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Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-KSB/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 1999, as amended on
March 9, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________.
Commission file number 0-19499
HEALTHSTAR CORP.
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(Name of Small Business as specified in its Charter)
Delaware 91-1934592
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
8745 West Higgins Road, Suite 300, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (773) 693-7827
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class in which Registered
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Common Stock, $.001 per share OTC Bulletin Board
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 / /
Check if there is disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year were $16,915,292.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the high and low
closing sales prices of such stock as of June 22, 1999 was $21,317,543. As of
such date, 3,819,872 shares of the Registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: (Check One):
Yes / / No /X/
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HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-KSB/A FOR THE FISCAL YEAR ENDED MARCH 31, 1999
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PART I
ITEM 1. BUSINESS
OVERVIEW
HealthStar Corp. ("Company") is a healthcare management company
dedicated to controlling the costs, improving the quality and enhancing the
delivery of healthcare services. The Company 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, health and welfare funds and third parties who administer
employee medical plans. These programs and services assist the Company's clients
in reducing healthcare costs for group health plans and for workers'
compensation coverage and automobile accident injury claims.
The Company provides a wide array of medical cost containment services
such as implementing and coordinating case management procedures, managing and
reviewing the utilization of healthcare services, providing independent medical
examinations and intervention in the early stages of medical care for the
injured party, and comprehensive bill review, claims processing and medical
repricing services. Through its wholly-owned subsidiaries, HealthStar, Inc., an
Illinois Corporation, ("HealthStar"), and National Health Benefits & Casualty
Corporation, a Nevada corporation ("NHBC"), the Company provides access to, and
operates, one of the largest independent preferred provider organizations
("PPO") of healthcare professionals and facilities in the United States.
The Company seeks to expand its presence as a national provider of
medical management services in the United States. To achieve this goal, the
Company's strategy is to (i) expand its network of providers to geographic areas
currently not covered by provider contracts, (ii) expand its range of services,
(iii) enhance its opportunities for growth through strategic acquisitions and
partnerships, and (iv) focus on creating a stronger market presence in the
workers' compensation and automobile accident injury claim markets.
DEVELOPMENT OF BUSINESS
The Company is a Delaware corporation incorporated on November 16,
1998. Its predecessor company was a Utah corporation organized in February, 1981
as "Bersham Energy & Minerals, Inc." In 1984, the Company changed its name to
"Champion Energy Corporation" and in 1989, changed its name to "Champion
Financial Corporation" ("Champion"). Prior to 1997, Champion was primarily an
inactive corporation which most recently had been engaged in the business of
distributing synthetic polymers and other polymers in the United States.
In January 1997, Champion acquired all of the issued and outstanding
stock of NHBC in a business combination accounted for as a reverse acquisition.
NHBC was incorporated in Nevada in July 1996 to serve as the parent corporation
of National Property Casualty Corporation ("NPCC"). NPCC has been in business
since 1994 providing management of group healthcare services, workers'
compensation claims and automobile accident medical claims for property and
casualty insurers, third-party administrators, and self-insured employers.
NHBC also provided a POS vision program until it was sold in June 1999.
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In December 1997, Champion acquired HealthStar, based in Chicago,
Illinois. HealthStar is a diversified healthcare services company with over 14
years experience in the formulation and management of PPO networks. HealthStar
employs approximately 200 people and operates managed care networks in the
Midwest, Southeast and Southwest regions covering 39 states and approximately
900,000 lives.
In November 1998, Champion became a Delaware corporation and changed
its name to "HealthStar Corp." The reincorporation in Delaware was accomplished
when Champion merged all of its assets into its newly formed Delaware
subsidiary, HealthStar Corp. As a result of this reincorporation merger,
HealthStar Corp. operates Champion's business while Champion has ceased to
exist.
INDUSTRY OVERVIEW
In response to escalating healthcare costs over the past 20 years,
federal and state governmental authorities have increasingly emphasized
stringent cost-containment measures, and employers, consumers, and other
purchasers of healthcare services have sought cost-effective alternatives to
traditional indemnity insurance, under which providers generally receive payment
on a fee-for-service basis. As a result, companies providing managed healthcare
delivery systems developed.
Managed healthcare encompasses various arrangements among healthcare
providers, payors, and enrollees that apply direction of patients, case
management, utilization review, utilization of authorization systems, and
allocation of risks and rewards to increase the efficiency of delivery of
healthcare services. Managed care delivery systems may include coalitions of
independent medical practices, alliances between hospitals and individual
medical practices or physician networks, PPOs, point of service plans and health
maintenance organizations ("HMOs"). Managed care health plans create economic
incentives designed to encourage patients to seek care from a distinct panel of
providers and for providers to monitor enrollees, eliminate inefficiencies, and
reduce unnecessary utilization of services while maintaining and improving the
quality of patient care.
The managed care industry has expanded beyond traditional organizations
providing cost containment services to group health insurance companies and
self-funded employers to include workers' compensation coverages and automobile
accident medical claims.
Group health insurance benefits may be provided through various
channels. One source is the traditional insurance company that charges premiums
and bears the underwriting risk. Another source is union health and welfare
trust funds in which a certain amount of union dues are placed in a trust fund
and administered by trustees in accordance with the Taft-Hartley Act. Group
health benefits may also be provided by an employer that is self-insured. In
these instances, the employer usually contracts with a Third Party Administrator
("TPA") to administer the health plan. Most states have significant legislation
related to group health insurance and HMOs. This legislation governs the
financial incentives that an insurance company may give insureds. Some state
insurance departments also regulate the services that can or must be covered by
the insurance company. In addition, the payment of health claims is regulated.
In most states, HMOs are highly regulated. PPOs, on the other hand, are usually
not subject to the same degree of regulation. In some states, there is little or
no regulation of PPOs, while in other states, PPOs are registered with the state
but not subject to licensure. Self-insured plans are
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subject to the federal Employee Retirement Income Security Act of 1934 (ERISA).
The union health and welfare funds are subject to the provisions of the
Taft-Hartley Act.
Medical provider reimbursement methods for workers' compensation
medical services vary on a state-by-state basis. A majority of the states have
adopted fee schedules pursuant to which all healthcare providers are uniformly
reimbursed. The fee schedules mandated by each state typically establish the
maximum amounts that are required to be reimbursed for each procedure. In states
without fee schedules, healthcare providers are reimbursed based on usual,
customary and reasonable ("UCR") fees charged in the particular geographic area
within the state in which the services are provided.
Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment and a
significant portion of lost wages, legal fees and other costs associated with
work-related injuries and disabilities. Companies provide such coverage to their
employees through either the purchase of commercial insurance from private
insurance companies, participation in state-run funds or through self-insurance.
For workers' compensation claims, many states do not permit employers to
restrict a claimant's choice of healthcare provider, making it more difficult
for employers and private insurance companies to utilize traditional managed
care approaches. However, employers in 20 states currently have the right to
direct employees to a specific primary healthcare provider during the onset of a
workers' compensation case, subject to the right of the employee to change
physicians after a specific period. Recently, a number of states have adopted
legislation encouraging the use of workers' compensation managed care
organizations in an effort to allow employers to control their workers'
compensation costs.
The automobile casualty industry is slowly beginning to incorporate
managed care services into controlling the medical care cost for the clients
that are injured in an automobile accident. Like the workers' compensation
industry, the automobile insurance industry is regulated on a state-by-state
basis. While regulatory approval is not required for the Company to offer most
of its services to the automobile insurance market, state regulatory approval is
required in order to offer automobile insurers products that permit them to
direct claimants into a network of medical providers. Currently, several states
have legislated the optional use of PPOs by private automobile, property and
casualty insurance companies and in return, the insured receives a reduced
annual premium. Additionally, six states have adopted fee schedules for
healthcare providers to be reimbursed for automobile related injuries. Because
of escalating medical costs, the Company expects that additional states will
pass legislation adopting managed care components for insureds injured in an
automobile accident. The management of the Company believes that the growing
implementation of managed case services in the automobile casualty industry
creates additional market opportunities.
THE COMPANY'S PROGRAMS AND SERVICES
The Company assists its customers in managing the increasing medical
costs of group health plans, workers' compensation claims and automobile related
injury claims through managed care techniques by providing access to a PPO
network, as well as a variety of cost containment services such as utilization
review, case management, bill review, claims processing and medical repricing.
In addition, the Company provides bill negotiation for clients on medical claims
from health care providers who do not participate in the Company's PPO networks.
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The Company has contracts with over 250 insurance companies, third
party administrators, health and welfare funds and self-insured employers of all
sizes in approximately 39 states. Three clients accounted for, in the aggregate,
approximately 25% of the Company's revenue for the fiscal year ended March 31,
1999. No single client accounted for more than 9% of the Company's revenue in
fiscal 1999.
PPO NETWORKS
PPOs are typically groups of hospitals, physicians and other healthcare
providers that offer services at pre-negotiated rates to employer groups. PPO
networks offer the Company's clients a means of managing healthcare costs by
reducing the per-unit price of medical services provided to clients, reviewing
utilization and managing high cost cases. The Company's network is one of the
largest independent networks of directly contracted hospitals available in the
United States and includes acute care hospitals, out-patient facilities,
physical rehabilitation services, ancillary services and a panel of primary care
physicians and specialists. In addition to directly contracted providers, the
Company provides its customers with access to a limited number of PPO networks
organized by others which meet the Company's criteria for provider selection.
