<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 FEBRUARY 28, 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 April 14, 1998:
Class Number of Shares
Common Stock, $0.001 par value 5,355,163
1
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information
Item 1
<S> <C>
Consolidated Balance Sheets as of February 28, 1998 and May 31, 1997 .................. 3
Consolidated Statements of Operations for the three months and nine months
ended February 28, 1998 and 1997 ................................................... 4
Consolidated Statements of Cash Flows
for the nine months ended February 28, 1998 and 1997 .............................. 5
Notes to Consolidated Financial Statements ............................................ 6-8
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 8-13
Part II - Other Information
Item 4
Submission of Matters to a Vote of Security Holders.................................... 13-14
Item 6
Exhibits and Reports on Form 8-K ...................................................... 14
Signatures............................................................................. 15
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
-------------------- ---------------------
ASSETS: Unaudited
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 613,361 $ 139,400
Accounts receivable, less allowance for doubtful accounts of
$1,153,656 and $650,000 at February 28, 1998 and May 31,
1997, respectively 11,524,638 11,260,466
Prepaid expenses and other current assets 998,656 1,406,328
Deferred income taxes 2,764,580 950,015
Income taxes receivable - 73,738
Total current assets 15,901,235 13,829,947
-------------------- ---- ----------------
Property and equipment, net of accumulated depreciation and
amortization of $1,146,574 and $943,511 at February 28,
1998 and May 31, 1997, respectively 1,966,121 1,200,018
Notes receivable from officer 85,865 93,353
Intangible assets, net of accumulated amortization 12,199,578 4,954,334
Other assets 226,534 222,805
$ 30,379,333 $ 20,300,457
==================== ==== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line $ 5,938,000 $ -
Accrued regulatory costs, contractual adjustments and
related expenses 3,160,000 -
Accounts payable and other accrued expenses 3,402,986 1,142,605
Accrued payroll and related expenses 2,721,416 3,017,009
Current maturities of long-term debt 125,000 125,000
Total current liabilities 15,347,402 4,284,614
-------------------- ---- ----------------
Long-Term Liabilities:
Revolving credit line - 2,622,000
Long-term debt 31,250 125,000
Other long-term liabilities 137,733 197,795
Total long-term liabilities 168,983 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; 5,302,073 and 4,214,335 issued, respectively 5,302 4,214
Additional paid-in capital 20,500,369 15,431,833
Note receivable from shareholder (397,782) (397,782)
Deficit (4,966,019) (1,688,295)
Treasury stock - 137,500 common shares at February 28, 1998
and May 31, 1997 (278,922) (278,922)
Total shareholder's equity 14,862,948 13,071,048
-------------------- ---- ----------------
$ 30,379,333 $ 20,300,457
==================== ==== ================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 15,151,498 $ 13,326,186 $ 43,333,280 $ 39,163,979
---------------- ---------------- --------------- ---------------
Operating costs and expenses:
Costs of revenue 10,659,693 8,710,173 29,032,429 25,624,871
Selling, general and administrative 5,513,067 3,520,720 12,980,596 10,503,636
Provision for doubtful accounts 962,055 57,169 1,095,790 148,556
Regulatory costs, contractual adjustments
and related expenses 3,254,515 - 3,280,511 -
Restructuring and Termination 362,718 - 362,718 -
Impairment of intangible assets 380,000 - 380,000 -
Depreciation and amortization 260,331 163,684 709,628 480,597
---------------- ---------------- --------------- ---------------
21,392,379 12,451,746 47,841,672 36,757,660
---------------- ---------------- --------------- ---------------
Income (loss) from operations (6,240,881) 874,440 (4,508,392) 2,406,319
Interest expense, net (144,745) (24,564) (338,938) (102,657)
Merger transaction costs - - - (2,808,223)
---------------- ---------------- --------------- ---------------
Income (loss) before income taxes (6,385,626) 849,876 (4,847,330) (504,561)
(Provision) Benefit for income taxes 2,200,307 (348,000) 1,569,606 207,000
---------------- ---------------- --------------- ---------------
Net income (loss) $ (4,185,319) $ 501,876 $ (3,277,724) $ (297,561)
================ ================ =============== ===============
Net income (loss) per common share:
Basic $ (0.79) $ 0.13 $ (0.69) $ (0.08)
================ ================ =============== ===============
Diluted $ (0.79) $ 0.12 $ (0.67) $ (0.07)
================ ================ =============== ===============
