<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 8, 1997
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in charter)
Delaware 0-21752 25-1697152
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
665 Philadelphia Street, Indiana, Pennsylvania 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 349-7500
Not Applicable
(Former name or former address, if changed from last report)
1
<PAGE>
Item 1. Changes in Control of Registrant.
On February 28, 1997, the Committee to Protect Northstar Health (the
"Committee") founded by Thomas W. Zaucha, Chairman of the Board and Chief
Executive Officer of the Company ("Mr. Zaucha"), and also comprised of Joseph F.
Micallef, Chairman and Chief Executive Officer, Associated Sales Tax Consultants
Incorporated, and Basil J. Asciutto, Chief Operating Officer of Commonwealth
Associates ("Commonwealth"), filed with the U.S. Securities and Exchange
Commission (the "Commission") a definitive consent solicitation statement on
Schedule 14A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") on behalf of the Committee (the "Consent Statement"). The Consent
Statement was furnished to shareholders of the Company on or about March 3, 1997
and subsequently the Committee solicited from the holders of the common stock of
the Company, par value $0.01 per share (the "Common Stock"), written consents to
take the following actions without a stockholders' meeting, as permitted by
Delaware law:
(1) amend Article III, Section 1 of the By-laws of the Company by
deleting the second sentence thereof and inserting in its place the following
sentence to set the number of directors on the Board of Directors of the Company
(the "Board") at eleven (11) as follows: "The Board of Directors shall be
comprised of eleven (11) directors.";
(2) amend Article III, Section 1 of the By-laws of the Company by
deleting the third, fourth and fifth sentences thereof and inserting in their
place a provision to eliminate the classified Board of Directors which will
enable stockholders to remove directors without cause. The proposed amendment
read as follows: "Each director shall serve for a term of one year and shall
hold office until such director's successor is elected and qualified or until
such director's earlier resignation or removal. Directors may be removed without
cause by the holders of a majority of the shares then entitled to vote.";
(3) elect the following five nominees as directors of the Company to
fill newly-created directorships on the Board of Directors and to serve until
their respective successors are duly elected and qualified: Lawrence F. Jindra,
M.D., James H. McElwain, Mark G. Mykityshyn, Roger J. Reschini and David B.
White, Esq. (collectively, including Mr. Zaucha, the "Zaucha Board"); and
(4) remove the following members of the Board of Directors other than
Mr. Zaucha (such other members being at the time all the other members of the
Board): Steven N. Brody, Robert J. Smallacombe, Charles B. Jarrett, Jr., Timothy
L. Pesci and David D. Watson (collectively, the "Brody Board"), and any other
person or persons (other than the persons elected pursuant to the Consent
Statement) elected or appointed to the Board of Directors of the Company prior
to the effective date of the shareholder action in addition to or in lieu of any
of the Zaucha Board to fill any newly-created directorship or vacancy on the
Board of Directors of the Company, or otherwise, other than Mr. Zaucha (together
with (1), (2) and (3), the "Proposals").
2
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On March 6, 1997, the Brody Board filed on their own behalf and on
behalf of the Company, a preliminary consent statement on Schedule 14A seeking
the revocation of the Committee's consents. The Brody Board never filed
definitive materials with the Commission.
On March 19, 1997, the Brody Board caused the Company to file an action
in the United States District Court for the Western District of Pennsylvania
(the "Pennsylvania Action"), encaptioned Northstar Health Services, Inc. v.
Thomas W. Zaucha, Zaucha Family L.P., Alice L. Zaucha, Commonwealth Associates,
L.P., Michael S. Falk, Andreas Bello, Joseph F. Micallef, Basil J. Asciutto,
Lawrence F. Jindra, James H. McElwain, Mark G. Mykityshyn, Roger J. Reschini and
David B. White, Esq. (the "Pennsylvania Complaint"), which sought, inter alia,
temporary and preliminary injunctive relief against the seating of the Zaucha
Board and an award of compensatory and punitive damages against all defendants.
The Pennsylvania Complaint alleged the following eight (8) counts: Count I --
violations of Section 13(d) of the Exchange Act against all defendants, Count II
- - -- proxy fraud in violation of Section 14(a) of the Exchange Act against all
defendants, Count III -- securities fraud and control person liability under
Section 20 of the Exchange Act against Michael Falk, Count IV -- fraud against
Commonwealth, Count V -- breach of fiduciary duty against Mr. Zaucha, Count VI
- - -- breach of contract against Commonwealth, Count VII -- conversion and unjust
enrichment against Commonwealth and Mr. Zaucha and Count VIII -- conspiracy
against all defendants. On March 21, 1997, the Brody Board caused the Company to
file a motion for a Temporary Restraining Order, Preliminary Injunction and
Expedited Discovery (the "TRO Motion") in the Pennsylvania Action.
On March 24, 1997, the Committee delivered to the Company, both at its
headquarters in Indiana, Pennsylvania and at the offices of The Corporation
Trust Company, the Company's registered agent in the State of Delaware, the
written consent of the holders of more than a majority of the outstanding shares
of Common Stock in favor of the adoption of the Proposals. Specifically, the
Committee delivered the written consent of the holders of 3,581,797 of the
5,867,153 outstanding shares of Common Stock of the Company as of February 5,
1997, representing the consent of 61% of the holders of the outstanding shares
of Common Stock.
