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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, 2000
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Walt Whitman Road, Huntington Station, New York 11746
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(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 423-6689
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 12, 2000:
Class Number of Shares
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Common Stock, $0.001 par value 1,815,567
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
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STAR MULTI CARE SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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, 2000, results of its
operations for the three month period ended August 31, 2000 and August 31, 1999
and cash flows for the three month period ended August 31, 2000 and August 31,
1999.
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, 2000, 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,
2000 are 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.
Net income available to common shareholders was computed as follows:
Three Months Ended August 31,
2000 1999
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Net income $ 26,011 $ 91,203
Dividends on preferred shares (11,500) (11,500)
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Net income available to common shareholders $ 14,511 $ 79,703
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Note 2: Credit Facility
On November 9, 1998, the Company entered into a $10 million revolving
credit facility with Daiwa Securities America, Inc. (the Credit Facility). In
connection with the agreement, Star Multi Care Services, Inc and certain of its
subsidiaries (the members) formed SMCS Care, LLC (a limited liability Company)
(the "LLC"). The operating agreement of the LLC provides for its members to sell
its eligible receivables to the LLC and whereby the LLC will borrow from the
lender in accordance with the Credit Facility.
The Credit Facility provided for the LLC to borrow up to 70% of eligible
accounts receivable (as defined) that are aged less than 180 days at LIBOR plus
4%, and the remaining eligible accounts receivable (as defined) at LIBOR plus
7%. The credit facility was due to expire on November 8, 2000 and required the
Company to meet certain financial ratios and covenants, including current ratio,
minimum tangible net worth, debt service coverage and interest coverage. All of
the assets of the Company collateralize the Credit Facility. At May 31, 2000,
the Company was in violation of certain financial covenants and the lender has
granted the Company a waiver for those covenants that were not met.
<PAGE>
On September 12, 2000, the Company renegotiated its Credit Facility with its
lender on more favorable terms and extended the Credit Facility for an
additional three years. The material terms of the new Credit Facility are:
1. The Credit Facility was reduced to $7 million from $10 million
to more accurately reflect the Company's actual borrowing
needs and to reduce non-utilization fees.
2. The interest rate was reduced to LIBOR plus 3.75% for the
entire Credit Facility.
3. The Credit Facility will gradually reduce the available
borrowing base from the present 90% of eligible receivables to
87.5% by January 2001.
4. A number of financial covenants were revised to more
realistically measure the Company's financial performance.
5. The lender granted waivers for all of the financial covenants
that were breached in the past fiscal year.
As of August 31, 2000 the borrowing base totaled $5,525,693, and the outstanding
loan balance totaled $5,401,663, as compared to $5,797,625 and $6,043,188,
respectively, as of August 31, 1999.
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, 2000.
The Company is subject to significant external factors, which could
significantly impact its business, including changes in Medicare and Medicaid
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.
Results of Operations.
Quarter ended August 31, 2000 compared to quarter ended August 31,
1999.
Net revenues for the quarter ended August 31, 2000 increased $347,987
or 3.3% to $10,760,487 from $10,412,500 for the quarter ended August 31, 1999.
The increase in net revenue for the quarter ended August 31, 2000 from the
quarter ended August 31, 1999 is primarily attributable to the acquisition of
three new locations in Pennsylvania as of May 8, 2000.
Gross profit margin increased to 32.6% for the quarter ended August 31,
2000 from 31.4% for the quarter ended August 31, 1999. The increase in the gross
profit margin is primarily attributable to lower costs in payroll and payroll
related benefits and to increased reimbursement rates in the states of
Pennsylvania, Ohio and New Jersey.
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Selling, general and administrative costs increased $277,623 (10.8%) to
$2,849,374 for the quarter ended August 31, 2000, up from $2,571,751 for the
quarter ended August 31, 1999. Selling, general and administrative costs
increased as a percentage of revenue to 26.5% for the quarter ended August 31,
2000, as compared to 24.7% for the quarter ended August 31, 1999 and is
primarily attributable to the acquisition of three new locations in Pennsylvania
as of May 8, 2000.
Income from operations decreased to $209,322 for the quarter ended
August 31, 2000 from a profit of $290,985 for the quarter ended August 31, 1999,
a decrease of $81,663. The decrease in income from operations for the quarter
ended August 31, 2000 from the quarter ended August 31, 1999, is attributable to
a decline in Medicaid service hour volume in New Jersey, and the decline of
Medicare subcontract services.
Net income for the quarter ended August 31, 2000 decreased to $26,011
from a profit of $91,203 for the quarter ended August 31, 1999, a decrease of
$65,192. The decrease in net income for the quarter is attributable to a decline
in Medicaid service hour volume in New Jersey, and the decline of Medicare
subcontract services.
Financial Condition, Liquidity and Capital Resources
As of August 31, 2000 cash and cash equivalents were $74,443 as
compared with $321,465 at May 31, 2000. The net decrease of $247,022 resulted
primarily from the acquisition of additional operations in Pennsylvania and the
subsequent funding of accounts receivable.
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 at August 31, 2000 and May 31, 2000.
The Company has available a line of credit with a lender which allows
for borrowings of up to $7,000,000 (the "Credit Facility"). Pursuant to the
Credit Facility, the amount the Company may borrow is limited to 90% of eligible
accounts receivables that are aged less than 180 days, declining gradually to
87.5% of eligible accounts receivable effective January 1, 2001. The interest
rate was reduced to at LIBOR +3.75% for the entire credit facility. The Credit
Facility provides for the lender to receive a security interest in all of the
assets of the Company and its subsidiaries. As of August 31, 2000, the
outstanding principal loan balance is $5,345,586. The amended Credit Facility
matures on September 12, 2003. The Company is not in violation of any of the
covenants of the Credit.