The Company uses the following guidelines in determining a provider's
eligibility for membership in the PPO: (a) geographic locations to meet the
needs of payors; (b) demonstrated cost effectiveness; (c) range of service
offered; (d) verification of provider's adequate professional liability
insurance and all licenses and certifications as required by law and (e) risk
profile including malpractice litigation history and licensure actions.
The Company provides limited or full access to its PPO network
depending upon the client's business practices and the level of savings for
medical costs that the client is seeking. Some customers will access all the
Company's PPO networks, while other customers will only contract with the
Company for a very specific geographic region. Most customers access the
Company's network of both hospitals and other healthcare providers including
physicians. However, there are some customers who only access the Company's PPO
hospitals. As of the end of the fiscal year, the Company had direct contracts
with over 1,800 hospitals and 121,000 physicians. In addition, there were 5,200
other healthcare providers under contract, including ancillary providers, home
health care agencies, pharmacies and outpatient facilities. Clients provide
their subscribers with identification cards with the Company's logo and
information. In addition, most clients provide their subscribers with a
directory of network providers and financial incentives to seek care from the
network providers.
The Company contracts with most hospitals using a per diem methodology
for inpatient services. Hospital outpatient services are currently contracted on
a percentage discount from billed charges. This outpatient services billing
methodology is being converted to a percentage of a hospital's inpatient per
diem. Physicians and other providers are normally contracted on a percentage
discount from billed charges based upon a fee schedule taking into account the
provider's specialty and geographic location. Physician fee schedules are
currently being converted to a derivative of the Medicare RESOURCE BASED
RELATIVE VALUE SYSTEM ("RBRVS"). The Company's standard contract with a provider
has an initial term of two years with automatic one-year renewal unless the
contracting provider or the Company provides written notice of termination,
typically 90 days prior to the renewal date.
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There will be no direct impact to the Company's revenue, liquidity or
cash flow from the change to RBRVS-based physician fee schedules from the
Company's current method of contracting with physicians. The conversion is
essentially revenue neutral, which was important in eliciting physicians'
support for the change. Since the majority of the Company's revenue is derived
on a per subscriber per month basis, management expects that any increase in
savings from billed charges as a result of the changes in pricing will be
insignificant. The change to RBRVS was necessitated to be more consistent with
industry trends. Physicians and their billing offices are more familiar with the
Medicare schedule as it has rapidly become the predominant form of pricing.
During the contracting process it becomes easier to converse with physicians
about the amount of revenue they can expect based on the volume that the Company
can deliver to them. The benefit to the Company is in ease of administration. It
is easier to maintain fewer fee schedules and because the RBRVS fee schedules
are easier to maintain, the Company anticipates that it will be able to shift
the repricing function to its payor clients, which has become the trend in the
PPO industry, thereby reducing the Company's costs of claims repricing and
claims resolution. The Company will begin to shift this function during the
third quarter of fiscal 2000.
The Company also offers a network of facilities known as the Exclusive
Provider Organization ("EPO"). The health care providers in the EPO network have
agreed to further discounts in exchange for proper patient identification,
direction on the facilities that may be used, and greater financial incentives
than found in the PPO network of providers. Over the years, the Company has
become more involved in managing its client's healthcare costs when the client
chooses to utilize the Company's EPO network. The EPO network normally requires
enhanced utilization review and case management services.
Although some state legislation prohibits automobile insurance
companies from directing a patient to a facility when the insured has suffered
an injury, no state legislation prohibits the insured from electing to direct
their own treatment in time for medical need. Consequently, a cost containment
program called ELECTIVE EXTENSION OF BENEFITS was instituted by the Company on
behalf of its automobile insurance clients. The creation of Elective Extension
of Benefits was designed to permit the automobile policyholder to extend the
number of medical care visits by utilizing one of the Company's contracted
medical providers. When the provider has agreed to accept a medical
reimbursement below their usual and customary fees, the policyholder is able to
receive more treatments without exceeding the medical limits of their policy.
Clients of the Company enhance benefits to their policyholders by permitting the
policyholder access to providers willing to reduce their fee for service.
The Company also markets its Non-Par Claims program. In this program
the Company negotiates a discount from medical providers who do not participate
in the PPO networks being accessed by the customer, but who submitted a medical
claim to a customer of the Company. Many of these non-participating providers
are willing to give a one-time discount on the submitted claim in exchange for
timely payment of that claim. In exchange for the discount, the client must pay
the claim in a timely manner, usually within two weeks. The Company receives a
percentage of the savings as compensation for securing the discount.
The Company has contracts with over 250 insurance companies, third
party administrators, health and welfare funds and self-insured employers of all
sizes in approximately 39 states. These clients provide their subscribers with
identification cards, directories of the PPO network and in most cases,
financial incentives to utilize the PPO network. In addition to the printed
directory, each policyholder is given the opportunity to contact the Company on
its toll free line when requesting a qualified provider in his or her own
community. The Company also has a web site that
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allows subscribers to locate medical providers. With more than 1,800 hospitals
and 121,000 physicians directly contracted in the network, the Company is
striving to ensure that its providers are located in areas desired by its
customers.
The Company's compensation for network access is based on either a
percentage of savings, or a fixed access fee based on the number of subscribers
("Capitation Fee"). The majority of the clients accessing the PPO networks pay
the Company on the Capitation Fee basis. This fee varies based upon the scope of
services contracted. Clients who have contracted with the Company for the
Workers' Compensation network, the automobile casualty network and the Non-par
Claims product all reimburse the Company on a percentage of savings basis. The
fee is a percentage of the savings generated off of billed charges.
Although the Company maintains its own PPO, it also contracts with
other national and regional PPOs based on the needs and demographics of its
clients. The PPO access fee paid by the Company to these contracted PPOs ranges
from 8 to 20% of the savings. The Company's business plan is to continue to
directly contract with healthcare providers whenever possible. As a result,
these relationships with other national and regional PPOs have been and will
continue to be terminated in accordance with their contract terms as the Company
is able to secure sufficient contracts on a direct basis.
HealthStar, Inc. has relationships with three (3) other PPO networks at
this time: American LifeCare, Virginia Health Network and Great Rivers Network.
HealthStar does believe, however, that any time that it can directly contract
with providers it is a better alternative than to access provider contracts
through other PPO networks. Direct provider contracts are easier to administer
and provide HealthStar a greater ability to control provider issues should they
arise. In addition, by reducing the number of PPO networks that HealthStar has
under contract, HealthStar does not place the fate of its business in the hands
of another PPO network. PPO networks have been known to terminate access
arrangements which would leave HealthStar looking for other alternatives while
at the same time disrupting the client relationships. Finally, HealthStar
clients favor working with PPO's that have direct provider contracts for these
very same reasons.
BILL REVIEW, CLAIMS PROCESSING AND MEDICAL REPRICING SERVICES
The Company offers retrospective bill review, claims processing and
medical repricing services for physician and hospital bills ("Bill Review").
Bill Review consists of an on-line computer-based information system which
stores and accesses state-mandated fee schedules and licensed practitioner usual
and customary charge information for the review of medical charges. The
management of the Company believes that the Company's program is one of the most
comprehensive bill review and medical repricing programs currently in use in the
market.
The Company's software systems monitor the bills by matching procedure
codes with the prevailing medical diagnosis, making the necessary adjustments.
Prior to the application of a PPO fee schedule, the Bill Review system screens
each bill for more than 90 different unwarranted charges. After a review of the
entire bill, the Bill Review system automatically makes the necessary
corrections and adjustments. In addition, the Bill Review system reveals
duplicate procedures, validates medical procedures and analyzes the relationship
of diagnosis to procedures performed. As part of the contractual arrangements
with the PPO network, clients are able to access certain PPO contracted rates
that can result in costs below the state-mandated fee schedule, which may
generate additional savings.
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VISION PROGRAM
Until June 1999, the Company operated a POS vision program. The
Company's First American Vision Services ("FAVS") program is a POS vision
program offering its members the opportunity to purchase eye wear substantially
below retail prices, when purchased from an independently owned FAVS provider.
In addition, members are entitled to an eye examination at a pre-established
reduced fee. The program benefits are extended to the members and their
immediate families, and there are no restrictions on the number of purchases.
The Company maintains toll free telephone lines to assist members in
accessing the nearest FAVS provider. FAVS providers consist primarily of Doctors
of Optometry and to a lesser extent licensed opticians. As of March 31, 1999,
there were approximately 4,650 vision care providers and 1 million members
participating in the FAVS program. On June 7, 1999 the Company sold its FAVS
program for cash consideration of $125,000.
SALES AND MARKETING
The Company actively markets its services to group health insurance
companies, automobile insurance companies, workers' compensation insurance
companies, third-party administrators and self-insured employers through the
Company's direct sales force of 15 full-time professionals. The Company creates
interest and demand for its programs and services primarily through direct
contact with potential customers and follow-up with marketing literature and
information designed to specifically address the client's needs. The Company
also participates in managed healthcare conventions and trade shows and
advertises its services on a limited basis in trade journals and other print
media, primarily to enhance name recognition and its reputation in the managed
care cost containment industry.
COMPETITION
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. Competition for customers is intense,
and 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 coverages 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. 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 demand for healthcare
services; regulatory, economic, and political factors; changes in patient
demographics; and competitive pricing strategies by HMOs and other
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healthcare plans. There can be no assurance that the Company will be able to
compete successfully.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
The Company regards certain features of its programs and services as
proprietary and relies on a combination of contract, copyright, trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services they provide.
In addition, HealthStar holds several federally registered trademarks, including
the name HealthStar. The Company has aggressively pursued any suspected
trademark infringement of the HealthStar name.
