<PAGE>
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 SEPTEMBER 30, 2000
/ / 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 of (I.R.S. employer
incorporation or organization) identification no.)
2875 N.E. 191ST STREET, SUITE 601
AVENTURA, FLORIDA 33180
(Address of principal executive offices)
(305) 933-8779
(Issuer's Telephone Number)
---------------------------------------------------------------
(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,
4,345,872 outstanding as of November 13, 2000.
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2000.......... 1
Consolidated Statements of Operations and Retained
Earnings (Deficit) For the Three and Six Months Ended
September 30, 2000 and 1999................................ 2
Consolidated Statements of Cash Flows For the Six
Months Ended September 30, 2000 and 1999................. 3
Notes to Unaudited Consolidated Financial Statements......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities and Use of Proceeds.................... 17
Item 3. Defaults Upon Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 5. Other Information............................................ 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
------------
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 6,557,044
Other current assets ................................... 28,165
-----------
Total current assets ............................ 6,585,209
Property and equipment, net ............................... 2,312
Other assets .............................................. 10,000
-----------
Total assets .................................... $ 6,597,521
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 168,991
Accrued expenses ....................................... 167,866
-----------
Total current liabilities ....................... 336,857
SHAREHOLDERS' EQUITY
Common stock, $.001 par value 15,000,000 shares
authorized, 4,345,872 shares issued and outstanding .... 4,346
Additional paid -in- capital .............................. 9,196,428
Retained earnings (deficit) ............................... (2,940,110)
-----------
Total shareholders' equity ...................... 6,260,664
-----------
Total liabilities and shareholders' equity ...... $ 6,597,521
===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT)
For the Three and Six Months Ended September 30, 2000 and 1999
(Unaudited)
------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Capitated fees ...................................... $ 0 $ 2,071,804 $ 667,773 $ 4,166,790
Repricing fees ...................................... 0 1,473,003 248,579 3,059,822
Other fees .......................................... 0 38,970 27,298 124,075
----------- ----------- ----------- -----------
Total revenue ..................................... 0 3,583,777 943,650 7,350,687
----------- ----------- ----------- -----------
OPERATING EXPENSES
Cost of services .................................... 0 463,009 74,813 996,636
Salaries and wages .................................. 39,469 1,819,389 935,846 3,776,948
General and administrative .......................... 282,747 943,254 838,667 2,021,552
Depreciation and amortization ....................... 128 322,708 57,003 640,866
----------- ----------- ----------- -----------
Total operating expenses .......................... 322,344 3,548,360 1,906,329 7,436,002
----------- ----------- ----------- -----------
Income (loss) from operations ......................... (322,344) 35,417 (962,679) (85,315)
Non-operating income (expense)
Interest income ..................................... 93,911 0 148,968 0
Interest expense .................................... 0 (79,791) (10,305) (141,290)
Asset impairment charge ............................. 0 (500,000) 0 (500,000)
Net gain (loss) on dispositions of assets ........... 0 0 (93,105) 114,538
Gain on settlement of litigation .................... 81,714 0 81,714 0
Other, net .......................................... 0 14,833 0 54,948
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item .................................. (146,719) (529,541) (835,407) (557,119)
Income tax expense (benefit) .......................... 0 (10,405) 0 (19,684)
----------- ----------- ----------- -----------
(Loss) before extraordinary item .................. (146,719) (519,136) (835,407) (537,435)
Extraordinary gain on extinguishment of debt
(net of income taxes - $0) .......................... 200,000 0 200,000 0
----------- ----------- ----------- -----------
Net income (loss) ................................. 53,281 (519,136) (635,407) (537,435)
Retained earnings (deficit) at beginning of period .... (2,993,391) 198,404 (2,304,703) 216,703
----------- ----------- ----------- -----------
Retained earnings (deficit) at end of period .......... $(2,940,110) $ (320,732) $(2,940,110) $ (320,732)
=========== =========== =========== ===========
Earnings (loss) per share - Basic and Diluted:
(Loss) before extraordinary item .................... $ (0.04) $ (0.13) $ (0.20) $ (0.14)
