<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
---------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from_______________to_________________
Commission file number 1-14382
----------------
SUNSTAR HEALTHCARE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-3361076
------------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
300 International Pkwy, Ste 230, Heathrow, Florida 32746
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 304-1066
-------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
There were 2,919,330 shares of the Registrant's common stock outstanding as of
September 30, 1999.
Transitional Small Business Disclosure Format (check one): YES NO X
---- -----
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements (unaudited) of SunStar
Healthcare, Inc. and Subsidiaries................................... 2
Consolidated Balance Sheet (unaudited).............................. 2
Consolidated Statements of Operations three months ended
September 30, 1999 (unaudited)..................................... 3
Consolidated Statements of Operations nine months ended
September 30, 1999 (unaudited)..................................... 4
Consolidated Statements of Cash Flows (unaudited)................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
Part II. Other Information................................................... 23
Item 2. Changes in Securities and Use of Proceeds........................... 23
Item 6. Exhibits and Reports on Form 8-K.................................... 24
Signatures .................................................................... 26
Item 1. Consolidated Financial Statements (unaudited) of SunStar Healthcare,
Inc. and Subsidiaries
</TABLE>
1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Assets
------------
<S> <C>
Current assets:
Cash and cash equivalents $17,654,115
Premium receivable 1,304,996
Estimated claim payment recoveries, net of an allowance 3,623,491
Prepaid expenses 240,845
Other current assets 1,056,260
-----------
Total current assets 23,879,707
Furniture and equipment, net 526,772
Deposits and other assets 592,869
Deferred taxes 100,000
-----------
Total assets $25,099,348
===========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Medical claims payable $15,718,707
Unearned premium - HMO 1,602,082
Accounts payable and accrued expenses 1,030,636
Capital lease obligations, current 84,524
-----------
Total current liabilities 18,435,949
Capital lease obligations, noncurrent 126,006
-----------
Total liabilities 18,561,955
Shareholders' equity
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 2,919,330 shares issued and outstanding 2,919
Redeemable preferred stock, par value $.001 per share, 1,000,000
shares authorized; 690,000 shares designated as Series A,
506,425 shares issued and outstanding as of June 30, 1999,
redemption price $15 per share (note 1 and note 3) 506
Additional paid-in capital
Common stock 8,531,027
Preferred stock 4,022,465
Accumulated deficit (6,019,524)
-----------
Total shareholders' equity 6,537,393
Total liabilities and shareholders' equity $25,099,348
===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended September 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
HMO premiums $ 8,199,560 $26,237,592
Investment income 111,113 239,759
Other -0- 503,384
----------- -----------
Total revenues 8,310,673 26,980,735
Operating expenses:
HMO medical costs 6,085,631 16,813,053
Selling, general and administrative 3,459,222 7,019,661
Option based compensation 16,276 5,425
Amortization of intangibles 8,360 -0-
----------- -----------
Total operating expenses 9,569,489 23,838,139
Profit (loss) before income taxes (1,258,816) 3,142,596
Provision for income taxes -0- -0-
----------- -----------
Net profit (loss) $(1,258,816) $ 3,142,596
=========== ===========
Net profit (loss) per share - basic (note 1i) $(0.43) $0.96
Net profit (loss) per share - diluted (note 1i) $(0.43) $0.65
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the nine months ended September 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
1998 1999
---------------- ------------
<S> <C> <C>
Revenues:
HMO premiums $13,848,781 $73,131,903
Investment income 220,400 683,966
Other -0- 1,146,277
----------- ----------
Total revenues 14,069,181 74,962,146
Operating expenses:
HMO medical costs 10,093,107 50,129,018
Selling, general and administrative 7,942,636 22,343,032
Option based compensation 48,828 37,978
Amortization of intangibles 22,862 44,585
----------- -----------
Total operating expenses 18,107,433 72,554,613
Profit (loss) before income taxes (4,038,252) 2,407,533
Provision for income taxes -0- -0-
----------- -----------
Profit (loss) from continuing operations (4,038,252) 2,407,533
Loss from disposal of assets -0- (9,000)
----------- -----------
Profit (loss) before discontinued operations (4,038,252) 2,398,533
Discontinued operations:
Income from discontinued operations 120,292 -0-
Gain on sale of discontinued operations 667,933 -0-
----------- -----------
Total discontinued operations 788,225 -0-
----------- -----------
Net profit (loss) $(3,250,027) $ 2,398,533
=========== ===========
Earnings per share:
Profit (loss) from continuing
operations - basic and diluted (note 1i) $(1.55) $0.11
Net profit (loss) - basic and diluted (note 1i) $(1.25) $0.11
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $(3,250,027) $ 2,398,533
Adjustments to reconcile net profit (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 115,518 149,783
Noncash compensation 48,828 37,978
Provision for doubtful accounts -0- 400,000
Gain on sale of medical centers (667,933) -0-
Gain on sale of furniture and equipment (1,224) -0-
Changes in operating assets and liabilities:
Increase in accounts receivables (324,020) (1,024,759)
Increase in estimated claim payment recoveries -0- (4,023,491)
Decrease (increase) in prepaid expenses and other assets 70,138 (8,787)
Increase in accounts payable and accrued expenses 7,673 278,179
Increase in medical claims payable 5,299,114 1,897,520
Increase (decrease) in unearned premium 1,614,369 (1,923,198)
