<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X
___ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
___ Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission File No.: 0-21752
NORTHSTAR HEALTH SERVICES, INC.
(exact name of registrant as specified in its charter)
DELAWARE 25-1697152
(State or other jurisdiction of (I.R.S. Employer
incorporation Identification No.)
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices)
412-349-7500
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 No X
----- -----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Class Outstanding as of May 20, 1997
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 5,867,154
Transitional Small Business Disclosure Format (Check one):
Yes No X
---- ----
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
Part I -- FINANCIAL INFORMATION
Item 1
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II -- OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
Item 1. -- Financial Statements
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
----------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
A S S E T S March 31, December 31,
----------- 1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents- $ 919 $ 1,607
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$3,605 and $3,759, respectively 6,502 6,098
Management fees 1,004 766
Miscellaneous 255 244
Prepaid expenses and other current assets 296 731
------------ ------------
Total current assets 8,976 9,446
------------ ------------
PROPERTY AND EQUIPMENT, net 3,425 3,682
INTANGIBLE ASSETS, net (Note 2) 20,623 21,132
OTHER ASSETS 280 282
------------ ------------
TOTAL ASSETS $ 33,304 $ 34,542
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
----------------------------------------------
(Dollars in Thousands, Except Share Data)
-----------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
------------------------------------ 1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)
IBJ Schroder Bank & Trust $ 14,083 $ 14,083
Subordinated debt to related parties 1,696 1,285
Other debt 2,325 1,893
Accounts payable 2,426 2,048
Accrued expenses 5,902 5,323
Contractual obligations to employees 1,511 1,633
-------- --------
Total current liabilities 27,943 26,265
-------- --------
LONG-TERM DEBT (Note 3)
Subordinated debt to related parties 2,828 3,183
Other debt 754 1,718
-------- --------
Total long term debt 3,582 4,901
MINORITY INTEREST 177 184
-------- --------
Total liabilities 31,702 31,350
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 1,000,000
shares authorized, none issued - -
Common stock, par value $.01 per share, 10,000,000
shares authorized; 6,229,718 shares issued;
5,867,154 shares outstanding 62 62
Additional paid-in capital 26,208 26,208
Warrants outstanding 1,951 1,951
Retained deficit (26,166) (24,576)
Less: Treasury stock, 362,564 shares, at cost (453) (453)
-------- --------
Total stockholders' equity 1,602 3,192
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,304 $ 34,542
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
--------------------------------------------------------
(Dollars in Thousands, Except Share Data)
-----------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE $ 8,635 $ 10,036
COSTS OF SERVICE 4,161 5,222
----------- -----------
Gross profit 4,474 4,814
OPERATING EXPENSES:
Selling, general and administrative expenses 2,975 3,461
Bad debt expense 516 507
Restructuring and other non-recurring expenses
(Note 5) 1,521 1,692
Amortization of intangibles (Note 2) 303 494
Depreciation and amortization 149 151
----------- -----------
Total operating expenses 5,464 6,305
----------- -----------
OPERATING LOSS (990) (1,491)
NON-OPERATING EXPENSES:
Interest expense, net 524 543
Other (income)/expense, net (58) 56
----------- -----------
Total non-operating expenses 466 599
----------- -----------
LOSS BEFORE INCOME TAXES (1,456) (2,090)
INCOME TAXES 65 117
----------- -----------
LOSS BEFORE MINORITY INTEREST (1,521) (2,207)
MINORITY INTEREST 69 161
----------- -----------
NET LOSS $ (1,590) $ (2,368)
=========== ===========
NET LOSS PER SHARE $ (0.27) $ (0.38)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND EQUIVALENTS 5,867,154 6,229,718
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
----------------------------------------------
(Dollars in Thousands)
----------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,590) $ (2,368)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities-
Depreciation and amortization 850 1,436
Gain on legal settlement (47) --
Provision for doubtful accounts (154) 79
Loss on note receivable collateralized by common stock -- 1,118
Loss on write off of investment -- 14
Interest on discounted obligation 57 58
Loss on sale of equipment 2 27
Provision for increase in contractual obligations to employees (122) 72
Stock option compensation expense -- 29
Minority interest 69 161
Change in current assets and liabilities-
Increase in receivables (499) (1,337)
Decrease in other current assets 435 52
Increase in accounts payable 378 1,449
Increase/(decrease) in accrued expenses 579 (396)
-------- --------
Net cash (used in)/provided by operating activities (42) 394
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired -- (24)
Capital expenditures (24) (159)
Deposits, loans and investments 3 (1)
-------- --------
Net cash used by investing activities (21) (184)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (549) (843)
Payment of acquisition note -- (5,100)
Distributions to minority interests (76) (37)
Borrowings on long-term debt -- 400
-------- --------
Net cash used in financing activities (625) (5,580)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (688) (5,370)
CASH AND CASH EQUIVALENTS, beginning balance 1,607 5,730
-------- --------
CASH AND CASH EQUIVALENTS, end balance $ 919 $ 360
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 213 $ 511
Income taxes paid 67 30
NONCASH INVSESTING ACTIVITIES:
Capital lease obligations 28 217
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
General
- -------
These condensed consolidated financial statements of Northstar Health Services,
Inc. (the Company) are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim period.
These statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Form 10-K for the year
ended December 31, 1996.
Management Fees
- ---------------
The Company manages two businesses, in one of which the Company owns a minority
interest. In conjunction with these contracts, the Company receives compensation
in the form of a monthly management fee. This fee is to be the net income or
loss of the managed business after the payment of certain agreed-upon salaries
and benefits to certain parties. A summary of these managed operations is
presented below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Management fees $ 545 $ 814
Less: expenses incurred in management function 658 861
------ ------
Net loss from managed operations
$ (113) $ (47)
====== ======
</TABLE>
The net of expenses in excess of management fees are presented in the selling,
general and administrative expenses section of the accompanying consolidated
statements of operations.
Effect of Recently Issued Accounting Standards
- -----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". SFAS No. 128
differs from current accounting guidance in that earnings per share is
classified as basic earnings per share and diluted earnings per share, compared
to primary earnings per share and fully diluted earnings per share under the
current standards. Basic earnings per share differs from primary earnings per
share in that it includes only the weighted average common shares outstanding
and does not include any dilutive securities in the calculation. Diluted
earnings per share under the new standard differs in certain calculations when
compared to fully diluted earnings per share under the existing standards.
Adoption of SFAS No. 128 is required for interim and annual period ending after
December 15, 1997. As a result of the Company's reported net loss,
-5-
<PAGE>
there would be no impact on earnings per share compared to the results presented
if the Company had applied SFAS No. 128.
2. INTANGIBLE ASSETS:
------------------
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $17,481 $17,481
Employment agreements (2 to 7 1/2 years) 2,660 2,660
Keystone tradename (20 years) 2,500 2,500
Covenant not to compete (5 years) 1,258 1,258
Assembled Keystone workforce (5 years) 1,000 1,000
Deferred financing and other costs (5 years) 861 861
-------- -------
Gross intangible assets 25,760 25,760
Less- accumulated amortization (5,137) (4,628)
-------- -------
Net intangible assets $20,623 $21,132
======= =======
</TABLE>
-6-
<PAGE>
3. DEBT:
-----
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Term loan with IBJ Schroder $ 6,083 $ 6,083
Revolving line of credit with IBJ Schroder 2,000 2,000
Acquisition facility with IBJ Schroder 6,000 6,000
Non-interest bearing, subordinated term notes to
related parties 2,625 2,625
Subordinated term notes to related parties 2,400 2,400
Capital lease obligations with interest rates
ranging from 9% to 15.6%1 2,939 3,059
Other debt 702 1,157
------- -------
Total long-term debt 22,749 23,324
Less:
Current portion (18,104) (17,261)
Debt discount (1,063) (1,162)
------- -------
Long-term debt $ 3,582 $ 4,901
======= =======
</TABLE>
As of March 31, 1997, the Company has no unused amounts under its existing
credit facilities. During the first quarter of 1997, the Company's weighted
average interest rate was 9.7%.
