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Conformed
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/96 Commission File Number 0-21752
Northstar Health Services Inc..
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(Exact name of registrant as specified in its charter)
Delaware 25-1697152
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
665 Philadelphia Street, Indiana Pennsylvania 15701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 349-7500
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value NASDAQ*
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*Due to circumstances described herein, the common stock was delisted on May 31,
1996 and currently trades OTC.
Securities registered pursuant to Section 12(g) of the Act: None
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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 and (2) has been subject to such filing
requirements for the past 90 days. Yes ____ No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 21, 1997:
Common Stock, $.01 par value -- $ 12,388,590
As of December 31, 1996, 5,867,154 shares of common stock, par value $.01 per
share, were outstanding.
Exhibit index is located on pages 42 to 43.
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Forward-Looking Statements
From time to time, the Company will publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, and projected plans for and results of its operations. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks and
uncertainties that may affect the operations and performance of the Company's
business include the following: changes in regulatory, governmental and payor
policies regarding reimbursement; competition, both directly in terms of other
providers of physical therapy and other services, and the competition for
qualified personnel; the outcomes of the current litigation involving the
Company, as well as its former and current officers and directors; defaults in
bank financing, including an inability to comply with various covenants in
connection with such financing; the ability of the Company to have its common
stock relisted on a recognized exchange; and the uncertainties surrounding the
health care industry in general. .
Item 1. Business
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In addition to other sections of this document, this Business section
contains the type of forward-looking statements and projections discussed above
and must be read in connection with those disclosures.
General
Northstar Health Services, Inc., a Delaware corporation ("Northstar"
or the "Company"), is a regional provider of rehabilitation therapy, mobile
diagnostics and related services at outpatient rehabilitation clinics and
patient care facilities in Western Pennsylvania, parts of West Virginia, Ohio,
and Illinois. It provides services to patients suffering from physical
disabilities. The goals of rehabilitation therapy are to improve a patient's
physical strength and range of motion, reduce pain, prevent injury, and restore
the ability to perform basic activities, including communication. The Company
believes that rehabilitation therapy improves patient outcomes and shortens a
patient's recovery time and, as a result, has gained increasing recognition by
payors as both a clinically effective and a cost-effective means to lower total
health care expenses.
The Company's strategy is to become the dominant provider of
rehabilitation therapy and diagnostic therapy within its geographic market. In
implementing this strategy, the Company continues to focus on acquiring
outpatient rehabilitation clinics and expanding the range of services it
provides. The Company believes that a geographically focused strategy
efficiently utilizes its existing corporate structure and positions the Company
as a preferred rehabilitation provider to referring physicians, hospitals, and
managed care organizations. This strategy is further enhanced via the Company's
ability to broaden the scope of its mobile diagnostics and subacute contract
rehabilitation to referring physicians, hospitals, nursing homes, managed care
organizations and insurance companies.
Between 1991 and December 31, 1996, the number of outpatient
rehabilitation clinics the Company operates has increased from zero to 62 and
the Company has increased the number of its contracts with patient care
facilities from 25 to 75. In November 1993, the Company completed three
acquisitions that
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added 7 outpatient rehabilitation clinics and 23 contracts with patient care
facilities to its operations. In addition, in July 1994, the Company completed
the acquisition of substantially all of the assets of Medical Rehabilitation
Services, Ltd. and two affiliated entities ("MRS"), which added five outpatient
rehabilitation clinics and two contracts with patient care facilities to its
operations. On November 15, 1995, the Company completed its merger with
Keystone Rehabilitation Systems, Inc. of Indiana, Pennsylvania ("Keystone").
Unless otherwise specified, references herein to the "Merger" are to the
Keystone merger. The Merger added 50 outpatient rehabilitation clinics and 24
contracts with patient care facilities. On December 1, 1995, the Company
completed the acquisition of Penn Vascular Labs ("PVL"), which performs
diagnostic, x-ray and other ultrasound services in seven fixed site clinics and
at 45 contracted facilities.
The outpatient rehabilitation industry is experiencing significant
consolidation, due primarily to the highly fragmented nature of the industry and
the preference of managed care organizations to contract with regional providers
offering comprehensive, cost-effective programs. The Company believes it is
well positioned to grow within the present industry environment. During 1996,
present management completed a restructuring of the Company's corporate and
outpatient operations to position it to manage existing and emerging
opportunities in its primary markets. In connection with such restructuring,
four operating subsidiaries were organized:
. Ability Plus Rehabilitation Management Company, Inc. ("Ability Plus")
provides contracted sub-acute care to entities in need of such services.
Ability Plus has the capacity to supply rehabilitation services to nursing
homes and hospitals in arrangements that capitalize on the entities' current
abilities to provide such services and enhance them to sub-acute
capabilities. Ability Plus can potentially save a facility capital
investment and human resource expenses by transitioning its existing base of
beds in service to a planned number dedicated to sub-acute care.
. Direct Provider Network, Inc. is a sales and marketing entity organized to
contract with third party payors, self-insured companies and managed care
organizations that contract for the Company's services on a state, regional,
or local basis.
. Keystone Rehabilitation Systems, Inc. provides outpatient rehabilitation,
primarily to ambulatory patients at 58 outpatient sites specializing in
orthopedics, sports and neurologic rehabilitation. Keystone utilizes physical
therapists, occupational therapists and speech therapists to provide its
services. Keystone also contracts with hospitals, nursing homes, home health
agencies, personal care homes and school districts to provide physical
therapy, occupational therapy, speech language pathology and Athletic
Training services. Keystone is one of the largest providers of outpatient
rehabilitation services in Pennsylvania. During the reorganization, the
Company closed and consolidated 4 outpatient sites secondary to overlap of
services with the Keystone Merger and existing Northstar facilities.
. Northstar Medical Services, Inc. and Northstar Diagnostic Services, Inc. were
organized to consolidate the diagnostic division with its joint ventures.
Northstar Medical Services provides multiple mobile diagnostic services
including mammography, ultrasound and echocardiography to physicians,
nursing homes and industries. The combined network of services including
its joint ventures represent the largest mobile diagnostic company in
Southwestern Pennsylvania. The Company also operates six freestanding
diagnostic centers in Western Pennsylvania. Services are available via a
complete mobile fleet for occupational testing at industrial sites and in
physician
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offices where patient convenience is emphasized.
The Company's executive and operating management group has substantial
business operating and health care management experience.
The Company believes that the growth in the outpatient medical
services and rehabilitation industry is largely the result of: (i) the
effectiveness of rehabilitation therapy; (ii) increasing emphasis on physical
fitness and the treatment of sports injuries; (iii) the aging population; and
(iv) earlier patient discharge from acute care hospitals to alternate sites.
Industry Background
Rehabilitation is the process of restoring an optimum level of
physical capability to individuals suffering from disabilities. Rehabilitation
therapy services are provided on an inpatient or outpatient basis, depending on
the type and severity of the physical disability. Outpatient rehabilitation
therapy services are generally provided by licensed therapists in hospitals,
patient care facilities, and outpatient rehabilitation clinics, including those
owned by various national, regional and local companies.
The Company believes that the rehabilitation therapy industry is
experiencing significant growth primarily as a result of the following factors:
. The Effectiveness of Rehabilitation Therapy. Rehabilitation
therapy is recognized by physicians and payors as a cost-effective
method to reduce future health care expenses, shorten the
recuperation time for injuries, reduce the likelihood of reinjury,
and enable patients to regain skills necessary to return to
independent living and a working environment. Additionally,
rehabilitation therapy may result in significant savings by
reducing the need for ongoing in-patient health care services and
other related costs.
. Increasing Emphasis on Physical Fitness and the Treatment of Sports
Injuries. The growing emphasis on physical fitness, leisure
sports, and conditioning, such as running and aerobics, has led to
increased injuries requiring rehabilitation therapy and increased
avenues for prevention.
. The Aging Population. The aging population is expected to increase
the demand for rehabilitation therapy. As a person ages, he or
she becomes more susceptible to both neurologic and
orthopedic-related ailments, including osteoporosis, which may
result in the type of injury or loss of function which can be
aided by rehabilitation therapy. The aging population is also
active longer in their lifespan.
. Earlier Patient Discharge From Acute Care Hospitals to Alternate
Sites. The trends toward earlier patient discharge from acute
care hospitals to sub-acute sites, from patient care facilities to
outpatient care, and from hospital-based care to clinic-based and
home-based treatment programs, have all increased the demand for
rehabilitation therapy, mobile and fixed, as well as mobile
diagnostic services.
The Company believes that the demand for rehabilitation therapy
services will be favorably affected by the recognition of rehabilitation therapy
as both a clinically and a cost-effective method of
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treating certain types of disabilities. However, the Company also believes that
this market will be characterized by increased cost containment pressures and
the growing influence of managed care organizations, other third-party payors
and state government mandated workers' compensation programs in the selection of
rehabilitation service providers.
Prices for rehabilitation therapy services have increasingly become
regulated by government or dictated by third-party payors who are capping or
reducing reimbursement rates for rehabilitation therapy services. Such entities
are seeking to contract with rehabilitation therapy services providers capable
of delivering a full continuum of care at the lowest cost. Accordingly,
marketing directly to these entities will become increasingly important.
State governments mandate and regulate programs that require employers
to pay the costs for medical services, lost wages and other expenses resulting
from work-related injuries and disabilities through the purchase of insurance
from private workers' compensation insurance carriers, participation in a state
fund, or self insurance. The costs associated with an injury often include
compensation for lost wages. Consequently, there has been increased demand for
comprehensive and sophisticated rehabilitation therapy services, such as work
reconditioning and functional capacity assessment, which reduce the time
required to return a person to the workplace. The Company believes that these
types of insurers will continue to represent a significant portion of the
Company's business.
In addition, the Company believes that the rehabilitation industry is
highly fragmented and experiencing significant consolidation. Growing
legislative and payor pressure to prohibit or limit referrals by physicians to
entities in which they have a financial interest is leading physicians to divest
themselves of their rehabilitation therapy practices. As a result, many sole
practitioners and owners of small groups of outpatient rehabilitation clinics
are selling such clinics to larger organizations or establishing networks of
outpatient rehabilitation clinics within a geographic area.
Rehabilitation Services
The Company utilizes licensed therapists and therapist assistants, to
provide physical, occupational and speech therapy to patients with
musculoskeletal injuries, physical disabilities associated with neurological
disorders, and post-surgical rehabilitation. The following is a brief
description of rehabilitation therapy services offered by the Company:
. Physical Therapy. Physical therapy is the evaluation and treatment
of physical disabilities designed to improve a patient's physical
strength, range of motion, and mobility. Treatments include
exercise and the application of modalities such as heat, cold,
water, sound, and electricity.
. Occupational Therapy. Occupational therapy is the evaluation and
treatment of physical and cognitive deficiencies with the goal of
improving self-care, work and leisure skills. Candidates for this
treatment include people who have suffered traumatic injuries,
have disease-related disabilities, or who have underdeveloped
physical and cognitive skills. Occupational therapists use a
variety of treatment techniques, including using therapeutic
exercises and activities, designing and fabricating adaptive
equipment (such as splints and custom-made handles for utensils)
and teaching compensatory techniques to help these individuals
achieve their potential for independent, productive living.
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. Speech Therapy. Speech therapy is the evaluation and treatment of
speech, language, voice and swallowing disorders arising from
strokes, head injuries, degenerative neurological disorders,
developmental deficits, cancer and hearing impairment. Speech
therapists use treatment techniques such as thermal stimulation,
muscle re-education, and hearing and/or speech aid through visual
communication devices.
. Work Reconditioning. Work reconditioning is a rehabilitation
program that simulates the specific job activities of an injured
worker in order to prepare the worker to return to work and
addresses issues of productivity, safety, physical tolerances and
worker behavior. The goal is to prepare the patient to work a
complete workday safely and without injury. The Company utilizes
a standardized industrial rehabilitation program at all of its
sites to improve both patient and payor acceptance.
. Functional Capacity Assessment. Functional capacity assessment is
the evaluation of an existing or prospective employee's physical
condition and endurance and of the ability to meet the
requirements of employment. The assessment may be used by
employers, insurers and other payors to estimate the extent of
rehabilitation treatment needed or as an objective method of
evaluating specific work capacity.
. Pain Management. Pain management programs are used to assist
patients in the use of compensatory motor patterns and other
coping mechanisms to minimize or eliminate the debilitating
effects of acute and chronic pain.
. Diagnostic Services. The Company performs non-invasive mobile
testing at client facilities and at seven fixed sites. Tests
performed include x-ray, mammography, echocardiography with
Doppler, Abdominal and Pelvic sonograms, Carotid Duplex, Peripheral
Vascular Thyroid and Breast Imaging, Osteoporosis -Bone Mineral
Densitometry, and nuclear cardiology. Northstar Medical Services,
Inc. employs Board Certified Cardiologists and Board Certified
Radiologists.
. Preventive Services. The Company also provides services designed
to prevent or avoid injuries in the workplace. These preventive
services, which may be performed at an employer's work site,
include programs to teach employees proper body mechanics and
techniques and detailed analysis of specific job activities, such
as lifting, with the goal of changing how a job is performed to
prevent injuries to employees. Although preventive services
currently provide only a small amount of revenue for the Company,
the Company believes pressure by insurers and managed care
organizations to limit the cost of health care and requirements
imposed on employers under the Americans with Disabilities Act may
cause such industrial consulting to become more prevalent in the
future.
Operations
Outpatient Rehabilitation Clinics. The Company currently owns and
operates 62 outpatient rehabilitation clinics in Pennsylvania, Ohio and West
Virginia at which the Company provides a wide range of outpatient rehabilitation
therapy services. The Company leases or purchases equipment for the outpatient
rehabilitation clinics, provides licensed therapists, therapist assistants,
certified aides and related personnel, while coordinating the establishment and
maintenance of patient records, billings to third-party
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payors, and management and operations of such clinics. Although the amount and
type of equipment for each such clinic may vary, such equipment typically
includes whirlpools, electric stimulation and ultrasound units, exercise
machines and hot and cold pack units.
The outpatient rehabilitation clinics are dependent upon patient
referrals from various sources within their communities, including orthopedists,
internists, neurologists, physiatrist, chiropractors, hospital discharge
planners, community organizations and insurance company case managers.
Referrals also come from non-physician sources, including insurance companies,
managed care organizations, lawyers and employers. Management believes that its
use of direct mail advertising and personal visits with referral sources
increase physician referrals. The Company's ability to attract managed care and
other third-party payor contracts in multiple locations is aided by its large
geographical market, central billing and collections, and direct marketing to
payors through Direct Provider Network.
Contract Rehabilitation and Diagnostic Services. As of December 31,
1996, the Company had contractual arrangements with 120 patient care entities,
including nine acute care hospitals. Under these contracts, the patient care
facility generally furnishes the space for the rehabilitation therapy center,
and the Company provides all other necessary services, including the appropriate
rehabilitation therapies and diagnostic services, on-site management, billing
and collections, staff recruitment, continuing education, insurance, and
quality assurance. The Company provides complete "turn-key" operations to allow
its patient care facilities to offer advanced rehabilitation therapies without
incurring the financial and operational risks associated with start-up costs,
capital expenditures and therapist recruitment. The Company is compensated
under such contracts on a fee-for-service basis and typically collects payment
for services directly from the patient care facility, which in turn receives
reimbursement from other third-party payors, or bills and collects from the
payor directly. The Company has two joint ventures with hospitals and believes
that this risk sharing proposition gives it long-term stability in certain
markets.
Generally, the Company enters into one-year or indefinite-term
contracts for medical rehabilitation services, cancelable by either party upon
as few as 30 days' notice and renewable from year to year. The Company believes
that its contract renewal rate is competitive in the industry.
Business Strategy
The Company is seeking to become the dominant provider of
rehabilitation therapy and mobile diagnostic services within its geographic
market through strategic alliances as well as acquisitions. This strategy is
based on the Company's belief that managed care organizations and other third-
party payors prefer to contract for service providers offering multiple
services within their geographic area. Key elements of the Company's business
strategy are summarized below.
