U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
OR
(_) 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 0-21299
STAR MULTI CARE SERVICES, INC.
(Exact Name of Registrant as specified in its charter)
NEW YORK 11-1975534
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 RAILROAD STATION PLAZA, HICKSVILLE, NEW YORK 11801
-----------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (516) 938-2016
Indicate by check mark whether the Registrant (1) has filed all 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
requirement for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 14, 1996:
Class Number of Shares
----- ----------------
COMMON STOCK, $0.001 PAR VALUE 3,815,218
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of August 31, 1996 and May 31, 1996....... 3
Consolidated Statements of Income for the three months
ended August 31, 1996 and 1995........................................ 4
Consolidated Statements of Cash Flows
for the three months ended August 31, 1996
and 1995 ............................................................ 5
Notes to Interim Consolidated Financial Statements....................... 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 6. Exhibits and Reports on Form 8-K .............................. 11
Signatures......................................................... 12
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 835,631 $ 1,881,979
Short-term investments -- 100,000
Accounts receivable, less allowance for doubtful accounts
of $700,000 and $808,000 at August 31, 1996 and
May 31, 1996, respectively 8,958,698 9,611,169
Prepaid expenses and other current assets 609,192 800,665
Deferred income taxes 400,015 400,015
Income taxes receivable 862,967 --
------------ ------------
Total current assets 11,666,503 12,793,828
Property and equipment, net of accumulated depreciation
and amortization of $763,313 and $706,818 at
August 31, 1996 and May 31, 1996, respectively 756,904 766,480
Notes receivable from officer 99,017 100,517
Intangible assets, net of accumulated amortization 5,286,434 5,197,778
Other assets 528,435 510,487
------------ ------------
$ 18,337,293 $ 19,369,090
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll and related expenses $ 1,469,101 $ 1,329,826
Accounts payable and other accrued expenses 2,124,889 1,530,138
Net liability of discontinued operations 97,881 98,081
Income taxes payable -- 295,647
Current maturities of long-term debt 125,000 125,000
------------ ------------
Total current liabilities 3,816,871 3,378,692
------------ ------------
REVOLVING CREDIT LINE 2,055,000 3,280,000
------------ ------------
DEFERRED TAX LIABILITY -- 39,909
------------ ------------
LONG-TERM LIABILITIES 1,306,819 33,970
------------ ------------
LONG-TERM DEBT 218,750 250,000
------------ ------------
Redeemable preferred stock
Preferred stock, $.01 par value; authorized 3,000,000 shares;
Class B; issued and outstanding 130,071 shares -- 1,301
Additional paid-in capital -- 340,135
------------ ------------
Total redeemable preferred stock -- 341,436
------------ ------------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity
Preferred stock, $1.00 par value per share,
5,000,000 shares authorized in 1994 -- --
Common Stock, $.001 par value per share, 10,000,000 shares
authorized; 3,952,718 and 3,878,955 issued, respectively 3,953 3,879
Additional paid-in capital 13,451,925 13,288,548
Note receivable from officer (397,782) (397,782)
Unrealized gain (loss) on short-term investments 4,000 (6,000)
Deficit (1,843,321) (564,640)
------------ ------------
11,218,775 12,324,005
Less treasury stock - 137,500 common shares at
August 31, 1996 and May 31, 1996 278,922 278,922
------------ ------------
Total shareholders' equity 10,939,853 12,045,083
------------ ------------
$ 18,337,293 $ 19,369,090
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
August 31,
-----------------------------
1996 1995
------------ ------------
Net revenues $ 12,563,160 $ 11,613,886
------------ ------------
Operating costs and expenses:
Costs of revenue 8,220,195 7,558,307
Selling, general and administrative 3,499,245 3,697,037
Depreciation and amortization 158,015 210,510
------------ ------------
Income from operations 685,705 148,032
Interest expense (74,597) (63,010)
Merger transaction costs (2,808,223) --
Interest income 29,434 55,110
------------ ------------
(Loss) income before income taxes (2,167,681) 140,132
Benefit (provision) for income taxes 889,000 (108,000)
------------ ------------
Net (loss) income $ (1,278,681) $ 32,132
============ ============
Net (loss) income per common share $ (0.33) $ 0.01
============ ============
Shares used in computing per share amounts 3,832,669 3,751,443
============ ============
See accompanying notes.