4. PROXY SOLICITATION:
-------------------
On February 6, 1997, Thomas W. Zaucha, the current Chairman of the Board of
Directors and Chief Executive Officer of Northstar, commenced a solicitation of
Northstar shareholder consents to remove and replace the other members of the
Northstar Board of Directors and effectuate related changes in Northstar's by-
laws ("the Consent Solicitation"). Shortly thereafter, the Board of Directors
terminated Mr. Zaucha's employment with the Company, though he remained a member
of the Board of Directors. On March, 24, 1997, Mr. Zaucha delivered executed
consents representing the votes of 61% of the outstanding shares in favor of his
proposals and, following confirmation of the decision by the Delaware Chancery
Court on May 8, 1997, Mr. Zaucha resumed his duties as the Company's Chief
Executive Officer.
The ruling of the Delaware Chancery Court remains subject to appeal. The proxy
solicitation is described in greater detail in the Company's Current Report on
Form 8-K, dated May 8, 1997.
5. NON-RECURRING EXPENSES:
-----------------------
Since the first quarter of 1996, the Company has incurred significant
accounting, legal and consulting expenses arising out of its investigation of
apparent wrongdoing on the part of the management team that controlled Northstar
prior to 1996.
-7-
<PAGE>
In addition, through March 28, 1997, the Company incurred costs of approximately
$442,000 in connection with its defense against the Consent Solicitation
outlined in Note 4. On March 28, 1997, the opposing sides in the Consent
Solicitation reached an agreement at a conference before Chief District Judge
Ziegler of the United States District Court for the Western District of
Pennsylvania. Under this agreement, Mr. Zaucha, on one hand, and the other
individual Directors, on the other hand, would thereafter bear their own
respective expenses. Under the agreement, only the side confirmed as the winner
of the contested vote by the Delaware courts, after all appeals, will be
entitled to reimbursement of expenses from the Company.
Mr. Zaucha has informed the Company that he expects that his reimbursable
expenses incurred in connection with the Consent Solicitation will approximate
$1,000,000. Of this total, the Company has recorded an expense during the first
quarter of $495,000 that represents the expenses incurred by Mr. Zaucha through
March 31, 1997. The Company anticipates an additional expense of approximately
$500,000 during the second quarter.
A summary of these unusual and non-recurring expenses is as follows:
<TABLE>
<CAPTION>
For three months ended
March 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Company costs related to proxy solicitation $ 442 $ --
Proxy solicitation cost incurred by Mr. Zaucha 495 --
Additional legal and accounting fees 210 --
Write off of intangible assets 169 527
Litigation costs 102 --
Corporate restructuring costs 103 47
Loss on notes receivable collateralized with common stock -- 1,118
------- ------
Total $1,521 $1,692
======= ======
</TABLE>
6. RELATED-PARTY TRANSACTIONS:
---------------------------
PVL Acquisition
- ---------------
In connection with the purchase of PVL and Vascusonics, the purchase agreement
stated that certain equipment lease obligations would be transferred to
Ultrasonics, Inc. (Ultrasonics) and subsidiaries of the Company agreed to
sublease the equipment from Ultrasonics. Current management of the Company
believes that these leases are for rates which are for in excess of fair market
value for such equipment.
The Company made lease payments of $53,341 during the quarter ended March 31,
1996. After March 1996, the Company refused to pay any further amounts under
this contract, believing the payment to be excessive. In March 1997,
Ultrasonics filed suit against the Company and certain of its subsidiaries
related to the Company's non-performance under the lease agreements. The
Company is vigorously contesting this obligation.
-8-
<PAGE>
Shields Management Agreement
- ----------------------------
During the quarter ended March 31, 1996, the Company paid Mr. Shields $59,106
under the terms of a management contract which he signed with the Company. In
March 1996, the Company severed its relationship with Mr. Shields and refused to
pay any further amounts under this contract, believing the payments to be
excessive. The Company is vigorously contesting this obligation.
Keystone Acquisition Debt
- -------------------------
In connection with the Keystone acquisition, Mr. Thomas Zaucha and Mr. David
Watson, who are now or were officers with Northstar, have debt and other amounts
due directly to them of $3,919,500 and $275,000 as of March 31, 1997,
respectively. In addition, Mr. Zaucha's family limited partnership is due
$1,167,756 as of March 31, 1997.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. During 1997, the
Company incurred an expense of $114,684 related to rent due on these spaces.