Decrease in estimated Medicare settlement (125,132) (103,175)
----------- -----------
Net cash provided by (used in) operating activities 2,787,304 (1,921,417)
Cash flows from investing activities:
Proceeds from sale of medical centers 1,500,000 -0-
Proceeds from sale of held-to-maturity investments 280,000 -0-
Purchase of restricted certificate of deposit -0- (250,000)
Purchase of furniture and equipment (139,803) (297,934)
Disposal of furniture and equipment 1,345 9,000
----------- -----------
Net cash provided by (used in) investing activities 1,641,542 (538,934)
Cash flows from financing activities:
Issuance of redeemable preferred stock -0- 4,312,283
Issuance of common stock 1,342,752 -0-
Exercise of common stock options 12,500 -0-
Preferred stock dividends -0- (289,311)
Principal payments under capital lease obligations (65,820) 108,333
----------- -----------
Net cash provided by financing activities 1,289,432 4,131,305
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,718,278 1,670,954
Cash and cash equivalents, beginning of period 3,807,187 15,983,161
----------- -----------
Cash and cash equivalents, end of period $ 9,525,465 $17,654,115
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 11,468 $ 15,060
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(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) 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 through
its 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
September 30, 1999, the Company was approved to operate its HMO in 52
counties in the State of Florida. 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 entered into a service agreement with a third party
administrator ("TPA") for enrollment and underwriting administration,
claims processing, payment of agents' commissions and premium billing
and collection. Service fees charged to operations under such
contract were approximately $665,000 and $1,892,000 for the quarters
ended September 30, 1998 and 1999, respectively. In February 1999,
the Company verbally notified the TPA of its intention to terminate
the service agreement effective July 1, 1999. Subsequent thereto, the
Company received a written notice of termination from
6
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
the TPA. On March 26, 1999 and effective July 1, 1999, the Company's
management finalized an agreement for similar services with a
different TPA.
(b) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair
presentation of the financial results for the interim periods
presented. Operating results for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. Pursuant
to the rules and regulations of the Securities and Exchange
Commission, certain footnote disclosures which would substantially
duplicate the disclosures contained in the audited financial
statements of the Company have been omitted from these interim
financial statements. Although the Company believes that the
disclosures presented below are adequate to make the interim financial
statements presented not misleading, it is suggested that these
unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the
period ended December 31, 1998.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP").
These financial statements include the accounts of SunStar and SHP.
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
an Asset Purchase Agreement (the "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 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 were also included in discontinued
operations in the accompanying consolidated statements of operations
for the three months and the nine months ended September 30, 1998.
HCFA did not approve the assignment of the contract during 1998,
prompting SHP to renew the contract for 1999. As a result, HCFA
revenues are included as other operating revenue and related costs are
included as selling, general and administrative operating expenses in
the accompanying statement of operations for the three months and the
nine months ended September 30, 1999.
(c) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less.
7
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
(d) Estimated Claim Payment Recoveries
----------------------------------
During the second quarter 1999, the Company contracted the services of
independent consultants to perform an operational assessment of the
TPA, including a random claim audit. As a result of such operational
assessment, the consultants identified material potential claim
payment error rates, primarily attributed to overpayments. In
addition, the Company contracted the services of claim recovery
consultants to identify and document such claim payment errors. To
date, the claim recovery consultants have identified and documented
extensive claim overpayments. Such overpayments are attributed to
different situations such as payments made to providers in excess of
contracted rates, payments to providers for non-covered benefits, etc.
The Company is in the process of recovering such amounts from
providers. Some claim overpayments are offset from future claim
payments and some claim overpayments will be recovered through cash
collections. At September 30, 1999, the balance is approximately
$3,600,000, net of recoveries made during the third quarter plus an
additional allowance for uncollectable balances, and is presented in
the current assets section of the balance sheet.
(e) 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.
(f) 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.
(g) Reedemable Preferred Stock
--------------------------
The carrying value of the Series A Preferred Stock is net of the
estimated effect of beneficial common stock conversion features and
offering costs paid in connection with the offering. These amounts
are amortized over periods through the first applicable conversion
date with respect to the related preferred stock agreements, which was
a 30 day period for the offering costs and 2 years for the beneficial
conversion amount. Amortization amounts are included in preferred
stock additional paid in capital in the accompanying financial
statements.