. Maintain Regional Presence. The Company provides both inpatient
and outpatient rehabilitation therapy and related services and
thus seeks to position itself as the preferred option for
physicians, hospitals and managed care organizations at its
locations.
. Expand Geographic Focus. The Company intends to further expand
operations in Pennsylvania and states such as Ohio, West Virginia
and Illinois. This growth within the Company's regional market
will allow the Company to maintain its present cost structure and
continue to maximize the productivity of therapists within its
market. Expanding services through affiliated providers will give
our geographical presence more clout with
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payors.
. Expand Referral Sources. The Company seeks to expand the referral
base of the outpatient rehabilitation clinic by aggressively
marketing its rehabilitation therapy services to local and
regional referral sources such as physicians, orthopedic surgeons,
insurance companies, managed care organizations, lawyers and
employers. As part of its strategy, the Company is cross-selling
services between rehabilitation and mobile diagnostics.
. Alignment with Physician Practices. As part of its business
strategy, the Company is looking to more closely align itself with
physician practices, either through management service
arrangements or through providing diagnostic services in their
offices.
. Expand Contracts With Managed Care Organizations. As managed care
organizations become more prevalent in the marketplace, outpatient
rehabilitation service providers will need to deliver a
comprehensive range of services in a cost-effective manner with
multiple locations within a metropolitan area or region. The
Company intends to market aggressively to these organizations, by
providing a complete continuum of care.
. Expand Contracts With Patient Care Facilities. The Company
continues to seek additional contracts with, as well as expand the
range of services it offers to, patient care facilities.
. Increase Range of Services. The Company provides a wide range of
services, including physical, occupational, and speech therapies
and intends to increase our more specialized treatments such as
hand therapy, aquatic therapy, sports therapy, neurological
therapy and incontinence therapy. Due to the Company's geographic
focus, the Company will be able to hire a limited number of
specialists to serve the Company's entire network from a
centralized location. The Company believes that the additional
specialized therapies will make it an attractive provider of
rehabilitation therapy services to physicians, hospitals and
managed care organizations.
. Increase Efficiency of Operations. The Company has substantially
completed the centralization of accounting, payroll, certain
other administrative activities, and the billing and collection
process using standardized procedures. The Company has also
developed, and is in the process of implementing, systems designed
to enhance productivity by standardizing and automating certain
administrative functions at the outpatient rehabilitation clinic
level.
Mergers, Acquisitions and Joint Ventures
The Keystone Merger. On November 15, 1995, NSK Merger Corp., a newly-
formed subsidiary of the Company, was merged with and into Keystone. Prior to
this Merger, Keystone was the largest privately held rehabilitation company in
Pennsylvania, providing services in physical, occupational and speech therapy,
including sports rehabilitation and work hardening in outpatient clinics, as
well as in patient care facilities, located throughout Pennsylvania and in New
York, Ohio and West Virginia.
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As a result of the Merger, the Company acquired substantially all of
the assets of Keystone, including accounts receivable of approximately
$5,300,000 and net assets used in the rehabilitation business of approximately
$2,300,000. The company intends to continue to utilize these assets in the same
manner as did Keystone. The liabilities of Keystone at the time of the Merger,
were certain current and non-current liabilities (which will be offset against
certain earn-out payments to be made in the future as discussed below) and
capital leases of approximately $1,200,000.
As consideration for the Merger, the shareholders of Keystone, Thomas
W. Zaucha and Alice L. Zaucha and the Zaucha Family Limited Partnership
(collectively, the "Zaucha Shareholders"), received the following: (a)
$2,500,000 in cash; (b) a time note due January 3, 1996 in the aggregate
principle amount of $5,100,000;(c) a five-year, interest free term note in the
aggregate principal amount of $2,625,000; (d) the agreement by the Company to
issue, on January 3, 1996, a three-year, 6% term note in the aggregate principle
amount of $2,400,000 (the "Three-Year Note"); and (e) the agreement by the
Company to issue to the Zaucha Shareholders, on January 3, 1996, an aggregate of
944,352 shares of the Company's common stock, par value $.01 per share (the
"Zaucha Stock Consideration").
In connection with the Merger, the Company (i) guaranteed the value of
the Zaucha Stock Consideration to be at least $5,600,000 through certain periods
ending no later that December 31, 1997; (ii) agreed to seek necessary
stockholder approval to allow the Three-Year Note to be converted into common
stock at the conversion price of $5.93 per share and to pay any guaranteed
amount in additional shares of Northstar common stock based on the trading price
of the common stock at the time of issuance; and (iii) issued a five-year
interest free note to David D. Watson, formerly Keystone's Chief Operating
Officer and Executive Vice President, in the aggregate principal amount of $
375,000.
The Company also agreed to make additional "earn-out" payments to the
Zaucha Shareholders of $1,600,000 per year in the event that Keystone's "EBITA"
exceeds $2,500,000 in any year from 1996 to 2000, inclusive. EBITA is defined,
generally, to mean Keystone's earnings (including earnings from any internally
generated facility or contract but excluding earnings from any facility or
contract acquired from third parties) before taxes, interest, depreciation and
amortization. In the event an earn-out is not earned and therefore not paid in
any given year, the earn-out will be paid in the next year if EBITA in such next
year exceeds the greater of $3,200,000 or $2,500,000 plus the amount of the
EBITA shortfall in such prior year. Additionally, the Zaucha Shareholders could
receive an earn-out of up to approximately $270,000 in the event that Keystone's
EBITA for 1995 exceeds $2,500,000 million (as adjusted to exclude certain pre-
Merger expenses that will not recur). The earn-out amounts for years 1996
through 2000 will be reduced if Keystone's accounts receivable at the date of
the Merger were less than $5,000,000 and in the event that the current
liabilities of Keystone at the date of the Merger (other than permitted capital
leases) exceeded $2,000,000. In addition, such earn-out payments will be
reduced by 50% of such current liabilities up to $2,000,000.
At the time of the Merger, the Company paid $2,500,000 in cash to the
Zaucha Shareholders and deposited $5,100,000 in a cash collateral account with a
bank to support a letter of credit securing the Company's obligation to pay the
Zaucha Shareholders $5,100,000 on January 3, 1996. The Company borrowed
$3,500,000 of such amounts under the $6,500,000 acquisition line portion of its
existing $16,000,000 credit facility with IBJ Schroder Bank and Trust Company
("IBJ"). The remainder of the funds required at the time of the Merger were
provided from working capital.
Immediately prior to the Merger, Keystone transferred to the Zaucha
Family Limited Partnership,
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of which Thomas W. Zaucha is a general partner, all of the real estate owned by
Keystone for approximately $5,000,000, which funds were used to pay off real
estate and other debt owed to a bank by Mr. Zaucha. In connection with the
Merger, the parcels of such real estate used in Keystone's business were then
leased to Keystone by Zaucha.
As part of the Merger, the Company paid a broker fee of $1,350,000 to
CFC Financial, Inc., an entity related to Mr. DeSimone. This obligation was
satisfied by the issuance of 150,000 shares of the Company's common stock and
$450,000 in cash.
As part of the Merger, certain of the executive officers of Keystone
entered into employment agreements with and became executive officers of the
Company. Thomas W. Zaucha, who formed Keystone in 1981, became the Chief
Executive Officer of the Company. David D. Watson, the former Chief Operating
Officer of Keystone, became the President of the Company. Lisa S. Guarino, the
Chief Financial Officer of Keystone, became the Chief Financial Officer and
Executive Vice President of the Company. Brian K. Strong remained the Chief
Operating Officer of the Company and Michael J. Kulmoski, Jr., formerly Chief
Financial Officer and Treasurer, became Executive Vice President of Corporate
Development. Additionally, within thirty (30) days of the Merger, Thomas W.
Zaucha and Steven N. Brody, a director of Keystone, joined Mark A. DeSimone, the
Chairman of the Board of Directors of the Company, and Michael P. Pitterich, an
outside director, as the four members of the Board of Directors of the Company.
As of the date of this document, Mr. Zaucha had been fired for cause
as the Company's CEO, but remains as a director. Mssrs. DeSimone, Kulmoski, and
Pitterich and Ms. Guarino have left the Company in all capacities, for various
reasons set forth herein.
Joint Venture Agreements. In 1994, the Company entered into the Joint
Ventures (as defined herein) to provide cardiac and other diagnostic testing
services in order to expand the range of products and services the Company could
offer to its clients, particularly in the contract rehabilitation segment of the
business.
During 1994, the Company entered into joint venture arrangements with
C.F. Services, Inc. (the "C.F. Services Joint Venture") to develop mobile
diagnostic services in Western Pennsylvania and West Virginia. The Company had
made loans totaling $100,000 for working capital purposes in connection with the
C.F. Services Joint Venture. In April 1994, the Company entered into joint
venture arrangements with CDL Medical Technologies, Inc. (the "CDL Joint
Venture," and, together with the C.F. Services Joint Venture, the "Joint
Ventures") to provide mobile diagnostic testing services, including cardiac and
ultrasound diagnostic services. In order to concentrate its managerial and
financial efforts on the Company's core rehabilitation business, the Company has
initiated negotiations with CFS with respect to a possible sale of its interest
in the Joint Ventures to such joint venture partners, although no agreement or
understanding has been received with respect to any such possible sale.
However, there can be no assurance as to whether, when, or on what terms any
sale may be completed.
Marketing
As of December 31, 1996, the Company had a marketing staff of 20
people responsible for expanding its patient base in outpatient rehabilitation
clinics, subacute and diagnostic centers through referrals by
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physicians and health maintenance organizations and increasing the number of
contracts with patient care facilities served by the Company through targeted
mailings, telephone calls, and on-site meetings.
Through its Merger with Keystone, the Company is in the process of
further implementing its marketing program at the local outpatient
rehabilitation clinic, regional, and corporate levels directed at hospitals,
physicians, insurance companies, managed care organizations, lawyers, and
employers. The Company believes this program will enable the Company to market
its services effectively and increase patient flow.
At the local outpatient rehabilitation clinic level, the facility
directors for each clinic are expected to maintain relationships with existing
referral sources and to establish relationships with new referral sources,
typically physicians, in that clinic's geographic area. Therapists contact
referral sources on a regular basis in order to maintain personal relationships
and to be responsive to their service needs. The Company believes that being
responsive to the needs of the referral sources and reducing their
administrative burden in referring patients will enhance the Company's prospects
of obtaining additional referrals from such sources.
At the regional level (which are groups of related offices and
services), the Company has recognized the value of sales personnel in marketing
to larger regional referral sources (multi-physician groups, home health
agencies, and hospital-owned physicians) that may be in a position to refer of
groups to the Company's facilities. Sales personnel can set up meetings for the
facility directors with referral sources and meet with case managers, employers,
and local community groups. Their marketing efforts are responsible for
developing and expanding business relationships with all referral sources such
as insurance companies, managed care organizations, lawyers, and employers, as
well as the physicians targeted by the clinical personnel. In addition, these
regional sales personnel are responsible to the Company's sales and marketing
directors.
At the corporate level, the Company concentrates on establishing
contracts with multi-regional managed care organizations, insurance companies,
employers and long-term care facilities. When appropriate, the Company may
consider service provider alliances in which two or more large rehabilitation
organizations enter into an arrangement such that, collectively, these two
organizations are able to secure a contract with a large referral source.
Corporate marketing programs are effective in establishing links with larger
employers and third party payors.
The Company is aware of the growing importance of managed care
organizations in controlling patient referrals and their demand for high-
quality, cost-effective care from service providers with a regional presence.
Accordingly, both its corporate and regional sales personnel devote substantial
efforts to building relationships with these organizations. The Company has
been able to secure contracts and establish relationships with such
organizations in the past and believes that its sales and marketing efforts will
allow it to acquire additional contracts from, and establish additional
relationships with, managed care organizations in the future.
Reimbursement
The health care industry is generally experiencing a trend toward cost
containment as private and governmental payors seek to respond to rapidly
escalating health care costs. One means of cost containment has been to limit
reimbursement rates by capping or lowering fees or restricting the number of
treatments which will be reimbursed for any given condition. Pennsylvania, as
well as the other states into which the Company anticipates expanding, have fee
schedules which limit the reimbursement rates under workers' compensation
programs. Another cost reduction methodology is increased utilization
management by third-party payors
11
<PAGE>
through the use of physician "gatekeepers" and other pre-certification
mechanisms to control utilization of services. The Company expects that
legislation and payors' fee schedules and payment methodologies will continue to
limit the reimbursement of fees for various services and control access to
various services, including rehabilitation therapy services, which may have a
material adverse effect on the business, financial position, and results of
operations of the Company.
Reimbursement for the Company's services may also be limited by third-
party payors. Such payors often limit the amount of fees per visit, regardless
of the number or type of therapies applied to the patient, or otherwise limit by
the terms of the managed care contract the amount of fees which may be charged.
The Company expects the trend toward third-party payor limiting of reimbursement
levels for various outpatient and inpatient services, including outpatient
rehabilitation therapy services, will continue.
As a consequence, there can be no assurance that reimbursement for the
Company's rehabilitation therapy services will remain at current levels. The
reduction or limitation of reimbursement levels for the Company's services could
have a material adverse effect on the business, financial condition, and results
of operations of the Company. In addition, such payors are expected to continue
to develop programs designed to control or reduce the cost of health care
services, which may have a material adverse effect on the business, financial
condition, and results of operations of the Company.
Through December 31, 1995, Northstar Therapy Services, Inc., a
subsidiary of the Company ("NTS"), was a Medicare-certified rehabilitation
agency, and several outpatient rehabilitation clinics of the Company have been
certified as "extension sites" of NTS which can bill Medicare through NTS.
Beginning January 1, 1996, all direct bill Medicare is being handled through one
of eight certified rehabilitation agencies throughout Pennsylvania, West
Virginia and Ohio. All clinics throughout the Company have been certified as
extension sites of one of these agencies. The use of NTS as such an agency is no
longer necessary, and therefore has been terminated. In addition, patient care
facilities that contract with the Company for rehabilitation therapy services
and which bill Medicare directly for reimbursement of such services also must be
certified. The Company believes that all of its facilities are in compliance
with such certification requirements; however, the loss of the Company's
Medicare certification, or the Medicare certification of a significant number of
the patient care facilities with which the Company contracts could materially
adversely affect the Company's ability to obtain Medicare reimbursement for
services.
The Company anticipates that much of its future growth will continue
to be through expanding the number of its outpatient rehabilitation clinics
through start-ups and acquisitions, contracting for outpatient rehabilitation
and adding further services at existing locations.. Rehabilitation therapy
services provided in the Company's outpatient rehabilitation clinics are
reimbursed primarily from third-party payors, which typically take longer to
reimburse the Company than Medicare. Reimbursement from third-party payors is
dependent in large part on the Company's timely and correct submission of claims
in accordance with the varying requirements of different payors. In addition,
expansion beyond Pennsylvania might require the Company to seek payment from a
larger number of payors, which could result in longer collection cycles and
increased costs of collection.
Most third-party payors, including Blue Cross/Blue Shield, compensate
the insured or a service provider, such as the Company, for physical,
occupational, and speech therapy at fee levels that are determined to be
"reasonable and customary" for such services within a geographic area. The
determination of what is "reasonable and customary" is based on "objective
industry data." Reimbursement based on this criteria may be substantially less
than rates the Company customarily charges and may not cover all of the
Company's costs
12
<PAGE>
and expenses. As a result, the Company often will seek the balance of such
claims, if any, as well as the portion of the claims not covered by third-party
payors, directly from the patient. However, certain third-party payor
agreements may prohibit the Company from billing a patient for any amount by
which the Company's fees exceed those allowed by the payor. Therefore,
attempting to collect fees from patients may be uneconomical in light of the
associated costs, or may be prohibited by government regulations or contractual
arrangements with third-party payors, and may be unsuccessful. Additionally,
third-party payors could adopt more restrictive reimbursement schedules, which
may affect the Company's profitability.