Extraordinary item .................................. 0.05 0.00 0.05 0.00
----------- ----------- ----------- -----------
Net income (loss) ................................. $ 0.01 $ (0.13) $ (0.15) $ (0.14)
=========== =========== =========== ===========
Weighted average shares outstanding -
Basic and Diluted ................................... 4,345,872 3,850,713 4,345,872 3,835,402
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2000 and 1999
(Unaudited)
------------
<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) ....................................................... $ (635,407) $(537,435)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization ................................. 57,003 640,866
Asset impairment charge ....................................... 0 500,000
Bad debt expense .............................................. 0 197,654
Stock-based compensation ...................................... 0 27,500
(Gain) loss on dispositions of assets ......................... 93,105 (114,538)
Extraordinary gain on extinguishment of debt .................. (200,000) 0
Gain on settlement of litigation .............................. (81,714) 0
Increase (decrease) in cash resulting from changes
in operating assets and liabilities:
Trade accounts receivable ..................................... 133,281 26,435
Other current assets .......................................... 1,324 (40,840)
Accounts payable .............................................. 460,538 (248,185)
Accrued expenses .............................................. (482,808) (872,181)
----------- ---------
Net cash (used in) operating activities ................ (654,678) (420,724)
----------- ---------
INVESTING ACTIVITIES
Net proceeds from dispositions of assets ......................... 8,201,861 125,000
Proceeds from settlement of litigation ........................... 19,827 0
Purchases of equipment ........................................... 0 (36,936)
----------- ---------
Net cash provided by (used in) investing activities .... 8,221,688 88,064
----------- ---------
FINANCING ACTIVITIES
Decrease (increase) in other assets .............................. 10,000 (37,144)
Net proceeds from line of credit ................................. 0 400,000
Payments on long-term debt ....................................... (1,325,000) (150,000)
Proceeds from the issuance of stock options ...................... 0 162,875
----------- ---------
Net cash (used in) provided by financing activities .... (1,315,000) 375,731
----------- ---------
Net increase in cash and cash equivalents ............................ 6,252,010 43,071
Cash and cash equivalents at beginning of year ....................... 305,034 71,936
----------- ---------
Cash and cash equivalents at end of period ........................... $ 6,557,044 $ 115,007
=========== =========
Supplemental data:
Non-cash transactions:
Cancellation of subordinated promissory note payable
due to the previous owner of HealthStar, Inc., and
related accrued interest and other liabilities as
a result of settlement of litigation ......................... $ 261,887 $ 0
=========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Description of the Business
Prior to April 28, 2000, HealthStar Corp. (the "Company") was
a healthcare management company dedicated to controlling the
cost, improving the quality and enhancing the delivery of
healthcare services. The Company provided related products and
services designed to reduce healthcare costs. The Company
marketed and provided 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 assisted clients in reducing
healthcare costs for group health plans and for workers'
compensation coverage and automobile accident injury claims.
The Company operated its business in one segment through its
two wholly-owned subsidiaries, HealthStar, Inc. ("HealthStar")
and National Health Benefits & Casualty Corporation ("NHBC").
The Company is a registrant with the Securities and Exchange
Commission and its shares are publicly traded on the
Over-The-Counter Bulletin Board.
On December 30, 1999, the Company sold all of the assets of
NHBC to Carlmont Capital Group, Inc. and received as
consideration $1,500,000 in cash at closing and an earn-out
agreement that may provide up to an additional $300,000 in
cash, based on cash flows of NHBC, over the 18 months
following the closing of the transaction.
On April 28, 2000, the Company sold all of the capital stock
of HealthStar to Beyond Benefits, Inc. and received
consideration of $8,880,000 in cash at closing. The capital
stock of HealthStar constituted substantially all of the
assets of the Company. As a result of this sale, the Company
no longer operates in the managed healthcare industry and
currently does not have any ongoing revenue generating
operations. See Note 2, "Gains and Losses on Dispositions of
Assets," for further details of the sale of HealthStar and its
impact on future operations.