(h) 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
8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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 Medicare settlement for open-year cost reports under the
aforementioned HCFA contract which are subject to audit. As discussed
in note 1(b), the Company has retained the HCFA contract through 1999.
(i) Per Share Data
--------------
The following table sets forth the computation of basic earnings per
share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1998 1999 1998 1999
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Profit (loss) from continuing
operations (1,258,816) 3,142,596 (4,038,252) 2,407,533
Preferred stock deemed dividends -0- (211,010) -0- (1,789,267)
Preferred stock dividends -0- (127,647) -0- (289,311)
------------------------- --------------------------
Profit (loss) from continuing
operations available to common
stockholders (1,258,816) 2,803,939 (4,038,252) 328,955
Average shares outstanding 2,919,330 2,919,330 2,603,110 2,919,330
------------------------- --------------------------
Earnings per share (0.43) 0.96 (1.55) 0.11
========================= =========================
Discontinued operations available to common
stockholders -0- -0- 788,225 -0-
Average shares outstanding -0- -0- 2,603,110 -0-
------------------------- --------------------------
Earnings per share -0- -0- 0.30 -0-
========================= ==========================
Net profit (loss) (1,258,816) 3,142,596 (3,250,027) 2,398,533
Preferred stock deemed dividends -0- (211,010) -0- (1,789,267)
Preferred stock dividends -0- (127,647) -0- (289,311)
------------------------- --------------------------
Net profit (loss) available to common
stockholders (1,258,816) 2,803,939 (3,250,027) 319,955
Average shares outstanding 2,919,330 2,919,330 2,603,110 2,919,330
-------------------------- --------------------------
Earnings per share (0.43) 0.96 (1.25) 0.11
========================== ==========================
</TABLE>
9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Common stock options, warrants and convertible preferred stock are not
included in the 1998 computation of diluted earnings per share as
their effect is antidilutive due to the Company's net losses
attributable to common shares. In addition, common stock options,
warrants and convertible preferred stock are not included in the nine
months ended September 30, 1999 computation of diluted earnings per
share as their effect is antidilutive due to the Company's preferred
stock deemed dividends. For these periods, diluted earnings per share
is equal to basic earnings per share. The following table sets forth
the computation of diluted earnings per share for the 1999 period
indicated.
Three Months Ended
September 30 1999
-------------------
Net profit available to common stockholders 2,803,939
Plus: income impact of assumed conversions
Preferred stock deemed dividends 211,010
Preferred stock dividends 127,647
----------------
Net profit 3,142,596
----------------
Average shares outstanding 2,919,330
Plus: incremental shares for assumed conversions
Convertible preferred stock 1,350,467
Stock options 319,836
Warrants 230,866
----------------
Adjusted average shares outstanding 4,820,499
----------------
Earnings per share 0.65
----------------
10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
(j) Reclassifications
-----------------
Certain reclassifications have been made to the prior year's financial
statement amounts to conform to the current year's financial statement
presentation.
(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 the Asset
Purchase Agreement, to Brevard Medical Care, Inc. for $1,500,000. 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. Pursuant to the
Asset Purchase Agreement, the Company agreed to assign the existing HCFA
contract held by SHP to the buyer subject to HCFA approval. HCFA, however,
did not approve the assignment of the contract during 1998, prompting SHP to
renew the contract for 1999.
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 the three months and the nine months ended September
30, 1998 are reported in the accompanying consolidated statements of
operations under discontinued operations.
Information with respect to discontinued operations is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
---------------------------- ----------------------------
<S> <C> <C>
Revenues $295,709 $1,602,694
Expenses 295,709 1,482,402
-------- ----------
Income from discontinued operations $ -0- $ 120,292
-------- ----------
Gain on sale of discontinued operations $ -0- $ 667,933
-------- ----------
</TABLE>
(3) Commitments, Contingencies and Other Matters
--------------------------------------------
(a) Professional Liability
----------------------
The Company currently maintains professional liability insurance
coverage through December 1999 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.
11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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. At September 30, 1999,
the deductible under the policy for commercial healthcare claims was
$50,000 and the maximum life time reinsurance indemnity payable under
the agreement for any one member was $2,000,000.
(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 statutory
surplus in an amount which is the greater of $1,150,000 or 10% of
total liabilities or 1.25% of annualized premium, which at September
30, 1999 was approximately $1,780,000. SHP was in compliance with
this requirement and had an unaudited statutory surplus of $2,143,494
at September 30, 1999.
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 during the annual reporting period or over the
past four quarterly reporting periods is less than 2% of total
revenue. SHP's reported audited net income for the year ended December
31, 1998 did not meet the 2% criteria and a correction plan was filed
in 1999. SHP's reported, unaudited, net income for each of the
quarters ended March 31, 1999; June 30, 1999 and September 30, 1999
does meet the 2% criteria.
