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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999, as amended on March 10,
2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _______________
Commission file number 0-19499
HEALTHSTAR CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1934592
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
15720 N. GREENWAY HAYDEN LOOP SUITE 1
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices)
(480) 451-8575
(Issuer's Telephone Number)
8745 WEST HIGGINS ROAD, SUITE 300 CHICAGO, ILLINOIS 60631
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: Common stock, $0.001 par
value, 3,905,872 outstanding as of November 19, 1999.
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HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1999........ ........................3
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Three and Six Months Ended
September 30, 1999 and 1998.........................................................4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998.........................................................5
Notes to Unaudited Consolidated Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................12
PART II. OTHER INFORMATION
Item 5 Other Information..................................................................19
Item 6 Exhibits and Reports on Form 8-K...................................................19
Signatures......................................................................................20
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 115,007
Trade accounts receivable, less allowance for doubtful
accounts of $221,826 1,760,300
Other current assets 460,994
-------------
Total current assets 2,336,301
Property and equipment, net 2,101,831
Goodwill, net of accumulated amortization of $844,860 7,932,635
Other assets, at cost 180,405
-------------
Total assets $ 12,551,172
=============
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 634,726
Accrued expenses 716,854
Current portion of long-term debt 3,175,000
-------------
Total current liabilities 4,526,580
Shareholders' equity:
Common stock, $.001 par value 15,000,000 shares authorized,
3,875,872 shares issued and outstanding 3,876
Additional paid -in- capital 8,341,448
Accumulated deficit (320,732)
-------------
Total shareholders' equity 8,024,592
-------------
Total liabilities and shareholders' equity $ 12,551,172
=============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Capitated fees $2,071,804 $2,364,468 $4,166,790 $5,015,720
Repricing fees 1,473,003 1,775,353 3,059,822 3,538,583
Other fees 38,970 129,820 124,075 300,160
---------- ---------- ---------- ----------
3,583,777 4,269,641 7,350,687 8,854,463
---------- ---------- ---------- ----------
Operating expenses:
Cost of services 463,009 578,906 996,636 1,281,774
Salaries and wages 1,819,389 2,036,600 3,776,948 4,066,272
General and administrative 943,254 1,229,856 2,021,552 2,497,108
Depreciation and amortization 322,708 293,185 640,866 582,299
---------- ---------- ---------- ----------
3,548,360 4,138,547 7,436,002 8,427,453
---------- ---------- ---------- ----------
Income (loss) from operations 35,417 131,094 (85,315) 427,010
Non-operating income (expense)
Interest expense (79,791) (88,949) (141,290) (249,292)
Gain on disposition of assets -- -- 114,538 --
Other, net 14,833 17,293 54,948 38,139
Asset impairment charge 500,000 -- 500,000 --
---------- ---------- ---------- ----------
Income (loss) before income taxes (529,541) 59,438 (557,119) 215,857
Income tax expense (benefit) (10,405) 15,000 (19,684) 70,000
---------- ---------- ---------- ----------
Net income (loss) (519,136) 44,438 (537,435) 145,857
Retained earnings at beginning of period 198,404 493,792 216,703 392,373
---------- ---------- ---------- ----------
Retained earnings (accumulated deficit)
at end of period $ (320,732) $ 538,230 $ (320,732) $ 538,230
========== ========== ========== ==========
Earnings (loss) per share-basic and diluted $ (0.13) $ 0.01 $ (0.14) $ 0.05
=========== =========== =========== ===========
Weighted average shares outstanding-basic
and diluted 3,850,713 3,115,386 3,835,402 3,063,331
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------------ --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (537,435) $ 145,857
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 640,866 582,299
Asset impairment charge 500,000 --
Bad debt expense 197,654 330,305
Stock-based compensation 27,500 15,000
Interest expense on debentures -- 29,578
Increase (decrease) in cash resulting from
changes in operating assets and
liabilities:
Trade accounts receivable 36,897 (188,516)
Other current assets (40,840) (21,946)
Accounts payable (248,185) 17,839
Accrued expenses (872,181) (518,861)
---------- ----------
Net cash provided (used) in operating activities (295,724) 391,555
---------- ----------
Investing activities:
Purchases of equipment (36,936) (289,051)
Proceeds from the sale of equipment -- 5,113
---------- ----------
