10-Q 1 form10q_11865.txt FORM 10-Q ================================================================================ 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, 2003 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 April 18, 2003: Class Number of Shares ------------------------------ ---------------- Common Stock, $0.001 par value 4,836,865 ================================================================================ STAR MULTI CARE SERVICES, INC. INDEX Page PART I: FINANCIAL INFORMATION Item 1 Consolidated Balance Sheets as of February 28, 2003 and May 31, 2002.......3 Consolidated Statements of Operations for the three months and nine months ended February 28, 2003 and February 28, 2002..................4 Consolidated Statements of Cash Flows for the nine months ended February 28, 2003 and February 28, 2002....................................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...................................................10 PART II: OTHER INFORMATION Item 5. Other Information.........................................................11 Item 6 Exhibits and Reports on Form 8-K..........................................12 Signatures................................................................12 Index of Exhibits.........................................................15 2

STAR MULTI CARE SERVICES, INC. CONSOLIDATED BALANCE SHEETS ~~November~~February 3028, May 31, ~~2002~~2003 2002 ------------ ------------ ASSETS: Unaudited Audited ~~-------~~ CURRENT ASSETS: Cash and cash equivalents ~~............................................~~ $ ~~137~~211,~~373~~116 $ 74,235 Accounts receivable, net of allowance for doubtful accounts of $2,425,000 at ~~November~~February 3028, ~~2002~~2003 and May 31, 2002 ~~...................~~ 1,~~825~~856,~~138~~647 1,613,540 Prepaid expenses and other current assets ~~............................ 77~~119,~~653~~578 83,206 Deferred income taxes ~~................................................~~ 206,000 206,000 ------------ ------------ Total current assets ~~.............................................~~ 2,~~246~~393,~~164~~341 1,976,981 PROPERTY AND EQUIPMENT, ~~NET~~net ~~............................................ 425~~352,~~302~~572 572,859 GOODWILL ~~...............................................................~~ 1,307,444 1,307,444 OTHER INTANGIBLE ASSETS, ~~NET~~net ~~........................................... 338~~333,~~685~~210 351,~~860~~859 DEFERRED INCOME TAXES ~~.................................................. 1,~~404,000 1,404,000 OTHER ASSETS ~~...........................................................~~ 19,449 50,647 ------------ ------------ $ 54,~~741~~810,~~044~~016 $ 5,663,~~791~~790 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accrued payroll and related expenses ~~.................................~~ $ ~~530~~444,~~747~~986 $ 637,908 Accounts payable ~~..................................................... 362~~224,~~964~~249 586,629 Accrued expenses ~~..................................................... 703~~678,~~617~~823 758,368 Due Medicare ~~......................................................... 250~~119,~~000~~843 350,000 Note payable - related party ~~......................................... 50~~250,000 -- Due officer ~~.......................................................... 325~~320,000 125,000 ------------ ------------ Total current liabilities ~~.........................................~~ 2,~~222~~037,~~328~~901 2,457,905 ------------ ------------ LONG-TERM LIABILITIES: Revolving credit line ~~................................................~~ 1,~~340~~618,~~183~~290 990,254 ------------ ------------ SHAREHOLDERS' EQUITY: Convertible preferred stock-aggregate liquidation value $469,000 and $325,000; $1.00 par value, 5,000,000 shares authorized; 469 and 325 shares issued, respectively ~~............................~~ 469 325 Common stock, $.001 par value per share, 5,000,000 shares authorized; 1,059,232 and 1,024,021 shares issued, respectively ~~.......................................................~~ 1,059 1,024 Additional paid-in capital ~~...........................................~~ 21,821,~~685~~684 21,669,864 Deficit ~~..............................................................~~ (1920,~~253~~278,~~989~~696) (19,064,891) Treasury stock, 26,367 common shares, at cost ~~........................~~ (390,691) (390,691) ------------ ------------ Total shareholders' equity ~~........................................... 2~~1,~~178~~153,~~533~~825 2,215,631 ------------ ------------ $ 54,~~741~~810,~~044~~016 $ 5,663,790 ============ ============

