-----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, UtTPNaHGIFRV2ea3ksk4ONWskzLQUeARs6q/sL+u0qYkceGmtY//fArZ9wwFMuw2 agaZVYftpjkLtq78yqM8lA== 0000950147-99-000680.txt : 20000203 0000950147-99-000680.hdr.sgml : 20000203 ACCESSION NUMBER: 0000950147-99-000680 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSTAR CORP /UT/ CENTRAL INDEX KEY: 0000877050 STANDARD INDUSTRIAL CLASSIFICATION: 2721 IRS NUMBER: 911934592 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19499 FILM NUMBER: 99654162 BUSINESS ADDRESS: STREET 1: 8745 WEST HIGGINS STREET 2: SUITE 300 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 602-451-85 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 10KSB 1 FORM 10-KSB Securities and Exchange Commission Washington, D. C. 20549 ---------- FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________ to ________. Commission file number 0-19499 HEALTHSTAR CORP. ---------------------------------------------------- (Name of Small Business as specified in its Charter) DELAWARE 91-1934592 - - - ------------------------------- ------------------ (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 8745 West Higgins Road, Suite 300, Chicago, Illinois 60631 - - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (773) 693-7827 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Name of Each Exchange Title of Each Class in which Registered ------------------- ------------------- Common Stock, $.001 per share OTC Bulletin Board Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 there is 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 $16,915,292 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 22, 1999 was $21,317,543. As of such date, 3,819,872 shares of the Registrant's Common Stock were outstanding. Transitional Small Business Disclosure Format: (Check One): Yes [ ] No [X] PART I ITEM 1. BUSINESS OVERVIEW HealthStar Corp. ("Company") is a healthcare management company dedicated to controlling the costs, improving the quality and enhancing the delivery of healthcare services. The Company 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, health and welfare funds and third parties who administer employee medical plans. These programs and services assist the Company's clients in reducing healthcare costs for group health plans and for workers' compensation coverage and automobile accident injury claims. The Company provides 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. Through its wholly-owned subsidiaries, HealthStar, Inc., an Illinois Corporation, ("HealthStar"), and National Health Benefits & Casualty Corporation, a Nevada corporation ("NHBC"), the Company provides access to, and operates, one of the largest independent preferred provider organizations ("PPO") of healthcare professionals and facilities in the United States. The Company seeks to expand its presence as a national provider of medical management services in the United States. To achieve this goal, the Company's strategy is to (i) expand its network of providers to geographic areas currently not covered by provider contracts, (ii) expand its range of services, (iii) enhance its opportunities for growth through strategic acquisitions and partnerships, and (iv) focus on creating a stronger market presence in the workers' compensation and automobile accident injury claim markets. DEVELOPMENT OF BUSINESS The Company is a Delaware corporation incorporated on November 16, 1998. Its predecessor company was a Utah corporation organized in February, 1981 as "Bersham Energy & Minerals, Inc." In 1984, the Company 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 was incorporated in Nevada in July 1996 to serve as the parent corporation of National Property Casualty Corporation ("NPCC"). NPCC has been in business since 1994 providing 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 it was sold in June 1999. 2 In December 1997, Champion acquired HealthStar, based in Chicago, Illinois. HealthStar is a diversified healthcare services company with over 14 years experience in the formulation and management of PPO networks. HealthStar employs approximately 200 people and operates managed care networks in the Midwest, Southeast and Southwest regions covering 39 states and approximately 900,000 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 reincorporation merger, HealthStar Corp. operates Champion's business while Champion has ceased to exist. 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 coverages 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. 3 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. Workers' compensation is a statutorily defined employee benefit which 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 is not required for the Company to offer most of its services to the automobile insurance market, state regulatory approval is 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 management of the Company believes that the growing implementation of managed case services in the automobile casualty industry creates additional market opportunities. THE COMPANY'S PROGRAMS AND SERVICES The Company assists 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 provides bill negotiation for clients on medical claims from health care providers who do not participate in the Company's PPO networks. 4 The Company has contracts with over 250 insurance companies, third party administrators, health and welfare funds and self-insured employers of all sizes in approximately 39 states. Three clients accounted for, in the aggregate, approximately 25% of the Company's revenue for the fiscal year ended March 31, 1999. No single client accounted for more than 9% of the Company's revenue in fiscal 1999. 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 offer 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 is one of the largest independent networks of directly contracted hospitals available in the United States and includes 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 provides its customers with access to a limited number of PPO networks organized by others which meet the Company's criteria for provider selection. The Company uses 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. The Company provides limited or full access to its PPO network depending upon the client's business practices and the level of savings for medical costs that the client is seeking. Some customers will access all the Company's PPO networks, while other customers will only contract with the Company for a very specific geographic region. Most customers access the Company's network of both hospitals and other healthcare providers including physicians. However, there are some customers who only access the Company's PPO hospitals. As of the end of the fiscal year, the Company had direct contracts with over 1,800 hospitals and 121,000 physicians. In addition, there were 5,200 other healthcare providers under contract, including ancillary providers, home health care agencies, pharmacies and outpatient facilities. Clients provide their subscribers with identification cards with the Company's logo and information. In addition, most clients provide their subscribers with a directory of network providers and financial incentives to seek care from the network providers. The Company contracts with most hospitals using a per diem methodology for inpatient services. Hospital outpatient services are currently contracted on a percentage discount from billed charges. This outpatient services billing methodology is being converted to a percentage of a hospital's inpatient per diem. Physicians and other providers are normally contracted on a percentage discount from billed charges based upon a fee schedule taking into account the provider's specialty and geographic location. Physician fee schedules are currently being converted to a derivative of the Medicare RESOURCE BASED RELATIVE VALUE SYSTEM ("RBRVS"). The Company's standard contract with a provider has an initial term of two years with automatic one-year renewal unless the contracting provider or the Company provides written notice of termination, typically 90 days prior to the renewal date. The Company also offers a network of facilities known as the Exclusive Provider Organization ("EPO"). The health care providers in the EPO network have agreed to further discounts in exchange for proper patient identification, direction on the facilities that may be used, and greater financial incentives than found in the PPO network of providers. Over the years, the Company has become more involved in managing its client's healthcare costs when the client chooses to utilize the Company's EPO network. The EPO network normally requires enhanced utilization review and case management services. 