<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 March 31, 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
April 30, 1999.
Transitional Small Business Disclosure Format (check one): YES __ NO X
-----
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 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 (unaudited)......................... 3
Consolidated Statements of Cash Flows (unaudited)......................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 12
Part II. Other Information......................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................. 19
Item 6. Exhibits and Reports on Form 8-K...................................... 20
Signatures............................................................................. 22
</TABLE>
1
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
Item 1. Consolidated Financial Statements (unaudited) of SunStar Healthcare,
Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets:
Cash and cash equivalents $17,230,778
Premiums receivable 187,228
Prepaid expenses 850,411
Other current assets 1,177,339
-----------
Total current assets 19,445,756
Furniture and equipment, net 352,004
Deposits and other assets 383,371
Deferred taxes 100,000
-----------
Total assets $20,281,131
===========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Medical claims payable $15,298,108
Unearned premium - HMO 3,871,733
Accounts payable and accrued expenses 655,735
Estimated Medicare settlement 103,175
Capital lease obligations, current 35,614
-----------
Total current liabilities 19,964,365
Capital lease obligations, noncurrent 57,918
-----------
Total liabilities 20,022,283
Shareholders' equity
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 690,000 shares designated as Series A,
132,675 shares issued and outstanding as of March 31, 1999 (note 4) 133
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 2,919,330 shares issued and outstanding 2,919
Additional paid-in capital 9,351,470
Unearned compensation from stock options (21,702)
Accumulated deficit (9,073,972)
-----------
Total shareholders' equity 258,848
-----------
Total liabilities and shareholders' equity $20,281,131
===========
See accompanying notes to consolidated financial statements.
</TABLE>
2
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Revenues:
HMO premiums $ 1,604,084 $23,381,076
Investment income 41,694 213,409
Other -0- 315,479
----------- -----------
Total revenues 1,645,778 23,909,964
Operating expenses:
HMO medical costs 1,012,224 17,260,290
Selling, general and administrative 1,856,095 7,233,398
Option based compensation 16,276 16,276
Amortization of intangibles 6,141 44,585
----------- -----------
Total operating expenses 2,890,736 24,554,549
Loss before income taxes (1,244,958) (644,585)
Provision for income taxes -0- -0-
----------- -----------
Loss from continuing operations (1,244,958) (644,585)
Loss from disposal of assets -0- (9,001)
----------- -----------
Loss before discontinued operations (1,244,958) (653,586)
Discontinued operations:
Income from discontinued operations 120,293 -0-
----------- -----------
Total discontinued operations 120,293 -0-
----------- -----------
Net loss $(1,124,665) $ (653,586)
=========== ===========
Earnings per share
Loss from continuing operations $ (0.51) $ (0.23)
Loss from disposal of assets $ 0.00 $ (0.01)
Discontinued operations $ 0.05 $ 0.00
Net loss $ (0.46) $ (0.24)
Weighted average shares outstanding 2,445,000 2,919,330
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,124,665) $ (653,586)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 32,341 80,870
Noncash compensation 16,276 16,276
Loss from disposal of assets (1,224) -0-
Changes in operating assets and liabilities:
Increase in accounts receivables (96,507) (55,229)
Increase (decrease) in prepaid expenses and other assets 316 (631,697)
Increase (decrease) in accounts payable and
accrued expenses 79,291 (137,252)
Increase in medical claims payable 258,322 1,476,921
Increase (decrease) in unearned premium (37,748) 346,453
Increase in estimated Medicare settlement 53,705 -0-
----------- -----------
Net cash (used in) provided by operating activities (819,893) 442,756
Cash flows from investing activities:
Purchase of furniture and equipment (43,500) (16,051)
Disposal of furniture and equipment 1,345 9,001
----------- -----------
Net cash used in investing activities (42,155) (7,050)
Cash flows from financing activities:
Issuance of preferred stock -0- 820,576
Principal payments under capital lease obligations 20,960 (8,665)
----------- -----------
Net cash provided by financing activities 20,960 811,911
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (841,088) 1,247,617
Cash and cash equivalents, beginning of period 3,807,187 15,983,161
----------- -----------
Cash and cash equivalents, end of period 2,966,099 17,230,778
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 4,590 2,832
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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
March 31, 1999, the Company was 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 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 $167,000 and $2,108,000 for the quarters
ended March 31, 1998 and 1999, respectively. At March 31, 1999, the
Company had a receivable of approximately $ 929,000 for premiums and
collections due from the TPA, which is included in other current
assets.