Weighted average number of shares:
Basic 5,296,940 3,966,785 4,756,939 3,946,379
================ ================ =============== ===============
Diluted 5,296,940 4,296,185 4,891,963 4,179,119
================ ================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended February 28,
--------------------------------------------------------
1998 1997
------------------------ -------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (3,277,724) $ (297,561)
------------------------ -------------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 1,095,790 148,556
Impairment of intangible assets 380,000 -
Depreciation and amortization of property and equipment 295,341 164,792
Amortization of intangible assets 414,287 315,805
Deferred income taxes (1,610,565) (601,126)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (351,114) (667,836)
Prepaid expenses and other current assets 443,096 31,300
Income taxes receivable 73,738 (28,997)
Other assets (3,729) 291,571
Increase (decrease) in liabilities:
Regulatory costs and related expenses 3,160,000
Accrued payroll and related expenses (463,458) (88,621)
Accounts payable and other accrued expenses 497,054 (125,118)
Income taxes payable - (295,647)
Other liabilities - 1,158,030
-------------------------- --------------------------
Total adjustments 3,930,440 302,709
-------------------------- --------------------------
Net cash provided by operating activities 652,716 5,148
-------------------------- --------------------------
Cash flows from investing activities:
Payments of costs related to discontinued operations - (98,081)
Acquisition of a business, net of cash acquired (2,587,564) -
Purchase of property and equipment (885,447) (314,593)
Increase in intangibles - (177,327)
Repayment of note receivable from officer 7,488 5,580
Net proceeds from the sale of short-term investments - 106,000
Net cash used in investing activities (3,465,523) (478,421)
-------------------------- --------------------------
Cash flows from financing activities:
Net proceeds (repayments of) from revolving credit line 3,316,000 (1,283,000)
Repayment of long-term debt (93,750) (93,750)
Repayment of capital lease obligations (60,062) -
Redemption of class B preferred shares - (341,436)
Proceeds from issuance of common stock 124,580 388,054
Net cash provided by (used in) financing activities 3,286,768 (1,330,132)
-------------------------- --------------------------
Net increase (decrease) in cash and cash equivalents 473,961 (1,803,405)
Cash and cash equivalents at beginning of period 139,400 1,881,979
-------------------------- -------------------------
Cash and cash equivalents at end of period $ 613,361 $ 78,574
========================= =========================
Supplemental disclosures:
Income taxes paid $ 533,031 $ 600,000
Interest paid $ 317,570 $ 173,000
========================= =========================
</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 February 28, 1998, results of its
operations for the three month and nine month periods ended February 28, 1998
and 1997 and cash flows for the three month and nine month periods ended
February 28, 1998.
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 nine month period
ended February 28, 1998 are not necessarily indicative of the results to be
expected for the full year.
Note 1 - Net Income (Loss) Per Share
During the quarter ended February 28, 1998 the Company adopted
Financial Accounting Standards Board ("FASB') Statement No. 128, "Earnings Per
Share." Basic earnings per common share is computed by dividing the net earnings
by the weighted average number of shares of common stock outstanding during the
period. Dilutive earnings per share gives effect to stock options and warrants
which are considered to be dilutive common stock equivalents. Treasury shares
have been excluded from the weighted average number of shares. Earnings per
share have been retroactively restated to reflect FASB No. 128 for all prior
periods presented.
Note 2: Reclassifications and 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. In the third quarter of 1998, Management
estimated and recorded approximately a $885,000 adjustment to increase the
allowance for doubtful accounts and approximately a $612,000 adjustment to
increase the reserve for self funded workers' compensation and medical benefits.
Note 3: Restructuring and Termination Costs
The Company has adopted a plan to restructure and consolidate several
of its operating locations and administrative functions within specific
geographic areas. The plan, which will be completed by May 31, 1998, resulted in
a charge in the third quarter of approximately $363,000. Amounts paid under the
restructuring plan as of February 28, 1998 were approximately $11,000 consisting
of severance and termination costs.
