U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from _____________ to _____________
Commission file number 0-19499
HEALTHSTAR CORP
(Exact name of small business issuer as
specified in its charter)
DELAWARE 91-1934592
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
8745 West Higgins, Suite 300,
CHICAGO, ILLINOIS 60631
(Address of principal executive offices)
(773) 693-7827
(ISSUER'S TELEPHONE NUMBER)
Champion Financial Corporation 9495 E. San Salvador Dr. Scottdale, Arizona 85258
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
Common stock, $0.001 par value, 3,385,089 outstanding as of February 10, 1999
1
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HealthStar Corp.
Index
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998 ......................................................3
Consolidated Statements of Operations for the Three Months
and Nine Months Ended December 31, 1998 and 1997 ....................4
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 1998 and 1997 ....................................5
Notes to Unaudited Consolidated Financial Statements ................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................10
Part II: Other Information
Exhibits - None
Signatures ..............................................................14
2
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HEALTHSTAR CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1998 March 31,
(UNAUDITED) 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 23,875 $ 199,466
Trade accounts receivable, less allowance
for doubtful accounts of $103,580 and
$250,000, respectively 2,431,543 2,512,446
Other current assets 101,956 69,126
----------- -----------
Total current assets 2,557,374 2,781,038
Property and equipment, net 2,620,906 2,851,957
Investment in healthcare technology company 309,626 309,626
Intangibles, net of accumulated amortization
of $494,596 and $146,030, respectively 8,657,899 9,006,465
Other assets, at cost 83,477 499,577
----------- -----------
Total assets $14,229,282 $15,448,663
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 883,000 $ 1,163,741
Accrued expenses 1,449,540 2,269,678
Current portion of long-term debt 500,000 400,000
Note payable 200,000 200,000
----------- -----------
Total current liabilities 3,032,540 4,033,419
Line of credit 850,000 300,000
Long-term debt 2,700,000 6,100,000
----------- -----------
Total liabilities 6,582,540 10,433,419
----------- -----------
Shareholders' equity:
Common stock, $.001 par value 15,000,000
shares authorized, 3,385,089 shares
issued and outstanding at December 31, 1998
and 2,927,901 at March 31, 1998 3,385 2,928
Additional paid-in-capital 7,151,564 4,619,943
Retained earnings 491,793 392,373
----------- -----------
Total shareholders' equity 7,646,742 5,015,244
----------- -----------
Total liabilities and shareholders' equity $14,229,282 $15,448,663
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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HEALTHSTAR CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Capitated fees $2,406,647 $ 109,735 $ 7,636,855 $ 347,805
Repricing fees 1,835,766 588,258 5,479,854 1,732,549
Other fees 125,266 1,600 477,311 12,185
---------- ---------- ----------- ----------
4,367,679 699,593 13,594,020 2,092,539
---------- ---------- ----------- ----------
Operating expenses:
Cost of services 589,578 268,465 1,871,352 796,527
Salaries and wages 2,162,510 277,204 6,228,782 745,446
General and administrative 1,274,212 230,488 4,105,059 532,430
Depreciation and amortization 305,497 27,452 887,796 55,691
Interest expense 83,901 -- 333,193 --
---------- ---------- ----------- ----------
4,415,698 803,609 13,426,182 2,130,094
---------- ---------- ----------- ----------
Earnings (loss) before income taxes (48,019) (104,016) 167,838 (37,555)
Income tax (benefit) (1,582) (10,000) 68,418 --
---------- ---------- ----------- ----------
Net earnings (loss) (46,437) (94,016) 99,420 (37,555)
Retained earnings at beginning
of period 538,230 144,729 392,373 88,268
---------- ---------- ----------- ----------
Retained earnings at end of period $ 491,793 $ 50,713 $ 491,793 $ 50,713
========== ========== =========== ==========
Earnings (loss) per share-
Basic and Diluted $ (0.01) $ (0.03) $ 0.03 $ (0.01)
========== ========== =========== ==========
Weighted average shares outstanding-
Basic and Diluted 3,385,089 2,769,912 3,159,979 2,747,778
========== ========== =========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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HEALTHSTAR CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended December 31,
------------------------------
1998 1997
----------- -----------
Operating activities:
Net earnings (loss) $ 99,420 $ (37,555)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 887,796 55,691
Bad debt expense 183,000
Stock-based employee compensation 15,000
Interest expense on debentures 29,578 --
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Trade accounts receivable (102,097) 11,326
Other current assets (32,830) (11,715)
Accounts payable (222,118) (104,536)
Accrued expenses (820,139) 695,231
Deferred revenue -- (58,909)
----------- -----------
Net cash provided by operating activities 37,610 549,533
----------- -----------
Investing activities:
Purchases of equipment (371,915) (49,684)
Proceeds from the sale of equipment 5,113 --
Cash purchase cost not yet allocated -- (6,965,904)
Investment in healthcare technology company -- (309,626)
----------- -----------
Net cash used in investing activities (366,802) (7,325,214)
----------- -----------
Financing activities:
Increase in other assets (96,399) --
Net proceeds (payments) from long term debt (300,000) 6,086,146
Net proceeds from line of credit 550,000 --
----------- -----------
Net cash provided by financing activities 153,601 6,086,146
----------- -----------
Net decrease in cash and cash equivalents (175,591) (689,535)
Cash and cash equivalents at beginning of year 199,466 896,096
----------- -----------
Cash and cash equivalents at end of period $ 23,875 $ 206,561
=========== ===========
Supplemental schedule of noncash financing
activities:
Settlement on convertible debenture $ 3,000,000
===========
Issuance of common stock $ 2,532,078
===========
See accompanying notes to unaudited consolidated financial statements.