Net cash used in investing activities (36,936) (283,938)
---------- ----------
Financing activities:
Decrease (increase) in other assets (37,144) (99,733)
Net proceeds from line of credit 400,000 150,000
Net (payments on) term loan (150,000) (200,000)
Proceeds from the issuance of stock options 162,875 --
---------- ----------
Net cash provided (used) by financing activities 375,731 (149,733)
---------- ----------
Net increase (decrease) in cash and cash equivalents 43,071 (42,116)
Cash and cash equivalents at beginning of year 71,936 199,466
---------- ----------
Cash and cash equivalents at end of period $ 115,007 $ 157,350
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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HEALTHSTAR CORP. AND SUBSIDIARIES
Notes To Unaudited Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HealthStar Corp. (the "Company") is a healthcare management company
dedicated to controlling the costs, improving the quality and enhancing the
delivery of healthcare services. The Company markets and provides programs
and services to a variety of payers of medical claims such as insurance
companies, self-insured businesses and third parties that administer
employee medical plans. These programs and services assist the Company's
customers in reducing healthcare costs for group health plans, workers'
compensation coverage and automobile accident injury claims. The Company
operates its business through its two wholly owned subsidiaries,
HealthStar, Inc. ("HSI") and National Health Benefits & Casualty
Corporation ("NHBC").
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of HealthStar
Corp. and Subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information and
pursuant to rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, such
unaudited interim information reflects all adjustments, consisting only of
normal recurring adjustments, necessary to present the Company's financial
position and results of operations for the periods presented. The results
of operations for interim periods are not necessarily indicative of the
results to be expected for a full fiscal year. It is suggested that these
consolidated financial statements be read in conjunction with the Company's
audited consolidated financial statements included in the Company's Annual
Report Form 10-KSBA, for the year ended March 31, 1999.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its two wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
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 dividend 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.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. Management believes that the recorded amounts of current assets
and current liabilities approximate fair value because of the short
maturity of these instruments. The recorded balance of long-term debt
approximates fair value, as the terms of the debt are similar to rates
currently offered to the Company for similar debt instruments.
REVENUE RECOGNITION
The Company provides it customers with access to a network of healthcare
providers which includes physicians, acute care hospitals and ancillary
providers such as outpatient surgery centers and home healthcare agencies.
These providers have contractually agreed with the Company to provide
healthcare services to the Company's customers at a discount from billed
charges. The Company generates revenue from its customer base by charging
network access fees. The Company enters into contracts with its customers
and charges network access fees using either of two methods. Customers may
choose to pay a capitated fee, which is a fixed, monthly fee per eligible
subscriber. Initial enrollment figures are based on estimates provided by
the customer. Actual enrollment figures are subsequently provided by the
customer and are updated periodically at intervals ranging from monthly to
semi-annually. Capitated revenue is recognized on a monthly basis when
customers are billed using the most current enrollment figures available.
Adjustments are made when new enrollment figures are submitted by the
customer. The other method under which customers may elect to pay the
Company for network access is called a repricing fee. Under this method,
the Company receives a percentage of the dollar amount of the discount
granted by the healthcare provider for services rendered to an enrolled
subscriber. The Company's percentage of the dollar amount of the discount
is determined by contract and varies from customer to customer. Repricing
fees are recognized as revenue when the Company processes the medical
claim, calculates the discount and notifies the customer of the amount due.
COST OF SERVICES
The major components of cost of services are the cost of outsourcing the
medical case management and utilization review functions, external
marketing commissions, printing of provider directories and costs
associated with the electronic transmission of healthcare claims.
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.