See accompanying notes to consolidated financial statements 3

STAR MULTI CARE SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS ~~UNAUDITED~~(Unaudited) Three Months Ended ~~Six~~Nine Months Ended ~~November~~February 3028, ~~November~~February 3028, ---------------------------- ---------------------------- 2003 2002 ~~2001~~2003 2002 ~~2001~~ ------------ ------------ ------------ ------------ REVENUE, net ~~..........................................~~ $ 2,~~562~~687,~~210~~633 $ 2,~~369~~287,~~864~~705 $ 47,~~951~~639,~~563~~196 $ 1012,~~354~~641,~~064~~769 OPERATING EXPENSES: Costs of revenue ~~..................................~~ 1,~~565~~715,~~252~~305 1,~~564~~403,~~734~~566 34,~~006~~721,~~119~~424 68,~~937~~341,~~872~~438 Selling, general and administrative ~~............... 901~~831,~~644~~177 1,~~495~~382,~~205~~770 12,~~873~~704,~~359~~536 35,~~842~~225,~~883~~653 Depreciation and amortization ~~..................... 82~~77,~~954~~475 ~~105~~71,~~451~~036 ~~154~~232,~~954~~429 ~~351~~422,~~583~~619 Provision for doubtful accounts ~~................... 16~~49,~~789~~844 13135,~~887~~296 2777,~~674~~518 94229,~~227~~523 ------------ ------------ ------------ ------------ 2,~~566~~673,~~639~~801 32,~~179~~992,~~277~~668 57,~~062~~735,~~106~~907 1114,~~226~~219,~~565~~233 ------------ ------------ ------------ ------------ OPERATING ~~LOSS~~INCOME ~~........................................~~ (~~4,429~~LOSS) 13,832 (~~809~~704,~~413~~963) (~~110~~96,~~543~~711) (~~872~~1,~~501~~577,464) OTHER ~~EXPENSE:~~INCOME ~~Gain~~ (~~loss~~EXPENSE): Loss on sale of business ~~...................~~-- -- ~~8,596~~ -- (12,986) Interest expense, net ~~.............................~~ (3330,~~835~~534) (85126,~~503~~113) (6293,~~660~~194) (~~533~~659,~~236~~349) ------------ ------------ ------------ ------------ (3330,~~835~~534) (76126,~~907~~113) (6293,~~660~~194) (~~546~~672,~~222~~335) ------------ ------------ ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES ~~...............~~ (3816,~~264~~702) (~~886~~831,~~320~~076) (~~173~~189,~~203~~905) (12,~~418~~249,~~723~~799) PROVISION (BENEFIT) FOR INCOME TAXES ~~............................~~1,000,000 -- --1,000,000 -- -- ------------ ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM ~~........................~~ (381,~~264~~016,702) (~~886~~831,~~320~~076) (~~173~~1,~~203~~189,905) (12,~~418~~249,~~723~~799) EXTRAORDINARY ITEM: - Gain on extinguishment of debt, net of income taxes -- -- -- 1,607,824 ------------ ------------ ------------ ------------ NET (LOSS) ~~INCOME .....................................~~ $ (381,~~264~~016,702) $ (~~886~~831,~~320~~076) $ (~~173~~1,~~203~~189,905) $ ~~189~~(641,~~101~~975) ============ ============ ============ ============ BASIC (LOSS) ~~INCOME~~ PER COMMON SHARE: Loss before extraordinary item ~~....................~~ $ (0.0399) $ (10.1798) $ (01.1718) $ (12.8987) Extraordinary item ~~................................~~ -- ~~0.00~~ -- 2.1203 ------------ ------------ ------------ ------------ Net (loss) ~~income~~$ (0.~~................................~~99) $ (0.0398) $ (1.1718) $ (0.1784) ~~$ 0.23~~ ============ ============ ============ ============ DILUTED (LOSS) ~~INCOME~~ PER COMMON SHARE: Loss before extraordinary item ~~....................~~ $ (0.0399) $ (10.1798) $ (01.1718) $ (12.87) Extraordinary item ~~................................~~ -- ~~0.00~~ -- 2.1003 ------------ ------------ ------------ ------------ Net (loss) ~~income~~$ (0.~~................................~~99) $ (0.0398) $ (1.1718) $ (0.1784) ~~$ 0.23~~ ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF ~~COMMON~~ SHARES OUTSTANDING: Basic ~~.............................................~~ 1,032,865 ~~770~~858,~~860~~954 1,~~022~~025,~~282~~669 ~~756~~790,~~671~~291 ============ ============ ============ ============ Diluted ~~...........................................~~ 1,032,865 ~~770~~858,~~860~~954 1,~~022~~025,~~282~~669 ~~766~~790,~~167~~291 ============ ============ ============ ============