-4-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. Basis of Presentation
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
notes required by generally accepted accounting principles for
a complete financial statement presentation. In the opinion of
management, such unaudited interim financial 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. 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 on Form 10-KSB for the year ended
March 31, 2000.
C. 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.
D. 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.
E. Cash Equivalents
The Company considers all highly liquid instruments with
original maturities of three months or less to be cash
equivalents.
F. Earnings (Loss) per Share
In accordance with Statement of Financial Accounting Standards
No. 128, "Earnings per Share," basic earnings (loss) per share
is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding.
-5-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Earnings (Loss) per Share (Continued)
Diluted earnings (loss) per share 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. Outstanding
options to purchase common shares were not included in the
computation of diluted earnings (loss) per share because they
were considered anti-dilutive.
G. 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.
H. Revenue Recognition
The Company provided its customers with access to a network of
healthcare providers which included physicians, acute care
hospitals and ancillary providers such as outpatient surgery
centers and home healthcare agencies. These providers
contractually agreed with the Company to provide healthcare
services to the Company's customers at a discount from billed
charges. The Company generated revenue from its customer base
by charging network access fees. The Company entered into
contracts with its customers and charged network access fees
using either of two methods. Customers could choose to pay a
capitated fee, which is a fixed, monthly fee per eligible
subscriber. Initial enrollment figures were based on estimates
provided by the customer. Actual enrollment figures were
subsequently provided by the customer and updated periodically
at intervals ranging from monthly to semi-annually. Capitated
revenue was recognized on a monthly basis when customers were
billed using the most current enrollment figures available.
Adjustments were made when new enrollment figures were
submitted by the customer. The other method under which
customers could have elected to pay the Company for network
access was called a repricing fee. Under this method, the
Company received a percentage of the dollar amount of the
discount granted by the healthcare provider for services
rendered to an enrolled subscriber. The Company's percentage
of the dollar amount of the discount was determined by
contract and varied from customer to customer. Repricing fees
were recognized as revenue when the Company processed the
medical claim, calculated the discount and notified the
customer of the amount due.
-6-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. Cost of Services
The major components of cost of services consists of
utilization review, case management, external marketing
commissions, and costs associated with electronic transmission
of customers' healthcare claims.
J. Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. 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.
K. Goodwill
Goodwill, which represents the excess of purchase price over
the fair value of net tangible assets acquired, was amortized
on a straight-line basis over the expected period to be
benefited of 20 years.
L. 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 for the portion of the net operating loss
carryforward and other deferred tax assets which may not be
recognized in future years.
-7-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. 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 undiscounted cash
flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets measured using
quoted market prices when available or the present value of
estimated expected future cash flows using a discount rate
commensurate with the risks involved. In measuring impairment,
assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the
cash flows of other groups of assets.
N. Stock Based Compensation
The Company applies Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure required by SFAS No. 123. In accordance with APB
Opinion No. 25, compensation expense is recorded on the date
an option is granted only if the current market price of the
underlying stock exceeds the exercise price.
O. Comprehensive Income
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), established
standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial
statements. Comprehensive income (loss) was the same as net
income (loss) for all periods presented.
-8-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
P. Segment Reporting
Until April 28, 2000, the Company had one operating business
segment, healthcare cost containment, which involved the
marketing and provision of programs and services to insurance
companies, self-insurance businesses for their medical plans
and third parties who administer employee medical plans.
Note 2. GAINS AND LOSSES ON DISPOSITIONS OF ASSETS
On April 28, 2000, the Company completed the sale of the stock of its
wholly owned subsidiary, HealthStar, Inc. to Beyond Benefits, Inc.
