<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, 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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Walt Whitman Road, Huntington Station, New York 11746
---------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 423-6689
--------------
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 12, 2001:
Class Number of Shares
-------------------------- -----------------------------
Common Stock, $0.001 par value 1,765,567
<PAGE>
STAR MULTI CARE SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1
Consolidated Balance Sheets as of November 30, 2000 and May 31, 2000.............................. 3
Consolidated Statements of Operations for the three months and six months
ended November 30, 2000 and 1999.................................................................. 4
Consolidated Statements of Cash Flows
for the six months ended November 30, 2000 and 1999............................................... 5
Notes to Consolidated Financial Statements........................................................ 6-7
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 7-9
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K.................................................................. 10
Signatures........................................................................................ 10
</TABLE>
2
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
------------ -----------
Unaudited Audited
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 214,566 $ 321,465
Accounts receivable, net of allowance for doubtful accounts of
$1,176,000 and $1,378,000 at November 30, 2000 and May 31,
2000, respectively 9,805,096 8,274,520
Prepaid expenses and other current assets 440,307 326,636
Deferred income taxes 743,927 762,000
------------ ------------
Total current assets 11,203,896 9,684,621
Property and equipment, net of accumulated depreciation and
amortization of $2,042,000 and $1,854,000 at November 30,
2000 and May 31, 2000 respectively 1,151,566 1,312,754
Intangible assets, net 10,735,268 10,970,886
Deferred income taxes 2,242,000 2,242,000
Other assets 220,440 220,228
------------ ------------
$ 25,553,170 $ 24,430,489
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accrued payroll and related expenses $ 2,299,078 $ 2,423,322
Accounts payable 840,103 451,283
Accrued expenses 884,159 519,810
Due to Medicare 2,593,324 2,593,324
------------ ------------
Total current liabilities 6,616,664 5,987,739
------------ ------------
Long-Term Liabilities:
Revolving credit line 5,348,312 4,848,883
Other long-term liabilities 888,902 935,221
------------ ------------
Total long-term liabilities 6,237,214 5,784,104
------------ ------------
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 (8,084,288) (8,118,059)
Treasury stock 79,099 common
shares at November 30, 2000 and May 31, 2000 at cost (390,691) (390,691)
------------ ------------
Total shareholders' equity 12,699,292 12,658,646
------------ ------------
$ 25,553,170 $ 24,430,489
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------- -------------------------------------
November 30, 2000 November 30, 1999 November 30, 2000 November 30, 1999
---------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 10,229,017 $ 9,865,995 $ 20,989,504 $ 20,278,494
Operating expenses:
Costs of revenue 6,835,105 6,770,353 14,091,787 13,915,654
Selling, general and administrative 2,696,388 2,363,102 5,534,050 4,934,860
Depreciation and Amortization 265,710 233,187 531,472 483,042
Provision for doubtful accounts 178,938 148,096 358,306 302,698
------------ ------------ ------------ ------------
9,976,141 9,514,738 20,515,615 19,636,254
------------ ------------ ------------ ------------
Operating Income 252,876 351,257 473,889 642,240
Interest expense, net (204,030) (189,853) (383,777) (351,034)
------------ ------------ ------------ ------------
Income before income taxes 48,846 161,404 90,112 291,206
(Provision) for income taxes (18,073) (59,719) (33,341) (107,746)
------------ ------------ ------------ ------------
Income from continuing operations 30,773 101,685 56,771 183,460
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net of
applicable income tax -- (48,349) -- (38,923)
------------ ------------ ------------ ------------
Net income $ 30,773 $ 53,336 56,771 $ 144,537
============ ============ ============ ============
Basic income (loss) per common share:
Continuing operations $ 0.01 $ 0.06 $ 0.02 $ 0.10
Discontinued operations 0.00 (0.03) 0.00 (0.02)
------------ ------------ ------------ ------------
Net income (loss) $ 0.01 $ 0.03 $ 0.02 $ 0.03
============ ============ ============ ============
Diluted income (loss) per common share:
Continuing operations $ 0.01 $ 0.06 $ 0.02 $ 0.06
Discontinued operations 0.00 (0.03) 0.00 (0.02)
------------ ------------ ------------ ------------
Net income (loss) $ 0.01 $ 0.03 $ 0.02 $ 0.08
============ ============ ============ ============
Weighted average number of common shares:
Basic 1,765,567 1,741,188 1,765,512 1,747,170
============ ============ ============ ============
Diluted 1,765,567 1,741,188 1,784,865 1,747,170
============ ============ ============ ============
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended
November 30, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 56,771 $ 144,537
----------- -----------
Adjustments to reconcile net income to net cash
(used in) provided by
operating activities:
Provision for doubtful accounts 358,306 302,698
Depreciation and amortization 531,472 483,042
Deferred income taxes 18,073 36,649
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,888,882) 518,052
Prepaid expenses and other current assets (113,671) 20,393
Other assets (212) (5,164)
Increase (decrease) in liabilities:
Accrued payroll and related expenses (124,244) (526,184)
Accounts payable and other accrued expenses 753,169 (743,197)
----------- -----------
Total adjustments (465,989) (86,289)
----------- -----------
Net cash (used in) provided by operating activities (409,218) 230,826
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (121,959) (64,347)
Repayment of note receivable from officer -- 4,750
Purchase of intangibles (35,707) --
----------- -----------
Net cash used in investing activities (157,666) (59,597)
----------- -----------
Cash flows from financing activities:
Revolving credit line 499,429 (707,811)
Repayment of long-term debt (46,319) --
Exercise of stock options 6,875
Purchase of treasury stock -- (111,769)
----------- -----------
Net cash (used in) provided by financing activities 459,985 (819,580)
----------- -----------
Net decrease in cash and cash equivalent (106,899) (648,351)
Cash and cash equivalents at beginning of period 321,465 1,734,421
----------- -----------
Cash and cash equivalents at end of period $ 214,566 $ 1,086,070
=========== ===========
Supplemental disclosure:
Income taxes paid $ -- $ 10,000
=========== ===========
Interest paid $ 383,777 $ 283,648
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<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, 2000, results of its
operations for the three and six months periods ended November 30, 2000 and 1999
and cash flows for the six month period ended November 30, 2000 and 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 and six months periods ended
November 30, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 30,773 $ 53,336 $ 56,771 $ 144,537
Dividends on preferred shares (11,500) (11,500) (23,000) (23,000)
--------- --------- --------- ---------
Net income available to common shareholders $ 19,273 $ 41,836 $ 33,771 $ 121,537
========= ========= ========= =========
</TABLE>
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.
