-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoY/7SVkEFQDG+6eWJKQADUHPuBdqaRn3rKb24MEUzmGw9eoy8Ke431MziNyWf1Y ib6473pLxtbwqP9GOoupdw== 0000950147-99-000097.txt : 19990215 0000950147-99-000097.hdr.sgml : 19990215 ACCESSION NUMBER: 0000950147-99-000097 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSTAR CORP /UT/ CENTRAL INDEX KEY: 0000877050 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 911934592 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19499 FILM NUMBER: 99534168 BUSINESS ADDRESS: STREET 1: 8745 WEST HIGGINS STREET 2: SUITE 300 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 602-451-8575 MAIL ADDRESS: STREET 1: 8745 WEST HIGGINS STREET 2: SUITE 300 CITY: CHICAGO STATE: IL ZIP: 60631 FORMER COMPANY: FORMER CONFORMED NAME: CHAMPION FINANCIAL CORP /MD/ DATE OF NAME CHANGE: 19970213 10QSB 1 QUARTERLY REPORT FOR THE QTR ENDED 12/31/98 U. S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from _____________ to _____________ Commission file number 0-19499 HEALTHSTAR CORP (Exact name of small business issuer as specified in its charter) DELAWARE 91-1934592 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 8745 West Higgins, Suite 300, CHICAGO, ILLINOIS 60631 (Address of principal executive offices) (773) 693-7827 (ISSUER'S TELEPHONE NUMBER) Champion Financial Corporation 9495 E. San Salvador Dr. Scottdale, Arizona 85258 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the last practicable date: Common stock, $0.001 par value, 3,385,089 outstanding as of February 10, 1999 1 HealthStar Corp. Index Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998 ......................................................3 Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 1998 and 1997 ....................4 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1997 ....................................5 Notes to Unaudited Consolidated Financial Statements ................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................10 Part II: Other Information Exhibits - None Signatures ..............................................................14 2 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 March 31, (UNAUDITED) 1998 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 23,875 $ 199,466 Trade accounts receivable, less allowance for doubtful accounts of $103,580 and $250,000, respectively 2,431,543 2,512,446 Other current assets 101,956 69,126 ----------- ----------- Total current assets 2,557,374 2,781,038 Property and equipment, net 2,620,906 2,851,957 Investment in healthcare technology company 309,626 309,626 Intangibles, net of accumulated amortization of $494,596 and $146,030, respectively 8,657,899 9,006,465 Other assets, at cost 83,477 499,577 ----------- ----------- Total assets $14,229,282 $15,448,663 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 883,000 $ 1,163,741 Accrued expenses 1,449,540 2,269,678 Current portion of long-term debt 500,000 400,000 Note payable 200,000 200,000 ----------- ----------- Total current liabilities 3,032,540 4,033,419 Line of credit 850,000 300,000 Long-term debt 2,700,000 6,100,000 ----------- ----------- Total liabilities 6,582,540 10,433,419 ----------- ----------- Shareholders' equity: Common stock, $.001 par value 15,000,000 shares authorized, 3,385,089 shares issued and outstanding at December 31, 1998 and 2,927,901 at March 31, 1998 3,385 2,928 Additional paid-in-capital 7,151,564 4,619,943 Retained earnings 491,793 392,373 ----------- ----------- Total shareholders' equity 7,646,742 5,015,244 ----------- ----------- Total liabilities and shareholders' equity $14,229,282 $15,448,663 =========== =========== See accompanying notes to unaudited consolidated financial statements. 3 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Statements of Operations and Retained Earnings (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, ---------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ---------- Revenues: Capitated fees $2,406,647 $ 109,735 $ 7,636,855 $ 347,805 Repricing fees 1,835,766 588,258 5,479,854 1,732,549 Other fees 125,266 1,600 477,311 12,185 ---------- ---------- ----------- ---------- 4,367,679 699,593 13,594,020 2,092,539 ---------- ---------- ----------- ---------- Operating expenses: Cost of services 589,578 268,465 1,871,352 796,527 Salaries and wages 2,162,510 277,204 6,228,782 745,446 General and administrative 1,274,212 230,488 4,105,059 532,430 Depreciation and amortization 305,497 27,452 887,796 55,691 Interest expense 83,901 -- 333,193 -- ---------- ---------- ----------- ---------- 4,415,698 803,609 13,426,182 2,130,094 ---------- ---------- ----------- ---------- Earnings (loss) before income taxes (48,019) (104,016) 167,838 (37,555) Income tax (benefit) (1,582) (10,000) 68,418 -- ---------- ---------- ----------- ---------- Net earnings (loss) (46,437) (94,016) 99,420 (37,555) Retained earnings at beginning of period 538,230 144,729 392,373 88,268 ---------- ---------- ----------- ---------- Retained earnings at end of period $ 491,793 $ 50,713 $ 491,793 $ 50,713 ========== ========== =========== ========== Earnings (loss) per share- Basic and Diluted $ (0.01) $ (0.03) $ 0.03 $ (0.01) ========== ========== =========== ========== Weighted average shares outstanding- Basic and Diluted 3,385,089 2,769,912 3,159,979 2,747,778 ========== ========== =========== ==========
