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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED MARCH 31, 2000.
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER 0-19499
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HEALTHSTAR CORP.
(Exact name of small business issuer as specified in its charter)
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DELAWARE 91-1934592
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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2875 N.E. 191(ST) STREET, SUITE 601
AVENTURA, FLORIDA 33180
(Address of principal executive offices)
(305) 933-8779
(Issuer's Telephone Number)
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15720 N. GREENWAY HAYDEN LOOP, SUITE 1, SCOTTSDALE, ARIZONA
(Former name, former address and former fiscal year, if 85260
changed since last report) (Zip Code)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
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NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS
Common Stock, $.001 per share OTC Bulletin Board
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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 / /
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year were $12,979,660
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the high and low closing
sales prices of such stock as of June 26, 2000 was $11,815,339. As of such date,
4,345,872 shares of the Registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes / / No /X/
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HEALTHSTAR CORP. AND SUBSIDIARIES
FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 2000
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7. Financial Statements........................................ 12
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 13
Item 10. Executive Compensation...................................... 14
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 16
Item 12. Transactions with Related Parties........................... 17
Item 13. Exhibits and Reports on Form 8-K............................ 18
Signatures
Exhibit Index
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PART I
ITEM 1. BUSINESS
OVERVIEW
On April 28, 2000, HealthStar Corp. (the "Company") sold all of the issued
and outstanding stock of its wholly owned subsidiary, HealthStar, Inc., to
Beyond Benefits, Inc., a Long Beach, California based managed healthcare
company. The sale was made pursuant to a Stock Purchase Agreement dated
September 23, 1999, as amended, by and among the Company, HealthStar, Inc., and
Beyond Benefits, Inc. The Company received $8,880,000 in cash at closing, of
which approximately $1,325,000 was used to repay the entire amount outstanding
under the Company's Credit Facility with Harris Trust and Savings Bank. As a
result of the completion of this transaction, the Company is no longer engaged
in the managed healthcare business and currently has no operations.
Prior to April 28, 2000, the Company was a healthcare management company
dedicated to controlling the costs, improving the quality and enhancing the
delivery of healthcare services. The Company provided related products and
services designed to reduce healthcare costs. The Company marketed and provided
programs and services to insurance companies, self-insured businesses for their
medical plans, health and welfare funds and third parties who administer
employee medical plans. These programs and services assisted the Company's
clients in reducing healthcare costs for group health plans and for workers'
compensation coverage and automobile accident injury claims.
The Company provided a wide array of medical cost containment services such
as implementing and coordinating case management procedures, managing and
reviewing the utilization of healthcare services, providing independent medical
examinations and intervention in the early stages of medical care for the
injured party, and comprehensive bill review, claims processing and medical
repricing services. The Company operated its business through its wholly owned
subsidiary, HealthStar, Inc., an Illinois Corporation, ("HealthStar"). Through
HealthStar, the Company provided access to, and operated, one of the largest
independent preferred provider organizations ("PPO") of healthcare professionals
and facilities in the United States.
DEVELOPMENT OF BUSINESS
The Company was incorporated in Delaware on November 16, 1998. Its
predecessor company was a Utah corporation organized in February 1981 as
Berscham Energy & Minerals, Inc. In 1984, Berscham changed its name to Champion
Energy Corporation and in 1989, changed its name to Champion Financial
Corporation ("Champion"). Prior to 1997, Champion was primarily an inactive
corporation which most recently had been engaged in the business of distributing
synthetic polymers and other polymers in the United States.
In January 1997, Champion acquired all of the issued and outstanding stock
of NHBC in a business combination accounted for as a reverse acquisition. NHBC
provided management of group healthcare services, workers' compensation claims
and automobile accident medical claims for property and casualty insurers,
third-party administrators and self-insured employers. NHBC also provided a POS
vision program until that program was sold by the Company in June 1999.
In December 1997, Champion acquired HealthStar Inc., based in Chicago,
Illinois. HealthStar is a diversified managed healthcare company with over
15 years experience in the formulation and management of PPO networks. At the
time of the acquisition, HealthStar employed approximately 200 people and
operated managed care networks in the Midwest, Southeast and Southwest regions
covering 39 states and approximately 1,000,000 lives. In November 1998, Champion
became a Delaware corporation and changed its name to HealthStar Corp. The
reincorporation in Delaware was accomplished when Champion merged all of its
assets into its newly formed Delaware subsidiary, HealthStar Corp. As a result
of this merger, HealthStar Corp. operated Champion's business while Champion
ceased to exist.
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On December 30, 1999, the Company sold the assets of its wholly owned
subsidiary NHBC to Carlmont Capital Group, Inc., a privately held company based
in Chula Vista, California. This sale was made pursuant to the terms of an Asset
Purchase Agreement dated December 28, 1999, by and among the Company, NHBC and
Carlmont Capital Group, Inc. The Company received $1,500,000 in cash at closing
and an earnout agreement that may provide up to an additional $300,000 in cash,
based on the actual cash flows of NHBC during the 18 month period after closing.
On April 28, 2000, the Company sold all of the issued and outstanding stock
of its wholly owned subsidiary HealthStar, Inc. to Beyond Benefits Inc.
See--"Overview."
INDUSTRY OVERVIEW
In response to escalating healthcare costs over the past 20 years, federal
and state governmental authorities have increasingly emphasized stringent
cost-containment measures, and employers, consumers, and other purchasers of
healthcare services have sought cost-effective alternatives to traditional
indemnity insurance, under which providers generally receive payment on a
fee-for-service basis. As a result, companies providing managed healthcare
delivery systems developed.
Managed healthcare encompasses various arrangements among healthcare
providers, payors, and enrollees that apply direction of patients, case
management, utilization review, utilization of authorization systems, and
allocation of risks and rewards to increase the efficiency of delivery of
healthcare services. Managed care delivery systems may include coalitions of
independent medical practices, alliances between hospitals and individual
medical practices or physician networks, PPOs, point of service plans and health
maintenance organizations ("HMOs"). Managed care health plans create economic
incentives designed to encourage patients to seek care from a distinct panel of
providers and for providers to monitor enrollees, eliminate inefficiencies, and
reduce unnecessary utilization of services while maintaining and improving the
quality of patient care.
The managed care industry has expanded beyond traditional organizations
providing cost containment services to group health insurance companies and
self-funded employers to include workers' compensation coverage and automobile
accident medical claims.
Group health insurance benefits may be provided through various channels.
One source is the traditional insurance company that charges premiums and bears
the underwriting risk. Another source is union health and welfare trust funds in
which a certain amount of union dues are placed in a trust fund and administered
by trustees in accordance with the Taft-Hartley Act. Group health benefits may
also be provided by an employer that is self-insured. In these instances, the
employer usually contracts with a Third Party Administrator ("TPA") to
administer the health plan. Most states have significant legislation related to
group health insurance and HMOs. This legislation governs the financial
incentives that an insurance company may give insureds. Some state insurance
departments also regulate the services that can or must be covered by the
insurance company. In addition, the payment of health claims is regulated. In
most states, HMOs are highly regulated. PPOs, on the other hand, are usually not
subject to the same degree of regulation. In some states, there is little or no
regulation of PPOs, while in other states, PPOs are registered with the state
but not subject to licensure. Self-insured plans are subject to the federal
Employee Retirement Income Security Act of 1934 (ERISA). The union health and
welfare funds are subject to the provisions of the Taft-Hartley Act.
Medical provider reimbursement methods for workers' compensation medical
services vary on a state-by-state basis. A majority of the states have adopted
fee schedules pursuant to which all healthcare providers are uniformly
reimbursed. The fee schedules mandated by each state typically establish the
maximum amounts that are required to be reimbursed for each procedure. In states
without fee schedules, healthcare providers are reimbursed based on usual,
customary and reasonable ("UCR") fees charged in the particular geographic area
within the state in which the services are provided.
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Workers' compensation is a statutorily defined employee benefit that varies
on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment and a
significant portion of lost wages, legal fees and other costs associated with
work-related injuries and disabilities. Companies provide such coverage to their
employees through either the purchase of commercial insurance from private
insurance companies, participation in state-run funds or through self-insurance.
For workers' compensation claims, many states do not permit employers to
restrict a claimant's choice of healthcare provider, making it more difficult
for employers and private insurance companies to utilize traditional managed
care approaches. However, employers in 20 states currently have the right to
direct employees to a specific primary healthcare provider during the onset of a
workers' compensation case, subject to the right of the employee to change
physicians after a specific period. Recently, a number of states have adopted
legislation encouraging the use of workers' compensation managed care
organizations in an effort to allow employers to control their workers'
compensation costs.
The automobile casualty industry is slowly beginning to incorporate managed
care services into controlling the medical care cost for the clients that are
injured in an automobile accident. Like the workers' compensation industry, the
automobile insurance industry is regulated on a state-by-state basis. While
regulatory approval was not required for the Company to offer most of its
services to the automobile insurance market, state regulatory approval was
required in order to offer automobile insurers products that permit them to
direct claimants into a network of medical providers. Currently, several states
have legislated the optional use of PPOs by private automobile, property and
casualty insurance companies and in return, the insured receives a reduced
annual premium. Additionally, six states have adopted fee schedules for
healthcare providers to be reimbursed for automobile related injuries. Because
of escalating medical costs, the Company expects that additional states will
pass legislation adopting managed care components for insureds injured in an
automobile accident.
THE COMPANY'S PROGRAMS AND SERVICES
Prior to April 28, 2000 the Company assisted its customers in managing the
increasing medical costs of group health plans, workers' compensation claims and
automobile related injury claims through managed care techniques by providing
access to a PPO network, as well as a variety of cost containment services such
as utilization review, case management, bill review, claims processing and
medical repricing. In addition, the Company provided bill negotiation for
clients on medical claims from health care providers who do not participate in
the Company's PPO networks.