5
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
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 the TPA. On March 26, 1999, the Company's management
finalized an agreement for similar services with a different TPA and
anticipates completion of the conversion from the existing TPA to the
new TPA on July 1, 1999.
(b) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair
presentation of the financial results for the interim periods
presented. Pursuant to the rules and regulations of the Securities
and Exchange Commission, certain footnote disclosures which would
substantially duplicate the disclosures contained in the audited
financial statements of the Company have been omitted from these
interim financial statements. Although the Company believes that the
disclosures presented below are adequate to make the interim financial
statements presented not misleading, it is suggested that these
unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the
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 quarter ended March 31, 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, net of program costs,
are included as other operating revenue in the accompanying statement
of operations for the quarter ended March 31, 1999.
(c) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of 90 days or less.
6
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
(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) 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 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.
(g) Per Share Data
--------------
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.
(h) Reclassifications
-----------------
Certain reclassifications have been made to the prior year's financial
statement amounts to conform to the current year's financial statement
presentation.
(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.
7
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
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 quarter ended March 31, 1998 are reported in the
accompanying consolidated statements of operations under discontinued
operations.
Information with respect to discontinued operations for the quarter ended
March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Revenues $ 1,001,288
Expenses 880,995
-----------
Income from discontinued operations $ 120,293
===========
</TABLE>
(3) Commitments, Contingencies and Other Matters
--------------------------------------------
(a) Professional Liability
----------------------
The Company insures its professional liability risks on a claims-made
basis. The Company has secured claims-made coverage from December 3,
1998 through December 3, 1999, 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.
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 and
the maximum life time reinsurance indemnity payable under the
agreement for any one member is $2,000,000.
8
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
(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 $800,000 or 10% of total
liabilities or 1% of annualized premium, which at March 31, 1999 was
approximately $1,935,000. SHP was not in compliance with this
requirement and had an unaudited statutory surplus of $830,175 at
March 31, 1999. Management's plans for obtaining capital to meet
mandated minimum surplus requirements are discussed in note 4.
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 will be
filed in 1999. SHP's reported, unaudited, net income for the quarter
ended March 31, 1999 has met the 2% criteria.
(c) Nasdaq Listing Requirements
---------------------------
The Company's shares of Common Stock are traded on the Nasdaq SmallCap
Market. Continued trading of the Common Stock on the Nasdaq SmallCap
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 SmallCap 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). As of March 31, 1999, the Company did not meet the
net tangible assets maintenance requirement, and had received a
delisting letter from Nasdaq. During April 1999, the Company
completed a private offering ("the Offering") under Rule 506 of
Regulation D, resulting in net proceeds to the Company of
approximately $4,200,000. The Company appeared before a Nasdaq panel
at a hearing on April 22, 1999 to appeal the proposed delisting as
contained in the Nasdaq letter. The Nasdaq panel has not issued its
decision regarding the Company's hearing, and there can be no
assurance the Company will satisfy all such requirements and retain
its Nasdaq SmallCap Market listing. As a result, Common Stock could
be delisted from trading on the Nasdaq SmallCap Market, which
delisting could adversely affect the trading market for the Common
Stock. In such event, trading in the Common
9
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
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.
(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. The Company
filed a registration statement covering these shares on February 10,
1999 and has properly accrued for delayed filing fees.
(4) Subsequent Events
-----------------
The Company's consolidated financial statements for the quarter ended March
31, 1999 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
$1,124,665 and $653,586 for the quarters ended March 31,1998 and 1999,
respectively, and as of March 31, 1999 had an accumulated deficit of
$9,073,972. 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 March 31, 1999 will be sufficient to fund
ongoing business operations. Management believes that the Company will
require additional resources to enable it to continue operations.
In recognition thereof, during April 1999, the Company completed the
Offering and sold 501,425 Units (the Units, each a Unit), resulting in net
proceeds to the Company of approximately $4,200,000. Each Unit consisted
of (i) one share of Series A Preferred Stock, par
10
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
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 from the date of the Offering. The
purchase price per Unit was $10.00.
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 achieve profitability or that the funds will be
sufficient to sustain the Company's losses. 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. 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. 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.