See accompanying notes to unaudited consolidated financial statements. 4 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, ------------------------------ 1998 1997 ----------- ----------- Operating activities: Net earnings (loss) $ 99,420 $ (37,555) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 887,796 55,691 Bad debt expense 183,000 Stock-based employee compensation 15,000 Interest expense on debentures 29,578 -- Increase (decrease) in cash resulting from changes in operating assets and liabilities: Trade accounts receivable (102,097) 11,326 Other current assets (32,830) (11,715) Accounts payable (222,118) (104,536) Accrued expenses (820,139) 695,231 Deferred revenue -- (58,909) ----------- ----------- Net cash provided by operating activities 37,610 549,533 ----------- ----------- Investing activities: Purchases of equipment (371,915) (49,684) Proceeds from the sale of equipment 5,113 -- Cash purchase cost not yet allocated -- (6,965,904) Investment in healthcare technology company -- (309,626) ----------- ----------- Net cash used in investing activities (366,802) (7,325,214) ----------- ----------- Financing activities: Increase in other assets (96,399) -- Net proceeds (payments) from long term debt (300,000) 6,086,146 Net proceeds from line of credit 550,000 -- ----------- ----------- Net cash provided by financing activities 153,601 6,086,146 ----------- ----------- Net decrease in cash and cash equivalents (175,591) (689,535) Cash and cash equivalents at beginning of year 199,466 896,096 ----------- ----------- Cash and cash equivalents at end of period $ 23,875 $ 206,561 =========== =========== Supplemental schedule of noncash financing activities: Settlement on convertible debenture $ 3,000,000 =========== Issuance of common stock $ 2,532,078 =========== See accompanying notes to unaudited consolidated financial statements. 5 HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Effective November 16, 1998, Champion Financial Corporation (Champion), a Utah corporation, reincorporated in the State of Delaware. At the same time, Champion merged all of its assets into its newly formed Delaware subsidiary, HealthStar Corp. The effectiveness of this reincorporation has caused HealthStar Corp. to continue to operate Champion's business while Champion has ceased to exist. The accompanying unaudited consolidated financial statements of HealthStar Corp. and Subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for a complete financial statement presentation. In the opinion of management such unaudited interim information reflects all adjustments, consisting only of normal recurring adjustments, necessary to present the Company's financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated Balance Sheet as of March 31, 1998 was derived from audited consolidated financial statements as of that date but does not include all the information and footnotes required by generally accepted accounting principles. It is suggested that these consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report Form 10-KSB, for the year ended March 31, 1998. DESCRIPTION OF BUSINESS HealthStar Corp. is a healthcare management company dedicated to controlling the cost, improving the quality and enhancing the delivery of healthcare services. The Company also provides related products and services designed to reduce healthcare costs. The Company markets and provides programs and services to insurance companies, self-insured businesses for their medical plans and third parties that administer employee medical plans. These programs and services assist clients in reducing healthcare costs for group health plans and for workers' compensation coverage and automobile accident injury claims. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its two wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. 6 HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) EARNINGS PER SHARE The Company adopted Statement of Accounting Standards No. 128 "Earnings per Share" (SFAS 128) during 1997. The Company's Earnings per Common Share (EPS) figures for the prior period were not effected by adoption of SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing net income, after deducting preferred stock dividends requirements (if any), by the weighted average number of shares of common stock outstanding. Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive stock options and warrants and to the assumed conversion of all dilutive convertible securities and stock. For purposes of the diluted earnings per share calculation, the convertible debentures had an antidilutive effect. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Management believes that the recorded amounts of current assets and current liabilities approximate fair value because of the short maturity of these instruments. The recorded balance of long-term debt approximates fair value, as the terms of the debt are similar to rates currently offered to the Company for similar debt instruments. REVENUE RECOGNITION The Company receives monthly capitation fees based upon the number of each customer's members regardless of services actually provided. Repricing fees are derived from a negotiated percentage of the medical savings generated from customer claims managed by the Company or on a per member per month basis. The percentage of savings fees are recognized as revenue as the Company renders services and notifies the health care provider of their required billings reduction for a specified period of time. COST OF SERVICES The major components of cost of services consist of utilization review, case management and external marketing commissions. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which approximates three years for equipment to seven years for furniture and fixtures. Computer software is amortized over three to five years. INTANGIBLES Intangibles, which represent the excess of purchase price over fair value of net tangible assets acquired, are amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the intangibles over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of intangible impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. 7 HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) 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. 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 cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. YEAR 2000 Management has developed a plan to address the Year 2000 problem and all computer systems are in the process of conversion to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four digits to define the applicable year. The total cost of the project is not material and the Company is expensing all associated costs as they are incurred. RECLASSIFICATIONS Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. 8 HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued (2) DEBT The Company maintains a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at prime (7.75% at December 31, 1998). The line is collateralized by substantially all the assets of the Company. There was $850,000 in borrowings against this line of credit at December 31, 1998. In connection with the acquisition of HealthStar Inc., the Company issued $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable debentures. On August 31, 1998, $3,000,000 of the debentures were converted into 800,000 shares of common stock and $1,000,000 of the debentures were converted into a promissory note. At the present time, management does not intend to use working capital to redeem the promissory note. Debt consists of the following at December 31, 1998: 8% Convertible Promissory Note 1,000,000 Note payable to Harris Trust and Savings Bank due on December 14, 2000, with quarterly principal payments ranging from $100,000 - $150,000 plus interest on the unpaid balance at prime (7.75% at December 31, 1998), secured by substantially all the assets of the Company 2,200,000 Unsecured note payable to an individual, interest payable monthly at 8%, due currently 200,000 ---------- 3,400,000 Less current maturities 700,000 ---------- $2,700,000 ========== (3) REVERSE STOCK SPLIT On November 16, 1998, the Company effected a 1for 2 reverse stock split of the Company's outstanding common stock. The effect of the reverse stock split is reflected in earnings per share. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and footnotes for the quarter ended December 31, 1998 and the year ended March 31, 1998 contained in the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 29, 1998. The managed healthcare cost containment industry is highly fragmented, with a large number of competitors. The Company does not believe that any single company commands significant market share. The management of the Company believes the level of competition will continue to increase in the future. Most of the Company's competitors are national managed care providers, insurance companies, HMOs, and third-party administrators that have implemented their own managed care programs. Several large insurance companies for workers' compensation, health and automobile have also implemented their own cost-containment programs through the carrier's own personnel. Many of the Company's current and potential competitors are significantly larger and have greater financial, technical, marketing, and management resources than the Company. The Company competes on the basis of its specialized knowledge and expertise in the managed healthcare services industry and on its ability to deliver effective services to the customer with a high level of customer satisfaction at a very affordable price. There can be no assurance that the Company will be able to compete successfully. The managed healthcare industry has experienced significant changes in recent years, primarily as a result of rising healthcare costs. The Company will be required to respond to various competitive factors affecting the healthcare industry, including new medical technologies that may be introduced; general trends relating to the demand for healthcare services; regulatory, economic, and political factors; changes in patient demographics; and competitive pricing strategies by HMOs and other healthcare plans. RESULTS OF OPERATIONS When comparing the Company's financial results for the three and nine months ended December 31, 1998 to the three and nine months ended December 31, 1997, it is important to note that the majority of the increase in the level of revenues and expenses is due primarily to the Company's acquisition of HealthStar, Inc., which was completed on December 15, 1997. REVENUE The Company derives the majority of its revenue from fees charged to clients for access to the Company's network of contracted providers. The Company's client base consists of a variety of payors of medical claims such as insurance companies, third-party administrators and self-insured employers. Access fees can be either a