4
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) income $(1,278,681) $ 32,132
----------- -----------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 45,000 78,131
Depreciation and amortization of property and equipment 55,077 49,877
Amortization of intangible assets 102,938 160,248
Deferred income taxes (39,909) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 607,471 (940,134)
Prepaid expenses and other current assets 191,473 (56,681)
Income taxes receivable (862,967) 24,413
Other assets (17,948) 26,702
Increase (decrease) in liabilities:
Accrued payroll and related expenses 139,275 (2,469)
Accounts payable and other accrued expenses 1,867,600 74,650
Income taxes payable (295,647) (10,116)
----------- -----------
Total adjustments 1,792,363 (595,379)
----------- -----------
Net cash provided by (used in) operating activities 513,682 (563,247)
----------- -----------
Cash flows from investing activities:
Payments of costs related to discontinued operations (200) (89,029)
Purchase of property and equipment (45,501) (97,977)
Increase in intangibles (191,594) (26,598)
Repayment of note receivable from officer 1,500 9,723
Net proceeds from the sale of short-term investments 110,000 642,607
----------- -----------
Net cash (used in) provided by investing activities (125,795) 438,726
----------- -----------
Cash flows from financing activities:
Net (repayments of) and proceeds from revolving credit line (1,225,000) 700,000
Repayment of long-term debt (31,250) (41,667)
Redemption of class B preferred shares (341,436) --
Proceeds from issuance of common stock 163,451 --
----------- -----------
Net cash (used in) provided by financing activities (1,434,235) 658,333
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,046,348) 533,812
Cash and cash equivalents at beginning of period 1,881,979 1,496,792
----------- -----------
Cash and cash equivalents at end of period $ 835,631 $ 2,030,604
=========== ===========
Supplemental disclosures:
Income taxes paid $ 181,936 $ 180,902
=========== ===========
Interest paid $ 78,000 $ 88,647
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
In the opinion of management, the accompanying unaudited interim
consolidated financial statements of Star Multi Care Services, Inc. and its
subsidiaries (the "Company") contain all adjustments necessary to present fairly
the Company's financial position as of August 31, 1996 and May 31, 1996 and the
results of its operations and cash flows for the three month periods ended
August 31, 1996 and 1995.
The accounting policies followed by the Company are set forth in Note
1 to the Company's consolidated financial statements included in its Annual
Report on Form 10-KSB for the fiscal year ended May 31, 1996, which is
incorporated herein by reference. Specific reference is made to this report for
the notes to consolidated financial statements included therein.
The results of operations for the three month period ended August 31,
1996 are not necessarily indicative of the results to be expected for the full
year.
Note 1 - Contingencies
- ----------------------
The Company in the past treated certain of its nurses and certain
others as independent contractors. The Internal Revenue Service ("IRS") and the
New York State Department of Labor ("DOL") have, in certain cases, determined
that per diem health care workers were employees, and not independent
contractors of the firm placing them. Two of the Company's subsidiaries have
been selected for an employment tax audit by the DOL and another of the
Company's subsidiaries has been selected for an employment tax audit by the IRS.
In October 1994, the subsidiary subjected to the IRS audit received
from the IRS a formal report proposing an adjustment in taxes of $1,222,220 for
years 1989-1993. On October 12, 1995, that subsidiary signed a closing agreement
with the IRS providing for zero tax liability for years 1989- 1995. The
subsidiary has agreed to treat all skilled nurses providing hospital staffing
services as employees for federal employment tax purposes commencing January 1,
1996. As skilled hospital staffing services currently represents only 2% of
revenues, this change is not expected to have a significant impact on earnings.
In May 1993, one of the Company's subsidiaries received from the DOL
a formal report proposing an adjustment in the amount of $73,000. In January
1994, the other of the Company's subsidiaries received from the DOL a formal
report proposing an adjustment in the amount of $33,000. The Company prevailed
before the hearing examiner in the latter of these cases, which decision is
presently being appealed by the DOL, and the Company is vigorously defending its
position. The Company did not prevail in the former case and is currently
appealing that decision. Management believes that the possibility of an
unfavorable outcome which would materially affect the financial position and
results of operations of the Company is remote.
6
<PAGE>
Note 2 - Net Income Per Share
- -----------------------------
Net income per share has been computed by dividing net income by the
weighted average number of common stock and common stock equivalents outstanding
during each period. Common stock equivalents represent the dilutive effect of
the assumed exercise of certain outstanding stock options and warrants.