Upon such delivery of sufficient consents to take action by written
consent of the stockholders of the Company in accordance with the provisions of
Section 228 of the General Corporation Law of the State of Delaware, all four of
the Committee's Proposals were duly adopted by the Company. That is, as of March
24, 1997, the By-laws were amended to increase the number of directors to eleven
(11) and to eliminate the classified Board of Directors thereby enabling
stockholders to remove directors without cause. The Zaucha Board became duly
elected members of the Board and the Brody Board was removed from office by vote
of the shareholders of the Company. Notwithstanding the delivery of consents by
the Zaucha Board, the Brody Board refused to relinquish control of the Company
and continued to purport to act on behalf of the Company.
Immediately following their election to the Board, on March 24, 1997,
Mr. Zaucha and the newly-elected Zaucha Board held their first meeting. The
purposes of the meeting were (i) to announce the consent of the holders of a
majority of the outstanding shares of Common Stock of the Company to the
Proposals, (ii) to elect new officers of the Company to replace
3
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certain of the then serving officers of the Company, and (iii) to conduct
various other administrative matters in connection with assuming the operation
of the Company and fulfilling the mandate given to the Zaucha Board in
connection with the adoption of the Proposals by the Company's shareholders.
The directors present at the March 24, 1997 Board meeting, constituting
the entire Board of Directors of the Company, were:
Thomas W. Zaucha (Chairman of the Board)
Lawrence F. Jindra, M.D.
James H. McElwain
Mark G. Mykityshyn
Roger J. Reschini
David B. White, Esq.
At that same meeting, the following persons were named as officers of the
Company:
Thomas W. Zaucha - Chairman of the Board, Chief Executive
Officer and President
Michael Delaney - Assistant Secretary and Assistant Treasurer
Also at the March 24, 1997 Board meeting, Mr. Zaucha and the
newly-elected Board resolved that (i) Steven N. Brody, Robert J. Smallacombe and
David D. Watson be removed from each and every office, position, consultancy,
employee relationship or other relationship with the Company effective
immediately and (ii) Sweeney & Associates, P.C., Shapiro & Allen, Advest, Inc.,
Richards, Layton & Finger, Georgeson & Company Inc., Melissa Krantz and the
Krantz Group and Lamb & Bouchard be terminated and removed from the employ of
the Company effective immediately.
On March 28, 1997, Mr. Zaucha and the other defendants in the
Pennsylvania Action filed a motion to dismiss the complaint and filed papers in
opposition to the TRO Motion.
On the same date, Chief District Judge Donald E. Ziegler of the United
District Court for the Western District of Pennsylvania held a status conference
on the Brody Board's TRO Motion and the defendants' motion to dismiss. At the
conference, the parties agreed to a settlement (the "Settlement") which
provided, inter alia, that the parties would (i) commence an action under
Section 225 of the Delaware General Corporation Law before the Delaware Chancery
Court (the "Delaware Action") to rule on the validity of the outcome of the
consent solicitation, (ii) stay the Pennsylvania Action initiated by the Brody
Board pending the outcome of the Delaware Action, (iii) be bound by the decision
of the trial court in the Delaware Action, such that whichever Board is
confirmed by the Delaware trial court immediately assumes control of the
Company, notwithstanding that the defeated Board retains its right to appeal,
and (iv) agree that if the Zaucha Board was the successful Board, the Brody
Board and the Company would dismiss
4
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with prejudice the Pennsylvania Complaint. As discussed in greater detail below,
the terms of the Settlement were entered as an Order of the court on May 5,
1997.
On March 31, 1997, notwithstanding the prior delivery of consents by
the Zaucha Board and the terms of the Settlement, the Brody Board filed a Form
10-K purportedly on behalf of the Company for the fiscal years ended December
31, 1995 and December 31, 1996 without the consent or participation of any
member of the Zaucha Board or of any of the Zaucha Board's advisors. In response
to the filing of the Form 10-K, on April 1, 1997, the Zaucha Board filed before
Judge Ziegler a Motion To Modify and Enforce Settlement Order And For Sanctions
against the Brody Board for violating the terms of the Settlement.
On April 1, 1997, Mr. Zaucha commenced the Delaware Action in the
Delaware Chancery Court seeking an order pursuant to Section 225 of the Delaware
General Corporation Law confirming the result of the consent solicitation,
including that the members of the Zaucha Board are the duly elected directors of
Northstar. On April 3, 1997, the Brody Board filed their answer to the Section
225 complaint, and, in addition, Mr. Brody filed six counterclaims, four of
which were subsequently stayed.
On April 4, 1997, Chief Judge Ziegler entered an order making the
transcript of the proceedings in the Pennsylvania Action held before him on
March 28, 1997 part of the record in the case and ordering that the transcript
constitute a record of the settlement reached by the parties on March 28, 1997.
Thereafter, pursuant to an Order, dated April 8, 1997, the parties each
submitted a proposed order to the Court, including a proposed settlement
agreement (the "Settlement Agreement"). On May 5, 1997, Chief Judge Ziegler
decreed that the Settlement Agreement submitted by the Zaucha Board and the
other defendants be entered as an Order of the United States District Court for
the Western District of Pennsylvania in the Pennsylvania Action. Chief Judge
Ziegler retained continuing jurisdiction to enforce the terms of the Settlement.
A copy of each of Chief Judge Ziegler's Orders, including a copy of the
transcript of the March 28, 1997 proceedings, are attached as EXHIBIT A hereto.
