<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 December 31, 1999, as amended on March
30, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _______________
Commission file number 0-19499
HEALTHSTAR CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1934592
(State or other jurisdiction (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 /X/
No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: Common stock, $0.001 par
value, 4,145,872 shares outstanding as of February 11, 2000.
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheet as of December 31, 1999 .........................................3
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for December 31, 1999 and 1998 .......................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 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 ....................................................11
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................20
Signatures ................................................................................21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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<CAPTION>
DECEMBER 31,
1999
---------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $299,783
Trade accounts receivable, less allowance for doubtful accounts of $140,393 1,537,176
Other current assets 372,906
-------
Total current assets $2,209,865
Property and equipment, net $1,893,835
Goodwill, net of accumulated amortization of 1,186,762
7,674,809
Other assets at cost 166,179
Total assets $11,944,688
===========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accounts payable $509,064
Accrued expenses 1,203,783
Current portion of long-term debt 1,525,000
-----------
Total current liabilities 3,237,847
-----------
Shareholders equity:
Common stock, $.001 par value 15,000,000 shares authorized, 4,145,872 shares issued 4,146
and outstanding
Additional paid-in capital 8,727,428
Accumulated deficit (24,733)
-----------
Total shareholders' equity 8,706,841
Total liabilities and shareholders' equity $11,944,688
===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------- ------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Capitated fees $2,035,116 $2,338,476 $6,201,906 $7,354,196
Repricing fees 1,234,267 1,783,766 4,294,089 5,322,349
Other fees 43,115 121,718 222,138 460,017
---------------------- ------------------ ------------------ ----------------
3,312,498 4,243,960 10,718,133 13,136,562
Operating expenses:
Cost of services 405,060 589,578 1,401,696 1,871,352
Salaries and wages 1,793,340 2,162,510 5,570,288 6,228,782
General and administrative 1,069,775 1,150,493 3,091,327 3,647,601
Depreciation and 296,647 305,497 937,513 887,796
amortization
---------------------- ------------------ ------------------ ----------------
3,564,822 4,208,078 11,000,824 12,635,531
---------------------- ------------------ ------------------ ----------------
Income (loss) from (252,324) 35,882 (282,691) 501,031
operations
Non-operating income (expense)
Interest expense (89,310) (83,901) (230,600) (333,193)
Gain on disposition of assets 1,031,210 -- 1,145,748 --
Asset impairment charge (150,000) -- (650,000) --
---------------------- ------------------ ------------------ ----------------
Income (loss) before income taxes 539,576 (48,019) (17,543) 167,838
Income tax expense (benefit) 243,577 (1,582) 223,893 68,418
---------------------- ------------------ ------------------ ----------------
Net income (loss) 295,999 (46,437) (241,436) 99,420
Retained earnings
(accumulated deficit)
at beginning of period (320,732) 538,230 216,703 392,373
---------------------- ------------------ ------------------ ----------------
Retained earnings
(accumulated deficit)
at end of period $(24,733) $491,793 $(24,733) $491,793
======== ======== ========= ========
Earnings (loss) per share-basic $0.07 $(0.01) $(0.06) $0.03
and diluted
===================== ================== ================== ================
Weighted average shares
outstanding
- -basic and diluted 3,966,850 3,385,089 3,879,378 3,159,979
===================== ================== ================== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
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Operating activities:
Net income (loss) $ (241,436) $ 99,420
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 937,513 887,796
Gain on the disposition of assets (1,145,748) --
Asset impairment charge 650,000 --
Bad debt expense 287,654 442,542
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 (63,727) (361,639)
Other current assets 20,647 (32,830)
Accounts payable (519,822) (222,118)
Accrued expenses (385,252) (820,139)
----------- -----------
Net cash provided by (used in) operating activities (432,671) 37,610
----------- -----------
Investing activities:
Purchases of equipment (181,726) (371,915)
Proceeds from the sale of equipment -- 5,113
Proceeds from the disposition of assets 1,625,000 --
----------- -----------
Net cash provided by (used in) investing activities 1,443,274 (366,802)
----------- -----------
Financing activities:
Decrease (increase) in other assets 68,119 (96,399)
Proceeds from borrowings 400,000 550,000
Payments on long term debt (1,800,000) (300,000)
Proceeds from issuance of common stock 549,125 --
----------- -----------
Net cash provided by (used in) by financing activities (782,756) 153,601
----------- -----------
Net increase (decrease) in cash and cash equivalents 227,847 (175,591)
Cash and cash equivalents at beginning of year 71,936 199,466
----------- -----------
Cash and cash equivalents at end of period $ 299,783 $ 23,875
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<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 through its wholly owned
subsidiary, HealthStar, Inc. ("HSI").