Note 4: Merger
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.
Page 6
<PAGE>
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 $7,928,000 (which includes acquisition costs of approximately
$893,000). The excess purchase price over the estimated fair value of the assets
was approximately $6,842,000 and is being amortized over a period of up to 40
years.
Note 5: Regulatory Costs and Contractual Adjustments
a. In February 1998, Star Multi Care Services, Inc. (the "Company") was
advised by its regulatory counsel that jurisdiction with respect to a previously
disclosed audit (the "1997 Audit") of Star Multi Care Services of Florida, Inc.
d/b/a American Health Care Services, the Company's Medicare agency, by the
Office of Audit Services of the Office of Inspector General of the United States
Department of Health and Human Services, which had previously been forwarded to
the Civil Division of the United States Attorney for the Southern District of
Florida (the "US Attorney") by the Medicare intermediary assigned to administer
Medicare payments in Florida, has been relinquished by the US Attorney to the
Medicare intermediary for recovery of an administrative overpayment.
The Company has now been informed that the Medicare intermediary has
assessed an administrative overpayment against the Company in the amount of
$1,248,747 based on the 1997 Audit. The Company has appealed the administrative
overpayment determination by pursuing administrative and judicial remedies. Such
appeal could result in elimination or reduction of the overpayment amount. The
Company's regulatory counsel has also advised that the Company has claims
against third-parties (e.g., subcontractors and licensed home health agencies)
for a portion of any liability of the Company in connection with such
administrative overpayment. The Company has established a reserve, in the period
ended February 28, 1998, for $1.25 million, in connection with the
administrative overpayment
b. The Company discovered errors in certain cost reports that had been
previously submitted by the Company to the New York State Department of Social
Services during the years 1993-1995, the basis of which served to determine the
Medicaid reimbursement rates in respect of the Company for the years 1994-1996.
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 established a reserve, in the period ended
February 28, 1998, for $660,000, in connection with this overpayment assessment.
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 and has voluntarily disclosed the
results of its internal investigation to the Office of Deputy Attorney General
for Medicaid Fraud Control. The Company has established a reserve of $1,000,000
in connection with this matter. The amount accrued has been based upon
information learned to date, additional information may be learned in the future
which would require the Company to modify this amount.
Management anticipates that these matters will be satisfactorily
resolved.
Page 7
<PAGE>
Included in regulatory costs and related expenses are approximately
$370,511, of legal and professional fees incurred in connection with the matters
discussed above.
Note 6: Impairment of Long Lived Assets
During the period ended February 28,1998 the Company recorded a charge
of $380,000 for the write down of various intangible assets related to its
Medicare operations and the discontinuance of certain contracts related to a
previously completed acquisition.
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.
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 February 28,1998, the Company developed a 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 the nine
months of fiscal 1998, combined with service utilization adjustments projected
for 1998, the Company expects to reduce costs to meet the reimbursement
shortfalls without any further material adverse effect to the Company.
The Company's Medicare-certified nursing agencies are subject to the
Medicare/Medicaid surety bond requirement imposed by the Budget Act. The Company
was required to have surety bonds in place no later than February 27,1998 for
these agencies and has successfully complied with these requirements. Management
estimates that the annualized cost of these surety bonds to be approximately
$44,000. The purpose of the surety bonds is to serve as Medicare fraud and abuse
deterrent. Additionally, there can be no assurance that any judgements,
settlements or costs relating to future claims under these surety bonds will not
have a material adverse effect on the Company's results of operations or
financial condition.
Results of Operations.
Quarter ended February 28, 1998 compared to quarter ended February 28,
1997.
Total net revenues increased $1,825,312 or 14% to $15,151,498 for the
quarter ended February 28, 1998 over net revenues of $13,326,186 for the quarter
ended February 28, 1997. The increase in net revenue for the quarter ended
February 28, 1998 from the quarter ended February 28, 1997 is primarily
attributable to the
Page 8
<PAGE>
acquisition of EFCC and growth in the New Jersey and Florida branches of the
Company.
The Company continues to expand its home health operations, as this
sector of the health care industry continues to become a greater part of health
care delivery system. In addition, the Company is also expanding its service mix
to include pediatric nursing care which provides the Company with both niche
marketing opportunities and greater gross margin potential. The Company
continues its focus on development and enhancement of new service delivery
models which provide for both decreased cost and increased profitability.