Note 3: Credit Facility
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.
3
<PAGE>
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.
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 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 November 30, 2000 compared to quarter ended November 30,
1999.
Net revenues for the quarter ended November 30, 2000 increased $363,022
or 4% to $10,229,017 from $9,865,995 for the quarter ended November 30, 1999.
The increase in net revenue for the quarter ended November 30, 2000 from the
quarter ended November 30, 1999 is primarily attributable to the acquisition of
three branch locations in Pennsylvania in May 2000, offset by a decrease in
revenue in the New Jersey, New York and Florida branches of the Company.
Gross profit margin increased to 33.2% for the quarter ended November
30, 2000 from 31.4% for the quarter ended November 30, 1999. The increase in the
gross profit margin is primarily attributable to an elimination of low profit
margin contracts, change in wage and benefit programs for employees and contract
rate increases in New Jersey, Pennsylvania and Ohio.
Selling, general and administrative costs increased $333,286 (14.1%) to
$2,696,388 for the quarter ended November 30, 2000, up from $2,363,102 for the
quarter ended November 30, 1999. The increase in selling, general and
administrative expenses is primarily attributable to the May 2000 acquisition of
three branch locations in Pennsylvania.
Income from operations decreased to $252,876 for the quarter ended
November 30, 2000 from $351,257 for the quarter ended November 30, 1999, a
decrease of $98,381. The decrease in income from operations for the quarter
ended November 30, 2000 from the quarter ended November 30, 1999 is attributable
to additional operating costs associated with the recent acquisition, as noted
above.
Net income for the quarter ended November 30, 2000 decreased to $30,773
from $53,336 for the quarter ended November 30, 1999, a decrease of $22,563. The
decrease in net income for the quarter is attributable to additional costs
associated with the recent acquisition.
Six months ended November 30, 2000 compared to six months ended
November 30, 1999.
Net revenues for the six months ended November 30, 2000 increased
$711,010 or 3.5% to $20,989,504 from $20,278,494 for the six months ended
November 30, 1999. This increase is primarily attributable to the acquisition of
three branch locations in Pennsylvania in May 2000, offset by a decrease in
revenue in the New Jersey, New York and Florida branches of the Company.
4
<PAGE>
Gross profit margin increased to 32.9% for the six months ended
November 30, 2000 from 31.4% for the six months ended November 30, 1999. The
increase in the gross profit margin is primarily attributable to an elimination
of low profit margin contracts, change in wage and benefit programs for
employees and contract rate increases in New Jersey, Pennsylvania and Ohio.
Selling, general and administrative costs increased $599,190 (12.1%) to
$5,534,050 for the six months ended November 30, 2000, up from $4,934,860 for
the six months ended November 30, 1999. Selling, general and administrative
costs increased as a percentage of revenue from 24.3% for the same period last
year to 26.4% for the six months ended November 30, 2000. The increase in
selling, general and administrative expenses is primarily attributable to the
May 2000 acquisition of three branch locations in Pennsylvania.
Income from operations decreased to $473,889 for the six months ended
November 30, 2000 from $642,240 for the six months ended November 30, 1999, a
decrease of $168,351. The decrease in income from operations for the six months
ended November 30, 2000 from the six months ended November 30, 1999 is
attributable to an increase in operating costs associated with the recent
acquisition.
Net income for the six months ended November 30, 2000 decreased to
$56,771 from net income of $144,537 for the six months ended November 30, 1999,
a decrease of $87,766.
Financial Condition, Liquidity and Capital Resources
As of November 30, 2000 cash and cash equivalents were $214,566 as
compared with $321,465 at May 31, 2000. The net decrease of $106,899 resulted
primarily from the acquisition of three branches in Pennsylvania and an increase
in 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 November 30, 2000 and May 31, 2000.
The Company currently has available a line of credit with a bank 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 87.5% of
eligible accounts receivables that are aged less than 180 days at LIBOR +3.75%.
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 November 30, 2000,
the outstanding loan balance is $5,348,312. The Credit Facility matures on
September 12, 2003. The Company is not in violation of any of the covenants of
the Facility as of November 30, 2000.
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.
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
reimbursement system, including any changes to the current IPS and/or the
ultimate implementation of a
5
<PAGE>
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.
6
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
27. Financial Data Schedule
2. Reports on Form 8-K.
None
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 16, 2001 By: s/Stephen Sternbach
------------------ -------------------------
Date Chairman of the Board, President and
Chief Executive Officer
7
<PAGE>
Index of Exhibits
27. Financial Data Schedule
8