Note 3 - Merger
- ---------------
On August 23, 1996, the Company completed a merger to acquire AMSERV
HEALTHCARE INC. ("Amserv"), a health care service company which provides home
care services in New Jersey and Ohio. In accordance with the Merger Agreement,
each share of common stock of Amserv outstanding immediately prior to
consummation of the merger was converted into .4090 shares of common stock of
the Company. The total shares issued amounted to 1,410,731. The Company also
assumed all outstanding options and other rights to acquire Amserv stock. All
costs related to the merger amounted to $2,808,223. Unpaid amounts at August 31,
1996 have been included in "Accounts payable and other accrued expenses" and
LONG-TERM LIABILITIES.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
attached consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended May 31, 1996.
RESULTS OF OPERATIONS.
- ----------------------
On August 23, 1996, the Company completed a merger (the "Merger")
with AMSERV HEALTHCARE, INC. ("Amserv"), a health care service company that
provides home care services, including personal care, such as assistance with
the activities of daily living (e.g. eating, walking and grooming), and skilled
nursery services, such as wound care and assistance with medications, injections
and patient education, in New Jersey and Ohio. In accordance with the terms of
the Merger, each share of common stock of Amserv, outstanding immediately prior
to consummation of the Merger, was converted into .4090 shares of common stock
of the Company. A total of 1,410,731 shares of common stock of the Company were
issued upon consummation of the Merger. The Company also assumed all outstanding
options and other rights to acquire Amserv stock. The following results of
combined operations for the periods ending August 31, 1996 and 1995 include the
operations of both the Company and Amserv.
Quarter ended August 31, 1996 compared to quarter ended August 31, 1995.
Total net revenues increased $949,274 or 8% to $12,563,160 for the
quarter ended August 31, 1996 over net revenues of $11,613,886 for the quarter
ended August 31, 1995. Net revenues from providing placement services of
registered and licensed nurses and home health aides to patients for care at
home ("Home Care") increased by $1,122,067 or 10% while net revenues from
providing temporary health care personnel recruiting to hospitals and nursing
homes ("Hospital Staffing") decreased by $172,793 or 2%.
The Company's decreased revenues from Hospital Staffing resulted from
a general decline in demand for these services.
The Company's decided shift towards Home Care mirrors a changing
social and economic attitude toward the de-institutionalization of patients. Due
to the long hospital stays of some terminally ill patients and the greater costs
associated with institutional treatment plans, the Company believes that the
industry (i.e. hospital, insurance companies and home care agencies) trend is to
find ways to care for patients in the home. The Company continues to devote its
resources toward the growth in Home Care and believes this upward trend will
continue in the future. Home Care revenues represented approximately 98% of 1996
net revenues and Hospital Staffing represented approximately 2% of 1996 net
revenues.
8
<PAGE>
Gross profit margins were approximately 35% for the quarters ended
August 31, 1996 and 1995.
Selling, general and administrative costs as a percentage of net
revenues were 28% for the quarter ended August 31, 1996 as compared with 32% for
the quarter ended August 31, 1995. Such decrease is primarily attributable to
the increase in revenues from Home Care being absorbed by existing back office
overhead.
Income from operations increased $537,673 or 364% to $685,705 for the
quarter ended August 31, 1996 compared with $148,032 for the quarter ended
August 31, 1995.
The Company incurred a one-time charge of $2,808,223 for acquisition
costs, legal fees and restructuring expenses associated with the merger with
Amserv, which contributed to a net loss for the quarter ended August 31, 1996 of
$1,278,681 compared with net income of $32,132 for the quarter ended August 31,
1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
As of August 31, 1996 cash and cash equivalents were $835,631 as
compared with $1,881,979 at May 31, 1996. The net decrease of $1,046,348
resulted primarily from the repayment of its revolving credit line.
The nature of the Company's business requires weekly payments to its
personnel at the time they render services, while it receives payment for
services rendered over an extended period of time (60 to 180 days or longer),
particularly when the payor is an insurance company, medical institution or
governmental unit. Accounts receivable represent a substantial portion of
current and total assets at August 31, 1996 and May 31, 1996. During August 31,
1996, accounts receivable turnover was approximately 70 days while for the year
ended May 31, 1996 turnover was approximately 73 days, a decrease of 3 days.
The Company currently has available a line of credit with a bank
which allows for maximum borrowings of $8,000,000. This line of credit expires
on October 31, 1998 and is subject to renewal. However, as the Company's
business expands, additional financing may be required. Short-term borrowings at
August 31, 1996 were $2,055,000 as compared to $3,280,000 at May 31, 1996.
As a result, the Company feels that its current financial condition
is sufficient in order to permit the Company to meet its financial requirements
for at least the ensuing twelve months.