GOVERNMENT REGULATION
Managed healthcare programs for group healthcare, workers' compensation
and automobile accident injuries are conducted within a regulated environment.
The Company's activities are regulated principally at the state level, which
means the Company may be required to comply with certain regulatory standards
which differ from state to state. Although the laws affecting the Company's
operations vary widely from state to state, these laws fall into four principal
categories: (i) laws that require licensing, certification or other approval of
businesses that provide managed healthcare services; (ii) laws regulating the
operation of managed care provider networks; (iii) laws that restrict the
methods and procedures that the Company may employ in its health, workers'
compensation and automobile managed care programs; and (iv) proposed laws which,
if adopted, would have as their objective the reform of the healthcare system as
a whole.
Generally, parties that actually provide or arrange for the provision
of healthcare services assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulations
that govern many aspects of their conduct and operations. In contrast, the
services provided by the Company to its customers typically have not been the
subject of regulation by the federal government and most states. Since the
managed healthcare field is a rapidly expanding and changing industry and the
cost of providing healthcare continues to increase, it is possible that the
applicable state and federal regulatory frameworks will expand to more fully
regulate the conduct and operation of the Company's business.
The Company's ability to provide comprehensive managed care services
depends in part on its ability to contract with or create networks of healthcare
facilities and providers which share the Company's objectives. The Company
offers access to networks of healthcare providers selected by the Company for
quality of care and pricing. New laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks which the Company may organize or acquire. To the extent the
Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers. These regulations may result in
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increased costs of operations for the Company, which may have an adverse impact
upon the Company's ability to compete with other available alternatives for
healthcare cost control.
The Employee Retirement Income Security Act of 1974 ("ERISA"), governs
employee benefit plans offered by employers who self-insure. Employers opt to
self insure as a way to underwrite their own health claims and better control
their healthcare costs. Regulation of such self-insured benefit plans falls
under the jurisdiction of the United States Department of Labor, which has
strict guidelines relative to such plans and to the TPAs which administer such
plans. In addition to the ERISA guidelines, a TPA may be subject to additional
state requirements regarding registration.
The Company does not engage in any professional practice or control the
cost of professional services. Likewise, the Company does not believe that
membership in the Company's programs constitutes insurance subjecting the
Company to laws and regulations governing healthcare insurers and their
operations. Certain regulations, present in most state and local jurisdictions,
relating to the standards governing licensed healthcare professionals, prohibit
such professionals from compensating any third person for soliciting patients or
patronage on their behalf. The Company has received immaterial payments for
inclusion in the Company's networks from chiropractors and vision service
providers, and the Company believes that these payments do not violate such
regulations.
The automobile insurance industry, like the workers' compensation
industry, is regulated on a state-by-state basis. While regulatory approval is
not required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only a few states have legislation that permits
such direction of care. The Company's automobile claims repricing business is
non-directed and not affected by such legislation.
Regulations in the healthcare, workers' compensation and automobile
insurance fields are constantly evolving. The Company is unable to predict what
additional regulations, if any, affecting its business may be promulgated in the
future. The Company's business may be adversely affected by failure to comply
with existing laws and regulations, failure to obtain necessary licenses and
government approvals or failure to adapt to new or modified regulatory
requirements. Proposals for healthcare legislative reforms are regularly
considered at the federal and state levels. In addition, changes in workers'
compensation laws and regulations may impact demand for the Company's services,
require the Company to develop new or modified services to meet the demands of
the marketplace or modify the fees that the Company may charge for its services.
Recently, the managed care industry has received significant amounts of
negative publicity. This publicity, in turn, has contributed to increased
legislative activity, regulation and review of industry practices. These factors
may adversely affect the Company's ability to market its products or services,
could necessitate changes in the Company's products and services, and may
increase regulatory burdens under which the Company operates, further increasing
the costs of doing business and adversely affecting profitability.
EMPLOYEES
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As of March 31, 1999, the Company had 167 full-time employees and 37
part-time employees, including its corporate officers. The vast majority of the
employees, 150 full-time and 37 part-time, were employed by HealthStar, Inc. The
remaining 17 employees were employed by the Company and NHBC. The Company has no
collective bargaining agreements with any unions and believes that its overall
relations with its employees are good.
VOLATILITY OF STOCK MARKET
The market prices of the securities of certain publicly-held companies
in the industry in which the Company operates have shown volatility and
sensitivity in response to many factors, including general market trends, public
communications regarding managed care, legislative or regulatory actions,
healthcare costs trends, pricing trends, competition, earnings and acquisition
activity. There can be no assurance regarding the level or stability of the
Company's share price at any time or the impact of these or any other factors on
share price.
POSSIBLE LITIGATION AND LEGAL LIABILITY
The Company contracts and markets medical care utilization management
services and case management services that make recommendations concerning the
appropriateness of providers' medical treatment plans of patients throughout the
country, and it could share in potential liabilities for adverse medical
consequences. The Company does not grant or deny claims for payment of benefits
and the Company does not believe that it engages in the practice of medicine or
the delivery of medical services. There can be no assurance however, that the
Company will not be subject to claims or litigation related to the grant or
denial of claims for payment of benefits or allegations that the Company engages
in the practice of medicine or the delivery of medical services. In addition,
there can be no assurance that the Company will not be subject to other
litigation that may adversely affect the Company's business or results of
operations. It is possible that the Company could be named as a party in any
malpractice action which might be brought against a physician or hospital in the
Company's PPO network. The Company does not have product liability insurance or
insurance intended to protect against claims which might be asserted in any
malpractice action. If the Company were found liable for any such claim, the
cost of defending such claim as well as any judgment against the Company, could
materially adversely affect the Company's financial condition, results of
operations and future prospects.
RISKS RELATED TO GROWTH STRATEGY
The Company's strategy is to continue its internal growth and, as
strategic opportunities arise, to consider acquisitions of, or relationships
with, other companies in related lines of business. As a result, the Company is
subject to certain growth-related risks, including the risk that it will be
unable to attract and retain personnel or acquire other resources necessary to
service such growth adequately. Expenses arising from the Company's efforts to
increase its market penetration may have a negative impact on operating results.
In addition, there can be no assurance that any suitable opportunities for
strategic acquisitions or relationships will arise or, if they do arise, that
the transactions contemplated thereby could be completed. If such a transaction
does occur, there can be no assurance that the Company will be able to integrate
effectively any acquired businesses into the Company. In addition, any such
transactions would be subject to various risks associated with the acquisition
of businesses, including the financial impact of expenses associated with the
integration of businesses. There can be no assurance that
10
<PAGE>
any future acquisitions or strategic relationships will not have an adverse
impact on the Company's business, financial condition or results of operations.
As suitable opportunities arise, the Company anticipates that it would finance
such transactions, as well as internal growth, through working capital or
through debt or equity financing. There can be no assurance however, that such
debt and equity financing would be available to the Company on acceptable terms
when and if suitable strategic opportunities arise.
YEAR 2000 MATTERS
Many computer programs and equipment with embedded chips or processors
use two rather than four digits to represent the year and may be unable to
accurately process dates after December 31, 1999. This, as well as certain other
date-related programming issues, may result in miscalculations or system
failures which can disrupt the businesses which rely on them. The term "Year
2000 Issue" is used to refer to all difficulties the turn of the century may
bring to computer users.
The Company has determined that many of its internal computer programs
and some items of its equipment are susceptible to potential Year 2000 system
failures or processing errors. This assessment of internal systems is
substantially complete and plans have been formulated to modify or replace the
impacted programs or equipment. Remediation efforts are underway using both
internal and external resources, with priority given to the systems whose
failure might have a material impact on the Company. To date all required
changes have been identified and made and testing of the changes is
approximately 80% complete.
The Company is also dependent on its contracted medical providers and
payor clients to successfully address their respective Year 2000 technology
issues in connection with their claims processing functions. An important part
of the Year 2000 program involves working with those third parties to determine
the extent to which the Company may be vulnerable to their failure to address
their own Year 2000 issues. The Company is communicating with those third
parties to ascertain whether their Year 2000 issues which might impact the
Company are being addressed. Where practical and appropriate, the Company will
try to verify the information or assurances they provide with testing,
particularly with regard to mission critical relationships. At present, the
Company has not been advised by any third party of any Year 2000 issue likely to
materially interfere with the Company's business. However, not all third parties
have been responsive to the Company's inquiries and there may be providers of
significant services on which the Company relies, such as utilities, which are
unwilling or unable to provide information concerning their Year 2000 readiness.
To the extent that outside vendors do not provide satisfactory responses, the
Company will consider changing to vendors who have demonstrated Year 2000
readiness. However, there are no assurances that the Company will be able to do
so.
The Company has begun to develop contingency plans to minimize any Year
2000 disruptions in the event that an internal or third party mission critical
system does not function properly. The 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, manual processing of transactions, use of alternative
service providers, relocation to temporary facilities, and other measures as
deemed necessary. Once developed, these contingency plans will be continually
refined as additional information becomes available.
11
<PAGE>
The consequences of an uncorrected Year 2000 issue could include
business interruption, exposure to monetary claims by clients and others and
loss of business goodwill. The likelihood of these events and the possible
financial impact if they occur cannot be predicted.
The Company is continuing to upgrade equipment to be Year 2000
compliant and total expenditures relating to the upgrade for the year are
expected to be approximately $20,000, of which $7,000 was incurred as of June
28, 1999.
