-------------------------
Future minimum lease payments under capitalized lease obligations at July
31, 1998, were as follows:
<TABLE>
<CAPTION>
Year ended July 31 Amount
------------------ ------
<S> <C>
1999 $ 43,613
2000 45,986
2001 34,393
2002 12,245
2003 2,766
-------
Total minimum lease payments 139,003
Less amounts representing interest (23,258)
Less amounts due within one year (32,806)
-------
Amounts due after one year $ 82,939
=======
</TABLE>
F-12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Capital Lease Obligations, continued
------------------------------------
During 1998, the Company acquired equipment under capital leases for $91,660
of which $29,182 was sold pursuant to the sale of the assets of Brevard and
First Health as discussed in note 2.
(6) Income Taxes
------------
The provision for income taxes for the years ended July 31, 1997 and 1998
consists of:
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
Current:
Federal $(13,600) -
State - -
(13,600) -
Deferred tax benefit (37,400) -
------- -------
Total $(51,000) -
======= =======
</TABLE>
Deferred tax assets at July 31, 1998 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforward $ 1,968,800
Medical claims payable 371,300
Stock option amortization 128,400
Estimated Medicare settlement 38,800
----------
2,507,300
Less valuation allowance (2,305,600)
----------
Net deferred tax assets 201,700
----------
Deferred tax liabilities:
HMO startup costs (22,000)
Furniture and equipment (10,200)
Other assets (69,500)
----------
Net deferred tax liabilities (101,700)
----------
Net deferred tax asset $ 100,000
==========
</TABLE>
F-13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Income Taxes, continued
-----------------------
The reconciliation of the statutory tax rate to the effective rate
for the years ended July 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Federal statutory rate $ (571,900) (1,552,900)
State taxes, net of federal tax benefit (70,200) (164,700)
Discontinued operations - 90,000
Change in valuation allowance 625,200 1,600,600
Overaccrual of prior year taxes (13,600) -
Other (20,500) 27,000
---------- ----------
$ (51,000) -
========== ==========
</TABLE>
The difference between the tax provision provided for the year ended July
31, 1998 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 believes that it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize net deferred tax assets resulting from
other temporary differences. NOL carryforwards against future taxable income
were approximately $5,232,000 at July 31, 1998. Such NOLs are scheduled to
expire in years through 2013.
(7) Financial Instruments
---------------------
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of its cash and cash equivalents and premiums and other
receivables. The Company's cash and cash equivalents are concentrated in
liquid investments. Premiums and other receivables are geographically
disbursed through out Central and South Florida.
Financial instruments, such as cash and cash equivalents, are valued
at cost which approximates fair market value.
F-14
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters
--------------------------------------------
(a) Leases
------
The Company rents various office facilities and equipment under terms
of several lease agreements which include escalation clauses.
At July 31, 1998, minimum annual rental commitments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $245,680
2000 227,067
2001 59,396
2002 6,677
2003 5,008
</TABLE>
Rent expense amounted to approximately $389,000 and $322,000
for the years ended July 31, 1997 and 1998, respectively.
(b) Regulatory Requirements
-----------------------
As an HMO licensed in Florida, SHP is required, pursuant to Section 641
of the Florida Insurance Code, to maintain a minimum capital surplus in
an amount which is the greater of $500,000 or 10% of total liabilities
which at July 31, 1998 was approximately $547,000. The Company is in
compliance with this requirement and had an unaudited statutory surplus
of $906,000 at July 31, 1998. Effective September 30, 1998, the capital
surplus requirement will increase to an amount which is the greater of
$800,000 or 10% of total liabilities or 1% of annualized premium.
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.
Pursuant to the Florida Administrative Code, the Department may require
an HMO to submit a corrective action plan in the event that net income
before taxes over the past four quarterly reporting periods is less than
2% of total revenue. SHP's reported, unaudited, quarterly net income has
met the 2% criteria.
F-15
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(c) Stock Option and Warrant Plans
------------------------------
In February 1996, the Board of Directors of SunStar adopted and
SunStar's sole shareholder at that time, NHHC, approved the 1996 Stock
Option Plan (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 terminated, the Plan will expire on February 13, 2006.
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.
F-16
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(c) Stock Option and Warrant Plans, continued
-----------------------------------------
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 May 15, 1996 at $5.00 per share.
During the year ended July 31, 1998, 7,500 of such options were canceled
due to the resignation of a director. Each nonemployee director option
will expire five years from the date of grant.
The Company's granting of options with exercise prices below the market
price of the stock on the grant date resulted in charges to operations of
approximately $65,000 in the years ended July 31, 1997 and 1998,
respectively. Unearned compensation at July 31, 1998 amounts to
approximately $65,000 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.
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, 1997 and 1998: 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 .82,
respectively; and a weighted-average expected life of the option of 5
years.
F-17
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(c) Stock Option and Warrant Plans, continued
-----------------------------------------
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>
1997 1998
----------- -----------
<S> <C> <C>
Pro forma net loss $(1,755,373) (4,704,324)
Pro forma loss per share $ (.73) (1.94)
</TABLE>
The weighted average fair value of options granted during the years ended
July 31, 1997 and 1998 with exercise prices equal to the market price of
the stock on the date of grant was $2.82 and $2.42, respectively.
F-18
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(c) Stock Option and Warrant Plans, continued
-----------------------------------------
A summary of the Company's stock option activity, and related
information for the years ended July 31 follows:
<TABLE>
<CAPTION>
1997 1998
----------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 437,500 $ 1.47 492,500 1.60
Granted 130,000 4.00 12,500 3.50
Exercised - - (50,000) .25
Forfeited/canceled (75,000) 5.00 (37,500) 4.20
------- -------
Outstanding, end of year 492,500 1.60 417,500 1.59
======= =======
Exercisable at end of year 280,833 1.46 313,333 1.55
======= =======
</TABLE>
Exercise prices for options outstanding as of July 31, 1998 ranged from
$0.25 to $5.00. Options exercisable at $0.25 per share totaled 275,000 of
which 212,500 were exercisable at July 31, 1998. Options with exercise
prices ranging from $3.50 to $5.00 totaled 142,500 of which 100,833 were
exercisable at July 31, 1998. The weighted average remaining contractual
life of options exercisable at $0.25 and $3.50 to $5.00 per share was
7.53 and 7.13 years, respectively, at July 31, 1998.
In connection with the Offering, 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-19
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(c) Stock Option and Warrant Plans, continued
-----------------------------------------
In connection with the Private Placement, the Company has granted
warrants to the placement agent to purchase an aggregate of 150,000
shares of common stock at an exercise price equal to $4.00 per share. The
warrants are exercisable on or after July 16, 1998 and expire four years
from that date.
