<PAGE>
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, 1997
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 1-10751
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)
Registrant's telephone number, including area code: (516) 423-6688
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 16, 1997:
Class Number of Shares
Common Stock, $0.001 par value 4,742,126
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STAR MULTI CARE SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1
Consolidated Balance Sheets as of August 31, 1997 and May 31, 1997................................... 3
Consolidated Statements of Operations for the three months
ended August 31, 1997 and 1996.................................................................... 4
Consolidated Statements of Cash Flows
for the three months ended August 31, 1997 and 1996 ............................................. 5
Notes to Consolidated Financial Statements .......................................................... 6
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 7-8
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K .................................................................... 8
Signatures...................................................................................... 9
</TABLE>
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,340,205 $ 139,400
Accounts receivable, less allowance for doubtful accounts
of $695,000 and $650,000 at August 31, 1997 and
May 31, 1997, respectively 10,321,909 11,260,466
Prepaid expenses and other current assets 1,829,175 1,406,328
Deferred income taxes 950,015 950,015
Income taxes receivable -- 73,738
------------ ------------
Total current assets 15,441,304 13,829,947
------------ ------------
Property and equipment, net of accumulated depreciation
and amortization of $1,014,042 and $943,511 at
August 31, 1997 and May 31, 1997, respectively 1,480,901 1,200,018
Notes receivable from officer 93,353 93,353
Intangible assets, net of accumulated amortization 4,844,329 4,954,334
Other assets 228,400 222,805
------------ ------------
$ 22,088,287 $ 20,300,457
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued payroll and related expenses $ 2,285,834 $ 3,017,009
Accounts payable and other accrued expenses 1,242,782 1,142,605
Current maturities of long-term debt 125,000 125,000
Income taxes payable 165,913 --
------------ ------------
Total current liabilities 3,819,529 4,284,614
------------ ------------
Long-Term Liabilities:
Revolving credit line 4,462,000 2,622,000
Long-term debt 93,750 125,000
Other long-term liabilities 166,246 197,795
------------ ------------
Total long-term liabilities: 4,721,996 2,944,795
------------ ------------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity
Preferred stock, $1.00 par value per share,
5,000,000 shares authorized -- --
Common Stock, $.001 par value per share, 10,000,000 shares
authorized; 4,249,978 and 4,214,335 issued, respectively 4,250 4,214
Additional paid-in capital 15,496,130 15,431,833
Note receivable from officer (397,782) (397,782)
Deficit (1,276,914) (1,688,295)
Treasury stock - 137,500 common shares at
August 31, 1997 and May 31, 1997 (278,922) (278,922)
------------ ------------
Total shareholders' equity 13,546,762 13,071,048
------------ ------------
$ 22,088,287 $ 20,300,457
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
August 31,
--------------------
1997 1996
------------ ------------
[S] [C] [C]
Net revenues $ 13,001,925 $ 12,563,160
------------ ------------
Operating costs and expenses:
Costs of revenue 8,506,282 8,220,195
Selling, general and administrative 3,583,624 3,499,245
Depreciation and amortization 180,536 158,015
------------ ------------
Income from operations 731,483 685,705
Interest expense, net (34,227) (45,163)
Merger transaction costs -- (2,808,223)
------------ ------------
Income (loss) before income taxes 697,256 (2,167,681)
(Provision) Benefit for income taxes (285,875) 889,000
------------ ------------
Net income (loss) $ 411,381 $ (1,278,681)
============ ============
Net income (loss) per common share $ 0.10 $ (0.33)
============ ============
Shares used in computing per share amounts 4,321,229 3,832,669
============ ============
See accompanying notes to consolidated financial statements.
Page 4
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
ended August 31
-------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 411,381 $(1,278,681)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 45,000 45,000
Depreciation and amortization of property and equipment 70,531 55,077
Amortization of intangible assets 110,005 102,938
Deferred income taxes -- (39,909)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 893,557 607,471
Prepaid expenses and other current assets (422,847) 191,473
Income taxes receivable 73,738 (862,967)
Other assets (5,595) (17,948)
Increase (decrease) in liabilities:
Accrued payroll and related expenses (731,175) 139,275
Accounts payable and other accrued expenses 100,177 1,867,600
Income taxes payable 165,913 (295,647)
----------- -----------
Total adjustments 299,304 1,792,363
----------- -----------
Net cash provided by operating activities 710,685 513,682
----------- -----------
Cash flows from investing activities:
Payments of costs related to discontinued operations -- (200)
Purchase of property and equipment (351,414) (45,501)
Increase in intangibles -- (191,594)
Repayment of note receivable from officer -- 1,500
Net proceeds from the sale of short-term investments -- 110,000
----------- -----------
Net cash used in investing activities (351,414) (125,795)
----------- -----------
Cash flows from financing activities:
Net proceeds (repayments of) from revolving credit line 1,840,000 (1,225,000)
Repayment of long-term debt (31,250) (31,250)
Repayment of capital lease obligations (31,549) --
Redemption of class B preferred shares -- (341,436)
Proceeds from issuance of common stock 64,333 163,451
----------- -----------
Net cash provided by (used in) financing activities 1,841,534 (1,434,235)
----------- -----------
Net (decrease) increase in cash and cash equivalents 2,200,805 (1,046,348)
Cash and cash equivalents at beginning of period 139,400 1,881,979
----------- -----------
Cash and cash equivalents at end of period $ 2,340,205 $ 835,631
=========== ===========
Supplemental disclosures:
Income taxes paid $ 120,250 $ 181,936
----------- ===========
Interest paid $ 74,601 $ 78,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
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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, 1997 and the results of its
operations and cash flows for the three month periods ended August 31, 1997 and
1996.