GOODWILL
Goodwill, which represents the excess of purchase price over the 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.
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
7
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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.
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 undiscounted measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is 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.
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 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.
OTHER FEES
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.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
(2) ASSET IMPAIRMENT CHARGE
The acquisition of HSI in fiscal 1998 resulted in allocating a substantial
portion of the purchase price to goodwill. Pursuant to SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed Of", management evaluated the recoverability of the
long-lived assets, including goodwill. While management originally believed
that revenues and profits could grow after HSI's operations were fully
integrated into the Company, management also explored strategic mergers and
acquisitions that would complement HSI's operations. In May 1999,
management received an offer to sell HSI to Beyond Benefits, Inc. a
privately held managed healthcare company. The original offer was for
$15,500,000 in cash. However, in subsequent negotiations, that offer was
reduced in final form to $10,000,000 in cash, 5% of the common equity of
Beyond Benefits, Inc. and an earn-out provision for up to an additional
$1,250,000. The offer was accepted and approved by the Board of Directors
on August 19, 1999, subject to shareholder approval.
8
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Management is in the process of obtaining an independent valuation of the
Beyond Benefits stock, and management has assigned no value to the earn-out
provision. Until the valuation is completed, management has estimated that
the stock has a value of approximately $1,000,000. This value is based on
the expected future operating results of Beyond Benefits after giving
effect to the proposed transaction. A range of cash flow multiples commonly
used to value PPO's was applied to determine the estimated enterprise
value. Accordingly, the Company has adjusted the carrying value of HSI's
goodwill to an estimated fair value of approximately $7,932,635 resulting
in a non-cash impairment loss of approximately $500,000 ($0.13 loss per
basic and diluted share). The fair value was estimated based on a sales
price of $11,000,000 less direct and incremental costs to dispose of
approximately $300,000.
(3) BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company's operations are in one operating business segment, the
marketing and provision of programs and services to insurance companies,
self-insurance businesses for their medical plans, health and welfare funds
and third parties who administer employee medical plans.
The Company operates in a very competitive market. The Company's success is
dependent upon the ability of its sales and marketing group to identify and
contract with businesses and organizations nationwide, and to administer
its networks. Changes in the insurance and healthcare industries, including
the regulation thereof by federal and state agencies, may significantly
affect management's estimates of the Company's performance.
(4) DEBT
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<S> <C>
Debt consists of the following at September 30, 1999:
Note payable to Harris Trust and Savings Bank, due
January 31, 2000 secured by substantially all the
assets of the Company $ 1,925,000
Line of credit payable to Harris Trust and Savings Bank,
due January 31, 2001 secured by substantially all the
assets of the Company 1,050,000
Unsecured note payable to the seller of HSI, interest
payable monthly at 8.0%, currently due 200,000
------------
$ 3,175,000
============
</TABLE>
On November 19, 1999, the Company and Harris Trust and Savings Bank entered
into an agreement as follows: (i) the Company made a payment of $100,000 on
the line of credit concurrent with entering into the agreement; (ii) on
November 30, 1999, the Company will make the $150,000 principal payment
which was due on September 30, 1999; (iii) the bank will extend the
maturity date of the term loan and line of credit to January 31, 2000; and
(iv) the bank will reset the interest rate on the term loan and line of
credit to prime plus 1.0% on November 30, 1999 from the current rate of
prime plus 3.5%.
(5) RELATED PARTY TRANSACTIONS
On June 7, 1999, the Company sold its vision program for cash consideration
of $125,000 to an immediate family member of a former officer of the
Company. The Company recognized a gain on the sale of approximately
$114,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes for the quarter ended September 30, 1999 contained herein and for the
year ended March 31, 1999 contained in the Company's Form 10-KSB filed with the
Securities and Exchange Commission on June 29, 1999.