5 Although some state legislation prohibits automobile insurance companies from directing a patient to a facility when the insured has suffered an injury, no state legislation prohibits the insured from electing to direct their own treatment in time for medical need. Consequently, a cost containment program called ELECTIVE EXTENSION OF BENEFITS was instituted by the Company on behalf of its automobile insurance clients. The creation of Elective Extension of Benefits was designed to permit the automobile policyholder to extend the number of medical care visits by utilizing one of the Company's contracted medical providers. When the provider has agreed to accept a medical reimbursement below their usual and customary fees, the policyholder is able to receive more treatments without exceeding the medical limits of their policy. Clients of the Company enhance benefits to their policyholders by permitting the policyholder access to providers willing to reduce their fee for service. The Company also markets its Non-Par Claims program. In this program the Company negotiates a discount from medical providers who do not participate in the PPO networks being accessed by the customer, but who submitted a medical claim to a customer of the Company. Many of these non-participating providers are willing to give a one time discount on the submitted claim in exchange for timely payment of that claim. In exchange for the discount, the client must pay the claim in a timely manner, usually within two weeks. The Company receives a percentage of the savings as compensation for securing the discount. The Company has contracts with over 250 insurance companies, third party administrators, health and welfare funds and self-insured employers of all sizes in approximately 39 states. These clients provide their subscribers with identification cards, directories of the PPO network and in most cases, financial incentives to utilize the PPO network. In addition to the printed directory, each policyholder is given the opportunity to contact the Company on its toll free line when requesting a qualified provider in his or her own community. The Company also has a web site that allows subscribers to locate medical providers. With more than 1,800 hospitals and 121,000 physicians directly contracted in the network, the Company is striving to ensure that its providers are located in areas desired by its customers. The Company's compensation for network access is based on either a percentage of savings, or a fixed access fee based on the number of subscribers ("Capitation Fee"). The majority of the clients accessing the PPO networks pay the Company on the Capitation Fee basis. This fee varies based upon the scope of services contracted. Clients who have contracted with the Company for the Workers' Compensation network, the automobile casualty network and the Non-par Claims product all reimburse the Company on a percentage of savings basis. The fee is a percentage of the savings generated off of billed charges. Although the Company maintains its own PPO, it also contracts with other national and regional PPOs based on the needs and demographics of its clients. The PPO access fee paid by the Company to these contracted PPOs ranges from 8 to 20% of the savings. The Company's business plan is to continue to directly contract with healthcare providers whenever possible. As a result, these relationships with other national and regional PPOs have been and will continue to be terminated in accordance with their contract terms as the Company is able to secure sufficient contracts on a direct basis. 6 BILL REVIEW, CLAIMS PROCESSING AND MEDICAL REPRICING SERVICES The Company offers 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 management of the Company believes that the Company's program is one of the most comprehensive bill review and medical repricing programs currently in use in the market. The Company's software systems monitor 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 reveals duplicate procedures, validates medical procedures and analyzes the relationship of diagnosis to procedures performed. As part of the contractual arrangements with the PPO network, clients are able to access certain PPO contracted rates that can result in costs below the state-mandated fee schedule, which may generate additional savings. VISION PROGRAM Until June 1999, the Company operated a POS vision program. The Company's First American Vision Services ("FAVS") program is a POS vision program offering its members the opportunity to purchase eye wear substantially below retail prices, when purchased from an independently owned FAVS provider. In addition, members are entitled to an eye examination at a pre-established reduced fee. The program benefits are extended to the members and their immediate families, and there are no restrictions on the number of purchases. The Company maintains toll free telephone lines to assist members in accessing the nearest FAVS provider. FAVS providers consist primarily of Doctors of Optometry and to a lesser extent licensed opticians. As of March 31, 1999, there were approximately 4,650 vision care providers and 1 million members participating in the FAVS program. On June 7, 1999 the Company sold its FAVS program for cash consideration of $125,000. SALES AND MARKETING The Company actively markets 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 of 15 full-time professionals. The Company creates 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 specifically address the client's needs. The Company also participates in managed healthcare conventions and trade shows and advertises 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. 7 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. Competition for customers is intense, and 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 coverages 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. 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 demand for healthcare services; regulatory, economic, and political factors; changes in patient demographics; and competitive pricing strategies by HMOs and other healthcare plans. There can be no assurance that the Company will be able to compete successfully. INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES The Company regards certain features of its programs and services as proprietary and relies 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 obtains nondisclosure agreements from its employees and hospital-clients and limits access to and distribution of its software, documentation, and other proprietary information. The Company believes that trade secret and copyright protection are less significant than factors such as the knowledge, ability, and experience of the Company's employees and the timeliness and quality of the services they provide. In addition, HealthStar holds several federally registered trademarks, including the name HealthStar. The Company has aggressively pursued any suspected trademark infringement of the HealthStar name. GOVERNMENT REGULATION Managed healthcare programs for group healthcare, workers' compensation and automobile accident injuries are conducted within a regulated environment. The Company's activities are regulated principally at the state level, which means the Company may be required to comply with certain regulatory standards which differ from state to state. Although the laws affecting the Company's operations vary widely from state to state, these laws fall into four principal categories: (i) laws that require licensing, certification or other approval of businesses that provide managed healthcare services; (ii) laws regulating the operation of managed care provider networks; (iii) laws that restrict the methods and procedures that the Company may employ in its health, workers' compensation and automobile managed care programs; and (iv) proposed laws which, if adopted, would have as their objective the reform of the healthcare system as a whole. 8 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 the Company's business. The Company's ability to provide comprehensive managed care services depends in part on its ability to contract with or create networks of healthcare facilities and providers which share the Company's objectives. The Company offers access to networks of healthcare providers selected by the Company for quality of care and pricing. New laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with the Company or to provider networks which the Company may organize or acquire. To the extent the Company is governed by these regulations, it may be subject to additional licensing requirements, financial oversight and procedural standards for beneficiaries and providers. These regulations may result in increased costs of operations for the Company, which may have an adverse impact upon the Company's ability to compete with other available alternatives for healthcare cost control. 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 which administer such plans. In addition to the ERISA guidelines, a TPA may be subject to additional state requirements regarding registration. The Company does 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 programs constitutes 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. Although the Company has not sought or received confirmation from government officials or an opinion of counsel, the Company believes that payments to the Company by participating vision and chiropractic providers do not violate such regulations since the Company's programs involve only the purchase of products and services on a cost containment basis. The automobile insurance industry, like the workers' compensation industry, is regulated on a state-by-state basis. While regulatory approval is not required for the Company to offer most of its services to the automobile insurance market, state regulatory approval is 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. 