Common stock reserved for future issuance at July 31, 1998 is as follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Options granted under employment and consulting agreements 275,000
Options granted under the Plan 142,500
Reserved for future grants under the Plan 57,500
Warrants granted to underwriters 280,000
-------
755,000
=======
</TABLE>
(d) Professional Liability
----------------------
The Company insures its professional liability risks on a claims-made
basis. The Company has secured claims-made coverage from August 1,
1997 through April 15, 1998, with retroactive coverage through July 1,
1993 to insure for potential professional liability claims by patients
and others as a result of the negligence of physicians that occurred
prior to the divestment of the primary care medical centers. The Company
could become liable for the negligent acts of physicians, as well as
negligence in recruiting and selecting physicians. The Company currently
maintains professional liability insurance with limits of $1,000,000 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 type of medical services provided. 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 management has not identified any such incidents.
F-20
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments, Contingencies and Other Matters, continued
-------------------------------------------------------
(d) Professional Liability, continued
---------------------------------
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 HMO medical costs
and insurance recoveries, if any, are recorded as a reduction of HMO
medical costs. 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.
(e) Liquidity
---------
The Company's consolidated financial statements for the year ended
July 31, 1998 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a
net loss of $1,631,165 and $4,567,357 for the years ended July 31, 1997
and 1998, respectively, and as of July 31, 1998 had an accumulated
deficit of $6,221,707. The Company expects to incur substantial
expenditures to further its HMO development and to expand its current
commercial service area and enter into the Medicare market. The
Company's working capital at July 31, 1998 will not be sufficient to fund
ongoing business operations. Management recognizes that the Company must
generate additional resources to enable it to continue operations.
Management's plans include consideration of the sale of additional equity
securities under appropriate market conditions, alliances or other
partnership agreements with entities interested in and resources to
support the Company's expansion plans, or other business transactions
which would generate sufficient resources to assure continuation of the
Company's operations.
The Company has retained investment banking advisors and independent
consultants to counsel it on the possible sale of equity securities as
well as to introduce and assist in the evaluation of potential merger and
partnering opportunities. However, no assurance can be given that the
Company will be successful in raising additional capital or entering into
a business alliance. Further, there can be no assurance, assuming the
Company successfully raises additional funds or enters into a business
alliance, that the Company will achieve profitability. If the Company is
unable to obtain adequate additional financing or enter into such
business alliance it will not be able to meet ongoing business operation
needs. The consolidated financial statements do not include any
adjustments that may result from the possible inability of the Company to
continue as a going concern.
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, 1998
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:
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<S> <C>
/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 Officer, Director
David A. Jesse
/s/ Jack W. Shields
- -------------------------------------------------- Vice President, Chief Financial Officer
Jack W. Shields (Principal Financial and Accounting Officer)
/s/ Frederick H. Failkow
- -------------------------------------------------- Director
Frederick H. Failkow
/s/ Steven Failkow
- -------------------------------------------------- Director
Steven Failkow
/s/ Bernard Levine, M.D.
- -------------------------------------------------- Director
Bernard Levine, M.D.
/s/ Richard Seidelman, M.D.
- -------------------------------------------------- Director
Richard Seidelman, M.D.
/s/ Howard Silverman
- -------------------------------------------------- Director
Howard Silverman
</TABLE>
<PAGE>
Exhibits required to be filed by Item 601 of Regulation SB are included in
Exhibits to this Report as follows:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
2.1 Asset Purchase Agreement, dated April 15, 1998, between Brevard Medical Care, Inc. and SunStar
Healthcare, Inc.****
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**
10.3 Agreement for Third Party Administrator Services, dated March 7, 1997, between Healthplan Services,
Inc. and SunStar Health Plan, Inc.***
10.4 Lease, dated November 26, 1997 between the Company and Pizzuti*****
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*
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 Exhibit 10.12 to Form 10-KSB for the fiscal year ended July 31, 1997.
**** Filed as same exhibit reference to Form 10-QSB, for the quarterly period ended April 30, 1998.
***** Filed herewith.
</TABLE>
2
<PAGE>
Exhibit 10.4
HEATHROW
300 INTERNATIONAL PARKWAY
- --------------------------------------------------------------------------------
LEASE AGREEMENT
BETWEEN
INTERNTIONAL PARKWAY DEVELOPMENT COMPANY
("LANDLORD")
AND
SUNSTAR HEALTHCARE, INC.
("TENANT")
- --------------------------------------------------------------------------------
<PAGE>
LEASE SUMMARY
- -------------
A. Date of Execution of Lease: November 26, 1997
B. Landlord: International Parkway Development Company
A Florida general partnership
C. Address of Landlord: c/o Pizzuti Management Inc.
Suite 1300
255 South Orange Ave.
Orlando, Florida 32801
D. Tenant: Sunstar Healthcare Inc.
E. Address of Tenant: 300 International Parkway
Suite 230
Heathrow, Florida 32746
F. Building: The four story office building located at 300
International Parkway, Heathrow, Florida
32746; together with the approximately 5.8
acre tract of land on which the building is
located. The Building contains 86,709 square
feet of rentable space.
G. Leasing Premises: That portion of the building outlined on
Exhibit A. The Leased Premises contain 9,059
square feet of rentablespace (6,226 rentable
square feet in Suite 230 and 2,833 rentable
square feet in Suite 100).
H. Permitted use: General office use
I. Lease term: Three years commencing on the Commencement
Date and terminating on the Termination
Date.
J. Commencement Date: November 1, 1997 (see provisions in Exhibit
G concerning the timing of the Tenant's
occupancy of Suite 100).
K. Termination Date: October 31, 2000 ( subject to early
cancellation provisions set forth in Exhibit
G on the lease).
L. Base rent: See the Base Rent schedule attached as
Exhibit b to the Lease.
2
<PAGE>
M. Base expenses: Actual Operating Expenses for 1998 calendar
year.
N. Tenant's Proportionate Share
Of Excess Expenses: 10.45%.
O. Security Deposit: $14,135.81
P. Guarantor: None.
Q. Guarantor's Address: N/A
The following exhibits are attached to and made a part of the Lease:
Exhibit A - Description of Lease Premises
Exhibit B - Base Rent Schedule
Exhibit C - Examples of Operating Expenses
Exhibit D - Heathrow Rules and Regulations
Exhibit E - Landlords Work
Exhibit F - Agency Disclose Statement
Exhibit G - Special Terms
Exhibit H - Radon Notice
THE PROVISIONS OF THIS LEASE SUMMARY ARE INCORPORATED BY THIS REFERENCE INTO THE
LEASE.
LEASE AGREEMENT
- ---------------
Landlord hereby leases the Leased Premises to Tenant for the duration of the
Lease Term. The leasing of the Leased Premises to Tenant will be upon the terms
and conditions set forth in this Lease.
3
<PAGE>
1. Base rent. Tenant will pay Base Rent in the amount set forth in the Base
----------
Rent Schedule attached hereto as Exhibit B.
2. Excess Expense Payments. Tenant will pay its Proportionate Share of the
-----------------------
increase, if any, of the Operating Expenses incurred by Landlord during the
Lease Term over the Base Expenses identified in the Lease Summary ("Excess
Expenses"). Illustrative examples of those expenses which are included within
the definition of "Operating Expenses" are set forth in Exhibit C. Tenant's
Proportionate Share of such Excess Expenses will be paid by Tenant in advance
based upon landlords estimate of the Excess Expenses which will be incurred
during each calendar year during the Lease Term. Landlord will use its best
efforts to notify Tenant by December 1 of each year during the Lease Term of the
amount of the estimated Excess Expense payment which Tenant will be required to
make for each month of the upcoming calendar year.