9
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OVERVIEW
HealthStar Corp. (the "Company") is a healthcare management company
dedicated to controlling the costs, improving the quality and enhancing the
delivery of healthcare services. The Company markets and provides programs and
services to a variety of payers of medical claims such as insurance companies,
self-insured businesses and third parties that administer employee medical
plans. These programs and services assist the Company's customers in reducing
healthcare costs for group health plans, workers' compensation coverage and
automobile accident injury claims.
Through its two wholly owned subsidiaries, HealthStar, Inc. ("HSI"), and
National Health Benefits and Casualty Corporation ("NHBC"), the Company provides
its customers with access to a nationwide network of healthcare providers. The
Company owns and operates the HealthStar Preferred Provider Organization (the
"PPO"). At September 30, 1999, the HealthStar PPO network consisted of direct
contracts with over 2,000 acute care hospitals, approximately 125,000 physicians
and approximately 5,000 ancillary healthcare providers such as outpatient
surgery facilities and home healthcare agencies. The Company also provides
access to medical cost containment services such as implementing and
coordinating case management procedures, managing and reviewing the utilization
of healthcare services and comprehensive medical bill review.
RECENT DEVELOPMENTS
On September 23, 1999, the Company and HSI entered into a Stock Purchase
Agreement with Beyond Benefits, Inc., a privately held managed healthcare
Company, pursuant to which the Company proposes to sell all of the capital stock
of HSI to Beyond Benefits. Under the terms of the agreement, the Company will
receive $10,000,000 in cash at closing and 303,943 shares of non-voting Series B
common stock of Beyond Benefits, which constitutes 5% of the total common equity
of Beyond Benefits outstanding as of the closing of the transaction. Further,
the Company may receive up to an additional $1,250,000 in cash pursuant to an
earn-out provision if predetermined HSI revenue figures are realized during the
18 month period following the closing.
The proposed transaction constitutes a sale of substantially all of the
Company's assets for the purpose of Delaware law applicable to the Company. The
Company is required to obtain the affirmative vote of a majority of the
outstanding shares of its common stock prior to consummating the proposed
transaction. On August 19, 1999, the Board of Directors of the Company
unanimously approved the proposed transaction subject to the approval by the
shareholders. The vote will take place in conjunction with the Company's Annual
Shareholders' Meeting which is expected to be held in January 2000. If the
proposed transaction is approved by the shareholders, the Company will receive
$10,000,000 in cash at closing, of which approximately $2,725,000 will be used
to repay the entire amount of outstanding indebtedness owed to Harris Trust and
Savings Bank.
On November 15, 1999, the Company announced that it had terminated an
agreement whereby it was to have acquired a 49% interest in Physiciansite.com,
Inc., a privately held Internet based healthcare company. The Company was to
have issued 4.0 million shares of its common stock to an investment group in
exchange for the right to acquire the interest in Physiciansite.com through
subsequent cash purchases of Physiciansite.com stock totaling $7.2 million.
As of the date of this report, the Company and NHBC have entered into a
letter of intent to sell the assets of NHBC to a privately held company not
affiliated with the Company for $2,500,000 in cash. The offer is subject to a
number of conditions including the buyer's satisfaction with the results of its
due diligence, the negotiation and execution of a definitive asset purchase
agreement, and the buyer obtaining financing for the purchase.
The Company intends to use the net proceeds from these sales to acquire
Internet e-commerce or other businesses. The Company intends to structure any
future acquisitions so that future subsidiaries will be wholly owned. The
Company will not distribute any of the net proceeds of the proposed sale of HSI
to its shareholders.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
The Company derives the majority of its revenue from fees paid by its
customers for access to the Company's PPO network of contracted healthcare
providers. These providers have contractually agreed with the Company to provide
healthcare services to the Company's customers at a discount from billed
charges. The Company's customer base consists of a variety of payers of
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medical claims such as insurance companies, third-party administrators and
self-insured employers. The Company enters into contracts with its customers and
charges network access fees using either of two methods. Customers may choose to
pay a capitated fee, which is a fixed, monthly fee per eligible subscriber. The
other method that customers may elect choose to pay the Company for network
access is called a repricing fee. Under this method, the Company receives a
percentage of the dollar amount of the discount granted by the healthcare
provider for services rendered to an enrolled subscriber. The Company's
percentage of the dollar amount of the discount is determined by contract and
varies from customer to customer
Total revenue decreased $685,864 or 16% to $3,583,777 in 1999 compared to
$4,269,641 in 1998. Revenue for HSI decreased $665,319 to $2,934,013 in 1999
from $3,599,332 in 1998, a decrease of 18%. The majority of the decrease was
attributable to the loss of four significant customers that were active during
the comparable period in 1998. Revenue for NHBC decreased $20,545 or 3% from
$670,309 in 1998 to $649,764 in 1999. Overall, capitated fees declined 12% and
repricing fees declined approximately 17% from the year ago period.