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-KSB, 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 he 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. 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.
<PAGE>
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. If shares
are considered anti-dilutive, they are not presented in loss per share
calculations.
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 the customer submits new
enrollment figures. 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
<PAGE>
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 that 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
undiscounted 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 the 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 sale 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.
<PAGE>
(2) ASSET IMPAIRMENT CHARGE
The Company's acquisition of HSI in fiscal 1998 resulted in allocating
a substantial portion of the purchase price to goodwill. Pursuant to
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long Lived Assets to be Disposed Of", management evaluated the
recoverability of the long-lived assets, including goodwill. While
management originally believed that revenues and profits could grow
after HSI's operations were fully integrated into the Company,
management also explored strategic mergers and acquisitions that would
complement HSI's operations. In May 1999, management received an offer
to sell HSI to Beyond Benefits, Inc. a privately held managed
healthcare company. The original offer was for $15,500,000 in cash.
However, in subsequent negotiations, that offer was reduced to
$10,000,000 in cash, 5% of the common equity of Beyond Benefits, Inc.
and an earn-out provision for up to an additional $1,250,000. The offer
was accepted and approved by the Board of Directors on August 19, 1999,
subject to shareholder approval.
On December 16, 1999, the Company and Beyond Benefits entered into an
amendment to the Stock Purchase Agreement to provide that the cash
portion of the purchase price be increased to $10,850,000 from
$10,000,000 and to remove from the purchase price 303,943 shares of
Beyond Benefits' non-voting common stock which was to have represented
5% of the common equity of Beyond Benefits. Accordingly, the Company
has adjusted the carrying value of HSI's goodwill to an estimated fair
value of approximately $7,674,809, resulting in a non-cash impairment
charge of $150,000 ($0.04 loss per basic and diluted share) in the
current quarter and $650,000 ($0.17 loss per basic and diluted share)
for the nine months ended December 31, 1999. The fair value was
estimated based on a sales price of $10,850,000 less direct and
incremental costs to dispose of approximately $300,000.
On February 29, 2000 the Company and Beyond Benefits executed a second
amendment to the Stock Purchase Agreement which reduced the purchase
price of HSI to $8,880,000 in cash, as discussed in "--Recent
Developments." As a result of this change, the sale of HSI is expected
to create a loss of approximately $1,600,000. The Company expects to
take this loss as an additional asset impairment charge in the quarter
ending March 31, 2000.
(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-insured businesses, health and welfare funds and third
parties that 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
Debt consists of the following at December 31, 1999:
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<S> <C>
Note payable to Harris Trust and Savings Bank, due
APRIL 28, 2000 secured by substantially all the
Assets of the Company $1,325,000
Unsecured note payable to the seller of HSI, interest
payable monthly at 8.0%, currently due 200,000
----------
$1,525,000
==========
</TABLE>
<PAGE>
The Company anticipates using a portion of the cash proceeds from the
sale of HSI to Beyond Benefits, Inc. to repay the remaining term loan
balance of $1,325,000. The Company and Harris Bank executed a letter
agreement, dated as of March 3, 2000, which extended the maturity date
of the term loan to the earlier of (i) April 28, 2000 or (ii) the sale
of HSI to Beyond Benefits (the "Target Date"). Specifically, the letter
agreement acknowledged that the Company was in default under the terms
of its loan agreement with Harris Bank because (i) it did not comply
with the financial covenant regarding the applicable fixed charges
coverage ratio (during the months of November and December 1999) and
with the financial covenant regarding the applicable minimum EBITDA
(during the month of December 1999), and (ii) it failed to pay the
principal amount of $1,325,000 outstanding and owed to the bank on
February 29, 2000. Under the terms of such letter agreement, the Bank
waived the defaults described above, only with respect to the
referenced periods, subject to the following conditions: (i) the
principal amount outstanding under the applicable note must be paid in
full by the Target Date; (ii) payment of a $10,000 fee; (iii) all
things necessary to effect the sale of HSI and repayment must be done
by the Target Date; and (iv) there must not occur any change in the
condition or prospects of the Company, financial or otherwise, that
Harris Bank deems material and adverse. If the Company is unable to
consummate the sale of HSI to Beyond Benefits on or before April 28,
2000, the Company would need to raise additional capital from outside
sources in order to meet its obligation to the bank. There can be no
assurances that the Company will be able to secure the necessary
funding required to repay the term loan if such funding should be
required.