As soon as reasonably practicable after the end of each calendar year, Landlord
will deliver to Tenant a written statement showing its actual Operating
Expenses for such calendar year and Tenants actual Proportionate Share of the
Excess Expenses, if any. If the sum of the estimated Excess Expense payments
paid by Tenant during such calendar year exceeds Tenants Proportionate Share of
the actual Excess Expense incurred during such year, then, at Landlords
election, Landlord will either refund the excess to Tenant or apply the same
toward the next succeeding monthly estimated Excess Expense payment due from
Tenant. If the sum of the estimated Excess Expense payments paid by Tenant
during such calendar year is less than Tenants Proportionate Share of the
actual Excess Expense incurred during such year, then Tenant will pay the
deficiency to Landlord within ten days after Tenant's receipt of Landlord's
written demand for the payment thereof. If the Lease Term expires on a date
other than December 31, then Tenant's Proportionate Share of the Excess
Expenses for the last calendar year during which the Lease Term is in effect
will be prorated to take into consideration the number of days during such
calendar year in which the Lease Term is in effect.
3. Manner and Timing of Rent Payments. The first monthly installment of Base
----------------------------------
Rent has been paid by Tenant. Hereafter, monthly installments of Base Rent and
estimated Excess Expense payments, if any, will be due and payable in advance on
or before the first day of each calendar month during the Lease Term. Each such
installment will be paid to Landlord at its address set forth in the Lease
Summary (or such other address as Landlord may designate from time to time). If
the Lease Term commences on a day other than the first day of the month or
terminates on a day other than the last day of the month then the installments
of Base Rent and estimated Excess Expense payments such as month(s) will be
adjusted accordingly. If any installment of Base Rent or any Excess Expense
payment is not received by Landlord within ten days after its due date, then a
late payment charge of 5% of such past due amount will be assessed and will be
immediately due and payable from Tenant. All installments of Base Rent and
estimated Excess Expense payments will be paid by Tenant without demand and
without any rights of reduction, counterclaim or offset. Tenant hereby agrees
to pay as additional rent any sales, use or other tax (other than income taxes)
now and hereafter imposed by any governmental authority upon the rent and other
sums payable by Tenant hereunder. The sales tax on Base Rent initially payable
by Tenant is set forth in the Base Rent Schedule attached hereto as Exhibit B.
Landlord will notify Tenant of any change in tax payable by Tenant as additional
rent hereunder.
4
<PAGE>
Landlords acceptance of any payment which constitutes less than all of the
balance then owed to it by Tenant hereunder will be treated as its receipt of
payment "on account" and not as an accord and satisfaction and Landlord may
accept any such payment (regardless of the existence of any endorsement or
statement to the contrary contained on any check or letter accompanying such
payment) without prejudice to Landlord's right to recover the balance of the
amount owed to it or pursue any other remedy provided for in this Lease.
4. Services. Landlord will provide all utility, HVAC and elevator services
---------
which are required for the use of the Leased Premises for general office
purposes during normal business hours (7:00a.m. to 6:00 p.m. Monday through
Friday, and 8:00 a.m. to 1:00 p.m. on Saturday, holidays excepted.)
Notwithstanding the foregoing, Tenant will pay all costs related to the
provision of telephone service to the Leased Premises. If Tenants usage of any
such service is excessive when compared to the normal, anticipated usage of
other tenants in the Building or if the nature of Tenant's business requires the
provision of any such service outside of normal business hours at a level in
excess of that normally provided for the Building, then, in either such event,
Tenant agrees to pay a service surcharge to Landlord in an amount which fairly
reflects its excessive usage of such service. Landlord will not be liable to
Tenant, nor will Tenant be relieved of any obligation hereunder if any service
to the Leased Premises is interrupted for any reason beyond Landlord's
reasonable control.
5. Maintenance and Repair. Landlord will maintain the Building (including all
-----------------------
common areas which serve the Building) and all structural elements and
mechanical systems located within the Leased Premises in good repair and
condition, provided, however, that Tenant (and not Landlord) will be required to
pay all costs of maintaining the same if the need thereafter arises due to the
fault or negligence of Tenant or its agents, employees, or guests. Landlord
will also provide janitorial service to the Leased Premises five days per week.
Except as otherwise expressly set forth in this 5, Tenant will be responsible
and pay for all costs associated with maintaining and repairing the interiors of
the Leased Premises, including without limitation, all costs associated with the
painting of interior walls, the cleaning or replacing of wall coverings and
floor coverings and the replacing of light bulbs and light fixtures. Landlord
will not be liable to Tenant, nor will Tenant be relieved of any obligation
hereunder if Tenant's use of the Leased Premises is interrupted as a result of
Landlords required entry into the Leased Premises for the purpose of making any
repairs, alterations, or improvements to the structural elements or mechanical
systems located within the Leased Premises (including, without limitation, the
HVAC system). Tenant expressly waives any right it might otherwise have under
any law, statute, or ordinance now or hereafter in effect to make any repairs to
the Leased Premises at Landlord's expense. Tenant acknowledges and agrees that
it has accepted the Leased Premises in its "as is, where is" condition.
6. Use of Leased Premises. Tenant will use the Leased Premises solely for
-----------------------
the Permitted Use. Tenant will not cause or permit any waste or damage to the
Leased Premises or the Building and will not occupy or use the Leased Premises
for any business or purpose which is unlawful, hazardous, unsanitary, noxious or
offensive or which unreasonably interferes with the business operations of other
tenants in the Building. Tenant will comply with the Rules and Regulations for
the Building which are set forth in Exhibit D (and any modifications thereto
which are consistent with the provisions of this Lease). Tenant will also have
the non-exclusive right to use the common areas which serve the Building,
including, without limitation, the Building's common lobbies, hallways,
elevators, restrooms and parking areas.
5
<PAGE>
7. Compliance with Law. Tenant will at it's sole expense comply with all laws,
--------------------
governmental, requirements and recorded covenants or conditions which are now or
hereafter in force pertaining to the Leased Premises and Tenant's occupancy and
use thereof, including, without limitation the Americans with Disabilities Act
1990, as amended.
8. Signs. Tenant will not place any sign or other advertising material on the
------
exterior or interior of the Leased Premises or the Building, without the prior
written consent of Landlord. Landlord will at its expense provide Tenant with
the building's standard graphics and signage for identification of Tenant on the
business directory, the elevator, lobby, and the entranceway to the Leased
Premises.
9. Leasehold Improvements. Landlord will construct those improvements to the
-----------------------
Leased Premises, if any, which are described in Exhibit E. Landlord will use
its best efforts to substantially complete such improvements by the Commencement
Date of the Lease Term, subject to the occurrence of unforeseen events beyond
its reasonable control (including, without limitation, delays caused by Tenant).