The Delaware Action was tried on May 7 and 8, 1997, before Vice
Chancellor Balick. At the end of the trial, Vice Chancellor Balick ruled in
favor of Mr. Zaucha confirming the results of the Committee's consent
solicitation, including that the Zaucha Board constituted the lawful Board of
Directors of Northstar as of March 24, 1997. A copy of the ruling in the
Delaware Action is attached hereto as EXHIBIT B.
Accordingly, on May 9, 1997, Mr. Zaucha and the Zaucha Board assumed
control of the Company. The Brody Board, while no longer in office, may appeal
the ruling of the Delaware Chancery Court. A copy of the press release, dated
May 9, 1997, issued by the Company regarding the ruling in the Delaware Chancery
Court is attached hereto as EXHIBIT C.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of businesses being acquired: None.
5
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(b) Pro Forma financial information: None.
(c) Exhibits:
99.1 Orders of the United States District Court for the Western
District of Pennsylvania, dated April 4, 1997 and May 5,
1997, in Northstar Health Services, Inc. v. Thomas W.
Zaucha et al. (Civil Action No. 97-0510).
99.2 Ruling of The Court of Chancery of the State of Delaware,
dated May 8, 1997, in Thomas W. Zaucha v. Steven N. Brody
et al. (Civil Action No. 15638).
99.3 Press release, dated May 9, 1997, issued by the Company
regarding the ruling in the Delaware Chancery Court.
6
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHSTAR HEALTH SERVICES, INC.
/s/ Thomas W. Zaucha
---------------------------------------------
Name: Thomas W.Zaucha
Title: Chief Executive Officer and President
May 16, 1997
7
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EXHIBIT INDEX
Exhibit Page
- - ------- ----
99.1 Orders of the United States District Court for
the Western District of Pennsylvania, dated
April 4, 1997 and May 5, 1997, in Northstar
Health Services, Inc. v. Thomas W. Zaucha et
al. (Civil Action No. 97-0510).
99.2 Ruling of The Court of Chancery of the State
of Delaware, dated May 8, 1997, in Thomas W.
Zaucha v. Steven N. Brody et al. (Civil Action
No. 15638).
99.3 Press release, dated May 9, 1997, issued by
the Company regarding the ruling in the
Delaware Chancery Court.
8
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
- - --------------------------------X
NORTHSTAR HEALTH SERVICES, INC. :
Plaintiff :
vs. : Civil Action No. 97-510
THOMAS ZAUCHA, et al. :
Defendant. :
- - --------------------------------X
ORDER OF COURT
AND NOW, this 4th day of April, 1997,
IT IS ORDERED that the attached transcript shall be and hereby
is made part of the record at the above Civil Action No. 97-510.
IT IS FURTHER ORDERED that the attached transcript shall
constitute a record of the Settlement Agreement reached by the parties on March
28, 1997.
/s/ Donald E. Ziegler
------------------------------
Donald E. Ziegler
Chief Judge
cc: Counsel of record.
<PAGE>1
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
- - --------------------------------X
NORTHSTAR HEALTH SERVICES, INC. :
Plaintiff :
vs. : Civil Action No. 97-0510
THOMAS ZAUCHA, et al. :
Defendants :
- - --------------------------------X
PROCEEDINGS
Transcript of hearing commencing on FRIDAY, MARCH 28, 1997, United
States District Court, Pittsburgh, Pennsylvania, before Honorable DONALD
ZIEGLER, Chief District Judge.
APPEARANCES:
For the Plaintiff: By: Paul Manion, Esq.
Mary Jo Rebel, Esq.
Stuart L. Shapiro, Esq.
Paul Titus, Esq.
For the Defendants: By: Steven H. Reisberg, Esq.
David G. Ries, Esq.
Donald M. Lund, Esq.
Reported by:
Patricia W. Sherman
Official Court Reporter
1017A USPO & Courthouse
Pittsburgh, Pennsylvania 15219
(412) 281-6855
Proceedings recorded by mechanical stenography. Transcript produced by
computer-aided transcription.
<PAGE>2
FRIDAY MORNING, MARCH 28, 1997, 11:15 A.M.
THE COURT: This case is entitled Northstar Health Services,
Inc., as plaintiff, vs. Thomas W. Zaucha and others as defendants, Civil Action
No. 97-0510 wherein pending before the Court is a motion for a preliminary
injunction and temporary restraining order. The defendants responded with a
motion for stay and a motion to dismiss.
The Court scheduled a status conference and a number of the
principals are present with their able lawyers, and I am pleased to announce
that a partial resolution of this matter apparently has been consummated.
Counselor, do you want to summarize the terms and conditions?
MR. REISBERG: Yes, Your Honor. The terms are as follows:
One, the parties agree that they will file a Section 225
proceeding under Delaware law and seek an expedited resolution of that action
before the Delaware Chancery Court.
Two, the parties agree to a stay of the Pittsburgh action
pending the outcome of the Delaware proceeding.
Three, each party will pay all of their own attorney fees and
expenses in connection with the Delaware Section 225 action. Only the party who
is the successful party in that action will be entitled to seek reimbursement of
those fees and expenses from the company.
<PAGE>3
Four, the parties agree to abide by the decision of the
Delaware Chancery Court. This means that if Mr. Zaucha and his slate of
directors is confirmed by the Delaware Chancery Court, then the Brody board will
dismiss this action with prejudice.
I can't remember the number -- maybe it's six.
THE COURT: Five.