(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.
(6) SALE OF NHBC
On December 30, 1999, the Company sold all of the assets of its wholly
owned subsidiary National Health Benefits and Casualty Corp. ("NHBC")
to Carlmont Capital Group, Inc., a California based company. The
Company received $1,500,000 in cash at closing and an earnout agreement
that may provide up to an additional $300,000 in cash, based on the
actual cash flows of NHBC over the next 18 months. The Company used
$1,350,000 of the cash proceeds to pay down indebtedness owed to Harris
Bank.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, competition, no dividends, limited public
market and liquidity, shares eligible for future sale, and other risks detailed
in the Company's Securities and Exchange Commission filings.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes for the quarter ended December 31, 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.
<PAGE>
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 wholly owned subsidiary, HealthStar, Inc. ("HSI"), 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 December 31, 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 would
receive $10,000,000 in cash at closing and 303,943 shares of Beyond Benefits'
non-voting series B common stock, which represents 5% of the issued and
outstanding common stock of Beyond Benefits. 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 the 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 March 2000.
On December 16, 1999, the Company and Beyond Benefits entered into an
amendment to the Stock Purchase Agreement to provide that the cash portion of
the purchase price be increased to $10,850,000 from $10,000,000 and to remove
from the purchase price 303,943 shares of Beyond Benefits' non-voting common
stock which was to have represented 5% of the common equity of Beyond Benefits.
The amended agreement expired on February 20, 2000.
On December 30, 1999, the Company sold all of the assets of its wholly
owned subsidiary National Health Benefits and Casualty Corp. ("NHBC") to
Carlmont Capital Group, Inc., a California based company. The Company received
$1,500,000 in cash at closing and an earnout agreement that may provide up to an
additional $300,000 in cash, based on the actual cash flows of NHBC over the
next 18 months. The Company used $1,350,000 of the cash proceeds to pay down
indebtedness owed to Harris Trust and Savings Bank, which has now been reduced
to $1,325,000.
On or about January 20, 2000, the Company requested an extension of the
February 20, 2000 closing date under the Beyond Benefits Agreement because
additional time was required to obtain shareholder approval of the proposed
transaction. In late January, 2000 the Company received notice from its largest
client that such client would be terminating its relationship with the Company
effective May 1, 2000. Beyond Benefits was promptly notified of the loss of that
client. The percentages of revenues accounted for by the Company's largest
client during the periods set forth below are as follows: (a) 8.3 % of the
Company's revenues (9.9% of HSI's revenues) during the 3 months ended December
31, 1999; (b) 7.9% of the Company's revenues (9.5% of HSI's revenues) during the
3 months ended December 31, 1998; (c) 8.6% of the Company's revenues (10.2% of
HSI's revenues) during the 9 months ended December 31, 1999; and (d) 7.8% of the
Company's revenues (9.1% of HSI's revenues) during the 9 months ended December
31, 1998. On February 7, 2000, Beyond Benefits requested a teleconference or
meeting with the Company
<PAGE>
to discuss the Company's request for an amendment of the Agreement (including
an extension of the proposed closing date) and Beyond Benefits' concerns
regarding certain material changes in HSI's business (the loss of HSI's
largest client). On February 8, 2000, Beyond Benefits submitted a letter to
senior management of the Company which stated its request to revise the
purchase price downward to $7,000,000 in cash as a result of the loss of the
Company's largest client. As an alternative, the February 8, 2000 letter
proposed cash consideration of $6,000,000 subject to an amended earn-out
schedule conditioned upon saving the account of the Company's largest client
or the Company's sale of additional business with no other loss of existing
business prior to the closing of the sale of HSI. In a letter dated February
9, 2000, the Company's President, Edward Chism, rejected the Beyond Benefits
offer and request for a reduction of the purchase price. In a letter dated
February 10, 2000, Beyond Benefits requested a meeting with the Company as
soon as would be possible. Following the exchange of such letters, the
Company's management, together with a consultant acting on its behalf,
conducted discussions with Beyond Benefits' management to reach a mutually
agreeable revised purchase price for HSI. While the Company did acknowledge
the circumstances underlying such request (including the Company's
significant claims backlog, the loss of its largest client and continued loss
of sales and account management staff), the Company believed that the
proposed price reduction to $7,000,000 was excessive. It also concluded that
the alternative offer of $6,000,000 in cash and an amended earn-out schedule
was not a viable alternative for the Company in view of its inability to
compete effectively in the changing and highly competitive managed health
care industry. The Company subsequently negotiated a revised purchase price
of $8,880,000 and Beyond Benefits submitted a draft of a proposed Second
Amendment to the Agreement to the Company on February 21, 2000.