The estimates and conclusions set forth above contain forward-looking
statements and are based on management's best estimate of future events. Risks
to completing the plan include the availability of resources, the Company's
ability to discover and correct material Year 2000 issues, and other third
parties on which the Company relies to bring their systems into Year 2000
compliance.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to STATEMAN V. HEALTHSTAR CORP. (Circuit Court
of Cook County, Illinois (Chancery Division, Case No. 98 CH 16824)), filed on
December 4, 1998. Mr. Stateman claimed a purported breach by the Company of the
Stock Purchase Agreement dated December 15, 1997 (the "SPA") pursuant to which
he sold all the stock of HealthStar, Inc. to the Company. Section 2.2 of the SPA
delineates the consideration to be paid under the SPA, and also provides for a
purchase price adjustment, upwards or downwards, by the "Adjustment Amount."
Section 2.2(a) of the SPA specifies the procedures for determining the
Adjustment Amount. In his Complaint, Stateman seeks a declaration that the
"Adjustment Procedure" be performed by PriceWaterhouseCooper, including a
specifically named partner and he seeks damages of up to $900,000. The Company
understands through its litigation counsel that Mr. Stateman is prepared to drop
his lawsuit and permit PriceWaterhouseCooper to proceed with the Adjustment
Procedure. That procedure is, essentially, a review of the closing balance sheet
under the SPA which was audited by KPMG. The potential loss range is $0 to
$900,000, and presently known facts indicate that any loss would be in the lower
end of the range.
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Over-The-Counter Bulletin
Board market under the symbol "PPOS."
The following table sets forth the approximate high and low closing
sales prices per share as reported by the Over-The-Counter Bulletin Board market
for the Company's Common Stock for the calendar periods indicated. The
quotations do not reflect retail markups, markdowns or commissions and may not
reflect actual transactions. On November 16, 1998, the Company
12
<PAGE>
effected a 1 for 2 reverse stock split of the Company's outstanding common
stock. Share prices for periods prior to this date have accordingly been
restated.
<TABLE>
<CAPTION>
Fiscal Quarter High Low
- -------------- ---- ---
<S> <C> <C>
Quarter Ended March 31, 1999 $4.06 $2.00
Quarter Ended December 31, 1998 $4.44 $2.50
Quarter Ended September 30, 1998 $7.63 $2.25
Quarter Ended June 30, 1998 $11.72 $5.75
Quarter Ended March 31, 1998 $21.50 $5.50
Quarter Ended December 31, 1997 $24.25 $18.00
Quarter Ended September 30, 1997 $18.50 $10.00
Quarter Ended June 30, 1997 $14.00 $9.50
</TABLE>
There were approximately 800 shareholders of record and approximately
800 beneficial owners of the Company's Common Stock as of March 31, 1999. The
Company has neither declared nor paid any cash dividends to date and is
restricted by the loan agreement with Harris Bank from paying cash dividends.
In August 1998, the Company issued an aggregate of 800,000 shares of
common stock and a promissory note in the principal amount of $1 million upon
the conversion of $4 million of 8% senior subordinated convertible debentures
that the Company had issued to two institutional investors in December 1997 in
an off-shore private offering pursuant to Regulation S. The Regulation S
offering had previously been disclosed in the Company's current report on Form
8-K dated December 12, 1997, and the issuance of the shares and the promissory
note had previously been disclosed in the company's current report on Form 8-K
dated September 16, 1998, both filed with the Securities and Exchange
Commission.
On March 30, 1999, the Company issued shares in a private placement in
reliance upon Section 4(2) of the Securities Act of 1933 to three accredited
investors at a price per share of $2.50, as follows: (i) Forward Looking
Technologies Ltd., 150,000 shares; (ii) Income Partnership of America 1998 Ltd.,
150,000 shares; and (iii) USA Strategic Investments Corp., 100,000 shares. The
Company used the aggregate proceeds of the private placement ($1 million) to pay
off the $1.0 million promissory note issued in August 1998 upon the conversion
of the 8% senior subordinated debentures.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
HealthStar Corp. is the successor company to Champion Financial
Corporation ("Champion"), a Utah corporation. Effective November 16, 1998,
Champion 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
financial statements include the results of operations of the Company and its
two
13
<PAGE>
wholly-owned subsidiaries HealthStar, Inc. ("HealthStar") and National Health
Benefits & Casualty Corporation ("NHBC").
Champion acquired NHBC on January 1, 1997 in a business combination
accounted for as a reverse acquisition with a publicly-traded shell company. In
completing the acquisition, Champion issued 2,200,000 shares of common stock for
all of the outstanding shares of NHBC common stock. To effect the combination,
the fair value of the net tangible assets of Champion were added to the equity
of NHBC.
Champion purchased the outstanding stock of HealthStar on December 12,
1997 for approximately $13,728,000. The transaction was accounted for under the
purchase method of accounting. The purchase price consisted of approximately
$6,000,000 cash, 382,500 shares of Champion common stock valued at $9 a share, a
seller note in the amount of $200,000, transaction related costs of
approximately $1,245,000 and the assumption of $2,840,000 of liabilities. The
assets and liabilities of HealthStar at the time of acquisition were adjusted to
their fair values. The excess purchase cost over the estimated fair value of the
net tangible assets acquired was approximately $9,000,000 and was recorded as
goodwill.
RESULTS OF OPERATIONS
When comparing the Company's financial results for the year ended March
31, 1999 to the year ended March 31, 1998, it is important to note that the
majority of the increase in the level of revenues and expenses is due primarily
to the acquisition of HealthStar which was completed on December 15, 1997. The
financial results for HealthStar for approximately 15 weeks are included in the
financial results of the Company in fiscal 1998, and are included for the full
year in fiscal 1999.
Net earnings decreased $479,775 from $304,105 or $.11 per share in 1998
to a loss of $175,670 or a loss per share of $.05 in 1999.
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 from billed charges which is granted by a contracted provider. The
Company's participation in the amount saved varies from 20% to 35% with the
exact amount determined by contractual provisions with the Company's clients.
14
<PAGE>
Total revenue increased $9,061,296 to $16,915,292 for the fiscal year
ended March 31, 1999 compared to $7,853,996 for 1998, an increase of 115%. The
entire increase is attributable to the acquisition of HealthStar.
Pro forma revenues for the year ended March 31, 1998 (assuming the
acquisition of HealthStar occurred on April 1, 1997) were $20,328,321. The
decrease in revenue from 1998 (on a pro forma basis) to 1999 is the result of
the unanticipated loss of business attributable to poor service levels prior to
the integration of HealthStar. Under the Company's ownership, during the first
half of fiscal 1999, HealthStar spent considerable time restructuring its
operations to accelerate claims turnaround times, improve its directory
production process and enhance its communications with its clients. Throughout
and subsequent to this time, HealthStar lost business to its competition.
Attrition of HealthStar's revenue base continued in fiscal 1999 as a result of
consolidation in the industry as well as pricing pressures. Management has
restructured its sales and marketing processes to help generate new sales
opportunities as well as to retain existing business. Management believes that
HealthStar's loss of business will level off during the first half of the fiscal
year ending March 31, 2000.
Other fees consists of revenue generated from the Company's pharmacy
management and case management programs, as well as from the production of
provider directories that are generated for use by enrollees of HealthStar's
clients. Other fees increased from $360,532 for fiscal 1998 to $540,381 for
fiscal 1999, an increase of $179,849, or 50%. The increase is attributable to
the acquisition of HealthStar in fiscal 1998.
OPERATING EXPENSES
Cost of services includes the cost of outsourcing the case management
and utilization review function, 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 $967,851, or 66%, from $1,466,387 in 1998 to
$2,434,238 in 1999. The entire increase is attributable to the acquisition of
HealthStar.
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. Salaries and wages
increased $4,965,027, or 153%, from $3,237,534 in 1998 to $8,202,561 in 1999.
The entire increase is attributable to the acquisition of HealthStar whose
employees comprise 92% of total employees employed by the Company.
General and administrative expenses include all other operating
expenses such as bad debt expense, telephone charges, office supplies, postage,
travel and entertainment, professional fees, rent and utilities. General and
administrative expenses increased $2,836,396, or 139%, from $2,041,365 in 1998
to $4,877,761 in 1999. The majority of this increase is attributable to the
acquisition of HealthStar. Bad debt expense increased $558,122 to $638,184 in
1999 from $80,062 in 1998 which is also due to the inclusion of the full year of
HealthStar operating results in 1999 as compared to 15 weeks of results in the
prior year.
Depreciation and amortization increased $822,224, or 210%, from
$391,980 in 1998 to $1,214,204 in 1999. Goodwill of approximately $9,000,000
recorded in conjunction with the acquisition of HealthStar is being amortized
over 20 years.
15
<PAGE>
Interest expense increased from $228,320 in 1998 to $397,165 in 1999,
an increase of $168,845 or 74%. This increase was related to the additional debt
incurred to finance the acquisition and the operations of HealthStar. The
interest rate on the Company's bank term loan and line of credit was at prime
and ranged between 7.75% and 8.50% during the year. The interest rate on the
convertible debentures and the seller note was 8.0%. In August 1998, $3 million
of the debentures were converted into stock. On March 31, 1999, the remaining $1
million debenture was repaid.
Overall, total operating expenses increased 133% in 1999 to $17,185,555
from $7,365,586 in 1998. The Company recognized an income tax benefit for 1999
at an effective rate of 35%, which is compared to the effective tax rate of 39%
in 1998 used to calculate the tax provision. The decrease in the effective tax
rate is due to limitations on the amount of net operating losses which can be
utilized in the current year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $72,000 in cash and cash equivalents at March 31, 1999.