(c) Nasdaq Listing Requirements
---------------------------
The Company's shares of Common Stock, $.001 par value per share ("the
Common Stock"), are traded on the Nasdaq SmallCap Market. In the event
the Company fails to comply with the listing requirements, the Common
Stock could be delisted from trading on the Nasdaq SmallCap Market. A
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.
12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
(d) 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. 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. 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. On February
10, 1999, the Company filed a registration statement covering these
shares with the Securities and Exchange Commission ("SEC"). On June
7, 1999, the Company filed an application for the withdrawal of the
registration statement, which withdrawal was accepted by the SEC. The
Company intends to file a registration statement with the SEC covering
these shares, but there can be no assurance that such registration
statement will ultimately become effective.
On April 16, 1999, the Company completed the Offering and sold 506,425
Units (the Units, each a Unit). The securities issued in the Offering
were not registered with the SEC under the Act and were offered and
sold solely to "accredited investors" in reliance on exemptions from
registration provided in Section 4(2) and Rule 506 of Regulation D
under the Act. The Offering resulted in net proceeds to the Company
of approximately $4,200,000. Each Unit consisted of (i) one share of
Series A Preferred Stock, par value $.001 per share (the Series A
Preferred Stock), of the Company, each share of Series A Preferred
Stock convertible into shares of Common Stock, subject to adjustment,
and accruing dividends at the cumulative rate of 10% per share per
annum; and (ii) one warrant to purchase one share of Common Stock at
$5.00 per share up to 60 months
13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
from the date of the Offering. The purchase price per Unit was $10.00.
The Company may, at its option, redeem all or any portion of the
outstanding shares of Series A Preferred Stock at any time at an
amount equal to $15 per share, plus all accrued and unpaid dividends.
Under the terms of the Offering 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 Offering. The Company intends to file a
registration statement with the SEC covering these shares, but there
can be no assurance that such registration statement will ultimately
become effective.
(e) 1999 Stock Option Plan
----------------------
In January 1999 the Board of Directors adopted, and in June 1999 the
stockholders approved, the Company's 1999 Stock Option Plan pursuant
to which 500,000 shares of Common Stock were reserved for issuance
upon the exercise of options designated as either (i) options intended
to constitute incentive stock options under the Internal Revenue Code
of 1986, as amended, or (ii) non-qualified options. Incentive stock
options may be granted under the 1999 Plan to the employees and
officers of the Company. Non-qualified options may be granted to
consultants, directors, employees or officers of the Company. The
1999 Plan is intended to qualify under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended. Unless sooner terminated, the 1999
Plan will expire on January 24, 2009. As of September 30, 1999, the
Company has granted options to purchase an aggregate of 442,500 shares
under the 1999 Plan.
(f) Civil Suit
----------
On September 3, 1999, SHP filed a civil suit against its previous TPA.
The complaint seeks damages resulting from the TPA's mismanagement of
claims processing and other administrative services, including but not
limited to the payment of claims for ineligible individuals, failure
to process claims in a timely manner, payment of duplicate and
excessive amounts to health care providers, and improper retention of
SSHP's HMO premium funds. Such HMO premium funds receivable of
approximately $620,000 is disclosed in the other current assets
section of the balance sheet at September 30, 1999. The civil suit
currently remains in the pre-discovery stages.
(4) Subsequent Event
----------------
The Company's consolidated financial statements for the period ended
December 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 $3,250,027and a net profit of $2,398,533 for the nine months
ended September 30,1998 and 1999, respectively, and as of September 30,
1999 had an accumulated deficit of $6,019,524. 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.
There can be no assurance that the Company's working capital at September
14
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
30, 1999 will be sufficient to fund ongoing business operations.
Management believes that the Company may require additional resources to
enable it to continue operations.
The Company is currently reviewing its options for possible sale of
additional equity securities as well as 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 maintain profitability or that the funds will be
sufficient to sustain any losses of the Company. If the Company is unable
to obtain adequate additional financing or enter into such business
alliance, it may not be able to meet ongoing business operation needs. The
inability to obtain additional financing may have a material adverse effect
on the Company. Additional equity financing may involve substantial
dilution to the interests of the Company's existing stockholders. 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.
A target market conduct examination was performed by the Florida Department
of Insurance ("the Department") earlier in 1999. No written report of its
findings was produced by the Department. On September 10, 1999, SHP
received notice from the Department that a limited scope financial
examination of SHP books and records would be conducted and the examination
started on September 22, 1999. To date, SHP continues to be under
regulatory scrutiny by the Department arising in part from the Company's
weak financial condition prior to current favorable operations and the
continuing recovery of claim overpayments. In addition to any remedies or
sanctions which may be imposed or required by the Department, adverse
regulatory findings can negatively affect the Company's marketing to
customers and providers.