Other fees include charges to customers for medical case management,
utilization review and revenue generated from the sale of provider directories.
The prior period results include revenue from a Company administered pharmacy
benefit program that was terminated in June 1999. Other fees decreased $90,850
or 70% from $129,820 in 1998 to $38,970 in 1999. Approximately $65,000 of the
decrease is attributable to the termination of the pharmacy benefit program.
Cost of services includes the cost of outsourcing the medical case
management and utilization review functions, commissions paid to outside
brokers, fees paid to other PPO networks for access to providers not contracted
directly with the Company, the cost of electronic claims processing and the cost
of printing provider directories. Included in the prior year period are costs
associated with administering the Company's pharmacy benefit program. Cost of
services decreased $115,897 or 20% to $463,009 in 1999 from $578,906 in the
comparable period in 1998. Approximately $50,000 of the decrease is due to the
termination of the pharmacy benefit program. The remaining reduction is due to a
decrease in access fees paid to other PPO networks during the period. As a
percentage of total revenue, cost of services decreased from 13.6% at September
30, 1998 to 12.9% at September 30, 1999.
Salaries and wages include all employee compensation, payroll taxes, health
insurance and other employee benefits. Also included in this category are the
commissions paid to in-house sales and marketing personnel. For the three months
ended September 30, 1999, salaries and wages were $1,819,389 compared to
$2,036,600 for the three months ended September 30, 1998, a decrease of $217,211
or 11%. The decrease is attributable to a reduction in staffing levels as a
result of departmental reorganizations that were recently implemented. In
addition, sales commissions have decreased as a result of the decline in
revenue.
General and administrative expenses include all other operating expenses
such as, telecommunications, office supplies, postage, travel and entertainment,
professional fees, bad debt expense, insurance, rent and utilities. For the
three months ended September 30, 1999, general and administrative expenses were
$943,254 compared to $1,229,856 for the comparable period in 1998, a decrease of
$286,602 or 23%. Bad debt expense for the quarter was $90,000 compared to
$209,522 in the comparable period in 1998, a decrease of approximately $120,000
or 57%. The decrease is a result of the lower revenue in the period and better
collection efforts. The decrease in bad debt expense accounted for approximately
42% of the overall decrease in general and administrative expenses. The
remainder of the decrease is due to tighter cost controls throughout the various
operating expense categories and the effect of the closing of a regional office
in Dallas, Texas in June 1999.
Depreciation and amortization increased $29,523 or 10%, to $322,708 in 1999
from $293,185 in 1998. The increase is due to higher depreciation expense as a
result of an increase in gross property and equipment. At September 30, 1999,
gross property and equipment was $3,540,285 compared to 3,424,446 at September
30, 1998.
Interest expense for the quarter was $79,791 compared to $88,949 for the
comparable period in 1998, a decrease of $9,158 or 10%. At September 30, 1999,
total indebtedness was $3,175,000 compared to $3,950,000 at September 30, 1998.
The decrease in interest expense resulting from a lower level of indebtedness
during the three months ended September 30, 1999 was partially offset by higher
interest rates during the current quarter.