The Company received $8,880,000 in cash at closing and used
$1,325,000 to repay the outstanding principal balance of the Harris
Bank term loan. This sale, which constituted the sale of
substantially all the assets of the Company, was approved by the
shareholders of the Company on April 25, 2000. The sale resulted in a
pre-tax loss of $93,105 primarily as a result of additional
transaction costs incurred during April 2000. HealthStar, Inc.
incurred a pre-tax loss from operations of $173,748 during April
2000. Following this sale, the Company no longer operates in the
managed healthcare industry and currently does not have any ongoing
revenue generating operations. The Company intends to utilize the
remaining net proceeds from the sale to acquire an Internet business
or other business or businesses.
On June 7, 1999, the Company sold its First American Vision Services
program for cash consideration of $125,000 to an immediate family
member of a former officer of the Company, which resulted in a
pre-tax gain of $114,538. The vision program accounted for
approximately $14,000 in revenue during the six month period ended
September 30, 1999.
Note 3. GAIN ON SETTLEMENT OF LITIGATION AND EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT
The Company was involved in litigation asserted by the previous owner
(the "plaintiff") of HealthStar. In this litigation, the plaintiff
filed a complaint for breach of contract on December 4, 1998 seeking
damages. On September 15, 2000, the plaintiff agreed to settle the
lawsuit under certain terms, including waiving his right to collect
principal and interest under the subordinated promissory note that
the Company issued to him in connection with the acquisition of
HealthStar. In return, the Company authorized the release to the
plaintiff of certain moneys and interest held in escrow under the
terms of a stock purchase agreement entered into in connection with
the acquisition of HealthStar. The settlement resulted in an
extraordinary gain, net of related income tax effects, of $200,000
resulting from the cancellation of the subordinated promissory note.
Additionally, a pre-tax non-operating gain of $81,714 was recognized
as a result of the waiver of accrued interest on the subordinated
note as well as reimbursement of certain professional fees from the
plaintiff.
-9-
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------
Note 4. ASSET IMPAIRMENT CHARGE
The acquisition of HealthStar in fiscal 1998 resulted in allocating a
substantial portion of the purchase price to goodwill. Pursuant to
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long Lived Assets to be Disposed Of", management evaluated the
recoverability of the long-lived assets, including goodwill. While
management originally believed that revenues and profits could grow
after HealthStar's operations were fully integrated into the Company,
management also explored strategic mergers and acquisitions that
would complement HealthStar's operations. In May 1999, management
received an offer to sell HealthStar to Beyond Benefits, Inc. a
privately held managed healthcare company. The original offer was for
$15,500,000 in cash. However, in subsequent negotiations, that offer
was reduced to $10,000,000 in cash, 5% of the common equity of Beyond
Benefits, Inc. and an earn out provision for up to an additional
$1,250,000. The offer was accepted and approved by the Board of
Directors on August 19, 1999, subject to shareholder approval.
Accordingly, at September 30, 1999, the Company adjusted the carrying
value of HealthStar's goodwill to an estimated fair value of
approximately $7,932,635 resulting in a non-cash impairment loss of
approximately $500,000 ($0.13 loss per basic and diluted share). The
fair value was estimated based on a sales price of $11,000,000 less
direct and incremental costs to dispose of approximately $300,000.
Subsequent to September 30, 1999, the offer was reduced in final form
to $8,880,000 in cash. The offer was accepted and approved by the
Board of Directors and was approved by the shareholders on April 25,
2000.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Capital
Resources" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, competition, no dividends, limited public
market and liquidity, shares eligible for future sale, delays in or failure to
identify and consummate a suitable acquisition, realization of the earn-out
provision related to cash flows of NHBC for the 18 months following the December
1999 sale of NHBC's assets to Carlmont Capital Group, Inc. and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings.
Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited financial
statements and notes for the six months ended September 30, 2000 contained
herein and the audited financial statements and notes for the year ended March
31, 2000 contained in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on June 29, 2000.