If Landlord fails to substantially complete such improvements by the
Commencement Date for any reason, then Tenant's obligation to pay Base Rent and
estimated Excess Expense payments will abate until such improvements are
substantially completed and the Commencement and Termination Dates will be
extended by the number of days included in such abatement period. For the
purpose of this 9, the improvements will be deemed "substantially completed" on
the date on which a certificate of occupancy (or other applicable approval) for
the construction of such improvements is issued by the appropriate governmental
authority.
10. Alterations. Tenant will not at any time prior to or during the Lease Term
------------
make any alterations, conditions, or improvements to the Leased Premises without
the prior written consent of Landlord. If Landlord consents to any proposed
alteration, addition or improvement, the same shall be made by Landlord or
Tenants sole expense. If required by landlord, any such alterations additions,
or improvements will be removed by Tenant upon the expiration of the Lease Term.
Tenant will repair any damage to the Leased Premises caused by such removal.
Notwithstanding anything to the contrary contained herein. Tenant may paint the
interior of the Leased Premises using its own painting contractor, so long as
any color selection is first approved by Landlord.
11. Mechanics Liens. Tenant will indemnify and hold Landlord harmless from any
----------------
liability or expense associated with its construction of any alteration,
addition or improvement to the Leased Premises. In particular, Tenant will
execute and record an appropriate notice of commencement pursuant to Chapter
713, Florida Statues, identifying Tenant's interest in the Leased Premises as a
leasehold interest only. Tenant will immediately discharge any mechanics lien
filed against the Leased Premises or the Building in connection with any work
performed by Tenant.
12. Assigned and Subletting. Tenant will not assign this Lease or sublet all
------------------------
or any part of the Leased Premises without the prior written consent of
Landlord. Unless otherwise agreed to by Landlord, Landlord's consent to any
such assignment or sublease will not relieve Tenant from its obligations under
this Lease.
6
<PAGE>
13. Subordination. Tenant's rights and interest under this lease are
--------------
subordinate to all mortgages and other encumbrances now or hereafter affecting
any portion of the building. In the event of the foreclosure of any mortgage or
other encumbrance, Tenant will, upon request of any person succeeding to the
interest of Landlord, attain to and automatically become the tenant of such
successor in interest without change in the terms or conditions of this Lease;
provided, however, that such successor in interest shall not be liable for any
act or omission of any prior landlord or subject to any offsets or defenses
which Tenant may have against any such prior landlord. This paragraph will be
self-operative and no further instrument will be required to effect the
subordination provided herein. Within ten days after its receipt of Landlord's
request therefore, Tenant will execute and deliver to Landlord a certificate
confirming such subordination and attainment and setting forth the current
status and facts related to this Lease and Tenant's occupancy of the Leased
Premises. If Tenant fails to execute and deliver to Landlord such a
certificate within the aforementioned ten-day period, then Tenant hereby
appoints Landlord as its attorney-in-fact, coupled with an interest, for the
purposes of executing such certificate. Tenant may not terminate this Lease
because of any default by Landlord, unless Tenant first gives written notice of
the alleged default to any mortgagee of Landlord whose name and address have
been provided to Tenant, and such mortgagee fails to cure such default within 30
days after its receipt of such written notice.
14. Limitation of Landlord's Personal Liability. Tenant will look solely to
--------------------------------------------
Landlord's interest in the Lease Premises and the Building for the recovery of
any judgment against Landlord it being the express intent of the parties hereto
that neither Landlord, nor any of its partners will ever be personally liable
for any such judgement.
15. Indemnification and Insurance. Landlord will not be liable for and Tenant
------------------------------
hereby releases Landlord from any liability or expense associated with any
damage or injury to any person or property (including any person or property of
Tenant or anyone claiming under Tenant) which arises directly or indirectly in
connection with the Leased Premises or Tenants use or occupancy of the Leased
Premises or any common areas serving the building. Tenant will indemnify and
hold Landlord harmless from any of the above-described liabilities and expenses,
provided, however, that Tenant will not be obligated to indemnify Landlord as
to any liability or expense occasioned by the fault or negligence of Landlord.
Landlord will indemnify and hold Tenant harmless from any liability or expense
associated with any damage or injury to any person or property including any
person or property of Landlord or anyone claiming under Landlord which arises
directly or indirectly in connection with any common areas of the Building or
Landlord's use or occupancy thereof.
All property stored or placed by Tenant in or about the Leased Premises will be
so stored or placed at the sole risk of Tenant, Tenant will at its sole expense
maintain in full force and effect at all times during the Lease Term: (a)
comprehensive public liability insurance for personal injury and property damage
with liability limits of not less than $1,000,000 for injury to one person,
$2,000,000 for injury from one occurrence and $500,000 for property damage; (b)
extended coverage insurance on all of property stored or placed by Tenant in or
about the Leased Premises in an amount equal to the full replacement value
thereof. Each insurance policy required to be maintained by Tenant hereunder
will name Landlord as an additional insured and will specifically provide that
such insurance policy cannot be terminated without giving at least 30 days prior
written notice to Landlord.
7
<PAGE>
16. Waiver of Subrogation. Landlord and Tenant each hereby waives its right to
----------------------
receive damages against the other party with respect to any loss or claim
occasioned by the occurrence of any casualty to the Building or Leased Premises
which is covered under a valid and collectible fire and extended coverage
insurance policy. Any insurance policy procured by either Tenant or Landlord
hereunder will contain an express waiver of any right of subrogation by the
insurance company against Landlord or Tenant, as the case may be.
17. Hazardous Substances. Tenant will not use, store or dispose of any
---------------------
"hazardous substance", "hazardous material" or "toxic substance" (as those terms
are defined or used in the context of Comprehensive Environmental Response,
Compensation and Liability Act or any other federal, state or local
environmental law, regulation or requirement) on or about the Leased Premises,
except for Immaterial amounts that are exempt from or do not give rise to any
violation of applicable law. Tenant will indemnify and hold Landlord harmless
from any liability or expense (including, without limitation, reasonable
attorney fees and expenses, court costs, expenses and costs incurred in the
investigation, settlement and defense of claims and any cost or expenses
incurred in connection with any environmental clean-up) incurred by or claimed
against Landlord as a result of Tenant's breach of the covenant contained in
this section. The foregoing indemnification (as well as the indemnification set
forth in 5 of this lease) will survive the expiration or sooner termination of
the Lease Term.
18. Surrender of Premises. Upon the termination of Tenant's right of
----------------------
possession under this Lease, Tenant will immediately surrender possession of the
Leased Premises to Landlord in good repair and "broom clean" condition,
reasonable wear and tear excepted. Tenant will at the same time remove all of
its trade fixtures from the Leased Premises, as well as any alterations,
additions or improvements designed by Landlord (other than those improvements
constructed by Landlord pursuant to 10 and Exhibit E). Tenant will promptly
repair any damage caused to the Leased Premises by the removal of any of such
property. Tenant acknowledges and agrees that it has accepted the Leased
Premises in its "as is, where is" condition.
