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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, 1998
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 14, 1998:
Class Number of Shares
----------------- ---------------------------
Common Stock, $0.001 par value 5,228,122
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STAR MULTI CARE SERVICES, INC.
INDEX
Page
Part I - Financial Information
Item 1
Consolidated Balance Sheets as of August 31, 1998 and May 31, 1998 ...... 3
Consolidated Statements of Operations for the three months
ended August 31, 1998 and 1997 ....................................... 4
Consolidated Statements of Cash Flows
for the three months ended August 31, 1998 and 1997 .................. 5
Notes to Consolidated Financial Statements .............................. 6-7
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 7-13
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K ........................................ 13
Signatures .............................................................. 14
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS: Unaudited
Current Assets:
Cash and cash equivalents $ 516,838 $ 1,867,286
Accounts receivable, less allowance for doubtful accounts of
$1,952,166 and $1,872,000 at August 31, 1998 and May
31, 1998, respectively 10,494,706 10,108,879
Prepaid expenses and other current assets 297,507 382,899
Deferred income taxes 1,419,537 1,537,000
Income taxes receivable 1,225,946 1,225,946
------------ ------------
Total current assets 13,954,534 15,122,010
------------ ------------
Property and equipment, net of accumulated depreciation of
$1,419,453 and $1,303,532 at August 31, 1998 and May 31,
1998, respectively 2,050,667 1,999,924
Notes receivable from officer 84,485 86,260
Intangible assets, net of accumulated amortization 11,716,153 11,857,698
Deferred income taxes 619,000 619,000
Other assets 233,363 185,715
------------ ------------
$ 28,658,202 $ 29,870,607
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line $ 6,207,852 $ 6,207,852
Accrued regulatory costs, contractual adjustments and
related expenses 2,450,000 2,450,000
Accrued payroll and related expenses 3,056,232 3,214,207
Accounts payable and other accrued expenses 1,223,738 1,357,464
Deferred revenues -- 1,017,287
Current maturities of long-term debt 93,750 125,000
------------ ------------
Total current liabilities 13,031,572 14,371,810
------------ ------------
Long-Term Liabilities:
Other long-term liabilities 1,022,134 1,065,770
------------ ------------
Total long-term liabilities 1,022,134 1,065,770
------------ ------------
Committments 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; 5,384,016 and 5,362,780 issued,
respectively 5,384 5,363
Additional paid-in capital 20,990,889 20,951,899
Subscription receivable (397,782) (397,782)
Deficit (5,715,073) (5,847,531)
Treasury stock - 137,500 common shares at August 31, 1998
and May 31, 1998 (278,922) (278,922)
------------ ------------
Total shareholder's equity 14,604,496 14,433,027
------------ ------------
$ 28,658,202 $ 29,870,607
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
August 31,
----------------------------------
1998 1997
---------------- ----------------
Net revenues $ 14,093,393 $ 13,001,925
---------------- ----------------
Operating costs and expenses:
Costs of revenue 9,862,331 8,506,282
Selling, general and administrative 3,384,993 3,495,724
Provision for doubtful accounts 197,731 45,000
Depreciation and amortization 257,466 180,536
---------------- ----------------
$ 13,702,521 $ 12,227,542
---------------- ----------------
Income from operations 390,872 774,383
Interest expense, net (140,951) (77,127)
---------------- ----------------
Income before income taxes 249,921 697,256
Provision for income taxes 117,463 285,875
---------------- ----------------
Net income $ 132,458 $ 411,381
================ ================
Net income per common share:
Basic $ 0.03 $ 0.10
================ ================
Diluted $ 0.03 $ 0.10
================ ================
Weighted average number of common shares:
Basic 5,237,514 4,103,935
================ ================
Diluted 5,266,264 4,323,754
================ ================
See accompanying notes to consolidated financial statements.