RECENT DEVELOPMENTS
On April 28, 2000, the Company sold all of the issued and outstanding
stock of its wholly owned subsidiary HealthStar, Inc. ("HSI") to Beyond
Benefits, Inc., a Long Beach, California based managed healthcare company. The
sale was made pursuant to a Stock Purchase Agreement dated September 23, 1999,
as amended, by and among the Company, HealthStar, Inc., and Beyond Benefits,
Inc. The Company received $8,880,000 in cash at closing, of which, $1,325,000
was used to repay the entire amount outstanding under the Company's Term Loan
and Credit Facility with Harris Trust and Savings Bank ("Harris Bank"). As a
result of the completion of this transaction, the Company is no longer engaged
in the managed healthcare business and currently has no revenue generating
operations. The Company intends to utilize the remaining proceeds from this sale
to acquire an internet-related business or businesses or other business or
businesses.
On December 30, 1999, the Company sold the assets of its wholly owned
subsidiary National Health Benefits & Casualty Corporation ("NHBC") to Carlmont
Capital Group, Inc. ("Carlmont"), a privately held company based in Chula Vista,
California. This sale was made pursuant to the terms of an Asset Purchase
Agreement dated December 28, 1999, by and among the Company, NHBC and Carlmont.
The Company received $1,500,000 in cash at closing and an earnout agreement that
may provide up to an additional $300,000 in cash, based on the actual cash flows
of NHBC during the 18 month period after closing.
-11-
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
As a result of the completion of the sale of HSI to Beyond Benefits
on April 28, 2000 and the completion of the sale of the assets of NHBC to
Carlmont on December 30, 1999, the Company is no longer engaged in the managed
healthcare business and had no revenue generating operations for the three
months ended September 30, 2000. The Company's only source of cash is interest
income generated from the investment of the remaining proceeds from the sale of
HSI in a money market account. It should be noted that the operating results for
the three months ended September 30, 1999 include the operating results for both
HSI and NHBC for the entire period.
REVENUE
Prior to the sale of its two wholly owned subsidiaries, HSI and NHBC,
the Company derived the majority of its revenue from fees paid by its customers
for access to the Company's PPO network of contracted healthcare providers. The
Company had no revenue from operations for the three months ended September 30,
2000. Total revenue for the three months ended September 30, 1999 was
$3,583,777.
OPERATING EXPENSES
Prior to the sales of HSI and NHBC, cost of services included the
cost of outsourcing the medical case management and utilization review
functions, commissions paid to outside brokers, fees paid to other PPO networks
for access to healthcare providers which were not directly contracted with the
Company, the cost of electronic claims processing and the cost of printing
provider directories. There was no cost of services in the current quarter as a
result of the sales of HSI and NHBC. Cost of services for the three months ended
September 30, 1999 was $463,009.
Salaries and wages includes all employee compensation, payroll taxes,
health insurance and other employee benefits. Salaries and wages were $39,469
for the three months ended September 30, 2000 compared to $1,819,389 in the
comparable period last year. The Company currently has two full-time employees,
its President/Chief Executive Officer and its Vice President/Chief Financial
Officer.
General and administrative expenses include all other operating
expenses, such as telecommunications, office supplies, postage, travel and
entertainment, professional fees, bad debt expense, insurance, rent and
utilities. General and administrative expenses were $282,747 for the three
months ended September 30, 2000 versus $943,254 for the comparable period last
year. In the current quarter, approximately $200,000 or 70% of the total general
and administrative expenses were related to legal, accounting and consulting
costs incurred in connection with the Company's investigation of possible
acquisition candidates.
Depreciation and amortization was $128 for the three months ended
September 30, 2000 versus $322,708 for the three months ended September 30,
1999. The overall decrease in depreciation and amortization expense was
primarily due to a decrease in fixed assets and goodwill as a result of the
sales of HSI and NHBC.
-12-
<PAGE>
NON-OPERATING INCOME (EXPENSE)
Interest income for the three months ended September 30, 2000 was
$93,911. Interest income was generated from the investment of the net proceeds
from the sale of HSI into a money market account that currently yields
approximately 5.5%. The Company did not have any interest income in the
comparable period last year.