At March 31, 1999, the Company had a working capital deficiency of $2,910,005.
The Company has historically funded its working capital requirements
and capital expenditures primarily from cash flow generated from operations
supplemented by borrowings under its credit facility with Harris Trust and
Savings Bank ("Harris").
The Company has a $4 million credit facility with Harris which is
secured by substantially all the assets of the Company. $2.5 million of the
facility is comprised of a term loan and $1.5 million represents a revolving
line of credit. In connection with this facility, the Company is required to
comply with certain financial covenants. Covenants include a minimum current
ratio, maximum leverage ratio and a minimum fixed charge coverage ratio. At
March 31, 1999, the borrowings consisted of $2,075,000 remaining on the term
loan and $650,000 outstanding on the line of credit, with approximately $300,000
of additional borrowing capacity available.
At March 31, 1999, the Company was in violation of several of its
financial covenants. Harris agreed to a waiver in connection with the violations
effective June 8, 1999 upon amending the terms of the credit facility. The
amended terms, in addition to requiring that the entire balance outstanding be
repaid by November 30, 1999, reset the above-mentioned ratios and added an
additional minimum earnings covenant for subsequent periods. Based upon
unaudited financial statement balances at May 31, 1999, the Company was in
compliance with the revised covenants. Management of the Company believes that
they will be in compliance with the revised covenants during subsequent
measurement periods largely based on increased sales efforts and cost
containment measures. The Company is actively seeking replacement financing
through various sources and relationships with other companies in a related line
of business to ensure that adequate resources are available to meet the
accelerated deadline of the bank debt.
Interest on the debt due to Harris is calculated at the prime rate plus
1.5%. Prior to the amendment, interest had been calculated at prime, which was
7.75% at March 31, 1999. On June 18, 1999, the Company had $900,000 outstanding
under its line of credit with no additional borrowing capacity.
16
<PAGE>
On March 30, 1999, the Company entered into three stock subscription
agreements for an aggregate of 400,000 shares at $2.50 per share. Proceeds
totaling $1 million were received on March 31, 1999.
On April 29, 1997, the Company entered into an agreement with Hayes,
Incorporated ("Hayes") to acquire 338,476 shares of Hayes common stock for
$309,626. The issuance of Hayes common stock resulted in the Company acquiring a
12.4% interest in Hayes. On March 30, 1999, the Company sold its investment back
to Hayes for $100,000 cash and a $150,000 promissory note, which resulted in a
loss of $59,626.
On June 7, 1999, the Company sold its vision benefit program for
$125,000 in cash to an immediate family member of an officer of the Company. The
Company recognized a gain on the sale of approximately $114,000. The vision
program accounted for approximately $173,000 in revenue during fiscal 1999. The
vision program is not a separate business segment.
Although there can be no assurances, management of the Company believes
that the loss of business experienced during the year has leveled off and
management anticipates growth and expansion in the upcoming year through the
acquisition of complementary businesses or business lines, management personnel
and infrastructure additions. The Company believes additional sources of capital
may be required in conjunction with any such acquisition activity. There can be
no assurance that the Company will be able to obtain such funds on terms
acceptable to the Company. Management believes that cash on hand, amounts
available under the revolving line of credit, cash generated from future
operations and the sale of assets, as appropriate, will be sufficient to fund
the Company's operations and anticipated expansion plans. Management is
considering an offer for the purchase of HealthStar which, if consummated, would
generate significant cash proceeds.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting of
Comprehensive Income" establishes standards for reporting and display of
comprehensive income (all changes in equity during a period except those
resulting from investments by and distributions to owners) and its components in
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" establishes standards for
reporting information about operating segments in annual financial statements,
selected information about operating segments in interim financial reports and
disclosures about products and services, geographic area and major customers.
Statement of Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. The adoption
of this statement contains no change in disclosure requirements of the Company.
17
<PAGE>
ACCOUNTING STANDARDS NOT YET ADOPTED
Statement of Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This new standard, which will be
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999, is not currently anticipated to have a significant impact on the
consolidated financial statements based on the current financial structure and
operations of the Company. The Financial Accounting Standards Board has issued
an exposure draft that defers the effective date of FASB Statement No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000.
Statement of Accounting Standards No. 135, "Recission of FASB Statement
No. 75 and Technical Corrections". This Statement rescinds Statement No. 75,
"Deferral of the Effective Date of Certain Accounting Requirements for Pension
Plans of State and Local Governmental Units," and provides technical corrections
for over 20 accounting pronouncements. This new standard, which will be
effective for fiscal years ending after February 15, 1999, is not currently
anticipated to have a significant impact on the consolidated financial
statements based on the current financial structure and operations of the
Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB/A as
pages F-1 to F-18 are incorporated herein by reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information as of June 23, 1999,
of the Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerald E. Finnell 59 Director, Chairman of the Board
Stephen J. Carder 44 President, Chief Executive Officer and Director
Gary L. Nielsen 56 Director
Jon M. Donnell 39 Director
Thomas S. O'Brien 51 Director
Darren T. Horndasch 38 Vice President and Chief Operating Officer
Denise E. Nedza 35 Vice President and Chief Financial Officer
</TABLE>
GERALD E. FINNELL has been a Director of the Company since June 1997.
In April 1998 Mr. Finnell was elected Chairman of the Board. Mr. Finnell was a
partner with the public accounting
18
<PAGE>
firm of KPMG Peat Marwick LLP from 1970 to 1995, and served on its Board of
Directors from 1987 to 1994.
STEPHEN J. CARDER has been the Company's President, Chief Executive
Officer and Director, since April 1998. Prior to April 1998, Mr. Carder served
as Executive Vice President, Chief Financial Officer/Treasurer and Secretary of
the Company from January 1997 to April 1998. Prior to that, Mr. Carder was
principally employed since 1994 as Executive Vice President and Chief Operating
Officer of National Property and Casualty Corporation. From 1989 to 1994, Mr.
Carder served as Vice President of Finance and Administration for the Del Webb
Development Corporation, a subsidiary of Del Webb Corporation, a NYSE company
that develops and markets active adult communities. Mr. Carder served as Vice
President of Finance for National Health Benefits Corporation from 1987 to 1988.
Prior to 1987, Mr. Carder served as Vice President of Finance and Administration
for First American Health Concepts, a publicly traded corporation listed on
NASDAQ, which markets and administers a national vision program.
GARY L. NIELSEN has been a Director of the Company since June 1997. Mr.
Nielsen is currently the Chief Financial Officer of Granite Golf Corporation and
has held this position since March 1999. Prior to that he was the Vice President
of Finance and Chief Financial Officer of Best Western International, Inc. and
served in that position from May 1996. From October 1986 to May 1996, Mr.
Nielsen was Vice President and Treasurer of Giant Industries, Inc.
JON M. DONNELL has been a Director of the Company since June 1998. Mr.
Donnell is the Chief Operating Officer of Dominion Homes, Inc. and has held that
position since 1995. Prior to working for Dominion Homes, Mr. Donnell was with
the Del Webb Corporation for 11 years. Mr. Donnell also serves on the Board of
Directors of Dominion Homes.
THOMAS S. O'BRIEN has been a Director of the Company since November
1998. Mr. O'Brien is Senior Vice President of Aon Risk Services, Inc. of
Illinois and has been with Aon since 1990. Prior to working for Aon, Mr. O'Brien
worked in various capacities in the insurance brokerage industry with such firms
as Swett & Crawford of Illinois and Stewart Smith Mid America. Mr. O'Brien also
serves on the Board of Trustees of St. Joseph's College in Rensselaer, Indiana.
DARREN T. HORNDASCH has been Vice President and Chief Operating Officer
of the Company since November 1998. He also serves as Secretary of the Company.
He joined the Company in July 1998 as Chief Operating Officer of HealthStar Inc.
Prior to that Mr. Horndasch served as the Chief Executive Officer for Wisconsin
Health Fund based in Milwaukee, Wisconsin. Prior to joining Wisconsin Health
Fund, he was the Director of the University of Illinois HMO, responsible for all
managed care operations at the University of Illinois HMO. Mr. Horndasch
received his Bachelor of Arts and Masters degrees, both in Political Science,
from Western Illinois University.
DENISE E. NEDZA has been Vice President and Chief Financial Officer of
the Company since November 1998. She also serves as Treasurer of the Company.
Prior to joining HealthStar, Ms. Nedza was the Regional Chief Financial Officer
of Oxford Health Plans (IL), Inc., a wholly-owned subsidiary of Oxford Health
Plans, Inc. in Norwalk, Connecticut. Prior to Oxford, she had been the Director
of Finance and Administration for PacifiCare/FHP of Illinois. Ms. Nedza received
her Bachelor of Science degree in Commerce from DePaul University in Chicago and
her MBA from the University of Chicago.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
for all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's Chief Executive Officer and certain
executive officers of the Company. No other executive officers of the Company
received compensation in excess of $100,000 during the fiscal year ended March
31, 1999.
SUMMARY OF EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
All Other
Name and Position Year Salary Bonus Compensation(1)
- ----------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Stephen J. Carder, 1999 $186,458 $0 $12,000
President 1998 $135,000 $20,000 $12,000
Chief Executive Officer, 1997 $83,750 $33,500 $7,800
And Director
Darren T. Horndasch(4), 1999 $139,618 $0 $44,250 (3)
Vice President,
Chief Operating Officer
Steven L. Lange(2), 1999 $136,804 $0 $5,550
Vice President, 1998 $110,000 $10,000 $2,425
Sales and Marketing 1997 $95,000 $2,500 $6,983
</TABLE>
(1) The Company pays each of its executive officers an automobile allowance
each month and pays or reimburses its executive officers for
business-related expenses. The Company also provides certain health
insurance benefits for all full time employees, including its officers.