Governmental Regulation
General. The provision of physical therapy services and
reimbursement for such services are subject to a number of federal, state, and
local laws, regulations, and rules, some of which are very complex. Although
the Company believes that it is currently in compliance with applicable laws,
regulations, and rules, some of such laws are broadly written and subject to
little or no interpretation by courts or administrative authorities. Hence,
there can be no assurance that a third-party or governmental agency will not
contend that certain aspects of the Company's operations or procedures are not
in compliance with such laws, regulations, or rules or that state agencies or
courts would interpret such laws, regulations, and rules in the Company's favor.
The sanctions for failure comply with such laws, regulations, or rules could be
denial of the right to conduct business, significant fines, and/or criminal
penalties. Additionally, an increase in the complexity or substantive
requirements of such laws, regulations, or rules could have a material adverse
effect on the business, financial condition, and results of operations of the
Company.
Fraud and Abuse Laws. The Social Security Act and certain provisions
of state law provide civil and criminal penalties for persons who knowingly and
willfully solicit, pay, offer or receive any remuneration, directly or
indirectly, as an inducement to make a referral of a patient for services or
items for which payment may be made under the Medicare programs. Often termed
"fraud and abuse" or "anti-kickback" laws, the provisions have been broadly
interpreted by the courts.
The Officer of Inspector General of the Department of Health and Human
Services ("HHS") has issued regulations specifying certain business arrangements
and payment practices involving providers or other entities, such as the
Company, which will not be considered prohibited activities. Commonly termed
"safe harbor regulations," the regulations set forth certain standards which, if
satisfied, will ensure that the arrangement will not be subject to criminal
prosecution or civil sanctions under the fraud and abuse laws. Failure to
satisfy the safe harbors in and of itself does not render an arrangement
illegal. The Company believes it is in compliance with the safe harbor
regulations applicable to its current operations.
One principal focus of the fraud and abuse laws has been on
arrangements in which profit distributions are made by a partnership or other
business venture for health-related items or services to venture. Where such
arrangements exist, a question is raised as to whether the profit distributions
are illegal payments in exchange for referrals. Certain safe harbors set forth
criteria which, if met, will ensure that investors in business ventures for
health-related items or services will not be subject to scrutiny under the fraud
and abuse laws.
One safe harbor protects profit distributions to investors made by
publicly-traded companies with tangible assets of more than $50 million. At
present, the Company does not satisfy the asset threshold for protection under
this safe harbor. Another safe harbor covers investment interests in small
entities. The criteria that must be satisfied for protection under this safe
harbor include, among other things, requirements that no more than 40% of the
investment interests of each class of investment interests in the entity may be
held
13
<PAGE>
by persons, or so-called "tainted investors," who are in a position to make or
influence referrals (including hospitals and physicians), furnish items or
services to the entity or otherwise generate business for the entity, and that
no more than 40% of the entity's gross revenues may come from referrals, items,
or services furnished, or business otherwise generated by "tainted investors."
Unless a large percentage of the Company's common stock is held by "tainted
inventors," investments in the Company should fall within the safe harbor for
investment interests. None of the Company's physical therapy activities are
carried out through partnerships or other ventures with hospitals, physicians,
or other third parties in a position to make or influence referrals to, or
otherwise generate business for, the joint ventures.
The laws involving fraud and abuse and the safe harbor regulations are
currently in a rapid state of development, and it is difficult to provide a
clear analysis of the risks in this area. There can be no assurance that
enforcement agencies or courts will determine that any existing arrangements
comply with all applicable laws and regulations.
Stark II. The Omnibus Budget Reconciliation Act of 1993 enacted new
federal anti-referral legislation, more commonly known as "Stark II." Effective
January 1, 1995, Stark II bans referrals by physicians of Medicare patients to
entities for certain designated health services, including physical therapy
services, if a physician or immediate family member has a financial relationship
with the entity providing the service which does not meet any of the exceptions
(or safe harbors) set forth in Stark II. A financial relationship is generally
defined as an ownership or investment interest in or compensation arrangement
with the entity, subject to certain exceptions. One exception (or safe harbor)
relates to ownership of investment securities in publicly traded companies that
had, at the end of its most recent fiscal year, or on average during the
previous three fiscal years, stockholder equity exceeding $75 million. At
present, the Company does not satisfy the asset threshold and physicians may not
make referrals of Medicare patients to the Company where the physician or his or
her immediate family member holds an ownership or investment in the Company.
Penalties for prohibited referrals include nonpayment for services rendered
pursuant to a prohibited referral, civil money penalties, and fines and possible
exclusion from the Medicare programs. The Company believes it is currently in
compliance with the requirements of Stark II. However, there can be no
assurance that enforcement agencies or courts will determine that existing
arrangements comply with all applicable laws and regulations.
The Practice of Physical Therapy. In the State of Texas, a 1979
opinion of the State Attorney General provides that corporate entities may not
engage in the practice of physical therapy unless such corporations are
professional corporations with all stockholders being licensed therapists. The
Company knows of no similar opinion or of the existence of any similar law,
regulation, or rule, whether pending or currently in effect, in Pennsylvania or
in any state into which the Company currently plans to expand its operations.
If such an opinion were expressed and enforced in Pennsylvania or in any state
in which the Company may in the future operate, management believes that it
could restructure its operations so as to be in compliance therewith. However,
such restructuring could materially adversely affect the Company, and there can
be no assurance that a satisfactory restructuring, under such circumstances,
could be accomplished.
Other Legislative and Regulatory Actions. The Pennsylvania
legislature has enacted automobile insurance reforms which became effective in
1991 and which limit payments to providers for non-emergency services rendered
to patients who suffer injuries as a result of automobile accidents. The
Pennsylvania Legislature also enacted workers' compensation legislation
effective September 1, 1993 which limits payments to provides for services
rendered to patients with work-related injuries. The Pennsylvania Workers'
Compensation Act, among other things, altered the methodology for payment of
health care services to persons covered by workers' compensation, limiting
health care providers to payment of no greater than 113% of the
14
<PAGE>
applicable governmentally imposed standard fees for medical services as
determined principally under the Medicare Program. If such services do not fall
under the Medicare fee structure, the Pennsylvania Department of Labor and
Industry establishes rates, which may not be more than 80% of the prevailing
rate for such services in the area. The law also requires employees to obtain
treatment from designated providers for a specified period of time and contains
restrictions concerning patient referrals, similar to those established in the
Medicare fraud and abuse and Stark II laws, which are designed to prevent fraud
and abuse in the delivery of services to patients covered by workers'
compensation insurance.
Competition
The rehabilitation industry is highly competitive and subject to
continual changes in the manner in which services are delivered and in which
providers are selected. The Company believes the most significant competitive
factors in the rehabilitation market are quality patient care, comprehensive
scope of service offered, treatment, alignment with physicians outcome measures,
cost-effectiveness through the reduction of the need for more costly health care
intervention, convenience of rehabilitation locations to patients, regional
dominance, and the ability to develop and maintain relationships with
rehabilitation referral sources such as physicians, insurance companies, managed
care organizations, lawyers and employers. The Company competes, and will
compete, with many national, local, and regional providers of rehabilitation
therapy services, including the outpatient rehabilitation operations of acute
hospitals, managed care organizations and other long-term care rehabilitation
therapy providers. Many of the Company's competitors have equal or longer
histories of operations and longer-term relationships with therapists and
referral sources than the Company and have greater financial, marketing, human
and other resources than the Company.
The Company also competes with other health care companies in
acquiring rehabilitation providers. Several larger national companies with
substantially greater financial resources than the Company have been actively
acquiring rehabilitation providers. Certain of these companies, because of the
size of their stockholders' equity, may not be affected by present or future
laws limiting or prohibiting referrals by stockholders who may be referral
sources. Continued competition in this area may increase the valuation of
rehabilitation providers and limit the Company's ability to make future
acquisitions.
The Company also competes for the services of therapists with
hospitals, nursing homes, other outpatient rehabilitation clinics and
physicians' offices. Although the Company has not experienced significant
difficulties in attracting and retaining qualified therapists, it is generally
recognized that the demand for qualified therapists exceeds the supply and there
can be no assurance that the Company will continue to be able to attract or
retain sufficient therapists to meet its needs.
Employees
As of December 31, 1996, the Company had 652 employees of which seven
were executive officers of the Company; 288 were licensed therapists or
therapists' assistants; and 20 were involved in marketing and business
development. The Company also has contracts with certain independent physical,
occupational, and speech therapists who are utilized by the Company on an as-
needed or minimum-number-of-hours-per-week basis.
None of the Company's employees is represented by a labor union, and
the Company is not aware of any activities seeking such organization. The
Company considers its relationships with its employees to be
15
<PAGE>
satisfactory.
The Company's business is dependent on its ability to attract and
retain qualified therapists and therapists' assistants. The Company employs a
variety of recruiting techniques, including employee referral, personal phone
contact and follow-up, advertising, convention attendance, mass mailings, loan
programs, and on-site college recruiting. The Company also maintains
relationships with six local physical therapy colleges and two physical therapy
assistant schools. The ability of the Company to attract and retain qualified
physical, occupational, and speech therapists and therapists' assistants is
crucial to the Company's operations, and competition for therapists is intense.
Therapists are in short supply and may be attracted to hospitals and other
facilities which may provide predictable locations and work schedules in
contrast to the nature of the Company's services at patient care facilities,
which provide less predictable work schedules and changing locations. Although
there can be no assurance, the Company believes that it is able to compete
effectively for therapists due to its local Pennsylvania presence near several
certified rehabilitation schools, provision for reimbursement for continuing
education, quality reputation, and attractive compensation and benefits package.
In addition, the Company believes that its management philosophy appeals to many
therapists because it encourages therapists to manage the operations of their
respective patient care facilities or outpatient rehabilitation clinics on a
semi-autonomous basis, including scheduling, hands-on therapy, facility
financial results, retaining staff, and, if applicable, relations with the
patient care facility. The Company also provides therapists with career
advancement opportunities beyond the individual-facility level. To date, the
Company has been able to attract a sufficient number of physical, occupational
and speech therapists, either as employees or as independent contractors;
however, there can be no assurance that this will continue. The Company
believes its future success will depend in part on its continued ability to
attract and retain highly skilled employees. If the Company is unable to
attract and retain a sufficient number of qualified therapists to staff all of
its facilities, the Company could be materially adversely affected. The Company
believes its annual turnover rate among therapists compares favorably with that
of its competitors.
In most states, physical, occupational, and speech therapists,
therapist assistants, COTAs, and licensed technicians must be state-licensed
clinicians with clinically specific associate, baccalaureate, or masters
degrees. All therapists must pass a national licensure exam administered by the
states. A certified physical therapy assistant provides therapy under the
supervision of a physical therapist. In order to be licensed, physical therapy
assistants must have an associate degree from an approved physical therapy
assistants program. In addition, Pennsylvania requires physical therapy
assistants to complete successfully a state-wide written and practical
examination. COTAs provide therapy under the supervision of an occupational
therapist. In order to be certified, COTAs must also have an associate degree
and have successfully completed a national certification examination.
Therapists with the Company undergo an orientation program to familiarize
themselves with the Company's policies and procedures.
Liability Insurance
The Company maintains professional malpractice liability insurance up
to $5,000,000 per incident and up to $5,000,000 in the aggregate on all of its
professional employees, in addition to coverage for the customary risks inherent
in the operation of health care facilities and businesses in general. The cost
of liability insurance coverage and the availability of such coverage have
varied in recent years with a trend toward higher cost. In an effort to control
the cost associated with such coverage, the Company has shifted from an
occurrence based policy to a claims made policy. While the Company believes its
insurance policies to be adequate in amount and coverage for its current
operations, there can be no assurance that its coverage will, in fact, be or
continue to be available in sufficient amounts and on reasonable terms, or at
all.
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<PAGE>
Item 2. Properties
- ----------------------
The Company leases approximately 13,000 square feet as corporate
office space at 665 Philadelphia Street, Indiana, Pennsylvania 15701. Several
leases expire on dates ranging from November 2000 to November 2005. The Company
also leases and operates approximately 60 rehabilitation clinics in
Pennsylvania. These leases may be month-to-month or for a term of years. Monthly
payments under these leases range from approximately $100 to $15,000.
Item 3. Legal Proceedings
- ----------------------------
In September 1996, after an internal investigation by Northstar's
directors and Investigative Committee headed by Steven N. Brody, 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 which 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,
17
<PAGE>
directors and auditors, as set forth above.
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 not filed a statement of damages, and the court has scheduled
settlement and discovery activities. It is not possible to make an assessment of
the impact of this action upon the Company 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. See Note 21 to the
financial statements.
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.
On February 10, 1997, Thomas W. Zaucha filed suit against Northstar
Health Services, Inc. ("Northstar") and all other members of its Board of
Directors in the Delaware Chancery Court, Civil Action No. 15530. His
litigation commenced on the same day that Zaucha's Committee filed with the U.S.
Securities and Exchange Commission its preliminary consent materials in
connection with this current Solicitation. Zaucha began his lawsuit without
providing any prior notice to the Company or fellow Board members. The Company
believes that, had Zaucha fulfilled his duty of candor to the Company, and
requested clarification of issues, he could have avoided unnecessary and
potentially costly litigation.
The Company intends to move for dismissal of Zaucha's request for
declaratory relief for want of an actual or possible case or controversy. His
request for declaratory relief is based upon Zaucha's own apparent misconception
of important shareholder suffrage rights. Although the Board, with Zaucha
abstaining, approved certain Bylaw amendments, the Board has not proposed or
adopted amendments to the Company's articles of incorporation, which amendment
would be required to eliminate the shareholders right to take action by written
consent/1/.
- ------------------------
/1/ The Zaucha Committee's own current Solicitation of shareholder consents
bears testimony to the vitality of shareholder suffrage rights inherent in
Northstar's articles of incorporation under Delaware law.
18
<PAGE>
Zaucha also seeks injunctive relief to prevent the Company from
enforcing a conventional Bylaw feature adopted on January 21, 1997. That
amendment (providing for removal of directors for cause by a 2/3 vote of
shareholders) was enacted in response to the circumstances in which the Company
now finds itself due, in part, to Zaucha's own actions and omissions. The
amendments were designed solely to enable the Company to provide a stable Board
in negotiations with IBJ Schroder, the Company's senior lender. Moreover, the
Company has always had a staggered Board, believed by the Company, since its
inception, to be a desirable mechanism.
The Company intends to oppose vigorously Zaucha's attempt to enjoin a
bylaw the Board believes is necessary, at this time, to reassure the Company's
creditors. While it is impossible to predict the outcome of the Delaware
litigation, the Company intends, if successful, to seek recovery from Zaucha of
the Company's costs expended in defending litigation.
On March 19, 1997, the Company filed suit in the Western District of
Pennsylvania against Thomas W. Zaucha, its former Chief Executive Officer, and
Commonwealth Associates L.P., its former investment banker (No. 97-0510 W.D.
Pa.). Also named as defendants were Michael Falk, Basil J. Asciutto and Andreas
V. Bello of Commonwealth Associates; Joseph H. Micalleff of the Associated Sales
Tax Consultants, Inc. and Lawrence F. Jindra, M.D., James H. McElwain, Mark G.
Mykityshyn, Roger J. Reschini, and David B. White (members of the group seeking
to take control of Northstar). The suit alleges that the defendants'
solicitation of written consents contained false and misleading information in
violation of federal securities laws. The Company requested that the Court issue
a temporary restraining order against the defendants use of such misleading
proxy materials and order expedited discovery such that the Company can prepare
for a hearing on such equitable relief.