There was no interest expense in the current quarter as a result of
the payoff of the remaining $1,325,000 owed to Harris Bank from the proceeds of
the sale of HSI on April 28, 2000. Interest expense for the three months ended
September 30, 1999 was $79,791.
The Company was involved in litigation asserted by the previous owner
(the "plaintiff") of HSI. In this litigation, the plaintiff filed a complaint
for breach of contract on December 4, 1998 seeking damages. During the current
quarter, the plaintiff agreed to settle the lawsuit under certain terms,
including waiving his right to collect principal and interest under the
subordinated promissory note that the Company issued to him in connection with
the acquisition of HSI. In return, the Company authorized the release to the
plaintiff of certain moneys and interest held in escrow under the terms of a
stock purchase agreement entered into in connection with the acquisition of HSI.
The settlement resulted in an extraordinary gain, net of related income tax
effects, of $200,000 resulting from the cancellation of the subordinated
promissory note. Additionally, a pre-tax non-operating gain of $81,714 was
recognized as a result of the waiver of accrued interest on the subordinated
note as well as reimbursement of certain professional fees from the plaintiff.
INCOME TAX EXPENSE
The Company recorded no income tax expense in the current quarter due
to the level of year-to-date losses incurred. A tax benefit of $10,405 was
recorded in the comparable period last year.
NET LOSS
The Company had net income of $53,281 for the three months ended
September 30, 2000 compared to a net loss of $519,136 for the three months ended
September 30, 1999. Without the effect of the extraordinary gain and the
non-operating gain related to the cancellation of the subordinated promissory
note and related accrued interest and the reimbursement of certain professional
fees, the Company would have reported a net loss of $228,433, principally as a
result of the costs incurred during the current quarter to investigate possible
acquisition candidates.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
As a result of the completion of the sale of HSI to Beyond Benefits
on April 28, 2000 and the completion of the sale of the assets of NHBC to
Carlmont on December 30, 1999, the Company is no longer engaged in the managed
healthcare business and has no revenue generating operations. It should be noted
that the operating results for the six months ended September 30, 2000 only
include the operating results of HSI for the first 28 days of the month of April
2000, and do not include any operating results for NHBC. Conversely, the
Company's operating results for the six months ended September 30, 1999 include
the operating results for both HSI and NHBC for the entire period.
-13-
<PAGE>
REVENUE
Prior to the sale of its two wholly owned subsidiaries, HSI and NHBC,
the Company derived the majority of its revenue from fees paid by its customers
for access to the Company's PPO network of contracted healthcare providers.
Total revenue for the six months ended September 30, 2000 was $943,650 versus
$7,350,687 for the six months ended September 30, 1999. Total revenue in the
current year period is equal to the total revenue for HSI for the 28-day period
in April 2000, prior to the Company's sale of HSI, which was consummated on
April 28, 2000.
OPERATING EXPENSES
Prior to the sales of HSI and NHBC, cost of services included the
cost of outsourcing the medical case management and utilization review
functions, commissions paid to outside brokers, fees paid to other PPO networks
for access to healthcare providers which are not directly contracted with the
Company, the cost of electronic claims processing and the cost of printing
provider directories. For the six months ended September 30, 2000, cost of
services was $74,813 versus $996,636 for the comparable period last year. Cost
of services in the current six month period is equal to the cost of services for
HSI for the 28-day period in April 2000.
Salaries and wages includes all employee compensation, payroll taxes,
health insurance, other employee benefits, and temporary labor. Prior to the
sales of HSI and NHBC, this category also included commissions paid to in-house
sales and marketing personnel. Salaries and wages were $935,846 for the six
months ended September 30, 2000 compared to $3,776,948 in the comparable period
last year. In the current six month period, salaries and wages were $688,345 at
HSI for the 28-day period. The remaining salaries and wages expense for the six
months ended September 30, 2000 of $247,501 is related to the compensation of
the Company's two executive officers. Of this amount, $150,000 represents a
bonus for the Company's Vice President and Chief Financial Officer, which was
earned in connection with the closing of the sale of HSI.