MR. REISBERG: Thank you. During the interim period while the
Delaware action is pending, it is agreed as follows: A, Northstar will not take
any action that requires board approval without the mutual consent of both the
Zaucha board and the Brody board. The parties will cooperate to the extent that
board approval is required for such items as the completion of the audit.
B, no company funds will be further expended in connection
with any costs related to the proxy contest or the related litigation.
C, Mr. Watson is to remain as president of the company during
this interim period with his authority limited to the routine day-to-day
operations of the company.
D, no further payments will be made pursuant to any consulting
or other agreements to any other person.
And E, the parties will jointly agree upon a filing of this
agreement with the SEC and a press release. No other press releases will be made
by either party commenting on the
<PAGE>4
proceedings. Your Honor, that's my understanding of what my outline was.
THE COURT: I have one question. You stated that the parties
will abide by the decision of the Chancery Court of Delaware. Does that mean
that the decision of the Chancery Court will be final and binding with no right
of appeal to either side?
MR. SHAPIRO: I don't think that was what was proposed.
MR. REISBERG: I hadn't thought about that, Your Honor. I
wouldn't -- I don't object if the parties have a right to appeal that
determination. I don't know what the other --
MR. SHAPIRO: I would cut off that. So, I think we're in
agreement that it meets -- the decision of the Delaware courts would be abided
by. In other words, this case will --
THE COURT: You're talking about years of litigation before it
gets to the Delaware Supreme Court.
MR. SHAPIRO: I don't think, so, Your Honor.
THE COURT: You're talking at least 24 months.
MR. SHAPIRO: I don't think that either, a case like this. But
I --
MR. REISBERG: Your Honor, we would abide by the decision, Tom.
I think we'd abide by the decision of the Delaware Chancery Court. That would be
acceptable to us.
MR. SHAPIRO: Your Honor, if the Chancery Court were to decide
promptly, and then there were an appeal, the decision would be effective and
whoever the board was as a result of that
<PAGE>5
decision would take control. So, if I'm wrong and Your Honor is right, which
occasionally happens in my experience, and it took 24 months, it would all be
moot.
If it took through two weeks or three weeks for the Delaware
Supreme Court, which they do very quickly on this kind of thing, I don't think
it's going to be meaningful. I hate to sort of give up a right to appeal without
having thought about it, but I don't think it's going to have an impact on the
situation.
MR. REISBERG: Your Honor, if I may, given Mr. Shapiro's
comment, it does resolve a problem which I just replied to which is certainty.
That is a problem if it was uncertainty about who the board was during the
appeal period. I think we are in agreement that upon the ruling of Delaware
Chancery Court, whatever board is affirmed by that court will be able to take
office immediately.
MR. SHAPIRO: I think certainty is so important that both sides
ought to agree to that, and we do.
THE COURT: So, we are agreed on that point?
MR. SHAPIRO: Yes.
THE COURT: Whatever the Chancery Court rules with respect to
the competing boards will be accepted by the other side and the victor will
assume control of the company.
MR. SHAPIRO: Right. Without waiving rights on the appeal.
There was one point that Mr. Reisberg mentioned which I
<PAGE>6
don't think was in the original proposition which was the limitation of Mr.
Watson's authority as the president. That's not something that anybody
discussed. I don't know what it means. I'd rather stay with the proposition that
was made that we accepted.
THE COURT: What do you define as the duties of Mr. Watson?
MR. REISBERG: Your Honor, we recognize that during this
interim period, we have to accept somebody running the company on a day-to-day
basis. What we don't want happening during this period is for Mr. Watson to make
decisions such as firing senior employees, hiring senior employees, making
decisions to make major purchases or sales of assets.
I think it's, since we're talking a relatively short period of
time, it should be possible to run a business, open the doors in the morning,
and conduct your routine business without having to make what are otherwise
decisions which the new management really should have the right to make.
THE COURT: What is your advice?
MR. SHAPIRO: I don't -- I just -- I'm disabled to respond
because I have no knowledge whether there were issues coming up in the next two
or three weeks.
What I assumed was that the management wasn't going to be able
to make any decisions that required board approval. This was the proposal but
they'd be able to manage the business in the
<PAGE>7
ordinary course. If that means you catch somebody stealing, you fire them. It
seems to me you got to be able to do that. If you have a vendor that submitted a
bill, you got to be able to pay him. I didn't -- you're going to end up spending
a lot of time running the business if we have to squabble over decisions over
the next two or three weeks.
THE COURT: There are two examples he has cited --
MR. REISBERG: That day-to-day operation of the business, the
decision to fire the chief financial officer and hire someone else, I suggest is
not something that has to be done within the next two or three weeks.
THE COURT: I agree with that.
MR. REISBERG: To open a client doesn't have to be decided
within the next few weeks. I don't think we have a dispute. I just don't want
the other side to say, look, well, look, because this is the Brody board,
nevertheless, it is a senior management decision, we have carte blanche here.
That would put us in -- it would be very uncomfortable.
THE COURT: Let's work it out. What is your suggestion, Paul?
MR. TITUS: What I had was a little different thing than what
I had heard. That is, no payments to consultants, and frankly, I don't know who
consultants are. Certainly in terms of incurring further fees from this day
forward or in terms of something like that, but there may be fees that are due
and owing
<PAGE>8
and anything that's due and owing as of today would be paid in the ordinary
course. I would assume they mean going forward from today is what we're talking
about.