Item 4. Submission of Matters to Vote
- ----------------------------------------
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters
- --------------------------------------------------------------------------
On May 31, 1996, NASDAQ suspended trading in the Company's common
stock. Prior to its suspension, the Company's common stock was traded on the
NASDAQ National Market under the symbol "NSTR". Since the suspension, the
Company's common stock is traded over the counter. On March 21, 1997 the high
and low sales prices for the common stock of the Company as reported by NASDAQ
were $ 2.750 and $ 2.500. Pursuant to current disclosure guidelines, the
following table sets forth the high and low sales prices for the common stock of
the Company during the calendar periods indicated, through December 31, 1996, as
reported by NASDAQ:
<TABLE>
<CAPTION>
Calendar Year and Quarter High Low
------------------------- ------ -----
<S> <C> <C> <C>
1993 Second Quarter 8.125 5.250
Third Quarter 8.250 6.750
Fourth Quarter 9.500 7.750
1994 First Quarter 10.375 7.875
Second Quarter 9.125 6.750
Third Quarter 8.250 6.250
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Fourth Quarter 7.500 4.750
1995 First Quarter 8.500 6.500
Second Quarter 7.625 5.750
Third Quarter 9.625 7.000
Fourth Quarter 7.625 5.375
1996 First Quarter 6.125 2.625
Second Quarter 5.500 1.250
Third Quarter 3.125 1.250
Fourth Quarter 2.000 0.750
</TABLE>
As of December 31, 1996, the Company had approximately 1,700 holders
of record, including those who hold in street name, for its common stock.
The Company has not paid nor does it expect to pay in the future
cash dividends on its common stock.
The Company's Registrar and Transfer Agent for its common stock is
Continental Stock Transfer and Trust Company, New York, New York.
Stock Option Plan
The Company adopted two stock option plans: the 1992 Plan and the 1994
Plan. The Company adopted the 1992 Plan in order to attract and retain key
personnel. A total of 650,000 shares of Common Stock are authorized and have
been reserved for issuance under the 1992 Plan. Options may be either
"incentive stock options" within the meaning of Section 422 of the Code, or non-
qualified options. Incentive stock options may be granted only to employees of
the Company, while non-qualified options may be issued to consultants, as well
as to employees of, the Company. The 1992 Plan is administered by the
Compensation Committee which recommends to the Board, among other things, those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of Common Stock that
may be purchased under each option, and the option exercise price. Currently
Messrs. Brody, Smallacombe and Jarrett serve on the Compensation Committee. As
of December 31, 1995, options to purchase an aggregate of 502,880 shares of
Common Stock have been granted and remain outstanding under the 1992 Plan. As
of December 31, 1996, options to purchase an aggregate of 320,300 shares of
Common Stock have been granted and remain outstanding under the 1992 Plan. To
date, 24,000 options granted under the 1992 Plan have been exercised.
The Company adopted the 1994 Plan to promote the interests of the
Company and its stockholders by increasing the proprietary and vested interests
of non-employee directors in the growth and performance of the Company by
granting such directors options to purchase shares of Common Stock of the
Company. Options are non-qualified. Non-qualfied may be granted only to
directors who are non-employees of the Company. Each eligible director, as of
June 7, 1994 and June 7, 1995, was granted an option to purchase 7,500 and 2,500
shares, respectively, pursuant to the Plan. A total of 150,000 shares of Common
Stock are authorized and have been reserved for issuance under the 1994 Plan.
The 1994 Plan is also administered by the Compensation Committee as described
above. As of December 31, 1995 and 1996, options to purchase an aggregate of
37,500 and 87,500 shares of Common Stock, respectively, have been granted and
remain outstanding under the 1994 Plan. To date no stock options under the 1994
Plan have been exercised.
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Change in Control Provisions
The merger agreement between Northstar and Keystone Rehabilitation
Systems provides that in the event of a "change in control" of Northstar during
December 31, 1996 through and including the fiscal year ending December 31,
2000, all contingent payments for each remaining fiscal year shall immediately
and fully vest and be payable by Northstar to Thomas Zaucha, Alice Zaucha, and
the Zaucha Family Limited Partnership ("the Zaucha Shareholders") within 90 days
of the change in control. Contingent payments shall mean for each fiscal year
during the above described time period if the EBITA of Keystone exceeds
$2,500,000, Northstar shall pay to the Zaucha Shareholders a sum equal to
$1,600,000 divided by such Shareholder's percentage ownership interest in
Keystone. In general a "change in control" is deemed to have occurred if (i)
there is a sale of all or substantially all of the assets of Northstar or
Keystone or (ii) the sale and transfer of 50% or more of the outstanding capital
stock of Northstar or Keystone in one or a series of related transactions.
Item 6: Selected Financial Data
- ----------------------------------
The information set forth below is provided only for the years ended
December 31, 1996 and 1995 because the Company and its independent public
accountants cannot provide such information for any prior years with the
requisite level of accuracy due to prior mismanagement and the resultant
resignation of its previous auditors.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets $ 9,446,000 $ 14,603,000
Intangible Assets (Net) $ 21,132,000 $ 23,947,000
Total Assets $ 34,542,000 $ 43,355,000
Current Liabilities $ 26,265,000 $ 26,584,000
Total Liabilities $ 31,350,000 $ 32,988,000
Total Stockholders' Equity $ 3,192,000 $ 10,367,000
Net Patient Service Revenue $ 35,176,000 $ 15,424,000
Gross Profit $ 16,220,000 $ 4,784,000
Operating Loss ($5,956,000) ($11,962,000)
Non-Operating Expenses $ 2,226,000 $ 1,041,000
Extraordinary Loss $ 0 ($ 274,000)
Net Loss ($ 8,947,000) ($ 13,101,000)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
Net Loss Per Share ($1.44) ($3.28)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations
- ---------------------
Forward-Looking Statements
In addition to other sections of this report, the Management's
Discussion and Analysis section also contains the type of forward-looking
statements discussed on page 2 herein.
The information presented in this Management's Discussion and Analysis
is of a summary nature; please refer to the Financial Statements, including
notes, which are included in this report.
EXECUTIVE SUMMARY
Current management prepared a comprehensive Business Plan that was
presented to the Company's senior lender, IBJ Schroder Bank and Trust ("IBJ")
and its primary subordinated creditor (Thomas Zaucha) in early December, 1996.
This plan outlines specific strategic tasks and goals which will enable the
Company to improve its cash flow as well as operating results. The plan,
portions of which are summarized below, is based on projections, goals and
anticipated results, all of which are the type of forward-looking statement
discussed on page 2 herein, and are subject to the contingencies discussed both
in this section and on page 2. No assurances can be given as to the probability
of or the actual implementation of any part of this plan.
This plan addresses the critical issues of debt restructuring with
both IBJ and Mr. Zaucha. Some highlights of this plan include:
. Overhead reductions in 1997 of approximately $700,000, in addition to the
$1,500,000 overhead cost reduction that was implemented in mid 1996.
. Restructure of the Company into four operating subsidiaries. This will allow
significant revenue and operating income growth in the emerging areas of
sub-acute care and medical diagnostics in addition to outpatient
rehabilitation clinics and patient care facilities.
. The plan calls for restructuring the IBJ debt on mutually agreeable terms as
well as conversion of Mr. Zaucha's debt to equity on mutually agreeable
terms.
The Company has had conversations with a major stock exchange about
getting its common stock relisted by the end of 1997. This past year has been
very traumatic for Northstar. The investigation into malfeasance of past
officers was made necessary by current management's discovery of such
malfeasance and the resignation of our auditors. It has been a very necessary
and expensive undertaking, but it has served and continues to serve as the
platform to support litigation against prior management and the people with whom
they dealt.
As outlined in detail in the liquidity and capital resources section,
the Company funded approximately $1,700,000 of non-recurring legal, professional
and other expenses through its operating cash flow. The Company still had cash
flow from operations of $2,481,000 after consideration of the above expenses.
This exhibits the strength of the Company's core operations and their ability to
produce consistent cash flow which
22
<PAGE>
will aid the Company in its restructuring efforts. This cash flow from
operations was also a result of the Company's efforts to extend payment terms to
some of its professional advisors and certain trade creditors.
The Company posted an operating loss for 1996 of $5,956,000 compared
to $11,962,000 during 1995. Exclusive of the non-recurring items discussed
above, write-offs of intangible assets and write-offs of notes receivable, the
Company's operating loss during 1996 would have been $987,000 down from
$5,085,000 in 1995. This marked improvement is indicative of the strength of
the businesses which were acquired during late 1995, for which a full year of
results was not included in 1995, as well as cost reductions and strategies
implemented by current management.
The Company was able to finance its operations and non-recurring
expenses without significantly increasing its debt load. Current management of
the Company strongly believes, although it cannot guarantee, that in 1997, cash
flow and net operating results will be improved through additional cost
reductions and revenue enhancements. Management believes that these
improvements will enable the Company to enhance its core operations, begin to
restructure its debt, and increase shareholder value.
RESULTS OF OPERATIONS
In addition to other sections of this report, this Management's
Discussion and Analysis section contains the type of forward-looking statements
discussed on page 2 herein. Please refer to such discussion in connection with
the information presented here.
Net Revenues
- ------------
In 1996, the Company's net patient service revenues increased to
$35,176,000 from $15,424,000 in 1995 with $23,090,000 of the increase being
generated by acquired companies, primarily Keystone Rehabilitation Systems, for
which a full year's operations are included in 1996 compared to 45 days in 1995.
Excluding acquisitions, net revenues declined by $3,338,000 reflecting extensive
reorganization and resulting in the closure or termination of unprofitable
clinics and contracts. Management expects, but cannot guarantee, revenue growth
during 1997 due to the addition of new business units, including a new sub-acute
care business and an expanding presence in the diagnostics medicine arena.
Costs of Service
- ----------------
The Company's costs of service increased to $18,956,000 in 1996
compared to $10,640,000 in 1995. Of the increase, $10,714,000 arose from
acquired companies, with the remainder of the group declining by $2,398,000. As
the increase in total cost was proportionately less than the increase in net
revenues, gross profit in 1996 rose by $11,436,000 to $16,220,000 in 1996 (46%
of revenue) compared to $4,784,000 in 1995 (31% of revenue). Acquired companies
accounted for $12,376,000 of the increase in gross profit and the operations
that existed prior to the acquisition declined by $940,000.
SG&A Expenses
- -------------
Total selling, general and administrative expenses increased to
$13,129,000 compared to $6,202,000. As of percentage of net revenue, SG&A fell
from 40% to 37% . This decrease as reflected in the percentage of net revenue
represents increased efficiencies due to the merger and consolidation of the
corporate office functions.
Restructuring and Non Recurring Expenses
- ----------------------------------------
During 1995, non-recurring expenses included $3,827,000 for numerous
expenses including: a write-down
23
<PAGE>
of intangible assets that represented costs where no deemed value existed, non-
cash compensation recorded and corporate reorganization costs. In 1996, the
Company incurred significant, non-recurring expenses related to investigation of
the actions of prior management, legal costs associated with both a defense of
shareholders litigation and a plaintiff suit filed against former management,
and additional asset write-offs. A summary of these non-recurring expenses
during 1995 and 1996 follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Legal and accounting fees $ 629,000 $ -
Litigation costs 565,000 -
Loss on notes receivable collateralized with common stock 1,772,000 -
Write off of intangible assets 960,000 3,421,000
Corporate restructuring costs 292,000 406,000
Professional fees related to investigation 751,000 -
---------- ----------
Total $4,969,000 $3,827,000
========== ==========
</TABLE>
Though the Company will continue to defend the litigation in which it is
currently a party, the Company anticipates that the legal and other professional
fees for these matters will be significantly lower than during 1996. In
addition, the Company believes that the other non-recurring items outlined above
were also one-time charges which it has recorded in order to properly reflect
its financial position as of December 31, 1996.
The Company will incur legal and other professional expenses related to the
proxy solicitation filed by the Company's former Chief Executive Officer. As of
the date of this document, the Company is uncertain as to the aggregate amount
of such expenses.
Bad Debt Expense
- ----------------
Other operating expenses of $1,820,000 and $2,301,000 were incurred for bad
debt provisions during 1996 and 1995, respectively. The 1995 provision was
higher than in previous years and above the industry average due to the Company
writing the historical Northstar and acquired Keystone patient accounts
receivable down to the net collectable amounts. During mid to late 1996, the
Company began to address certain operational difficulties in the billing area
and also began to aggressively pursue collection of its receivables. Thus,
although there can be no assurances, the 1996 provision for bad debt is still
higher than the level that management believes will be incurred in 1997. Thus
far in 1997, additional operational improvements have been made to the accounts
receivable department, including the recruitment of an experienced accounts
receivable manager. While the Company has reserved for approximately $3,300,000
of patient accounts receivable which are substantially in excess of one year
old as of December 31, 1996, vigorous collection efforts are in process.
New Accounting Standards - Intangible Assets
- --------------------------------------------
In connection with the Company's early adoption in 1995 of under the
provisions of Financial Accounting Standards Board No. 121, the Company incurred
a charge of $3,050,000 as a result of impairment of goodwill and other
intangible assets. The Company performed a similar analysis as of December 31,
1996 and believes that the remaining intangible assets do not require any write
off as a result of further impairment.
24
<PAGE>
Depreciation and Amortization Expense
- -------------------------------------
Other operating costs include amortization of intangibles, depreciation and
other deferred charges totalling $2,258,000 in 1996, an increase of $892,000
over 1995, due primarily to the impact of amortization of intangible assets
recorded in conjunction with the Keystone acquisition in November 1995.
Interest Expense
- ----------------
Interest expense of $2,130,000 for 1996 represented an increase of $1,297,000
over 1995, most of which was attributable to increased borrowing costs arising
from debt used to finance acquisitions.
Extraordinary Loss and Income Taxes
- -----------------------------------
The extraordinary loss of $274,000 for 1995 arose from write-offs of deferred
financing costs for the early extinguishment of debt during that year. The
income tax credit of $236,000 for 1995 was primarily due to refunds arising from
carry-backs. The Company recorded a tax liability of $471,000 for 1996 due to
state income and franchise taxes on some of its profitable subsidiaries.
Summary
- -------
In summary, the operating loss for 1996 and 1995 included the following
charges of an unusual nature:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating loss $(5,956,000) $(11,962,000)
Non recurring expenses 4,969,000 3,827,000
Impairment of long lived assets - 3,050,000
Operating loss prior to unusual charges $ (987,000) $ (5,085,000)
</TABLE>
After taking into account the non-recurring nature of many of the Company's
expenses, the Company's operating loss has been reduced by over $4 million in
1996.
LIQUIDITY AND CAPITAL RESOURCES
In addition to other sections of this report, this Management's Discussion and
Analysis section contains the type of forward-looking statements discussed on
page 2 herein. Please refer to such discussion in connection with the
information presented here.
Overview
- --------
The cash flow impact of the costs of the investigation, the lawsuits initiated
by and against Northstar, and much higher than normal audit and legal fees, was
adverse for the Company in the year ended December 31, 1996. In addition, a
reorganization of the Company resulted in a sharp increase in payment of
professional fees for consulting, accounting and legal services. Total costs
for all of these expenses amounted to approximately $2,237,000 during the year
ended in 1996. The Company was able to finance approximately $1,700,000 of
these expenses through its current cash flow.
Cash flow generated from operations was $2,481,000 for the year 1996, despite
the outlays for the
25
<PAGE>
legal investigation, the lawsuits and the reorganization of the Company,
compared to a use of cash of $4,781,000 in 1995. The improvement arose from a
sharply reduced net loss of $4,154,000 as well as through the introduction of
extended payment terms to many of the Company's professional advisors and some
trade creditors.
The change in working capital accounts during 1996 generated $2,561,000 in
cash compared to a net increase of only $395,000 in the previous year.
Receivables and other current assets declined by $786,000 and current
liabilities increased by $3,347,000 during 1996. An extension of payment terms
resulted in accounts payable increasing from $456,000 to $2,048,000 during 1996.
Also during 1996, accrued expenses increased from $3,568,000 to $5,323,000.