On February 29, 2000, following negotiations with Beyond Benefits, the
Company executed a Second Amendment to the Beyond Benefits Stock Purchase
Agreement which reduced the purchase price to $8,880,000 cash; removed the
earn-out provision; provided that the transaction would close by April 30, 2000;
and provided that the Company would consult with and coordinate operations and
management of HSI with Beyond Benefits until the transaction closed.
The Company and Harris Bank executed a letter agreement dated as of March
3, 2000, which extended the maturity date of the term loan to the earlier of (i)
April 28, 2000 or (ii) the sale of HSI to Beyond Benefits. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
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 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 to 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 $932,000 or 22% to $3,312,000 in 1999 compared to
$4,244,000 in 1998. Revenue for HSI decreased $754,000 to $2,792,000 in 1999
from $3,546,000 in 1998, a decrease of 21%. 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 $177,000 or 25% from
$698,000 in 1998 to $521,000 in 1999. Overall, capitated fees declined 13% and
repricing fees declined approximately 31% from the year ago period. See
"--Recent Developments."
Other fees include charges to customers for medical case management,
utilization review and revenue generated from the sale of provider directories.
Other fees decreased $79,000 or 65% from $122,000 in 1998 to $43,000 in 1999.
Approximately $27,000 of the decrease is due to the termination of a Company
administered pharmacy benefit program in June 1999. Revenue from case management
decreased approximately $25,000 from the prior year period.
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 $185,000 or 31% to $405,000 in 1999 from $590,000 in the
comparable period in 1998. Approximately $26,000 of the decrease is due to the
termination of the pharmacy benefit program. The remaining reduction is due
primarily to a decrease in access fees paid to other PPO networks and lower
commissions paid to outside brokers as a result of the overall decrease in
revenue. As a percentage of total revenue, cost of services decreased from 13.9%
at December 31, 1998 to 12.2% at December 31, 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 December 31, 1999, salaries and wages were $1,793,000 compared to
$2,163,000 for the three months ended December 31, 1998, a decrease of $370,000
or 17%. 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 December 31, 1999, general and administrative expenses were
$1,070,000 compared to $1,150,000 for the comparable period in 1998, a decrease
of $80,000 or 7%. Bad debt expense for the quarter was $90,000 compared to
$106,000 in the comparable period in 1998, a decrease of approximately $16,000
or 15%. The decrease is a result of the lower revenue in the current year period
and better collection efforts. The decrease in bad debt expense accounted for
approximately 20% 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 decreased $8,000 or 3%, to $297,000 in 1999
from $305,000 in 1998. The decrease is due to lower amortization expense as a
result of the impairment charge of $500,000 that was taken on September 30,
1999. At December 31, 1999, gross property and equipment was $3,365,474.
<PAGE>
Interest expense for the quarter was $89,000 compared to $84,000 for the
comparable period in 1998, an increase of $5,000 or 6%. The increase in interest
expense is due to higher interest rates during the current year period.
On December 16, 1999, the Company and Beyond Benefits entered into an
amendment to the Stock Purchase Agreement to provide that the cash portion of
the purchase price be increased to $10,850,000 from $10,000,000 and to remove
from the purchase price 303,943 shares of Beyond Benefits' non-voting common
stock which was to have represented 5% of the common equity of Beyond Benefits.
Accordingly, the Company adjusted the carrying value of HSI's goodwill to an
estimated fair value of approximately $7,674,809, resulting in a non-cash
impairment charge of $150,000 ($0.04 loss per basic and diluted share) in the
current quarter and $650,000 ($0.17 loss per basic and diluted share) for the
nine months ended December 31, 1999. The fair value was estimated based on a
sales price of $10,850,000 less direct and incremental costs to dispose of
approximately $300,000. See "--Recent Developments."