PPO NETWORKS
PPOs are typically groups of hospitals, physicians and other healthcare
providers that offer services at pre-negotiated rates to employer groups. PPO
networks offered the Company's clients a means of managing healthcare costs by
reducing the per-unit price of medical services provided to clients, reviewing
utilization and managing high cost cases. The Company's network was one of the
largest independent networks of directly contracted hospitals available in the
United States and included acute care hospitals, out-patient facilities,
physical rehabilitation services, ancillary services and a panel of primary care
physicians and specialists. In addition to directly contracted providers, the
Company provided its customers with access to a limited number of PPO networks
organized by others which met the Company's criteria for provider selection. The
Company used the following guidelines in determining a provider's eligibility
for membership in the PPO: (a) geographic locations to meet the needs of payors;
(b) demonstrated cost effectiveness; (c) range of service offered;
(d) verification of provider's adequate professional liability insurance and all
licenses and certifications as required by law and (e) risk profile including
malpractice litigation history and licensure actions.
3
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BILL REVIEW, CLAIMS PROCESSING AND MEDICAL REPRICING SERVICES
The Company offered retrospective bill review, claims processing and medical
repricing services for physician and hospital bills ("Bill Review"). Bill Review
consists of an on-line computer-based information system which stores and
accesses state-mandated fee schedules and licensed practitioner usual and
customary charge information for the review of medical charges.
The Company's software systems monitored the bills by matching procedure
codes with the prevailing medical diagnosis, making the necessary adjustments.
Prior to the application of a PPO fee schedule, the Bill Review system screens
each bill for more than 90 different unwarranted charges. After a review of the
entire bill, the Bill Review system automatically makes the necessary
corrections and adjustments. In addition, the Bill Review system revealed
duplicate procedures, validated medical procedures and analyzed the relationship
of diagnosis to procedures performed.
VISION PROGRAM
Until June 1999, the Company operated a "Point of Sale" ("POS") vision
program. The Company's First American Vision Services ("FAVS") program offered
its members the opportunity to purchase eye wear substantially below retail
prices, when purchased from an independently owned FAVS provider. In addition,
members were entitled to an eye examination at a pre-established reduced fee.
The program benefits were extended to the members and their immediate families,
and there were no restrictions on the number of purchases. On June 7, 1999 the
Company sold its FAVS program for cash consideration of $125,000 to an immediate
family member of a former officer of the Company. See Item 12--"Transactions
with Related Parties."
SALES AND MARKETING
The Company actively marketed its services to group health insurance
companies, automobile insurance companies, workers' compensation insurance
companies, third-party administrators and self-insured employers through the
Company's direct sales force. The Company created interest and demand for its
programs and services primarily through direct contact with potential customers
and follow-up with marketing literature and information designed to address the
client's needs. The Company also participated in managed healthcare conventions
and trade shows and advertised its services on a limited basis in trade journals
and other print media, primarily to enhance name recognition and its reputation
in the managed care cost containment industry.
COMPETITION
The managed healthcare cost containment industry is highly fragmented, with
a large number of competitors. The Company does not believe that any single
company commands significant market share. Most of the Company's competitors
were 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
coverage have also implemented their own cost-containment programs through the
carrier's own personnel. Many of the Company's competitors were significantly
larger and had greater financial, technical, marketing, and management resources
than the Company. The Company competed 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 an affordable price.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
The Company regarded certain features of its programs and services as
proprietary and relied on a combination of contract, copyright, trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtained nondisclosure
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agreements from its employees and hospital-clients and limited access to and
distribution of its software, documentation, and other proprietary information.
The Company believed that trade secret and copyright protection were less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services provided.
GOVERNMENT REGULATION
Managed healthcare programs for group healthcare, workers' compensation and
automobile accident injuries are conducted within a regulated environment. The
Company's activities were regulated principally at the state level, which means
the Company was required to comply with certain regulatory standards which may
have differed from state to state.
Generally, parties that actually provide or arrange for the provision of
healthcare services assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulations
that govern many aspects of their conduct and operations. In contrast, the
services provided by the Company to its customers typically have not been the
subject of regulation by the federal government and most states. Since the
managed healthcare field is a rapidly expanding and changing industry and the
cost of providing healthcare continues to increase, it is possible that the
applicable state and federal regulatory frameworks will expand to more fully
regulate the conduct and operation of companies engaged in that industry.
The Employee Retirement Income Security Act of 1974 ("ERISA") governs
employee benefit plans offered by employers who self-insure. Employers opt to
self insure as a way to underwrite their own health claims and better control
their healthcare costs. Regulation of such self-insured benefit plans falls
under the jurisdiction of the United States Department of Labor, which has
strict guidelines relative to such plans and to the TPAs that administer such
plans. In addition to the ERISA guidelines, a TPA may be subject to additional
state requirements regarding registration.
The Company did not engage in any professional practice or control the cost
of professional services. Likewise, the Company does not believe that membership
in the Company's prior programs constituted insurance subjecting the Company to
laws and regulations governing healthcare insurers and their operations. Certain
regulations, present in most state and local jurisdictions, relating to the
standards governing licensed healthcare professionals, prohibit such
professionals from compensating any third person for soliciting patients or
patronage on their behalf. The Company received immaterial payments for
inclusion in the Company's networks from chiropractors and vision service
providers, and the Company believes that these payments do not violate such
regulations.
The automobile insurance industry, like the workers' compensation industry,
is regulated on a state-by-state basis. While regulatory approval was not
required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval was required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only a few states have legislation that permits
such direction of care. The Company's automobile claims repricing business was
non-directed and not affected by such legislation.
Regulations in the healthcare, workers' compensation and automobile
insurance fields are constantly evolving. Proposals for healthcare legislative
reforms are regularly considered at the federal and state levels.
EMPLOYEES
As of March 31, 2000, prior to the sale of HealthStar, Inc. to Beyond
Benefits, Inc., the Company had approximately 125 full-time employees and 30
part-time employees. All of these employees were employed by HealthStar, Inc.,
with the exception of the President/Chief Executive Officer and the Vice
President/ Chief Financial Officer, who were employed by HealthStar Corp. As of
April 28, 2000 the Company had 2 full-time employees.
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RISKS RELATED TO BUSINESS STRATEGY
The Company's business strategy is to acquire an internet-related business
or businesses, or other business or businesses, which includes a number of risks
including, but not limited to, the following risks:
- The Company has no existing Internet business or products, and therefore
has no operating history or experience in that business. The Company's
business plan involves all of the risks, uncertainties, expenses and
difficulties frequently encountered by development stage companies,
particularly companies in the rapidly evolving Internet market.
- The Company's future success depends, in significant part, on its ability
to attract, hire and retain directors, management and other personnel with
the managerial, marketing and technical skills that may be required by the
Internet-related or other business or businesses that the Company may
acquire in the future. Competition for personnel in the Internet and
related technology market is intense, and there are a limited number of
persons with knowledge of, and experience in, this industry. If the
Company fails to timely identify, recruit and hire qualified personnel, it
may be unable to compete effectively.
- To be successful in its planned acquisition of Internet businesses, the
Company will need to identify applications, technologies and businesses
that are complementary, and the Company may need to integrate disparate
technologies and corporate cultures and potentially manage a
geographically dispersed company. If the Company is able to make multiple
acquisitions, later acquisitions could divert attention from other
business concerns and expose the Company to unforeseen liabilities or
risks associated with entering new markets. Integrating newly acquired
organizations and technologies could be expensive, time consuming and may
strain the Company's resources. The Company anticipates facing intense
competition for acquisitions, and that many of these competitors will be
larger, better-funded organizations. If the Company fails to execute its
acquisition strategy successfully for any reason, the Company's business
may be adversely affected. The Company does not have a tested business
model and cannot be sure that any business model it develops will yield
positive results.
- The Company may pay for some acquisitions by issuing additional common
stock and this could dilute stockholders. The Company may also use cash to
buy companies or technologies in the future. If the Company does use cash,
it may need to incur debt to pay for these acquisitions as well as to fund
any operating losses. Acquisition financing may not be available on
favorable terms or at all. In addition, the Company may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would have an adverse affect on
the Company's results of operations.
ITEM 2. PROPERTIES
At March 31, 2000, the Company leased approximately 24,000 square feet of
office space in Chicago, Illinois; 6,200 square feet of office space in
Independence (Cleveland), Ohio; 3,300 square feet of office space in Atlanta,
Georgia; 6,300 square feet of office space in Dallas, Texas and 2,900 square
feet of office space in Jacksonville, Florida. The Dallas, Texas lease expired
on May 30, 2000, the Independence, Ohio lease expired on June 1, 2000 and the
Jacksonville, Florida lease expires on April 30, 2001. In connection with the
April 28, 2000 sale of HealthStar, Inc. to Beyond Benefits, Inc., the Company
assigned all of its rights in and to the Chicago, Atlanta and Jacksonville
leases. Pursuant to a sublease between the Company and American Financial
Group, Inc., which is an affiliate of the Company's President and one of its
directors, the Company leases approximately 2,000 square feet from American
Financial Group in Aventura, Florida for its corporate headquarters for $1,000
per month. This sublease expires on December 31, 2000 however, the Company has
an option to renew for an additional one year period. See
Item 12--"Transactions with Related Parties."
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to THOMAS H. STATEMAN V. HEALTHSTAR CORP. (Circuit
Court of Cook County, Illinois (Chancery Division, Case No. 98 CH 16824)), filed
on December 4, 1998. Mr. Stateman claimed a purported breach by the Company of
the Stock Purchase Agreement dated December 15, 1997 (the "SPA") pursuant to
which he sold all the stock of HealthStar, Inc. to the Company. Section 2.2 of
the SPA delineates the consideration to be paid under the SPA, and also provides
for a purchase price adjustment, upwards or downwards, by the "Adjustment
Amount." Section 2.2(a) of the SPA specifies the procedures for determining the
Adjustment Amount. In his Complaint, Mr. Stateman seeks a declaration that the
"Adjustment Procedure" be performed by PricewaterhouseCoopers, including a
specifically named partner, and he seeks damages of up to $900,000.
On May 2, 2000, Mr. Stateman offered to settle the lawsuit as follows:
Mr. Stateman would be entitled to receive the balance of the funds ($250,000)
remaining in the interest bearing escrow account which were part of the cash
portion of the purchase price the Company paid to Mr. Stateman on December 15,
1997. Mr. Stateman also offered to waive his right to collect under the $200,000
subordinated promissory note that the Company issued to him in connection with
the December 15, 1997 transaction. Further, Mr. Stateman offered to remit
approximately $20,000 to the Company, which represents one-half of the cost that
the Company has incurred in connection with retaining PricewaterhouseCoopers to
perform the Adjustment Procedure. The Company has instructed its legal counsel
to settle this matter under these terms, but there can be no assurance that the
settlement will be consummated.