MR. REISBERG: I'm talking about going forth from today.
THE COURT: Are your concerns concerning discharge? You
mentioned someone may be discharged which you thought would be part of this
ongoing dispute? Do you have someone in mind?
MR. REISBERG: In the past, Your Honor, there had been people
in the senior management position, I believe it was a treasurer, who was fired
over Mr. Zaucha's objections. We wouldn't want change in senior -- there are
many people in current jobs who Mr. Zaucha wants to retain. We won't want them
fired by this named management during the next few weeks. Is that contemplated
at all, Mr. Shapiro?
MR. SHAPIRO: Apparently, no. There were some people fired this
week but they were fired by Mr. Zaucha when they broke into the office. I don't
think anybody else is -- anybody on this side of the table is contemplating
firing anybody.
MR. REISBERG: Your Honor, as long as they don't and since I'm
also thinking that they were creating an issue that may not exist as long as the
other side is keeping us advised of these management issues, we can always, if
we have disagreement, bother your Court. I hope that won't happen.
MR. SHAPIRO: We're not going to presume to do that.
<PAGE>9
THE COURT: Anything else you gentlemen want to place on the
record? What is your name, sir?
MR. WATSON: David Watson, president. Since my name is being
banded about here, so informally, I thought I would at least say that I have
been running the company with Tom Zaucha for many, many years. I do think I have
rather good judgment about firing and hiring people, and I really don't expect
my authority to be limited to the point where I have to ask questions everyday
of an eleven member board.
In fact, this company is in a rather difficult period of time
where we are looking at limiting expenses and potentially closing some things
and opening others.
Contracts. We have a potential contract we can sign in the
next week. There is positive things. I have never done anything that would be
negative toward the company. I do not think that I should be having my power
limited in the normal course of business.
MR. REISBERG: Your Honor --
THE COURT: That's the key phrase.
MR. WATSON: That's all I've been doing in the normal course of
business.
MR. REISBERG: Your Honor, I believe Mr. Watson's position is
really a caretaker right now, pending the outcome of this proceeding, rather
than an active manager's decision about active management of this company and
which way it's going to go.
<PAGE>10
We should decide who is going to control first as caretaker,
and given the relationship between the two, leaving the company in Mr. Watson's
hands on a day-to-day basis for routine business decisions.
THE COURT: Fine. Does that solve it?
MR. SHAPIRO: I think so.
THE COURT: Very good, sir. Anything else you want to place on
the record? Very good. Thank you. Have a nice holiday.
* * * * *
I certify that the foregoing is a correct transcript from the
record of proceedings in the above-entitled matter.
Dated: 3-31-97 /s/ Patricia W. Sherman
Patricia W. Sherman,
Official Court Reporter
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
NORTHSTAR HEALTH SERVICES, INC. ) Civil Action No. 97-0510
)
)
Plaintiff, ) Judge Ziegler
) Magistrate Judge Sensenich
)
v. )
)
)
THOMAS W. ZAUCHA, )
ZAUCHA FAMILY L.P. )
ALICE L. ZAUCHA, )
COMMONWEALTH ASSOCIATES, L.P., ) JURY TRIAL DEMANDED
MICHAEL S. FALK, )
JOSEPH F. MICALLEF, )
BASIL J. ASCIUTTO, )
ANDREAS V. BELLO, )
LAWRENCE F. JINDRA, )
JAMES H. MCELWAIN, )
MARK G. MYKITYSHYN, )
ROGER J. RESCHINI, and )
DAVID B. WHITE )
)
Defendants. )
ORDER OF COURT
--------------
AND NOW, this 5th day of May 1997, IT IS HEREBY ORDERED, ADJUDGED and
DECREED that the Settlement attached hereto is entered as an Order of this
Court. This Court shall have continuing jurisdiction to enforce the terms of the
Settlement.
/s/ Donald E. Ziegler
-------------------------
Donald E. Ziegler
Chief Judge
1
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
NORTHSTAR HEALTH SERVICES, INC. ) Civil Action No. 97-0510
)
)
Plaintiff, ) Judge Ziegler
) Magistrate Judge Sensenich
)
v. )
)
)
THOMAS W. ZAUCHA, )
ZAUCHA FAMILY L.P. )
ALICE L. ZAUCHA, )
COMMONWEALTH ASSOCIATES, L.P., ) JURY TRIAL DEMANDED
MICHAEL S. FALK, )
JOSEPH F. MICALLEF, )
BASIL J. ASCIUTTO, )
ANDREAS V. BELLO, )
LAWRENCE F. JINDRA, )
JAMES H. MCELWAIN, )
MARK G. MYKITYSHYN, )
ROGER J. RESCHINI, and )
DAVID B. WHITE )
)
Defendants. )
SETTLEMENT
----------
This Settlement, by and between Steven N. Brody, Charles B. Jarrett,
Jr., Timothy C. Pesci, Robert J. Smallacombe, and David D. Watson, individually
(collectively and hereinafter referred to as the "Brody Board"), and Thomas W.
Zaucha, Zaucha Family L.P., Alice L. Zaucha, Commonwealth Associates, L.P.,
Michael S. Falk, Joseph F. Micallef, Basil J. Asciutto, Andreas V. Bello,
Lawrence F. Jindra, James H. McElwain, Mark G. Mykityshyn, Roger G. Reschini,
and David B. White, individually, (collectively and hereinafter referred to as
the "Zaucha Group").