15
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
"FORWARD-LOOKING" INFORMATION
This report on Form 10-QSB contains certain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which represent the Company's expectations and
beliefs, including, but not limited to, statements concerning the Company's
expected growth. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements, which
speak only as of the date such statement was made. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors, including but not limited to: the Company's
ability to forge satisfactory relationships with physician groups and provider
networks and enroll sufficient numbers of HMO members; continued efforts to
control healthcare costs; future membership composition and premium rates for
the commercial business; potential regulatory intervention if the Company fails
to comply wih regulatory requirements; proposed future efforts to control
administrative costs; the ability of the Company to effectively manage any
future outsourcing provider conversions; the individual and group renewal
process; future health care and administrative costs, future provider network,
future provider utilization rates, future medical-loss ratio levels, future
claims payment, service performance and other operations matters; the Company's
ability to meet the listing requirements of The Nasdaq SmallCap Market; future
government regulation and relations and the future of the health care industry;
the Company's ability to attract members that are of sufficient underwriting
risk; the ability of the Company to price its products competitively for this
assumed underwriting risk; 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
SEPTEMBER 30, 1999 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1998 AND 1999 SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT. ALTHOUGH THE COMPANY BELIEVES THAT THE DISCLOSURES PRESENTED BELOW ARE
ADEQUATE TO MAKE THE INTERIM FINANCIAL STATEMENTS PRESENTED NOT MISLEADING, IT
IS SUGGESTED THAT THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BE
READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
FIVE MONTHS ENDED DECEMBER 31, 1998.
GENERAL.
On February 24, 1997, SunStar Health Plan, Inc. ("SHP"), the Company's
principal subsidiary, was awarded its HMO Certificate of Authority in the State
of Florida by the Department of Insurance ("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
16
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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 the Agency for Health Care Administration ("AHCA") to offer its HMO products
in 52 counties. As a result of this accelerated growth, development costs were
also accelerated in the areas of advertising, marketing and materials, personnel
and related expenses during 1998. In 1999, SHP has made the strategic decision
to slow down the rapid growth and intends to resume and complete the expansion
throughout the entire state of Florida during year 2000. As of October 31, 1999
the Company provided coverage to approximately 87,000 members in its current
service areas. The Company has established a distribution network of
approximately 40 general agencies, representing more than 2,500 brokers, to
market its HMO products. The Company has also established a comprehensive
delivery system of contractual providers numbering approximately 15,000
physicians and 130 hospitals. The net profits/losses for the three and nine
months ended September 30, 1999 and 1998 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.
However, if profitability is not maintained and losses reoccur without the
Company obtaining additional financing, they could have a material adverse
effect on the Company's business and financial condition. See "Financial
Condition, Liquidity and Capital Resources."
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 expansion of SHP. During November 1998, HCFA
determined the existing contract held by SHP was not transferrable pursuant to
the Asset Purchase Agreement. Effective January 1, 1999, SHP obtained HCFA
approval to convert the existing prepaid cost reimbursement contract into a cost
contract and entered into an agreement to exclusively use Brevard Medical Care,
Inc. to provide medical services under the new plan.
Since accepting its first HMO members in May 1997, the Company's focus has
been on the marketing and sale of its HMO product in the medically underwritten
individual and small group markets. During 1999 the Company is continuing to
broaden its focus in the geographic areas in which the Company is currently
licensed and to address the large group market.
On April 20, 1998, the Board of Directors approved a change in the
Company's fiscal year end from July 31 to December 31, effective beginning
December 31, 1998.
17
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
GENERAL FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1999
----------- -----------
<S> <C> <C>
Total revenue $14,069,181 $74,962,146
Profit (loss) from continuing operations (4,038,252) 2,407,533
Profit (loss) from disposal of assets -0- (9,000)
Discontinued operations 788,225 -0-
Net profit (loss) (3,250,027) 2,398,533
Net profit (loss) per common share - basic and diluted (1.25) 0.11
Total assets 10,856,352 25,099,348
Long term obligations 76,723 126,006
</TABLE>
Results of Operations.
- ----------------------
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998.
The net profit increased from a net loss of approximately $3,250,000
for the nine months ended September 30, 1998 to a net profit of approximately
$2,399,000 for the nine months ended September 30, 1999. The Company's
investment in rapid growth during 1998 and early 1999 has led to sufficient
growth in revenue to support profitable operations for the nine months ended
September 30, 1999. The profitable operations reflect the effect of the
increased efficiencies related to higher revenue levels, the normal lag in
claims from new enrollees, a slowing of investment in marketing, seasonal effect
and a reduction in the medical loss ratio due to estimated claim overpayment
recoveries.