During February 1997, the then management of the Company ceased making lease
payments under the agreements, claiming that the rental rates were above market
rates. As of March 31, 1997, approximately $76,000 of these expenses remained
unpaid by the Company. The Board of Directors of the Company is currently re-
evaluating the lease agreements.
Transactions with Board Members
- -------------------------------
During 1996 and 1997, Brody Associates, a consulting firm wholly-owned by Steven
Brody, a Director who was removed from office by the Consent Solicitation, was
retained to perform a variety of consulting services for the Company related to
its investigation of former management and related to the corporate
restructuring of the Company. The Company paid $102,444 to Brody Associates for
these services and related business expenses during the three months ended March
31, 1997. In addition, during early 1996, the Company had a consulting contract
with Mr. Brody for services related to growth and strategic management
functions. The Company paid $10,362 to Brody Associates under the term of that
agreement. At March 31, 1997, the Company had a liability to Brody Associates
of $26,192.
In 1996, the Company retained Executive Advisory Group, Ltd., whose sole owner
is Robert Smallacombe, a Director who was removed from office by the Consent
Solicitation, to serve as a management consultant and to aid in the corporate
restructuring. For these services and related business expenses, the company
paid $56,201 to Executive Advisory Group, Ltd. During the three months ended
March 31, 1997. As of February 17, 1997, Mr. Smallacombe was appointed Chief
Executive Officer of the Company and his existing consulting contract was recast
as an employment agreement.
-9-
<PAGE>
7. COMMITMENTS AND CONTINGENCIES:
------------------------------
Stockholders' Suit
- ------------------
The Company is a defendant in suits filed by groups of stockholders. The
Company believes that the basis for the stockholders' suit is the actions of
certain members of Northstar's pre-1996 management and other potentially
responsible parties. The outcome of these lawsuits is indeterminable at this
time.
Company's Suit
- --------------
The Company has brought suit against Mark DeSimone, a former Chairman of the
Board, certain former employees, Richard A. Eisner & Company, a former auditor
of the Company for years prior to 1995, and certain other individuals and
entities who were allegedly involved in improper actions and diversion of funds
to other entities. A suit was filed in the Western District of Pennsylvania US
District Court on September 12, 1996. The outcome of this lawsuit is
indeterminable at this time.
Other Legal Matters
- -------------------
On March 17, 1997, Ultrasonics filed suit against the Company as a result of
disputed lease agreements. The Company is vigorously defending this suit.
The Company is currently involved in an arbitration involving a former officer
of the Company regarding that employee's severance from the Company. The timing
of any final determination of this arbitration is currently unknown. The
Company does not anticipate a materially adverse effect as a result of this
arbitration.
Earn Out Payments Due Mr. Zaucha
- --------------------------------
In conjunction with the acquisition of Keystone Rehabilitation by Northstar in
November 1995, the former owners of Keystone were granted certain contingent
payments (earn out payments) based on the financial performance of Keystone
during the period from 1996 through 2000. The Company is currently in the
process of evaluating the earn out agreement to determine if amounts are due to
the former owners for 1996 and 1997. If an earn out is determined to be due to
the former shareholders, the additional consideration would be recorded as
goodwill.
Senior Loan Default
- -------------------
As a result of the unavailability of financial statements following the
resignation of the Company's auditors in March 1996, and subsequent failure to
make payments when due, the Company is in default of its obligations under its
credit agreement with its senior lender. During the period of the Consent
Solicitation, and prior to the date that Mr. Zaucha resumed management control
of the Company following the decision of the Delaware Chancery Court, the
Company's senior lender notified the Company that it had terminated all
negotiations with the Company regarding further forbearance in exercising its
rights under the credit agreement, and that it was considering immediate
acceleration of all amounts outstanding thereunder. The
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<PAGE>
recently elected management team expects to promptly resume negotiations with
the senior lender on behalf of the Company, with a view to restructuring the
Company's outstanding debt in a mutually satisfactory manner. However, there is
no assurance that the Company will be successful in so doing. Failure to reach
such an agreement could result in acceleration of the senior debt, a likely
consequence of which would be the filing of a petition for relief under the
Federal Bankruptcy Code.