fixed, monthly fee per enrolled subscriber which is called a capitated fee or can be based on a percentage of the amount of the discount off of billed charges which is granted by a contracted provider. The Company's participation in the amount saved varies from 20% to 25% with the exact amount determined by contractual provisions with the Company's clients. Total revenue increased $3,668,086 to $4,367,679 for the three months ended December 31, 1998 compared to $699,593 for the three months ended December 31,1997, an increase of 524%. Total revenue for the nine months ended December 31, 1998 increased $11,501,481 or 550% to $13,594,020, compared to $2,092,539 for the nine months ended December 31, 1997. The increase 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) REVENUE (CONT'D) was a result of operations from the newly acquired subsidiary HealthStar, Inc. Revenues for the Company's National Health Benefits and Casualty (NHBC) division remained consistent with prior year's levels. OPERATING EXPENSES Cost of services includes the cost of outsourcing the case management and utilization review functions, commissions paid to outside brokers, fees paid to other regional PPO networks for access to providers not contracted directly with the Company and other products and services provided by outside vendors. Cost of services increased $321,113 to $589,578 for the three months ended December 31, 1998 from $268,465 in 1997. Cost of services for the nine months ended December 31, 1998 increased $1,074,825 to $1,871,352 compared to $796,527 for the nine months ended December 31, 1997. The entire increase is attributable to HealthStar Inc. and is primarily related to the cost of outsourcing the case management and utilization review functions. As a percentage of revenue, cost of services for the nine months ended December 31, 1998 decreased from 38% in 1997 to 14% in 1998. This margin improvement is a result of the fact that HealthStar Inc. contracts directly with healthcare providers which limits the fees paid to access other PPO networks. Salaries and wages includes all employee compensation including payroll taxes, health insurance and other employee benefits. Also included are commissions paid to in-house sales and marketing personnel. For the quarter ended December 31, 1998, salaries and wages were $2,162,510 compared to $277,204 for the quarter ended December 31, 1997, an increase of $1,885,306. For the nine months ended December 31, 1998, salaries and wages increased $5,483,336 to $6,228,782 from $745,446. Approximately $1.9 million of this increase is due to the addition of HealthStar Inc. for the three months ended December 31, 1998 and $5.3 million of the increase for the nine months ended December 31, 1998. General and administrative expenses include all other operating expenses such as telephone charges, office supplies, postage, travel and entertainment, professional fees, insurance, rent and utilities. For the quarter ended December 31, 1998, general and administrative expenses were $1,274,212 compared to $230,488 for the quarter ended December 31, 1997. General and administrative expenses for the nine months ended December 31, 1998 were $4,105,059 compared with $532,430 for the nine months ended December 31, 1997. The majority of this increase is due to the addition of HealthStar Inc. and legal expenses incurred by the Company for the lawsuit filed in March 1998 against the holders of the convertible debentures. For the three months ended December 31, 1998, depreciation and amortization increased $278,045 to $305,497 from $27,452 for the three months ended December 31, 1997. For the nine months ended December 31, 1998, depreciation and amortization was $887,796 compared with $55,691 for the nine months ended December 31, 1997, an increase of $832,105. This significant increase is due to goodwill created as a result of the HealthStar acquisition. Goodwill of approximately $9,000,000 is being amortized over 20 years. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) OPERATING EXPENSES (CONT'D) For the quarter ended December 31, 1998, the Company incurred interest expense of $83,901. The Company's interest expense for the nine months ended December 31, 1998 was $333,193. Interest expense relates to the indebtedness incurred as a result of the HealthStar acquisition. The interest rate on the Company's term loan and line of credit was 7.75% at December 31, 1998. The interest rate on the convertible promissory note is 8.0%, and the interest rate on the seller note payable is 8.0%. Net loss for the three months ended December 31, 1998 decreased $47,579 or 51% to $46,437 from $94,016 in the quarter ended December 31, 1997. For the nine months ended December 31, 1998, net earnings increased $136,975 to $99,420 or 365%, compared to a net loss of $37,555 for the nine months ended December 30, 1997. YEAR 2000 The Year 2000 concern, which is common to most companies, concerns the inability of information and non-information systems, primarily computer software programs, to properly recognize and process date sensitive information as the Year 2000 approaches. The Company is reviewing, modifying, and testing its computer applications to ensure their functionality with respect to the Year 2000 changes. At present, the Company does not anticipate that material incremental costs will be incurred. The Company is also dependent on its contracting medical providers and payer