19. Security Interest. INTENTIONALLY OMITTED.
------------------
20. Casualty. If the Lease Premises is damaged by fire or other casualty, the
---------
Landlord will promptly give written notice to Tenant whether the damaged area
can reasonably be repaired within 120 days after the date of the occurrence of
such casualty. If Landlord notifies Tenant that it does not believe that the
damaged area can reasonably be repaired within such 120 day period, then both
Landlord and Tenant will have the option of terminating this Lease by giving a
written notice thereof to the other at any time within 30 days after the date of
Tenants receipt of the aforementioned notice from Landlord. If Landlord
determines that the damaged area can reasonably be repaired within such 120 day
period or if neither party elects to terminate this Lease despite the fact that
Landlord has determined that the damaged area cannot be reasonably repaired
within such 120 day period, then landlord will proceed to repair the damaged
area at its sole expense; provided, however, that Landlord will in no event be
required to repair any improvements previously made to the Lease Premises by or
at the request of Tenant.
8
<PAGE>
If the Leased Premises are rendered untenantable in whole or in part as a result
of a fire or other casualty which was not caused by Tenant, then all rent and
other payments accruing after the occurance of any such fire or other casualty
and prior to the completion of the repair of the Leased Premises will be
equitably and proportionately abated to reflect the untenantable portion of the
Leased Premises. Landlord will not be liable to Tenant for any inconvenience or
interruption to Tenant's business occasioned by such fire or other casualty or
the concomitant repair of the damaged area. In the event of the occurrence of
any casualty, Landlord will use its best efforts to provide temporary space to
Tenant in another Landlord owned building, if such space is then available.
21. Condemnation. If all or any substantial portion of the Leased Premises or
-------------
the Building is taken by or under threat of condemnation so as to render the
Leased Premises wholly untenantable, then this Lease will automatically
terminate as of the date of the condemnation by the condemning authority. If
such taking does not render the Leased Premises wholly untenantable, then this
lease will not terminate but will continue in full force and effect in
accordance with its terms, except that the Base Rent and Tenant's Proportionate
Share will be adjusted to fairly reflect the portion of the Leased Premises, the
Building or the Land which was so taken. Landlord will be liable to Tenant for
any inconvenience or interruption to Tenant's business occasioned by any such
taking. Landlord will be entitled to receive the entire award made by the
condemning authority for any such taking. Landlord will promptly notify Tenant
of the instruction of any condemnation proceeding affecting the Leased Premises.
22. Holding Over. Tenant will not hold over in its occupancy of the Leased
------------
Premises after the expiration of the Lease Term without the prior written
consent of Landlord. If Tenant holds over without the prior written consent of
Landlord, then Tenant will pay 150% of the Base Rent then in effect for each
month during the entire holdover term. Any holding over without the consent of
Landlord will constitute this Lease as a lease from month to month.
23. Default. If Tenant fails to pay any installment of Base Rent or any other
--------
payable by its hereunder within five days after its receipt of written notice
from Landlord that the same is due and unpaid, or if Tenant defaults in the
performance of any of its other obligations under this Lease and such default
continues for 30 days after written notice thereof is given to Tenant, then, in
addition to any other legal rights and remedies available to Landlord at law or
in equity Landlord may (a) terminate Tenant's right of possession under this
Lease and declare all Base Rent and estimated Excess Expense payments payable
over the remainder of the Lease Term to be immediately due and payable or (b)
reenter and attempt to relet the Leased Premises without terminating this Lease,
in which event Tenant will remain obligated to pay to Landlord any deficiency
between all sums payable by Tenant pursuant to this Lease and any sums collected
by Landlord from any reletting of the Leased Premises (net of any sums paid by
Landlord in connection with such reletting, including, without limitation,
leasing commissions, attorney's fees and costs of improvements to the Leased
Premises). Landlord may collect any amounts payable to its pursuant to this
paragraph by any lawful means, including, without limitation, the sole by public
or private side of all Tenant's personal property in which Landlord has a
security interest.
9
<PAGE>
24. Prevailing Party's Fees. If any legal action is commenced by either
------------------------
Landlord or Tenant, to enforce its rights hereunder, then all attorney's fees,
paralegal fees and other expenses incurred by the prevailing party in such
action shall be promptly paid by the non-prevailing party.
25. Successors and Assigns. This lease shall be binding upon and inure to the
-----------------------
benefit of the successors and assigns of Landlord and the successors and
permitted assigns of Tenant.
26. No waiver. No waiver of any covenant or condition of this Lease by either
----------
party will be deemed to constitute a future waiver of the same or any other
covenant or condition of this Lease. In order to be effective, any such waiver
must be in writing and must be delivered to the other party to this Lease.
27. Brokerage Commissions. Each of Landlord and Tenant hereby represents and
----------------------
warrants that it has not dealt or consulted with any real estate broker or agent
in connection with this lease other then those real estate brokers and agents
specifically identified in the Agency Disclosure Statement attached hereto as
Exhibit F. Each of Landlord and Tenant agrees to indemnify and hold the other
harmless from and against any liability or expense occasioned by a breach of the
foregoing representation.
28. Relocation. Landlord will have the right to relocate Tenant to other space
-----------
in the building, so long as the size, configuration, improvements and amenities
of the new space are substantially similar to those of the Leased Premises.
Landlord will pay all reasonable expenses incurred by Tenant in connection with
the relocation of its space. Landlord will effect such relocation in a manner
intended to minimize any interference with Tenant's business operations. If
such a relocation occurs, this Lease will continue in full force and effect
without any change in the terms and conditions thereof, except that the new
space will thereafter be substituted as the Leased Premises for the purposes of
this Lease and, if the new space is smaller than the initial Lease Premises,
then the Base Rent and Tenant's Proportionate Share of Excess Expenses will be
proportionately decreased.
29. Reasonableness of Consent. Landlord shall not unreasonably withhold any
--------------------------
consent or approval which is required to be given by it pursuant to the Terms of
this Lease.
30. Amendment. This lease may not be amended except by a written instrument
----------
signed by both Landlord and Tenant.
31. Governing Law. This lease will be governed by and construed in accordance
--------------
with the laws of the State of Florida.
32. Notices. All notices required or permitted under this Lease must be given
--------
in writing and must be delivered to Landlord and Tenant at their addresses set
forth in the Lease Summary (or such other address as may hereafter be designated
by such party). Any such notice must be personally delivered or sent by either
registered or certified mail or overnight courier.
33. Security Deposit. Tenant has deposited with Landlord a Security Deposit in
-----------------
the amount identified in the Lease Summary. The Security Deposit will be
retained by Landlord as partial security for Tenant's performance of all its
obligations under this Lease. If Tenant defaults in the performance of any of
its obligations under this Lease, then Landlord will have the right to use all
or a portion of the Security Deposit to cure such default.
10
<PAGE>
Any portion of the Security Deposit remaining unutilized following the
expiration of the Lease Term and Tenant's full performance of all its
obligations under the Lease will be returned to Tenant without interest.
34. Special Terms. Exhibit G sets forth those special provisions, if any,
---------------
which supplement the provisions of this Lease.