9 Regulations in the healthcare, workers' compensation and automobile insurance fields are constantly evolving. The Company is unable to predict what additional regulations, if any, affecting its business may be promulgated in the future. The Company's business may be adversely affected by failure to comply with existing laws and regulations, failure to obtain necessary licenses and government approvals or failure to adapt to new or modified regulatory requirements. Proposals for healthcare legislative reforms are regularly considered at the federal and state levels. In addition, changes in workers' compensation laws and regulations may impact demand for the Company's services, require the Company to develop new or modified services to meet the demands of the marketplace or modify the fees that the Company may charge for its services. Recently, the managed care industry has received significant amounts of negative publicity. This publicity, in turn, has contributed to increased legislative activity, regulation and review of industry practices. These factors may adversely affect the Company's ability to market its products or services, could necessitate changes in the Company's products and services, and may increase regulatory burdens under which the Company operates, further increasing the costs of doing business and adversely affecting profitability. EMPLOYEES As of March 31, 1999, the Company had 167 full-time employees and 37 part-time employees, including its corporate officers. The vast majority of the employees, 150 full-time and 37 part-time, were employed by HealthStar, Inc. The remaining 17 employees were employed by the Company and NHBC. The Company has no collective bargaining agreements with any unions and believes that its overall relations with its employees are good. VOLATILITY OF STOCK MARKET The market prices of the securities of certain publicly-held companies in the industry in which the Company operates have shown volatility and sensitivity in response to many factors, including general market trends, public communications regarding managed care, legislative or regulatory actions, healthcare costs trends, pricing trends, competition, earnings and acquisition activity. There can be no assurance regarding the level or stability of the Company's share price at any time or the impact of these or any other factors on share price. POSSIBLE LITIGATION AND LEGAL LIABILITY The Company contracts and markets medical care utilization management services and case management services that make recommendations concerning the appropriateness of providers' medical treatment plans of patients throughout the country, and it could share in potential liabilities for adverse medical consequences. The Company does not grant or deny claims for payment of benefits and the Company does not believe that it engages in the practice of medicine or the delivery of medical services. There can be no assurance however, that the Company will not be subject to claims or litigation related to the grant or denial of claims for payment of benefits or allegations that the Company engages in the practice of medicine or the delivery of medical services. In addition, there can be no assurance that the Company will not be subject to other litigation that may adversely affect the Company's business or results of operations. It is possible that the Company could be named as a party in any malpractice action which might be brought against a physician or hospital in the Company's PPO network. The Company does not have product liability insurance or insurance intended to protect against claims which might be asserted in any malpractice action. If the Company were found liable for any such claim, the cost of defending such claim as well as any judgment against the Company, could materially adversely affect the Company's financial condition, results of operations and future prospects. 10 RISKS RELATED TO GROWTH STRATEGY The Company's strategy is to continue its internal growth and, as strategic opportunities arise, to consider acquisitions of, or relationships with, other companies in related lines of business. As a result, the Company is subject to certain growth-related risks, including the risk that it will be unable to attract and retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from the Company's efforts to increase its market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the transactions contemplated thereby could be completed. If such a transaction does occur, there can be no assurance that the Company will be able to integrate effectively any acquired businesses into the Company. In addition, any such transactions would be subject to various risks associated with the acquisition of businesses, including the financial impact of expenses associated with the integration of businesses. There can be no assurance that any future acquisitions or strategic relationships will not have an adverse impact on the Company's business, financial condition or results of operations. As suitable opportunities arise, the Company anticipates that it would finance such transactions, as well as internal growth, through working capital or through debt or equity financing. There can be no assurance however, that such debt and equity financing would be available to the Company on acceptable terms when and if suitable strategic opportunities arise. YEAR 2000 MATTERS Many computer programs and equipment with embedded chips or processors use two rather than four digits to represent the year and may be unable to accurately process dates after December 31, 1999. This, as well as certain other date-related programming issues, may result in miscalculations or system failures which can disrupt the businesses which rely on them. The term "Year 2000 Issue" is used to refer to all difficulties the turn of the century may bring to computer users. The Company has determined that many of its internal computer programs and some items of its equipment are susceptible to potential Year 2000 system failures or processing errors. This assessment of internal systems is substantially complete and plans have been formulated to modify or replace the impacted programs or equipment. Remediation efforts are underway using both internal and external resources, with priority given to the systems whose failure might have a material impact on the Company. To date all required changes have been identified and made and testing of the changes is approximately 80% complete. 11 The Company is also dependent on its contracted medical providers and payor clients to successfully address their respective Year 2000 technology issues in connection with their claims processing functions. An important part of the Year 2000 program involves working with those third parties to determine the extent to which the Company may be vulnerable to their failure to address their own Year 2000 issues. The Company is communicating with those third parties to ascertain whether their Year 2000 issues which might impact the Company are being addressed. Where practical and appropriate, the Company will try to verify the information or assurances they provide with testing, particularly with regard to mission critical relationships. At present, the Company has not been advised by any third party of any Year 2000 issue likely to materially interfere with the Company's business. However, not all third parties have been responsive to the Company's inquiries and there may be providers of significant services on which the Company relies, such as utilities, which are unwilling or unable to provide information concerning their Year 2000 readiness. To the extent that outside vendors do not provide satisfactory responses, the Company will consider changing to vendors who have demonstrated Year 2000 readiness. However, there are no assurances that the Company will be able to do so. The Company has begun to develop contingency plans to minimize any Year 2000 disruptions in the event that an internal or third party mission critical system does not function properly. The contingency plans call for isolation of the failing component and taking the appropriate corrective action, which may include modification or replacement of the faulty hardware, software or non-information system, manual processing of transactions, use of alternative service providers, relocation to temporary facilities, and other measures as deemed necessary. Once developed, these contingency plans will be continually refined as additional information becomes available. The consequences of an uncorrected Year 2000 issue could include business interruption, exposure to monetary claims by clients and others and loss of business goodwill. The