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended August 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 132,458 $ 411,381
----------- -----------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for doubtful accounts 197,731 45,000
Depreciation and amortization of property and equipment 115,921 70,531
Amortization of intangible assets 141,545 110,005
Deferred income taxes 117,463 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (583,558) 893,557
Prepaid expenses and other current assets 85,392 (422,847)
Income taxes receivable -- 73,738
Other assets (47,648) (5,595)
Increase (decrease) in liabilities:
Accrued payroll and related expenses (157,975) (731,175)
Accounts payable and other accrued expenses (133,726) 100,177
Deferred revenue (1,017,287) --
Income taxes payable -- 165,913
Other liabilities (43,636) (31,549)
----------- -----------
Total adjustments (1,325,778) 267,755
----------- ------------
Net cash (used in) provided by operating activities (1,193,320) 679,136
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (166,664) (351,414)
Repayment of note receivable from officer 1,775 --
----------- -----------
Net cash used in investing activities (164,889) (351,414)
----------- ------------
Cash flows from financing activities:
Net proceeds from revolving credit line -- 1,840,000
Repayment of long-term debt (31,250) (31,250)
Proceeds from issuance of common stock 39,011 64,333
----------- -----------
Net cash provided by financing activities 7,761 1,873,083
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,350,448) 2,200,805
Cash and cash equivalents at beginning of period 1,867,286 139,400
----------- -----------
Cash and cash equivalents at end of period $ 516,838 $ 2,340,205
=========== ===========
Supplemental disclosures:
Income taxes paid $ -- $ 120,250
=========== ===========
Interest paid $ 139,875 $ 74,601
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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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, 1998, results of its
operations and cash flows for the three month period ended August 31,1998 and
1997.
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, 1998, 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,
1998 is not necessarily indicative of the results to be expected for the full
year.
Note 1 - Net Income Per Common Share
Net income per common share and per common and common equivalent share is
based upon weighted average common and common equivalent shares outstanding
during each period. Common equivalent shares include the dilutive effect of
stock options if any.
Note 2: Use of Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Such amounts include, among others, the allowance for doubtful
accounts, workers' compensation and medical benefit reserves for its Self
Funded Plans, other asset valuation allowances and certain liabilities.
Management periodically re-evaluates the estimates inherent in certain
financial statement amounts and may adjust accordingly.
Note 3: Merger
On September 9, 1997, the Company acquired Extended Family Care
Corporation ("EFCC") through the merger of EFCC into a wholly-owned subsidiary
of the Company. The Company paid $2,400,000 in cash and issued 974,160 shares
of common stock to EFCC shareholders for an aggregate purchase price of
approximately $7,250,000. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of EFCC have been included in the
Company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair market value of net
assets acquired of approximately $6,800,000 is being amortized over 40 years.
Note 4: Regulatory Costs and Related Expenses
a. In May 1997, the Company was advised that an audit of American
Healthcare Services, Inc., the Company's Medicare agency, by the Office of
Audit Services, Office of Inspector General of the United States Department of
Health and Human Services which had been forwarded to the Medicare
intermediary assigned to administer Medicare payments in Florida had been
referred to the Civil Division of the United States Attorney for the Southern
District of Florida. In February 1998, The Audit was relinquished by the
United States Attorney to the Medicare intermediary for recovery of an
administrative overpayment in the amount of $1,248,747. The Company has
appealed the assessment, which could result in the elimination or reduction of
the assessment. The Company has accrued $1,250,000 in connection with this
matter.
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b. The Company discovered errors in certain cost reports that had been
previously submitted to the New York State Department of Social Services
during the years 1993 through 1995, the basis of which served to determine the
Medicaid reimbursement rates for the years 1994 through 1996. Amended cost
reports containing the correct data were submitted to the New York State
Department of Health (the "DOH") in February 1998, which are expected to
result in the DOH's retroactive recalculation of the Company's Medicaid
reimbursement rate and imposition of a substantial overpayment assessment
against the Company. The Company has offset the $660,000 overpayment against
existing accounts receivable from Medicaid in connection with this matter.