35. Parking. The rental party by Tenant hereunder entitles it and its
--------
employees, guests and invitees to the non-exclusive use of up to four parking
spaces per 1,000 square feet of rentable space contained within the Leased
Premises, located adjacent to the building. Tenant will abide by all reasonable
rules and regulation hereafter adopted by the Landlord with respect to the use
of the parking spaces.
36. Financial Statements. Upon Landlord's request, Tenant will provide
---------------------
Landlord, not more frequently than once per calendar year, with its then most
current financial statements (balance sheet and income and loss statement),
certified to be true and accurate in all material respects by the chief
financial officer of Tenant.
(Signatures and Acknowledgments Appear on the Next Page)
11
<PAGE>
SIGNATURES AND ACKNOWLWDGMENTS
Landlord and Tenant have executed this Lease as of the date specified in the
Lease Summary.
Signed and acknowledged in
the presence of:
LANDLORD:
International Parkway Development Company
_____________________ By Pizzuti Management Inc.
_____________________ By_____________________________________________
(Name) (Title)
TENANT:
______________________ SUNSTAR HEALTHCARE, INC.
______________________ By: ___________________________________________
(Name) (Title)
State of ___________
County of_____________
12
<PAGE>
Before me, a notary public in and for said state and county, personally appeared
_____________________, the _______________ of Pizzuti Management Inc., the
managing agent of International Parkway Development Company, the Landlord in
the foregoing Lease, who acknowledged the signing of the Lease to be his free
act and deed on behalf of the Landlord.
Date:__________ ______________________________________
Notary Public
State of___________
County of _________: SS
Before me, a notary public in and for said state and county, personally appeared
_____________________, the _____________ of Sunstar Healthcare, Inc., the Tenant
in the foregoing Lease, who acknowledged the signing of the Lease to be his free
act and deed on behalf of Tenant.
Date: ___________________________ ___________________________________
Notary Public
13
<PAGE>
EXHIBIT B
BASE RENT SCHEDULE
------------------
The monthly Base Rent (and sales tax thereon calculated at the present sales tax
rate of 7%) payable by Tenant during the Lease Term will be as set forth in the
following schedule:
<TABLE>
<CAPTION>
Leased Period Monthly Base Rent Annual PRSF Base Rent
- --------------------- ----------------- ---------------------
<S> <C> <C>
First 12 months $13,211.04 $17.50
Second 12 months $13,588.50 $18.00
Last 12months $13,965.96 $18.50
</TABLE>
The total monthly payment due from Tenant during the first 12 months of the
Lease Term will be $14,135.81 (consisting of Base Rent of $13,211.04 and sales
tax thereon of $924.77.) Notwithstanding anything to the contrary contained
herein, the monthly Base Rent payable by Tenant for all full or partial calendar
months prior to the date of Landlord's delivery of possession of Suite 100 to
Tenant per Exhibit G will be $9,715.15 (consisting of Base Rent of $9,079.58 and
sales tax of $635.57).
Initialed and Approved by Tenant:
14
<PAGE>
EXHIBIT C
---------
ILLUSTRATIVE EXAMPLES OF OPERATING EXPENSES
-------------------------------------------
The following are illustrative examples of some of the expenses which are
included within the definition of "Operating Expenses":
1. Costs of maintaining and repairing (but not replacing ) the Building and all
common areas serving the Building;
2. The cost of providing janitorial services to the Building;
3. The cost of providing security for the building;
4. Real Estate taxes and assessments on the building including, without
limitation, any assessments imposed any property owner's association;
5. Insurance premiums for liability and extended coverage insurance policies
maintained any Landlord on the Building;
6. Costs related to the provision of utility services to the building;
7. Salaries and related costs (including fringe benefit, payroll taxes and a
labor overhead charge of not more than 15%) of personnel spending time
directly associated with the operation, management and maintenance of the
Building, including, without limitation, those paid to any on-site assistant
property management or maintenance personnel;
8. A reasonable property management fee;
9. A reasonable contingency/replacement reserve;
10. The cost of any cost-saving utility device installed in the Building, but
only to the extent of the actual cost-savings obtained therefrom;
11. The cost of any building improvement (amoritized over such period as is
consistent as with generally accepted accounting principles) which Landlord
is required to make as a result of the enactment or promulgation of any
governmental law or regulation after the date of the execution of this
lease;
15
<PAGE>
12. Accounting legal and other professional services rendered in connection with
the operation, management and maintenance of the building; and
13. All other costs related to the operation, management and maintenance of the
building which are considered to be operating expenses under generally
accepted accounting principles.
The following are those expenses which are excluded from the definition of
"Operating Expenses":
1. Landlords debt service on any financing related to the building;
2. Franchise or income taxes payable by landlord
3. Salaries and related costs of Landlord's off-site administration personnel;
4. Costs of all tenant improvements;
5. Leasing commission;
6. Attorney's fees incurred by Landlord in prosecuting any eviction or other
legal action against any tenant in the building; and
7. All costs and expenses which are considered to be capital expenditures under
generally accepted accounting principles (other than those specifically
included within the definition of "Operating Expenses" in this Exhibit C).
Operating Expenses shall be computed for each calendar year during the Lease
Term based upon the actual method of accounting. If the building is ever less
than 100% occupied, then Operating Expenses shall be calculated as if the
building had been 100% occupied and the results shall constitute Landlords
Operating Expenses for such calendar year for all purposes of this lease.
Initialed and Approved by Tenant:
_______________________________
16
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice visible from the
outside Premises shall be installed or displayed on any part of the outside
or inside of the building without prior written consent of Landlord.
Landlord shall have the right to remove, at Tenant's expense and without
notice, any sign installed or displayed in violation of this rule. All
approved signs or lettering on doors and walls shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person chosen by
Landlord, using materials of Landlord's choice and in a style and format
approved by Landlord.
2. Tenant must use Landlord's blinds in all exterior and atrium window offices.
No awning shall be permitted on any part of the premises. Tenant shall not
place anything against or near glass partitions or doors or windows which
may appear unsightly from the outside Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances,
elevators, escalators or stairways of the building. The halls, passages,
exits, entrances, shopping malls, elevators, escalators and stairways are
not for the general public, and Landlord shall in all cases retain the right
to control and prevent access thereto of all persons whose presence in the
judgement of Landlord would be prejudicial to the safety, character,
reputation and interests of the building and its tenants; provided that
nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities. No tenant
and no employee or invitee of any tenant shall go upon the roof of the
building.
4. The directory will be provided by Landlord and shall consist exclusively of
the display of the name and location of tenants only; Landlord reserves the
right to exclude any other names therefrom.
5. All cleaning and janitorial services for the building and the premises shall
be provided exclusively through Landlord, and except with the written
consent of Landlord, no person or persons other than those approved by
Landlord shall be employed by Tenant or permitted to enter the building for
the purpose of cleaning the same. Landlord shall not in any way be
responsible to any tenant for any loss of property on the Premises, however
occurring, or for any damage to any Tenant's property by the Janitor or any
other employee or any other person.
6. Landlord will furnish Tenant, free of charge, with two keys to each door in
the Premises. Landlord may make a reasonable charge for any additional keys.
Tenant shall not make or have made additional keys, and Tenant shall not
alter any lock or install a new additional lock or bolt on any door of its
premises.