likelihood of these events and the possible financial impact if they occur cannot be predicted. The Company is continuing to upgrade equipment to be Year 2000 compliant and total expenditures relating to the upgrade are expected to be approximately $20,000. The estimates and conclusions set forth above contain forward-looking statements and are based on management's best estimate of future events. Risks to completing the plan include the availability of resources, the Company's ability to discover and correct material Year 2000 issues, and other third parties on which the Company relies to bring their systems into Year 2000 compliance. ITEM 2. PROPERTIES The Company leases approximately 24,000 square feet of office space in Chicago, Illinois; 3,300 square feet of office space in Atlanta, Georgia; 7,600 square feet of office space in Independence, Ohio; 6,300 square feet of office space in Dallas, Texas, of which approximately 2,900 square feet are being sublet; and approximately 6,700 square feet of office space in Scottsdale, Arizona. The Chicago, Illinois lease expires in the year 2006; the Atlanta, Georgia lease expires in the year 2003; and the Independence, Ohio and Dallas, Texas leases expire in May, 2000. The Scottsdale, Arizona lease expired on April 30, 1999. The Company is currently on a month to month lease in its current Scottsdale office until it can secure other space. This office space is adequate for the Company's current operations. As a result of the acquisition of HealthStar, the Company is still paying rent on a former HealthStar office in Jacksonville, Florida comprising approximately 2,900 square feet. This lease expires in 2001 and is currently being sublet at terms mirroring the original lease agreement. During 1999, the Company also paid rent on former HealthStar offices in Birmingham, Alabama, Indianapolis, Indiana, Louisville, Kentucky and Charlotte, North Carolina. These leases have since expired or been terminated. 12 ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II 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." 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 effected a 1 for 2 reverse stock split of the Company's outstanding common stock. Share prices for periods prior to this date have accordingly been restated. Fiscal Quarter High Low - - - -------------- ---- --- Quarter Ended March 31, 1999 $ 4.06 $ 2.00 Quarter Ended December 31, 1998 $ 4.44 $ 2.50 Quarter Ended September 30, 1998 $ 7.63 $ 2.25 Quarter Ended June 30, 1998 $11.72 $ 5.75 Quarter Ended March 31, 1998 $21.50 $ 5.50 Quarter Ended December 31, 1997 $24.25 $18.00 Quarter Ended September 30, 1997 $18.50 $10.00 Quarter Ended June 30, 1997 $14.00 $ 9.50 There were approximately 800 shareholders of record and approximately 800 beneficial owners of the Company's Common Stock as of March 31, 1999. The Company has neither declared nor paid any cash dividends to date and is restricted by the loan agreement with Harris Bank from paying cash dividends. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW HealthStar Corp. 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 effectiveness of this reincorporation has caused HealthStar Corp. to continue to operate Champion's business while Champion has ceased to exist. The financial statements include the results of operations of the Company and its two wholly-owned subsidiaries HealthStar, Inc. ("HealthStar") and National Health Benefits & Casualty Corporation ("NHBC"). Champion acquired NHBC on January 1, 1997 in a business combination accounted for as a reverse acquisition with a publicly-traded shell company. In completing the acquisition, Champion issued 2,200,000 shares of common stock for all of the outstanding shares of NHBC common stock. To effect the combination, the fair value of the net tangible assets of Champion were added to the equity of NHBC. On January 9, 1997, Champion acquired the outstanding stock of Three Rivers Provider Network ("TRPN") through the issuance of 100,000 shares of Champion common stock valued at $.71 a share by an independent appraiser. The business combination was treated as a purchase transaction which created $76,039 of goodwill through excess purchase cost. Champion purchased the outstanding stock of HealthStar on December 12, 1997 for approximately $13,700,000. The acquisition was accounted for using the purchase method and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed, based upon fair values at the date of acquisition. The excess purchase cost over the estimated fair value of the net tangible assets acquired was approximately $9,000,000 and was recorded as goodwill. The net assets of TRPN were merged into HealthStar during 1999. RESULTS OF OPERATIONS When comparing the Company's financial results for the year ended March 31, 1999 to the year ended March 31, 1998, it is important to note that the majority of the increase in the level of revenues and expenses is due primarily to the acquisition of HealthStar which was completed on December 15, 1997. The financial results for HealthStar for approximately 15 weeks are included in the financial results of the Company in fiscal 1998, and are included for the full year in fiscal 1999. Net earnings decreased $479,775 from $304,105 or $.11 per share in 1998 to a loss of $175,670 or a loss per share of $.05 in 1999. 14 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 from billed charges which is granted by a contracted provider. The Company's participation in the amount saved varies from 20% to 35% with the exact amount determined by contractual provisions with the Company's clients. Total revenue increased $9,061,296 to $16,915,292 for the fiscal year ended March 31, 1999 compared to $7,853,996 for 1998, an increase of 115%. The entire increase is attributable to the acquisition of HealthStar. Proforma revenues for the year ended March 31, 1998 (assuming the acquisition of HealthStar occurred on April 1, 1997) were $20,328,321. The decrease in revenue from 1998 (on a proforma basis) to 1999 is a result of unanticipated attrition attributable to the integration of HealthStar. OPERATING EXPENSES Cost of services includes the cost of outsourcing the case management and utilization review function, 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 $967,851, or 66%, from $1,466,387 in 1998 to $2,434,238 in 1999. The entire increase is attributable to the acquisition of HealthStar. 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. Salaries and wages increased $4,965,027, or 153%, from $3,237,534 in 1998 to $8,202,561 in 1999. The entire increase is attributable to the acquisition of HealthStar whose employees comprise 92% of total employees employed by the Company. The increase is also attributable to the hiring of additional management and administrative personnel to accommodate the increase in business and future growth. General and administrative expenses include all other operating expenses such as bad debt expense, telephone charges, office supplies, postage, travel and entertainment, professional fees, rent and utilities. General and administrative expenses increased $2,896,022, or 142%, from $2,041,365 in 1998 to $4,937,387 in 1999. The majority of this increase is attributable to the acquisition of HealthStar Depreciation and amortization increased $822,224, or 210%, from $391,980 in 1998 to $1,214,204 in 1999. Goodwill of approximately $9,000,000 recorded in conjunction with the acquisition of HealthStar is being amortized over 20 years. Interest expense increased from $228,320 in 1998 to $397,165 in 1999, an increase of $168,845 or 74%. This increase was related to the additional debt incurred to finance the acquisition and the operations of HealthStar. The interest rate on the Company's bank term loan and line of credit was at prime and ranged between 7.75% and 8.50% during the year. The interest rate on the convertible debentures and the seller note was 8.0%. In August 1998, $3 million of the debentures were converted into stock. On March 31, 1999, the remaining $1 million debenture was repaid. 