c. In August 1995, the Office of Deputy Attorney General for Medicaid
Fraud Control initiated a personnel, clinical and billing investigation for
the years 1992 through 1995. On December 3, 1997, the Company was advised by
its counsel that the investigation, which was previously reported as pending,
may be expanded through 1997 and that the Company was a target of a criminal
investigation. In response to this, the Company conducted its own internal
investigation and has revised its systems. The Company has voluntarily
disclosed the results of its internal investigation to the Office of Deputy
Attorney General for Medicaid Fraud Control. The Company has accrued
approximately $1,000,000 in connection with this matter. The amount accrued
has been based upon information learned to date and advice of legal counsel,
additional information may be learned in the future, which would require the
Company to modify this amount.
d. On July 16, 1998, Star was advised that an audit of American Health
Services, Star's Medicare agency, was being commenced by the Office of Audit
Services, Office of Inspector General of the United States Department of
Health and Human Services. This audit was being conducted in conjunction with
the United States Attorney's Office for the Southern District of Florida and
involved a review of claims for home health services submitted by American
Health Care Services during 1995 and 1996. A similar audit commenced during
May of 1997 for its submitted claims during 1993. Star has been advised by
Broad and Cassel ("Regulatory Counsel") that they have been in contact with
the Office of Inspector General and the Assistant United States Attorney
assigned to this matter, and there is no way to determine at this time the
extent of Star's liability. Regulatory Counsel has advised Star that it may
litigate or appeal any determination of liability and pursue claims against
third parties (e.g., subcontractors and licensed home health agencies) for a
portion of any liability of Star. Management anticipates that this matter
should be satisfactorily resolved. This is grounded upon the advice of
Regulatory Counsel to the Company as to the (1) the resolution of similar
types of audits or claims based upon their experience in the health care
industry, handling appeals of these determinations and dealing with similar
matters before the Office of Inspector General and the Department of Justice,
even though there has not been a final determination of liability, and there
can be no assurance as to the ultimate liability; and (2) the fact that Star
will have the right, whether or not this audit or claim is resolved in whole
or in part in Star's favor, to appeal or litigate any liability, determination
and pursue a claim against third-party independent contractors and other
parties that may have rendered services to Star, even though there is no
assurance that any such claims would ultimately be collectible.
Management anticipates that the matters will be satisfactorily resolved.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding
of the Company's results of operations and financial condition. This
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, 1998.
This discussion contains forward-looking statements that are subject to a
number of known and unknown risks that, in addition to general economic,
competitive and other business conditions, could cause actual results,
performance and achievements to differ materially from those described or
implied in the forward-looking
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statements.
The Company is subject to significant external factors which could
significantly impact its business, including changes in Medicare
reimbursement, government fraud and abuse initiatives and other such factors
which are beyond the control of the Company. These factors, as well as, future
changes in reimbursement and changes in interpretations of regulations, could
cause future results to differ materially from historical trends.
In 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget
Act"). The Budget Act established an interim payment system (the "IPS") that
provided for the lowering of reimbursement limits for home health visits. For
cost reporting periods beginning on or after October 1, 1997,
Medicare-reimbursed home health agencies will have their costs limits
determined as the lesser of (i) their actual costs, (ii) cost limits based on
105% of median costs of freestanding home health agencies, or (iii) an
agency-specific per-patient cost limits, based on 98% of 1994 costs adjusted
for inflation. The new IPS cost limits will apply to the Company for the cost
reporting period beginning January 1,1998. During the three months ended
December 1997, various regulations and interpretations of the Budget Act were
published which enabled the Company to calculate the potential impact on
reimbursement of the new IPS cost limits. After analysis it was determined
that these new limits will reduce reimbursement to the Company for the
Medicare services it provides. During the three months ended August 31, 1998,
the Company continued its restructuring plan to aggressively respond to the
new reductions in Medicare reimbursement by fundamentally reshaping the
Company for long-term growth in the changing environment. After giving effect
to restructuring efforts undertaken in late 1997 and currently underway,
combined with service utilization adjustments projected for the remainder of
1998, the Company expects to reduce costs to meet the reimbursement shortfalls
without any material adverse effect to the Company.
