<PAGE>
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 June 30, 1999 as amended on March 9, 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.)
8745 WEST HIGGINS, SUITE 300
CHICAGO, ILLINOIS 60631
(Address of principal executive offices)
(773) 693-7827
(Issuer's Telephone Number)
________________________________________________________________________________
(Former name,former address and former fiscal year,if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / X / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: Common Stock, $0.001 par value,
3,819,872 outstanding as of August 10, 1999.
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-QSB/A FOR THE QUARTER ENDED JUNE 30, 1999
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSTAR CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1999
------------------
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 820
Trade accounts receivable, less allowance for doubtful accounts of $260,712 2,036,148
Other current assets 419,708
---------------------
Total current assets 2,456,676
Property and equipment, net 2,296,890
Goodwill, net of accumulated amortization of $726,972 8,550,523
Other assets, at cost 145,038
---------------------
Total assets $13,449,127
=====================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 901,291
Accrued expenses 1,169,483
Current portion of long-term debt 3,025,000
---------------------
Total current liabilities 5,095,774
---------------------
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 198,404
---------------------
Total shareholders' equity 8,353,353
---------------------
Total liabilities and shareholders' equity $13,449,127
=====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Revenue:
Capitated fees $ 2,094,986 $ 2,651,252
Repricing fees 1,586,819 1,763,230
Other fees 125,220 191,186
----------------- -----------------
3,807,025 4,605,668
----------------- -----------------
Operating expenses:
Cost of services 533,627 702,868
Salaries and wages 1,957,559 2,029,672
General and administrative 1,078,298 1,267,252
Depreciation and amortization 318,158 289,114
----------------- -----------------
3,887,642 4,288,906
----------------- -----------------
Income (loss) from operations (80,617) 316,762
Non-operating income (expense)
Interest expense (61,499) (160,343)
Gain on disposition of assets 114,538 -
----------------- -----------------
Income (loss) before income taxes (27,578) 156,419
Income tax expense (benefit) (9,279) 55,000
----------------- -----------------
Net income (loss) (18,299) 101,419
Retained earnings at beginning of quarter 216,703 392,373
----------------- -----------------
Retained earnings at end of quarter $ 198,404 $ 493,792
================= =================
Earnings (loss) per share-Basic and diluted $ - $ 0.03
================= =================
Weighted average shares outstanding-Basic and diluted 3,819,872 2,977,901
================= =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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HEALTHSTAR CORP.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------------- --------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (18,299) $ 101,419
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 318,158 289,114
Bad debt expense 107,654 120,783
Gain on disposition of assets (114,538) -
Interest expense on debentures - 29,578
Increase (decrease) in cash resulting from changes in operating
assets and liabilities:
Trade accounts receivable (148,951) (82,486)
Other current assets 446 (38,785)
Accounts payable 18,380 (253,628)
Accrued expenses (419,552) (581,697)
---------------- ----------------
Net cash used in operating activities (256,702) (415,702)
---------------- ----------------
Investing activities:
Net proceeds from disposition of assets 114,538
Purchases of equipment (27,175) (8,190)
---------------- ----------------
Net cash used in investing activities 87,363 (8,190)
---------------- ----------------
Financing activities:
Decrease (Increase) in other assets (1,777) 63,334
Net proceeds from line of credit 250,000 200,000
Net proceeds from (payments on) long-term debt (150,000) -
---------------- ----------------
Net cash provided by financing activities 98,223 263,334
---------------- ----------------
Net decrease in cash and cash equivalents (71,116) (160,558)
Cash and cash equivalents at beginning of quarter 71,936 199,466
---------------- ----------------
Cash and cash equivalents at end of quarter $ 820 $ 38,908
================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
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 in a
one business segment through its two wholly owned subsidiaries, HealthStar, Inc.
("HSI") 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 Financial Corporation (Champion), a Utah corporation, reincorporated in
the State of Delaware. At the same time, Champion merged all of its assets into
its newly formed Delaware subsidiary, HealthStar Corp. The effectiveness of this
reincorporation has caused HealthStar Corp. to continue to operate Champion's
business while Champion has ceased to exist.
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 a complete financial statement
presentation. In the opinion of management such unaudited interim information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. It
is suggested that these consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's Annual Report Form 10-KSB/A, 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.
6
<PAGE>
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 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.
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.
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.
COST OF SERVICES
7
<PAGE>
The major components of cost of services are the cost of
outsourcing the medical case management and utilization review functions, case
management, external marketing commissions, printing of provider directions and
costs associated with 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
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 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 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.
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
8
<PAGE>
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.
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.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period
financial statements to conform to the current period presentation.
