<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 NOVEMBER 30, 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 January 13, 1998:
Class Number of Shares
----- ----------------
Common Stock, $0.001 par value 5,155,564
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX
Page
Part I - Financial Information
Item 1
Consolidated Balance Sheets as of November 30, 1997
and May 31, 1997 ................................................... 3
Consolidated Statements of Operations for the three months
and six months ended November 30, 1997 and 1996 .................... 4
Consolidated Statements of Cash Flows
for the six months ended November 30, 1997 and 1996 ............. 5
Notes to Consolidated Financial Statements .......................... 6-7
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 .................................... 9
Signatures........................................................... 11
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, May 31,
1997 1997
-------------------- ---------------------
ASSETS: Unaudited Audited
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 845,191 $ 139,400
Accounts receivable, less allowance for doubtful accounts of
$715,000 and $650,000 at November 30, 1997 and May 31,
1997, respectively 11,574,435 11,260,466
Prepaid expenses and other current assets 933,526 1,406,328
Deferred income taxes 1,154,015 950,015
Income taxes receivable - 73,738
--------------------- ---------------------
Total current assets 14,507,167 13,829,947
--------------------- ---------------------
Property and equipment, net of accumulated depreciation and
amortization of $1,321,203 and $943,511 at November 30,
1997 and May 31, 1997, respectively 1,804,480 1,200,018
Notes receivable from officer 89,609 93,353
Intangible assets, net of accumulated amortization 12,928,402 4,954,334
Other assets 227,237 222,805
--------------------- ---------------------
$ 29,556,895 $ 20,300,457
===================== =====================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued payroll and related expenses $ 2,027,925 $ 3,017,009
Accounts payable and other accrued expenses 2,049,878 1,142,605
Current maturities of long-term debt 125,000 125,000
Income taxes payable 675,903 -
--------------------- ---------------------
Total current liabilities 4,878,706 4,284,614
--------------------- ---------------------
Long-Term Liabilities:
Revolving credit line 5,462,000 2,622,000
Long-term debt 62,500 125,000
Other long-term liabilities 150,293 197,795
--------------------- ---------------------
Total long-term liabilities 5,674,793 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; 5,292,031 and 4,214,335 issued, respectively 5,292 4,214
Additional paid-in capital 20,455,508 15,431,833
Note receivable from shareholder (397,782) (397,782)
Deficit (780,700) (1,688,295)
Treasury stock - 137,500 common shares at November 30,
1997 and May 31, 1997 (278,922) (278,922)
--------------------- ---------------------
Total shareholder's equity 19,003,396 13,071,048
--------------------- ---------------------
$ 29,556,895 $ 20,300,457
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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<PAGE>
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 15,179,857 $ 13,274,633 $ 28,181,782 $ 25,837,793
---------------- ---------------- --------------- ----------------
Operating costs and expenses:
Costs of revenue 9,866,454 8,694,502 18,372,736 16,914,698
Selling, general and administrative 4,086,536 3,575,059 7,627,260 7,074,303
Depreciation and amortization 268,761 158,898 449,297 316,913
---------------- ---------------- --------------- ----------------
Income from operations 958,106 846,174 1,732,489 1,531,879
Interest expense, net (117,066) (32,930) (194,193) (78,093)
Merger transaction costs - - - (2,808,223)
---------------- ---------------- --------------- ----------------
Income (loss) before income taxes 841,040 813,244 1,538,296 (1,354,437)
(Provision) Benefit for income taxes (344,826) (334,000) (630,701) 555,000
---------------- ---------------- --------------- ----------------
Net income (loss) $ 496,214 $ 479,244 $ 907,595 $ (799,437)
================ ================ =============== ================
Net income (loss) per common share:
Primary $ 0.10 $ 0.12 $ 0.19 $ (0.19)
================ ================ =============== ================
Fully Diluted $ 0.10 $ 0.12 $ 0.19 $ (0.19)
================ ================ =============== ================
Weighted average number of shares:
Primary 5,204,241 4,150,444 4,761,497 4,150,444
================ ================ =============== ================
Fully Diluted 5,207,476 4,150,444 4,763,115 4,150,444
================ ================ =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended November 30,
-----------------------------------------------------
1997 1996
------------------------ -----------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 907,595 $ (799,437)