Zaucha Stock Guarantee
- ----------------------
The Company has issued a guarantee of the value of certain stock issued to the
former owners of Keystone to be at least $5,600,000 for a period not to extend
beyond December 31, 1997. The Company has an obligation to fund any shortfall
in stock value through the issuance of additional shares of stock or a cash
payment equal to the shortfall. As of the March 31, 1997 closing stock price,
the shortfall results in a liability of $3,239,000. The Company would need to
issue 1,295,650 shares to fulfill this obligation.
8. SUBSEQUENT EVENTS:
------------------
Please refer to Note 4 for a discussion of the Consent Solicitation and related
issues.
-11-
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
Results of Operations
- ---------------------
Net Revenues
- -------------
During the first quarter of 1997 the Company's net patient revenues of
$8,635,000 declined by 14%, or $1,401,000 in comparison to the same period in
1996. This change in net patient service revenue resulted primarily from the
following:
. Approximately $950,000 of the decrease reflected the results of an agreement
reached with the former owner of the Company's subsidiary, NW Rehabilitation
Services, Inc, ("NWR") who severed her relationship with the Company late in
March of 1996, and retained the rights to certain of NWR's clinical and
contract businesses.
. Extensive reorganization in the Company resulted in the closure or termination
of clinics and contracts that resulted in a $700,000 decline in net patient
service revenue.
. The first quarter of 1997 also reflected the initial impact of the Company's
venture into the sub-acute care business, which began late in 1996. Sub-acute
revenues were approximately $200,000 during the first quarter of 1997.
Costs of service
- -----------------
The Company's costs of service declined marginally as percentage of net
revenue during the first quarter of 1997, 48% versus 52% during the first
quarter of 1996. This decline shows the results of divestment of the marginally
profitable clinics that the Company performed during 1996. As a result of the
decline in net patient service revenue, gross profit for 1997 declined $340,000,
to $4,474,000. However, as noted above, the cost of service and related gross
margin improved slightly during the first quarter of the year.
Selling, general and administrative expense
- --------------------------------------------
Total selling, general and administrative expenses for 1997 quarter
declined to $2,975,000, down 14% from the 1996 quarter. This decline can be
attributed to increased efficiency and consolidation of the Indiana, PA and
Pittsburgh, PA corporate office functions, corporate overhead reductions and a
reduction of expenses arising from the above noted NWR severance agreement.
SG&A expense as a percent of net patient service revenue remained at 34% during
the first quarter. The Company is committed to continuing reductions in
overhead expenses wherever possible by continually evaluating all administrative
expenses for necessity and value.
-12-
<PAGE>
Bad Debt Expense
- -----------------
The Company incurred bad debt expense of approximately $516,000 or
approximately 4.6% of gross revenue during the first quarter of 1997 versus
$507,000 or approximately 3.8% of gross revenue during the first quarter of 1996
Non-recurring expense
- ----------------------
During the 1997 first quarter, certain expenses deemed non-recurring were
$1,521,000 compared to $1,692,000 for 1996. A significant portion of 1997
expense arose from legal fees and other expenses incurred relating to the
Company's defense of the Consent Solicitation. These expenses totaled
approximately $442,000 for the first quarter of 1997. The results of operations
also includes $495,000 of expenses which represent the Consent Solicitation
costs incurred by Mr. Zaucha which are applicable to the first quarter. Mr.
Zaucha has agreed not to seek reimbursement by the Company for these expenses
until the decision of the Delaware Chancery Court is affirmed by the Delaware
Supreme Court.
In addition, the Company continued to incur higher than normal audit, legal
and other professional fees resulting from continuing reorganization of the
Company, shareholder litigation against the Company, and the Company's lawsuit
against former management. Intangible assets written off for both 1997 and 1996
represented the write off of the remaining employment contracts with former
employees.
Depreciation and amortization
- ------------------------------
Other operating costs include amortization of intangibles arising from past
acquisitions, depreciation and other deferred charges, primarily finance costs.