From time to time, the Company is named as a defendant in routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Over-the-Counter Bulletin Board
market under the symbol "PPOS." On June 26, 2000, the closing trade price for
the Company's common stock was $2.44 as quoted on the OTC Bulletin Board.
The following table sets forth the approximate high and low closing sales
prices per share as reported by the Over-The-Counter Bulletin Board market for
the Company's common stock for the calendar periods indicated. The quotations do
not reflect retail markups, markdowns or commissions and may not reflect actual
transactions. On November 16, 1998, the Company affected a 1-for-2 reverse stock
split of its outstanding common stock. Share prices for periods prior to this
date have accordingly been restated.
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FISCAL QUARTER HIGH LOW
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Quarter Ended June 30, 1998................................. $11.72 $5.75
Quarter Ended September 30, 1998............................ $ 7.63 $2.25
Quarter Ended December 31, 1998............................. $ 4.44 $2.50
Quarter Ended March 31, 1999................................ $ 4.06 $2.00
Quarter Ended June 30, 1999................................. $ 7.72 $3.31
Quarter Ended September 30, 1999............................ $12.63 $3.88
Quarter Ended December 31, 1999............................. $ 7.13 $1.69
Quarter Ended March 31, 2000................................ $ 4.25 $2.56
</TABLE>
There were approximately 740 stockholders of record and approximately 800
beneficial owners of the common stock as of June 26, 2000. The Company has
neither declared nor paid any cash dividends to date.
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On March 20, 2000, 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.
ITEM 6. 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, delays in or failure to
identify and consummate a suitable acquisition, realization of the earn-out
provision related to cash flows of NHBC for the 18 months following the
December 1999 sale of NHBC's assets to Carlmont Capital Group, Inc. and other
risks detailed from time to time in the Company's Securities and Exchange
Commission filings.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the audited financial statements
and footnotes for the year ended March 31, 2000 contained herein and for the
year ended March 31, 1999 contained in the Company's Form 10-KSB/A filed with
the Securities and Exchange Commission on March 9, 2000.
RECENT DEVELOPMENTS
SALE OF HEALTHSTAR, INC. TO BEYOND BENEFITS, INC.
On April 28, 2000, the Company sold all of the issued and outstanding stock
of its wholly owned subsidiary HealthStar, Inc. ("HSI") to Beyond
Benefits, Inc., a Long Beach, California based managed healthcare company. The
sale was made pursuant to a Stock Purchase Agreement dated September 23, 1999,
as amended, by and among the Company, HealthStar, Inc., and Beyond
Benefits, Inc. The Company received $8,880,000 in cash at closing, of which,
$1,325,000 was used to repay the entire amount outstanding under the Company's
Term Loan and Credit Facility with Harris Trust and Savings Bank ("Harris
Bank"). As a result of the completion of this transaction, the Company is no
longer engaged in the managed healthcare business and currently has no revenue
generating operations. The Company intends to utilize the remaining proceeds
from this sale to acquire an internet-related business or businesses or other
business or businesses. See--"Risks Related to Business Strategy"
SALE OF NHBC TO CARLMONT CAPITAL GROUP, INC.
On December 30, 1999, the Company sold the assets of its wholly owned
subsidiary National Health Benefits & Casualty Corporation ("NHBC") to Carlmont
Capital Group, Inc. ("Carlmont"), a privately held company based in Chula Vista,
California. This sale was made pursuant to the terms of an Asset Purchase
Agreement dated December 28, 1999, by and among the Company, NHBC and Carlmont.
The
8
<PAGE>
Company received $1,500,000 in cash at closing and an earnout agreement that may
provide up to an additional $300,000 in cash, based on the actual cash flows of
NHBC during the 18 month period after closing.
RESULTS OF OPERATIONS
The following discussion of "Results of Operations" describes the Company's
business as it was conducted during the fiscal year ended March 31, 2000
("fiscal 2000" or "2000"). As a result of the completion of the sale of HSI to
Beyond Benefits on April 28, 2000 and the completion of the sale of the assets
of NHBC to Carlmont on December 30, 1999, the Company is no longer engaged in
the business as described in this section. It should also be noted that as a
result of the Company's sale of the assets of NHBC to Carlmont, the operating
results for fiscal 2000 include nine months of operating results for NHBC versus
twelve months of operating results during the fiscal year ended March 31, 1999
("fiscal 1999" or "1999").
TWELVE MONTHS ENDED MARCH 31, 2000 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1999
During fiscal 2000, the Company derived the majority of its revenue from
fees paid by its customers for access to the Company's PPO network of contracted
healthcare providers. These providers 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 consisted of a variety of payors of medical
claims such as insurance companies, third-party administrators and self-insured
employers. The Company entered into contracts with its customers and charged
network access fees using either of two methods. Customers could choose to pay a
capitated fee, which is a fixed, monthly fee per eligible subscriber. The other
method that customers could elect to choose to pay the Company for network
access is called a repricing fee. Under this method, the Company received a
percentage of the dollar amount of the discount granted by the healthcare
provider for services rendered to an enrolled subscriber. The Company's
percentage of the dollar amount of the discount was determined by contract and
varied from customer to customer.
REVENUE
Total revenue decreased $3,935,632 or 23% to $12,979,660 in 2000 compared to
$16,915,292 in 1999. Revenue for HSI decreased $3,015,375 to $11,246,047 in 2000
from $14,261,422 in 1999, a decrease of 21%. The majority of the decrease was
attributable to the loss of six significant customers that were active during
fiscal 1999. Overall, capitated fees declined approximately 15% and repricing
fees declined approximately 34% from the year ago period. The decline in
repricing fees is also attributable to the sale of NHBC at December 30, 1999 and
the inclusion of twelve months of revenue from NHBC in fiscal 1999 versus nine
months of revenue in fiscal 2000.
Other fees include charges to customers for various healthcare services
provided by the Company such as medical case management, utilization review, and
revenue generated from the sale of provider directories. Other fees also include
revenue from a Company administered pharmacy benefit program that was
discontinued in June 1999. Other fees decreased $161,348 or approximately 30%
from $540,381 in 1999 to $379,033 in 2000. The majority of this decrease is due
to the discontinuation of the pharmacy benefit program.
OPERATING EXPENSES
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 healthcare providers
which are not directly contracted with the Company, the cost of electronic
claims processing and the cost of printing provider directories. Included in the
prior year are costs associated with administering the Company's pharmacy
benefit program. Cost of services decreased $639,191 or approximately 26% to
$1,795,047 in 2000 from $2,434,238 in 1999. Approximately $200,000 of the
decrease is due to the
9
<PAGE>
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 was approximately
14% in 2000, unchanged from 1999.
Salaries and wages include all employee compensation, payroll taxes,
employee health insurance and other employee benefits. Also included in this
category are the commissions paid to in-house sales and marketing personnel.
Salaries and wages were $7,319,042 in 2000 compared to $8,202,561 in 1999, a
decrease of $883,519 or approximately 11%. The decrease is attributable to an
overall reduction in staffing levels as a result of departmental reorganizations
that were implemented during fiscal 2000. In addition, sales commissions
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. General and
administrative expenses were $3,843,487 in 2000 compared to $4,877,761 in 1999,
a decrease of $1,034,274 or approximately 21%. The majority of this decrease was
due to a decrease in bad debt expense of $767,581 from the year ago period. The
decrease in bad debt expense was attributable to lower revenue in the current
year and better collection efforts. The remainder of the decrease was 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 expense was consistent between fiscal years.
NON-OPERATING INCOME (EXPENSE)
Interest expense for the year was $292,396 compared to $397,165 in 1999, a
decrease of $104,769 or approximately 26%. The decrease is attributable to lower
levels of indebtedness during fiscal 2000 compared to fiscal 1999.
The Company's December 30, 1999 sale of the assets of NHBC to Carlmont
resulted in the Company recording a pretax gain of $1,097,147. The Company also
recorded a pretax gain of $114,538 on the sale of the assets of its vision
program, which occurred in June 1999.
The Company incurred a pretax loss of $222,453 related to the disposition of
equipment during fiscal 2000.
The acquisition of HSI in fiscal 1998 resulted in allocating a substantial
portion of the purchase price to goodwill. Pursuant to SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed
Of", management evaluates the recoverability of long-lived assets, including
goodwill. On April 28, 2000, the Company completed the sale of HSI to Beyond
Benefits for $8,880,000 in cash. Accordingly, the Company has adjusted the
carrying value of HSI's goodwill to an estimated fair value of $6,219,736,
resulting in a non-cash impairment charge of $1,996,824 ($0.51 loss per basic
and diluted share) for the fiscal year ended March 31, 2000.
INCOME TAX EXPENSE (BENEFIT)
Although the Company incurred operating losses for 2000, the Company
recognized $23,400 of income tax expense for 2000 due to minimum state tax
provisions in certain states in which the Company conducts business. Management
believes it is more likely than not that the Company will not realize the entire
benefit of the deferred tax assets at March 31, 2000, due, in part, to the sale
of HSI on April 28, 2000 and limitations on the use of the net operating loss
carryforwards which it generated. The Company recognized an income tax benefit
for 1999 primarily due to the ability to carryback net operating losses incurred
during the year to recover taxes paid in prior years.
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<PAGE>
NET LOSS
The Company incurred a net loss of $2,521,406 in fiscal 2000 compared to a
net loss of $175,670 in fiscal 1999. The primary reasons for the increased loss
are a decline in revenues resulting from the loss of six significant customers,
a goodwill impairment charge of $1,996,824, offset by net gains on the
disposition of assets of $989,232, which is primarily related to the sale of
NHBC.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents of $305,034,
total current assets of $1,848,086 and total current liabilities of $3,159,226.