Results of Operations.
Quarter ended August 31, 1998 compared to quarter ended August 31, 1997.
Net revenues for the quarter ended August 31, 1998 increased $1,091,468
or 8% to $14,093,393 from $13,001,925 for the quarter ended August 31, 1997.
The increase in net revenue for the quarter is primarily attributable to the
acquisition of EFCC and growth in the New Jersey and Florida branches of the
Company, partially offset by a reduction in net revenues from American
Healthcare Services, the certified home health agency in Florida, due to a
reduction in per beneficiary cost limits established be Medicare effective for
cost reporting periods beginning January 1, 1998.
Gross profit margin decreased to 30% for the quarter ended August 31,
1998 from 35% for the quarter ended August 31, 1997. The decrease in the gross
profit margin is primarily attributable to an increase in the accrual rate for
the self funded workers' compensation plan, a shift in allocating a greater
percentage of workers' compensation expense to costs of revenue to reflect the
occurrence of workers' compensation claims, and a reduction in per beneficiary
costs limits established by Medicare for cost reporting periods beginning
January 1, 1998 and visits performed by the Company's Medicare certified
agency in Florida with gross profit margins of approximately 48% in the
quarter ended August 31, 1998.
Selling, general and administrative costs as a percentage of revenue
decreased to 24% for the quarter ended August 31, 1998, from 27% for the
quarter ended August 31, 1997. The decrease in selling, general, and
administrative expenses as a percentage of net revenues is attributable to the
results of the Company's restructuring efforts undertaken during the third and
fourth quarters of the fiscal year-ended May 31, 1998. During this period the
Company consolidated several branches and eliminated various positions
resulting from the integration of the Company's new computer technology.
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Provision for Doubtful Accounts: The provision for doubtful accounts as a
percentage of net revenues for the quarter ended August 31, 1998 was 1.4%
compared to 0.3 % for the quarter ended August 31, 1997. The three month
period in 1998 reflects an increase in the bad debt provision rate for
accounts receivable aged less than 180 days, necessitated by billing and
collection difficulties that continued into 1998. (see Liquidity and Capital
Resources).
Income from operations decreased to $390,872 for the quarter ended August
31, 1998 from $774,383 for the quarter ended August 31, 1997. The decrease in
income from operations for the quarter is attributable to a reduction in the
gross profit margin, increases in the provision for doubtful accounts,
partially offset by a reduction in selling, general and administrative
expenses as a percentage of net revenues.
Net income for the quarter ended August 31, 1998 decreased to $132,458
from $411,381 for the quarter ended August 31, 1997. The decrease in net
income for the quarter is attributable to the decrease in income from
operations, and higher interest expense from additional borrowings associated
with the acquisition of EFCC.
Financial Condition, Liquidity and Capital Resources
As of August 31, 1998 cash and cash equivalents were $516,838 as compared
with $1,867,286 at May 31, 1998. The net decrease of $1,350,448 resulted from
repayment to Medicare of approximately $1,140,000 from prior overpayments that
resulted from changes associated with the reimbursement structure of Medicare
reflected by both changes in IPS and regional cost limits.
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 represents a substantial portion of
current and total assets. Accounts receivable turnover was approximately 67
days during the quarter ended August 31, 1998 compared to 76 days during the
quarter ended August 31, 1997. The decrease in accounts receivable turnover
days is primarily attributable to the increase in the allowance for doubtful
accounts.
The Company currently has available a line of credit with a bank which
allows for borrowings of up to $8,000,000 (the "Credit Agreement"). Pursuant
to the Credit Agreement, the amount the Company may borrow is limited up to 80
percent of eligible receivables under 120 days old. The Credit Agreement
provides for the lender to receive a security interest in all of the assets of
the Company and its subsidiaries. As of August 31, 1998, the Formula equaled
approximately $6,700,980 and the outstanding balance of the funds advanced to
the Company pursuant to the Credit Agreement, as of such date, was $6,207,852.