General and administrative expenses include all other operating
expenses, such as telecommunications, office supplies, postage, travel and
entertainment, professional fees, bad debt expense, insurance, rent and
utilities. General and administrative expenses were $838,667 for the six months
ended September 30, 2000 versus $2,021,552 for the comparable period last year.
In the current six month period, general and administrative expenses were
$298,604 for HSI for the 28-day period. The remaining general and administrative
expenses of $540,063 are primarily related to professional fees, including legal
and accounting fees, consulting fees related to the Company's investigation of
possible acquisition candidates and other general overhead items such as travel
and insurance.
Depreciation and amortization was $57,003 for the six months ended
September 30, 2000 versus $640,866 for the six months ended September 30, 1999.
The overall decrease in depreciation and amortization expense was primarily due
to a decrease in fixed assets and goodwill as a result of the sales of HSI and
NHBC.
NON-OPERATING INCOME (EXPENSE)
Interest income for the six months ended September 30, 2000 was
$148,968. Interest income was generated from the investment of the net proceeds
from the sale of HSI into a money market account that currently yields
approximately 5.5%. The Company did not have any interest income in the
comparable period last year.
-14-
<PAGE>
NON-OPERATING INCOME (EXPENSE) (CONTINUED)
Interest expense for the six months ended September 30, 2000 was
$10,305 versus $141,290 for the six months ended September 30, 1999. The overall
decrease was a result of the payoff of the remaining $1,325,000 owed to Harris
Bank from the proceeds of the sale of HSI on April 28, 2000.
The acquisition of HSI in fiscal 1998 resulted in allocating a
substantial portion of the purchase price to goodwill. Pursuant to SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of", management evaluated the recoverability of the long-lived
assets, including goodwill. While management originally believed that revenues
and profits could grow after HSI's operations were fully integrated into the
Company, management also explored strategic mergers and acquisitions that would
complement HSI's operations. In May 1999, management received an offer to sell
HSI to Beyond Benefits, Inc. a privately held managed healthcare company. The
original offer was for $15,500,000 in cash. However, in subsequent negotiations,
that offer was reduced to $10,000,000 in cash, 5% of the common equity of Beyond
Benefits, Inc. and an earn out provision for up to an additional $1,250,000. The
offer was accepted and approved by the Board of Directors on August 19, 1999,
subject to shareholder approval.
Accordingly, at September 30, 1999, the Company adjusted the carrying
value of HSI's goodwill to an estimated fair value of approximately $7,932,635
resulting in a non-cash impairment loss of approximately $500,000 ($0.13 loss
per basic and diluted share). The fair value at September 30, 1999 was estimated
based on a sales price of $11,000,000 less direct and incremental costs to
dispose of approximately $300,000.
Subsequent to September 30, 1999, the offer was reduced in final form
to $8,880,000 in cash. The offer was accepted and approved by the Board of
Directors and was approved by the shareholders on April 25, 2000.
The Company recorded a pretax loss of $93,105 on the sale of HSI
during the current six month period. The Company also recorded a pre-tax gain of
$114,538 on the sale of its vision program during the six months ended September
30, 1999.
The Company was involved in litigation asserted by the previous owner
(the "plaintiff") of HSI. In this litigation, the plaintiff filed a complaint
for breach of contract on December 4, 1998 seeking damages. On September 15,
2000, the plaintiff agreed to settle the lawsuit under certain terms, including
waiving his right to collect principal and interest under the subordinated
promissory note that the Company issued to him in connection with the
acquisition of HSI. In return, the Company authorized the release to the
plaintiff of certain moneys and interest held in escrow under the terms of a
stock purchase agreement entered into in connection with the acquisition of HSI.
The settlement resulted in an extraordinary gain, net of related income tax
effects, of $200,000 resulting from the cancellation of the subordinated
promissory note. Additionally, a pre-tax non-operating gain of $81,714 was
recognized as a result of the waiver of accrued interest on the subordinated
note as well as reimbursement of certain professional fees from the plaintiff.