Total revenues increased by approximately $60,893,000 from approximately
$14,069,000 for the nine months ended September 30, 1998 to approximately
$74,962,000 for the nine months ended September 30, 1999. This increase is
attributable to a $59,283,000 increase in revenues generated by the Company's
HMO, which commenced operations in the fourth quarter of fiscal 1997, coupled
with an increase in other revenues of approximately $1,146,000 due to the
renewal of the HCFA contract effective January 1, 1999 and higher interest
income of approximately $464,000.
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 $13,849,000 and $73,132,000 in HMO
premium revenues for the nine months ended September 30, 1998 and 1999,
respectively. This HMO premium revenue increase is consistent with enrolled
membership growth to approximately 86,000 at September 30, 1999 from
approximately 36,000 at September 30, 1998. The Company anticipates that HMO
premium revenues will remain consistent over the next three-month period.
However, there can be no assurance that such consistency will occur as the
Company expects.
HMO medical costs were approximately $10,093,000 and $50,129,000 for the
nine months ended September 30, 1998 and 1999, respectively, resulting in
medical loss ratios of approximately 73% and 69% for the respective periods.
Material claim overpayments, as described below, contributed to the current
reduction in the medical loss ratio. HMO medical costs include amounts accrued
for actual claims reported but not paid and estimates of medical services
incurred but not reported. Total medical
18
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
payments, including net reinsurance premiums paid, for all dates of service were
approximately $5,109,000 and $51,608,000 for the nine months ended September 30,
1998 and 1999, respectively. During the second quarter 1999, the Company
contracted the services of independent consultants to perform an operational
assessment of the previous TPA, including a random claim audit. As a result of
such operational assessment, the consultants identified material potential claim
payment error rates, primarily attributed to overpayments. In addition, the
Company contracted the services of claim recovery consultants to identify and
document such claim payment errors. To date, the claim recovery consultants have
identified and documented extensive claim overpayments. Such overpayments are
attributed to different situations such as payments made to providers in excess
of contracted rates, payments to providers for non-covered benefits, etc. The
Company is in the process of recovering such amounts. Some claim overpayments
are being offset from future claim payments and some claim overpayments will be
recovered through cash collections. At September 30, 1999, the balance is
approximately $3,623,000, net of recoveries made during the third quarter and an
additional allowance for uncollectable balances.
Selling, general and administrative expenses increased by
approximately $14,400,000 from approximately $7,943,000 for the nine months
ended September 30, 1998 to approximately $22,343,000 for the nine months ended
September 30, 1999. The increase is primarily the result of an increase in
professional and outsourcing fees of $6,211,000; an increase in sales and
marketing salaries, benefits and commission expense related to the HMO products
of approximately $5,429,000; additional administrative salaries and related
benefits of approximately $1,936,000; and an increase in occupancy, insurance,
general office and related costs of approximately $433,000 coupled with an
increase of approximately $391,000 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.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 30% for the nine months ended September 30, 1999 from 56% for the
nine months ended September 30, 1998, due in part to an increased revenue base
and a slow down in marketing efforts. The Company expects selling, general and
administrative expenses as a percentage of revenues to continue to decrease as
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.
Financial Condition, Liquidity and Capital Resources.
- -----------------------------------------------------
At September 30, 1999 the Company had positive working capital of
approximately $5,444,000 as compared to negative working capital of
approximately $674,000 at December 31, 1998. The increase in working capital
from the end of fiscal year 1998 is attributable primarily to proceeds received
in connection with the preferred stock funds received under the Offering and the
estimated claim payment recoveries, offset by development, marketing and
personnel costs incurred in order to support and manage the continued growth and
expansion of the HMO.
Net cash provided by (used in) operating activities was approximately
$2,787,000 and $(1,921,000) for the nine months ended September 30, 1998 and
1999, respectively. Net cash used in operating activities at September 30,
1999 was primarily attributable to an increase in estimated claim
19
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
payment recoveries of approximately $4,024,000, a decrease in cash received
related to unearned and deferred revenues of approximately $1,923,000, an
increase in accounts receivable of approximately $1,025,000, a decrease in
estimated Medicare settlement of approximately $103,000 and a decrease in
prepaid expenses and other assets of approximately $9,000, offset by a net
profit of approximately $2,399,000, an increase in medical claims payable and
reserves for incurred but not reported claims of approximately $1,898,000, an
increase in the allowance for estimated claim overpayment recoveries of
$400,000, an increase in accounts payable and accrued expenses of $278,000,
depreciation expenses of approximately $150,000 and non cash compensation
expenses of approximately $38,000.