Investing activities used $349,000 in 1996, most of which was used to purchase
new equipment. This compares to an outlay of $14,859,000 in 1995, which largely
reflected the payments made in conjunction with the acquisitions of Keystone and
PVL.
Financing activities in 1996 used cash totaling $5,860,000 during the year
compared to a 1995 inflow of $25,683,000. During 1996, the Company repaid
$6,666,000 in debt, of which $5,100,000 was paid to the sellers of Keystone (Mr.
Zaucha and entities controlled by him), and another $333,000 was paid to IBJ.
The remainder of the cash outflow represented primarily repayment of capital
leases and a line of credit for a joint venture. The Company added $716,000
in new borrowings during 1996, $400,000 from the IBJ line of credit facility and
the remainder mostly from new capital lease obligations and a line of credit for
a joint venture.
At December 31, 1996, the Company held $1,607,000 in general operating funds
representing an increase of $977,000 from 1995 year-end general operating funds
balance of $630,000. Total cash and equivalents of $5,730,000 for December 31,
1995 included a $5,100,000 deposit in a cash collateral account which was
reserved to pay the shareholders of Keystone on January 3, 1996.
The company has no material commitments for capital expenditures in 1997.
Historical Overview of Capitalization and Liquidity
- ---------------------------------------------------
The Company has historically financed its operations and its mergers and
acquisitions primarily from sales of common stock through both private and
public equity offerings, borrowings under bank credit facilities, loans from
related parties, directors, officers and stockholders, and cash flow from
operations.
During 1995 and 1996, the Company raised additional funds for acquisitions and
capital expenditures through a public stock offering in May 1995, a bridge
financing in August 1995 and a three-tiered credit facility arranged with IBJ
Schroder Bank & Trust. The details of these sources of capital are outlined
below.
Stock Offering
--------------
On May 18, 1995, the Securities and Exchange Commission (the "Commission")
declared effective a registration statement for the offer and sale of 1,750,000
shares of Common Stock. The Public Offering was closed on May 26, 1995. On
June 8 and June 15, 1995, the underwriters of the Public Offering exercised
their over-allotment option to purchase an aggregate of 262,500 shares of Common
Stock. The net proceeds of approximately $10,700,000 from the Public Offering
and the exercise of the over-allotment option were used to repay certain of the
Company's short-term indebtedness, including the Company's former bank line of
credit
26
<PAGE>
of $2,000,000; $1,000,000 to satisfy an obligation under a seller note;
$1,825,000 of the net proceeds to pay other current obligations, including
certain expenses of the Company's Public Offering, and the remainder to
partially finance the Keystone acquisition as well as to satisfy general working
capital requirements.
Bridge Loan
-----------
On August 30, 1995, the Company closed on a credit facility from a local bank
totaling $6,500,000, consisting of a $4,500,000 term loan and a $2,000,000
revolving line of credit. The term loan had a maturity date of 60 months from
closing. The proceeds of the term loan were used to consolidate the Company's
existing loan obligations with Med-Bill and certain sellers of acquired
companies. The facility was repaid in full on October 20, 1995. The Company
repaid the $4,500,000 term note in the favor of Med-Bill. The Company does not
know the actual source of the funds for the $4,500,000 loan from Med-Bill;
however, when it was repaid to Med-Bill, Med-Bill re-distributed at least
$3,000,000 to Mr. DeSimone. Related party interest expense was approximately
$235,000 during 1995. Med-Bill distributed most, if not all, of the interest,
to Mr. DeSimone.
The proceeds of the revolving credit facility provided working capital as
needed. In addition, the President and Chief Executive Officer of the
Company, Mark A. DeSimone, personally guaranteed the loan, receiving a 5%
guarantee fee totaling $325,000 (See, "Certain Relationships and Related
Transactions").
IBJ Schroder Credit Facility
----------------------------
On October 20, 1995, the Company closed on a $16,000,000 credit facility with
IBJ. The facility consisted of:
. $6,500,000 term loan to refinance existing operations;
. $3,000,000 revolving line of credit to fund operations; and
. $6,500,000 acquisition facility to fund the Company's existing and future
acquisition activity.
The total facility has a final maturity of five years from closing. The
term loan was funded in full at closing and was used to repay the aforementioned
bank credit facility.
As of December 31, 1995, and 1996, the Company was not in compliance with
certain covenants within the credit agreement between the Company and IBJ. As
such, the Company is in default with the IBJ facility; however, as of December
31, 1996, the Company, through current management's continued communication with
IBJ, had succeeded in staying any formal action by IBJ in connection with such
default.
As of December 31, 1995, the term loan portion of this facility had been
drawn in full, the revolving line of credit had $1,400,000 available, $6,000,000
of the acquisition facility had been used, and the remaining $500,000 has been
terminated by the bank.
Payments for the acquisitions totaled $30,899,000, which consisted of
$15,200,000 in cash, $7,958,000 in notes from sellers and $7,741,000 in issuance
of the Company's common stock. Of the $15,200,000 paid in cash for the
acquisitions during 1995, $3,500,000 in acquisition loans from IBJ were used to
partially finance the merger with Keystone on November 15, 1995. Another
$2,150,000 from the same source were used to finance the November 28, 1995
purchase from Penn Vascular Labs, P.C. of certain assets and the stock of
Vascusonics, Inc. Other sources of cash payments for acquisitions came from the
Company's
27
<PAGE>
initial public offering and a private placement, both of which occurred in 1993,
and a public offering in May of 1995, which generated proceeds of $3,400,000,
$1,800,000 and $10,697,000 respectively.
Merger with Keystone Rehabilitation
-----------------------------------
On November 15, 1995, the Company completed a merger with Keystone
Rehabilitation Systems, Inc. Prior to the merger, Keystone was the largest
privately held rehabilitation company in Pennsylvania, with approximately
$21,000,000 in net revenues during 1994. The merger added approximately 50
outpatient clinics to the Company's operations;
As consideration for the merger, the shareholders of Keystone, Thomas W.
and Alice L. Zaucha and the Zaucha Family Limited Partnership (collectively, the
"Zaucha Shareholders"), received the following:
. $2,500,000 in cash;
. time note due January 3, 1996 in the aggregate principal amount of
$5,100,000;
. five-year, interest-free term note in the aggregate principal amount of
$2,625,000;
. agreement by the Company to issue on January 3, 1996, a three-year 6% term
note in the aggregate principal amount of $2,400,000 (the "three year note");
and
. agreement by the Company to issue to the Zaucha Shareholders on January 3,
1996, an aggregate of 944,352 shares of Northstar common stock, which were
guaranteed a value to be at least $5,600,000 through certain periods ending
no later than December 31, 1997.
The Company also agreed to make additional "earn-out" payments to the
Zaucha Shareholders of $1,600,000 per year in the event that Keystone's "EBITA"
exceeds $2,500,000 in any year from 1996 to 2000, inclusive. Detailed
provisions of the earn out calculations are outlined in Note 3 to the Financial
Statements.
At the merger date, the Company paid $2,500,000 in cash to the Zaucha
Shareholders and deposited $5,100,000 in a cash collateral account with a bank
to support a letter of credit securing the Company's obligation to pay the
Zaucha Shareholders $5,100,000 on January 3, 1996. The Company borrowed
$3,500,000 of such amounts under the $6,500,000 acquisition line portion of its
existing $16,000,000 credit facility with IBJ. The remainder of the funds
required were provided from working capital.
Acquisition of Penn Vascular Labs, P.C.
---------------------------------------
On November 28, 1995, the Company acquired from Penn Vascular Labs, P.C.
("PVL") certain assets as well as the stock of Vascusonics. As consideration
for the above-mentioned items, the Company:
. paid $50,000 to the seller upon consummation of the agreement;
. loaned $2,150,000 to the seller in exchange for a note;
. provided the seller with 362,564 shares of Northstar common stock with a
fair market value equivalent of $2,150,000 on the acquisition date;
. promised to pay $100,000 to the seller in twelve equal non-interest bearing
installment payments beginning in December 1996; and
. promised to pay certain contingent payments to the seller as outlined in
the notes to the financial statements.
Additionally, in exchange for the loan and the common stock, the seller
agreed to pay back to Northstar
28
<PAGE>
the lesser of $2,150,000 or the proceeds from the sale of the common stock,
whichever was less. In December 1996, the Company foreclosed on this stock and
currently accounts for these shares as treasury stock. The foreclosure also
resulted in a one-time, non-cash expense of $1,697,000 equal to the decline in
collateral value.
The Company borrowed $2,500,000 under the $6,000,000 acquisition portion of
its existing $16,000,000 credit facility with IBJ. These borrowings financed
the $2,150,000 promissory note to the seller and a $350,000 brokerage fee to Mr.
James P. Shields.
The Company's funding under various joint venture arrangements with C. F.
Services, Inc. (the "C. F. Services Joint Venture") and with CDL Medical
Technologies, Inc. (the "CDL Joint Venture") to provide mobile diagnostic
testing services, has taken the form of approximately $200,000 in working
capital loans and $1,091,000 in equipment purchases through capital leasing.
Effective June 1, 1995, the Company transferred certain interests in the C. F.
Services Joint Venture in exchange for repayment of moneys invested ($70,000)
and the release of all liabilities. The remaining joint ventures are cash flow
positive and are currently operating profitably.
Effect of Recently Issued Accounting Standards
Financial Accounting Standard Board Statement No. 128, Earnings Per Share
(SFAS No. 128) was issued in February 1997 and is effective for fiscal years
beginning after December 15, 1997. This statement, upon adoption, will require
all prior-period earnings per share (EPS) data to be restated, to conform to the
provisions of the statement. This statements objective is to simplify the
computation of EPS and to make the U.S. standard for EPS computations more
compatible with that of the International Accounting Standards Committee. The
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
Financial Accounting Standard Board Statement No. 129, Disclosure of
Information about Capital Structure (SFAS No. 129) was issued in February 1997
and is effective for period ending after December 15, 1997. This statement, upon
adoption, will require all companies to provide specific disclosure regarding
the entities capital structure. SFAS No. 129 will specify the disclosures, for
all companies, including descriptions of the securities comprising the capital
structure and the contractual rights of the holders such securities. The Company
will adopt SFAS No. 129 in fiscal 1997 and does not anticipate that the
statement will have a significant impact on its disclosure.
Item 8: Financial Statements and Supplementary Data
- -------------------------------------------------------
The Company's financial statements appear on pages 1 through 38 of this
report.
Item 9: Changes in and Disagreements with Accountants on Accounting and
- ---------------------------------------------------------------------------
Financial Disclosure
- --------------------
In March 1996, the Company's auditors, KPMG Peat Marwick ("KPMG"), who had
been appointed in late 1995, resigned prior to completing their audit of the
Company. As a result, the Company's Form 10-K for the year ended December 31,
1995 was not filed timely. The Company retained Arthur Andersen LLP as its
auditors, and Arthur Andersen completed the audit of the Company for the years
ended December 31, 1996 and 1995 (See Note 1 to the Financial Statements).
Item 10: Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Director Since Position
- ------------------------- --- -------------- --------------------------
<S> <C> <C> <C>
Steven N . Brody 52 December 1995 Chairman of the Board
Charles B. Jarrett, Jr. 69 November 1996 Director
John Lombardi 31 N/A Executive Vice President
Chief Financial Officer
Hon. Timothy L. Pesci 52 January 1997 Director
Robert J. Smallacombe 61 May 1996 Chief Executive Officer
and Director
David D. Watson 42 May 1996 President, Chief Operating
Officer and Director
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Thomas W. Zaucha 51 November 1995 Director
</TABLE>
As of the date of this document, the officers and directors of the Company are
as follows:
STEVEN N. BRODY, age 52, has been a Director since December 1995 and Chairman of
the Board since February 1997. His term as a Director of the Company is for
1995-1997. He will stand for election at the next annual meeting in order for
the shareholders to approve his directorship. He is the founder and principal
consultant of Steven N. Brody Associates, an independent management consulting
firm. He has assisted dozens of companies with development opportunities,
market and product plans and strategies, expansion and corporate development
programs, financial and organization strategies and operational
performance/profit improvement. Prior to establishing his consulting practice
in the late 1970s, Mr. Brody held senior management positions in strategic
planning, marketing, and corporate development with the Standard and Poor's
Corporation and Dun & Bradstreet Group. He is a graduate of Yale University
(B.A. 1966) and in 1970 he received his M.B.A. from Columbia University's
Graduate School of Business. He has been or is a member of the National
Association of Corporate Directors, the Pittsburgh High Technology Council and
the Central Pennsylvania Venture Investment Forum. His business address is that
of the Company.
CHARLES B. JARRETT, JR., age 69, has been a Director since November 1996. His
term as a Director of the Company is for 1996-1998. He will stand for election
at the next annual meeting in order for the shareholders to approve his
directorship. He is a practicing attorney and member of Plowman, Spiegel and
Lewis, P.C., a law firm in Pittsburgh, Pennsylvania. Mr. Jarrett's practice
focuses on corporate, banking, securities and commercial law. Prior to joining
Plowman, Spiegel, Mr. Jarrett served as Senior Vice-President and General
Counsel of Mellon Bank, N.A. and Vice-President, General Counsel and Secretary
of its parent company, Mellon National Corporation. At Mellon Bank, Mr. Jarrett
was responsible for Mellon Bank's compliance with the rules and regulations of
the Federal Reserve Board, the Comptroller of the Currency and the Securities
and Exchange Commission. Mr. Jarrett has also served as Assistant Corporate
Secretary of Gulf Oil Corporation where he was responsible for compliance with
securities laws; proxy and other shareholder matters; legal issues of corporate
financing; employee benefit plans; and general corporate affairs. His business
address is Plowman, Spiegel & Lewis P.C., 310 Grant Street, Pittsburgh, PA
15219-2204.
JOHN A. LOMBARDI, CPA, age 31, is the Executive Vice President and Chief
Financial Officer of the Company since September 1996; he is intimately involved
in the overall debt restructuring, bank negotiations and restructuring of the
operations of the Company. Prior to joining Northstar, Mr. Lombardi was
promoted through the ranks of Arthur Andersen from staff auditor to senior
manager in the firm's audit and business advisory services practice. Mr.
Lombardi has provided troubled company consulting services to publicly-held and
privately-owned businesses ranging from $5 million to $1 billion in revenues in
the distribution, healthcare, construction, manufacturing, real estate and
retail industries. He is a Certified Insolvency and Reorganization Accountant,
a Certified Fraud Examiner and a member of the American and Pennsylvania
Institutes of Certified Public Accountants and the Turnaround Management
Association. His business address is that of the Company.
HON. TIMOTHY L. PESCI, age 52, has been a Director of the Company since January,
1997. His term as a Director of the Company is for 1997-1999. He will stand
for election at the next annual meeting in order for the shareholders to approve
his directorship. He is a current member of the Pennsylvania House of
Representatives reelected to consecutive two year terms since May 1989,
representing Indiana and Armstrong counties. Prior to election as a State
Representative, Mr. Pesci served as Armstrong County Controller from
30
<PAGE>
1976 to 1989 while actively involved in numerous local public service
organizations. His extensive experience in the public sector assists the
Company in the areas of compliance and regulatory affairs as well as in
understanding various healthcare payer markets from a regulatory perspective.
His business address is Heritage Square; Suite #4, 170 Lincoln Street,
Vandergrift, PA 15690.
ROBERT J. SMALLACOMBE, age 61, has been a Director of the Company since May 1996
and Chief Executive Officer of the Company, since February 1997. His term as a
Director of the Company is for 1996-1998. He will stand for election at the
next annual meeting in order for the shareholders to approve his directorship.
Mr. Smallacombe is an independent consultant specializing in crisis management
and the reorganization and rejuvenation of failing companies and the growth of
new or stalled companies. He has served as President and/or Chief Executive
Officer of eight companies, successfully increasing their profitability and
upgrading their management. He is experienced at negotiating out of troubled
banking relationships as well as with customers, labor and suppliers. Most
recently, he served as President of O'Brien Environmental and President and
founder of Executive Advisory Group LTD. He received a Bachelor of Science
degree from New York State University and served in the U.S. Marines from 1951 -
1953. Currently, he is a member of the American Institute of Industrial
Engineers, World President Organization, and Philadelphia Presidents
Organization. His business address is that of the Company.