5
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HEALTHSTAR CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective November 16, 1998, Champion Financial Corporation (Champion), a
Utah corporation, reincorporated in the State of Delaware. At the same
time, Champion merged all of its assets into its newly formed Delaware
subsidiary, HealthStar Corp. The effectiveness of this reincorporation
has caused HealthStar Corp. to continue to operate Champion's business
while Champion has ceased to exist.
The accompanying unaudited consolidated financial statements of
HealthStar Corp. and Subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim financial
information and pursuant to rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for a complete financial statement presentation. In the
opinion of management such unaudited interim information reflects all
adjustments, consisting only of normal recurring adjustments, necessary
to present the Company's financial position and results of operations for
the periods presented. The results of operations for interim periods are
not necessarily indicative of the results to be expected for a full
fiscal year. The consolidated Balance Sheet as of March 31, 1998 was
derived from audited consolidated financial statements as of that date
but does not include all the information and footnotes required by
generally accepted accounting principles. It is suggested that these
consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report Form 10-KSB, for the year ended March 31, 1998.
DESCRIPTION OF BUSINESS
HealthStar Corp. is a healthcare management company dedicated to
controlling the cost, improving the quality and enhancing the delivery of
healthcare services. The Company also provides related products and
services designed to reduce healthcare costs. The Company markets and
provides programs and services to insurance companies, self-insured
businesses for their medical plans and third parties that administer
employee medical plans. These programs and services assist clients in
reducing healthcare costs for group health plans and for workers'
compensation coverage and automobile accident injury claims.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its two wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
6
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HEALTHSTAR CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
EARNINGS PER SHARE
The Company adopted Statement of Accounting Standards No. 128 "Earnings
per Share" (SFAS 128) during 1997. The Company's Earnings per Common
Share (EPS) figures for the prior period were not effected by adoption of
SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing
net income, after deducting preferred stock dividends requirements (if
any), by the weighted average number of shares of common stock
outstanding. Diluted EPS reflects the maximum dilution that would result
after giving effect to dilutive stock options and warrants and to the
assumed conversion of all dilutive convertible securities and stock.
For purposes of the diluted earnings per share calculation, the
convertible debentures had an antidilutive effect.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. Management believes that the recorded amounts of current assets
and current liabilities approximate fair value because of the short
maturity of these instruments. The recorded balance of long-term debt
approximates fair value, as the terms of the debt are similar to rates
currently offered to the Company for similar debt instruments.
REVENUE RECOGNITION
The Company receives monthly capitation fees based upon the number of
each customer's members regardless of services actually provided.
Repricing fees are derived from a negotiated percentage of the medical
savings generated from customer claims managed by the Company or on a per
member per month basis. The percentage of savings fees are recognized as
revenue as the Company renders services and notifies the health care
provider of their required billings reduction for a specified period of
time.
COST OF SERVICES
The major components of cost of services consist of utilization review,
case management and external marketing commissions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets, which approximates three years for equipment to seven years for
furniture and fixtures. Computer software is amortized over three to five
years.