15 Overall, total operating expenses increased 133% in 1999 to $17,185,555 from $7,365,586 in 1998. The Company recognized an income tax benefit for 1999 at an effective rate of 35%, which is compared to the effective tax rate of 39% in 1998 used to calculate the tax provision. The decrease in the effective tax rate is due to limitations on the amount of net operating losses which can be utilized in the current year. LIQUIDITY AND CAPITAL RESOURCES The Company had $72,000 in cash and cash equivalents at March 31, 1999. At March 31, 1999, the Company had a working capital deficiency of $2,910,005. The Company has historically funded its working capital requirements and capital expenditures primarily from cash flow generated from operations supplemented by borrowings under its credit facility with Harris Trust and Savings Bank ("Harris"). The Company has a $4 million credit facility with Harris which is secured by substantially all the assets of the Company. $2.5 million of the facility is comprised of a term loan and $1.5 million represents a revolving line of credit. In connection with this facility, the Company is required to comply with certain financial covenants. Covenants include a minimum current ratio, maximum leverage ratio and a minimum fixed charge coverage ratio. At March 31, 1999, the borrowings consisted of $2,075,000 remaining on the term loan and $650,000 outstanding on the line of credit, with approximately $300,000 of additional borrowing capacity available. At March 31, 1999, the Company was in violation of several of its financial covenants. Harris agreed to a waiver in connection with the violations effective June 8, 1999 upon amending the terms of the credit facility. The amended terms, in addition to requiring that the entire balance outstanding be repaid by November 30, 1999, reset the above-mentioned ratios and add an additional minimum earnings covenant for subsequent periods. Based upon unaudited financial statement balances at May 31, 1999, the Company was in compliance with the revised covenants. Management of the Company believes that they will be in compliance with the revised covenants during subsequent measurement periods largely based on increased sales efforts and cost containment measures. The Company is actively seeking replacement financing through various sources and relationships with other companies in a related line of business to ensure that adequate resources are available to meet the accelerated deadline of the bank debt. Interest on the debt due to Harris is calculated at the prime rate plus 1.5%. Prior to the amendment, interest had been calculated at prime, which was 7.75% at March 31, 1999. On June 18, 1999, the Company had $900,000 outstanding under its line of credit with no additional borrowing capacity. On March 30, 1999, the Company entered into three stock subscription agreements for an aggregate of 400,000 shares at $2.50 per share. Proceeds totaling $1 million were received on March 31, 1999. Although there can be no assurances, management of the Company anticipates growth and expansion to continue to accelerate in the upcoming year through the acquisition of complementary businesses or business lines, management personnel and infrastructure additions. The Company believes additional sources of capital may be required in conjunction with any such acquisition activity. There can be no assurance that the Company will be able to obtain such funds on terms acceptable to the Company. Management believes that cash on hand, amounts available under the revolving line of credit and cash generated from future operations will be sufficient to fund the Company's operations and anticipated expansion plans. 16 NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting of Comprehensive Income" establishes standards for reporting and display of comprehensive income (all changes in equity during a period except those resulting from investments by and distributions to owners) and its components in financial statements. Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in annual financial statements, selected information about operating segments in interim financial reports and disclosures about products and services, geographic area and major customers. Statement of Accounting Standards No.134, " Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This Statement establishes accounting and reporting standards for certain activities of mortgage banking enterprises and other enterprises that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise. The adoption of this statement contains no change in disclosure requirements of the Company. ACCOUNTING STANDARDS NOT YET ADOPTED Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This new standard, which will be effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, is not currently anticipated to have a significant impact on the consolidated financial statements based on the current financial structure and operations of the Company. The Financial Accounting Standards Board has issued an exposure draft that defers the effective date of FASB Statement No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Statement of Accounting Standards No. 135, "Recission of FASB Statement No. 75 and Technical Corrections". This Statement rescinds Statement No. 75, "Deferral of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental Units," and provides technical corrections for over 20 accounting pronouncements. This new standard, which will be effective for fiscal years ending after February 15, 1999, is not currently anticipated to have a significant impact on the consolidated financial statements based on the current financial structure and operations of the Company. ITEM 7. FINANCIAL STATEMENTS The financial statements attached to this Report on Form 10-KSB as pages F-1 to F-17 are incorporated herein by reference. 17 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 23, 1999, of the Directors and Executive Officers of the Company: Name Age Position ---- --- -------- Gerald E. Finnell 59 Director, Chairman of the Board Stephen J. Carder 44 President, Chief Executive Officer and Director Gary L. Nielsen 56 Director Jon M. Donnell 39 Director Thomas S. O'Brien 51 Director Darren T. Horndasch 38 Vice President and Chief Operating Officer Denise E. Nedza 35 Vice President and Chief Financial Officer GERALD E. FINNELL has been a Director of the Company since June 1997. In April 1998 Mr. Finnell was elected Chairman of the Board. Mr. Finnell was a partner with the public accounting firm of KPMG Peat Marwick LLP from 1970 to 1995, and served on its Board of Directors from 1987 to 1994. STEPHEN J. CARDER has been President, Chief Executive Officer and Director, since April 1998. Prior to April 1998, Mr. Carder served as Executive Vice President, Chief Financial Officer/Treasurer and Secretary of the Company. Prior to that, Mr. Carder was principally employed since 1994 as Executive Vice President and Chief Operating Officer of National Property and Casualty Corporation. From 1989 to 1994, Mr. Carder served as Vice President of Finance and Administration for the Del Webb Development Corporation, a subsidiary of Del Webb Corporation, a NYSE company that develops and markets active adult communities. Mr. Carder served as Vice President of Finance for National Health Benefits Corporation from 1987 to 1988. Prior to 1987, Mr. Carder served as Vice President of Finance and Administration for First American Health Concepts, a publicly traded corporation listed on NASDAQ, which markets and administers a national vision program. GARY L. NIELSEN has been a Director of the Company since June 1997. Mr. Nielsen is currently the Chief Financial Officer of Granite Golf Corporation and has held this position since March 1999. Prior to that he was the Vice President of Finance and Chief Financial Officer of Best Western International, Inc. and served in that position from May 1996. From October 1986 to May 1996, Mr. Nielsen was Vice President and Treasurer of Giant Industries, Inc. 18 JON M. DONNELL has been a Director of the Company since June 1998. Mr. Donnell is the Chief Operating Officer of Dominion Homes, Inc. and has held that position since 1995. Prior to working for Dominion Homes, Mr. Donnell was with the Del Webb Corporation for 11 years. Mr. Donnell also serves on the Board of Directors of Dominion Homes. THOMAS S. O'BRIEN has been a Director of the Company since November 1998. Mr. O'Brien is Senior Vice President of Aon Risk Services, Inc. of Illinois and has been with Aon since 1990. Prior to working for Aon, Mr. O'Brien worked in various capacities in the insurance brokerage industry with such firms as Swett & Crawford of Illinois and Stewart Smith Mid America. Mr. O'Brien also serves on the Board of Trustees of St. Joseph's College in Rensselaer, Indiana. DARREN T. HORNDASCH has been Vice President and Chief Operating Officer of the Company since November 1998. He also serves as Secretary of the Company. He joined the Company in July 1998 as Chief Operating Officer of HealthStar Inc. Prior to that Mr. Horndasch served as the Chief Executive Officer for Wisconsin Health Fund based in Milwaukee, Wisconsin. Prior to joining Wisconsin Health Fund, he was the Director of the University of Illinois HMO, responsible for all managed care operations at the University of Illinois HMO. Mr. Horndasch received his Bachelor of Arts and Masters degrees, both in Political Science, from Western Illinois University. DENISE E. NEDZA has been Vice President and Chief Financial Officer of the Company since November 1998. She also serves as Treasurer of the Company. Prior to joining HealthStar, Ms. Nedza was the Regional Chief Financial Officer of Oxford Health Plans (IL), Inc, a wholly-owned subsidiary of Oxford Health Plans, Inc. in Norwalk, Connecticut. Prior to Oxford, she had been the Director of Finance and Administration for PacifiCare/FHP of Illinois. Ms. Nedza received her Bachelor of Science degree in Commerce from DePaul University in Chicago and her MBA from the University of Chicago. 19 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, 1999. SUMMARY OF EXECUTIVE COMPENSATION All Other Name and Position Year Salary Bonus Compensation(1) - - - ----------------- ---- ------ ----- --------------- Stephen J. Carder, 1999 $186,458 $ 0 $12,000 President 1998 $135,000 $20,000 $12,000 Chief Executive Officer, 1997 $ 83,750 $33,500 $ 7,800 And Director Darren T. Horndasch(4), 1999 $139,618 $ 0 $44,250(3) Vice President, Chief Operating Officer Steven L. Lange(2), 1999 $136,804 $ 0 $ 5,550 Vice President, 1998 $110,000 $10,000 $ 2,425 Sales and Marketing 1997 $ 95,000 $ 2,500 $ 6,983 (1) The Company pays each of its executive officers an automobile allowance each month and pays or reimburses its executive officers for business-related expenses. The Company also provides certain 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. Lange served as the Company's Vice President of Sales and Marketing until May 13, 1999. (3) Includes $15,000 calculated as the Fair Market Value of 5,000 shares of stock awarded at the time of employment and a move allowance of $25,000. (4) Mr. Horndasch is compensated under an agreement which provides for continuation of his salary for 90 days in the event of termination by the Company without cause. OPTION GRANTS IN LAST FISCAL YEAR