The Company's Officers do not receive additional compensation for serving
as directors of the Company.
(2) Mr. Lange served as the Company's Vice President of Sales and Marketing
until May 13, 1999. The Company does not intend to replace him at this
time.
(3) Includes $15,000 calculated as the Fair Market Value of 5,000 shares of
stock awarded at the time of employment and a move allowance of $25,000.
(4) Mr. Horndasch is compensated under an agreement which provides for
continuation of his respective salary for 90 days in the event of
termination by the Company without cause.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of securities Percent of total options
underlying options granted to employees Exercise price Expiration
Name granted (#) (1) in fiscal year ($/Sh) (1) date
- ----- --------------- ----------- ---------- ----
<S> <C> <C> <C> <C>
Stephen J. Carder 0 0% N/A N/A
Darren T. Horndasch 30,000 31.3% $2.875 10/8/08
Steven L. Lange (2) 20,000 20.8% 2.875 10/8/08
</TABLE>
(1) As adjusted giving effect to the reverse stock split on November 16, 1998.
20
<PAGE>
(2) Mr. Lange's options were forfeited on May 13, 1999 as a result of his
termination of employment with the Company.
The options were awarded under the HealthStar Corp. 1998 Stock Option
Plan ("the Plan"). The options awarded to Mr. Horndasch vest equally over two
years. Fifteen thousand options were also awarded to Mr. Finnell, Mr. Donnell
and Mr. Nielsen, who serve as the Company's outside directors. These options,
which vest equally over three years, also have an exercise price of $2.875 and
an expiration date of October 8, 2008. Upon a Change of Control, as defined in
the Plan, all options granted shall become fully vested and immediately
exercisable. All nonvested options terminate immediately upon the optionee's
termination of employment or cessation of services as a Director of the Company.
<TABLE>
<CAPTION>
Number
Shares of Number of Unexercised Options Value of Unexercised
Acquired Value Held At In-The-Money Options At
Name on Exercise Realized March 31, 1999 March 31, 1999
- ---- ----------- -------- -------------- --------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Carder 0 0 0 0 $0 $0
Darren T. Horndasch 0 0 0 30,000 0 13,125
Steven L. Lange (2) 0 0 0 20,000 0 8,750
</TABLE>
No executive officer or director exercised options during the fiscal
year ended March 31, 1999.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
Darren T. Horndasch, the Vice President and Chief Operating Officer of
the Company's subsidiary HealthStar, Inc., is a party to a Compensation
Agreement effective July 1, 1999, which sets forth the terms and conditions of
Mr. Horndasch's compensation for his service to HSI. The term of this agreement
is July 1, 1999 through June 30, 2000. Mr. Horndasch is paid an annual salary of
$180,000 under this agreement, and the agreement provides that he will receive
his salary for 90 days upon the termination of his employment by the Company
without cause. Mr. Horndasch resigned his position with HSI in November 1999 to
pursue other opportunities, and his resignation did not trigger the 90-day
termination payment provision of the agreement.
Denise E. Nedza, the Vice President and Chief Financial Officer of HSI,
is a party to a Compensation Agreement effective July 1, 1999, which sets forth
terms substantially identical to those in the Horndasch agreement, except Ms.
Nedza's annual salary is $137,000 per annum. Neither the Company nor any of its
subsidiaries is a party to an employment or severance agreement with any other
employee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1999, for (i)
each executive officer of the Company; (ii) each director of the Company; (iii)
all executive officers and directors of the Company as a group; and (iv) each
person known by the Company to be the beneficial owner of more than five percent
of the Common Stock.
21
<PAGE>
<TABLE>
<CAPTION>
% of
Outstanding
Officers and Directors: Shares Beneficially Owned(1) Stock
- ---------------------- ------------------------- -----
<S> <C> <C>
Gerald E. Finnell................................. 0 *
Stephen J. Carder................................. 537,500 14.07%
Gary L. Nielsen................................... 0 *
Jon M. Donnell.................................... 500 *
Darren T Horndasch................................ 2,250 *
Denise E. Nedza................................... 0 *
Directors and Executive Officers as a
group (6 persons) ............................... 540,250 14.14%
5% Holders:
Thomas H. Stateman................................ 191,250 5.01%
</TABLE>
* Indicates less than 1.0%.
(1) Beneficial ownership is determined under rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed to
be outstanding for computing the percentage ownership of the person holding
such options and the percentage ownership of any group of which the holder
is a member, but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of capital stock
shown beneficially owned by them.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(2) 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.
Date: March 9, 2000.
HEALTHSTAR CORP.
By: /s/ Steven A. Marcus
-------------------------------------------
Steven A. Marcus
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
HealthStar Corp.:
We have audited the accompanying consolidated balance sheet of HealthStar Corp.
and subsidiaries as of March 31, 1999 and the related consolidated statements of
operations and retained earnings, and cash flows for the years ended March 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthStar Corp. and
subsidiaries at March 31, 1999, and the results of their operations and their
cash flows for the years ended March 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Phoenix, Arizona
May 28, 1999
F-1
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1999
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 71,936
Trade accounts receivable, less allowance for doubtful accounts of $317,580 1,994,851
Other current assets 420,154
-----------------
Total current assets 2,486,941
Property and equipment, net 2,471,686
Goodwill, net of accumulated amortization of $610,784 8,569,423
Other assets, at cost 240,548
-----------------
Total assets $ 13,768,598
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 882,911
Accrued expenses 1,589,035
Current portion of long-term debt 2,925,000
-----------------
Total current liabilities 5,396,946
-----------------
Shareholders' equity:
Common stock, $.001 par value, 15,000,000 shares authorized,
3,819,872 shares issued and outstanding 3,820
Additional paid-in capital 8,151,129
Retained earnings 216,703
-----------------
Total shareholders' equity 8,371,652
Commitments and contingencies (notes 2 and 10 )
-----------------
Total liabilities and shareholders' equity $ 13,768,598
=================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Revenues:
Capitated fees $ 9,481,392 3,536,008
Repricing fees 6,893,519 3,957,456
Other fees 540,381 360,532
------------------- -------------------
16,915,292 7,853,996
------------------- -------------------
Operating expenses:
Cost of services 2,434,238 1,466,387
Salaries and wages 8,202,561 3,237,534
General and administrative 4,877,761 2,041,365
Depreciation and amortization 1,214,204 391,980
------------------- -------------------
16,728,764 7,137,266
------------------- -------------------
Income from operations 186,528 716,730
Non-operating income (expense):
Interest expense (397,165) (228,320)
Loss on sale of investment (59,626) --
------------------- -------------------
Income (loss) before income taxes (270,263) 488,410
Income tax expense (benefit) (94,593) 184,305
------------------- -------------------
Net earnings (loss) (175,670) 304,105
Retained earnings at beginning of year 392,373 88,268
------------------- -------------------
Retained earnings at end of year $ 216,703 392,373
=================== ===================
Earnings (loss) per share - Basic and Diluted $ (0.05) .11
=================== ===================
Weighted average shares outstanding - Basic and Diluted 3,216,676 2,793,750
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Operating activities:
Net earnings (loss) $ (175,670) 304,105
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,214,204 391,980
Bad debt expense 638,184 80,062
Gain related to stock transactions (70,981) --
Loss on investment in healthcare technology company 59,626 --
Loss on sale of fixed assets -- 5,658
Increase (decrease) in cash resulting from changes in operating assets
and liabilities:
Trade accounts receivable (120,589) (619,338)
Other current assets (397,980) 38,218
Accounts payable (280,830) (886,649)
Accrued expenses (608,691) 161,539
Deferred revenue -- (58,909)
------------------- -------------------
Net cash provided by (used in) operating activities 257,273 (583,334)
------------------- -------------------
Investing activities:
Purchases of equipment (369,183) (141,751)
Proceeds from sale of fixed assets -- 12,336
Investment in healthcare technology company 100,000 (309,626)
Acquisition of HealthStar, Inc. -- (6,000,000)
------------------- -------------------
Net cash used in investing activities (269,183) (6,439,041)
------------------- -------------------
Financing activities:
(Increase) decrease in other assets (40,620) (449,915)
Net proceeds from line of credit 350,000 300,000
Net proceeds from (payments on) on long-term debt (425,000) 2,475,660
Issuance (redemption) of convertible debt (1,000,000) 4,000,000
Proceeds from issuance of common stock 1,000,000 --
------------------- -------------------
Net cash provided by (used in) financing activities (115,620) 6,325,745
------------------- -------------------
Net decrease in cash and cash equivalents (127,530) (696,630)
Cash and cash equivalents at beginning of year 199,466 896,096
------------------- -------------------
Cash and cash equivalents at end of year $ 71,936 199,466
=================== ===================
Supplemental financial disclosure:
Interest paid $ 345,738 106,730
=================== ===================
Income taxes paid $ 220,737 1,205
=================== ===================
Supplemental disclosure of noncash financing activities:
Settlement on convertible debenture $ 3,000,000 --
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(1) DESCRIPTION OF BUSINESS
HealthStar Corp. (the "Company") is a healthcare management company
dedicated to controlling the cost, improving the quality and enhancing
the delivery of healthcare services. The Company 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. The
Company operates its business in one segment through its two wholly-owned
subsidiaries, HealthStar, Inc. ("HealthStar") and National Health
Benefits & Casualty Corporation ("NHBC").