INTANGIBLES
Intangibles, which represent the excess of purchase price over fair value
of net tangible assets acquired, are amortized on a straight-line basis
over the expected periods to be benefited, generally 20 years. The
Company assesses the recoverability of intangible assets by determining
whether the amortization of the intangibles over their remaining lives
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of intangible impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangibles will be impacted if
estimated future operating cash flows are not achieved.
7
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HEALTHSTAR CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance must be established to reduce deferred income tax
benefits if it is more likely than not that a portion of the deferred
income tax benefits will not be realized. It is management's opinion that
the entire deferred tax benefit may not be recognized in future years.
Therefore, a valuation allowance equal to the deferred tax benefit has
been established.
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews the possible impairment of long-lived assets and
certain identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
YEAR 2000
Management has developed a plan to address the Year 2000 problem and all
computer systems are in the process of conversion to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four digits to define the applicable
year. The total cost of the project is not material and the Company is
expensing all associated costs as they are incurred.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
8
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HEALTHSTAR CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(2) DEBT
The Company maintains a $1,500,000 line of credit with Harris Trust and
Savings Bank. The line of credit bears interest at prime (7.75% at
December 31, 1998). The line is collateralized by substantially all the
assets of the Company. There was $850,000 in borrowings against this line
of credit at December 31, 1998.
In connection with the acquisition of HealthStar Inc., the Company issued
$4,000,000 Series A 8% Senior Subordinated Convertible Redeemable
debentures. On August 31, 1998, $3,000,000 of the debentures were
converted into 800,000 shares of common stock and $1,000,000 of the
debentures were converted into a promissory note. At the present time,
management does not intend to use working capital to redeem the
promissory note.
Debt consists of the following at December 31, 1998:
8% Convertible Promissory Note 1,000,000
Note payable to Harris Trust and Savings Bank due
on December 14, 2000, with quarterly principal
payments ranging from $100,000 - $150,000 plus
interest on the unpaid balance at prime (7.75%
at December 31, 1998), secured by substantially
all the assets of the Company 2,200,000
Unsecured note payable to an individual, interest
payable monthly at 8%, due currently 200,000
----------
3,400,000
Less current maturities 700,000
----------
$2,700,000
==========
(3) REVERSE STOCK SPLIT
On November 16, 1998, the Company effected a 1for 2 reverse stock split
of the Company's outstanding common stock. The effect of the reverse
stock split is reflected in earnings per share.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes for the quarter ended December 31, 1998 and the year ended March 31,
1998 contained in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on June 29, 1998.
The managed healthcare cost containment industry is highly fragmented, with a
large number of competitors. The Company does not believe that any single
company commands significant market share. The management of the Company
believes the level of competition will continue to increase in the future. Most
of the Company's competitors are national managed care providers, insurance
companies, HMOs, and third-party administrators that have implemented their own
managed care programs. Several large insurance companies for workers'
compensation, health and automobile have also implemented their own
cost-containment programs through the carrier's own personnel. Many of the
Company's current and potential competitors are significantly larger and have
greater financial, technical, marketing, and management resources than the
Company.
The Company competes on the basis of its specialized knowledge and expertise in
the managed healthcare services industry and on its ability to deliver effective
services to the customer with a high level of customer satisfaction at a very
affordable price. There can be no assurance that the Company will be able to
compete successfully. The managed healthcare industry has experienced
significant changes in recent years, primarily as a result of rising healthcare
costs. The Company will be required to respond to various competitive factors
affecting the healthcare industry, including new medical technologies that may
be introduced; general trends relating to the demand for healthcare services;
regulatory, economic, and political factors; changes in patient demographics;
and competitive pricing strategies by HMOs and other healthcare plans.
RESULTS OF OPERATIONS
When comparing the Company's financial results for the three and nine
months ended December 31, 1998 to the three and nine months ended December 31,
1997, it is important to note that the majority of the increase in the level of
revenues and expenses is due primarily to the Company's acquisition of
HealthStar, Inc., which was completed on December 15, 1997.
REVENUE
The Company derives the majority of its revenue from fees charged to
clients for access to the Company's network of contracted providers. The
Company's client base consists of a variety of payors of medical claims such as
insurance companies, third-party administrators and self-insured employers.
Access fees can be either a fixed, monthly fee per enrolled subscriber which is
called a capitated fee or can be based on a percentage of the amount of the
discount off of billed charges which is granted by a contracted provider. The
Company's participation in the amount saved varies from 20% to 25% with the
exact amount determined by contractual provisions with the Company's clients.