At March 31, 2000, the Company had total outstanding indebtedness of $1,525,000,
of which $1,325,000 was owed to Harris Bank under the Company's Term Loan and
Credit Facility. The remaining $200,000 was owed to the former owner of
HealthStar Inc. in connection with the Company's acquisition of HSI in
December 1997. The entire amount of outstanding indebtedness was included in
current liabilities, resulting in a working capital deficiency of $1,311,140.
Under the terms of the Credit Facility, the Company was 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.
On 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.
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 1.5% on
November 30, 1999 and (v) the Company could no longer make any borrowings under
the line of credit.
On December 30, 1999, the Company completed the sale of the assets of its
wholly owned subsidiary NHBC to Carlmont Capital Group, Inc. The Company
received $1,500,000 in cash at closing and 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.
On March 3, 2000, the Company and Harris Bank executed a letter agreement
which extended the maturity date of the term loan to the earlier of
(i) April 28, 2000 or (ii) the Target Date. The Target Date was defined as the
date on which the sale of HSI to Beyond Benefits would occur. 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
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<PAGE>
failed to pay the principal amount of $1,325,000 outstanding and owed to the
bank on February 29, 2000. Under the terms of the 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 on 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 would deem material and adverse.
On April 28, 2000, in connection with the sale of HSI to Beyond Benefits,
the Company repaid the entire balance of $1,325,000 owed to Harris Bank. The
remaining proceeds from the sale are currently invested in a money market
account yielding approximately 5.5%. The Company is considering investing these
proceeds in short-term investment grade securities until such time that they are
needed in connection with the Company's plan to acquire a business or
businesses. There can be no assurance that the Company will be able to
consummate an acquisition of a business or businesses in accordance with the
Company's current business plan or in a timely manner.
As of April 28, 2000, the Company no longer has any revenue generating
operations. The only source of cash is interest income generated from the
investment of the remaining proceeds from the sale of HSI. The Company intends
to use a portion of the remaining proceeds to pay certain transaction related
costs and for general working capital purposes including the payment of salaries
to its two executive officers and other overhead costs. To date, pending
acquisition of an operating business, the Company has deposited the proceeds of
the sale of HealthStar, Inc. in money-market or similar bank accounts that earn
interest at a relatively low rate (currently 5.5% annually). To the extent the
Company continues to hold its cash in these types of accounts, the net effect of
reductions in interest rate, the advent of inflation, corporate overhead and the
passage of time--or a combination of two or more of these factors--could result
in a reduction of the Company's cash or its purchasing power, which, in turn,
could adversely affect the Company's prospects. Conversely, in the event the
Company were to invest any of its cash in securities that could yield a higher
return, such investment may involve greater risk of loss of principal.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as pages F-1
to F-19 are incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 9, 2000 KPMG LLP ("KPMG") notified the Company of their resignation
as independent accountants for the Company. The audit report of KPMG LLP on the
consolidated financial statements of HealthStar Corp. and subsidiaries as of
March 31, 1999 and for the years ended March 31, 1999 and 1998, did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles. In connection
with the audits of the two fiscal years ended March 31, 1999 and the subsequent
interim period through March 9, 2000, there were no disagreements with KPMG LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not resolved
to their satisfaction would have caused them to make reference in connection
with their opinion to the subject matter of the disagreement. During the
Company's year ended March 31, 1999 and any subsequent interim period preceding
this report, KPMG did not advise the Company with respect to any of the matters
described in paragraphs (a)(1)(v)(A) through (D) of Item 304 of Regulation S-K.
The Company provided KPMG LLP with a copy of the foregoing disclosures and
received a letter from KPMG addressed to the SEC stating that KPMG agreed with
such disclosures.
The Company has engaged Arthur F. Bell, Jr. & Associates, L.L.C., ("AFB"),
as the successor accounting firm to KPMG effective May 10, 2000. The engagement
of AFB has been approved by the Audit Committee of the Board of Directors of the
Company. Prior to the engagement of AFB there were no consultations by the
Company with AFB relating to disclosable disagreements with KPMG, how accounting
principles would be applied by AFB to a specific transaction, or the type of
opinion AFB might render.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information as of June 28, 2000, of
the Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Edward M. Chism............. 60 Chairman of the Board, President and Chief Executive
Officer
Isidor Buholzer, Jr......... 39 Director
Dr. Michael D. Flax......... 44 Director
David J. Lewis.............. 40 Director
Dr. Luis A. Queral.......... 51 Director
Steven A. Marcus............ 40 Vice President and Chief Financial Officer
</TABLE>
EDWARD M. CHISM has been Chairman of the Board since July 1999. Mr. Chism is
a principal and the Chief Executive Officer and President of American Financial
Group, Inc., a capital management company based in Aventura, Florida ("AFG").
Mr. Chism has held that position since 1993.
ISIDOR BUHOLZER, JR. has been a Director of the Company since
November 1999. Mr. Buholzer is a vice president of AFG. He has held that
position since October 1998. Prior to that, he was general manager of Austro
Financial Services, Inc. from January 1998 to October 1998, a vice president of
Banque Nationale de Paris in Miami, Florida, from October 1996 through
December 1997, and a vice president of Clariden Asset Management (New
York), Inc. from January 1994 through December 1995.
DR. MICHAEL D. FLAX has been a Director of the Company since July 1999.
Dr. Flax is an endodontist and has been in private practice in Coral Springs,
Florida since 1981. Dr. Flax is also an associate professor at the Nova
Southeastern University School of Dentistry.
DAVID J. LEWIS has been a Director of the Company since August 1999.
Mr. Lewis is President and Chief Executive Officer of Affinity Financial
Group Inc., a financial advisory company based in Toronto, Canada. Mr. Lewis has
held that position since 1991.
DR. LUIS A. QUERAL has been a Director of the Company since July 1999.
Dr. Queral is Chief of Vascular Surgery at Mercy Medical Center in Baltimore,
Maryland and has held that position since 1997. Prior to that, Dr. Queral was in
private practice as a vascular surgeon.
STEVEN A. MARCUS joined the Company in August 1999 as Vice President, Chief
Financial Officer and Secretary. Prior to that Mr. Marcus was President of
Marcus Financial, Inc., a financial consulting firm based in Scottsdale,
Arizona. Mr. Marcus held that position since 1989. Mr. Marcus was also the
President of the Company's subsidiary, HealthStar, Inc. from February 24, 2000
until April 28, 2000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the provisions of Section 16(a) of the Exchange Act, the Company's
officers, directors and 10% beneficial stockholders are required to file reports
of their transactions in the Company's securities with the Commission. Based
solely on a review of the Forms 3 and 4 and amendments thereto furnished to the
Company during its most recent fiscal year and Forms 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal year, the
Company believes that Messrs. Chism, Buholzer,
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<PAGE>
Flax, Lewis and Queral did not file their Form 3 disclosure statements within
the period of time required for such filings.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid for
all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's Chief Executive Officer and certain
executive officers of the Company. No other executive officers of the Company
received compensation in excess of $100,000 during the fiscal year ended
March 31, 2000.
SUMMARY OF EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION(1)
----------------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Edward M. Chism(2)................................... 2000 $ 42,862 0 $ 1,200
President, 1999 0 0 0
Chief Executive Officer, 1998 0 0 0
and Director
Steven A. Marcus(3).................................. 2000 85,975 0 1,200
Vice President, 1999 0 0 0
Chief Financial Officer 1998 0 0 0
Stephen J. Carder(4)................................. 2000 200,000 0 9,000
President, 1999 186,458 0 12,000
Chief Executive Officer, 1998 135,000 20,000 12,000
and Director
Darren T. Horndasch(5)............................... 2000 121,154 0 4,000
Vice President, 1999 139,618 0 44,250(6)
Chief Operating Officer 1998 0 0 0
Denise E. Nedza(7)................................... 2000 137,000 0 3,600
Vice President, 1999 57,962 0 1,500
Chief Financial Officer 1998 0 0 0
</TABLE>
------------------------
(1) The Company paid each of its executive officers an automobile allowance each
month with exception of Mr. Chism and Mr. Marcus. The Company also provides
health insurance benefits for all full time employees, including its
officers. The Company's officers do not receive additional compensation for
serving as Directors of the Company.
(2) Mr. Chism was appointed President and Chief Executive Officer of the Company
on November 12, 1999.
(3) Mr. Marcus was appointed Vice President and Chief Financial Officer of the
Company on August 19, 1999.
(4) Mr. Carder resigned his position as President, Chief Executive Officer and
Director of the Company on August 19, 1999. Mr. Carder remained President of
HealthStar, Inc. until his resignation on February 16, 2000.
(5) Mr. Horndasch resigned his position as Vice President and Chief Operating
Officer of the Company on August 19, 1999 and his position as Vice President
and Chief Operating Officer of HealthStar, Inc. on December 3, 1999.
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<PAGE>
(6) Includes $15,000 calculated as the fair market value of 5,000 shares of
common stock awarded at the time employment commenced and a moving allowance
of $25,000.
(7) Ms. Nedza resigned her position as Vice President and Chief Financial
Officer of the Company on August 19, 1999 and her position as Vice President
and Chief Financial Officer of HealthStar, Inc. on March 29, 2000.
The following table provides information concerning stock options granted to the
Named Officers during the fiscal year ended March 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE
UNDERLYING IN PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR ($ PER SHARE) DATE
---- --------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Edward M. Chism............................... 25,000 31.25% $4.00 12/17/09
25,000 31.25% $6.00 12/17/09
Steven A. Marcus.............................. 15,000 18.75% $4.00 12/17/09
15,000 18.75% $6.00 12/17/09
Stephen J. Carder............................. 0 0% N/A N/A
Darren T. Horndasch........................... 0 0% N/A N/A
Denise E. Nedza............................... 0 0% N/A N/A
</TABLE>
The options were awarded on December 17, 1999, under the HealthStar Corp
1998 Stock Option Plan (the "Plan"). The options have a ten-year term and vest
equally over a two-year period from the date of issuance. Options were also
awarded to the Company's outside directors, Mr. Buholzer, Dr. Flax, Mr. Lewis
and Dr. Queral. Each director received options to purchase 20,000 shares at
$4.00 and 20,000 shares at $6.00. These options have a ten-year term and vest
equally over a two-year period from the date of issuance, which was
December 17, 1999. Upon the change of control, as defined in the plan, which
resulted from the sale of HealthStar Inc. to Beyond Benefits Inc., all options
granted under such plan were to become fully vested and immediately exercisable.