See accompanying notes to consolidated financial statements 4

STAR MULTI CARE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ~~UNAUDITED~~(Unaudited) ~~Six~~Nine Months Ended ~~November~~February 3028, ---------------------------- 2003 2002 ~~2001~~ ------------ ------------ Cash flow from operating activities: Net (loss) ~~income ......................................................~~ $ (~~173~~1,~~203~~189,905) $ ~~189~~(641,~~101~~975) ------------ ------------ Adjustments to reconcile net (loss) ~~income~~ to net cash used in operating activities: Extraordinary gain on extinguishment of debt ~~........................~~ -- (1,607,824) ~~Depreciation~~Provision ~~and~~for ~~amortization~~doubtful ~~.......................................~~accounts ~~154~~77,~~954~~518 ~~351~~229,~~583~~523 ~~Provision~~Depreciation ~~for~~and ~~doubtful~~amortization ~~accounts~~232,429 ~~..................................... 27~~422,~~674~~619 94Deferred income taxes 1,~~227~~000,000 -- Loss on ~~disposal~~sale of ~~assets~~business ~~..........................................~~-- ~~3,557~~ 12,986 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable ~~...........................................~~ (~~239~~320,~~272~~625) 12,~~990~~754,~~017~~670 Prepaid expenses and other current assets ~~..................... 5~~(36,~~553~~372) 64(118,~~966~~016) Other assets ~~.................................................. 33~~31,~~419~~198 2826,~~166~~266 Increase (decrease) in liabilities: Accrued payroll and related expenses ~~..........................~~ (~~107~~192,~~161~~922) (1,~~147~~445,~~601~~123) Accounts payable and ~~other~~ accrued expenses ~~...................~~ (~~142~~313,~~312~~827) (~~785~~684,~~051~~661) Due Medicare ~~..................................................~~ (~~100~~230,~~000~~157) (~~250~~500,000) ------------ ------------ Total adjustments ~~........................................ (363~~247,~~588)~~242 (1909,~~248,531~~560) ------------ ------------ Net cash used in by operating activities ~~..........................~~ (~~536~~942,~~791~~663) (1,~~059~~551,~~430~~535) ------------ ------------ Cash ~~flows~~flow from investing activities: ~~Proceeds~~Purchase ~~from sale~~ of ~~business~~property ~~.................................~~and equipment -- 3(1,~~458,000~~591) ~~Purchase~~Proceeds offrom ~~property~~sale ~~and~~of ~~equipment~~assets ~~.............................~~/ --business, (net 6,~~470)~~508 3,458,000 Deposit on contract for sale of business ~~.......................~~ -- 700,000 ------------ ------------ Net cash provided by investing activities ~~.........................~~6,508 0 4,~~151~~156,~~530~~409 ------------ ------------ Cash flows from financing activities: Proceeds from ~~officer~~(repayment ~~loan~~of) ~~.....................................~~revolving ~~200~~credit line,~~000~~ --net 628,036 (3,175,046) Proceeds from notes ~~............................................~~payable 50450,000 800,000 ~~Borrowings under revolving credit line ......................... 441,172 -- Repayments under revolving credit line ......................... (91,243) (3,133,128)~~ Repayment of notes payable ~~.....................................~~(5,000) -- (300,000) Exercise of stock options ~~......................................~~ -- 62,646 ------------ ------------ Net cash provided by (used in) financing activities ~~............... 599~~1,~~929~~073,036 (2,~~570~~612,~~482~~400) ------------ ------------ Net increase (decrease) in cash and cash equivalents ~~.............................. 63~~136,~~138~~881 ~~521~~(7,~~618~~526) Cash and cash equivalents at beginning of period ~~.......................~~ 74,235 10,511 ------------ ------------ Cash and cash equivalents at end of period ~~.............................~~ $ ~~137~~211,~~373~~116 $ ~~532~~2,~~129~~985 ============ ============ Supplemental disclosure: Income taxes paid ~~..............................................~~ $ --6,000 $ -- ============ ============ Interest paid ~~..................................................~~ $ 6289,000 $ ~~533~~659,~~000~~349 ============ ============