Gross profit margin decreased to 30% for the quarter ended February 28,
1998 from 35% for the quarter ended February 28, 1997. The decrease in the gross
profit margin is primarily attributable to an increase of approximately $512,000
in the reserve for self funded workers' compensation, 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
visits performed and revenues generated by the Company's Medicare certified
agency in Florida with gross profit margins of approximately 48%.
Selling, general and administrative costs as a percentage of revenue
increased to 36% for the quarter ended February 28, 1998, from 26% for the
quarter ended February 28, 1997. The increase in selling, general, and
administrative expenses as a percentage of revenues is attributable to: (i) an
increase in the reserve for the self funded health and dental plan, (ii) an
increase in the reserve for the self funded workers' compensation plan, (iii) a
reduction in the overhead allocation to the Company's Medicare certified agency
in Florida, (iv) increases in costs such as staffing in credit, collections and
billing, management information systems, human resources, accounting and key
management positions within the Company to support the Company's current and
anticipated future growth, and (v) increased costs associated with implementing
the Company's new policies and procedures over credit, collections, and billing
functions and increases in insurance, telecommunications, and other operating
expenses resulting from the growth in revenues. In effort to reduce operating
costs the Company recorded a restructuring and termination charge during the
three months ended February 28, 1998. See Note 3 "Restructuring and Termination
Costs".
Provision for Doubtful Accounts: The provision for doubtful accounts as
a percentage of net revenues for the quarter ended February 28, 1998 was 6%
compared to 0.4 % for the quarter ended February 28, 1997. A charge of
approximately $885,000 was taken in the quarter ended February 28, 1998 to
increase the allowance for doubtful accounts and reflects a more conservative
position taken on accounts in excess of 180 days past due. The revision in the
estimate for the Provision for Doubtful Accounts was considered necessary by the
Company because the collection of these accounts had been slower than
anticipated. The charge also reflects an increase to the bad debt provision rate
for accounts receivable aged less than 180 days, necessitated by billing and
collection difficulties that continued into early 1998 (see Liquidity and
Capital Resources).
Regulatory recoupments, contractual adjustments and related costs for
the quarter ended February 28, 1998, of $3,254,515, consist of, (i) a charge of
$1,250,000 to reserve for an administrative overpayment assessed by the Medicare
intermediary related to the Company's Medicare certified agency, (ii) a charge
of $660,000 to reserve for potential overpayment assessments by the New York
State Department of Health relating to discovered errors in previously filed
costs reports for the 1993 through 1995 periods which are the basis for the
Company's Medicaid reimbursement rates for the 1994 through 1996 period, (iii) a
charge of $1,000,000 to reserve for a potential audit adjustment by the office
of Deputy Attorney General for Medicaid Fraud Control, and (iv) $344,515 for
legal fees related to the above matters. See Note 5 "Regulatory Costs and
Contractual Adjustments".
Restructuring and termination for the quarter ended February 28, 1998,
consist of charges of approximately $363,000, relating to the Company's plan to
restructure and consolidate several of its operating locations and
administrative functions within specific geographic areas. See Note 3
"Restructuring and Termination Costs".
Impairment of intangible assets for the quarter ended February 28,
1998, consists of a charge to income
Page 9
<PAGE>
of $380,000 for the write down of various intangible assets related to its
Medicare operations and the discontinuance of certain contracts related to a
previously completed acquisition.
Income (loss) from operations decreased to ($6,240,881) for the quarter
ended February 28, 1998 from $874,440 for the quarter ended February 28, 1997.
This decrease was attributable to charges for regulatory costs, contractual
adjustments and related expenses, charges for restructuring and termination,
charges for the impairment of various intangible assets, increases in the
reserve for self funded workers' compensation and medical and dental plans,
increases in selling, general and administrative expenses, and increases in
provision for doubtful accounts.
Net income (loss) was ($4,185,319) for the quarter ended February 28,
1998 as compared to $501,876 for the quarter ended February 28, 1997. This
decrease was attributable to the decreased income from operations, and higher
interest expense from additional borrowings associated with the acquisition of
EFCC.