DAVID D. WATSON, M.S., P.T., E.C.S., age 42, has been a Director of the Company
since May 1996 and President of Northstar Health Services, since November 1995.
His term as a Director of the Company is for 1996-1998. He will stand for
election at the next annual meeting in order for the shareholders to approve his
directorship. Mr. Watson has over twenty (20) years of experience in healthcare
and physical therapy. Prior to the Northstar merger with Keystone
Rehabilitation Systems, Mr. Watson was the Chief Operating Officer and Executive
Vice President of Keystone. During Mr. Watson's employment with Keystone, he
served as Facility Director, District Director, and Vice-President, where he was
responsible for the management of 25 outpatient rehabilitation offices, 18
contracts and 4 hospitals. He is a graduate of the University of California and
Duke University where he received his Masters degree in Physical Therapy. His
business address is that of the Company.
THOMAS W. ZAUCHA, age 51, has been a Director of the Company since November
1995. As part of the November 15, 1995 acquisition of Keystone Rehabilitation
Systems, Mr. Zaucha, the founder and Chairman of Keystone became the Chairman of
the Board and Chief Executive Officer of the Company until his removal for cause
in February 1997.
Item 11: Executive Compensation
- -------------------------------
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company for the fiscal
years ended December 31, 1996, 1995 and 1994, for those persons who were, at
December 31, 1996 (i) the Chief Executive Officer, and (ii) the other most
highly compensated executive officers of the Company whose remuneration exceeded
$100,000 (the "Named Executives").
31
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(1)Long Term
Annual Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) (2) Awards (2)All
Principal Other ------ Other
Position ($) Securities Compen-
Underlying sation
Warrants
(#)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Zaucha, 1996 $150,000 $ 0 $125,000 -0- $300
Chairman and
CEO (3) 1995 $ 17,308 $ 0 $ 0 -0- $300
1994 N/A N/A N/A N/A N/A
David D. Watson, President and COO (4) 1996 $ 75,000 $ 0 $ 75,000 -0- $300
1995 $ 6,635 $ 0 $ 0 50,000 $300
1994 N/A N/A N/A N/A N/A
John A. Lombardi, 1996 $ 30,156 $ 0 $ 0 -0- $ 0
Executive V.P., CFO and Treasurer
(5) 1995 N/A N/A N/A N/A N/A
1994 N/A N/A N/A N/A N/A
Ralph C. Sweithelm, President Keystone 1996 $ 85,531 $182,538 $ 0 -0- $300
Rehabilitation Systems (6)
1995 $ 6,338 $ 8,957 $ 0 -0- $300
1994 N/A N/A N/A N/A N/A
====================================================================================================================================
</TABLE>
(1) The Company has a 401(k) plan which is being merged with the Keystone 401(k)
plan. The plans call for certain matching contributions by the employer
equal to 50% of the participants contribution up to a maximum employer
contribution of $300 per year. The plan also calls for discretionary
employer contributions, none of which were made after the November, 1995
merger of Northstar and Keystone.
(2) During the year ended December 31, 1996, the Named Executives received
medical benefits under the Company's group insurance policy, including
disability and life insurance benefits which are equivalent to such benefits
paid to all other full-time employees. The aggregate amount of all
perquisite compensation was less than 10% of the total annual salary and
bonus reported for each Named Executive with the exception of Mr. Zaucha,
who received $14,400 in lease payments for his Mercedes Benz in addition to
his other benefits.
32
<PAGE>
(3) During 1996, Mr. Zaucha received cash compensation in the amount of
$275,000. That amount is comprised of $150,000 in salary and $125,000 in
deferred compensation which was a provision of the November 1995 merger
between Northstar and Keystone negotiated by Mr. Zaucha and Mark DeSimone.
During 1995, Mr. Zaucha received compensation in the form of $150,000 in
annual compensation, $125,000 pursuant to his employment contract, which is
summarized herein. Zaucha also receives funds from the Company in the form
of lease payments, deferred compensation and other related-party
transactions which relate to the merger of Keystone and Northstar (See,
"Certain Relationships and Related Transactions"). Lease payments to Zaucha
for 1996 and 1995 were $470,364 and $59,000, respectively. In conjunction
with the merger with Keystone, the Company makes earn out payments to
Zaucha, Alice Zaucha and the Zaucha Family Limited Partnership discussed in
Note 3 to the financial statements. The Company also paid $86,320 in 1996
and $9,156 in 1995 to Impulse Development Corporation, a company controlled
by Zaucha for maintenance and housekeeping services.
(4) David Watson holds a note payable from Northstar resulting from the November
1995 merger which pays him an additional $75,000 annually.
(5) Mr. Lombardi was hired by the Company in September 1996 pursuant to an
employment contract which is summarized herein. His annual salary pursuant
to such contract is $112,000.
(6) Because Mr. Sweithelm is the president of the Company's largest revenue-
generating subsidiary, he performs policy-making functions for Northstar and
is included as a Named Executive.
Option/SAR Grants in Last Fiscal Year
No options or stock appreciation rights were granted to any Named Executive
during 1996.
Option/SAR Grants During Fiscal 1995
The following table sets forth the option grants to the Named Executive set
forth below. This table is included because, due to problems discussed
elsewhere, the Company did not file its Form 10-K for the Fiscal Year ended
December 31, 1995.
There were no option or SAR grants to any Named Executive during the Fiscal
Year Ended December 31, 1996. However, the Company is contractually obligated
to issue certain options (See, Note 13 to the financial statements.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR
OPTION TERM (3)
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/ SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year (1) ($/Sh) Date 5% ($) 10% ($) 0% ($)
- ------------------------------------------------------------------------------------------------------------------------==========
<S> <C> <C> <C> <C> <C> <C> <C>
David D. Watson, President 50,000 12.6% $5.50 11/16/05 $174,500 $440,000 ($2,000)
and COO (2)
==================================================================================================================================
</TABLE>
__________________________________________
33
<PAGE>
(1) For purposes of calculating this percentage, the total number of options
granted during 1995 was 395,287.
(2) The options were granted for a term of ten years; however, in the event that
the Named Executive's employment is terminated earlier, the options will
expire three months after the Named Executive's termination.
(3) Potential realizable values reflect the difference between the option
exercise price and the fair value of the Company's common stock price from
the date of the grant until the expiration of the option. The 5% and 10%
appreciation rates, compounded annually, are assumed pursuant to the rules
promulgated by the SEC and do not reflect actual historical or projected
rates of appreciation of the common stock. Assuming such appreciation, the
following illustrates the per share value on the dates set forth (the
expiration dates for the options), assuming the values set forth (the
closing bid price on the date of the extension as reported by NASDAQ):
STOCK PRICE ON EXPIRATION
DATE OF GRANT DATE 5% 10%
------------- ---- --- ----
11/16/95: $5.54 11/16/05 $9.03 $14.34
The foregoing values do not reflect appreciation actually realized by the
Named Executive (See, "Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Value" Table, Below).
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End ($)
at FY-End (#)
Name Shares Value Exercisable/ Exercisable/
Acquired Realize($) Unexerciseable (l) Unexercisable(2)
Exercise
(#)
=====================================================================================
<S> <C> <C> <C> <C>
David D. Watson 0 $0 50,000 (3) $N/A
=====================================================================================
- ------------------
</TABLE>
(1) All options held by the Named Executive are currently exercisable.
(2) Because the market price of the Company's common stock was $.9375 as of
December 31, 1996, the Named Executive's options were not In-the-Money
Options at fiscal year end.
(3) Includes options to purchase 50,000 shares of common stock at $5.50 per
share.
34
<PAGE>
Employment Agreements with Named Executives
The Company has employment contracts with its Named Executives Thomas W.
Zaucha, David D. Watson, John A. Lombardi, and Ralph C. Sweithelm.
Zaucha
Mr. Zaucha's contract with the Company is dated November 15, 1995 and has a
five-year term. Pursuant to the contract, Mr. Zaucha was to serve as the
Company's CEO with a base salary of $125,000. The contract contains
confidentiality and non-compete provisions. Mr. Zaucha also receives
compensation from the Company in other capacities outside of his role as its
CEO. On February 13, 1997, the Board removed Zaucha for cause from his office
as Chief Executive Officer.
Watson
Mr. Watson's contract with the Company is dated November 15, 1995 and has a
five-year term. Pursuant to the contract, Mr. Watson serves as the Company's
President with a base salary of $ 75,000. The contract contains confidentiality
and non-compete provisions.
Lombardi
Mr. Lombardi's contract with the Company is dated September 16, 1996 and
has a renewable one-year term. Pursuant to the contract, Mr. Lombardi serves as
the Company's Executive Vice President, Chief Financial Officer and Treasurer
with an annual salary of $112,000. The contract also entitles Mr. Lombardi to
options to purchase 25,000 shares of common stock at a price of $1.75 per share
(the prevailing market price) on the effective date of his employment contract,
and options to purchase 50,000 shares of common stock at a price of $2.00 per
share; however, such options are not exercisable until the Company's common
stock is listed and trades at a price in excess of $5.93 per share for a period
of ten consecutive trading days. None of the options have been issued as of the
date of this filing. The contract contains confidentiality provisions and a
non-compete clause.
Sweithelm
Mr. Sweithelm entered into an updated employment contract with the Company
in January, 1997. Pursuant to the contract, he serves as the president of
Northstar's subsidiary Keystone Rehabilitation Systems, Inc. The contract has a
five-year term, renewable for one-year terms and provides for an annual salary
of $85,531. In addition, Mr. Sweithelm is entitled to incentive compensation
based on Keystone's quarterly performance. The contract entitles Mr. Sweithelm
to options to purchase 50,000 shares of common stock; none of those options have
been issued as of the date of this filing. The contract contains
confidentiality provisions and a non-compete clause.
Director Compensation
Each Director who is not an employee of the Company receives a quarterly
retainer fee of $3,000, an attendance fee of $1000 for each meeting at which he
is present in person and $250 for each telephonic meeting. The meeting fees are
not paid to those directors with consulting contracts with the Company. Each
member of the Audit Committee receives an attendance fee of $500 for each
meeting at which he is present in person. In addition, Directors receive an
option to purchase 25,000 shares, at market value, for joining the board,
unless they own more than 10% of the outstanding common stock. Those
35
<PAGE>
directors with consulting contracts do not receive compensation for the
committee meetings.
During 1996, Messrs. Brody and Smallacombe were compensated as consultants
to the Company. A summary of their consulting contracts is set forth below.
Brody
Mr. Brody's original consulting contract with the Company was dated January
1, 1996 for a term of one year, renewable month by month thereafter. Pursuant
to the contract, Brody would provide to Northstar services related to strategic
planning and growth management. For performance of these services Brody was
paid a monthly retainer fee of $3,000 plus expenses and an overage fee of $150
per hour for time in excess of 20 hours per month. This contract was suspended
on March 19, 1996 when Brody began heading-up the Investigative Committee.
On April 5, 1996, Brody entered into a contract with the Company whereby he
would perform all of the duties from the January 1, 1996 contract as well as
additional investor relations responsibilities, search activities for new
directors, negotiations with lenders and interfaces with investment bankers,
related to his position as head of the Investigative Committee. This contract
calls for Brody to be compensated at the rate of $150 per hour plus expenses for
the services rendered. In the event that Brody is engaged in services for
Northstar in excess of 60 hour per month, the excess hours are billed at a rate
of $250 per hour. The director services agreement also provided Brody with non-
qualified stock options ranging from 75,000 to 150,000 shares of common stock of
Northstar depending on his performance, exercisable at the lowest closing price
for Northstar common stock during the period March 19, 1996 and ending at the
formal termination of the investigation. To date, none of such options have
been issued. On the same date, Brody entered into another contract with the
Company whereby he would perform various services related to an investigation of
the former management of Northstar and its activities. This contract calls for
Brody to be compensated at the rate of $150 per hour plus expenses for the
services rendered. If Brody performs services in excess of 20 hours per month
regarding the above investigation, all hours in excess of 20 hours will be
billed to the Company at $250 per hour. Since July 1996 when the Interim Report
of the Investigative Committee was completed, no material billings have been
made on this contract.
Smallacombe
Mr. Smallacombe entered into a contract with the Company on August 18,
1996, whereby he agreed to provide consulting services related to crisis and
financial management and restructuring. This contract was extended in January
1997 for a period of eight months, concluding September 30, 1997. The Company
agreed to compensate Smallacombe $6,500 per week for those services. The
contract also provided an option to purchase up to 25,000 shares of common stock
at $2.00 per share and 100,000 in non-qualified stock options for those
services, exercisable when the Company's common stock is listed and trades in
excess of $5.93 for at least fifteen consecutive trading days. The contract was
renewed for an additional eight months effective January 20, 1997 and provided
an additional option to purchase 25,000 shares at $1.75 per share. To date, none
of such options have been issued. When Smallacombe was appointed CEO, this
consulting contract was transformed into an employment contract with the same
terms.
Item 12: Security Ownership and Certain Beneficial Ownership
- ------------------------------------------------------------
The following table sets forth the indicated information as of December 31,
1996 with respect to each person who is known by the Company to be the
beneficial owner of more than five percent (5%) of the outstanding common stock,
each director of the Company who owns common stock or options, and all directors
and executive officers of the Company as a group. The table excludes disclosure
of entities such as Cede & Co. and other companies which would reflect the
ownership of entities who hold stock on behalf of shareholders.
As of December 31, 1996, there were 5,867,154 shares of the Company's
common stock outstanding. The first column sets forth the total number of
shares of common stock which each named person or group has the right to
acquire, through the exercise of options, within sixty (60) days, plus common
stock currently owned. The third column sets forth the percentage of the total
number of shares of common stock outstanding as of December 31, 1996
36
<PAGE>
which would be owned by each named person or group upon the exercise of all of
the warrants held by such person or group together with common stock currently
owned, as set forth in the first column. Except as otherwise indicated, each
person has the sole power to vote and dispose of each of the shares listed in
the columns opposite his name.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership (2) Percent of Class
- -----------------------------------------------------------------------------------
<S> <C> <C>
Steven N. Brody 107,500 (3) 1.8%
36 Overlook Drive
Indiana, PA 15701
- -----------------------------------------------------------------------------------
Thomas Zaucha 949,958 (4) 16.2%
100 Lafayette Circle
Indiana, PA 15701
- -----------------------------------------------------------------------------------
David Watson 90,230 (5) 1.5%
202 Forest Ridge Road
Indiana, PA 15701
- -----------------------------------------------------------------------------------
All directors and executive officers 1,147,688 19.2%
as a group
- -----------------------------------------------------------------------------------
</TABLE>
________________________
(1) Includes ownership of all shares of common stock which each named person or
group has the right to acquire, through the exercise of options, within
sixty (60) days, together with the common stock currently owned.
(2) Represents total number of shares of common stock owned by each person,
which each named person or group has the right to acquire, through the
exercise of options within sixty (60) days, together with common stock
currently owned, as a percentage of the total number of shares of common
stock outstanding as of December 31, 1996. For computation purposes, the
total number of shares of common stock outstanding as of December 31, 1996
has been increased by the number of additional shares which would be
outstanding if the person or group owned the number of shares set forth.
(3) Includes 50,000 shares of common stock and currently exercisable options to
purchase 7,500 shares at $6.13 per share which expires at the earlier of 10
years or one year after termination and options to purchase 50,000 shares at
$5.25 with same features and terms.
(4) Includes 667,201 shares owned directly by Mr. Zaucha and his wife, Alice L.
Zaucha, as joint tenants, 207,757 shares are held by the Zaucha Family
Limited Partnership whose sole and general partners are currently Zaucha,
his spouse and their four children, and 75,000 shares which are held by
Zaucha as sole beneficial owner.