2
<PAGE>
The Brody Board and Zaucha Group are collectively referred to herein as "the
Parties."
1. The Parties have sought and will diligently pursue an expedited
resolution of the Delaware Section 225 Action before the Delaware Chancery
Court.
2. The Parties agree to stay the dispute entitled Northstar Health
Services, Inc. v. Thomas W. Zaucha et al. (C.A. No. 97-0510 W.D. Pa.) (the
"Western District Action"), pending the outcome of the claims and counterclaims
filed in a Section 225 Action in Delaware Chancery Court entitled Thomas W.
Zaucha v. Steven N. Brody, et al. (C.A. No. 15638) and scheduled for hearing on
May 7, 1997 (the "Delaware Section 225 Action").
3. Each party agrees to pay all of their own attorney fees and
expenses incurred from and after March 28, 1997, arising in connection with the
Delaware Section 225 Action and in connection with the Western District Action.
Only the successful board ("Successful Board" means the party ultimately found
to be in control of Northstar Health Services, Inc. after the final resolution
of the Delaware Section 225 Action (including the resolution of all appeals)),
will be entitled to seek reimbursement of those fees and expenses from Northstar
Health Services, Inc.
4. The Parties agree to be bound by the decision of the trial court in
the Delaware Section 225 Action, such that whichever Board is confirmed by the
Delaware trial court immediately assumes control of Northstar Health Services,
Inc.
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The right to appeal the Delaware trial court's decision is retained by the
Defeated Board ("Defeated Board" means the Board not deemed by the Delaware
trial court to be in control of Northstar Health Services, Inc.) but this right
to appeal does not, in any way, delay the assumption of control of Northstar by
the Successful Board. If the Zaucha Board is the Successful Board, Northstar and
the Brody Board agree that they will dismiss with prejudice the entire Western
District Action.
5. During the Interim Period ("Interim Period" means the period
commencing March 28, 1997 following the hearing before Judge Ziegler through the
resolution of the Delaware Section 225 Action by the Chancery Court scheduled
for May 7, 1997), the parties agree to the following:
a. The Company shall not take any action that
requires Board Approval without the mutual consent
of the Brody Board and the Zaucha Board ("Board
Approval" means action for which there is a
requirement under federal or Delaware law or the
Articles or Bylaws of the Company that an approval
by the Board is necessitated before a certain
action of the company can commence). The Parties
will cooperate to the extent that Board Approval
is required.
b. No Company funds will be expended in connection
with the Delaware 225 action, including any
appeals, or the Western District Action. During
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the Interim Period, Company funds may be paid for
services rendered in connection with the proxy
solicitation contest provided that such services
were rendered prior to March 28, 1997. During the
Interim Period, Company funds will continue to be
paid to all vendors, suppliers and other contract
holders provided their services are provided to
Northstar Health Services, Inc. in the ordinary
course of business.
c. It is agreed that the person who shall be
responsible for the management of the Company
during this Interim Period will be David Watson.
Mr. Watson shall remain President of the Company
with authority limited to those routine day-to-day
operations of the Company necessary to maintain
the Company, during the Interim Period. Mr. Watson
will be acting in the capacity of a caretaker,
preserving the Company for the management
ultimately determined by the Delaware Section 225
Action.
d. No payments shall be made pursuant to any
consulting or other agreements for services
rendered after March 28, 1997, to either Mr. Brody
or Mr. Smallacomb under their consulting and/or
employment agreements.
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e. The Parties acknowledge that the transcript of the
March 28, 1997 proceeding has been submitted to
the U.S. Securities and Exchange Commission. The
Parties also acknowledge that they were unable to
agree upon the language for a press release
summarizing the March 28, 1997 proceeding;
therefore, no press release was filed.
f. The Parties agree not to issue any press releases
relating to the Western District Action until the
Delaware Section 225 Chancery Court proceeding is
completed. ("Press Release" shall mean any written
statement delivered by the parties or their agents
or employees to members of the press.)
6. This Settlement and the transcript of the March 28 Agreement
constitute the entire understanding and agreement of the parties with respect to
the matters which are the subject thereof. Any promises or conditions, whether
written or oral, not specifically incorporated herein or in the March 28
Agreement, shall not be binding upon any of the parties hereto with respect to
the matters contained herein.
7. The parties consent to the continuing jurisdiction of this Court to
enforce the terms of this Order and Settlement Agreement. In the event of a
breach of this Settlement by any party hereto, the prevailing party in any
action to enforce its
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rights hereunder shall be entitled to recover all costs and expenses, including
reasonable attorneys' fees.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
THOMAS W. ZAUCHA, :
Plaintiff, :
Civil Action
vs. : No. 15638
STEVEN N. BRODY, ROBERT J. :
SMALLACOMBE, DAVID D. WATSON,
CHARLES B. JARRETT, JR., and
:
TIMOTHY C. PESCI,
:
Defendants.
:
- - --------------------------------------------------------------------------------
STEVEN N. BRODY, :
individually and derivatively
on behalf of nominal counter- :
claim defendant Northstar
Health Services, Inc., :
Counterclaim Plaintiff, :
vs. :
THOMAS W. ZAUCHA, :
Counterclaim Defendant, :
-and- :
NORTHSTAR HEALTH SERVICES,
INC., :
Nominal Counterclaim
Defendant. :
RULING OF THE COURT
May 8, 1997
- - --------------------------------------------------------------------------------
CHANCERY COURT REPORTERS
135 Herrmann Courthouse
Wilmington, Delaware 19801
(302) 577-2447
- - --------------------------------------------------------------------------------
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Chancery Courtroom No. 1
Herrmann Courthouse
Wilmington, Delaware
Thursday, May 8, 1997
---
BEFORE: HON. BERNARD BALICK, Vice Chancellor.