Amortization of intangibles for the first quarter of 1997 was $303,000, which
represents a decline of $191,000 from the 1996 total. This decline reflects the
effect of (1) intangible asset write-offs that occurred after the first quarter
of 1996 and (2) completion of the amortization period for certain assets
acquired during previous acquisitions by the Company.
Interest and other non-operating expenses
- ------------------------------------------
Interest expenses were $524,000 for 1997 compared to $543,000, the slight
decline being attributable to debt repayment during the past twelve months. The
Company reported net non-operating income of $58,000 compared to net non-
operating expenses of $56,000, a favorable variance of $114,000. The income for
1997 arose from a $57,000 gain on a legal settlement, while expenses for 1996
came from losses on equipment disposals and minor amounts of other assets
written off.
Income taxes
- -------------
The Company has recorded an expense of $65,000 during 1997 versus an
expense of $117,000 during the first quarter of 1996. This reduction reflects
the tax benefits associated with the corporate restructuring which occurred
during the fourth quarter of 1996 as well as the use of net operating loss
carryforwards by some entities of the Company.
-13-
<PAGE>
Effect of Recently Issued Accounting Standards
- -----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". SFAS No. 128
differs from current accounting guidance in that earnings per share is
classified as basic earnings per share and diluted earnings per share, compared
to primary earnings per share and fully diluted earnings per share under the
current standards. Basic earnings per share differs from primary earnings per
share in that it includes only the weighted average common shares outstanding
and does not include any dilutive securities in the calculation. Diluted
earnings per share under the new standard differs in certain calculations when
compared to fully diluted earnings per share under the existing standards.
Adoption of SFAS No. 128 is required for interim and annual period ending after
December 15, 1997. As a result of the Company's reported net loss, there would
be no impact on earnings per share compared to the results presented if the
Company had applied SFAS No. 128.
Liquidity and Capital Resources
- -------------------------------
The Company has historically financed its operations and acquisitions
through both public and private placements of equity securities as well as bank
credit facilities.
During the fourth quarter of 1995, the Company entered into a $16 million
credit facility with IBJ Schroder Bank & Trust Company. The proceeds from this
loan were used to finance portions of the Keystone and Penn Vascular Lab PC
acquisitions, to refinance existing term debt and to provide for general working
capital needs. Of the total facility available, the Company drew $14.1 million
toward the above mentioned purposes.
The Company is currently in default of its obligations under the facility.
Failure to reach an agreement with the senior creditor relative to a
restructuring of the Company's outstanding debt obligations would likely result
in acceleration of the loan and a filing of a petition for relief under the
Federal Bankruptcy Code.
During the first quarter of 1997, the Company used $42,000 in its
operations versus $394,000 of cash provided by operations during the first three
months of 1996. This change in cash from operations can be attributed to a
number of items including:
. Accounts payable increased $378,000 during the first quarter of 1997 versus a
marked increase of $1,449,000 during the first quarter of 1996.
. Accounts receivable also increased during the first quarter of 1997 by
$499,000 compared to an increase of $1,337,000 during the comparable period
of 1996. This reflects the Company's improved management of its accounts
receivable, resulting in enhanced cash flow.
The Company also expended less money on investments in 1997 versus that
expended during 1996. The net cash used in investing activities declined from
$184,000 to only $21,000 resulting from reduced capital investment.
-14-
<PAGE>
The Company also had a significant change in its cash used in financing
activities. During 1996, the Company had a net usage of $5,580,000 during the
first quarter of the year. This total was used to:
. Pay a $5,100,000 note due to the former owners of Keystone in connection with
that acquisition and
. Pay approximately $880,000 to amortize long term debt and other obligations of
the Company.
The net figure presented above also includes a $400,000 cash inflow during the
first quarter of 1996 resulting from a direct borrowing on the Company's line of
credit with IBJ.
During 1997, the Company made net debt payments of $549,000 during the
first quarter of this year which were primarily to pay debts owed to former
owners and managers of the Company as well as scheduled debt and lease payments.
In addition, the Company paid approximately $76,000 to minority interest holders
in companies controlled by Northstar. During the first quarter of 1997, the
Company made no additional material borrowings under any debt arrangements.