However, each of the optionees agreed to waive their rights to immediate vesting
and consequently the options remain subject to the original vesting
requirements.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning options exercised
during the fiscal year ended March 31, 2000 by the Named Officers and the value
of in-the-money options held by the Named Officers on March 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
OF SHARES MARCH 31, 2000 MARCH 31, 2000 (1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward M. Chism............. 0 0 0 50,000 0 $ 0
Steven A. Marcus............ 0 0 0 30,000 0 0
Stephen J. Carder........... 0 0 0 0 0 0
Darren T. Horndasch......... 30,000 86,250 0 0 0 0
Denise E. Nedza............. 0 0 0 0 0 0
</TABLE>
------------------------
(1) Based on the closing sales price of $2.75 of the underlying common stock as
of March 31, 2000.
During fiscal 2000, former outside directors of the Company, Gerald E.
Finnell, Jon M. Donnell, Gary L. Nielsen and Thomas S. O'Brien exercised stock
options that were previously granted to them. These options had exercise prices
ranging from $2.875 to $3.25. Messrs. Finnell, Donnell and Nielsen exercised
15,000 shares apiece at an exercise price of $2.875 and Mr. O'Brien exercised
5,000 shares at an exercise price of $3.25. These options were scheduled to vest
equally over a three-year period from the date of grant, however, a change of
control, as defined by the plan occurred when the aforementioned directors
resigned on July 27, 1999 and thus all non-vested options became immediately
exercisable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of March 31, 2000, for
(i) each Named Officer; (ii) each director of the Company; (iii) all executive
officers and directors as a group; and (iv) each person known by the Company to
be the beneficial owner of more than five percent (5%) of the Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
OFFICERS AND DIRECTORS: SHARES BENEFICIALLY OWNED(1) OUTSTANDING STOCK
----------------------- ---------------------------- -----------------
<S> <C> <C>
Edward M. Chism(4)................................... 329,166 7.6%
Isidor Buholzer, Jr.................................. 0 *
Dr. Michael D. Flax.................................. 45,000 1.0%
David J. Lewis....................................... 0 *
Dr. Luis A. Queral................................... 0 *
Steven A. Marcus..................................... 0 *
Stephen J. Carder.................................... 0 *
Darren T. Horndasch.................................. 0 *
Denise E. Nedza...................................... 0 *
All executive officers and directors as a group
(6 persons)........................................ 374,166 8.6%
5% Holders (2):......................................
Forward Looking Technologies Limited(3).............. 329,166 7.6%
</TABLE>
------------------------
* Indicates less than one percent (1.0%).
(1) Beneficial ownership is determined under rules of the Securities and
Exchange Commission and generally includes shares in respect of which the
person has voting or investment power. Shares of
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<PAGE>
common stock subject to stock options and warrants currently exercisable or
exercisable within 60 days are beneficially owned by the option or warrant
holder and are deemed to be outstanding for computing the percentage
ownership of the person holding such options or warrants and the percentage
ownership of any group of which the holder is a member, but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment
power with respect to all shares of capital stock shown beneficially owned
by them.
(2) See "Transactions with Related Parties."
(3) The number of shares beneficially owned is given in reliance upon a
Schedule 13D filed with the Securities and Exchange Commission on
November 24, 1999 by Forward Looking Technologies, Ltd. Forward Looking
Technologies Ltd.'s principal place of business is 50 Shirley Street, Second
Floor, Nassau, Bahamas. Edward M. Chism, the Company's CEO, president and
chairman of the board of directors, has the power to vote these shares.
(4) Represents the same 329,166 shares owned by Forward Looking Technologies
Limited.
ITEM 12. TRANSACTIONS WITH RELATED PARTIES
In June 1999, Stephen J. Carder, then the Company's president, chief
executive officer and a director, sold 179,166 shares of the Company's common
stock owned by him, to Forward Looking Technologies, Ltd., at $4.00 per share.
Prior to this transaction, Forward Looking Technologies had purchased 150,000
shares of common stock at $2.50 per share from the Company in a private
placement in March 1999. As a result of its purchase from Mr. Carder, Forward
Looking Technologies increased its common stock ownership from 150,000 to
329,166 shares of common stock, and from approximately 3.9% to 7.9% of total
shares outstanding.
In June of 1999, the Company sold its vision program business for $125,000
to the sister of Stephen Carder, the Company's then president. The Company
believes, based upon a third-party valuation, that it received fair
consideration for such business.
On August 19, 1999, the board of directors authorized the Company to
purchase shares of Physiciansite.com for approximately $7.0 million, by assuming
rights under a stock subscription agreement between Physiciansite.com and
DocNet.com, Inc. The board also approved the issuance of 4 million shares of
common stock of the Company to DocNet.com, Inc. to purchase DocNet's rights
under the subscription agreement. At the same meeting, the board elected Richard
A. Yardley and Thomas C. Ronk to fill vacancies then existing on the board.
Mr. Yardley was an officer of Physiciansite.com and Mr. Ronk a shareholder in
DocNet. When the agreement with DocNet and the proposed investment in
Physiciansite.com was ultimately terminated on November 12, 1999, Mr. Yardley
and Mr. Ronk resigned their respective positions with the Company.
The President of InfoPlan Inc. entered into a Consulting Agreement with the
Company dated as of February 11, 2000 pursuant to which he provided consulting
services in connection with the sale of HSI (which have primarily involved
assisting in negotiations with Beyond Benefits for the sale of HSI) and such
other matters as requested by the Company. The Company was obligated to pay
compensation for such services in the sum of $1,000 per week for the term of the
Agreement and reimburse the consultant for reasonable expenses incurred in
connection with the performance of his services under such Agreement. The
Company intends to continue the consulting arrangement. InfoPlan Inc. is a
shareholder of 200,400 (approximately 4.6%) of the outstanding shares of the
Company. This number of shares is given in reliance upon an amendment dated
June 12, 1999 to Schedule 13D filed with the Securities and Exchange Commission,
with the shares reported in the amendment adjusted for a 1-for-2 reverse stock
split of the common stock effected on November 16, 1998. InfoPlan Inc.'s
principal place of business is 19 Hillsyde Court, Hunt Valley, Maryland, 21030.
In reliance upon an additional amendment dated June 12, 1999 to
17
<PAGE>
Schedule 13D filed with the Commission, the Company understands that the number
of shares excludes 117,116 shares (2.7%) owned by the wife of InfoPlan Inc.'s
President (with respect to which she has sole dispositive power and no voting
power). Voting power with respect to such shares was assigned to the Company's
Board of Directors. The number of shares also excludes 30,000 shares issuable
upon the exercise of options granted to the President of InfoPlan, Inc. as
compensation for prior consulting services to the Company (15,000 shares at
$4.00 per share and 15,000 shares at $6.00 per share; fifty percent (50%) of
which become exercisable on December 17, 2000 with the remaining fifty (50%)
becoming exercisable on December 17, 2001).
The Company subleases approximately 2,000 square feet of office space from
American Financial Group ("AFG") in Aventura, Florida for $1,000 per month. AFG
is an affiliate of Mr. Chism and Mr. Buholzer.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Report.
(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.
A report on Form 8-K (Item 5) was filed with the Securities and Exchange
Commission on January 14, 2000 relating to the Company's sale of the assets of
its wholly owned subsidiary National Health Benefits & Casualty Corporation to
Carlmont Capital Group, Inc., on December 30, 1999.
A report on Form 8-K/A (Item 5) was filed with the Securities and Exchange
Commission on March 14, 2000, relating to an Amendment to the Stock Purchase
Agreement between the Company and Beyond Benefits, Inc., dated February 29,
2000. The Amendment provided for a reduction to the sales price in connection
with the Company's proposed sale of the stock of its wholly owned subsidiary
HealthStar, Inc. to Beyond Benefits, Inc.
A report on Form 8-K (Item 4) was filed with the Securities and Exchange
Commission on March 15, 2000 relating to the resignation KPMG LLP as the
Company's independent auditors.
A report on Form 8-K (Item 5) was filed with the Securities and Exchange
Commission on March 15, 2000 relating to an Amendment to the Company's Credit
Agreement with Harris Trust and Savings Bank that provided for an extension of
the maturity date of the Company's Term Loan to April 28, 2000.
A report on Form 8-K/A (Item 5) was filed with the Securities and Exchange
Commission on March 31, 2000 relating to a revision to pro forma financial
information contained in a Form 8-K filed on January 14, 2000 in connection with
the Company's sale of the assets of its wholly owned subsidiary National Health
Benefits & Casualty Corporation to Carlmont Capital Group, Inc., on
December 30, 1999.
A report on Form 8-K (Item 4) was filed with the Securities and Exchange
Commission on May 17, 2000 relating to the engagement of Arthur F. Bell, Jr. &
Associates, L.L.C. as the successor accounting firm to KPMG.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(2) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: June 29, 2000
HEALTHSTAR CORP.
BY: /S/ EDWARD M. CHISM
-----------------------------------------
Edward M. Chism
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ------------------
<S> <C>
/s/ EDWARD M. CHISM
-------------------------------------------
Edward M. Chism June 29, 2000
President, Chief Executive Officer and Director
/s/ STEVEN A. MARCUS
-------------------------------------------
Steven A. Marcus June 29, 2000
Vice President, Chief Financial Officer
/s/ ISIDOR BUHOLZER, JR.
-------------------------------------------
Isidor Buholzer, Jr. June 29, 2000
Director
/s/ MICHAEL D. FLAX
-------------------------------------------
Michael D. Flax June 29, 2000
Director
/s/ DAVID J. LEWIS
-------------------------------------------
David J. Lewis June 29, 2000
Director
/s/ LUIS A. QUERAL
-------------------------------------------
Luis A. Queral June 29, 2000
Director
</TABLE>
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
HealthStar Corp.
We have audited the accompanying consolidated balance sheet of HealthStar
Corp. and subsidiaries as of March 31, 2000, and the related consolidated
statements of operations and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express and opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthStar
Corp. and subsidiaries at March 31, 2000, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ ARTHUR F. BELL, JR. & ASSOCIATES,
L.L.C.