Net cash provided by investing activities for the nine months ended
September 30, 1998 was approximately $1,642,000 as compared to net cash used in
investing activities for the nine months ended September 30, 1999 of
approximately $539,000. The decrease in cash from investing activities at
September 30, 1999 was primarily the result of purchases of furniture and
equipment associated with the development of the Company's administrative
offices of approximately $298,000 and the purchase of a restricted certificate
of deposit of $250,000, offset by $9,000 in disposal of furniture and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 1998 and 1999 was approximately $1,289,000 and $4,131,000,
respectively. Net cash provided by financing activities at September 30, 1999
was primarily attributable to the receipt of approximately $4,312,000 in net
proceeds from the preferred stock subscriptions in connection with the Offering
coupled with an increase in capital lease obligations of approximately $108,000,
offset by approximately $289,000 in preferred dividends declared.
During the current and next fiscal year, the Company's liquidity will be
affected by continued HMO development, marketing and operation. Effective
September 30, 1999, SHP is required to maintain a minimum statutory surplus in
an amount which is the greater of $1,150,000 or 10% of total liabilities or
1.25% of annualized premium pursuant to Section 641 of the Florida Insurance
Code. Based on this criteria, at September 30, 1999, SHP is required to
maintain a minimum statutory surplus of approximately $1,780,000. At September
30, 1999, SHP's unaudited statutory financial statements reflect an actual
surplus of approximately $2,143,000. 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. There can be no assurance that the Company will
continue to be able to comply with the DOI requirements.
SHP continues to be under regulatory scrutiny by the Department arising in
part from the Company's weak financial condition prior to current favorable
operations and the continuing recovery of claim overpayments. In addition to
any remedies or sanctions which may be imposed or required by the Department,
adverse regulatory findings can negatively affect the Company's marketing to
customers and providers.
HMO development costs will continue to be incurred by SHP in fiscal year
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 employees' 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 1998 and early 1999 to augment the Company's
20
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
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 sold 506,425 Units pursuant to the Offering, resulting in net
proceeds to the Company of approximately $4,200,000. The Series A Preferred
Stock issued in the Offering 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) of the Securities Act and Rule 506 of Regulation D. The Placement
Agent received a retail commission of 8% of the aggregate amount of the Offering
and received five-year warrants (the "Placement Agent Warrants") to purchase
100,000 shares of Common Stock at $1.50 per share and 422,021 shares of Common
Stock at $4.00 per share. The Placement Agent Warrants are not exercisable
until one year after the completion of the Offering and thereafter are
exercisable over a period of four years. The Placement Agent also received non-
accountable expenses of 3% of the aggregate amount of the Offering and non-
accountable marketing expenses of 2% of the aggregate amount of the Offering.
Under the terms of the Offering, the Company is to file a registration statement
on the appropriate form with the Securities and Exchange Commission not later
than 90 days following the closing of the Offering covering all of the shares of
Common Stock underlying the Series A Preferred Stock and Warrants sold pursuant
to the Offering and the Placement Agent Warrants. The Company intends to file a
registration statement with the SEC covering these shares, but there can be no
assurance that such registration statement will ultimately become effective.
The Company conducted an initial public offering ("IPO") in May 1996, a
Private Placement in July 1998 and the Offering in April 1999 to provide funds
for its growth and expansion plans. The net proceeds from such offerings,
approximating $11,600,000, have been used to implement such expansion and for
the support of its HMO operations. 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, to satisfy in the future its
net tangible asset requirements as governed by the Nasdaq SmallCap Market and to
comply with other equity requirements as governed by certain regulatory entities
including, without limitation, the Florida DOI, 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 the Company with 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.
21
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
The Company's shares of Common Stock are traded on the Nasdaq SmallCap
Market. In the event the Company fails to comply with the listing requirements,
the Common Stock could be delisted from trading on the Nasdaq SmallCap Market. A
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.
Year 2000 Readiness.
- --------------------
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize the date "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations. The Company
is utilizing internal resources to identify, correct or reprogram, and test the
systems for Year 2000 compliance.
As of September 30, 1999, the Company was 90% complete with its Year 2000
compliance program and anticipates being complete with all phases of the program
by December 1999. The Company's Year 2000 compliance program requires
remediation of certain programs and the replacement of certain hardware within
particular time frames in order to avoid disruption of the Company's operations.
Although the Company believes it will complete the remediation of these programs
within the applicable time frames, there can be no assurance that such
remediation will be completed or that the Company's operations will not be
disrupted to some degree.
The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including business partners, landlords and suppliers. The effect of such
vendors' noncompliance, if any, is not reasonably estimable at this time.
The Company estimates that the costs in connection with its Year 2000
compliance efforts will be less than $100,000. The cost of this project and the
date on which the Company plans to complete the necessary Year 2000
modifications are based on management's best estimate, which includes
assumptions of future events including the continued availability of certain
resources. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
22
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On August 23, 1999, and as permitted by the Certificate of Designation,
the Company requested from the Placement Agent and received a waiver of
redemption rights under the Company's Series A Preffered Stock.