11
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
"FORWARD-LOOKING" INFORMATION
This report on Form 10-QSB contains certain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which represent the Company's expectations and
beliefs, including, but not limited to, statements concerning the Company's
expected growth. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements, which
speak only as of the date such statement was made. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors, including the Company's ability to forge
satisfactory relationships with physician groups and provider networks and
enroll sufficient numbers of HMO members; continued efforts to control
healthcare costs; future membership composition and premium rates for the
commercial business; 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 comply with
regulatory requirements; 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
MARCH 31, 1999 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE QUARTERS ENDED
MARCH 31, 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, 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
12
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SUN HEALTHCARE, INC. AND SUBSIDIARIES
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 were also accelerated in
the areas of advertising, marketing and materials, personnel and related
expenses. SHP intends to complete this expansion throughout the entire state of
Florida over the next twelve months. As of April 1, 1999, the Company provided
coverage to approximately 78,000 members in its current service areas. The
Company has established a growing distribution network of more than 3,000
brokers and 125 general agencies to market its HMO products. The Company has
also established a comprehensive delivery system of contractual providers
numbering approximately 17,000 physicians and 130 hospitals. The net losses for
the three months ended March 31, 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 such losses continue 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 rapid 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 BMC to provide medical
services under the new plan.
Since accepting its first HMO members in May 1997, the Company's initial
focus had 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
objective has been 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. During 1998 the Company had begun to broaden its focus in
the geographic areas in which the Company is currently licensed.
On April 20, 1998, the Board of Directors approved a change in the
Company's fiscal year end from July 31 to December 31, to be effective beginning
December 31, 1998.
13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
GENERAL FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1998 1999
----------- -----------
<S> <C> <C>
Total revenue $ 1,645,778 $23,909,964
Loss from continuing operations (1,244,958) (644,585)
Loss from disposal of assets - (9,001)
Discontinued operations 120,293 -
Net loss (1,124,665) (653,586)
Net loss per common share (0.46) (0.24)
Total assets 5,183,860 20,281,131
Long term obligations 142,517 57,918
</TABLE>
Results of Operations.
- ----------------------
Quarter ended March 31, 1999 compared to quarter ended March 31, 1998.
Total revenues increased by approximately $22,264,000 from
approximately $1,646,000 for the three months ended March 31, 1998 to
approximately $23,910,000 for the three months ended March 31, 1999. This
increase is attributable to a $21,777,000 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 $315,000 due to the
renewal of the HCFA contract effective January 1, 1999 and higher interest
income of approximately $172,000.
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 $1,604,000 and $23,381,000 in HMO
premium revenues for the quarters ended March 31, 1998 and 1999, respectively.
This HMO premium revenue increase is consistent with enrolled membership growth
to approximately 76,000 at March 31, 1999 from approximately 7,300 at March 31,
1998. The Company anticipates that HMO premium revenues will continue to
increase over the next nine-month period as the Company further implements its
growth plan. However, there can be no assurance that such growth will occur as
the Company expects.
HMO medical costs were approximately $1,012,000 and $17,260,000 for
the quarters ended March 31, 1998 and 1999, respectively, resulting in medical
loss ratios of approximately 63% and 74% for the respective periods. 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,
including net reinsurance premiums paid, for all dates of service were
approximately $525,000 and $13,714,000 for the three months ended March 31, 1998
and 1999, respectively.
Selling, general and administrative expenses increased by
approximately $5,377,000 from approximately $1,856,000 for the quarter ended
March 31, 1998 to approximately $7,233,000 for the quarter ended March 31, 1999.
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 $2,450,000; an increase in professional and outsourcing fees of
$2,183,000; additional administrative salaries and related benefits of
approximately $418,000; an increase of approximately $182,000 in other general
and
14
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
administrative expenses, including costs related to HMO enrollee medical
records, benefit statements and other miscellaneous office expenses coupled with
an increase in occupancy, insurance, general office and related costs of
approximately $144,000. 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 three months ended March 31, 1999 from 113% for the three months ended
March 31, 1998. 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.
As a result of the foregoing, the net loss decreased from
approximately $1,125,000 for the quarter ended March 31, 1998 to approximately
$654,000 for the quarter ended March 31, 1999.
Financial Condition, Liquidity and Capital Resources.
- -----------------------------------------------------
At March 31, 1999 the Company had negative working capital of
approximately $519,000 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 subscriptions received under the Offering, offset by
development, marketing and personnel costs incurred in order to support and
manage the continued growth and expansion of the HMO.
Net cash used by operating activities was approximately $820,000 for
the quarter ended March 31, 1998, as compared to net cash provided by operating
activities of approximately $443,000 for the quarter ended March 31, 1999. Net
cash provided by operating activities at March 31, 1999 was primarily
attributable to an increase in medical claims payable and reserves for incurred
but not reported claims of approximately $1,477,000, additional cash received
related to unearned and deferred revenues of approximately $347,000,
depreciation expenses of approximately $81,000 and non cash compensation
expenses of approximately $16,000, offset by a net loss of approximately
$654,000, an increase in prepaid expenses and other assets of $632,000, a
decrease in accounts payable and accrued expenses of $137,000 and an increase in
accounts receivable of $55,000.