The acquisition of HSI in fiscal 1998 resulted in allocating a substantial
portion of the purchase price to goodwill. Pursuant to SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed
Of", management evaluated the recoverability of the long-lived assets, including
goodwill. While management originally believed that revenues and
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profits could grow after HSI's operations were fully integrated into the
Company, management also explored strategic mergers and acquisitions that would
complement HSI's operations. In May 1999, management received an offer to sell
HSI to Beyond Benefits, Inc. a privately held managed healthcare company. The
original offer was for $15,500,000 in cash. However, in subsequent negotiations,
that offer was reduced in final form to $10,000,000 in cash, 5% of the common
equity of Beyond Benefits, Inc. and an earn-out provision for up to an
additional $1,250,000. The offer was approved by the Board of Directors on
August 19, 1999, subject to shareholder approval.
Management is in the process of obtaining an independent valuation of the
Beyond Benefits stock, and management has assigned no value to the earn-out
provision. Until the valuation is completed, management has estimated that the
stock has a value of approximately $1,000,000. This value is based on the
expected future operating results of Beyond Benefits after giving effect to the
proposed transaction. A range of cash flow multiples commonly used to value
PPO's was applied to determine the estimated enterprise value. Accordingly, the
Company has adjusted the carrying value of HSI's goodwill to an estimated fair
value of approximately $7,932,635 resulting in a non-cash impairment loss of
approximately $500,000 ($0.13 loss per basic and diluted share). The fair value
was estimated based on a sales price of $11,000,000 less direct and incremental
costs to dispose of approximately $300,000.
Income tax expense (benefit) has been recognized at the Company's effective
income tax rate which, subject to various credits and adjustments, generally
approximating 30%. Management believes that there will be no tax benefit related
to the asset impairment charge of $500,000.
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Total revenue decreased $1,503,776 or 17% to $7,350,687 in 1999 compared to
$8,854,463 in 1998. Revenue for HSI decreased $1,557,119 to $6,044,271 in 1999
from $7,601,390 in 1998, a decrease of 20%. A majority of the decrease was
attributable to the loss of four significant customers that were active during
the comparable period in 1998. Revenue for NHBC increased $53,343 or 4% from
$1,253,073 in 1998 to $1,306,416 in 1999. Overall, capitated fees declined 17%
and repricing fees declined approximately 14% from the year ago period.
Other fees include charges to customers for medical case management,
utilization review and revenue generated from the sale of provider directories.
The prior period results include revenue from a Company administered pharmacy
benefit program that was terminated in June 1999. Other fees decreased $176,085
or 59% from $300,160 in 1998 to $124,075 in 1999. Approximately $155,000 of the
decrease is attributable to the termination of the pharmacy benefit program.
Cost of services includes the cost of outsourcing the medical case
management and utilization review functions, commissions paid to outside
brokers, fees paid to other PPO networks for access to providers not contracted
directly with the Company, the cost of electronic claims processing and the cost
of printing provider directories. Included in the prior year period are costs
associated with administering the Company's pharmacy benefit program. Cost of
services decreased $285,138 or 22% to $996,636 in 1999 from $1,281,774 in the
comparable period in 1998. Approximately $150,000 of the decrease is due to the
termination of the pharmacy benefit program. The remaining reduction is due to a
decrease in access fees paid to other PPO networks during the period. As a
percentage of total revenue, cost of services decreased to 13.6% for the six
months ended September 30, 1999 from 14.5% for the comparable period in 1998.
Salaries and wages include all employee compensation, payroll taxes, health
insurance and other employee benefits. Also included in this category are the
commissions paid to in-house sales and marketing personnel. For the six months
ended September 30, 1999, salaries and wages were $3,776,948 compared to
$4,066,272 for the six months ended September 30, 1998, a decrease of $289,324
or 7%. The decrease is attributable to a reduction in staffing levels as a
result of departmental reorganizations that were recently implemented. In
addition, sales commissions have decreased as a result of the decline in
revenue.