(2) DEBT
Debt consists of the following at June 30, 1999:
<TABLE>
<S> <C>
Note payable to Harris Trust and Savings Bank, due November 30, 1999, secured
by substantially all the assets of the Company $1,925,000
Line of credit with Harris Trust and Savings Bank, due November 30, 1999,
with permitted outstanding borrowings of $1,500,000, and secured by
substantially all the assets of the Company 900,000
Unsecured note payable to the previous owner of HealthStar, interest payable
monthly at 8%, currently due 200,000
----------
$3,025,000
==========
</TABLE>
The note payable and line of credit bear interest at the prime rate plus 1.5%
(9.25% at June 30, 1999).
(3) 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.
9
<PAGE>
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 June 30, 1999 and the year ended March 31, 1999
contained in the Company's Form 10-KSB/A filed with the Securities and Exchange
Commission on June 29, 1999.
OVERVIEW
The managed healthcare cost containment industry is highly fragmented,
with a large number of competitors. The Company does not believe that any single
company commands significant market share. The management of the Company
believes the level of competition will continue to increase in the future. Most
of the Company's competitors are national managed care providers, insurance
companies, HMOs, and third-party administrators that have implemented their own
managed care programs. Several large insurance companies for workers'
compensation, health and automobile have also implemented their own
cost-containment programs through the carrier's own personnel. Many of the
Company's current and potential competitors are significantly larger and have
greater financial, technical, marketing, and management resources than the
Company.
The Company competes on the basis of its specialized knowledge and
expertise in the managed healthcare services industry and on its ability to
deliver effective services to the customer with a high level of customer
satisfaction at a very affordable price. There can be no assurance that the
Company will be able to compete successfully. The managed healthcare industry
has experienced significant changes in recent years, primarily as a result of
rising healthcare costs. The Company will be required to respond to various
competitive factors affecting the healthcare industry, including new medical
technologies that may be introduced; general trends relating to the demand for
healthcare services; regulatory, economic, and political factors; changes in
patient demographics; and competitive pricing strategies by HMOs and other
healthcare plans.
The financial statements include the results of operations of the
Company and its two wholly-owned subsidiaries HealthStar, Inc.("HealthStar"),
acquired December 12, 1997, and National Health Benefits & Casualty Corporation
("NHBC"), acquired January 1, 1997.
RESULTS OF OPERATIONS
The Company derives the majority of its revenue from fees charged to
clients for access to the Company's network of contracted providers. The
Company's client base consists of a variety of payors of medical claims such as
insurance companies, third-party administrators and self-insured employers.
Access fees can be either a fixed, monthly fee per enrolled subscriber which is
called a capitated fee or can be based on a percentage of the amount of the
discount off of billed charges which is granted by a contracted provider. The
Company's participation in the amount saved varies from 20% to 25% with the
exact amount determined by contractual provisions with the Company's clients.
Total revenue decreased $798,643 to $3,807,025 for the three months
ended June 30, 1999 compared to $4,605,668 for the three months ended June 30,
1998, a decrease of 17%. The majority of the decrease was attributable to the
loss of four significant customers that were active during the comparable period
in 1998.
Other fees includes 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
10
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$65,966 or 35% from $191,186 in 1998 to $125,220 in 1999. The majority of the
decrease is attributable to the termination of the pharmacy benefit program.
Cost of services includes the cost of outsourcing the case management
and utilization review functions, commissions paid to outside brokers, fees paid
to other regional PPO networks for access to providers not contracted directly
with the Company and other products and services provided by outside vendors.
Cost of services decreased $169,241, or 24%, to $533,627 for the three months
ended June 30, 1999 from $702,868 in 1998. Approximately, $100,000 of the
decrease is a result of HealthStar discontinuing its pharmacy benefit program
previously made available to HealthStar customers. In addition, HealthStar has
continued to terminate its relationships with other PPO networks, which
accounted for $47,326 of the decrease. The discontinuation of the pharmacy
benefit program resulted in a corresponding decrease in revenue of $90,791,
while the discontinuation of the lease network arrangements has resulted in
minimal revenue loss. The decision to discontinue both arrangements was made so
that the Company could focus its efforts on its core business of providing
direct PPO networks to its existing and potential customer base.