17
<PAGE>
Tenant, upon the termination of its tenancy, shall deliver to Landlord the
keys of all doors which have been furnished to Tenant, and in the event of
loss of any keys so furnished, shall pay Landlord therefor.
7. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlords instructions in
their installation.
8. Any freight elevator shall be available for use by all tenants in the
building, subject to such reasonable scheduling as Landlord in its
discretion shall deem appropriate. No equipment, materials, furniture,
packages, supplies, merchandise, or other property will be received in the
building or carried in the elevators except between such hours and in such
elevators as may be designated by Landlord.
9. Tenant shall not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which is
allowed by law. Landlord shall have the right to prescribe the weight ,
size, and position of all equipment, materials, furniture or other property
brought into the building. Heavy objects, if such objects are considered
necessary by Tenant, as determined by Landlord, shall stand on such
platforms as determined by Landlord to be necessary to properly distribute
the weight. Business machines and mechanical that may be transmitted to the
structure of the Building or to any space therein to such degree as to be
objectionable to Landlord or to any other tenants in the building, shall be
placed and maintained by Tenant, at Tenant's expense, on vibration
eliminators or other devices sufficient to eliminate noise or vibration. The
persons employed to move such equipment in or out of the building must be
acceptable to Landlord. Landlord will not be responsible for loss of, or
damage to, any such equipment or other property from any cause, and all
damage done to the building by monitoring or moving such equipment or other
property shall be repaired at the expense of Tenant.
10. Tenant shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office equipment.
Tenant shall not use or permit to be used in the Premises any foul or
noxious gas or substance, or permit or allow the premises to be occupied or
used in a manner offensive or objectionable to Landlord or other occupants
of the building by reason of noise, odors, or vibrations, nor shall Tenant
bring into or keep in or about the Premises any birds or animals.
11. Tenant shall not use any method of heating or air conditioning other than
supplies by Landlord.
12. Tenant shall not waste electricity, water on air conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
buildings heating, air conditioning and lighting to comply with any
governmental energy saving rules, laws, or regulations of which Tenant has
actual notice, and shall refrain from attempting to adjust control. Tenant
shall keep corridor doors closed, and shall close window coverings at the
end of each business day.
13. Landlord reserves the right, exercisable without notice and without
liability to tenant, to change the name and street address of the building.
14. Landlord reserves the right to exclude from the building between the hours
of 8pm to 7am, the following day, or such other hours as may be established
from time to time by Landlord, and on Sundays and legal holidays, any person
unless that person is known to the person or employee in charge of the
building and has a pass or is properly identified. Tenant shall be
responsible for all persons for whom it requests passes and shall be liable
to Landlord for all acts of such person. Tenant shall pay the cost of
replacing any security cards provided by Landlord. Landlord shall not be
liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. Landlord reserves the right to
prevent access to the Building in case of invasion, mob, riot, public
excitement or other circumstances by closing the doors or by other
appropriate action.
18
<PAGE>
15. Tenant shall close and lock the doors of its premises and entirely shut off
all water faucets or other water apparatus, and electricity, gas or air
outlets before Tenant and its employees leave the premises. Tenant shall be
responsible for any damage or injuries sustained by other tenants or
occupants of the building or by Landlord for noncompliance with this rule.
16. Tenant shall not obtain for use on the premises ice, drinking water, food,
beverage, towel, or other similar services or accept barbering or
bootblocking services upon the premises, except at such hours and under such
regulation as may be fixed by landlord.
17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage, or damage resulting from the violation of
this rule shall be borne by the tenant who, or whose employees or invitees,
shall have caused it.
18. Tenant shall not sell, or permit the sale of retail, of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to
the general public in or on the premises. Tenant shall not make any room to
room solicitation of business from other tenants in the building. Tenant
shall not use the premises for any business or activity other than that
specifically provided in the Tenant's Lease.
19. Tenant shall not install any radio or television antenna, loudspeaker or
other device on the roof or exterior walls of the building. Tenant shall not
interfere with radio or television broadcasting or reception from or in the
building or elsewhere.
20. Tenant shall not mark, drive nails, screw or drill into the partitions,
woodwork or plaster or in any way deface the premises or any art thereof,
except to install normal wall hangings. Landlord reserves the right to
direct electricians as to where and how telephone and telegraph wires are to
be introduced to the premises. Tenant shall not cut or bore holes for wires.
Tenant shall not affix any floor covering to the floor of the premises in
any manner except as approved by Landlord. Tenant shall repair any damage
resulting from noncompliance with this rule.
21. Tenant shall not install, maintain or operate upon the premises any vending
machine without the written consent of Landlord.
22. Canvassing, soliciting, and distribution of handballs or any other written
material, and peddling in the building are prohibited, and each tenant shall
cooperate to prevent same.
23. Landlord reserves the right to exclude or expel from the building any person
who, in Landlord's judgment, is intoxicated or under the influence of liquor
or drugs or who is in violation of any of the Rules and Regulations of the
building.
24. Tenant shall store all its trash and garbage within its premises. Tenant
shall not place any trash box or receptacle any material which cannot be
disposed in the ordinary and customary manner of trash and garbage disposal.
All garbage and refuse disposal shall be made in accordance with directions
issued from time to time by Landlord.
25. The premises shall not be used for the storage of merchandise held for sale
to the general public, or for lodging or for manufacturing of any kind, nor
shall the premises be used for any improper, immoral or objectionable
purpose. No cooking shall be done or permitted by any tenant on the
premises, except, that use by tenant of underwriters' laboratory approved
equipment for brewing coffee, tea, hot chocolate and similar beverages shall
be permitted, and the use of microwave shall be permitted, provided that
such equipment and its use is in accordance with all federal, state, county
and city laws, codes, ordinances, rules and regulations.
26. Tenant shall not use in any space or in the public halls of the building any
hand trucks except those equipped with rubber tires and side guards or such
other material handling equipment as Landlord may approve. Tenant shall not
bring any other vehicles of any kind into the building.
19
<PAGE>
27. Without the written consent of landlord, Tenant shall not use the name of
the building in connection with or in promoting or advertising the business
of Tenant except as Tenant's address.
28. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by landlord or any governmental
agency.
29. Tenant assumes any and all responsibility for protecting its premises from
theft, robbery, and pilferage, which includes keeping doors locked and other
mean of entry to the premises closed.
30. The requirements of Tenant will be attended to only upon appropriate
application to the office of the building by an authorized individual.
Employees of the Landlord shall not perform any work or do anything outside
of their regular duties unless under special instructions from Landlord, and
no employee of the Landlord will admit any person (Tenant or otherwise) to
any office without specific instructions from Landlord.
31. In the event Tenant fails to deliver to Landlord its keys to the premises
upon termination of the tenant's right to possession under the Lease, or
Tenant's vacating of the premises, the cost of replacing the locks and keys
shall be borne by Tenant.
32. Bicycles, motorbikes and motorcycles are prohibited within the building and
must be kept in designated parking areas.
33. No Pets or other animals of any type whatsoever are permitted in the
building at any time.