As of August 31, 1998 the Company was in violation of certain financial
covenants contained in the Credit Agreement. On September 11, 1998 the bank
waived compliance with the covenant violations preconditioned upon the Company
meeting certain terms and conditions and has prohibited any future advances
which otherwise would have become available under the terms of the Credit
Agreement. The Company has reclassified borrowings owed as of August 31, 1998
as a current liability.
This Credit Agreement expires on October 31, 1998 and will not be
renewed. The Company is currently negotiating its financing needs with several
sources and has received a non-binding letter of intent from an alternative
financing source to replace the line of Credit Agreement.
The Company feels that the results of operations in the ensuring twelve
months will provide sufficient excess cash flow to satisfy its working capital
requirements. 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. However, should the Company be unable to
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replace the Credit Agreement with another lender, the Company will not have
sufficient working capital to repay the money owed to its present lender
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.
Inflation and Seasonality
The rate of inflation was insignificant during the quarter ended August
31, 1998. 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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries to represent years. For example, the year
"1998" would be represented by "98." These systems and products will need to
be able to accept four digit entries to distinguish years beginning with 2000
from prior years. As a result, systems and products that do not accept four
digit year entries will need to be upgraded or replaced to comply with such
"Year 2000" requirements. The Company believes that its internal systems are
Year 2000 compliant or will be upgraded or replaced in connection with
previously planned changes to information systems prior to the need to comply
with Year 2000 requirements without material cost or expense. The anticipated
costs of any Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to the
availability or cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties. In
addition, there can be no assurance that Year 2000 compliance problems will
not be revealed in the future which could have a material adverse affect on
the company's business, financial condition and results of operations. Many of
the Company's customers and suppliers may be affected by Year 2000 issues that
may require them to expend significant resources to modify or replace their
existing systems. This may result in those customers having reduced funds to
purchase the Company's products or in those suppliers experiencing
difficulties in producing or shipping key components to the Company on a
timely basis or at all.
Forward Looking Statements and Cautionary Factors
Certain statements in this report on Form 10-Q constitute"
forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by
their inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward looking
statements are based on the Company's current expectations. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward- looking statements. The
potential risks and uncertainties which could cause actual results to differ
materially from the Company's expectations include the impact of further
changes in the Medicare reimbursement system, including any changes to the
current IPS and/or the ultimate implementation of a prospective payment
system; government regulation; health care reform; pricing pressures from
third-party payors, including managed care organizations; retroactive Medicare
audit adjustments; and changes in laws and interpretations of laws or
regulations relating to the health care industry.
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GOVERNMENT REGULATION. As a home health care provider, the Company is subject
to extensive and changing state and federal regulations relating to the
licensing and certification of its offices and the sale and delivery of its
products and services. The federal government and Medicare fiscal
intermediaries have become more vigilant in their review of Medicare and
Medicaid reimbursements to home health care providers generally, and are
becoming more restrictive in their interpretation of those costs for which
reimbursement will be allowed to such providers. Changes in the law and
regulations as well as new interpretations enforced by the relevant regulatory
agencies could have an adverse effect on the Company's operations and the cost
of doing business.
THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed
for its services primarily by the Medicare/Medicaid programs, insurance
companies, managed care companies and other third-party payors, the
implementation of alternative payment methodologies for any of these payors
could have an impact on revenues and profit margins. Generally, managed care
companies have sought to contain costs by reducing payments to providers.
Continued cost reduction efforts by managed care companies could adversely
affect the Company's results of operations.