Hunt Valley, Maryland
June 23, 2000
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
HealthStar Corp.:
We have audited the accompanying consolidated statements of operations and
retained earnings and cash flows of HealthStar Corp. and subsidiaries for the
year ended March 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conduct our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of HealthStar Corp. and subsidiaries for the year ended March 31, 1999 in
conformity with generally accepted accounting principles.
KPMG LLP
Phoenix, Arizona
May 28, 1999
F-2
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 305,034
Trade accounts receivable, less allowance for doubtful
accounts of $100,000.................................. 1,428,777
Other current assets.................................... 114,275
-----------
Total current assets................................ 1,848,086
Property and equipment, net............................... 1,527,465
Goodwill, net of accumulated amortization of $3,057,759... 6,219,736
Other assets, at cost..................................... 460,010
-----------
Total assets........................................ $10,055,297
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 648,477
Accrued expenses........................................ 985,749
Current portion of long-term debt....................... 1,525,000
-----------
Total current liabilities........................... 3,159,226
-----------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value, 15,000,000 shares
authorized, 4,345,872 shares issued and outstanding..... 4,346
Additional paid-in capital................................ 9,196,428
Retained earnings (deficit)............................... (2,304,703)
-----------
Total shareholders' equity.......................... 6,896,071
Commitments and contingencies (notes 2 and 10)
-----------
Total liabilities and shareholders' equity.......... $10,055,297
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
Capitated fees............................................ $ 8,033,984 $ 9,481,392
Repricing fees............................................ 4,566,643 6,893,519
Other fees................................................ 379,033 540,381
----------- -----------
Total revenues.......................................... 12,979,660 16,915,292
----------- -----------
OPERATING EXPENSES
Cost of services.......................................... 1,795,047 2,434,238
Salaries and wages........................................ 7,319,042 8,202,561
General and administrative................................ 3,843,487 4,877,761
Depreciation and amortization............................. 1,220,102 1,214,204
----------- -----------
Total operating expenses................................ 14,177,678 16,728,764
----------- -----------
Income (loss) from operations............................... (1,198,018) 186,528
Non-operating income (expense):
Interest expense.......................................... (292,396) (397,165)
Net gains (losses) on dispositions of assets.............. 989,232 (59,626)
Asset impairment charge................................... (1,996,824) 0
----------- -----------
(Loss) before income taxes.................................. (2,498,006) (270,263)
Income tax expense (benefit)................................ 23,400 (94,593)
----------- -----------
Net (loss).............................................. (2,521,406) (175,670)
Retained earnings at beginning of year...................... 216,703 392,373
----------- -----------
Retained earnings (deficit) at end of year.................. $(2,304,703) $ 216,703
=========== ===========
(Loss) per share--Basic and Diluted......................... $ (0.64) $ (0.05)
=========== ===========
Weighted average shares outstanding--Basic and Diluted...... 3,937,449 3,216,676
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss)................................................ $(2,521,406) $ (175,670)
Adjustments to reconcile net (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 1,220,102 1,214,204
Net gain on dispositions of assets...................... (989,232) 0
Asset impairment charge................................. 1,996,824 0
Bad debt expense........................................ (129,397) 638,184
Gain related to stock transactions...................... 0 (70,981)
Loss on investment in healthcare technology company..... 0 59,626
Stock-based compensation................................ 196,700 0
Increase (decrease) in cash resulting from changes in
operating assets and liabilities:
Trade accounts receivable............................... 420,404 (120,589)
Other current assets.................................... 194,793 (397,980)
Accounts payable........................................ (234,434) (280,830)
Accrued expenses........................................ (603,286) (608,691)
----------- -----------
Net cash (used in) provided by operating
activities........................................ (448,932) 257,273
----------- -----------
INVESTING ACTIVITIES
Purchases of equipment.................................... (97,988) (369,183)
Investment in healthcare technology company............... 0 100,000
Net proceeds from dispositions of assets.................. 1,550,355 0
----------- -----------
Net cash provided by (used in) investing
activities........................................ 1,452,367 (269,183)
----------- -----------
FINANCING ACTIVITIES
(Increase) in other assets................................ (219,462) (40,620)
Net proceeds from line of credit.......................... 0 350,000
Payments on long-term debt................................ (1,400,000) (425,000)
Redemption of convertible debenture....................... 0 (1,000,000)
Proceeds from issuance of common stock.................... 849,125 1,000,000
----------- -----------
Net cash (used in) financing activities............. (770,337) (115,620)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 233,098 (127,530)
Cash and cash equivalents at beginning of year.............. 71,936 199,466
----------- -----------
Cash and cash equivalents at end of year.................... $ 305,034 $ 71,936
=========== ===========
SUPPLEMENTAL FINANCIAL DISCLOSURE
Interest paid............................................. $ 246,687 $ 345,738
=========== ===========
Income taxes (refunded) paid.............................. $ (128,243) $ 220,737
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Settlement on convertible debenture....................... $ 0 $ 3,000,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. DESCRIPTION OF BUSINESS
Prior to April 28, 2000, HealthStar Corp. (the "Company") was a healthcare
management company dedicated to controlling the cost, improving the quality and
enhancing the delivery of healthcare services. The Company provided related
products and services designed to reduce healthcare costs. The Company marketed
and provided programs and services to insurance companies, self-insured
businesses for their medical plans, and third parties that administer employee
medical plans. These programs and services assisted clients in reducing
healthcare costs for group health plans and for workers' compensation coverage
and automobile accident injury claims. The Company operated its business in one
segment through its two wholly-owned subsidiaries, HealthStar, Inc.
("HealthStar") and National Health Benefits & Casualty Corporation ("NHBC"). The
Company is a registrant with the Securities and Exchange Commission and its
shares are publicly traded on the Over-The-Counter Bulletin Board.
The Company is the successor company to Champion Financial Corporation
("Champion"), a Utah corporation. Effective November 16, 1998, Champion
reincorporated in the State of Delaware. At the same time, Champion merged all
of its assets into its newly formed Delaware subsidiary, HealthStar Corp. The
effect of this reincorporation has caused HealthStar Corp. to continue to
operate Champion's business while Champion has ceased to exist.
On December 30, 1999, the Company sold all of the assets of NHBC to Carlmont
Capital Group, Inc. and received as consideration $1,500,000 in cash at closing
and an earn-out agreement that may provide up to an additional $300,000 in cash,
based on cash flows of NHBC, over the 18 months following the closing of the
transaction.
On April 28, 2000, the Company sold all of the capital stock of HealthStar
to Beyond Benefits, Inc. and received consideration of $8,880,000 in cash at
closing. The capital stock of HealthStar constituted substantially all of the
assets of the Company at March 31, 2000. As a result of this sale, the Company
no longer operates in the managed healthcare industry and currently does not
have any ongoing revenue generating operations. See Note 14, "Subsequent Event
(Unaudited)" for further details of the sale of HealthStar and its impact on
future operations.
NOTE 2. LIQUIDITY
The Company's financial statements have been prepared on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recently experienced operating losses and working capital deficits that have
affected the Company's liquidity. The Company and Harris Trust and Savings Bank
("Harris Bank") executed a letter agreement, dated as of March 3, 2000, which
extended the maturity date of its term loan with Harris Bank to the earlier of
(i) April 28, 2000 or (ii) the sale of HealthStar to Beyond Benefits, Inc. (the
"Target Date"). Specifically, the letter agreement acknowledged that the Company
was in default under certain terms of its loan agreement with Harris Bank. Under
the terms of the letter agreement, Harris Bank waived the defaults subject to
certain conditions, including payment in full of the principal amount
outstanding under the applicable note by the Target Date and the payment of a
$10,000 loan extension fee. On April 28, 2000, the Company completed the sale of
HealthStar to Beyond Benefits, Inc. and used $1,325,000 of the proceeds from the
sale to repay the Harris Bank term loan in its entirety. Management believes the
sale of HealthStar provides sufficient working capital for the Company to
continue as a going concern.
F-6
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its two wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
C. CASH EQUIVALENTS
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents.
D. EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding.
Diluted earnings (loss) per share reflects the maximum dilution that would
result after giving effect to dilutive stock options and warrants and to the
assumed conversion of all dilutive convertible securities and stock. Outstanding
options to purchase common shares were not included in the computation of
diluted earnings (loss) per share because they were considered anti-dilutive.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management believes that the recorded amounts of current assets and current
liabilities approximate fair value because of the short maturity of these
instruments.
F. REVENUE RECOGNITION
The Company provides its 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
F-7
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
G. COST OF SERVICES
The major components of cost of services consist of utilization review, case
management, external marketing commissions, and costs associated with electronic
transmission of customers' healthcare claims.
H. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, which approximates three years for equipment to
seven years for furniture and fixtures. Computer software is amortized over
three to five years.
I. 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 its
estimated useful life of 20 years.
J. INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
A valuation allowance must be established to reduce deferred income tax
benefits if it is more likely than not that a portion of the deferred income tax
benefits will not be realized. It is management's opinion that the entire
deferred tax benefit may not be recognized in future years. Therefore, a
valuation allowance equal to the deferred tax benefit has been established for
the portion of the net operating loss carryforward and other deferred tax assets
which may not be recognized in future years.
F-8
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews the possible impairment of long-lived assets and certain
identifiable intangible assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets measured using quoted
market prices when available or the present value of estimated expected future
cash flows using a discount rate commensurate with the risks involved. In
measuring impairment, assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets.
L. STOCK BASED COMPENSATION
The Company applies Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure required by SFAS No. 123. In accordance with APB Opinion No. 25,
compensation expense is recorded on the date an option is granted only if the
current market price of the underlying stock exceeds the exercise price.
M. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), established standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income (loss) was the same
as net income (loss) for all periods presented.
N. SEGMENT REPORTING
The Company has one operating business segment, healthcare cost containment,
which involves the marketing and provision of programs and services to insurance
companies, self-insurance businesses for their medical plans and third parties
who administer employee medical plans.