On December 30, 1999, the Company sold all of the assets of its wholly
owned subsidiary National Health Benefits and Casualty Corp. ("NHBC") to
Carlmont Capital Group, Inc., a California based company. The Company received
$1,500,000 in cash at closing and an earnout agreement that may provide up to an
additional $300,000 in cash, based on the actual cash flows of NHBC over the
next 18 months. This transaction resulted in a pretax gain of approximately
$1,031,000.
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. In May 1999, management received an offer to sell HSI to Beyond
Benefits, Inc. a privately held managed healthcare company. The original offer
was $15,500,000 in cash. However, in subsequent negotiations, that offer was
reduced to $10,000,000 in cash, 5% of the common equity of Beyond Benefits, Inc.
and an earn-out provision for up to an additional $1,250,000. The Board of
Directors approved the offer on August 19, 1999, subject to shareholder
approval.
Income tax expense (benefit) has been recognized at the Company's effective
income tax rate, which, subject to various credits and adjustments, generally
approximates 30%. Management believes that there will be no tax benefit related
to the asset impairment charge of $150,000.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
Total revenue decreased $2,419,000 or 18% to $10,718,000 in 1999 compared
to $13,137,000 in 1998. Revenue for HSI decreased $2,235,000 to $8,951,000 in
1999 from $11,186,000 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 decreased $184,000 or 9% from
$1,951,000 in 1998 to $1,767,000 in 1999. Overall, capitated fees declined 16%
and repricing fees declined approximately 19% from the year ago period. See
"--Recent Developments."
Other fees include charges to customers for medical case management,
utilization review and revenue generated from the sale of provider directories.
Other fees decreased $238,000 or 52% from $460,000 in 1998 to $222,000 in 1999.
Approximately $180,000 of the decrease is due to the termination of a Company
administered pharmacy benefit program in June 1999.
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 $469,000 or 25% to $1,402,000 in 1999 from $1,871,000 in the
comparable period in 1998. Approximately $175,000 of the decrease is due to the
termination of the pharmacy benefit program. The remaining reduction is due
primarily to a decrease in access fees paid to other PPO networks and lower
commissions paid to outside brokers as a result of the overall decrease in
revenue. As a percentage of total revenue, cost of services decreased from 14.2%
at December 31, 1998 to 13.1% at December 31, 1999.
<PAGE>
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 nine months
ended December 31, 1999, salaries and wages were $5,570,000 compared to
$6,229,000 for the nine months ended December 31, 1998, a decrease of $659,000
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 nine months ended December 31, 1999, general and
administrative expenses were $3,091,000 compared to $3,648,000 for the
comparable period in 1998, a decrease of $556,000 or 15%. Bad debt expense
for the nine months ended December 31, 1999 was $288,000 compared to $443,000
in the comparable period in 1998, a decrease of approximately $155,000 or
35%. 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 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 $50,000 or approximately 6% to
$938,000 in 1999 from $888,000 in 1998. The increase is due to higher
depreciation expense related to the purchase of new computer hardware and
software during the last nine months. At December 31, 1999, gross property
and equipment was $3,365,474.
Interest expense decreased $102,000 or 31% to $231,000 in 1999 compared to
$333,000 in 1998. The decrease is attributable to lower levels of indebtedness
during 1999.
On December 16, 1999, the Company and Beyond Benefits entered into an
amendment to the Stock Purchase Agreement to provide that the cash portion of
the purchase price be increased to $10,850,000 from $10,000,000 and to remove
from the purchase price 303,943 shares of Beyond Benefits' non-voting common
stock which was to have represented 5% of the common equity of Beyond
Benefits. Accordingly, the Company adjusted the carrying value of HSI's
goodwill to an estimated fair value of approximately $7,674,809, resulting in
a non-cash impairment charge of $150,000 ($0.04 loss per basic and diluted
share) in the current quarter and $650,000 ($0.17 loss per basic and diluted
share) for the nine months ended December 31, 1999. The fair value was
estimated based on a sales price of $10,850,000 less direct and incremental
costs to dispose of approximately $300,000. See "--Recent Developments."