---
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THE COURT: This is a summary proceeding to determine the board, in
this case to rule on the validity of the outcome of a contested election by
consent solicitations, initiated by a stockholder under Section 228 of the
Delaware General Corporation Law. It is summary in nature because it is
important to have this determination as quickly as possible, for obvious
reasons.
I will announce a decision. I hope to follow it with a written
opinion, because there are some interesting issues in the case. I say "hope"
because it happens that a number of expedited matters are occurring
simultaneously, and finding the time to get this particular opinion out quickly
might not be easy. So I will try to address the primary issues orally and enter
an order, and I hope I will follow up with more detail.
There are basically two contentions made as to why this result should
not be enforced. One has to do with the timing of the solicitation, and the
other has to do with whether the information provided to stockholders was
accurate or whether, on the other hand, there was deception or breach of the
duty of disclosure.
On the timing, I think the statute itself and the interpretations thus
far by the Supreme Court make it fairly clear that a stockholder has a right to
proceed at any time and is not constrained by considerations such as whether
audited financial reports are available to the company. In the line of cases
dealing with the scheduling of stockholder meetings -- and we know that there
has been none for this corporation for two years -- the courts have tended to
require the holding of those
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meetings even though financial statements might not be available to the extent
that management would like. And I think the same principle would apply with
greater force to a consent solicitation by a stockholder.
Moreover, on the facts I am satisfied that there was no inequitable
conduct here. First of all, I accept Mr. Zaucha's testimony as to the timing of
his action having nothing to do with the restriction on the company seeking
revocations of consents. I am satisfied that he wasn't even aware of that at the
time.
Moreover, I don't believe that the existence of audited financial
statements was actually material. The company had an opportunity to provide
those aspects of the financial statements that they thought would benefit the
company in the information provided to the stockholders.
It is debatable whether the existence of the audited reports would
have actually been helpful or harmful to management in the eyes of the
stockholders. There was some indication of savings but there was also indication
of substantial losses. In any event, if the audited reports had existed, there
would have been ample opportunity for the contesting parties to debate who
should take the credit or the blame, because after all, Mr. Zaucha was the chief
executive officer throughout the period that was reported on anyway. So I don't
believe that the timing of the consent solicitation was harmful for the reason
argued.
Of course, a consent solicitation might happen at a time that is not
favorable for management, and the speed of it
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might be thought by management to put them at a disadvantage. But that is not
the same as saying that the fact that management did not have the audited
financials and therefore could not solicit revocations was harmful.
And I would add that the preliminary revocation of consent statement
was circulated widely, and the shareholders were informed very clearly by Mr.
Zaucha's committee as well as by that preliminary revocation statement sent out
by management of their right to revoke. There is simply no reason to believe
that the existence of audited reports would have resulted in revocations.
I will turn now to the disclosure issue. I agree with the defendants
on the law and disagree with the plaintiffs. The plaintiffs argue law that one
time did exist, but I think it has been superseded by the developments in the
area of disclosure. The plaintiffs argue that when conducting a consent
solicitation as a stockholder the fraud standard applies. There is older
authority for that, and I believe that is suggested in the learned article on
this subject by Professor Hamermesh.
However, I think that the cases that have held that there is a duty of
disclosure on directors when they seek stockholder action, and perhaps in other
circumstances, applies here as well. Stockholder action -- namely, consents --
were being sought. I do not think there is any sound basis to relieve a director
of his fiduciary duty simply on the basis that he is exercising his right as a
stockholder.
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One of the reasons for the fiduciary duty is the greater access to
knowledge that a director has. A dissident director like Mr. Zaucha has that
knowledge no less simply because he is challenging the controlling board
members. It is also understood that stockholders have a right to assume and
believe that directors will be acting in their interest, and I see no reason why
the stockholders wouldn't continue to hold that assumption as to a director who
is sending them consent solicitations.
So I believe that Mr. Zaucha did have a fiduciary duty of disclosure
when he conducted the consent solicitation. I recognize that there is no case
directly on point that holds that, but that result seems to me to be the logical
and inevitable result of other cases in this evolving area.
Having said that, one must recognize that this situation differs from
many. It has been recognized from way back and continues to be true that in a
contest like this the stockholders will be receiving information by both
contending parties. Here both had access to inside information, and the
stockholders presumably understood that. The process itself is important in
evaluating what is and what is not material and what the consequences ought to
be of any arguable misstatement.
Indeed, I should point out that the cases are clear -- and I refer
back to the Seminole case -- that we are not here focused primarily on whether
there was or was not a breach of fiduciary duty. What we are focused on is
whether the way the election was conducted justifies setting it aside. And the
law
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recognizes the practical considerations, like the one I have just been referring
to. It recognizes that it is a serious matter to set aside an election,
particularly for a relatively small company that is in poor financial straits,
and to cause the serious expenditure of funds for this purpose to be wasted. It
also recognizes that elections are not forever. This particular company went a
long time without one, but there will be rights to further elections.