NOTE 4. ASSET IMPAIRMENT CHARGE
The Company's acquisition of HealthStar in fiscal 1998 was accounted for
under the purchase method of accounting. The assets and liabilities of
HealthStar at the time of acquisition were adjusted to their fair value and
resulted in $9,062,000 of the purchase price being allocated to goodwill.
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed
F-9
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 4. ASSET IMPAIRMENT CHARGE (CONTINUED)
Of," management evaluates the recoverability of the long-lived assets, including
goodwill. While management originally believed that revenues and profits would
increase after HealthStar's operations were fully integrated into the Company,
management also explored strategic mergers and acquisitions that would
complement HealthStar's operations. In May 1999, management received an offer to
sell HealthStar to Beyond Benefits, Inc., a privately held managed healthcare
company. On September 23, 1999, the Company and Beyond Benefits, Inc. entered
into a Definitive Stock Purchase Agreement ("Stock Purchase Agreement"). On
February 29, 2000, the Company and Beyond Benefits, Inc. executed an amendment
to the Stock Purchase Agreement. Under the terms of the amendment, the Company
would receive cash of $8,880,000 at closing (which occurred on April 28, 2000).
Accordingly, the Company adjusted the carrying value of HealthStar's goodwill to
an estimated fair value of approximately $6.2 million, resulting in a non-cash
impairment charge of approximately $2.0 million ($.51 loss per basic and diluted
share) for the year ended March 31, 2000. The fair value was estimated based on
the sales price of $8,880,000 less direct and incremental disposal costs of
approximately $545,000.
NOTE 5. GAINS AND LOSSES ON DISPOSITIONS OF ASSETS
On March 30, 1999, the Company sold its investment in a healthcare
technology company for $100,000 in cash and a $150,000 promissory note, which
resulted in a pre-tax loss of $59,626.
On June 7, 1999, the Company sold its First American Vision Services program
for cash consideration of $125,000 to an immediate family member of a former
officer of the Company, which resulted in a pre-tax gain of $114,538. The vision
program accounted for approximately $14,000 in revenue during the year ended
March 31, 2000.
On December 30, 1999, the Company sold all of the assets of NHBC. The
Company received $1,500,000 in cash at closing and an earnout agreement that may
provide up to an additional $300,000 in cash, based on the actual cash flows of
NHBC during the 18 months following the closing date. No value has been assigned
to the earn-out agreement. The Company recognized a pre-tax gain on the sale of
NHBC's assets of $1,097,147 and used $1,325,000 of the cash proceeds to pay down
indebtedness owed to Harris Bank.
During fiscal 2000, the Company also recognized a pre-tax loss of $222,453
related to the disposal of equipment.
NOTE 6. PROPERTY AND EQUIPMENT
A summary of property and equipment by major classification at March 31,
2000 follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 306,159
Computer software........................................... 649,925
Equipment................................................... 1,865,457
-----------
2,821,541
Accumulated depreciation.................................... (1,294,076)
-----------
$ 1,527,465
===========
</TABLE>
F-10
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 7. DEBT
Debt consists of the following at March 31, 2000:
<TABLE>
<S> <C>
Note payable to Harris Trust and Savings Bank, due April 28,
2000, secured by substantially all the assets of the
Company; interest payable monthly at prime plus 1.5%...... $1,325,000
Subordinated note payable to the previous owner of
HealthStar, Inc., interest payable monthly at 8%,
currently due............................................. 200,000
----------
$1,525,000
==========
</TABLE>
In connection with the acquisition of HealthStar, Champion issued $4,000,000
Series A 8% Senior Subordinated Convertible Redeemable debentures. The terms of
the debentures called for conversion at the lower of 75% of the average closing
bid price of Champion stock for the five days preceding the subscription, or 75%
of the closing bid price of Champion stock on the day prior to the holders'
election to convert. Management of the Company took action shortly after the
transaction which resulted in a modification of terms to the original agreement
such that the debentures would be converted to Champion stock at the market
price at settlement date. On August 31, 1998, $3,000,000 of the debentures were
settled through the issuance of 800,000 shares of common stock, and $1,000,000
of the debentures were converted into a promissory note bearing interest at 8%.
These settlement terms were substantially at then market rates. The promissory
note was redeemed in cash on March 31, 1999.
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 HealthStar to Beyond Benefits, Inc.
(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 the letter agreement, Harris 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 loan
extension fee; (iii) all things necessary to effect the sale of HealthStar 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.
On April 28, 2000, the Company completed the sale of HealthStar to Beyond
Benefits, Inc. and used $1,325,000 of the proceeds from the sale to repay the
Harris Bank term loan in its entirety.
F-11
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 8. ACCRUED EXPENSES
A summary of accrued expenses at March 31, 2000 follows:
<TABLE>
<S> <C>
Salaries and benefits....................................... $265,785
Professional fees........................................... 275,758
Other....................................................... 444,206
--------
$985,749
========
</TABLE>
NOTE 9. STOCK TRANSACTIONS
A summary of equity transactions follows:
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31,
1998............... 5,855,802 $ 5,856 $4,617,015 $ 392,373 $ 5,015,244
Net (loss)........... -- -- -- (175,670) (175,670)
Common stock issued.. 1,348,884 1,349 3,530,729 -- 3,532,078
Reverse stock
split.............. (3,384,814) (3,385) 3,385 -- --
---------- ------- ---------- ----------- -----------
Balance, March 31,
1999............... 3,819,872 3,820 8,151,129 216,703 8,371,652
Net (loss)........... -- -- -- (2,521,406) (2,521,406)
Stock-based
compensation....... -- -- 196,700 -- 196,700
Common stock issued.. 526,000 526 848,599 -- 849,125
---------- ------- ---------- ----------- -----------
Balance, March 31,
2000............... 4,345,872 $ 4,346 $9,196,428 $(2,304,703) $ 6,896,071
========== ======= ========== =========== ===========
</TABLE>
On March 10, 1998, the Company agreed to settle HealthStar
transaction-related costs of $300,000 for 100,000 shares of common stock. The
shares were issued on April 28, 1998.
On June 29, 1998, the Company issued 9,101 shares of common stock valued at
$29,578 as an interest payment on the convertible debentures.
On July 8, 1998, the Company issued 5,000 shares of common stock at $3.00
per share to an employee as compensation.
On August 31, 1998, the Company issued 800,000 shares of common stock valued
at $3.10 per share to effect the settlement of the convertible debentures
(Note 7).
F-12
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 9. STOCK TRANSACTIONS (CONTINUED)
On November 16, 1998, the Company effected a 1-for-2 reverse split of common
stock. All common stock data in the accompanying financial statements for all
years presented have been retroactively adjusted to reflect the stock split.
On March 30, 1999, the Company entered into three common stock subscription
agreements for an aggregate of 400,000 shares, yielding proceeds of $1,000,000.
On March 31, 1999, the shares were issued, and the Company issued an additional
34,783 shares for the settlement of offering costs.
On August 11, 1999, the Company issued 30,000 shares of common stock at
$2.88 per share to former directors of the Company under the 1998 Stock Option
Plan.
On August 24, 1999, the Company issued 15,000 shares of common stock at
$2.88 per share to a former director of the Company under the 1998 Stock Option
Plan.
On August 27, 1999, the Company issued 6,000 shares of common stock at $2.88
per share to an employee and 5,000 shares at $3.25 to a former director of the
Company under the 1998 Stock Option Plan.
On October 6, 1999, the Company issued 30,000 shares of common stock at
$2.88 per share to an employee of the Company under the 1998 Stock Option Plan.
On December 29, 1999, the Company issued an aggregate of 240,000 shares in a
private placement, yielding proceeds of $300,000, related to two common stock
subscription agreements in which the terms were agreed upon on November 24,
1999.
On March 20, 2000, the Company issued 200,000 shares in a private placement,
yielding proceeds of $300,000, related to a common stock subscription agreement
entered into on that date.
During fiscal 2000, the Company granted two consultants (including a
beneficial shareholder) stock options for an aggregate of 60,000 shares of
common stock with a weighted-average exercise price of $5.00 for services
provided during the year. The fair value of these unexercised options was
recognized as consulting expense and increased additional paid-in capital during
fiscal 2000.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under noncancelable operating leases for office
space and equipment which expire at various dates during the next six years.
Rent expense under noncancelable operating leases was approximately $1,161,000
and $1,044,000 in 2000 and 1999, respectively.
In connection with the sale of HealthStar on April 28, 2000, the Company
formally assigned its rights in and to its leases for real property to Beyond
Benefits, Inc. These leases were for office space in Chicago, Illinois and
Atlanta, Georgia.
On May 13, 1999, the Company settled litigation of a matter that was
originally filed against HealthStar prior to its acquisition by Champion. In
this litigation an individual claimed breach of contract among other charges.
The lawsuit was settled for $200,000 and was included in other accrued
liabilities at March 31, 1999.
F-13
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in litigation asserted by the previous owner (the
"plaintiff") of HealthStar. In this litigation, the plaintiff filed a complaint
for breach of contract on December 4, 1998 seeking damages. Subsequent to
March 31, 2000, the plaintiff offered to settle the lawsuit under certain terms,
including waiving his right to collect under the $200,000 subordinated
promissory note that the Company issued to him in connection with the
acquisition of HealthStar. The Company has instructed its legal counsel to
settle this matter under these terms, but there can be no assurance that the
settlement will be consummated. This gain contingency has not been recorded in
the consolidated balance sheet at March 31, 2000.
The Company is also the subject of various other claims and litigation
arising out of the ordinary course of business. In the opinion of management,
the Company has adequate legal defenses and the outcome of these matters will
not materially effect the Company's financial position.
NOTE 11. INCOME TAXES
The utilization of the Company's net operating loss carryforwards is
dependent on the Company's ability to generate sufficient taxable income during
the carryforward period. However, in March 1995, there was an ownership change
in the Company as defined in Section 382 of the Internal Revenue Code. As a
result, the Company's ability to utilize net operating losses and capital losses
available before the ownership change is restricted to a total of approximately
$46,000 per year.