34. Landlord may waive any one or more of these rules and regulations for the
benefit of Tenant or any other tenant, but no such waiver by landlord shall
be construed as a waiver of such rules and regulation in favor of tenant or
any other tenant, nor prevent landlord from thereafter enforcing any such
rules and regulations against any or all of the tenants of the building.
35. These rules and regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part the terms covenants,
agreements, and conditions of any lease of premises in the building.
36. Landlord reserves the right to make such other and reasonable rules and
regulation as in its judgment, may from time to time be needed for safety
and security, for care and cleanliness of the building and for the
preservation of good order therein. Tenant agrees to abide by all rules and
regulation hereinabove stated and any additional rules and regulations which
are adopted.
37. Tenant shall be responsible for the observance of all foregoing rules by
Tenant's employees, agents, clients, customers, invitees, and guests.
Initialed and Approved by Tenant:
_________________________________
20
<PAGE>
EXHIBIT E
- ---------
LANDLORD'S WORK
- ---------------
Tenant is leasing the Leased Premises in its "as is, where is" condition and
Landlord will not be required to make any improvements whatsoever to the Leased
Premises. Notwithstanding the foregoing, Landlord will at its expenses,
-------------------------------------------------------------
construct a demising wall and exit door (including finishing and painting the
- -----------------------------------------------------------------------------
side of the wall facing Tenant's leased premises) between Tenant's Leased
- -------------------------------------------------------------------------
Premises and the premises of the Adjacent tenant, Medical Protective.
- ---------------------------------------------------------------------
Initialed and Approved by Tenant:
___________________________
21
<PAGE>
EXHIBIT F
---------
AGENCY DISCLOSURE STATEMENT
- ---------------------------
The following are the only real estate agents and brokers involved in the
leasing transaction between Landlord and Tenant:
Pizzuti Realty of Florida Inc. -- Representative of Landlord
Commission to be paid by Landlord.
Nelson Group Inc. -- Representative of Tenant
Commission to be paid by Landlord
Initialed and Approved by Tenant:
_________________________________
22
<PAGE>
EXHIBIT G
---------
SPECIAL TERMS
- -------------
The following special terms modify and supplement the provisions of the Lease
Agreement between Landlord and Tenant. All capitalized terms used but not
defined in this Exhibit G will have the meanings attributed thereto in the Lease
Agreement.
1. Tenant acknowledges that Suite 100 is currently occupied by another user.
Landlord agrees to notify the existing user of Suite 100 that the space has
been leased to Tenant and that Landlord will grant no renewals whatsoever to
the existing user of Suite 100. As soon as the existing user vacates Suite
100, Landlord will notify Tenant that it is delivering possession of Suite
100 to Tenant. From and after the date of Tenant's receipt of the
aforementioned notice, Tenant will have the right to occupy Suite 100 under
the terms and conditions set forth in this Lease (including, without
limitation, the payment of Base Rent and Excess Expense Payments with
respect to such space). Prior to the date of Tenant's receipt of the
aforementioned noticed, Tenant will not have any obligation hereunder with
respect to Suite 100, including, without limitation, any obligation to pay
Base Rent or Excess Expense Payments with respect to such space.
2. Notwithstanding anything to the contrary contained in (S)12 of the Lease,
Tenant may, without first having to obtain Landlord's consent, sublet the
Leased Premises or assign its interest in this Lease to any successor of
Tenant resulting from a merger, consolidation, sale or acquisition of
Tenant's entire business. Tenant will, however, be required to provide
Landlord with written notice of any such proposed sublease or assignment at
least ten days prior to the effecting of such sublease or assignment.
3. Landlord agrees to use its best efforts to provide Tenant with an
opportunity to lease approximately 15,000 rentable square feet of space in
either the 701 International Parkway building (which is under construction
by an affiliate of Landlord) or the 801 International Parkway Building
(which is proposed by an affiliate of Landlord). If Landlord (or its
affiliate) and Tenant execute a mutually acceptable lease for approximately
15,000 square feet of space in either the 701 or the 801 International
Parkway Buildings, then as of the commencement date under such lease,
Landlord will terminate this Lease as it relates to Tenant's occupancy of
space in the 300 International Parkway Building.
If, as of May 1, 1998, there does not exist in the 701 International Parkway
Building, the 801 International Parkway Building or the 300 International
Parkway Building at least 15,000 rentable square feet of vacant and
leaseable space (which, as it relates to the 300 International Parkway
Building will include the Leased Premises), then Tenant will have the right
to terminate this lease as of the end of the 12th full month of the Lease
Term by delivering to Landlord on or before May 10, 1998, a written notice
of termination and a cash payment equal to two-thirds of any brokerage
commissions previously paid by Landlord to Nelson Group Inc., Tenant will
have the further right to terminate this Lease effective as of the end of
the 2nd full month of the Lease Term, regardless whether sufficient vacant
space is available in any of the aforementioned three buildings, by
delivering to Landlord on or before May 10, 1998 written notice of
termination to Landlord and a cash payment equal to $56,543.24 (four months
Base Rent), plus two-thirds of any brokerage commissions previously paid by
Landlord to Nelson Group Inc.
Initialed and Approved by Tenant:
_________________________________
23
<PAGE>
EXHIBIT H
---------
RADON NOTICE
- ------------
Notification pursuant to Florida statue 404.056(8):
RADON GAS: "Radon is a naturally occurring radioactive gas that, when it has
accumulated in a building in sufficient quantities, may present health risks to
persons who are exposed to it over time. Levels of radon that exceed federal and
state guidelines have been found in buildings in Florida. Additional information
regarding radon and radon testing may be obtained from your county public health
unit."
Initialed and Approved by Tenant:
_________________________________
24
<PAGE>
Exhibit 16.1
November 11, 1998
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, 1998 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 21.1
List of Subsidiaries
- --------------------
SunStar Health Plan, Inc.
(formerly known as Boro Medical Corporation)
Florida Corporation
<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 18, 1998 with
respect to the consolidated financial statements of SunStar Healthcare, Inc. as
of and for the two years ended July 31, 1998 in the Annual Report on Form 10-KSB
for the fiscal year ended July 31, 1998 of SunStar Healthcare, Inc.
Our report dated September 18, 1998, contains an explanatory paragraph that
states that the Company has experienced significant operating losses and is
seeking additional financing to meet its regulatory surplus and working capital
requirements and to fund additional expansion efforts. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Certified Public Accountants
Jacksonville, Florida
November 10, 1998
<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,
1998 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-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 7,348
<SECURITIES> 0
<RECEIVABLES> 16
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,150
<PP&E> 469
<DEPRECIATION> 107
<TOTAL-ASSETS> 8,650
<CURRENT-LIABILITIES> 6,319
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 2,245
<TOTAL-LIABILITY-AND-EQUITY> 8,650
<SALES> 0
<TOTAL-REVENUES> 9,079
<CGS> 0
<TOTAL-COSTS> 14,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,390)
<INCOME-TAX> (0)
<INCOME-CONTINUING> (5,390)
<DISCONTINUED> 822
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,567)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