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 February 28, 2003, results of its operations for the three month and nine month periods ended February 28, 2003 and February 28, 2002, and cash flows for the nine month periods ended February 28, 2003 and February 28, 2002. 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 nine month periods ended February 28, 2003 are not necessarily indicative of the results to be expected for the full year. NOTE 1: NET LOSS PER COMMON SHARE Net 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:

Three Months Ended ~~Six~~Nine Months Ended ~~November~~February 3028, ~~November~~February 3028, ~~----------------------~~2003 ~~----------------------~~ 2002 ~~2001~~2003 2002 ~~2001~~ ----~~-----~~ ----~~-----~~ ----~~-----~~ ----~~-----~~ Net ~~income (~~loss) ~~.........................~~ $ (381,~~264~~016,702) $ (~~886~~831,~~320~~076) $(~~173~~1,~~203~~189,905) $ ~~189~~(641,~~101~~975) Dividends on preferred shares ~~.............~~ (8,~~095~~005) (96,~~100~~400) (1523,~~895~~900) (1521,~~100~~500) ----------- ----------- ----------- ----------- Net ~~income~~loss available to common shareholders $ (461,~~359~~024,707) $ ~~895~~(837,~~420~~476) $(~~189~~1,~~098~~213,805) $ ~~174~~(663,~~001~~475) =========== =========== =========== ===========

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. 6 NOTE 3: GOODWILL AND INTANGIBLE ASSETS (continued) 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 was as follows:

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 February 28, 2003) 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: INCOME TAXES In October 2002, Stephen Sternbach ("Sternbach"), CEO of the Company, and Matthew Solof ("Solof"), former director of the Company, purchased all of the remaining issued and outstanding Series B 7% convertible preferred stock from the Shaar Fund Ltd. The Series B preferred stock is convertible into the common stock of the Company. In March 2003, Sternbach and Solof converted a portion of the Series B preferred stock into 3,800,000 shares of the Company's common stock. The conversion of the preferred shares by Sternbach and Solof resulted in them attaining more than a majority of the outstanding common stock in the Company, and will result in a change of control of the Company for Federal income tax purposes. 7 NOTE 5: INCOME TAXES (continued) As a result of the change in control, the tax net operating loss carryforward of approximately $6,900,000, that the Company has available to offset future taxable income as of May 31, 2002, is subject to Internal Revenue Code Section 382, which will result in a significant limitation on the utilization of the net operating loss. As such, Management believes that the realization of any tax benefit from this available net operating loss is no longer likely to be realized, and the Company has recorded an increase of $1,000,000 in its valuation allowance for the quarter ended February 28, 2003 against its deferred tax assets because of the uncertainty that sufficient taxable income will be realized during the carryforward period to utilize the deferred tax asset. 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 FEBRUARY 28, 2003 COMPARED TO QUARTER ENDED FEBRUARY 28, 2002 Net revenue for the quarter ended February 28, 2003 increased $399,928 or 17.5% to $2,687,633 from $2,287,705 for the quarter ended February 28, 2002. 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 decreased to 36.2% for the quarter ended February 28, 2003, from 38.6% for the quarter ended February 28, 2002. The decrease in the gross profit margin is primarily attributable to the disproportionate growth in unskilled services delivered by the Company, which yields a lower gross profit than skilled services. Gross profit margin increased to $972,328 from $884,139 for the respective periods. Selling, general and administrative expenses ("SG&A") for the quarter ended February 28, 2003 decreased $551,593 (39.9%) to $831,177, from $1,382,770 for the quarter ended February 28, 2002. 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 60.4% to 30.9% for the quarters ended February 28, 2002 and 2003, respectively. Income from operations increased $718,795 to $13,832 for the quarter ended February 28, 2003, from a loss of $(704,963) for the quarter ended February 28, 2002. This positive change is the result of the aforementioned increases in revenue and gross margin, and decrease in selling, general and administrative expenses. Interest expense decreased to $30,534 for the quarter ended February 28, 2003, from $126,113 for the quarter ended February 28, 2002. This decrease is the result of a decrease in the borrowing rate and, to a lesser extent, lower outstanding borrowings. Provision for income taxes was $1,000,000 for the quarter ended February 28, 2003, as compared to $0 for the quarter ended February 28, 2002. The provision represents a reversal of a portion of the deferred tax asset, and was triggered by the change in control, as discussed in Note 5 to the financial statements. 8 NINE MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 2002 Net revenue for the nine months ended February 28, 2003 decreased $5,002,573 or 39.6% to $7,639,196 from $12,641,769 for the nine months ended February 28, 2002. This decrease is primarily attributable to the sale of the New York and New Jersey operations of the Company. Gross profit margin increased to 38.2% for the nine months ended February 28, 2003, from 34.0% for the nine months ended February 28, 2002. The increase in the gross profit margin is 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, offset, in part, by the disproportionate growth during the third quarter of fiscal 2003 in lower margin, unskilled services. SG&A for the nine months ended February 28, 2003 decreased $2,521,117 (48.2%) to $2,704,536, from $5,225,653 for the nine months ended February 28, 2002. 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 nine months ended February 28, 2003 decreased $1,480,753 to $(96,711), from $(1,577,464) for the nine months ended February 28, 2002. The decrease is primarily attributable to the aforementioned decreases in volume (net revenue), and restructuring efforts, which resulted in a more substantial decline in SG&A expenses. Interest expense decreased to $93,194 for the nine months ended February 28, 2003, from $659,349 for the nine months ended February 28, 2002. 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. Provision for income taxes was $1,000,000 for the nine months ended February 28, 2003, as compared to $0 for the nine months ended February 28, 2002. The provision represents a reversal of a portion of the deferred tax asset, and was triggered by the change in control, as discussed in Note 5 to the financial statements. 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 these services over an extended period of time (60 to 120 days or longer), particularly when the payor is an insurance company or medical institution. Accounts receivable represents a substantial portion of current and total assets at February 28, 2003 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. 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 $14,667. During the second and third quarters of the current fiscal year, growth in patient services substantially increased the Company's borrowing base under its Credit Facility. In addition, the Company borrowed an additional $325,000 from an officer and a shareholder, to pay its past due obligations, and secure adequate cash flow until it is able to collect its accounts receivable generated by the increase in patient service revenue. 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 the Company, in installments (as amended), with the first payment of $250,000 made on November 8, 2001. 9 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued) As of February 28, 2003, cash and cash equivalents were $211,116, 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. The final payment of $119,843 was made on March 28, 2003, in advance of 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 also believes it has sufficient financing sources, and will have sufficient working capital to meet its obligations 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. 10 PART II: OTHER INFORMATION ITEM 5. OTHER INFORMATION. In the fiscal year ended May 31, 2002, we were undertaking a major restructuring to downsize our overhead at the same time arranging for the sale of our New York and New Jersey operations. The principal element of the overhead restructuring that was going to happen, was a decision to consolidate and move the Company's Resource Center (our back office operation), from our existing remote location in Miramar, Florida to our corporate office in Huntington Station, New York. This included the billing department of the Company. The Company anticipated reductions in personnel and loss of continuity. In addition, we were reaching timely filing / re-filing limits with some payors, some of which we would no longer be doing continuing business with after the sale of the New York and New Jersey operations. These factors necessitated a reevaluation of the Company's allowance for doubtful accounts on its related receivables. Accordingly, a provision of $4.7 million was made in the fourth quarter of fiscal 2001. Gross accounts receivable at May 31, 2001 was approximately $14.7 million, prior to the fourth quarter adjustment, as compared to approximately $1.8 million at May 31, 2002. The additional provision of $4.7 million represented approximately 36% of the change in gross accounts receivable for these respective periods; the balance of the reduction resulting primarily from collections during the period. [See table below]

11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits: 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 January 25, 2003 reporting Item 1. Changes in Control of Registrant was filed during the quarter. 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 21, 2003 By: /s/ Stephen Sternbach -------------- ------------------------------------- Date Chairman of the Board, President and Chief Executive Officer April 21, 2003 By: /s/ David M. Schoenberg -------------- ------------------------------------- Date Director of Finance and Chief Financial Officer 12 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 February 28, 2003, 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 13 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 February 28, 2003, 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 14 INDEX OF EXHIBITS 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. 15

Filing Compare · STAR MULTI CARE SERVICES INC