The Company is the successor company to Champion Financial Corporation
("Champion"), a Utah corporation. Effective November 16, 1998, Champion
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.
Champion acquired NHBC in a business combination accounted for as a
reverse acquisition with a publicly-traded shell company on January 1,
1997. In completing the acquisition, Champion issued 2,200,000 shares of
common stock for all of the outstanding shares of NHBC common stock. To
effect the combination, the fair value of the net tangible assets of
Champion were added to the equity of NHBC.
Champion purchased the outstanding stock of HealthStar on December 12,
1997 for approximately $13,728,000. The transaction was accounted for
under the purchase method of accounting. The purchase price consisted of
approximately $6 million cash, 382,500 shares of Champion common stock
valued at $9 a share, a seller note in the amount of $200,000,
transaction-related costs of approximately $1,245,000 and the assumption
of $2,840,000 of liabilities. The assets and liabilities of HealthStar at
the time of acquisition were adjusted to their fair values.
The allocation of purchase price to assets acquired of HealthStar was as
follows:
<TABLE>
<CAPTION>
HealthStar
------------------
<S> <C>
Cash and cash equivalents $ 10,000
Trade receivables at present value of amounts to be
received, less bad debt allowance 1,828,000
Property and equipment, generally at current
replacement cost 2,828,000
Goodwill 9,062,000
---------------
Total purchase price $ 13,728,000
===============
</TABLE>
F-5
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
In allocating purchase cost, management considered whether any intangible
assets could reasonably be identified and named to which fair values
could be ascribed. Since no such allocation could be reasonably made, all
excess purchase cost was allocated to goodwill.
The amortization period of goodwill relative to HealthStar is 20 years
($453,000 per year). This life approximates the periods expected to be
benefited based upon the activities of the business acquired.
On April 29, 1997, the Company entered into an agreement (Acquisition
Agreement) with Hayes, Incorporated (Hayes) to acquire 338,476 shares for
$309,626. The issuance of Hayes common stock resulted in the Company
acquiring a 12.4% interest in Hayes. On March 30, 1999, the Company sold
its investment in Hayes for $100,000 cash and a $150,000 promissory note,
which resulted in a loss of $59,626.
(2) LIQUIDITY
The Company's financial statements have been prepared on the basis that
it is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
Company has recently experienced certain operating losses and working
capital deficits that have affected the Company's liquidity. At fiscal
year-end, the Company was not in compliance with the minimum fixed charge
coverage ratio and minimum current ratio requirements contained within
its bank credit agreement. On June 8, 1999, the Company entered into an
agreement with respect to its line of credit and bank note which provides
for a waiver covering all periods of noncompliance prior to and including
March 31, 1999 and a modification of such agreement. The agreement
accelerates the due date of outstanding balances on the line of credit
and bank note to November 30, 1999. The agreement also resets the
above-mentioned ratios as well as adding an additional minimum earnings
covenant for subsequent periods. Based upon unaudited financial statement
balances at May 31, 1999, the Company was in compliance with the revised
covenants. The Company is actively seeking replacement financing through
various sources and relationships with other companies in a related line
of business to ensure that adequate resources are available to meet the
accelerated deadline of the bank debt. Management believes that these
actions and plans will provide sufficient working capital in order for
the Company to continue as a going concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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.
(B) 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.
F-6
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(C) CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
(D) EARNINGS (LOSS) 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.
(E) 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.
(F) REVENUE RECOGNITION
The Company receives repricing fees under two distinct methods of
pricing. The first method generates fees that are derived from a
negotiated percentage of the medical savings generated from
customer claims that are managed and repriced by the Company.
These percentage of savings fees are recognized as revenue as the
Company renders its claims repricing services and notifies its
customers of their required billings reduction for a specified
period of time, generally on a monthly basis. The second method
generates fees on a per enrollee per month basis. These fees are
recognized monthly based on the number of each customer's
enrollees regardless of the claims management and repricing
services actually provided. Initial enrollments for new customers
are based on estimates provided by the customer. Subsequent
amounts are based on actual enrollment which are provided by the
customer periodically at intervals ranging from monthly to
semi-annually.
Other fees consists of revenue generated from the Company's
pharmacy management and case management programs, as well as from
the production of provider directories that are generated for use
by enrollees of the Company's clients. Other fees are recognized
when realized, which is generally when users are billed.
(G) COST OF SERVICES
The major components of cost of services consist of utilization
review, case management, external marketing commissions, and costs
associated with electronic transmission of customers' healthcare
claims.
F-7
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(H) 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.
(I) GOODWILL
Goodwill, which represent the excess of purchase price over fair
value of net tangible assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited,
ranging from 10 to 20 years with a weighted average period of 20
years.
(J) 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
capital loss carryforward and a portion of the net operating loss
carryforward which may not be recognized in future years.
(K) 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 will be 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.
(L) STOCK BASED COMPENSATION
The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, 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
F-8
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
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 provisions of 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.
(M) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME (SFAS 130) which established standards for
reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. Adoption of
this standard required no additional disclosures for the Company.
Comprehensive income (loss) was the same as net income (loss) for
all periods presented.
(N) SEGMENT REPORTING
The Company has one operating business segment, healthcare cost
containment, which involves 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.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment by major classification at March 31,
1999 follows:
<TABLE>
<S> <C>
Furniture and fixtures $ 774,193
Computer software 626,225
Equipment 2,109,268
------------------
3,509,686
Accumulated depreciation (1,038,000)
------------------
$ 2,471,686
==================
(5) DEBT
Debt consists of the following at March 31, 1999:
<CAPTION>
<S> <C>
Note payable to Harris Trust and Savings Bank, due November 30, 1999, secured by
substantially all the assets of the Company $ 2,075,000
Line of credit with Harris Trust and Savings Bank with permitted outstanding
borrowings of $1,500,000, and secured by substantially all the assets of the
Company 650,000
Unsecured note payable to the previous owner of HealthStar, interest payable
monthly at 8%, currently due 200,000
-----------------
$ 2,925,000
=================
</TABLE>
F-9
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
As of March 31, 1999, the Company was in violation of several of the
financial covenants required to be met by Harris Trust and Savings Bank
("Harris"). Harris has agreed to a waiver in connection with such
violations effective June 8, 1999 upon amending the terms of the Credit
Agreement (the "Agreement") by and between the Company and Harris. The
amended terms call for payment of $150,000 on both June 30, 1999 and
September 30, 1999, with all amounts outstanding payable on November 30,
1999. Interest, which is payable monthly in arrears commencing June 30,
1999, is calculated at the prime rate plus 1.5%. Prior to the amendment,
interest had been payable quarterly and was calculated at prime, which
was 7.75% at March 31, 1999.
In connection with the acquisition of HealthStar, Champion issued
$4,000,000 Series A 8% Senior Subordinated Convertible Redeemable
debentures. The terms of the debentures called for conversion at the
lower of 75% of the average closing bid price of Champion stock for the
five days preceding the subscription, or 75% of the closing bid price of
Champion stock on the day prior to the holders' election to convert.
Management of the Company took action shortly after the transaction which
resulted in a modification of terms to the original agreement such that
the debentures would be converted to Champion stock at the market price
at settlement date. On August 31, 1998, $3,000,000 of the debentures were
settled through the issuance of 800,000 shares of common stock, and
$1,000,000 of the debentures were converted into a promissory note
bearing interest at 8%. These settlement terms were substantially at then
market rates. The promissory note was redeemed in cash on March 31, 1999.
(6) ACCRUED EXPENSES
A summary of accrued expenses at March 31, 1999 follows:
<TABLE>
<S> <C>
Salaries and benefits $ 808,768
Professional fees 107,817
Other 672,450
------------------
$ 1,589,035
==================
(7) STOCK TRANSACTIONS
A summary of equity transactions follows:
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
----------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 5,473,302 $ 5,473 874,897 88,268 968,638
Net income - - - 304,105 304,105
Common stock issued 382,500 383 3,442,118 - 3,442,501
Common stock subscribed - - 300,000 - 300,000
----------------- --------------- --------------- ---------------- ----------------
</TABLE>
F-10
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1998 5,855,802 5,856 4,617,015 392,373 5,015,244
Net loss - - - (175,670) (175,670)
Common stock issued 1,348,884 1,349 3,530,729 - 3,532,078
Reverse stock split (3,384,814) (3,385) 3,385 - -
----------------- --------------- --------------- ---------------- ----------------
Balance, March 31, 1999 3,819,872 $ 3,820 8,151,129 216,703 8,371,652
================= =============== =============== ================ ================
</TABLE>
During fiscal 1998 the Company issued 382,500 shares of common stock to
effect the acquisition of HealthStar. In addition, on March 10, 1998, the
Company agreed to settle HealthStar transaction-related costs of $300,000
for 100,000 shares of common stock (note 1). The shares were issued on
April 28, 1998.
On June 29, 1998 the Company issued 9,101 shares of common stock valued
at $29,578 as interest payment on the debentures.
On July 8, 1998 the Company issued 5,000 shares of common stock at $3.00
per share to an employee as compensation.
On August 31, 1998 the Company issued 800,000 shares of common stock
valued at $3.10 per share to effect the settlement of debentures (note
5).
On March 30, 1999, the Company entered into three common stock
subscription agreements for an aggregate of 400,000 shares, yielding
proceeds of $1,000,000. On March 31, 1999, the shares were issued, and
the Company issued an additional 34,783 shares for settlement of offering
costs.