------------------------ -----------------------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for doubtful accounts 133,735 91,387
Depreciation and amortization of property and equipment 162,981 96,900
Amortization of intangible assets 260,940 220,013
Deferred income taxes - (39,909)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 561,144 31,188
Prepaid expenses and other current assets 572,558 282,283
Income taxes receivable 73,738 (597,125)
Other assets (4,432) 254,922
Increase (decrease) in liabilities:
Accrued payroll and related expenses (1,094,572) (161,339)
Accounts payable and other accrued expenses (856,054) 1,021,702
Income taxes payable 675,903 (295,647)
------------------------- ----------------------
Total adjustments 485,941 904,375
-------------------------- ---------------------
Net cash provided by operating activities 1,393,536 104,938
-------------------------- ---------------------
Cash flows from investing activities:
Acquisition of a business, net of cash acquired (2,940,462) -
Payments of costs related to discontinued operations - (50,200)
Purchase of property and equipment (591,446) (146,473)
Increase in intangibles - (181,511)
Repayment of note receivable from officer 3,744 3,527
Net proceeds from the sale of short-term investments - 110,000
------------------------- ----------------------
Net cash used in investing activities (3,528,164) (264,657)
-------------------------- ----------------------
Cash flows from financing activities:
Net proceeds (repayments of) from revolving credit line 2,840,000 (1,380,000)
Repayment of long-term debt (62,500) (62,500)
Repayment of capital lease obligations (47,502) -
Redemption of class B preferred shares - (341,436)
Proceeds from issuance of common stock 110,421 243,549
------------------------- ----------------------
Net cash provided by (used in) financing activities 2,840,419 (1,540,387)
------------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 705,791 (1,700,106)
Cash and cash equivalents at beginning of period 139,400 1,881,979
------------------------- ----------------------
Cash and cash equivalents at end of period $ 845,191 $ 181,873
========================= ======================
Supplemental disclosures:
Income taxes paid $ 326,781 $ 328,436
========================= ======================
Interest paid $ 172,055 $ 126,000
========================= ======================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 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 November 30, 1997, results of its
operations for the three month and six month periods ended November 30, 1997 and
1996 and cash flows for the six month period ended November 30, 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, 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 and six month period
ended November 30, 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: Mergers
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 Amserv 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
November 30, 1997 have been included in accounts payable, accrued expenses and
accrued payroll and related expenses.
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 "EFCC 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 EFCC 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. 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 $8,143,000 (which includes acquisition
Page 6
<PAGE>
costs of approximately $893,000). The excess purchase price over the estimated
fair value of the assets was approximately $7,057,000 and is being amortized
over a period of up to 40 years.
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 November 30, 1997 compared to quarter ended November 30,
1996.
Total net revenues increased $1,905,224 or 14% to $15,179,857 for the
quarter ended November 30, 1997 over net revenues of $13,274,633 for the quarter
ended November 30, 1996. The increase in revenue for the quarter ended November
30, 1997 from the quarter ended November 30, 1996 is primarily attributable to
the acquisition of EFCC and 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
November 30, 1997 and 1996.
Selling, general and administrative costs as a percentage of net
revenues were 27% for the quarters ended November 30, 1997 and 1996.
Income from operations increased $111,932 or 13% to $958,106 for the
quarter ended November 30, 1997 compared with $846,174 for the quarter ended
November 30, 1996. The increase in income from operations for the quarter ended
November 30, 1997 from the quarter ended November 30, 1996 is attributable to
the increase in revenues.
Net income was $496,214 for the quarter ended November 30, 1997
compared to $479,244 for the quarter ended November 30, 1996. The increase in
net income for the quarter ended November 30, 1997 from the quarter ended
November 30, 1996 is attributable to the increase in revenues for the quarter
offset by higher interest expense from additional borrowings associated with the
acquisition of EFCC.
Six months ended November 30, 1997 compared to six months ended November 30,
1996.