The Company intends to meet its long-term liquidity needs through
available cash, cash flow and, if necessary, the Company's bank line of credit.
To the extent that such sources are inadequate, the Company will be required to
seek additional financing. In such event, there can be no assurance that
additional financing will be available to the Company on satisfactory terms.
9
<PAGE>
In May 1993, one of the Company's subsidiaries received from the DOL
a formal report proposing an adjustment in the amount of $73,000 as a result of
an employment tax audit. In January 1994, another of the Company's subsidiaries
received from the DOL a formal report proposing an adjustment in the amount of
$33,000.
The Company prevailed before the hearing examiner in the latter of
these cases, which decision is presently being appealed by the DOL, and the
Company is vigorously defending its position. The Company did not prevail in the
former case and is currently appealing that decision. Management believes that
an unfavorable outcome in either or both of these appeals would not materially
affect the financial position of the Company.
Other than the matters described above, the Company does not
anticipate any extraordinary material commitments for capital expenditures for
the Company's current fiscal year. The Company believes that cash generated from
operations, together with borrowings available under its existing line of
credit, will be sufficient to meet its short-term and long-term liquidity needs.
The Company is continually exploring possible acquisitions of
compatible companies in the health care business. If any such acquisition were
to be made with available cash, the Company's long-term liquidity would depend
to a greater extent on cash flow and the line of credit.
INFLATION AND SEASONALITY
- -------------------------
The rate of inflation was insignificant during the year ended May 31,
1996. In the past, the effects of inflation on personnel costs have been offset
by the Company's ability to increase its charges for services rendered. The
Company anticipates that it will be able to continue to do so in the near
future. The Company continually reviews its costs in relation to the pricing of
its services.
The Company's business is not seasonal.
10
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------------------
In the Company's Annual Report on Form 10-KSB, for the fiscal year
ended May 31, 1996, the Company reported the existence of certain legal
proceedings against Amserv. On September 13, 1996 the Company settled and
resolved completely all pending litigation against Amserv previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
On August 23, 1996 a special meeting of the shareholders of the
Company was held (the "Meeting"). At that Meeting the shareholders of the
Company were asked to vote upon a proposal to approve and adopt the Agreement
and Plan of Merger dated as of February 9, 1996, as amended on July 18, 1996
between Amserv and the Company, providing for the merger of AHI Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company, with
and into Amserv, with Amserv becoming a wholly-owned subsidiary of the Company
and the transactions contemplated thereby. There was represented at the Meeting,
in person or by proxy, an aggregate of 1,758,329 shares of the Company's Common
Stock entitled to vote at such meeting, representing 71.39% of the outstanding
shares of the Company's Common Stock. At the Meeting 1,744,982 votes were cast
"FOR" the proposal, representing approximately 99.25% of the votes cast at the
Meeting with respect to the proposal, 12,481 votes were cast "AGAINST" the
proposal and 866 votes "ABSTAINED". Accordingly, the proposal was approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
a. Exhibits:
27. Financial Data Schedule.
b. Reports on Form 8-K.
On August 28, 1996 the Company filed a Current Report on Form 8-K,
Date of Report (date of earliest event report) August 23, 1996, to report the
consummation of the Merger whereby the Company acquired control of Amserv. The
Items reported were Item 2 (Acquisition or Deposition of Assets) and Item 7
(Financial Statements and Exhibits).
All other items required in Part II have been previously filed or are not
applicable for the quarter ended August 31, 1996.
11
<PAGE>
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.
STAR MULTI CARE SERVICES, INC.
10/15/96 By: /s/ WILLIAM FELLERMAN
- -------- ----------------------------
Date William Fellerman
Chief Financial Officer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874038
<NAME> STAR MULTI CARE SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 835,631
<SECURITIES> 0
<RECEIVABLES> 9,658,698
<ALLOWANCES> 700,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,666,503
<PP&E> 1,520,217
<DEPRECIATION> 763,313
<TOTAL-ASSETS> 18,337,293
<CURRENT-LIABILITIES> 3,816,871
<BONDS> 0
0
0
<COMMON> 3,953
<OTHER-SE> 10,935,900
<TOTAL-LIABILITY-AND-EQUITY> 18,337,293
<SALES> 12,563,160
<TOTAL-REVENUES> 12,563,160
<CGS> 8,220,195
<TOTAL-COSTS> 11,877,455
<OTHER-EXPENSES> 2,808,223
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,597
<INCOME-PRETAX> (2,167,681)
<INCOME-TAX> 889,000
<INCOME-CONTINUING> (1,278,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,278,681)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