(5) Includes 40,230 shares of common stock and currently exercisable options to
purchase 50,000 shares at $5.50 per share which expires at the earlier of 10
years or one year after termination.
37
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -----------------------------------------------------------
The Company does not adopt or affirm any related party disclosures made in
prior public filings including financial statements. The transactions discussed
herein are based on current management's knowledge as of the date of this
document; however, management believes that other matters may come to their
attention during the various lawsuits and other actions as set forth in the
"Legal Proceedings" section herein, as well as those discussed in Notes 1, 20
and 21 to the Financial Statements. For more detailed financial information on
these matters see Note 12 to the Financial Statements.
Transactions Related to Zaucha
Keystone Acquisition
--------------------
In connection with the Keystone acquisition, Mr. Thomas Zaucha is a former
officer and current director of the Company, has debt and other amounts due
directly to him of $3,919,500 and $7,897,500 as of December 31, 1996 and
December 31, 1995, respectively. In addition, Mr. Zaucha's family limited
partnership is due $1,105,500 and $2,227,500 as of December 31, 1996 and 1995,
respectively.
As required under the Keystone Merger Agreement, immediately prior to the
merger, Keystone transferred to the Zaucha Family Limited Partnership, of which
Mr. Zaucha is a general partner, all of the real estate previously owned by
Keystone in return for a payment of $5,215,568. The parcels of such real estate
used in Keystone's business were then leased to Keystone. The current management
of the Company believes that the current leasing arrangements are in excess of
fair market value and continues its efforts to renegotiate the rental rates.
The leases are for a period of ten years, and commenced November 15, 1995.
Lease payments for 1996 and 1995 were $470,364 and $59,000, respectively.
Future minimum lease payments under these leases aggregate in excess of $4.6
million.
Impulse Development
-------------------
During 1995 and 1996, the Company also paid to Impulse Development
Corporation, a company controlled by Thomas Zaucha, invoices for maintenance and
improvements to Company sites. Current management discontinued its use of
Impulse when they determined that the invoices contained excessive mark-ups for
services. In addition, a family member of the Company's former Chief Financial
Officer was employed by Impulse Development Corporation.
DeSimone Related Transactions
Transactions Directly With Mr. Mark DeSimone
--------------------------------------------
During the year ended December 31, 1995, Mr. DeSimone paid the Company
$249,000 for expenses and interest which the Company had paid in previous years.
The Company repaid a loan of $162,000 to Mr. DeSimone on May 30, 1995 along with
8% per annum interest of $6,000.
As of July 18, 1995, the Company amended its employment agreement with Mr.
DeSimone in exchange for Mr. DeSimone entering into an extended non-compete
agreement, fixing his annual compensation and returning 250,000 Northstar common
stock options. In exchange, Mr. DeSimone received annual compensation and
benefits, 30,000 shares of Common Stock, a one-time bonus of $175,000 and the
38
<PAGE>
repayment of a personal loan to PNC Bank in the amount of $150,000. For each
year that Mr. DeSimone remained an employee of the Company, the Company agreed
to waive repayment by Mr. DeSimone of one-seventh of this loan.
In February 1996, Mr. DeSimone terminated his employment with the Company
but continued to work as a consultant to the Company. His employment contract
was changed to a consulting arrangement with similar terms underwhich the
Company paid him $47,000 during 1996. In March 1996, Mr. DeSimone resigned from
the Board of Directors and the Company terminated its relationship with him.
Mr. DeSimone personally guaranteed the Integra facility and received a 5%
guarantee fee totaling $325,000.
Prior to 1995, Mr. DeSimone sold his consulting business to the Company.
During 1995, Mr. DeSimone was a director and consultant of SMT Health Services,
Inc. received $75,000 for consulting services to SMT. Current management
believes that these and possibly other fees for consulting services should have
been remitted to the Company and is seeking to recover such fees.
Keystone Acquisition
--------------------
As part of the acquisition of Keystone, the Company paid $450,000 in cash
and issued 150,000 shares of common stock to Commercial Financial Corporation
(CFC), wholly-owned by Nichlaus P. Horoczko, a personal friend and business
associate of Mr. DeSimone. Current management believes that CFC is a related
party. The Company guaranteed CFC that it would be able to be sell such shares
of common stock for at least $937,500. The Company believes that these shares of
common stock were sold on February 12, 1996 for approximately $840,000. No
additional compensation has been requested by CFC for the shortfall in share
proceeds and in the opinion of current management, Mr. Horoczko did not perform
any services of value and therefore was not entitled to the common shares
discussed above or any additional compensation thereon.
Transactions with Med-Bill Corporation, Inc., Med Consulting and Med-
--------------------------------------------------------------------
Stat, Inc.
- ----------
Mr. James P. Shields, cousin of Mr. DeSimone, is an officer and sole owner
of Med-Bill. Mr. DeSimone and his current wife, Leslie M. DeSimone are believed
by current management to be the principal financial interests in Med-Bill, with
similar relationships to Med-Consulting and Med-Stat.
In 1994 the Company agreed to pay Med-Bill a financing fee of $250,000 at
the time of a loan. On May 29, 1995, the Company paid the final installment of
$150,000 toward the aforementioned financing fee.
In the first quarter of 1995, the Company loaned Med-Bill and Med
Consulting $41,000 and $25,000, respectively, pursuant to a demand note that
bears interest at the rate of 9% per annum. At December 31, 1995, these amounts
were deemed uncollectible and were written-off.
On July 1, 1995, the Company entered into a lease agreement with Med-Stat,
Inc. for two pieces of ultrasound equipment in the amount of $225,000 and paid a
deposit of $30,000. On August 31, 1995, the lease was bought-out by a reduction
in amounts due from Med-Bill of $167,500. Current management believes that the
equipment leased/purchased may have been used and may not have been acquired at
fair market value.
39
<PAGE>
White-Oak Diagnostics Systems (White Oak)
-----------------------------------------
In November 1993, the Company acquired an interest in White Oak Diagnostic
Systems (White Oak) from Northern Diagnostics Services, Inc. (Northern
Diagnostics), an entity which was purportedly owned by Mr. James Shields. As
part of that acquisition, the Company agreed to make certain contingent payments
to either Northern Diagnostics or Med-Bill if gross collected revenues exceeded
$400,000 for 1995. In 1995, the Company paid Med-Bill $85,000 for exceeding the
aforementioned gross collected revenues.
Northern Diagnostics acquired White Oak from a group of physicians. In
August 1995 White Oak made payments to the former physician owners of
approximately $150,000. Current management believes that these payments by
White Oak represent amounts due to these physicians by Northern Diagnostics for
the acquisition.
On May 30, 1995 the Company paid $350,000 to Med-Bill to satisfy amounts
recorded as due Med-Bill.
PVL Acquisition
---------------
In connection with the purchase of PVL and Vascusonics, the Company for no
consideration transferred to Ultrasonics, Inc. (Ultrasonics), all the
receivables of PVL and Vascusonics as of December 1, 1995 valued at $350,000.
Ultrasonics is a related party, owned by Mr. James Shields and/or Mr. Jeff D.
Bergman, the CEO and Chairman of the Board of SMT.
The purchase agreement specified that certain equipment lease obligations
would be transferred to Ultrasonics. White Oak and Vascusonics then agreed to
sublease the equipment from Ultrasonics. White Oak and the Company jointly and
severally indemnified the sellers from and against any liability resulting from
the failure of Ultrasonics to discharge all obligations to the lessors after the
date of the sale. Current management is not aware of any consideration received
by the Company from Ultrasonics in exchange for the lease contracts, which
current management believes yielded lease payments to Ultrasonics which were in
excess of fair market value for the leased equipment, or issuance of the
previously-mentioned indemnification.
During 1996, the Company paid $53,341 in lease payments. Although the
lessor paid approximately $155,000 for the equipment which it leased to the
Company, the Company is scheduled to make lease payments totaling approximately
$1,333,000. After March 1996, the Company refused to pay any further amounts
under this contract, believing the payments to be excessive. The Company is
vigorously contesting this obligation.
Shields Management Agreement
----------------------------
In 1995 the Company paid $270,000 to Mr. James Shields or Med-Bill in
connection with certain management services that Mr. Shields provided at White
Oak and PVL. As of December 31, 1995, the Company had approximately $37,000 due
to Mr. Shields or Med-Bill. During the first quarter of 1996, the Company paid
Mr. Shields approximately $59,106 under the terms of his contract. After March
1996, the Company refused to pay any further amounts under the contract,
believeing the payments to be excessive. severed its relationship with Mr.
Shields. The Company is vigorously contesting this obligation.
40
<PAGE>
Transactions with Other Board Members
In 1996, Brody Associates, a consulting firm wholly-owned by Steven Brody,
Director, 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. During 1996, the Company paid $223,795
to Brody Associates for these services and related business expenses. At
December 31, 1996, the Company owed $25,586 to Brody Associates.
In 1996, the Company retained Executive Advisory Group, Ltd., whose sole
owner is Robert Smallacombe, Director, to serve as a management consultant and
to aid in the corporate restructuring. During 1996, the Company paid $189,503 to
Executive Advisory Group, Ltd. For these services. As of December 31, 1996, the
Company owed $9,750 to Executive Advisory Group, Ltd.
In connection with the Keystone Merger, Mr. David Watson, an officer and
director of the Company, has debt due directly to him of $293,750 and $368,750,
as of December 31, 1996 and December 31, 1995, respectively.
To assist with the investigation of former management, the Company retained
Plowman, Speigel & Lewis, P.C. Charles Jarrett, Jr., currently a director of
the Company, is a member of that firm. During 1996, but prior to Mr. Jarrett's
appointment to the Board of Directors, the Company paid to Plowman, Speigel &
Lewis, P.C. $32,548 for professional services rendered.
Other
-----
During 1995, the Company paid $13,500 to Ogg Jones DeSimone & Ignelzi, a
law firm in which Mr. DeSimone was a partner, purportedly for rent.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -----------------------------------------------------------------------------
a) 1. Financial Statements
The financial statements, together with the report thereon of the Company's
independent accountants, are included in this report on the pages listed below.
<TABLE>
<CAPTION>
Financial Statements Page
----
<S> <C>
Report of Independent Public Accountants............. 1
Consolidated Balance Sheets
December 31,1996 and 1995............................ 2
Consolidated Statements of Operations
for the years ended December 31,1996 and 1995........ 4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996 and 1995....... 5
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows
for the years ended December 31, 1995 and 1996....... 6
Notes to Consolidated Financial Statements
December 31, 1995 and 1996........................... 7
</TABLE>
2. Exhibits:
(b) Reports on Form 8-K
The Company filed a Form 8-K report dated March 29, 1995. The items listed
was Item 5, Other Events.
The Company filed a Form 8-K report dated March 31, 1995. The items listed
was Item 5, Other Events.
The Company filed a Form 8-K report dated September 18, 1995. The items
listed were Item 4 Change in Registrant's Certifying Accountant; Item 5,
Other Events, and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 18, 1995. The items
listed were Item 5, Other Events, and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 15, 1995. The items
listed were Item 2, Acquisition and Disposition of Assets; Item 5, Other
Events, and Item 7(c), Exhibits.
The Company filed a Form 8-K/A#1 report dated November 15, 1995. The items
listed were Item 2, Acquisition and Disposition of Assets; Item 7(a),
Financial Statements of business acquired; and Item 7(b), Pro Forma Financial
Information.
The Company filed a Form 8-K report dated December 1, 1995. The items listed
were Item 2, Acquisition and Disposition of Assets; Item 5, Other Events, and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 25, 1996. The items listed
were Item 4, Change in Registrant's Certifying Accountant; Item 5, Other
Events, and Item 7(c) Exhibits.
The Company filed a Form 8-K report dated June 13, 1996. The items listed
was Item 4, Change in Registrant's Certifying Accountant.
(c) Exhibits Required by Item 601 of Regulation S-K
The following exhibits required by Item 601 of Regulation S-K are filed
as part of this report.
3.1(1) Articles of Incorporation
3.2 By-laws, as amended
4.1(2) 1992 Stock Option Plan, as amended
42
<PAGE>
<TABLE>
<S> <C>
4.2(2) 1994 Stock Option Plan for Non-Employee Directors
10.1 Ralph Sweithelm Employment Agreement with Keystone Rehabilitation Systems dated January 26, 1995
10.2 Brian K. Strong Employment Agreement with Northstar signed September 5, 1995
10.3 Michael J. Kulmoski Employment Agreement with Northstar signed October 27, 1995
10.4 Lisa S. Guarino Employment Agreement with Northstar signed November 11, 1995
10.5 Steven N. Brody Consulting Agreement with Northstar signed April 5, 1996
10.6 Nancy B. White Employment Agreement with Northstar signed May 1, 1996
10.7 Forbearance Agreement between Northstar and IBJ Schroder Bank & Trust Company dated May 31, 1996
10.8 Robert J. Smallacombe Consulting Contract with Northstar August 20, 1996
10.9 Edward Banos Employment Agreement with Northstar signed September 1, 1996
10.10 Separation Agreement with Lisa S. Guarino signed September 10, 1996
10.11 John A. Lombardi Employment Agreement with Northstar signed September 16, 1996
16.1(3) KPMG Peat Marwick Letter of Resignation dated March 25, 1996
17.1 Director Letter of Resignation from Daniel McMenamin dated November 15, 1995
17.2 Director Letter of Resignation from Daniel Dickman dated November 17, 1995
17.3 Letter of Resignation from Michael J. Kulmoski, Jr. dated February 20, 1996
17.4 Director Letter of Resignation from Michael P. Pitterich dated March 21, 1996
17.5 Director Resignation Letter from Mark A. DeSimone dated March 21, 1996
27 Financial Data Schedule
- ------------------------
</TABLE>
(1) Filed as an exhibit to the Company's Registration Statement on
Form sb-2 dated February 3, 1993 (Registration No. 33-57916).
(2) Filed as an annex to the Company's 1994 Proxy Statement dated May 9,
1994.
(3) Filed as an Exhibit to Form 8-K dated March 25, 1996.
43
<PAGE>
Conformed Copy
- --------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
----
March, 1997.