On December 30, 1999, the Company sold all of the assets of its wholly
owned subsidiary National Health Benefits and Casualty Corp. ("NHBC") to
Carlmont Capital Group, Inc., a California based company. The Company
received $1,500,000 in cash at closing and an earnout agreement that may
provide up to an additional $300,000 in cash, based on the actual cash flows
of NHBC over the next 18 months. This transaction resulted in a pretax gain
of approximately $1,031,000.
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. In May 1999, management received an
offer to sell HSI to Beyond Benefits, Inc. a privately held managed
healthcare company. The original offer was $15,500,000 in cash. However, in
subsequent negotiations, that offer was reduced to $10,000,000 in cash, 5% of
the common equity of Beyond Benefits, Inc. and an earn-out provision for up
to an additional $1,250,000. The Board of Directors approved the offer on
August 19, 1999, subject to shareholder approval.
Income tax expense (benefit) has been recognized at the Company's effective
income tax rate, which, subject to various credits and adjustments, generally
approximates 30%. Management believes that there will be no tax benefit related
to the asset impairment charge of $150,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had approximately $300,000 in cash and
cash equivalents compared to $24,000 at December 31, 1998. The Company had a
working capital deficiency of $1,028,000 at December 31, 1999,
<PAGE>
compared to a deficiency of $2,910,000 at March 31, 1999, an improvement of
approximately $1,882,005. The Company has historically funded its working
capital requirements from cash generated by operations supplemented by
borrowings under a line of credit facility.
The Company has experienced a net loss of $241,436, a net use of cash in
operating activities of $432,671 and a loss from operations of $282,691 for the
nine months ended December 31, 1999. In addition, the Company was notified in
late January 2000 that its largest customer will be terminating its relationship
with the Company effective May 1, 2000. This will result in a continued decline
in the profitability and cash flow of HSI. Management believes that a
deterioration in operating results will continue as the efforts to sell HSI
proceed. A return to profitable and positive cash flow will occur when sales
increase, which will be driven by acquiring significant customers. This process
will not begin until the Company's sales force becomes more successful.
Management is currently evaluating that function. In addition, the customer
service personnel will focus on increasing the customer satisfaction of our
existing base to ensure that attrition of customers over customer service issues
ceases. At this time, management cannot estimate when any sales and customer
service improvements may generate positive results.
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 and 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 equated to 12.0% as of November 17, 1999.
On November 19, 1999, the Company and the bank entered into an amendment to
the credit agreement pursuant to which: (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 made the $150,000 principal payment which was
due on September 30, 1999; (iii) the bank extended the maturity date of the term
loan and line of credit to January 31, 2000; (iv) the bank reset the interest
rate on the term loan and line of credit to prime plus 1.0% on November 30, 1999
and (v) the Company could no longer make any borrowings under the line of
credit.
On November 24 1999, the Company raised $300,000 through the issuance of
240,000 shares of common stock in a private placement offering. The Company
used $200,000 of the proceeds to fund the November 30, 2000 $150,000 payment
and the December 7, 2000 $50,000 payment to Harris Bank.
At November 30, 1999, the total indebtedness owed to Harris Bank was
$2,725,000. The total amount outstanding on the line of credit was $950,000 and
the amount outstanding on the term loan was $1,775,000. On December 7, 1999, the
Company made an additional payment of $50,000 on the line of credit to remain in
compliance with the borrowing base.
On December 30, 1999, the Company sold all of the assets of its wholly
owned subsidiary National Health Benefits and Casualty Corp. ("NHBC") to
Carlmont Capital Group, Inc., a California based company. The Company received
$1,500,000 in cash at closing and an earnout agreement that may provide up to an
additional $300,000 in cash, based on the actual cash flows of NHBC over the
next 18 months. The Company used $1,350,000 of the cash proceeds to payoff the
line of credit and paydown the term loan to $1,325,000. In connection with this
reduction in debt, Harris agreed to extend the maturity date of the term loan to
February 29, 2000.
