10-Q 1 e90818_10-q.txt 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, 2002 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of January 6, 2002: Class Number of Shares ------------------------------ ---------------- Common Stock, $0.001 par value 1,032,865 STAR MULTI CARE SERVICES, INC. INDEX Page PART I: FINANCIAL INFORMATION Item 1 Consolidated Balance Sheets as of November 30, 2002 and May 31, 2002 ... 3 Consolidated Statements of Operations for the three months ended November 30, 2002 and November 30, 2001 ................................ 4 Consolidated Statements of Cash Flows for the six months ended November 30, 2002 and November 30, 2001 ................................ 5 Notes to Consolidated Financial Statements ............................. 6-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 8-10 Item 4 Controls and Procedures ................................................ 11 PART II: OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K ....................................... 11 Signatures ............................................................. 12

See accompanying notes to consolidated financial statements 3

See accompanying notes to consolidated financial statements 4

See accompanying notes to consolidated financial statements 5 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, 2002, results of its operations for the three month and six month periods ended November 30, 2002 and November 30, 2001, and cash flows for the six month periods ended November 30, 2002 and November 30, 2001. 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, 2002, 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 periods ended November 30, 2002 are not necessarily indicative of the results to be expected for the full year. NOTE 1: NET INCOME (LOSS) PER COMMON SHARE Net income (loss) 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:

NOTE 2: RECLASSIFICATIONS AND USE OF ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the period. Such estimates primarily relate to accounts receivable valuation allowances, recoverability of goodwill, realization of deferred tax assets, and related valuation allowance and regulatory adjustments. Actual amounts may differ from those estimates. NOTE 3: GOODWILL AND INTANGIBLE ASSETS In June 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. It also requires, upon adoption of SFAS No. 142 that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. No adjustments for impairment losses were required. The effect of adoption of SFAS No. 142 on the 2001 consolidated results of operations were as follows: Three Months Six Months Ended Ended November 30, November 30, 2001 2001 ----------- ------------ Reported loss before extraordinary item ... $ (886,320) $ (1,418,723) Add back: amortization of goodwill ....... 17,648 125,280 ---------- ------------ Loss before extraordinary item, as adjusted $ (868,672) $ (1,293,443) ========== ============ Basic earnings per share: Reported loss before extraordinary item $ (1.17) $ (1.89) Amortization of goodwill .............. 0.02 0.17 ---------- ------------ Basic earnings per share, as adjusted . $ (1.15) $ (1.72) ========== ============ Diluted earnings per share: Reported loss before extraordinary item $ (1.17) $ (1.89) Amortization of goodwill .............. 0.02 0.16 ---------- ------------ Diluted earnings per share, as adjusted $ (1.17) $ (1.73) ========== ============ NOTE 4: CREDIT FACILITY On August 31, 2001, the Company entered into a $2 million dollar credit facility with Heller Healthcare Finance, Inc. The facility provides for the Company to borrow up to 85% of eligible accounts receivable (as defined) that are aged less than 150 days, at the lender's prime rate (4-1/4% at November 30, 2002) plus 1%. The facility expires on August 31, 2004, and requires the Company to meet certain financial ratios and covenants. All assets of the Company collateralize the new credit facility. On December 30, 2002, the Credit Facility was amended to allow the Company to borrow up to an additional $176,000 in excess of eligible accounts receivable, under substantially the same terms as the basic Credit Facility. This extension, which expires on December 31, 2003, decreases each month by $41,667. NOTE 5: CHANGE OF OWNERSHIP On October 31, 2002, Stephen Sternbach, Chief Executive Officer of the Company, and Matthew Solof, an unrelated party, purchased all of the issued and outstanding Series B 7% Convertible Preferred Stock from the Shaar Fund Ltd. This Preferred Stock is convertible into the Company's common stock. The conversion would give Messrs. Sternbach and Solof more than a majority of the outstanding common stock of the Company. Management has not evaluated the effect, if any, on deferred income tax assets that might result as a consequence of this transaction. 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, 2002. The Company is subject to significant external factors that could have a significant impact on its business, including changes in Medicare reimbursement, government fraud and abuse initiatives and other such factors that 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, 2002 COMPARED TO QUARTER ENDED NOVEMBER 30, 2001. Net revenue for the quarter ended November 30, 2002 increased $192,346 or 8% to $2,562,210 from $2,369,864 for the quarter ended November 30, 2001. This increase is primarily attributable to the aggressive marketing efforts of the Company in securing new contracts and, to a lesser extent, rate increases on certain of the Company's existing contracts. Gross profit margin increased to 38.9% for the quarter ended November 30, 2002 from 34.0% for the quarter ended November 30, 2001. The increase in the gross profit margin is primarily attributable to the increase in the mix of higher profit margin contracts, and the elimination of certain lower profit margin contracts. Selling, general and administrative expenses ("SG&A") for the quarter ended November 30, 2002 decreased $593,561 (39.7%) to $901,644, from $1,495,205 for the quarter ended November 30, 2001. The decrease in SG&A is primarily attributable to the Company's restructuring efforts, following the sale of the New Jersey and New York operations. As a percentage of revenue, SG&A decreased from 63.1% to 35.2% for the quarters ended November 30, 2001 and 2002, respectively. Loss from operations decreased $804,984 to $(4,429) for the quarter ended November 30, 2002, from a loss of $(809,413) for the quarter ended November 30, 2001. The decrease in the operating loss is the result of the aforementioned increases in revenue and gross margin, and decrease in SG&A and other operating expenses. Interest expense decreased to $33,835 for the quarter ended November 30, 2002, from $85,503 for the quarter ended November 30, 2001. This decrease is the result of a decrease in the borrowing rate and, to a lesser extent, lower outstanding borrowings. SIX MONTHS ENDED NOVEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 2001. Net revenue for the six months ended November 30, 2002 decreased $5,402,501 or 52.2% to $4,951,563 from $10,354,064 for the six months ended November 30, 2001. This decrease is primarily attributable to the sale of the New York and New Jersey operations of the Company. Gross profit margin increased to 39.3% for the six months ended November 30, 2002 from 33.0% for the six months ended November 30, 2001. The increase in the gross profit margin is primarily attributable to the elimination of certain lower profit margin contracts resulting from the sale of the New York and New Jersey operations of the Company, and the increase in the mix of higher profit margin contracts. SG&A for the six months ended November 30, 2002 decreased $1,969,524 (51.3%) to $1,873,359, from $3,842,883 for the six months ended November 30, 2001. The decrease in SG&A is primarily attributable to the sale of the New Jersey and New York operations, and subsequent restructuring efforts. Loss from operations for the six months ended November 30, 2002 decreased $761,958 to $(110,543), from $(872,501) for the six months ended November 30, 2001. The decrease is primarily attributable to the aforementioned decreases in volume (net revenue) and SG&A expenses. Interest expense decreased to $62,660 for the six months ended November 30, 2002, from $533,236 for the six months ended November 30, 2001. This decrease is the result of lower outstanding borrowings commensurate with the decrease in net revenue and, to a lesser extent, a decrease in the borrowing rate. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 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 120 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, 2002 and May 31, 2002. On August 31, 2001, the Company entered into a $2 million dollar credit facility with Heller Healthcare Finance, Inc., which provides for the Company to borrow up to 85% of eligible accounts receivable (as defined in the loan agreement) that are aged less than 150 days, at the lender's prime rate plus 1%. The facility expires on August 31, 2004. As of November 30, 2002, the outstanding loan balance was $1,340,183. On July 11, 2001, the Company entered into a Settlement Agreement with United States Department of Justice and the Office of Inspector General of the Department of Health and Human Services. In order to avoid the delay, uncertainty, inconvenience, and the expense of protracted litigation of the claims, both parties mutually agreed upon a settlement amount of $1,000,000 payable by Star, in quarterly installment payments (as amended), with the first payment of $250,000 made on November 8, 2001. As of November 30, 2002, $250,000 remains payable under this Settlement Agreement. As of November 30, 2002, cash and cash equivalents were $137,373, as compared to $74,235 at May 31, 2002. The Company strives to maintain minimal cash balances, in its continued efforts to keep its outstanding borrowings under its credit facility to a minimum; however, a cash reserve was established to meet the Company's obligation under the aforementioned Settlement Agreement. Under this Agreement, a payment of $125,000 plus interest was made on December 5, 2002. The Company believes it will have the available funds necessary to make the remaining payment on its due date of April 5, 2003. 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 its present cash position will enable the Company to continue to support its operations for the next twelve months. 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 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, 2002, and (iii) with the section entitled Forward Looking Statements appearing in the Company's Form 10-K which is hereby incorporated by reference. ITEM 4. CONTROLS AND PROCEDURES. a.) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date (the Evaluation Date) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings. b.) Changes in internal controls. There were no significant changes made in our internal controls during the period covered by this report, or to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II: OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. a. Exhibits: 10.1 Overline Loan and Amendment to the Loan and Security Agreement dated December 30, 2002 by and among Heller Healthcare Finance, Inc. ("Lender") and Star Multi Care Services, Inc., Amserv Health Care of Ohio, Inc., Amserv Health Care of New Jersey, Inc. and EFCC Acquisition Corp. dated as of August 31, 2001. 99.1 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K. A Current Report on Form 8-K dated October 31, 2002 was filed disclosing that Stephen Sternbach, Chairman of the Board, President and Chief Executive Officer and Matthew Solof purchased all of the outstanding Series B 7% Convertible Preferred Stock, par value $1.00 per share from the Shaar Fund Limited 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 21, 2003 By: s/Stephen Sternbach ---------------- ----------------------------------------- Date Chairman of the Board, President and Chief Executive Officer January 21, 2003 By: s/David M. Schoenberg ---------------- ----------------------------------------- Date Director of Finance, Secretary and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 PURSUANT TO REGULATION ss.240.15D-14 AS PROMULAGATED BY THE SECURITIES AND EXCHANGE COMMISSION In connection with the Quarterly Report of Star Multi Care Services, Inc. (the "Company") on Form 10-Q for the period ended November 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen Sternbach, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 pursuant to Regulation ss.240.15d-14 as promulgated by the Securities and Exchange Commission, that: (1) I have reviewed the Report being filed; (2) Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report; (3) Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term is defined in paragraph (c) of this section) for the issuer and have: (i) Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic Reports are being prepared; (ii) Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report ("Evaluation Date"); and (iii) Presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date; (5) I and the other certifying officers have disclosed, based on their most recent evaluation, to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function): (i) All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and Report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and (6) The registrant's other certifying officers and I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ STEPHEN STERNBACH ---------------------------------------- Stephen Sternbach Chairman of the Board, President and Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 PURSUANT TO REGULATION ss.240.15D-14 AS PROMULAGATED BY THE SECURITIES AND EXCHANGE COMMISSION In connection with the Quarterly Report of Star Multi Care Services, Inc. (the "Company") on Form 10-Q for the period ended November 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David Schoenberg, Director of Finance, Secretary and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 pursuant to Regulation ss.240.15d-14 as promulgated by the Securities and Exchange Commission, that: (1) I have reviewed the Report being filed; (2) Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report; (3) Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term is defined in paragraph (c) of this section) for the issuer and have: (i) Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic Reports are being prepared; (ii) Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report ("Evaluation Date"); and (iii) Presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date; (5) I and the other certifying officers have disclosed, based on their most recent evaluation, to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function): (i) All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and Report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and (6) The registrant's other certifying officers and I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ DAVID SCHOENBERG ----------------------------------------- David Schoenberg Director of Finance, Secretary and Chief Financial Officer INDEX OF EXHIBITS 10.1 Overline Loan and Amendment to the Loan and Security Agreement dated December 30, 2002 by and among Heller Healthcare Finance, Inc. ("Lender") and Star Multi Care Services, Inc., Amserv Health Care of Ohio, Inc., Amserv Health Care of New Jersey, Inc. and EFCC Acquisition Corp. dated as of August 31, 2001. 99.1 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

STAR MULTI CARE SERVICES INC 10-Q