In the circumstances here I am satisfied that it would be completely
unjustified to set aside this election. First of all, it is hard to find
definite serious factual errors. On virtually every point we are talking about
opinions, perspectives, accusations, not only unadjudicated but in most cases
uncharged. And on all the points that the company makes they had an opportunity
to give as good as they got. They sent out information countering Mr. Zaucha's
charges and making many of their own, and there is simply no reason to believe
that any particular misstatement of fact or nondisclosure would have affected
the result of this election. It seems that what happened here was that the
stockholders were confronted with differing styles.
What I am about to say is not to indicate that one side was right or
the other side was wrong. That is really not the Court's business. It is the
voters' business. Our function is simply to make sure that there was a basically
fair process and that the result of the elections is one that the Court can
allow
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to stand with some confidence that it represents the true views of the
stockholders.
You have problems of the general kind that this company experienced
when there is this transition from private to public. It is greatly complicated
when you add the discovery of apparent fraud. At least the parties to this
proceeding seem to agree to that. As far as I know, there has been no charge
against Mr. DeSimone yet either. I have been told there certainly will be an
indictment. But I will assume -- I will have to assume that that's true.
The point is that you have a company that has had a very difficult
period. It wasn't sending out financial information. It was delisted. It was
losing money. And there was a basic choice between the man who founded and built
the business, the man whose strengths lie in operations, and others, who also
had legitimate talents in the area of corporate governance but perhaps not quite
the experience and know-how and proven record in bringing in revenue.
And both sides had a lot of communication with stockholders. They met
personally with the larger ones, some of the institutions and others, and made
their cases. And we see the result of the vote. And I see no good justification
for setting it aside.
I think I will leave it at that. I could go through the list of
particular topics that are argued to be inaccurate. It is a fairly long list.
But I am well satisfied that to the extent of any inaccuracy -- and that is
debatable. It is often a
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<PAGE>
question of interpretation -- that the assumed inaccuracy is highly unlikely to
have affected the result. So I will refrain from going down the list of
individual topics. That will have to suffice at this stage.
I will ask the prevailing party to submit an order.
MR. TULLY: Your Honor, we will put one together tonight and we will
submit it in the morning, first to the defendants for their comment and then to
Your Honor.
THE COURT: Excuse me?
MR. TULLY: Would you prefer that we submit it on notice to the
defendants and then to Your Honor or send it --
THE COURT: Oh, absolutely. In the best of all possible worlds, you can
agree on form. But since we don't live in that particular world, you at least
try. Okay? And, you know, a differing proposal can be presented if it comes to
that as well.
Thank you. We recess.
- - -
(Court adjourned at 5:11 p.m.)
- - -
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CERTIFICATE
-----------
I, LORRAINE B. MARINO, Official Reporter for the Court of Chancery of
the State of Delaware and Notary Public, do hereby certify that the foregoing
pages numbered 3 through 12 contain a true and correct transcription of the
proceedings as stenographically reported by me at the hearing in the above cause
before the Vice Chancellor of the State of Delaware, on the date therein
indicated.
IN WITNESS WHEREOF I have hereunto set my hand at Wilmington, this 9th
day of May, 1997.
/s/Lorraine B. Marino
--------------------------
Official Reporter for the
Court of Chancery of the
State of Delaware
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FOR IMMEDIATE RELEASE
Contact: Thomas W. Zaucha
(412) 465-3201
FORMER CHAIRMAN'S INSURGENT SLATE
CONFIRMED AS NEW BOARD OF DIRECTORS
OF NORTHSTAR HEALTH
INDIANA, PENNSYLVANIA, May 9, 1997. Northstar Health Services, Inc. (NSTRE:OTC)
today announced that the Delaware Chancery Court has confirmed the victory of an
insurgent slate of directors led by Thomas W. Zaucha. In so doing, the Court
overruled claims of fraud and inequitable conduct made against Mr. Zaucha's
solicitation by incumbent management. Mr. Zaucha began his proxy fight in
February of this year, after he became convinced that there was no other way to
prevent his fellow Board members from continuing a course of self-enrichment and
entrenchment at the expense of the company's shareholders. Mr. Zaucha had
objected, among other things, to management consulting fees and option grants
paid to nonexecutive board members that he considered excessive, as well as to
corporate governance provisions that the board's own counsel had described as
"shark repellents." Holders of 61% of Northstar's outstanding shares voted in
favor of Mr. Zaucha's slate.
Mr. Zaucha, a physical therapist by training, had built the largest
privately-held physical therapy company in the state of Pennsylvania before
selling it to Northstar for cash and securities in 1995 and becoming Northstar's
chairman. The proxy fight was the culmination of a widening rift between Mr.
Zaucha and other members of the Board of Directors. The opposing faction was led
by Mr. Zaucha's former close personal financial advisor, Steven M. Brody.
In his ruling, Vice-Chancellor Balick said: "There was a basic choice between
the man who founded and built the business and whose strengths lie in
operations, and others, who also had legitimate talents in the area of corporate
governance but perhaps not quite the experience and know-how and proven record
in bringing in revenue. And both sides had a lot of communication with
shareholders. They met personally with the larger ones, some of the institutions
and others, and made their cases. And we see the result of the vote. I see no
good justification for setting it aside."
Mr. Zaucha stated, "We are gratified that the Delaware court has given Northstar
back to its shareholders and their duly-elected representatives. Many challenges
lie ahead, but with a unified Board of Directors and management team committed
to restoring Northstar's financial health, our Company is ready to begin its
long-awaited return to profitability and growth."
1