<PAGE>
The Company anticipates using a portion of the $8,880,000 cash proceeds
from the sale of HSI to Beyond Benefits, Inc. to repay the remaining term loan
balance of $1,325,000 to Harris Bank. See "--Recent Developments." The Company
and Harris Bank executed a letter agreement, dated as of March 3, 2000, which
extended the maturity date of the term loan to the earlier of (i) April 28,
2000 or (ii) the Target Date. Specifically, the letter agreement acknowledged
that the Company was in default under the terms of its loan agreement with
Harris Bank because (i) it did not comply with the financial covenant regarding
the applicable fixed charges coverage ratio (during the months of November and
December 1999) and with the financial covenant regarding the applicable minimum
EBITDA (during the month of December 1999), and (ii) it failed to pay the
principal amount of $1,325,000 outstanding and owed to the bank on February 29,
2000. Under the terms of such letter agreement, the Bank waived the defaults
described above, only with respect to the referenced periods, subject to the
following conditions: (i) the principal amount outstanding under the applicable
note must be paid in full by the Target Date; (ii) payment of a $10,000 fee;
(iii) all things necessary to effect the sale of HSI and repayment must be done
by the Target Date; and (iv) there must not occur any change in the condition or
prospects of the Company, financial or otherwise, that Harris Bank deems
material and adverse. If the Company is unable to consummate the sale of HSI to
Beyond Benefits on or before April 28, 2000, the Company would need to raise
additional capital from outside sources in order to meet its obligation to the
bank. There can be no assurances that the Company will be able to secure the
necessary funding required to repay the term loan if such funding should be
required. If that funding is not available and the loan cannot be repaid, then
the remedies available to Harris Bank may be initiated and all of the secured
assets of the Company may necessarily be transferred to the bank. If it became
clear that this course of action were likely, then the Company may decide to
seek protection under law until it is able to reorganize. Management, however,
believes that the bank will accommodate the Company in the near-term.
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 that 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 determined that many of its internal computer programs and some
items of its equipment were susceptible to potential Year 2000 system failures
or processing errors. 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 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 has communicated 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 has verified 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 began to develop contingency plans to minimize any Year 2000
disruptions in the event that an internal or third party mission critical system
did not function properly. The contingency plans called 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. These contingency plans will be continually refined as
additional information becomes available.
<PAGE>
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 has upgraded equipment to be Year 2000 compliant and total
expenditures relating to the upgrade for the year are approximately $45,000.
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 24, 1999, the Company issued 240,000 shares of its Common Stock
in a private placement transaction. The shares were issued to accredited
investors for consideration of $300,000. The Company did not pay any commissions
or fees with respect to such transaction. The shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended, because the transaction
did not involve any public offering of shares by the Company, and did not
involve any general solicitation of the public or advertising with respect to
the offer and sale of such securities. In addition, each investor acknowledged
that such investor was acquiring the shares for their own account, as principal,
for investment and not with a view to the resale or distribution of all or any
part of the shares. The Company used $250,000 of the proceeds to fund the
payments to Harris Bank.
On March 20, the Company issued 200,000 shares of its Common Stock in
a private placement transaction. The shares were issued to an accredited
investor for consideration of $300,000. The Company did not pay any commissions
or fees with respect to such transaction. The shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended, because the transaction
did not involve any public offering of shares by the Company, and did not
involve any general solicitation of the public or advertising with respect to
the offer and sale of such securities. In addition, the investor acknowledged
acquiring the shares for such investor's own account, as principal, for
investment and not with a view to the resale or distribution of all or any part
of the shares. The Company intends to use the proceeds of such transaction for
general corporate purposes, including payment of account's payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Compensation Agreement between the Company and Darren Horndasch
dated July 1, 1999.
10.2 Compensation Agreement between the company and Denise Nedza dated
July 1, 1999.
10.3 Letter Agreement dated as of March 3, 2000 by and between the
Company and Harris Bank incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K as filed with
the Commission on March 15, 2000.
10.4 Second Amendment dated as of February 29, 2000 to the Stock
Purchase Agreement by and between the Company and Beyond
Benefits Incorporated by reference to Exhibit 99.1 of the
Company's Current Report on Form 8-K/A as filed with the
Commission on March 14, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K (Item 5) was filed with the Securities and Exchange
commission on October 13, 1999, relating to the Company entering into a
Definitive Agreement to sell the stock of its wholly owned subsidiary,
Healthstar, Inc., to Beyond Benefits, Inc.
A report on Form 8-K (Item 5) was filed with the Securities and Exchange
Commission on November 22, 1999 relating to the termination of an agreement
whereby the Company was to have acquired a 49% interest in Physiciansite.com,
Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-QSBA to be signed on its
behalf by the undersigned thereunto duly authorized, this 30th 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)