The Company intends to meet its long-term liquidity needs through
available cash, cash flow and the 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 funding will
be available to the Company on satisfactory terms. Additionally, there can be no
assurance that the Credit Facility can be extended beyond its expiration date
and/or can be replaced with another lender under favorable terms.
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.
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Forward Looking Statements
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 and Medicaid reimbursement systems,
including any changes to the current 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. This discussion should be read in conjunction with: (i)
the attached consolidated financial statements and notes thereto, (ii) with the
Company's audited financial statements and notes thereto for the fiscal year
ended May 31, 2000, and (iii) with the section entitled Forward Looking
Statements appearing in the Company's Form 10-K which is hereby incorporated by
reference.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR MULTI CARE SERVICES, INC.
October 13, 2000 By: /s/ Stephen Sternbach
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Date Chairman of the Board, President and
Chief Executive Officer
October 13, 2000 By: /s/ Virginia Wyan
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Date Controller and Chief Accounting Officer
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STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
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Unaudited Audited
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 74,443 $ 321,465
Accounts receivable, net of allowance for doubtful accounts of
$1,263,000 and $1,378,000 at August 31, 2000 and May 31,
2000, respectively 9,303,450 8,274,520
Prepaid expenses and other current assets 317,528 326,636
Deferred income taxes 746,724 762,000
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Total current assets 10,442,145 9,684,621
Property and equipment, net of accumulated depreciation and
amortization of $1,951,000 and $1,854,000 at August 31,
2000 and May 31, 2000 respectively 1,230,074 1,312,754
Intangible assets, net 10,803,762 10,970,886
Deferred income taxes 2,242,000 2,242,000
Other assets 220,930 220,228
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$ 24,938,911 $ 24,430,489
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accrued payroll and related expenses $ 2,636,430 $ 2,423,322
Accounts payable 682,205 451,283
Accrued expenses 425,490 519,810
Due to Medicare 2,593,324 2,593,324
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Total current liabilities 6,337,449 5,987,739
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Long-Term Liabilities:
Revolving credit line 5,345,586 4,848,883
Other long-term liabilities 575,844 935,221
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Total long-term liabilities 5,921,430 5,784,104
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Shareholders' equity:
Convertible preferred stock-aggregate liquidation value
$575,000; $1.00 par value, 5,000,000 shares authorized;
575 shares issued 575 575
Common stock, $.001 par value per share, 5,000,000 shares
authorized; 1,844,666 and 1,839,666 shares issued,
respectively 1,845 1,840
Additional paid-in capital 21,569,633 21,562,763
Subscription receivable (397,782) (397,782)
Deficit (8,103,548) (8,118,059)
Treasury stock 79,099 common
shares at August 31, 2000 and May 31, 2000 at cost (390,691) (390,691)
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Total shareholders' equity 12,680,032 12,658,646
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$ 24,938,911 $ 24,430,489
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</TABLE>
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
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August 31, 2000 August 31, 1999
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<S> <C> <C>
Cash flow from operating activities:
Net income $ 26,011 $ 91,203
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Adjustments to reconcile net income to net cash
(used in) operating activities:
Provision for doubtful accounts 179,368 154,603
Depreciation and amortization 265,762 249,859
Deferred income taxes 15,276 62,524
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,208,298) 339,300
Prepaid expenses and other current assets 9,108 28,119
Other assets (702) (15,320)
Increase (decrease) in liabilities:
Accrued payroll and related expenses 213,108 (676,093)
Accounts payable and other accrued expenses 236,686 (270,245)
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Total adjustments (763,064) (127,253)
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Net cash used in operating activities (737,053) (36,050)
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Cash flows from investing activities:
Purchase of property and equipment (6,672) (32,654)
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Net cash used in investing activities (6,672) (32,654)
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Cash flows from financing activities:
(Payments) proceeds from revolving credit line 496,703 (234,100)
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Net cash (used in) provided by financing activities 496,703 (234,100)
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Net decrease in cash and cash equivalent (247,022) (302,804)
Cash and cash equivalents at beginning of period 321,465 1,734,421
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Cash and cash equivalents at end of period $ 74,443 $ 1,431,617
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Supplemental disclosure:
Income taxes paid $ -- $ --
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Interest paid $ 179,000 $ 169,000
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</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
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August 31, 2000 August 31, 1999
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Net revenues $ 10,760,487 $ 10,412,500
Operating expenses:
Costs of revenue 7,256,661 7,145,302
Selling, general and administrative 2,849,374 2,571,751
Depreciation and amortization 265,762 249,859
Provision for doubtful accounts 179,368 154,603
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10,551,165 10,121,515
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Operating Income 209,322 290,985
Interest expense, net (168,035) (161,181)
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Income before income taxes 41,287 129,804
(Provision) for income taxes (15,276) (48,027)
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Income from continuing operations 26,011 81,777
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Discontinued operations:
Income from discontinued operations,
net of applicable income tax -- 9,426
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Net income $ 26,011 $ 91,203
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Basic income (loss) per common share:
Continuing operations $ 0.01 $ 0.05
Discontinued operations 0.00 0.00
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Net income (loss) $ 0.01 $ 0.05
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Diluted income (loss) per common share:
Continuing operations $ 0.01 $ 0.05
Discontinued operations 0.00 0.00
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Net income (loss) $ 0.01 $ 0.05
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Weighted average number of common shares:
Basic 1,765,458 1,753,078
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Diluted 1,804,163 1,753,078
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See accompanying notes to consolidated financial statements