Number of securities Percent of total options underlying options granted to employees in Exercise price Expiration Name granted (#) (1) fiscal year ($/Sh) (1) date - - - ----- --------------- ----------- ---------- ---- Stephen J. Carder 0 0% N/A N/A Darren T. Horndasch 30,000 31.3% $2.875 10/8/08 Steven L. Lange(2) 20,000 20.8% 2.875 10/8/08
(1) As adjusted giving effect to the reverse stock split on November 16, 1998. (2) Mr. Lange's options were forfeited on May 13, 1999 as a result of his termination of employment with the Company. The options were awarded under the HealthStar Corp. 1998 Stock Option Plan ("the Plan"). The options awarded to Mr. Horndasch vest equally over two years. Fifteen thousand options were also awarded to Mr. Finnell, Mr. Donnell and Mr. Nielsen, who serve as the Company's outside directors. These options, which vest equally over three years, also have an exercise price of $2.875 and an expiration date of October 8, 2008. Upon a Change of Control, as defined in the Plan, all options granted shall become fully vested and immediately exercisable. All nonvested options terminate immediately upon the optionee's termination of employment or cessation of services as a Director of the Company. 20
Number Number of Unexercised Value of Unexercised Shares of Options Held At In-The-Money Options At Acquired on Value March 31, 1999 March 31, 1999 Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - - - ---- -------- -------- ----------- ------------- ----------- ------------- Stephen J. Carder 0 0 0 0 $ 0 $ 0 Darren T. Horndasch 0 0 0 30,000 0 13,125 Steven L. Lange(2) 0 0 0 20,000 0 8,750
No executive officer or director exercised options during the fiscal year ended March 31, 1999. 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, 1999, for (i) each executive officer of the Company; (ii) each director of the Company; (iii) all executive officers and directors of the Company as a group; and (iv) each person known by the Company to be the beneficial owner of more than five percent of the Common Stock % of Outstanding Officers and Directors: Shares Beneficially Owned(1) Stock - - - ----------------------- ---------------------------- ----- Gerald E. Finnell............. 0 * Stephen J. Carder............. 537,500 14.07% Gary L. Nielsen............... 0 * Jon M. Donnell................ 500 * Darren T Horndasch............ 2,250 * Denise E. Nedza............... 0 * 5% Holders: InfoPlan Partners............. 500,000 13.09% Thomas H. Stateman............ 191,250 5.01% * Indicates less than 1.0% (1) Beneficial ownership is determined under rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to stock options and warrants currently exercisable or exercisable within 60 days are deemed to be outstanding for computing the percentage ownership of the person holding such options 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. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 21 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 was filed with the Securities and Exchange Commission on September 16, 1998, relating to the settlement of certain disputes among the Company, InfoPlan Partners, L.L.C., Thompson Kernaghan & Co., Ltd., and Bronia GmbH. A report on Form 8-K, was filed with the Securities and Exchange Commission on December 7, 1998, relating to the Company's name being changed to HealthStar Corp. and the Company effecting a 2-for-1 reverse stock split of its common stock. 22 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. Date: June 28, 1999 HEALTHSTAR CORP. By: /s/ Stephen J. Carder ------------------------------------ Stephen J. Carder President, Chief Executive Officer and Director 23 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen J. Carder, as his true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-KSB and any documents related to this report and filed pursuant to the Securities and Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. 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. Signature Date --------- ---- /s/ Stephen J. Carder - - - -------------------------------------------- Stephen J. Carder President, Chief Executive Officer and Director June 28, 1999 /s/ Denise E. Nedza - - - -------------------------------------------- Denise E. Nedza Vice President, Chief Financial Officer June 28, 1999 /s/ Gerald E. Finnell - - - -------------------------------------------- Gerald E. Finnell Director June 28, 1999 /s/ Gary L. Nielsen - - - -------------------------------------------- Gary L. Nielsen Director June 28, 1999 /s/ Jon M. Donnell - - - -------------------------------------------- Jon M. Donnell Director June 28, 1999 /s/ Thomas S. O'Brien - - - -------------------------------------------- Thomas S. O'Brien Director June 28, 1999 24 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - - - -------------- ----------- 3.1 Articles of Incorporation dated August 24, 1998 and all amendments thereto (incorporated by 3.1 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). 21. Subsidiaries of the Registrant. 27. Financial Data Schedule. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION ---- ---------------------- HealthStar, Inc. Illinois National Health Benefits & Casualty Corporation Nevada 25 EX-21 2 SUBSIDIARIES OF THE REGISTRANT HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Financial Statements March 31, 1999 and 1998 (With Independent Auditors' Report Thereon) INDEPENDENT AUDITORS' 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, 1999 and the related consolidated statements of operations and retained earnings, and cash flows for the years ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide 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, 1999, and the results of their operations and their cash flows for the years ended March 31, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Phoenix, Arizona May 28, 1999 F-1 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Balance Sheet March 31, 1999 ASSETS Current assets: Cash and cash equivalents $ 71,936 Trade accounts receivable, less allowance for doubtful accounts of $317,580 1,994,851 Other current assets 420,154 ----------- Total current assets 2,486,941 Property and equipment, net 2,471,686 Intangibles, net of accumulated amortization of $610,784 8,569,423 Other assets, at cost 240,548 ----------- Total assets $13,768,598 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 882,911 Accrued expenses 1,589,035 Current portion of long-term debt 2,925,000 ----------- Total current liabilities 5,396,946 ----------- Shareholders' equity: Common stock, $.001 par value, 15,000,000 shares authorized, 3,819,872 shares issued and outstanding 3,820 Additional paid-in capital 8,151,129 Retained earnings 216,703 ----------- Total shareholders' equity 8,371,652 Commitments and contingencies ----------- Total liabilities and shareholders' equity $13,768,598 =========== See accompanying notes to consolidated financial statements. F-2 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Statements of Operations and Retained Earnings Years ended March 31, 1999 and 1998 1999 1998 ------------ ------------ Revenues: Capitated fees $ 9,481,392 3,536,008 Repricing fees 6,893,519 3,957,456 Other fees 540,381 360,532 ------------ ------------ 16,915,292 7,853,996 ------------ ------------ Operating expenses: Cost of services 2,434,238 1,466,387 Salaries and wages 8,202,561 3,237,534 General and administrative 4,937,387 2,041,365 Depreciation and amortization 1,214,204 391,980 Interest expense 397,165 228,320 ------------ ------------ 17,185,555 7,365,586 ------------ ------------ Earnings (loss) before income taxes (270,263) 488,410 Income tax expense (benefit) (94,593) 184,305 ------------ ------------ Net earnings (loss) (175,670) 304,105 Retained earnings at beginning of year 392,373 88,268 ------------ ------------ Retained earnings at end of year $ 216,703 392,373 ============ ============ Earnings (loss) per share - Basic and Diluted $ (0.05) .11 ============ ============ Weighted average shares outstanding - Basic and Diluted 3,216,676 2,793,750 ============ ============ See accompanying notes to consolidated financial statements. F-3 HEALTHSTAR CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1999 and 1998