General and administrative expenses include all other operating expenses
such as, telecommunications, office supplies, postage, travel and entertainment,
professional fees, bad debt expense, insurance, rent and utilities. For the six
months ended September 30, 1999, general and administrative expenses were
$2,021,552 compared to $2,497,108 for the comparable period in 1998, a decrease
of $475,556 or 19%. Bad debt expense for the six months ended September 30, 1999
was $197,654 compared to $330,305 in the comparable period in 1998, a decrease
of approximately $133,000 or 40%. The decrease is a result of the lower revenue
in the period and better collection efforts. The decrease in bad debt expense
accounted for approximately 28% of the overall decrease in
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general and administrative expenses. The remainder of the decrease in is due to
tighter cost controls throughout the various operating expense categories and
the effect of the closing of a regional office in Dallas, Texas in June 1999.
Depreciation and amortization increased $58,567 or 10%, to $640,866 in 1999
from $582,299 in 1998. The increase is due to higher depreciation expense as a
result of an increase in gross property and equipment. At September 30, 1999,
gross property and equipment was $3,540,285 compared to 3,424,446 at September
30, 1998.
Interest expense for the six months ended September 30, 1999 was $141,290
compared to $249,292 for the comparable period in 1998, a decrease of $108,292
or 43%. The decrease in interest expense is attributable to a lower level of
indebtedness during the current six month period.
On June 7, 1999, the Company sold its First American Vision Services
program to a company whose president is a relative of the former president of
the Company for cash consideration of $125,000, which resulted in a gain of
$114,538. The vision program accounted for approximately $14,000 in revenue
during the six months ended September 30, 1999. The vision program is not a
separate business segment.
The acquisition of HSI in fiscal 1998 resulted in allocating a substantial
portion of the purchase price to goodwill. Pursuant to SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed
Of", management evaluated the recoverability of the long-lived assets, including
goodwill. While management originally believed that revenues and profits could
grow after HSI's operations were fully integrated into the Company, management
also explored strategic mergers and acquisitions that would complement HSI's
operations. In May 1999, management received an offer to sell HSI to Beyond
Benefits, Inc. a privately held managed healthcare company. The original offer
was for $15,500,000 in cash. However, in subsequent negotiations, that offer was
reduced in final form to $10,000,000 in cash, 5% of the common equity of Beyond
Benefits, Inc. and an earn-out provision for up to an additional $1,250,000. The
offer was approved by the Board of Directors on August 19, 1999, subject to
shareholder approval.
Management is in the process of obtaining an independent valuation of the
Beyond Benefits stock, and management has assigned no value to the earn-out
provision. Until the valuation is completed, management has estimated that the
stock has a value of approximately $1,000,000. This value is based on the
expected future operating results of Beyond Benefits after giving effect to the
proposed transaction. A range of cash flow multiples commonly used to value
PPO's was applied to determine the estimated enterprise value. Accordingly, the
Company has adjusted the carrying value of HSI's goodwill to an estimated fair
value of approximately $7,932,635 resulting in a non-cash impairment loss of
approximately $500,000 ($0.13 loss per basic and diluted share). The fair value
was estimated based on a sales price of $11,000,000 less direct and incremental
costs to dispose of approximately $300,000.
Income tax expense (benefit) has been recognized at the Company's effective
income tax rate which, subject to various credits and adjustments, generally
approximating 30%. Management believes that there will be no tax benefit related
to the asset impairment charge of $500,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the company had $115,000 in cash and cash
equivalents compared to $72,000 at September 30, 1998. At September 30, 1999,
the Company had a working capital deficiency of approximately $2,200,000
compared to a working capital deficiency of $2,900,000 at March 31, 1999, an
improvement of approximately $700,000.
During the three months ended September 30, 1999, the Company received
approximately $163,000 in cash from the exercise of employee stock options.
On June 7, 1999, the Company sold its vision benefit program for $125,000
in cash to an immediate family member of a former officer of the Company. The
Company recognized a gain on the sale of approximately $114,000. The vision
program accounted for approximately $14,000 in revenue during the six months
ended September 30, 1999.