In October 1998, the Company effected a 1-for-2 reverse split of common
stock. All common stock data in the accompanying financial statements for
all years presented have been retroactively adjusted to reflect the stock
split.
(8) BUSINESS AND CREDIT CONCENTRATION
The Company operates in a very competitive market. The Company's success
is dependent upon its ability to market to and contract with insurance
companies and self-funded companies, to effectively administer and
reprice claims, and to expand into new markets and opportunities through
acquisition. Changes in the insurance and health care industries,
including the regulation thereof by federal and state agencies, may
significantly affect management's estimates of the Company's performance.
The allowance for doubtful accounts is based on the creditworthiness of
the Company's customers as well as consideration for general economic
conditions. Consequently, an adverse change in those factors could affect
the Company's estimate of its bad debts.
F-11
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
The Company's customers are located throughout the United States. In 1999
and 1998 there were no customers whose revenue or accounts receivable
exceeded 10% of total revenue or total accounts receivable.
(9) ACQUISITION OF HEALTHSTAR
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the acquisition
of HealthStar had occurred at April 1, 1997, with pro forma adjustments
together with related income tax effects. The pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of the results of operations that would actually have resulted
had the combination been in effect on the date indicated.
<TABLE>
<S> <C>
Total revenues $ 20,328,321
Net income $ 56,802
Basic earnings per common share $ .10
(10) COMMITMENTS AND CONTINGENCIES
The Company is obligated under noncancelable operating leases for office
space and equipment which expire at various dates during the next eight
years. Rent expense under noncancelable operating leases was
approximately $1,044,000 and $400,000 in 1999 and 1998, respectively.
Future minimum lease payments under these leases are as follows:
<CAPTION>
OPERATING
LEASES
------------------
<S> <C> <C>
Fiscal years ending March 31:
2000 $ 943,000
2001 684,000
2002 650,000
2003 661,000
2004 631,000
Thereafter 1,327,000
------------------
Total minimum lease payments $ 4,896,000
==================
</TABLE>
On May 13, 1999, the Company settled litigation of a matter that was
originally filed against HealthStar prior its acquisition by Champion. In
this litigation an individual claimed breach of contract among other
charges. The lawsuit was settled for $200,000, which has been included in
other accrued liabilities at March 31, 1999.
The Company is involved in litigation asserted by the previous owner of
HealthStar. In this litigation the plaintiff filed a complaint for breach
of contract on December 4, 1998 seeking damages in the amount of
$900,000. It is management's opinion that the final outcome of this
matter will not materially affect the Company's financial condition.
F-12
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
The Company is also the subject of various other claims and litigation
arising out of the ordinary course of business. In the opinion of
management, the Company has adequate legal defenses and the outcome of
these matters will not materially effect the Company's financial
position.
The repricing agreements with customer companies and physicians are
cancelable at the option of those parties with written notice which
varies from 30 to 90 days. Management generally attempts to renegotiate
any such canceled agreements. Management believes that there is very
little likelihood that there would be cancellations sufficient to have a
material adverse effect on the Company's results of operations or
financial condition.
(11) INCOME TAXES
The utilization of the Company's net operating carryforwards is dependent
on the Company's ability to generate sufficient taxable income during the
carryforward period. However, in March 1995, there was an ownership
change in the Company as defined in Section 382 of the Internal Revenue
Code. As a result, the Company's ability to utilize net operating losses
and capital losses available before the ownership change is restricted to
a total of approximately $46,000 per year.
At March 31, 1999, the Company has available net operating loss
carryforwards and capital loss carryforwards for Federal income tax
purposes, subject to the limitations discussed above, which may provide
future tax benefits expiring as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE OPERATING CAPITAL
------------------- -----------------
<S> <C> <C> <C>
2000 $ -- 48,000
2001 -- 78,791
2002 -- --
2003 -- --
2004 -- --
2005 459 --
2006 201,008 --
2007 -- --
2008 -- --
2009 -- --
2010 11,465 --
2011 1,114 --
2012 264,844 --
------------------- -----------------
$ 478,890 126,791
=================== =================
</TABLE>
F-13
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
Income tax benefit for the year ended March 31, 1999 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Federal $ (76,218) -- (76,218)
State and local (18,375) -- (18,375)
------------------- ----------------- -----------------
$ (94,593) -- (94,593)
=================== ================= =================
Income tax expense for the year ended March 31, 1998 consists of:
<CAPTION>
CURRENT DEFERRED TOTAL
------------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Federal $ 148,504 -- 148,504
State and local 35,801 -- 35,801
------------------- ----------------- -----------------
$ 184,305 -- 184,305
=================== ================= =================
The provision for income taxes differs from the amount computed by
applying the statutory Federal income tax rate to income before taxes.
The sources and tax effects of the differences are as follows:
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Computed "expected" federal income tax expense $ (91,889) 172,859
Expected state income taxes, net of federal benefit (12,127) 23,629
Expiration of capital losses 354,273 --
Change in valuation allowance (420,642) (29,632)
Non deductible item (5,520) 8,718
Other 81,312 8,731
------------------ ------------------
$ (94,593) 184,305
================== ==================
</TABLE>
F-14
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows, there are no material
deferred tax liabilities:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forward $ 186,767 162,823
Capital loss carryforward 49,448 351,963
Reserve for bad debt 123,856 85,000
Accrued expenses 52,336 44,880
Deferred tax asset 412,407 644,666
Less valuation allowance (184,325) (527,408)
------------------ ------------------
Net deferred tax asset 228,082 117,258
Deferred tax liabilities:
Amortization (83,118)
Fixed Assets (101,073) (73,561)
Prepaid expenses (43,891) (21,524)
------------------ ------------------
Deferred tax liability (228,082) (117,258)
------------------ ------------------
Net deferred tax asset $ -- --
================== ==================
</TABLE>
The reduction of the total valuation allowance for the year ended March
31, 1999 of $343,083 is primarily due to the expiration of the capital
loss carryforward. In assessing the realizability of the deferred tax
asset, management considers whether it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The
ultimate realization of a deferred tax asset is dependent upon generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will not
realize the entire benefit of the deferred tax assets.
(12) STOCK OPTIONS
Effective August 18, 1998, the Board of Directors adopted the 1998 Stock
Option Plan (the Plan). The Plan allows incentive stock options to be
granted to employees only, while non-qualified stock options may be
granted to the Company's directors and key personnel and to providers of
various services to the Company. Incentive stock options to purchase
shares of the Company's common stock must be granted at a price
determined by the Board of Directors. The exercise price for individuals
granted incentive stock options must be no less than 100 percent of the
fair market value.
F-15
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
Both incentive stock options and qualified stock options may be exercised
within five years from the date of grant and vest in two to three years.
The Company has reserved 500,000 shares of common stock for grants under
the Plan. The Plan is administered by the Board of Directors, which
establishes the awards, vesting requirements and expiration dates of
options granted.
The fair value of options granted under the Plan was estimated on the
date of grant with vesting periods ranging from two to three years using
the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 4.3%, expected volatility of 100% and an expected life
of five years.
At March 31, 1999, the Company had 121,000 options outstanding at an
exercise price of $2.88.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------------
<S> <C> <C>
Net earnings (loss) As reported $ (175,670)
Pro forma (193,309)
Earnings (loss) per share - basic As reported (.05)
Pro forma (.06)
Earnings (loss) per share - diluted As reported (.05)
Pro forma (.06)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period of two to three years.
A summary of the aforementioned stock plan activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
NUMBER SHARE
------------------ ------------------
<S> <C> <C>
Balance, March 31, 1998 -- $ --
Granted 141,000 2.88
Forfeited (20,000) 2.88
------------------ ------------------
Balance, March 31, 1999 121,000 $ 2.88
================== ==================
</TABLE>
F-16
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
A summary of stock options granted at March 31, 1999 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, CONTRACTUAL EXERCISE AT MARCH 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
--------------- ------------------ ----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$2.88 121,000 10 years $ 2.88 -- $ 2.88
------------------ --------------- ----------------- ---------------
121,000 $ 2.88 -- $ 2.88
================== =============== ================= ===============
</TABLE>
(13) BENEFIT PLANS
The Company has a defined contribution 401(k) plan for all employees.
Under the 401(k) plan, employees are permitted to make contributions to
the plan in accordance with IRS regulations. The Company may make
discretionary contributions as approved by the Board of Directors. There
were no contributions made during 1999 and 1998.
In August 1998, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). Under the terms of the Purchase Plan, employees may
purchase a total of up to 500,000 shares of common stock. The purchase
price per share is 85% of the lessor of (1) the market value of common
stock on the last business day of the purchase period or, (ii) the
greater of the market value of common stock for the purchase period and
the market value of common stock on the first business day of the
purchase period. The first offering period for this plan began April 1,
1999.
(14) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowance for
doubtful accounts follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------
<S> <C> <C>
Balance at beginning of period $250,000 $ --
Addition to allowance due to acquisition of HealthStar, Inc. -- 375,000
Provision for bad debt 638,184 80,062
Write-offs (570,604) (205,062)
----------------- ---------------
Balance at end of period $317,580 $250,000
================= ===============
</TABLE>
A summary of adjustments made to reduce revenue resulting from
re-estimation of amounts owed to the Company their customers is as
follows:
F-17
<PAGE>
HEALTHSTAR CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenue adjustments $565,478 $694,570
============ ============
</TABLE>
F-18