Summary
- -------
Net loss for the first quarter of 1997 was $1,590,000 compared to a loss of
$2,368,000 for the same period in 1996. Were it not for the Company's non-
recurring expenses, the Company's results would have been at nearly break-even
levels. The Company believes that it will incur additional expenses in the
second quarter as it attempts to negotiate a restructuring of its debt
obligations.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss ($1,590,000) ($2,368,000)
Non-recurring expenses 1,521,000 1,692,000
------------ ------------
Net loss prior to non-recurring expenses ($69,000) ($676,000)
============ ============
</TABLE>
The improvement in the operating loss discussed above was accomplished
primarily through the elimination of unprofitable clinics and contracts and a
reduction in the corporate overhead expenses. The Company believes that the
operating results will continue to improve once the Company and the management
team is able to fully focus its attention on enhanced growth and profitability
measures.
-15-
<PAGE>
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
In September 1996, after an internal investigation by Northstar's directors
and Investigative Committee, Northstar filed suit in federal court against Mark
A. DeSimone, his wife Leslie M. DeSimone, his cousin James P. Shields and
several other related parties as well as Richard A. Eisner & Co., LLP,
Northstar's former accountants and auditors (No. 96-1695 W.D. Pa.). The lawsuit
seeks damages from the defendants for their allegedly illegal actions that
harmed the Company and its shareholders from late 1991 through early 1996. The
suit sets forth allegations in connection with the defendants' ongoing pattern
of fraud, deceptive conduct, theft, and other offenses, as well as DeSimone's
and his associates' misappropriation, diversion and conversion of Northstar
assets and funds for their own illegal benefit. Northstar's claims against
Richard A. Eisner & Co., LLP are based on that accounting firm's alleged
negligence, recklessness and failure to conduct proper audits which enabled
DeSimone and the other defendants to defraud the Company, resulting in sizeable
losses to the Company and its shareholders. Northstar is currently engaged in
discovery and settlement discussions with certain defendants. A copy of the
complaint, which includes claims under the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), is available from the Company upon the request of
any shareholder. Due to the preliminary nature of this proceeding, it is
impossible to make any representation regarding its outcome, although the
Company is committed to vigorously pursuing all of its remedies against the
defendants and any other party found liable for the damage to Northstar.
In response to Northstar's suit against DeSimone and the other defendants,
Coregis Insurance Company, which insured DeSimone's former law firm, brought an
action in federal court (No. 96-2243 W.D. Pa.) to determine its obligations to
defend DeSimone and his former law firm. Although the action names Northstar,
its primary purpose is to determine the obligations of the insurance company;
the outcome of this suit may have an impact upon Northstar's ability to recover
damages in connection with its lawsuit against DeSimone and others.
In April 1996, the first of seven class action lawsuits against Northstar
and certain of its former officers and directors was filed in federal court by
Northstar shareholders; all of such suits were consolidated into one action (No.
96-1399 W.D. Pa.). The suit alleges violations of federal securities laws by
Northstar and its former officers and directors Mark A. DeSimone, Michael
Pitterich, Michael Kulmoski, Jonathon Petruska and Daniel Dickman in connection
with the defendants' alleged scheme to disseminate false and misleading
information regarding the Company, its operations, financial status and related-
party transactions and to enrich themselves in the process. Settlement
negotiations, which also involve Richard A. Eisner & Co., LLP, Northstar's
former independent accountant and auditor, are continuing, and the plaintiffs
have claimed damages of approximately $20,000,000. It is not possible to make
any representations regarding the outcome of this suit at this time; however,
the Company is diligently pursuing all avenues for a reasonable settlement. The
Company's current officers and directors, none of whom are named in the class
action suit, are pursuing settlement negotiations on behalf of the Company, and
have filed an action against Northstar's former officers, directors and
auditors, as set forth above.
-16-
<PAGE>
In May 1996, a group of Northstar shareholders filed an action in
California state court against Northstar and its former officers and directors
Mark A. DeSimone, Michael J. Kulmoski, Jr. and Northstar's former auditors,
Richard A. Eisner & Co., LLP. The suit alleges violations of California state
law, as well as breaches of fiduciary duty and fraud. These claims also arise
out of the false and misleading statements concerning Northstar and its
financial condition, which were disseminated by the individual defendants. The
plaintiffs have filed a statement of damages, estimated their out of pocket
losses at $1.4 million and the court has scheduled a trial for early January
1998. The Company is engaged in discussions to settle this lawsuit at this
time.