clients to successfully address their respective Year 2000 technology issues in connection with their claims processing functions. The Company has not determined whether such providers or clients face Year 2000 problems that if not resolved, may have a material adverse affect on the Company's business or results of operations. The Company does not anticipate any disruption in its operations or financial reporting as a result of system upgrades or system integrations. However, there can be no assurance that such disruption will not occur or that the desired benefits from the Year 2000 compliance of the Company's information and non-information systems will be attained. In the event that the desired results are not obtained, the Company's contingency plans call for isolation of the failing component and taking the appropriate corrective action, which may include modification or replacement of the faulty hardware, software or non-information system. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its working capital requirements and capital expenditures primarily from cash flow generated from operations supplemented by borrowings under the Company's line of credit. For the nine months ended December 31, 1998, cash flow provided by operations was $37,610 compared to $549,533 for the nine months ended December 31, 1997. At December 31, 1998, the Company had a working capital deficiency of $475,166, an increase of $777,215 from its working capital deficiency of $1,252,381 at March 31, 1998. The Company had $23,875 in cash and cash equivalents at December 31, 1998. In connection with the acquisition of HealthStar Inc., the Company issued $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable debentures. The entire proceeds of the issuance and the debentures were utilized in the acquisition. Beginning on January 17, 1998, the debentures were convertible into common shares of the Company's stock based upon a formula related to the market price of the stock. Due to certain matters and litigation related to assertions made by the debenture holders, the Company entered into a settlement agreement. Under the terms of that agreement, on August 31, 1998, $3,000,000 of the debentures were converted into 800,000 shares of common stock and $1,000,000 of the 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D) LIQUIDITY AND CAPITAL RESOURCES (CONT'D) debentures were converted into a promissory note with the same terms as the original debentures. The net effect of the settlement was essentially the same as under the original terms of the debentures. The Company has the option to make principal payments on the promissory note as part of the settlement agreement with the debenture holders. If the company does not make principal payments, the settlement agreement reverts back to the conversion terms of the original debenture agreement. At the present time, management does not intend to use working capital to redeem the promissory note. Also in connection with the acquisition of HealthStar Inc., the Company secured a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at the Prime rate (7.75% at December 31, 1998) and is secured by substantially all of the assets of HealthStar Corp. and its subsidiaries. At December 31, 1998, the Company had borrowed $850,000 on the line of credit, and due to a bank covenant restriction had approximately $100,000 of additional availability. Although there can be no assurances, management of the Company anticipates growth and expansion to continue to accelerate through fiscal year 1999 with the acquisition of complementary businesses or business lines, management personnel and infrastructure additions. The Company believes additional sources of cash flow may be required in conjunction with any such acquisition activity. There can be no assurance that the Company may be able to obtain such funds on terms acceptable to the Company. Management currently believes that cash on hand, amounts available under the revolving line of credit and cash generated from future operations will be sufficient to fund the Company's operations and anticipated expansion plans. LEGAL PROCEEDINGS On August 31, 1998, the Company settled and resolved its disputes and misunderstandings with Thomson Kernaghan & Co., Ltd., and Bronia Gmbh (collectively referred to as "Thomson"). The Company dismissed Thomson from the lawsuit filed by the Company against Thomson in Federal District Court in Arizona, and Thomson has dismissed its arbitration proceeding commenced against the Company in New York. From time to time, the Company is named as a defendant in routine litigation incidental to its business. Based on the information currently available, the Company believes that none of such current proceedings, individually or in the aggregate, will have a material adverse effect on the Company. 13 SIGNATURES Pursuant to the requirements 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. HealthStar Corp. DATE: February 10, 1999 BY:/s/ Denise E. Nedza DENISE E. NEDZA CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1998, AND STATEMENT OF INCOME FOR THE NINE MONTHS ENDING DECEMBER 31, 1998, OF HEALTHSTAR CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 1 23,875 0 2,535,123 103,580 0 2,557,374 3,448,686 827,780 14,229,282 3,032,540 0 0 0 3,385 0 0 0 13,594,020 0 0 13,426,182 0 0 167,838 68,418 99,420 0 0 0 99,420 0.03 0.03
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