Net cash used in investing activities for the quarters ended March 31, 1998
and 1999 was approximately $42,000 and $7,000, respectively, primarily as a
result of purchases of furniture and equipment associated with the development
of the Company's new administrative offices.
Net cash provided by financing activities for the quarters ended March 31,
1998 and 1999 was approximately $21,000 and $812,000, respectively. Net cash
provided by financing activities at March 31, 1999 was primarily attributable to
the receipt of approximately $821,000 in net proceeds from the preferred stock
subscriptions in connection with the Offering, offset by approximately $9,000 in
principal payments under capital lease obligations.
15
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
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.
Based on this criteria, at March 31, 1999, SHP is required to maintain a minimum
capital surplus of approximately $1,954,000. At March 31, 1999, SHP's unaudited
statutory financial statements reflect an actual surplus of approximately
$830,000. 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 be able to comply
with the State regulatory requirements.
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 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 1998 and 1999 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 sold 501,425 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 is to receive five-year warrants (the "Placement Agent Warrants") to
purchase up to 100,000 shares of Common Stock at $1.50 per share, on a pro rata
basis, up to the sale of $1,500,000 in the Offering, and up to 500,000 shares of
Common Stock at $4.00 per share, on a pro rata basis, up to the sale of
$6,000,000 in the Offering. The Placement Agent Warrants are not to be
exercisable until one year after the completion of the Offering and thereafter
are to be 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 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
16
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
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.
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
achieve profitability or that the funds will be sufficient to sustain the
Company's losses. 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. 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.
The Company's shares of Common Stock are traded on the Nasdaq SmallCap
Market. Continued trading of the Common Stock on the Nasdaq SmallCap 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 SmallCap 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). As of March 31, 1999, the
Company did not meet the net tangible assets maintenance requirement, and had
received a delisting letter from Nasdaq. During April 1999, the Company
completed the Offering under Rule 506 of Regulation D, resulting in net proceeds
to the Company of approximately $4,200,000. The Company appeared before a
Nasdaq panel at a hearing on April 22, 1999 to appeal the proposed delisting as
contained in the Nasdaq letter. The Nasdaq panel has not yet issued its
decision regarding the Company's hearing, and there can be no assurance the
Company will satisfy all such requirements and retain its Nasdaq SmallCap Market
listing. As a result, Common Stock could be delisted from trading on the Nasdaq
SmallCap 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.
17
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
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 March 31, 1999, the Company was 80% complete with its Year 2000
compliance program and anticipates being complete with all phases of the program
by the second quarter of 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.
18
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 1999, and April 1999, the Company sold
501,425 Units pursuant to the Offering, resulting 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 from the date of the Offering.
The purchase price per Unit was $10.00. 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 is to
receive five-year warrants (the "Placement Agent Warrants") to purchase up to
100,000 shares of Common Stock at $1.50 per share, on a pro rata basis, up to
the sale of $1,500,000 in the Offering, and up to 500,000 shares of Common Stock
at $4.00 per share, on a pro rata basis, up to the sale of $6,000,000 in the
Offering. The Placement Agent Warrants are not to be exercisable until one year
after the completion of the Offering and thereafter are to be 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.
19
<PAGE>
SUN 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**
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*
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 herewith.
</TABLE>
20
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
Reports on Form 8-K:
Item 8. Change in fiscal year, filed on March 17, 1999.
21
<PAGE>
SUN HEALTHCARE, INC. AND SUBSIDIARIES
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUNSTAR HEALTHCARE, INC.
Date: 05/14/99 /s/ Warren Stowell
-------- --------------------
Warren Stowell
President, Chief Executive Officer
and Chairman
SUNSTAR HEALTHCARE, INC.
Date: 05/14/99 /s/ David Jesse
-------- --------------------
David Jesse
Executive Vice President and
Chief Operating Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUNSTAR
HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,231
<SECURITIES> 0
<RECEIVABLES> 187
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,446
<PP&E> 352
<DEPRECIATION> 36
<TOTAL-ASSETS> 20,281
<CURRENT-LIABILITIES> 19,964
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 256
<TOTAL-LIABILITY-AND-EQUITY> 20,281
<SALES> 0
<TOTAL-REVENUES> 23,910
<CGS> 0
<TOTAL-COSTS> 24,487
<OTHER-EXPENSES> 68
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (654)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