1999 1998 ----------- ----------- Operating activities: Net earnings (loss) $ (175,670) 304,105 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,214,204 391,980 Bad debt expense 638,184 80,062 Gain related to stock transactions (70,981) -- Loss on sale of fixed assets -- 5,658 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Trade accounts receivable (120,589) (619,338) Other current assets (397,980) 38,218 Accounts payable (280,830) (886,649) Accrued expenses (608,691) 161,539 Deferred revenue -- (58,909) ----------- ----------- Net cash provided by (used in) operating activities 197,647 (583,334) ----------- ----------- Investing activities: Purchases of equipment (369,183) (141,751) Proceeds from sale of fixed assets -- 12,336 Investment in healthcare technology company 100,000 (309,626) Acquisition of HealthStar, Inc. -- (6,000,000) ----------- ----------- Net cash used in investing activities (269,183) (6,439,041) ----------- ----------- Financing activities: (Increase) decrease in other assets 19,006 (449,915) Net proceeds from line of credit 350,000 300,000 Net proceeds from (payments on) on long-term debt (425,000) 2,475,660 Issuance (redemption) of convertible debt (1,000,000) 4,000,000 Proceeds from issuance of common stock 1,000,000 -- ----------- ----------- Net cash provided by (used in) financing activities (55,994) 6,325,745 ----------- ----------- Net decrease in cash and cash equivalents (127,530) (696,630) Cash and cash equivalents at beginning of year 199,466 896,096 ----------- ----------- Cash and cash equivalents at end of year $ 71,936 199,466 =========== =========== Supplemental financial disclosure: Interest paid $ 345,738 106,730 =========== =========== Income taxes paid $ 220,737 1,205 =========== =========== Supplemental disclosure of noncash financing activities: Settlement on convertible debenture $ 3,000,000 -- =========== ===========
See accompanying notes to consolidated financial statements. F-4 HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (1) DESCRIPTION OF BUSINESS HealthStar Corp. (the "Company") 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. The Company operates its business through its two wholly-owned subsidiaries, HealthStar, Inc. ("HealthStar") and National Health Benefits & Casualty Corporation ("NHBC"). The Company is the successor company to Champion Financial Corporation ("Champion"), a Utah corporation. Effective November 16, 1998, Champion 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. Champion acquired NHBC in a business combination accounted for as a reverse acquisition with a publicly-traded shell company on January 1, 1997. In completing the acquisition, Champion issued 2,200,000 shares of common stock for all of the outstanding shares of NHBC common stock. To effect the combination, the fair value of the net tangible assets of Champion were added to the equity of NHBC. On January 9, 1997, Champion acquired the outstanding stock of Three Rivers Provider network ("TRPN") through the issuance of 100,000 shares of Champion common stock valued at $.71 a share by an independent appraiser. The business combination was treated as a purchase transaction. Champion purchased the outstanding stock of HealthStar on December 12, 1997. The transaction was accounted for under the purchase method of accounting. The purchase price consisted of approximately $6 million cash, 382,500 shares of Champion common stock valued at $9 a share based on prices quoted by a stock exchange, a seller note in the amount of $200,000 and transaction and related costs of approximately $1,245,000. The assets and liabilities of HealthStar at the time of acquisition were adjusted to their fair values. The net assets of TRPN were merged into HealthStar during 1999. F-5 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (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 certain operating losses and working capital deficits that have affected the Company's liquidity. At fiscal year-end, the Company was not in compliance with the minimum fixed charge coverage ratio and minimum current ratio requirements contained within its bank credit agreement. On June 8, 1999, the Company entered into an agreement with respect to its line of credit and bank note which provides for a waiver covering all periods of noncompliance prior to and including March 31, 1999 and a modification of such agreement. The agreement accelerates the due date of outstanding balances on the line of credit and bank note to November 30, 1999. The agreement also resets the above-mentioned ratios as well as adding an additional minimum earnings covenant for subsequent periods. Based upon unaudited financial statement balances at May 31, 1999, the Company was in compliance with the revised covenants. The Company is actively seeking replacement financing through various sources and relationships with other companies in a related line of business to ensure that adequate resources are available to meet the accelerated deadline of the bank debt. Management believes that these actions and plans will provide sufficient working capital in order for the Company to continue as a going concern. (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. F-6 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (D) EARNINGS (LOSS) PER SHARE The Company adopted Statement of Accounting Standards No. 128 "Earnings per Share" (SFAS 128) during 1997. The Company's Earnings per Common Share (EPS) figures for the prior period were not effected by adoption of SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing net income, after deducting preferred stock dividends requirements (if any), by the weighted average number of shares of common stock outstanding. Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive stock options and warrants and to the assumed conversion of all dilutive convertible securities and stock. (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. 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. (F) REVENUE RECOGNITION 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. The Company receives monthly capitation fees based upon the number of each customer's members regardless of services actually provided. (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. 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. F-7 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (I) 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. (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. (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 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. F-8 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (L) STOCK BASED COMPENSATION The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. In accordance with APB Opinion No. 25, compensation expense is recorded on the date an option is granted only if the current market price of the underlying stock exceeds the exercise price. (4) PROPERTY AND EQUIPMENT A summary of property and equipment by major classification at March 31, 1999 follows: Furniture and fixtures $ 774,193 Computer software 626,225 Equipment 2,109,268 ----------- 3,509,686 Accumulated depreciation (1,038,000) ----------- $ 2,471,686 =========== (5) DEBT Debt consists of the following at March 31, 1999: Note payable to Harris Trust and Savings Bank, due November 30, 1999, secured by substantially all the assets of the Company $ 2,075,000 Line of credit with Harris Trust and Savings Bank with permitted outstanding borrowings of $1,500,000, and secured by substantially all the assets of the Company 650,000 Unsecured note payable to an individual, interest payable monthly at 8%, currently due 200,000 ----------- $ 2,925,000 =========== F-9 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 As of March 31, 1999, the Company was in violation of several of the financial covenants required to be met by Harris Trust and Savings Bank ("Harris"). Harris has agreed to a waiver in connection with such violations effective June 8, 1999 upon amending the terms of the Credit Agreement (the "Agreement") by and between the Company and Harris. The amended terms call for payment of $150,000 on both June 30, 1999 and September 30, 1999, with all amounts outstanding payable on November 30, 1999. Interest, which is payable monthly in arrears commencing June 30, 1999, is calculated at the prime rate plus 1.5%. Prior to the amendment, interest had been payable quarterly and was calculated at prime, which was 7.75% at March 31, 1999. In connection with the acquisition of HealthStar, Champion 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 bearing interest at 8%. The promissory note was redeemed in cash on March 31, 1999. (6) ACCRUED EXPENSES A summary of accrued expenses at March 31, 1999 follows: Salaries and benefits $ 808,768 Professional fees 107,817 Other 672,450 ---------- $1,589,035 ========== (7) STOCK