Total revenue increased $3,668,086 to $4,367,679 for the three months
ended December 31, 1998 compared to $699,593 for the three months ended December
31,1997, an increase of 524%. Total revenue for the nine months ended December
31, 1998 increased $11,501,481 or 550% to $13,594,020, compared to $2,092,539
for the nine months ended December 31, 1997. The increase
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
REVENUE (CONT'D)
was a result of operations from the newly acquired subsidiary HealthStar, Inc.
Revenues for the Company's National Health Benefits and Casualty (NHBC) division
remained consistent with prior year's levels.
OPERATING EXPENSES
Cost of services includes the cost of outsourcing the case management
and utilization review functions, commissions paid to outside brokers, fees paid
to other regional PPO networks for access to providers not contracted directly
with the Company and other products and services provided by outside vendors.
Cost of services increased $321,113 to $589,578 for the three months ended
December 31, 1998 from $268,465 in 1997. Cost of services for the nine months
ended December 31, 1998 increased $1,074,825 to $1,871,352 compared to $796,527
for the nine months ended December 31, 1997. The entire increase is attributable
to HealthStar Inc. and is primarily related to the cost of outsourcing the case
management and utilization review functions. As a percentage of revenue, cost of
services for the nine months ended December 31, 1998 decreased from 38% in 1997
to 14% in 1998. This margin improvement is a result of the fact that HealthStar
Inc. contracts directly with healthcare providers which limits the fees paid to
access other PPO networks.
Salaries and wages includes all employee compensation including payroll
taxes, health insurance and other employee benefits. Also included are
commissions paid to in-house sales and marketing personnel. For the quarter
ended December 31, 1998, salaries and wages were $2,162,510 compared to $277,204
for the quarter ended December 31, 1997, an increase of $1,885,306. For the nine
months ended December 31, 1998, salaries and wages increased $5,483,336 to
$6,228,782 from $745,446. Approximately $1.9 million of this increase is due to
the addition of HealthStar Inc. for the three months ended December 31, 1998 and
$5.3 million of the increase for the nine months ended December 31, 1998.
General and administrative expenses include all other operating
expenses such as telephone charges, office supplies, postage, travel and
entertainment, professional fees, insurance, rent and utilities. For the quarter
ended December 31, 1998, general and administrative expenses were $1,274,212
compared to $230,488 for the quarter ended December 31, 1997. General and
administrative expenses for the nine months ended December 31, 1998 were
$4,105,059 compared with $532,430 for the nine months ended December 31, 1997.
The majority of this increase is due to the addition of HealthStar Inc. and
legal expenses incurred by the Company for the lawsuit filed in March 1998
against the holders of the convertible debentures.
For the three months ended December 31, 1998, depreciation and
amortization increased $278,045 to $305,497 from $27,452 for the three months
ended December 31, 1997. For the nine months ended December 31, 1998,
depreciation and amortization was $887,796 compared with $55,691 for the nine
months ended December 31, 1997, an increase of $832,105. This significant
increase is due to goodwill created as a result of the HealthStar acquisition.
Goodwill of approximately $9,000,000 is being amortized over 20 years.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
OPERATING EXPENSES (CONT'D)
For the quarter ended December 31, 1998, the Company incurred interest
expense of $83,901. The Company's interest expense for the nine months ended
December 31, 1998 was $333,193. Interest expense relates to the indebtedness
incurred as a result of the HealthStar acquisition. The interest rate on the
Company's term loan and line of credit was 7.75% at December 31, 1998. The
interest rate on the convertible promissory note is 8.0%, and the interest rate
on the seller note payable is 8.0%.
Net loss for the three months ended December 31, 1998 decreased $47,579
or 51% to $46,437 from $94,016 in the quarter ended December 31, 1997. For the
nine months ended December 31, 1998, net earnings increased $136,975 to $99,420
or 365%, compared to a net loss of $37,555 for the nine months ended December
30, 1997.
YEAR 2000
The Year 2000 concern, which is common to most companies, concerns the
inability of information and non-information systems, primarily computer
software programs, to properly recognize and process date sensitive information
as the Year 2000 approaches. The Company is reviewing, modifying, and testing
its computer applications to ensure their functionality with respect to the Year
2000 changes. At present, the Company does not anticipate that material
incremental costs will be incurred. The Company is also dependent on its
contracting medical providers and payer clients to successfully address their
respective Year 2000 technology issues in connection with their claims
processing functions. The Company has not determined whether such providers or
clients face Year 2000 problems that if not resolved, may have a material
adverse affect on the Company's business or results of operations.