Nine months ended February 28, 1998 compared to nine months ended February 28,
1997.
Total net revenues increased $4,169,301 or 11% to $43,333,280 for the
nine months ended February 28, 1998 over net revenues of $39,163,979 for the
nine months ended February 28, 1997. This increase was primarily attributable to
the acquisition of EFCC and growth in the New Jersey and Florida branches of the
Company.
Gross profit margins decreased to 33% for the nine months ended
February 28, 1998 from 35% for the nine months ended February 28, 1997. This
decrease was primarily attributable to an increase of approximately $512,000 in
the reserve for self funded workers' compensation, 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
visits performed and revenues generated by the Company's Medicare certified
agency in Florida with a gross profit margin of approximately 48%.
Selling, general and administrative costs as a percentage of net
revenues increased to 30% for the nine months ended February 28, 1998, from 27%
for the nine months ended February 28, 1997. The increase in selling, general,
and administrative expenses as a percentage of revenues is attributable to: (i)
an increase in the reserve for the self funded health and dental plan, (ii) an
increase in the reserve for the self funded workers' compensation plan, (iii) a
reduction in the overhead allocation to the Company's Medicare certified agency
in Florida, (iv) increases in costs such as staffing in credit, collections and
billing, management information systems, human resources, accounting and key
management positions within the Company to support the Company's current and
anticipated future growth, and (v) increased costs associated with implementing
the Company's new policies and procedures over credit, collections, and billing
functions and increases in insurance, telecommunications, and other operating
expenses resulting from the growth in revenues. In effort to reduce operating
costs the Company recorded a restructuring and termination charge during the
three months ended February 28, 1998. See Note 3 "Restructuring and Termination
Costs".
Provision for Doubtful Accounts: The provision for doubtful accounts as
a percentage of net revenues for the nine months ended February 28, 1998 was 3%
compared to 0.4 % for the nine months ended February 28, 1997. A charge of
approximately $885,000 was taken in the nine months ended February 28, 1998 to
increase the allowance for doubtful accounts and reflects a more conservative
position taken on accounts in excess of 180 days. The revision in the estimate
for the Provision for Doubtful Accounts was considered necessary by the Company
because the collection of these accounts had been slower than anticipated. The
charge also reflects an increase to the bad debt provision rate for accounts
receivable aged less than 180 days, necessitated by billing and collection
difficulties that continued into early 1998 (see Liquidity and Capital
Resources).
Regulatory recoupments, contractual adjustments and related costs for
the quarter ended February 28, 1998, of $3,254,515, consist of, (i) a charge of
$1,250,000 to reserve for an administrative overpayment
Page 10
<PAGE>
assessed by the Medicare intermediary related to the Company's Medicare
certified agency, (ii) a charge of $660,000 to reserve for potential overpayment
assessments by the New York State Department of Health relating to discovered
errors in previously filed costs reports for the 1993 through 1995 periods which
are the basis for the Company's Medicaid reimbursement rates for the 1994
through 1996 period, (iii) a charge of $1,000,000 to reserve for a potential
audit adjustment by the office of Deputy Attorney General for Medicaid Fraud
Control, and (iv) $344,515 for legal fees related to the above matters. See Note
5 "Regulatory Costs and Contractual Adjustments".
Restructuring and termination for the nine months ended February 28,
1998 consist of a charge to income of approximately $363,000, relating to the
Company's plan to restructure and consolidate several of its operating locations
and administrative functions within specific geographic areas. See Note 3
"Restructuring and Termination Costs".
Impairment of intangible assets for the nine months ended February 28,
1998, consists of a charge to income of $380,000 for the write down of various
intangible assets related to its Medicare operations and the discontinuance of
certain contracts related to a previously completed acquisition.
Income (loss) from operations decreased to ($4,508,392) for the nine
months ended February 28, 1998 from $2,406,319 for the nine months ended
February 28, 1997. This decrease was attributable to charges for regulatory
costs, contractual adjustments and related expenses, charges for restructuring
and termination, charges for the impairment of various intangible assets,
increases in the reserve for self funded workers' compensation and medical and
dental plans, increases in selling, general and administrative expenses, and
increases in provision for doubtful accounts.