HEALTH CARE REFORM. In August 1997, Congress enacted and President Clinton
signed into law the Balanced Budget Act of 1997 ("BBA"), resulting in
significant changes to cost based reimbursement for Medicare home health care
providers. Although the new legislation enacted by Congress retains a cost
based reimbursement system, the cost limits have been reduced for fiscal years
which began on or after October 1, 1997 and a new per-beneficiary limit is
effective for fiscal years which began after such date. The BBA provides two
payment systems -- an IPS which is effective for the Company beginning January
1, 1998 until the adoption of the successor payment system which is a new
prospective payment system tentatively scheduled to begin in late 1999. The
effect of the changes under IPS is to reduce the limits for the amount of
costs that are reimbursable to home health care providers under the Medicare
program. The Company anticipates a possible decrease in aggregate net revenues
during the course of the current fiscal year due principally to reductions in
the limits for the amount of costs that are reimbursable in connection with
the provision of Medicare services. The Company cannot quantify the full
effect of IPS on the Company's future performance because certain components
of health care reform legislation, such as the per-beneficiary limit, require
annual data which will not be known until a final assessment by Medicare
and/or its fiscal intermediary is completed for each annual period.
As Congress and state reimbursement entities assess alternative health
care delivery systems and payment methodologies, the Company cannot predict
which additional reforms may be adopted or what impact they may have on the
Company. Additionally, uncertainties relating to the nature and outcomes of
health care reforms have also generated numerous realignments, combinations
and consolidations in the health care industry which may also have an adverse
impact on the Company's business strategy and results of operations. The
Company expects that in addition to industry consolidation generally, there
may be consolidations within the Company's locations, with the likely result
that there will be fewer offices by the end of the next fiscal year.
BUSINESS CONDITIONS. The Company must continue to establish and maintain close
working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the increasing
market demand for the type of services offered and the necessity to maximize
service volume due to anticipated operating margin decline.
ATTRACTION AND RETENTION OF EMPLOYEES. Maintaining quality managers and branch
administrators will play a significant part in the future success of the
Company. The Company's professional nurses and other health care personnel are
also key to the continued provision of quality care to the Company's patients.
The possible inability to attract and retain qualified skilled management and
sufficient numbers of credentialed health care professionals and
para-professionals could adversely affect the Company's operations and quality
of service.
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RISKS ASSOCIATED WITH COLLECTION OF ACCOUNTS RECEIVABLE. The home health care
industry is generally characterized by long collection cycles for accounts
receivable due to the complex and time consuming requirements for obtaining
reimbursement from private and governmental third party payors. The
lengthening of the amount of time required to collect accounts receivables
from managed care organizations or other payors could have a material adverse
effect on the Company's financial condition or results of operations.
DEPENDENCE ON RELATIONSHIPS WITH REFERRAL SOURCES. The growth and
profitability of the Company depends on its ability to establish and maintain
close working relationships with referral sources, including payors,
hospitals, physicians and other health care professionals. Managed care
organizations, which are exerting an increasing amount of influence over the
health care industry, have been consolidating to enhance their ability to
impact the delivery of health care services. As managed care organizations
have increased and continue to increase their market share in regions in which
the Company operates, these organizations have become and will continue to
become increasingly important to the Company as referral sources. There can be
no assurance the Company will be able to successfully maintain existing
referral sources or develop and maintain new referral sources. The loss of any
significant referral sources or the failure to develop any new referral
sources could have a material adverse effect on the Company's financial
condition or results of operations.
YEAR 2000 COMPUTER CONCERNS. The impact of Year 2000 computer problems on the
Medicare and Medicaid programs, other federal or state health care programs
and other third party payors could affect prompt reimbursement to the Company
in the future unless and until such potential problems are corrected. The
company believes that its internal systems are Year 2000 compliant or will be
upgraded or replaced in connection with previously planned changes to
information systems prior to the need to comply with Year 2000 requirements
without material cost or expense. However, there can be no assurance the
Company has adequately assessed or identified all aspects of its business
which may be impacted by Year 2000 issues which may arise after December 31,
1999. Additionally, there can be no assurance that vendors who supply the
Company's major management information system software will adequately address
and correct any and all Year 2000 issues that may arise prior to January 1,
2000. As a result of the foregoing, there can be no assurance that Year 2000
computer problems which may impact the Company or its payors will not have a
material adverse effect on the Company's financial condition or results of
operations.