The Company's senior lender is Harris Trust and Savings Bank in Chicago. In
December 1997, Harris provided the debt financing for the Company's acquisition
of HealthStar, Inc. The debt consisted of a $2,500,000 term loan and a
$1,500,000 line
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of credit. Both credit facilities had a term of three years. The term loan was
set to amortize over the three year period with quarterly payments of principal
of $100,000 in year one, $125,000 in year two, $150,000 in year three and a
final balloon payment at maturity in December 2000. The amount permitted to be
outstanding on the line of credit is determined by a borrowing base calculation
that is submitted to the bank on a monthly basis. At the end of each month, the
total amount outstanding on both the term loan and line of credit cannot exceed
the sum of 80% of the eligible accounts receivable and 50% of the gross fixed
assets of the Company.
Under the terms of the credit facility, the Company is required to be in
compliance with a series of financial covenants such as a minimum current ratio,
maximum leverage ratio and a minimum fixed charge coverage ratio. At March 31,
1999, the Company was not in compliance with two of the three covenants which
caused an event of default under the credit agreement. On June 8, 1999, the bank
agreed to a waiver and reset the covenant levels. As a condition to granting the
waiver, the bank amended the terms of the credit facility whereby it required
the Company to payoff all outstanding indebtedness no later than November 30,
1999. The interest rate on both the term loan and line of credit was increased
to prime plus 1.5% and a minimum earnings covenant was added.
At September 30, 1999, the total amount owed to the bank was $2,975,000.
The debt consisted of $1,925,000 on the term loan and $1,050,000 outstanding on
the line of credit. On September 30, 1999, the Company was required to make a
$150,000 principal payment on the term loan, however, the Company did not have
the cash available to make the payment. On October 19, 1999, the Company
prepared its monthly borrowing base report for September and it indicated that
the Company was required to make a payment of $100,000 on the line of credit.
The Company did not have the cash available to make the payment an the bank was
notified. These events constituted a default under the credit facility and the
bank exercised its right to raise the interest rate on the term loan and line of
credit to prime plus 3.5% which equates to 12.0% as of November 17, 1999.
On November 19, 1999, the Company and the bank entered into an agreement as
follows: (i) the Company made a payment of $100,000 on the line of credit
concurrent with entering into the agreement; (ii) on November 30, 1999, the
Company will make the $150,000 principal payment which was due on September 30,
1999; (iii) the bank will extend the maturity date of the term loan and line of
credit to January 31, 2000; and (iv) the bank will reset the interest rate on
the term loan and line of credit to prime plus 1.0% on November 30, 1999 from
the current rate of prime plus 3.5%.
The Company has arranged a private placement of common stock to one or more
accredited investors and the proceeds, estimated to be $300,000, will be used to
fund the November 30, 1999 payment of $150,000 due under the agreement.
If the proposed sale of HSI to Beyond Benefits, Inc. is approved by the
shareholders, the Company expects to receive $10,000,000 in cash at closing,
which will be sufficient to pay off the total amount of indebtedness due to the
bank on January 31, 2000. The estimated outstanding indebtedness at maturity is
$2,725,000. If the proposed transaction is not consummated prior to January 31,
2000, the Company will have to seek additional financing from outside sources to
pay off the indebtedness owed to the bank. There are no assurances that such
financing will be available to the Company.
YEAR 2000
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. The Company has modified and replaced 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 95% complete.
The Company is also dependent on its contracted medical providers and payer
customers 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
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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.
The consequences of an uncorrected Year 2000 issue could include business
interruption, exposure to monetary claims by customers 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 $40,000 and to date the Company has spent approximately $30,000.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-QSB[/A] to be signed on its
behalf by the undersigned thereunto duly authorized, this 10th day of March
2000.
HEALTHSTAR CORP.
By: /s/ Steven A. Marcus
Steven A. Marcus
Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
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