Net loss was ($3,277,724) for the nine months ended February 28, 1998
compared to $(297,561) for the nine months ended February 28, 1997. The increase
in net loss was attributable to the increase in loss from operations, and higher
interest expense from additional borrowings associated with the acquisition of
EFCC.
Financial Condition, Liquidity and Capital Resources
As of February 28, 1998 cash and cash equivalents were $613,361 as
compared with $139,400 at May 31, 1997. The net increase of $473,961 resulted
primarily from additional borrowings on the Company's 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 February 28, 1998 and May 31, 1997.
Management's quarter-end accounts receivable analysis includes a review
of aging trends and the aggregate amounts and timing of cash applications, bad
debt write-offs and revenue adjustments. Based on such analyses Management
estimated and recorded in the quarter ending February 28, 1998 approximately
$885,000 adjustment to increase the allowance for doubtful accounts (see Results
of Operations).
The Company currently has 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 February 28, 1998, the Formula equaled approximately
$6,558,000 and the outstanding balance of the funds advanced to the Company
pursuant to the Credit Agreement, as of such date, was $5,938,000. To date,
total borrowings under the Credit Agreement equal $6,188,000.
As of February 28, 1998, the Company was in technical default of the
Credit Agreement due to violation
Page 11
<PAGE>
of certain financial covenants contained in the Credit Agreement. The Lender has
not waived the violations, however it is the Company's belief that they have no
intention of calling the line of credit in the near term. The Company is
continuing to pursue a waiver of the violations, but until such time, the
Company may not borrow any additional funds under the line of credit.
The Credit Agreement expires on October 31, 1998 and will not be
renewed. The Company is currently working to replace the Credit Agreement. The
Company has received a non-binding letter of intent from an alternative
financing source to replace the Credit Agreement. The Company has reclassified
the bank debt as a current liability because of the technical default of the
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. However, should the Company be unable to replace the Credit
Agreement with another lender, the Company will not have sufficient working
capital to repay the money owed to its present lender.
The Company intends to meet its long-term liquidity needs through
available cash, cash flow and a new credit facility. 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.
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the Annual Meeting of Share holders on December 10, 1997. The
following matters were voted upon at the meeting:
1. The following slate of nominees stood for election to the Board of Directors:
For Withheld
Stephen Sternbach 3,651,343 30,894
William Fellerman 3,654,320 27,917
Charles Berdan 3,652,913 29,324
John P. Innes II 3,652,913 29,324
Matthew Solof 3,652,228 29,009
Melvin L. Katten 3,654,343 27,894
Gary L. Weinberger 3,653,320 28,917
Ivan Kaufman 3,654,320 27,917
2. The ratification of the appointment of Holtz Rubenstein & Co., LLP. as
independent certified accountants and auditors of the Corporation for
the fiscal year ending May 31, 1998.
Page 12
<PAGE>
For Against Abstain
3,648,823 6,486 26,928
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 November 10, 1997
reporting Item 5. Other Information.
Page 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.
April 20, 1998 By: /s/William Fellerman
- -------------- -------------------------
Date William Fellerman
Secretary and Chief Financial Officer
(Principal Financial Officer)
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 613,361
<SECURITIES> 0
<RECEIVABLES> 12,678,294
<ALLOWANCES> 1,153,656
<INVENTORY> 0
<CURRENT-ASSETS> 15,901,235
<PP&E> 3,115,695
<DEPRECIATION> 1,146,574
<TOTAL-ASSETS> 30,379,333
<CURRENT-LIABILITIES> 15,347,402
<BONDS> 0
0
0
<COMMON> 5,302
<OTHER-SE> 14,857,646
<TOTAL-LIABILITY-AND-EQUITY> 30,379,333
<SALES> 43,333,280
<TOTAL-REVENUES> 43,333,280
<CGS> 29,032,429
<TOTAL-COSTS> 29,032,429
<OTHER-EXPENSES> 709,628
<LOSS-PROVISION> 1,095,790
<INTEREST-EXPENSE> 338,938
<INCOME-PRETAX> (4,847,330)
<INCOME-TAX> (1,569,606)
<INCOME-CONTINUING> (3,277,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,277,724)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.67)
</TABLE>