POTENTIAL RISKS ASSOCIATED WITH ACQUISITIONS AND EXPANSION. When evaluating
acquisitions, the Company seeks potential acquisition candidates that would
complement or expand its current services. In attempting to make acquisitions,
the Company competes with other providers, some of which have greater
financial resources than the Company. In addition, since the consideration for
acquired businesses may involve cash, notes or the issuance of shares of
common stock, options or warrants, existing stockholders may experience
dilution in the value of their shares of common stock in connection with such
acquisitions. Moreover, many states have Certificate of Need, licensure, or
similar laws which generally require that the appropriate state agency approve
certain acquisitions and/or determine that a need exists for new services and
capital expenditures or other changes prior to such new services being added.
Additionally, HCFA approval concerning the redesignation of branch offices as
separate providers may also be required. To the extent that Certificates of
Need or other approvals are required for expansion of Company operations,
either through acquisitions or provision of new services, such expansion could
be adversely affected by the failure or inability to obtain the necessary
approvals, changes in the standards applicable to such approvals, and possible
delays and expenses associated with such approvals.
There can be no assurance that the Company will be able to successfully
negotiate, finance or integrate acquisitions. Acquisitions involve numerous
short- and long-term risks, including loss of referral sources, diversion of
management's attention, failure to retain key personnel, loss of net revenues
of the acquired companies, inability to integrate acquisitions (particularly
management information systems) without material disruptions and unexpected
expenses, the possibility of the acquired businesses becoming subject to
regulatory sanctions, potential undisclosed liabilities and the continuing
value of acquired intangible assets. There can be no assurance that any given
acquisition will be consummated, or if consummated, will not materially
adversely
-12-
<PAGE>
affect the Company's financial condition or results of operations.
Additionally, because of matters discussed herein that may be beyond the
control of the Company and the emerging trend of other health care providers,
such as long-term care providers, seeking to acquire home health care
businesses, there can be no assurance that suitable acquisitions will continue
to be identified or that acquisitions can be consummated on acceptable terms.
COMPETITION. The home health care industry is highly competitive and includes
national, regional and local providers. The Company competes with a large number
of companies in all areas in which its operations are located. The Company's
competitors include major national and regional companies, hospital- based
programs, numerous local providers and nursing agencies. Some current and
potential competitors have or may obtain significantly greater financial and
marketing resources than the Company. Accordingly, other companies, including
managed care organizations, hospitals, long-term care providers and health care
providers that currently are not serving the home health care market, may become
competitors. As a result, the Company could encounter increased competition in
the future that may limit its ability to maintain or increase its market share
or otherwise materially adversely affect the Company's financial condition or
results of operations.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
27. Financial Data Schedule
b. Reports on Form 8-K.
None
-13-
<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 hereunto duly authorized.
STAR MULTI CARE SERVICES, INC.
October 15, 1998 By: s/Reinaldo Romeu
- ---------------- ---------------------
Date Reinaldo Romeu
Controller and Treasurer
(Principal Financial Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 516,838
<SECURITIES> 0
<RECEIVABLES> 12,446,872
<ALLOWANCES> 1,952,166
<INVENTORY> 0
<CURRENT-ASSETS> 13,954,534
<PP&E> 3,470,120
<DEPRECIATION> 1,419,453
<TOTAL-ASSETS> 28,658,202
<CURRENT-LIABILITIES> 13,031,572
<BONDS> 0
0
0
<COMMON> 5,384
<OTHER-SE> 14,599,112
<TOTAL-LIABILITY-AND-EQUITY> 28,658,202
<SALES> 14,093,393
<TOTAL-REVENUES> 14,093,393
<CGS> 9,862,331
<TOTAL-COSTS> 9,862,331
<OTHER-EXPENSES> 257,966
<LOSS-PROVISION> 197,731
<INTEREST-EXPENSE> 140,951
<INCOME-PRETAX> 249,921
<INCOME-TAX> 117,463
<INCOME-CONTINUING> 132,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,458
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