At March 31, 2000, the Company has available net operating loss
carryforwards for Federal income tax purposes, subject to the limitations
discussed above, which may provide future tax benefits expiring as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE
---------------
<S> <C>
2005........................................................ $ 459
2006........................................................ 201,008
2010........................................................ 11,465
2011........................................................ 1,114
2012........................................................ 264,844
2019........................................................ 171,410
2020........................................................ 1,055,599
----------
$1,705,899
==========
</TABLE>
Income tax expense for the year ended March 31, 2000 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal.................................... $ 0 $0 $ 0
State and local................................. 23,400 0 23,400
-------- -- --------
$ 23,400 $0 $ 23,400
======== == ========
</TABLE>
F-14
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 11. INCOME TAXES (CONTINUED)
Income tax benefit for the year ended March 31, 1999 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal.................................... $(76,218) $0 $(76,218)
State and local................................. (18,375) 0 (18,375)
-------- -- --------
$(94,593) $0 $(94,593)
======== == ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory Federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Computed "expected" federal income tax benefit......... $(849,322) $(91,889)
Expected state income tax benefit, net of federal
benefit.............................................. (124,900) (12,127)
Expiration of capital losses........................... 0 354,273
Change in valuation allowance.......................... 1,014,717 (420,642)
Non deductible item.................................... 9,690 (5,520)
Other.................................................. (26,785) 81,312
--------- --------
$ 23,400 $(94,593)
========= ========
</TABLE>
Despite incurring operating losses for the year, the Company recognized
$23,400 of income tax expense for the year ended March 31, 2000 due to minimum
state tax provisions in certain states in which the Company conducts business.
The benefit of the Company's net operating loss carryforwards has been
eliminated through a valuation allowance.
F-15
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 11. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ 665,300 $186,767
Capital loss carryforward............................ 0 49,448
Alternative minimum tax carryforward................. 20,232 0
Asset impairment charge.............................. 778,761 0
Reserve for bad debt................................. 39,000 123,856
Accrued expenses..................................... 40,334 52,336
Other................................................ 10,925 0
---------- --------
Deferred tax asset................................. 1,554,552 412,407
Less valuation allowance........................... (1,199,042) (184,325)
---------- --------
Net deferred tax asset............................. 355,510 228,082
---------- --------
Deferred tax liabilities:
Amortization......................................... (146,512) (83,118)
Fixed Assets......................................... (189,074) (101,073)
Prepaid expenses..................................... (19,924) (43,891)
---------- --------
Deferred tax liability............................... (355,510) (228,082)
---------- --------
Net deferred tax asset............................. $ 0 $ 0
========== ========
</TABLE>
The increase in the deferred tax asset valuation allowance for the year
ended March 31, 2000 of $1,014,717 was primarily due to operating losses and
asset impairment charges incurred during the year. The reduction of the deferred
tax asset valuation allowance for the year ended March 31, 1999 of $343,083 was
primarily due to the expiration of certain capital loss carryforwards.
In assessing the realizability of the deferred tax asset, management
considers whether it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The ultimate realization of a deferred
tax asset is dependent upon generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Management believes it is more likely than not that the Company will not realize
the entire benefit of the deferred tax assets at March 31, 2000 due, in part to
the sale of HealthStar on April 28, 2000 and limitations on the use of net
operating loss carryforwards which it generated. In addition, management also
considered the level of historical taxable income and projections for future
taxable income over the periods in which the Company's deferred tax assets are
deductible, and concluded that is more likely than not that the Company will not
realize the entire benefit of the deferred tax assets.
F-16
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 12. STOCK OPTIONS
Effective August 18, 1998, the Board of Directors adopted the 1998 Stock
Option Plan (the "Plan"). The Plan allows incentive stock options ("ISO's") to
be granted to employees only, while non-qualified stock options ("NSO's") may be
granted to the Company's directors and key personnel and to providers of various
services to the Company. The exercise price for ISO's is determined by the
Compensation Committee of the Board of Directors and can be no less than
100 percent of the market price of the Company's common stock on the date of the
option grant.
Both ISO's and NSO's may be exercised within ten years from the date of
grant and generally vest in two to three years. The Company has reserved 500,000
shares of common stock for grants under the Plan. The Plan is administered by
the Compensation Committee, which establishes the awards, vesting requirements
and expiration dates of options granted.
A summary of the aforementioned stock plan activity follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
PRICE PER
NUMBER SHARE
-------- ---------
<S> <C> <C>
Balance, March 31, 1998................................... -- $ --
Granted................................................... 141,000 2.88
Forfeited................................................. (20,000) 2.88
------- -----
Balance, March 31, 1999................................... 121,000 2.88
Granted................................................... 305,000 4.97
Exercised................................................. (86,000) 2.90
Forfeited................................................. (40,000) 2.88
------- -----
Balance, March 31, 2000................................... 300,000 $5.00
======= =====
</TABLE>
A summary of stock options outstanding at March 31, 2000 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, CONTRACTUAL EXERCISE AT MARCH 31, EXERCISE
PRICES 2000 LIFE PRICE 2000 PRICE
--------------------- ------------ ----------- --------- ------------ ---------
<C> <C> <S> <C> <C> <C>
$4-$6 300,000 9.7 years $5.00 0 --
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its Plan, and accordingly, no
compensation cost has been recognized for its stock options in the consolidated
financial statements as no options were granted at a price below the market
price of the Company's common stock on the day of grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the
F-17
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 12. STOCK OPTIONS (CONTINUED)
Company's net (loss) and (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C> <C>
Net (loss) As reported $(2,521,406) $(175,670)
Pro forma (2,710,406) (193,309)
(Loss) per share--basic As reported (.64) (.05)
Pro forma (.69) (.06)
(Loss) per share--diluted As reported (.64) (.05)
Pro forma (.69) (.06)
</TABLE>
For purposes of pro forma disclosures, stock-based compensation is amortized
to expense on a straight-line basis over the vesting period.
The fair value of options granted under the Plan was estimated on the date
of grant with vesting periods ranging from two to three years using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Expected life in years...................................... 5 5
Risk-free interest rate..................................... 6.2% 4.3%
Expected volatility......................................... 100% 100%
Dividend yield.............................................. 0% 0%
</TABLE>
NOTE 13. BENEFIT PLANS
Until April 28, 2000, the Company had a defined contribution 401(k) plan for
all employees. Under the 401(k) plan, employees were permitted to make
contributions to the plan in accordance with IRS regulations. The Company had
the option to make discretionary contributions as approved by the Board of
Directors. There were no contributions made during 2000 and 1999.
In August 1998, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). Under the terms of the Purchase Plan, employees may purchase a
total of up to 500,000 shares of common stock. The purchase price per share is
85% of the lessor of (1) the market value of common stock on the last business
day of the purchase period or, (ii) the greater of the market value of common
stock for the purchase period and the market value of common stock on the first
business day of the purchase period. No shares have been issued since the
inception of the Purchase Plan.
NOTE 14. SUBSEQUENT EVENT (UNAUDITED)
On April 28, 2000, the Company completed the sale of the stock of its wholly
owned subsidiary, HealthStar, Inc. to Beyond Benefits, Inc. The Company received
$8,880,000 in cash at closing and used $1,325,000 to repay the outstanding
principal balance of the Harris Bank term loan. This sale, which constituted the
sale of substantially all the assets of the Company, was approved by the
shareholders of the Company on April 25, 2000. As a result of the asset
impairment charge related to HealthStar taken in fiscal 2000, HealthStar's net
income or loss is not expected to have any material effect on the Company's
F-18
<PAGE>
HEALTHSTAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 14. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
consolidated net income or loss in fiscal 2001. Following this sale, the Company
no longer operates in the managed healthcare industry and currently does not
have any ongoing revenue generating operations. The Company intends to utilize
the remaining net proceeds from the sale to acquire an Internet business or
other business or businesses.
The operations of NHBC and HealthStar represented substantially all of the
operations of the Company for the year ended March 31, 2000. Had the sale of
NHBC's assets and the sale of HealthStar's capital stock occurred at the
beginning of fiscal 2000, the Company would have had no revenue and an unaudited
pro forma net loss of approximately $1.2 million due to corporate overhead and
general and administrative expenses. Additionally, had the sale of HealthStar
occurred at March 31, 2000, the Company would have had approximately $7 million
in unaudited pro forma total assets and net assets (consisting primarily of cash
and cash equivalents) at March 31, 2000.
The pro forma results of operations include adjustments to give effect to
the payment of outstanding indebtedness from the proceeds of the sales, as well
as to give effect to eliminating the results of operations of NHBC and
HealthStar (including the $1,097,147 gain on the sale of NHBC's assets and the
$1,996,824 asset impairment charge related to HealthStar). The unaudited pro
forma information is not necessarily indicative of the results of operations
that would have occurred had the sales been made at the beginning of fiscal 2000
or the future results of operations.
NOTE 15. SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowance for doubtful
accounts follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Balance at beginning of period........................ $ 317,580 $ 250,000
Provision for bad debt................................ (129,397) 638,184
Write-offs............................................ (88,183) (570,604)
--------- ---------
Balance at end of period.............................. $ 100,000 $ 317,580
========= =========
</TABLE>
A summary of adjustments made to reduce revenue resulting from re-estimation
of amounts owed to the Company from its customers is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Revenue adjustments..................................... $770,408 $565,478
======== ========
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
3.1 Articles of Incorporation dated August 24, 1998 and all
amendments thereto (incorporated by reference to the
Company's Report on Form Def 14A filed with the Commission
on August 26, 1998).
3.2 By-Laws (incorporated by reference to the Company's Report
on Form Def 14A filed with the Commission on August 26,
1998).
10.1 Stock Purchase Agreement and Amendments thereto among the
Company, HealthStar, Inc. and Beyond Benefits, Inc.
regarding the sale of HealthStar, Inc. (incorporated by
reference to Definitive Proxy Statement as filed with the
Commission on April 3, 2000).
10.2 Form of Amendment of Option Contract entered between the
Company and each pertinent optionee as of April 28, 2000.(1)
16.1 Letter on Change in Certifying Accountant.(1)
21 Subsidiaries of the Registrant.(1)
23.1 Consent of Arthur F. Bell, Jr. & Associates, L.L.C.(1)
23.2 Consent of KPMG.(1)
27 Financial Data Schedule.(1)
</TABLE>
------------------------
(1) Filed herewith