Salaries and wages includes all employee compensation including payroll
taxes, health insurance and other employee benefits. Also included are
commissions paid to in-house sales and marketing personnel. For the quarter
ended June 30, 1999, salaries and wages were $1,957,559 compared to $2,029,672
for the quarter ended June 30, 1998, a decrease of $72,113 or 4%. 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 bad debt expense, telephone charges, office supplies, postage,
travel and entertainment, professional fees, insurance, rent and utilities. For
the quarter ended June 30, 1999, general and administrative expenses were
$1,081,631 compared to $1,267,252 for the quarter ended June 30, 1998, a
decrease of $185,621 or 15%. The decrease is a result of tighter cost control
throughout various operating expense categories. Included in general and
administrative expenses is bad debt expense which amounted to $107,654 for the
quarter ended June 30, 1999 compared to $129,757 for the quarter ended June 30,
1998, a decrease of $22,103 or 17%. The decrease in bad debt expense is
attributable to the decrease in revenue experienced during this period.
The Company estimates an allowance for doubtful accounts based on its
prior experience with uncollectible balances, as well as revenue adjustments
resulting from misstated enrollment figures in the case of capitation fee
revenue, or from claims savings amounts not actually realized by its customers
in the case of percentage of savings fee revenue. Such revenue adjustments are
recorded as a reduction in earned revenue. Amounts written off during the years
ended March 31, 1999 and 1998 are as follows:
11
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<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Write-offs due to uncollectibility $570,604 $ 205,062
Revenue adjustments 694,570 565,478
An analysis of the allowance account from April 1, 1997 is as follows:
Allowance for doubtful accounts, at April 1, 1997 $ 0
Addition to allowance for HealthStar, Inc. 375,000
Bad debt expense 80,062
Less: Write-offs (205,062)
---------
Balance at March 31, 1998 250,000
Bad debt expense 638,184
Less: Write-offs (570,604)
---------
Balance at March 31, 1999 $ 317,580
=========
The allowance for doubtful accounts decreased from $317,580, or 14% of trade
accounts receivable, at March 31, 1999 to $260,712, or 11% of trade accounts
receivable, at June 30, 1999, a decrease of $56,868 or 18%. An analysis of the
allowance account is as follows:
Balance at March 31, 1999 $ 317,580
Bad debt expense 107,654
Less: Write-offs (164,522)
---------
Balance at June 30, 1999 $ 260,712
=========
</TABLE>
Management believes the allowance is adequate since the loss of business that
the Company had experienced during the previous fiscal year has begun to level
off.
For the three months ended June 30, 1999, depreciation and amortization
increased $29,044, or 10%, to $318,158 from $289,114 for the three months ended
June 30, 1998. Goodwill of approximately $9,000,000 recorded in connection with
the acquisition of HealthStar is being amortized over 20 years. The entire
increase is attributable to depreciation expense which is the result of a higher
basis of property and equipment. At June 30, 1999, gross property and equipment
amounted to $3,536,861, compared to a balance of $3,148,697 at June 30, 1998.
For the quarter ended June 30, 1999, the Company incurred interest
expense of $58,166 compared to interest expense of $160,343 for the quarter
ended June 30, 1998, a decrease of $102,177. The decrease was a result of the
conversion of $3,000,000 of convertible debentures into common stock during
August 1998. The remaining $1,000,000 debenture was repaid on March 31, 1999.
The interest rate on the Company's term loan and line of credit was 9.25% at
June 30, 1999. The interest rate on the seller note payable is 8.0%.
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 three months ended June 30, 1999. The vision program is not a
separate business segment.
12
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a working capital deficiency of
$2,639,098 compared to a working capital deficiency of $2,910,005 at March 31,
1999, an improvement of $270,907.
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"). For the three months ended June 30, 1999, cash flow
used by operations was $256,702 compared to $415,702 for the three months ended
June 30, 1999, an increase in cash flow of $159,000.
The Company has a $4 million credit facility with Harris which is
secured by substantially all the assets of the Company. The facility is
comprised of a $2.5 million 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. In
January 1999, the Company determined that it was not in compliance with certain
covenants and immediately notified Harris and requested covenant modifications.
On June 8, 1999, Harris amended certain terms of the credit facility. The
amended terms, in addition to requiring that the entire balance outstanding be
repaid by November 30, 1999, reset several of these ratios and added an
additional minimum earnings requirement for subsequent periods. At June 30,
1999, the Company was in compliance with all of the financial covenants, as
restated, except for the leverage ratio requirement, which had not been restated
as part of the amended terms. Harris has agreed to a waiver in connection with
this requirement and will restate this requirement retroactive to June 8, 1999.
At June 30, 1999, the borrowings consisted of $1,925,000 remaining on
the term loan and $900,000 outstanding on the line of credit, with approximately
$150,000 of additional borrowing capacity available. Interest on the debt due to
Harris is calculated at the prime rate plus 1.5% (9.25% at June 30, 1999). 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.
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 funds.
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.
13
<PAGE>
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 85% 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.
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 $12,000 was incurred by August 1,
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.
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.
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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.
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.
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.
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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 9th 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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