Total net revenues increased $2,343,989 or 9% to $28,181,782 for the
six months ended November 30, 1997 over net revenues of $25,837,793 for the six
months ended November 30, 1996. The increase in revenue for the six months ended
November 30, 1997 from the six months ended November 30, 1996 is primarily
attributable to the acquisition of EFCC and growth in the New Jersey and Florida
branches of the Company.
Gross profit margins were approximately 35% for the six months ended
November 30, 1997 and 1996.
Page 7
<PAGE>
Selling, general and administrative costs as a percentage of net
revenues were 27% for the six months ended November 30, 1997 and 1996.
Income from operations increased $200,610 or 13% to $1,732,489 for the
six months ended November 30, 1997 compared with $1,531,879 for the six months
ended November 30, 1996. The increase in income from operations for the six
months ended November 30, 1997 from the six months ended November 30, 1996 is
attributable to the increase in revenues.
Net income (loss) were $907,595 for the six months ended November 30,
1997 compared to ($799,437) for the six months ended November 30, 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 six months ended November 30, 1996.
Financial Condition, Liquidity and Capital Resources
As of November 30, 1997 cash and cash equivalents were $845,191 as
compared with $139,400 at May 31, 1997. The net increase of $705,791 resulted
primarily from the increase in earnings for the period.
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 November 30, 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 November
30, 1997 were $5,462,000 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 2 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.
Page 8
<PAGE>
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Shareholders on September 5, 1997. The
following matters were voted upon at the meeting:
1. A proposal to approve and adopt the Agreement and Plan of Merger dated as
of January 3, 1997(the "Merger Agreement"), between Extended Family Care
Corporation, a New York corporation ("EFCC") and STAR, providing for the
merger (the "Merger") of EFCC with and into EFCC Acquisition Corp. ("Merger
Sub"), a New York corporation and a wholly owned subsidiary of STAR, and
the transactions contemplated thereby;
Vote
----
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
1,753,105 46,893 16,836 1,456,998
2. A proposal to adopt the following resolutions:
RESOLVED, that the amendment to the Corporation's 1992 Stock Option
Plan, as heretofore amended, to modify certain provisions to reflect
conforming changes to the new rules under the rules promulgated under the
Securities Exchange Act of 1934, as amended be, and it hereby is, adopted;
and it is further
RESOLVED, that the duly elected officers of the Company be, and each
of them, hereby is authorized and directed to take any and all actions
necessary to effect the amendment to the Company's 1992 Stock Option Plan.
Vote
----
For Against Abstain
--- ------- -------
3,154,329 98,050 21,453
3. A proposal to adopt the following resolutions:
RESOLVED, that the Non-Employee Director Stock Option Plan (the
"Plan"), as described in the proxy statement delivered in connection with
this Meeting be, and the same hereby is, adopted and approved.
RESOLVED, that the directors and officers of the Corporation be, and
each of them hereby is, authorized and empowered for, in the name and on
behalf of the Corporation, to do and perform all such further acts and
things as in the judgment of such officer shall be necessary, desirable or
appropriate to carry out and effectuate the foregoing resolution.
Vote
----
For Against Abstain
--- ------- -------
2,978,123 276,241 19,467
Page 9
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
27. Financial Data Schedule
b. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated September 9, 1997,
regarding the merger of Extended Family Care Corporation ("EFCC") into a wholly
owned subsidiary of the Company. The following items were reported: Item 2.
Acquisition or Disposition of Assets.
Page 10
<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.
January 14, 1998 By: s/William Fellerman
- ---------------- ---------------------------------
Date William Fellerman
Chief Financial Officer
(Principal Financial Officer)
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 845,191
<SECURITIES> 0
<RECEIVABLES> 12,289,435
<ALLOWANCES> 715,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,507,167
<PP&E> 3,125,683
<DEPRECIATION> 1,321,203
<TOTAL-ASSETS> 29,556,895
<CURRENT-LIABILITIES> 4,878,706
<BONDS> 0
0
0
<COMMON> 5,292
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,556,895
<SALES> 28,181,782
<TOTAL-REVENUES> 28,181,782
<CGS> 18,372,736
<TOTAL-COSTS> 26,449,293
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194,193
<INCOME-PRETAX> 1,538,296
<INCOME-TAX> 630,701
<INCOME-CONTINUING> 907,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 907,595
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