INCOME TAX EXPENSE
The Company recorded no income tax expense in the current six month
period due to the level of operating losses incurred. A tax benefit of $19,684
was recorded in the comparable period last year.
-15-
<PAGE>
NET LOSS
The Company incurred a net loss of $635,407 for the six months ended
September 30, 2000 compared to a net loss of $537,435 for the six months ended
September 30, 1999. Components of the net loss in the current year period are
net interest income of $138,663, a net loss from the operations of HSI of
$173,747, the loss on the sale of HSI of $93,105, corporate overhead expenses of
$788,932, and the extraordinary gain and non-operating gain totaling $281,714
resulting from the cancellation of the subordinated promissory note and related
accrued interest and the reimbursement of certain professional fees.
LIQUIDITY AND CAPITAL RESOURCES
On April 28, 2000, in connection with the sale of HSI to Beyond
Benefits, the Company received $8,880,000 in cash at the closing of the sale.
The Company incurred $595,491 in transaction costs related to the sale. The
Company used $1,325,000 of the cash proceeds to repay the entire principal
balance on its term loan owed to Harris Bank. The remaining proceeds were
invested in a money market account which currently yields approximately 5.5%.
At September 30, 2000, the Company had cash and cash equivalents of
$6,557,044 and total liabilities of $336,857, which equates to net working
capital of $6,220,187. Included in total liabilities is a $150,000 bonus payable
to the Company's Chief Financial Officer, which was earned in connection with
the completion of the sale of HSI. The remaining liabilities include costs
related to general corporate overhead items.
As of April 28, 2000, the Company no longer has any revenue
generating operations. The Company's only source of cash is interest income
generated from the investment of the remaining proceeds from the sale of HSI in
a money market account. The Company will continue to invest substantially all of
its cash in a money market account until such time that it is needed in
connection with the Company's plan to acquire a business or businesses. There
can be no assurance that the Company will be able to consummate an acquisition
of a business or businesses in accordance with the Company's current business
plan or in a timely manner.
The Company's principal use of cash will be the payment of general
corporate overhead items including the payment of salaries to its two employees,
both of whom are executive officers of the Company. The Company will also use
cash to execute its plan to acquire a business or businesses. These costs may
include the compensation of consultants, attorneys and other professionals whose
services are required in connection with effecting an acquisition.
To the extent the Company continues to hold its cash in a money
market account, the net effect of reductions in interest rates, the advent of
inflation, an increase in corporate overhead and the passage of time--or a
combination of two or more of these factors--could result in a reduction of the
Company's cash or its purchasing power, which, in turn, could adversely affect
the Company's prospects and financial condition.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was involved in litigation asserted by the previous
owner of HealthStar, Thomas A. Stateman (the "Plaintiff"). In this
litigation, the plaintiff filed a complaint for breach of contract
in the Circuit Court of Cook County, Illinois on December 4, 1998
(Thomas A. Stateman vs. Champion Financial Corporation) seeking
damages. On September 15, 2000, the plaintiff agreed to settle the
lawsuit under certain terms, including waiving his right to
collect principal and interest under the subordinated promissory
note that the Company issued to him in connection with the
acquisition of HealthStar. In return, the Company authorized the
release to the plaintiff of certain moneys and interest held in
escrow under the terms of a stock purchase agreement entered into
in connection with the acquisition of HealthStar. The settlement
resulted in an extraordinary gain, net of related income tax
effects, of $200,000 resulting from the cancellation of the
subordinated promissory note. Additionally, a pre-tax
non-operating gain of $81,714 was recognized as a result of the
waiver of accrued interest on the subordinated note as well as
reimbursement of certain professional fees from the plaintiff.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-QSB to be signed on its
behalf by the undersigned thereunto duly authorized, this 13th day of November,
2000.
HEALTHSTAR CORP.
By: /s/ STEVEN A. MARCUS
--------------------------------------------
Steven A. Marcus
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-18-