The Company does not anticipate any disruption in its operations or
financial reporting as a result of system upgrades or system integrations.
However, there can be no assurance that such disruption will not occur or that
the desired benefits from the Year 2000 compliance of the Company's information
and non-information systems will be attained. In the event that the desired
results are not obtained, the Company's contingency plans call for isolation of
the failing component and taking the appropriate corrective action, which may
include modification or replacement of the faulty hardware, software or
non-information system.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital requirements
and capital expenditures primarily from cash flow generated from operations
supplemented by borrowings under the Company's line of credit. For the nine
months ended December 31, 1998, cash flow provided by operations was $37,610
compared to $549,533 for the nine months ended December 31, 1997. At December
31, 1998, the Company had a working capital deficiency of $475,166, an increase
of $777,215 from its working capital deficiency of $1,252,381 at March 31, 1998.
The Company had $23,875 in cash and cash equivalents at December 31,
1998.
In connection with the acquisition of HealthStar Inc., the Company
issued $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable
debentures. The entire proceeds of the issuance and the debentures were utilized
in the acquisition. Beginning on January 17, 1998, the debentures were
convertible into common shares of the Company's stock based upon a formula
related to the market price of the stock. Due to certain matters and litigation
related to assertions made by the debenture holders, the Company entered into a
settlement agreement. Under the terms of that agreement, on August 31, 1998,
$3,000,000 of the debentures were converted into 800,000 shares of common stock
and $1,000,000 of the
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
debentures were converted into a promissory note with the same terms as the
original debentures. The net effect of the settlement was essentially the same
as under the original terms of the debentures. The Company has the option to
make principal payments on the promissory note as part of the settlement
agreement with the debenture holders. If the company does not make principal
payments, the settlement agreement reverts back to the conversion terms of the
original debenture agreement. At the present time, management does not intend to
use working capital to redeem the promissory note.
Also in connection with the acquisition of HealthStar Inc., the Company
secured a $1,500,000 line of credit with Harris Trust and Savings Bank. The line
of credit bears interest at the Prime rate (7.75% at December 31, 1998) and is
secured by substantially all of the assets of HealthStar Corp. and its
subsidiaries. At December 31, 1998, the Company had borrowed $850,000 on the
line of credit, and due to a bank covenant restriction had approximately
$100,000 of additional availability.
Although there can be no assurances, management of the Company
anticipates growth and expansion to continue to accelerate through fiscal year
1999 with the acquisition of complementary businesses or business lines,
management personnel and infrastructure additions. The Company believes
additional sources of cash flow may be required in conjunction with any such
acquisition activity. There can be no assurance that the Company may be able to
obtain such funds on terms acceptable to the Company. Management currently
believes that cash on hand, amounts available under the revolving line of credit
and cash generated from future operations will be sufficient to fund the
Company's operations and anticipated expansion plans.
LEGAL PROCEEDINGS
On August 31, 1998, the Company settled and resolved its disputes and
misunderstandings with Thomson Kernaghan & Co., Ltd., and Bronia Gmbh
(collectively referred to as "Thomson"). The Company dismissed Thomson from the
lawsuit filed by the Company against Thomson in Federal District Court in
Arizona, and Thomson has dismissed its arbitration proceeding commenced against
the Company in New York.
From time to time, the Company is named as a defendant in routine
litigation incidental to its business. Based on the information currently
available, the Company believes that none of such current proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company.
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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 thereunto duly authorized.
HealthStar Corp.
DATE: February 10, 1999 BY:/s/ Denise E. Nedza
DENISE E. NEDZA
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
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<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1998, AND STATEMENT OF INCOME FOR THE NINE MONTHS
ENDING DECEMBER 31, 1998, OF HEALTHSTAR CORP. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 23,875
<SECURITIES> 0
<RECEIVABLES> 2,535,123
<ALLOWANCES> 103,580
<INVENTORY> 0
<CURRENT-ASSETS> 2,557,374
<PP&E> 3,448,686
<DEPRECIATION> 827,780
<TOTAL-ASSETS> 14,229,282
<CURRENT-LIABILITIES> 3,032,540
<BONDS> 0
0
0
<COMMON> 3,385
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 13,594,020
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,426,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 167,838
<INCOME-TAX> 68,418
<INCOME-CONTINUING> 99,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,420
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