TRANSACTIONS In October 1998, the Company effected a 2-for-1 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 stock subscription agreements for an aggregate of 400,000 shares at $2.50 per share. (8) BUSINESS AND CREDIT CONCENTRATION The Company operates in a very competitive market. The Company's success is dependent upon its ability to market to and contract with insurance companies and self-funded companies, to effectively administer and reprice claims, and to expand into new markets and opportunities through acquisition. Changes in the insurance and health care industries, including the regulation thereof by federal and state agencies, may significantly affect management's estimates of the Company's performance. F-10 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 The allowance for doubtful accounts is based on the creditworthiness of the Company's customers as well as consideration for general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. The Company's customers are located throughout the United States. In 1999 and 1998 there were no customers whose revenue or accounts receivable exceeded 10% of total revenue or total accounts receivable. (9) ACQUISITION OF HEALTHSTAR The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition of HealthStar had occurred at April 1, 1997, with pro forma adjustments together with related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would actually have resulted had the combination been in effect on the date indicated. Total revenues $20,328,321 Net income 56,802 Basic earnings per common share $ .10 (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 eight years. Rent expense under noncancelable operating leases was approximately $1,044,000 and $400,000 in 1999 and 1998, respectively. Future minimum lease payments under these leases are as follows: OPERATING LEASES ---------- Fiscal years ending March 31: 2000 $ 943,000 2001 684,000 2002 650,000 2003 661,000 2004 631,000 Thereafter 1,327,000 ---------- Total minimum lease payments $4,896,000 ========== F-11 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 On May 13, 1999, the Company settled litigation of a matter that was originally filed against HealthStar prior its acquisition by Champion. In this litigation an individual claimed breach of contract among other charges. The lawsuit was settled for $200,000, which has been included in other accrued liabilities at March 31, 1999. The Company is involved in litigation asserted by the previous owner of HealthStar. It is management's opinion that the final outcome of this matter will not materially effect the Company's financial condition. 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. The repricing agreements with customer companies and physicians are cancelable at the option of those parties with written notice which varies from 30 to 90 days. Management generally attempts to renegotiate any such canceled agreements. Management believes that there is very little likelihood that there would be cancellations sufficient to have a material adverse effect on the Company's results of operations or financial condition. (11) INCOME TAXES The utilization of the Company's net operating 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. F-12 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 At March 31, 1999, the Company has available net operating loss carryforwards and capital loss carryforwards for Federal income tax purposes, subject to the limitations discussed above, which may provide future tax benefits expiring as follows: EXPIRATION DATE OPERATING CAPITAL -------- -------- 2000 $ -- 48,000 2001 -- 78,791 2002 -- -- 2003 -- -- 2004 -- -- 2005 459 -- 2006 201,008 -- 2007 -- -- 2008 -- -- 2009 -- -- 2010 11,465 -- 2011 1,114 -- 2012 264,844 -- -------- -------- $478,890 126,791 ======== ======== Income tax benefit for the year ended March 31, 1999 consists of: CURRENT DEFERRED TOTAL -------- -------- -------- U.S. Federal $(76,218) -- (76,218) State and local (18,375) -- (18,375) -------- -------- -------- $(94,593) -- (94,593) ======== ======== ======== Income tax expense for the year ended March 31, 1998 consists of: CURRENT DEFERRED TOTAL -------- -------- -------- U.S. Federal $148,504 -- 148,504 State and local 35,801 -- 35,801 -------- -------- -------- $184,305 -- 184,305 ======== ======== ======== F-13 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 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: 1999 1998 --------- --------- Computed "expected" federal income tax expense $ (91,889) 172,859 Expected state income taxes, net of federal benefit (12,127) 23,629 Expiration of capital losses 354,273 -- Change in valuation allowance (420,642) (29,632) Non deductible item (5,520) 8,718 Other 81,312 8,731 --------- --------- $ (94,593) 184,305 ========= ========= The tax effects of temporary differences that give rise to significant portions of deferred tax assets are as follows, there are no material deferred tax liabilities: 1999 1998 --------- --------- Deferred tax assets: Net operating loss carry forward $ 186,767 162,823 Capital loss carryforward 49,448 351,963 Reserve for bad debt 123,856 85,000 Accrued expenses 52,336 44,880 --------- --------- Deferred tax asset 412,407 644,666 Less valuation allowance (184,325) (527,408) --------- --------- Net deferred tax asset 228,082 117,258 --------- --------- Deferred tax liabilities: Amortization (83,118) (22,173) Fixed Assets (101,073) (73,561) Prepaid expenses (43,891) (21,524) --------- --------- Deferred tax liability (228,082) (117,258) --------- --------- Net deferred tax asset $ -- -- ========= ========= F-14 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 The net change in the total valuation allowance for the year ended March 31, 1999 was $343,083. 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. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the entire benefit of the deferred tax assets. (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 to be granted to employees only, while non-qualified stock options may be granted to the Company's directors and key personnel and to providers of various services to the Company. Incentive stock options to purchase shares of the Company's common stock must be granted at a price determined by the Board of Directors. The exercise price for individuals granted incentive stock options must be no less than 100 percent of the fair market value. Both incentive stock options and qualified stock options may be exercised within five years from the date of grant and 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 Board of Directors, which establishes the awards, vesting requirements and expiration dates of options granted. 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 weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 4.3%, expected volatility of 100% and an expected life of five years. At March 31, 1999, the Company had 121,000 options outstanding at an exercise price of $2.88. F-15 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 The Company applies APB Opinion 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below: MARCH 31, 1999 ---------- Net earnings (loss) As reported $ (175,670) Pro forma (193,309) Earnings (loss) per share - basic As reported (.05) Pro forma (.06) Earnings (loss) per share - diluted As reported (.05) Pro forma (.06) The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of two to three years. A summary of the aforementioned stock plan activity follows: WEIGHTED AVERAGE PRICE PER NUMBER SHARE --------- --------- Balances, March 31, 1998 -- $ -- Granted 141,000 2.88 Forfeited (20,000) 2.88 --------- ------ Balances, March 31, 1999 121,000 $ 2.88 ========= ====== F-16 (Continued) HEALTHSTAR CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 A summary of stock options granted at March 31, 1999 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------- RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE ------ -------------- ---------------- ---------------- -------------- -------------- $2.88 121,000 10 years $ 2.88 -- $ 2.88 ---------- ------ ---------- ------ 121,000 $ 2.88 -- $ 2.88 ========== ====== ========== ======
(13) BENEFIT PLANS The Company has a defined contribution 401(k) plan for all employees. Under the 401(k) plan, employees are permitted to make contributions to the plan in accordance with IRS regulations. The Company may make discretionary contributions as approved by the Board of Directors. There were no contributions made during 1999 and 1998. 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. The first offering period for this plan began April 1, 1999. F-17 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF MARCH 31, 1999, AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDING MARCH 31, 1999, OF HEALTHSTAR CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS MAR-31-1999 MAR-31-1999 71,936 0 1,994,851 317,580 0 2,486,941 2,471,686 1,038,000 13,768,598 5,396,946 0 0 0 3,820 0 5,396,948 0 16,915,292 0 0 17,185,555 0 0 (270,263) (94,593) (175,670) 0 0 0 (175,670) (0.05) (0.05)
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