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-K for the fiscal year ended May 31, 1997, 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,
1997 are not necessarily indicative of the results to be expected for the full
year.
Note 1 - Net Income (Loss) Per Share
Net income (loss) per share has been computed by dividing net income
(loss) 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 2: 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 as of August
31, 1997 have been included in accounts payable, accrued expenses and accrued
payroll and related expenses.
Note 3: Subsequent Event
On September 9, 1997, the Company and Extended Family Care Corporation
("EFCC") consummated a merger (the "Merger") whereby the Company acquired
control of EFCC pursuant to an Agreement and Plan of Merger dated as of January
3, 1997, as amended on April 6, 1997 (the "Merger Agreement"), among the
Company, EFCC Acquisition Corp., a New York corporation and a wholly owned
subsidiary of the Company ("Merger Sub"), and EFCC. Under the Merger Agreement,
EFCC was merged with and into Merger Sub, whereupon the separate existence of
EFCC ceased and all the assets of EFCC became the assets of Merger Sub.
Consummation of the Merger followed approval by the shareholders of the Company
and EFCC, which was obtained at separate shareholders meetings of the two
companies held on September 9, 1997. The Merger was structured as a reverse
triangular merger intended to qualify as a tax free reorganization.
In connection with the Merger, each outstanding share of EFCC's Common
Stock, par value $.01 per share ("EFCC Common Stock"), was converted into the
right to receive .025907006 shares (the "Exchange Ratio") of the Company's
Common Stock, par value $.001 per share ("Star Common Stock") and cash in the
amount of $.063826051. Accordingly, the Company registered with the Securities
and Exchange
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Commission 1,077,778 shares of Star Common Stock which are to be issued to the
former holders of EFCC Common Stock.
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, 1997.
Results of Operations.
Quarter ended August 31, 1997 compared to quarter ended August 31,
1996.
Total net revenues increased $438,765 or 3% to $13,001,925 for the
quarter ended August 31, 1997 over net revenues of $12,563,160 for the quarter
ended August 31, 1996. The increase in revenue for the quarter ended August 31,
1997 from the quarter ended August 31, 1996 is primarily attributable to growth
in the New Jersey and Florida branches of the Company.
The Company's decided shift towards Home Care (personal care, such as
assistance with the activities of daily living (e.g., eating, walking and
grooming), and skilled nursing services such as wound care and assistance with
medications, injections and patient education) 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.
Gross profit margins were approximately 35% for the quarters ended
August 31, 1997 and 1996.
Selling, general and administrative costs as a percentage of net
revenues were 28% for the quarters ended August 31, 1997 and 1996.
Income from operations increased $45,778 or 7% to $731,483 for the
quarter ended August 31, 1997 compared with $685,705 for the quarter ended
August 31, 1996. The increase in income from operations for the quarter ended
August 31, 1997 from the quarter ended August 31, 1996 is attributable to the
increase in revenues.
Net income (loss) were $411,381 for the quarter ended August 31, 1997
compared to ($1,278,681) for the quarter ended August 31, 1996. 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.
Financial Condition, Liquidity and Capital Resources
As of August 31, 1997 cash and cash equivalents were $2,340,205 as
compared with $139,400 at May 31, 1997. The net increase of $2,200,805 resulted
primarily from proceeds from the revolving credit line in anticipation of the
EFCC acquisition.
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
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unit. Accounts receivable represent a substantial portion of current and total
assets at August 31, 1997 and May 31, 1997.
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, 1997 were $4,462,000 as compared to $2,622,000 at May 31, 1997.
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.
On September 9, 1997, the Company acquired Extended Family Care
Corporation ("EFCC"), a health care service company which provides Home Care
services in New Jersey, New York and Pennsylvania. The Company paid $2,400,000
in cash and $4,850,000 in stock for EFCC. [See Note 3 of the Financial
Statements]
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.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
27. Financial Data Schedule
b. The Company filed no reports on Form 8-K during the quarter ended
August 31, 1997.
Page 8
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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 hereunto duly authorized.
STAR MULTI CARE SERVICES, INC.
October 20, 1997 By: s/William Fellerman
-----------------------------
Date William Fellerman
Chief Financial Officer
(Principal Financial Officer)
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 2,340,205
<SECURITIES> 0
<RECEIVABLES> 11,016,909
<ALLOWANCES> 695,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,441,304
<PP&E> 2,494,943
<DEPRECIATION> 1,014,042
<TOTAL-ASSETS> 22,088,287
<CURRENT-LIABILITIES> 3,819,529
<BONDS> 4,721,996
<COMMON> 4,250
0
0
<OTHER-SE> 13,542,512
<TOTAL-LIABILITY-AND-EQUITY> 22,088,287
<SALES> 0
<TOTAL-REVENUES> 13,001,925
<CGS> 0
<TOTAL-COSTS> 8,461,282
<OTHER-EXPENSES> 3,764,160
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 34,227
<INCOME-PRETAX> 697,256
<INCOME-TAX> 285,875
<INCOME-CONTINUING> 411,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 411,381
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