23
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Item 6. Exhibits and reports on Form 8-K
<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*
3.1 Certificate of Designation******
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)*
4.2 Form of Warrant Agreement (for Offering)******
4.2 Form of Registration Rights Agreement (for Offering)******
4.3 1996 Stock Option Plan*
4.4 Form of 1996 Stock Option Contract**
4.5 1999 Stock Option Plan*******
4.6 Form of 1999 Stock Option Contract*******
4.7 Series A Preferred Stock Redemption Waiver********
10.3 Agreement for Third Party Administrator Services, dated March 7,
1997, between Healthplan
Services, Inc. and SunStar Health Plan, Inc.***
10.3 Agreement for Third Party Administrator Services, dated March 26, 1999,
between Companion
Information Management Resources, 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*
10.4 Agreement for Health Care Cost-Based Plan, dated January 1, 1999,
between the Health Care Financing Administration and SunStar Health
Plan, Inc. ******
10.5 Certificate from State of Florida, Agency for Health Care
Administration certifying Boro Medical Corporation a Healthcare
Provider*
10.6 Employment Agreement, dated as of June 7, 1999, by and between the
Company and Warren Stowell*******
10.7 Employment Agreement, dated as of June 7, 1999, by and between the
Company and David Jesse*******
10.8 Employment Agreement, dated as of June 7, 1999, by and between the
Company and Robyn Stowell*******
10.9 Agreement, dated June 10, 1999, by and between the Company and The
Ulysses Group Advisors, Inc.*******
24
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
10.10 Financial Consulting and Investment Banking Agreement, dated June 30,
1999, by and between the Company and Schneider Securities, Inc.*******
10.11 Warrant to purchase 100,000 shares of Common Stock, dated as of
April 22, 1999, between the Company and Brookstreet Securities
Corporation, Inc.*******
10.12 Warrant to purchase 422,021 shares of Common Stock, dated as of
April 22, 1999, between the Company and Brookstreet Securities
Corporation, Inc.*******
11. Statement of Per Share Earnings (included in Consolidated Financial
Statements attached to this report)
23.1 Consent of KPMG Peat Marwick LLP******
27.1 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 as same exhibit reference to Form 10-KSB for the fiscal year
ended July 31, 1998.
****** Filed as same exhibit reference to Form 10-KSB for the five months
ended December 31, 1998.
******* Filed as same exhibit reference to Form 10-QSB for the three months
ended June 30, 1999.
******** Filed herewith.
</TABLE>
Reports on Form 8-K:
None.
25
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUNSTAR HEALTHCARE, INC.
Date: 11/15/99 /s/ Warren Stowell
------------------------------ ----------------------------------
Warren Stowell
President, Chief Executive Officer
and Chairman
Date: 11/15/99 /s/ David Jesse
----------------------------- ----------------------------------
David Jesse
Executive Vice President and
Chief Operating Officer
Date: 11/15/99 /s/ Maria Escurra
-------------------- ----------------------------------
Maria Escurra
Chief Financial Officer
26
<PAGE>
[SunStar Healthcare Letter Head]
Exhibit 4.7
August 20, 1999
Brookstreet Securities Corporation, Inc.
2361 Campus Drive, Suite 210
Irvine, CA 02612
Attention: Dave Rosier
Dear Dave:
As you may know, we were advised today by telephone by Nasdaq that
notwithstanding our apparent satisfaction of their net asset and loss minimum
requirements, we will be delisted without further notice unless the redemption
provisions of the preferred stock are waived. In order to help save the Nasdaq
listing, we are asking that Brookstreet waive the redemption provisions of the
preferred stock, as clearly permitted by the certificate of designation. We
trust you will agree that the Nasdaq listing is as, or more, important to
Brookstreet and its investors than the redemption provisions, which as you may
know we expect will terminate shortly anyway as we hit 90,000 members.
Unfortunately, Nasdaq has told us that they may not wait any longer and may act
without further notice.
If you agree to this waiver*, please sign where indiciated below so that
we may instantly solve this redemption feature problem.
Very truly yours,
/s/ Warren Stowell
Warren Stowell
Name: /s/ David Rosier Date: 8/23/99
----------------------------- --------------------------------
* Based on your E-mail today that you now have 86,000 members as of 8/12/99
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 17,654
<SECURITIES> 0
<RECEIVABLES> 5,926
<ALLOWANCES> 0
<INVENTORY> 59
<CURRENT-ASSETS> 23,880
<PP&E> 527
<DEPRECIATION> 150
<TOTAL-ASSETS> 25,099
<CURRENT-LIABILITIES> 18,436
<BONDS> 0
0
1
<COMMON> 3
<OTHER-SE> 6,534
<TOTAL-LIABILITY-AND-EQUITY> 25,099
<SALES> 0
<TOTAL-REVENUES> 74,962
<CGS> 0
<TOTAL-COSTS> 72,472
<OTHER-EXPENSES> 83
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 2,408
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,399
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