In July 1996, Michael Kulmoski, Jr., a named defendant in both Northstar's
lawsuit and the class action, filed a demand for arbitration against Northstar
for breach of his employment contract and other related matters. Kulmoski is
seeking damages of approximately $500,000. A preliminary hearing was held on
February 19, 1997, at which a scheduling order and discovery schedule were
issued. An arbitration hearing has been scheduled for the end of June 1997.
In January, 1997, the Company and Samuel Armfield III, M.D, reached a
settlement in regard to the various claims that each had against the other,
resulting from the acquisition by the Company of the stock of Vascusonics, Inc.
and certain of the assets of Penn Vascular Labs, P.C.
In January, 1997, the Justice Department initiated an action against Samuel
Armfield, III, M.D. for claims amounting to $300,000 in connection with Dr.
Armfield's Medicare billings. Although such claims could be trebled if Dr.
Armfield is convicted, the Company believes that its exposure, through its
dealings with Vascusonics, would aggregate $50,000 to $100,000. In addition,
the Company has recourse against Dr. Armfield for any amounts assessed against
the Company, which the Company plans to aggressively pursue, if necessary.
In March,1997, Ultrasonics, Inc. filed suit against the Company for alleged
non-performance under two lease agreements with the Company. The Company
believes that these lease agreements, which originated with the pre-1996
management team, may not have been validly supported by consideration. The
Company has filed an answer to the complaint as well as a counterclaim in this
action. The Company is not currently in a position to predict the outcome of
this matter.
On February 6, 1997, Thomas W. Zaucha, the current Chairman of the Board of
Directors and Chief Executive Officer of Northstar, commenced a solicitation of
Northstar shareholder consents to remove and replace the other members of the
Northstar Board of Directors and effectuate related changes in Northstar's by-
laws ("the Consent Solicitation"). Shortly thereafter, the Board of Directors
terminated Mr. Zaucha's employment with the Company, though he remained a member
of the Board of Directors. On March, 24, 1997, Mr. Zaucha delivered executed
consents representing the votes of 61% of the outstanding shares in favor of his
proposals and, following confirmation of the decision by the Delaware Chancery
Court on May 8, 1997, Mr. Zaucha resumed his duties as the Company's Chief
Executive Officer.
The ruling of the Delaware Chancery Court remains subject to appeal. The
proxy solicitation is described in greater detail in the Company's Current
Report on Form 8-K, dated May 8, 1997.
-17-
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
Form 8-K
Form 8-K covering Item 1 for the event dated May 8, 1997
-18-
<PAGE>
SIGNATURES
In accordanace with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHSTAR Health Services, Inc.
By: /s/ Thomas W. Zaucha
-------------------------
Thomas W. Zaucha
Chairman of the Board, President and Chief Executive Officer
Date: May 20, 1997
By: /s/ John A. Lombardi
-------------------------
John A. Lombardi
Executive Vice President and Chief Financial Officer
Date: May 20, 1997
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 919 1,607
<SECURITIES> 0 0
<RECEIVABLES> 10,107 9,857
<ALLOWANCES> (3,605) (3,759)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,555 1,741
<PP&E> 3,425 3,682
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 33,304 34,542
<CURRENT-LIABILITIES> 27,943 26,265
<BONDS> 3,582 4,901
0 0
0 0
<COMMON> 62 62
<OTHER-SE> 1,540 3,130
<TOTAL-LIABILITY-AND-EQUITY> 33,304 34,542
<SALES> 8,635 10,036
<TOTAL-REVENUES> 8,635 10,036
<CGS> 4,161 5,222
<TOTAL-COSTS> 5,464 6,305
<OTHER-EXPENSES> (58) 56
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 524 543
<INCOME-PRETAX> (1,465) (2,090)
<INCOME-TAX> 65 117
<INCOME-CONTINUING> (1,521) (2,207)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,590) (2,368)
<EPS-PRIMARY> (0.27) (0.38)
<EPS-DILUTED> (0.27) (0.38)
</TABLE>