- -----
NORTHSTAR HEALTH SERVICES, INC
By: /s/ Robert J. Smallacombe
-------------------------
Robert J. Smallacombe,
CEO, Principal Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- -------------------------- --------------
<S> <C> <C>
/s/ David D. Watson President, Chief Operating March 30, 1997
- --------------------------- Officer, Director
/s/ John Lombardi Executive Vice President, March 30, 1997
- --------------------------- Principal Accounting and
Financial Officer
/s/ Steven N. Brody Director March 30, 1997
- ---------------------------
/s/ Charles B. Jarrett Director March 30, 1997
- ---------------------------
/s/ Hon. Timothy L. Pesci Director March 30, 1997
- ---------------------------
Thomas W. Zaucha Director March 30, 1997
- ---------------------------
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Northstar Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Northstar Health
Services, Inc. (a Delaware corporation and the Company) and Subsidiaries as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the two years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northstar Health
Services, Inc. and Subsidiaries at December 31, 1996 and 1995, and the results
of its operations and its cash flows for the two years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 4, to the consolidated financial statements, effective
December 31, 1995, the Company changed its methods of accounting for impairment
of long-lived assets.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 7 and 20 to
the consolidated financial statements, the Company has suffered significant
losses from operations in 1996 and 1995, has been named in certain stockholder
litigation and is not meeting its contractual obligations with regard to debt
principal and interest payments and certain financial covenants which the lender
has not waived. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 7. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
March 25, 1997
-1-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS (Notes 1 and 2)
-------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
December 31,
-----------------
A S S E T S 1996 1995
----------- ------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents-
General operating funds $ 1,607 $ 630
Cash collateral supporting a letter
of credit (Notes 3 and 6) - 5,100
Accounts receivable-
Patients, net of allowances for
doubtful accounts of
$3,759 and $3,518, respectively 6,098 7,210
Management fees 766 361
Miscellaneous 244 445
Prepaid expenses and other current
assets 731 857
------- -------
Total current assets 9,446 14,603
------- -------
PROPERTY AND EQUIPMENT, net (Notes 5, 6
and 10) 3,682 4,422
INTANGIBLE ASSETS, net (Note 4) 21,132 23,947
OTHER ASSETS 282 383
------- -------
TOTAL ASSETS $34,542 $43,355
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS (Notes 1 and 2)
-------------------------------------------
(Dollars in Thousands, Except Share Data)
-----------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ -------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt
(Notes 6, 7, 10, 12 and 21)
IBJ Schroder $ 14,083 $ 14,017
Thomas Zaucha and Zaucha Family
Limited Partnership 1,285 5,500
Other debt 1,893 1,593
Accounts payable 2,048 456
Accrued expenses (Note 8) 5,323 3,568
Contractual obligations to employees
(Note 16) 1,633 1,450
-------- --------
Total current liabilities 26,265 26,584
-------- --------
LONG-TERM DEBT (Notes 6, 7, 10 and 12)
Thomas Zaucha and Zaucha Family 3,183 3,833
Limited Partnership
Other debt 1,718 2,455
-------- --------
Total long term debt 4,901 6,288
MINORITY INTEREST (Note 3) 184 116
-------- --------
Total liabilities 31,350 32,988
-------- --------
STOCKHOLDERS' EQUITY (Notes 3, 6, 9,
12, 13 and 19):
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 and 5,285,366 shares 62 53
issued; 5,867,154 and 5,285,366
outstanding in 1996 and 1995
Common shares issuable 0 and 944,352
shares in 1996 and 1995, respectively - 5,591
Additional paid-in capital 26,208 20,626
Warrants outstanding 1,951 1,951
Retained deficit (24,576) (15,629)
Less: Treasury stock, 362,564 in 1996 (453) -
and 0 shares in 1995
Notes receivable collateralized with
common stock - (2,225)
-------- --------
Total stockholders' equity 3,192 10,367
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 34,542 $ 43,355
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Notes 1 and 2)
-----------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
(Dollars in Thousands, Except Share Data)
-----------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE $ 35,176 $ 15,424
COSTS OF SERVICE 18,956 10,640
----------- -----------
Gross profit 16,220 4,784
OPERATING EXPENSES:
Selling, general and administrative
expenses 13,129 6,202
Bad debt expense 1,820 2,301
Restructuring and other non-recurring
expenses (Note 9) 4,969 3,827
Impairment of long-lived assets (Note
4) - 3,050
Amortization of intangibles (Note 4) 1,623 1,193
Depreciation and amortization 635 173
----------- -----------
Total operating expenses 22,176 16,746
----------- -----------
OPERATING LOSS (5,956) (11,962)
NON-OPERATING EXPENSES:
Interest expense, net 2,130 833
Other expense, net 96 208
----------- -----------
Total non-operating expenses 2,226 1,041
----------- -----------
LOSS BEFORE INCOME TAXES (8,182) (13,003)
INCOME TAXES (Note 14) 471 (236)
----------- -----------
LOSS BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS (8,653) (12,767)
MINORITY INTEREST (Note 3) 294 60
----------- -----------
LOSS BEFORE EXTRAORDINARY LOSS (8,947) (12,827)
EXTRAORDINARY LOSS, (Note 6) - (274)
----------- -----------
NET LOSS $ (8,947) $ (13,101)
=========== ===========
EARNINGS PER SHARE:
Loss before extraordinary loss $(1.44) $(3.21)
Extraordinary loss - (.07)
----------- -----------
NET LOSS $(1.44) $(3.28)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND EQUIVALENTS 6,216,840 3,996,147
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Notes 1 and 2)
---------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
Common Stock Common Shares Issuable
----------------------- ---------------------- Additional Warrants
Shares Issued Amount Shares Amount Paid-In Capital Outstanding
------------- ------ ------ ------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994, as previously
reported 2,600,000 $26 - $ - $ 5,592 $ -
Corrections of errors
(Note 19) - - 20,378 127 113 342
--------- --- ------- -------- ------- ------
BALANCE, December 31,
1994, as restated 2,600,000 26 20,378 127 5,705 342
Issuance of common
stock in secondary
offering 2,012,500 20 - - 10,678 -
Issuance of stock for
acquisitions (Note 3) 200,591 2 - - 1,678 -
Shares issuable for
acquisitions (Note 3) - - 944,352 5,591 - -
Issuance of shares
issuable 20,378 - (20,378) (127) 127 -
Issuance of common
stock in exchange
for salary reduction 30,000 - - - 198 -
Interest accrued - - - - - -
Warrants issued in
connection with bank
financing - - - - - 703
Issuance of warrants
for consulting
services - - - - - 220
Issuance of warrants
to underwriter - - - - (686) 686
Compensatory stock
options issued - - - - 358 -
Disproportionate
dividend (Note 3 ) - - - - - -
Reclassification of
note receivable for
new
collateralization by
common stock - - - - - -
Issuance of common
shares and
collateralized note
receivable (Note 3) 362,564 4 - - 2,146 -
Exercise of stock
options 59,333 1 - - 422 -
--------- --- ------- -------- ------- ------
Net loss - - - - - -
BALANCE, December 31,
1995 5,285,366 53 944,352 5,591 20,626 1,951
Issuance of shares
issuable (Note 3) 944,352 9 (944,352) (5,591) 5,582
Receipt of common
stock as treasury
stock through
surrender of a note
receivable (Note 3) - - - - - -
Write off of
uncollectible notes
receivable - - - - - -
Net loss - - - - - -
--------- --- ------- -------- ------- ------
BALANCE, December 31,
1996 6,229,718 $62 - $ - $26,208 $1,951
========= === ======= ======== ======= ======
<CAPTION>
Treasury Stock
Retained ---------------- Notes
(Deficit) Shares Amount Receivable Total
--------- ------ ------ ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994, as previously
reported $ 1,823 - $ - $ (30) $ 7,411
Corrections of errors
(Note 19) (3,173) - - - (2,591)
-------- ------- ---- ------- --------
BALANCE, December 31,
1994, as restated (1,350) - - (30) 4,820
Issuance of common
stock in secondary
offering - - - - 10,698
Issuance of stock for - - - - 1,680
acquisitions (Note 3)
Shares issuable for - - - - 5,591
acquisitions (Note 3)
Issuance of shares - - - - -
issuable
Issuance of common
stock in exchange
for salary reduction - - - - 198
Interest accrued - - - (7) (7)
Warrants issued in
connection with bank
financing - - - - 703
Issuance of warrants
for consulting
services - - - - 220
Issuance of warrants
to underwriter - - - - -
Compensatory stock
options issued - - - - 358
Disproportionate
dividend (Note 3 ) (1,178) - - - (1,178)
Reclassification of
note receivable for
new
collateralization by
common stock - - - (38) (38)
Issuance of common
shares and
collateralized note
receivable (Note 3) - - - (2,150) -
Exercise of stock
options - - - - 423
Net loss (13,101) - - - (13,101)
-------- ------- ---- ------- --------
BALANCE, December 31,
1995 (15,629) - - (2,225) 10,367
Issuance of shares
issuable (Note 3)
Receipt of common
stock as treasury
stock through
surrender of a note
receivable (Note 3) - 362,564 453 2,150 1,697
Write off of
uncollectible notes
receivable - - - 75 75
Net loss (8,947) - - - (8,947)
-------- ------- ---- ------- --------
BALANCE, December 31,
1996 $(24,576) 362,564 $453 $ - $ 3,192
======== ======= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 2)
-----------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,947) $(13,101)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities-
Depreciation and amortization 4,293 1,781
Impairment of long-lived assets - 3,050
Loss on early extinguishment of
debt - 274
Provision for doubtful accounts 1,820 2,301
Loss on note receivable
collateralized by common stock 1,772 -
Loss on write off of investment 25 -
Interest on discounted obligation 241 -
Deferred income taxes - (128)
Loss on sale of equipment 47 16
Provision for increase in
contractual obligations to
employees 262 -
Stock option and warrant
compensation expense 113 570
Minority interest 294 61
Change in current assets and
liabilities-
Decrease/(increase) in
receivables (912) 36
Decrease/(increase) in other
current assets 126 (218)
Increase/(decrease) in accounts
payable 1,592 (212)
Increase in accrued expenses 1,755 789
-------- ---------
Net cash provided/(used) by
operating activities 2,481 (4,781)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (10) (13,124)
Earn-out payments on prior period
acquisitions - (617)
Capital expenditures (345) (420)
Deposits, loans and investments (12) (33)
Other investing activities - (668)
Proceeds from sale of equipment 18 3
-------- ---------
Net cash used by investing
activities (349) (14,859)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock in public offering - 10,699
Payments on long-term debt (1,566) (15,695)
Debt issuance and organization costs - (729)
Payment of acquisition note to Thomas
Zaucha (5,100) -
Stock options exercised - 457
Payments of contractual obligations to
employees (79) -
Distributions to minority interests (226) (57)
Borrowings on long-term debt 716 30,045
-------- ---------
Net cash (used)/provided by
financing activities (6,255) 24,720
-------- ---------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (4,123) 5,080
CASH AND CASH EQUIVALENTS, beginning
balance 5,730 650
-------- ---------
CASH AND CASH EQUIVALENTS, end balance $ 1,607 $ 5,730
======== =========
SUPPLEMENTARY INFORMATION:
Interest paid $ 821 $ 1,018
Income taxes paid 216 494
NONCASH INVESTING AND ACTIVITIES:
Capital lease obligations $ 395 $ 1,467
Issuance of stock for acquisitions - 1,680
Shares issuable for acquisition - 5,591
Issue warrants to bank as debt discount - 703
Issue note receivable and related
common shares collateralizing note - 2,150
Issuance of common stock in exchange
for salary reduction - 198
Issuance of common stock warrants for
services - 886
Notes payable issued in connection
with the acquisitions - 9,618
Treasury stock received through
surrender of note receivable
collateral 453 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. DESCRIPTION OF BUSINESS ORGANIZATION AND SIGNIFICANT EVENTS:
------------------------------------------------------------
Nature of Operations
- --------------------
Northstar Health Services, Inc. (Northstar or the Company) is a provider of
rehabilitation therapy and related services, such as diagnostics and sub acute
care, in Pennsylvania and surrounding states, providing services at outpatient
rehabilitation clinics and patient care facilities to patients suffering from
physical disabilities. The goals of rehabilitation therapy are to improve the
patients' physical strength and range of motion, reduce pain, help prevent
injury, and restore the ability to perform basic activities, including
communication. The Company primarily provides these services through outpatient
rehabilitation clinics and under contractual arrangements with patient care
facilities. The term "Company" means, unless the context requires otherwise,
the Company and its subsidiaries and their respective predecessors.
Trading of Common Shares
- ------------------------
On May 18, 1995, the Securities and Exchange Commission (the Commission)
declared effective a registration statement on Form SB-2 originally filed by the
Company on March 31, 1995. The registration statement registered with the
Commission, among other things, the offer and sale of 1,750,000 shares of Common
Stock (the Public Offering). A closing on the Public Offering was held on May
26, 1995. On June 8 and June 15, 1995, the underwriters of the Public Offering
exercised their over-allotment option to purchase an aggregate of 262,500 shares
of Common Stock. The net proceeds of approximately $10,000,000 from the Public
Offering and the exercise of the over-allotment option were used to finance
acquisitions, to repay certain of the Company's short-term indebtedness, pay
certain expenses of the Company's Public Offering not paid at closing, and for
other general corporate purposes, including working capital.
The Company's common stock was traded on the NASDAQ National Market beginning
June 3, 1993 under the symbol "NSTR". After some of the events outlined below
occurred, trading of the Company's common stock was halted by the NASDAQ
National Market on May 31, 1996.
Resignation of Auditors and Immediate Board Changes
- ---------------------------------------------------
In March 1996, the Company's auditors, KPMG Peat Marwick (KPMG), who had been
appointed in late 1995, resigned prior to completing an audit of Northstar.
Soon after KPMG's resignation, the Company's former Chairman of the Board, Mark
A. DeSimone was asked to resign from the Company's Board of Directors along with
one independent director. Certain members of management were also relieved from
their duties. Concurrently, Thomas W. Zaucha was appointed as Chairman of the
Board and an independent member of the Board of Directors was appointed to
investigate certain allegations of improprieties.
-7-
<PAGE>
Employment Agreements
- ---------------------
During March 1996 the Company terminated Mr. DeSimone's employment agreement.
In accordance with the aforementioned agreement, Mr. DeSimone was to receive six
months salary after termination. The Company has not paid any termination
salary to Mr. DeSimone.
On April 30, 1996, one of the former owners of an acquired business terminated
her employment agreement with the Company due to a change in control clause in
the employee's contract. A new contract was negotiated with the same salary;
however, the new agreement ends approximately six months prior to the initial
contract. The Company and this employee later agreed to terminate this
employee's contract as a result of operational difficulties. The Company is
currently in settlement discussions with this individual in order to settle
issues related to this severance.
In July 1996, the Company terminated a former officer who had been on suspension
pending the outcome of the Board of Director's independent investigation. The
Company is currently involved in an arbitration with this former employee. See
Note 20 for additional discussion.
In September 1996, the Company's former chief financial officer left the
employment of the Company to pursue other interests as part of a negotiated
settlement. An employment contract has been accepted by the Company's new chief
financial officer.
Stockholders' Suits
- -------------------
Following the resignation of KPMG, while the Company was conducting its
investigation and before the Company filed its suit as discussed below, the
Company was named in suits filed by groups of stockholders. The Company believes
that the basis for the stockholders' suits are the actions of certain members of
former management and other potentially responsible parties. See Note 20 for a
discussion of the status of this litigation.
Company's Suit
- --------------
Based upon the investigation completed by special independent legal counsel, the
Board of Directors voted to pursue legal actions against the Company's former
Chairman of the Board, certain former employees, the predecessor auditors of the
Company, for years prior to 1995, Richard A. Eisner & Company and certain other
individuals and entities who were allegedly involved in improper actions and
diversion of funds to other entities. A complaint was filed in the Western
District of Pennsylvania United States District Court on September 12, 1996.
Although the result of this lawsuit is indeterminable at this time, the Company
expects to actively seek restitution for damages from the responsible parties.
See Note 20 for a further discussion of this litigation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, and its interests in partnerships and joint venture
arrangements only for the period subsequent to their acquisition. All
significant intercompany balances and transactions have been eliminated. The
Company uses the equity method of accounting for less than majority-owned
entities.
-8-
<PAGE>
Basis of Presentation
- ---------------------
The Company maintains its accounts on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Industry Risks
- --------------
The U.S. health care industry continues to experience significant change even
without passage of comprehensive legislative reform at the federal level.
Today, the primary force for change is being created by a competitive
marketplace resulting in rapid change in health care delivery and financing.
An increasing number of the Company's third-party payors are adopting
prospective payment systems. The Company has signed provider contracts with a
few managed care organizations, which emphasize utilization control and cost
containment, and the Company's business with these managed care organizations is
expected to increase significantly in the next few years. Managed care
organizations either directly transfer risk to health care providers through
capitation payment arrangements or pay for units of service on a steeply
discounted basis.
These factors cause significant challenges to all providers, including the
Company.
Net Patient Service Revenue
- ---------------------------
The Company has agreements with third-party payors that provide for payments to
the Company at amounts different from its established rates. A summary of the
payment arrangements with major third-party payors is as follows:
Medicare - Services rendered to Medicare program beneficiaries are paid based
on a cost reimbursement methodology subject to cost limitations. The Company
is reimbursed for services at a tentative interim rate with final settlement
determined after submission of annual cost reports by the Company and audits
thereof by the Medicare fiscal intermediary. The Company's Medicare cost
reports have been audited with final settlements determined by the Medicare
fiscal intermediary through December 31, 1994 for the Northstar and Keystone
"home offices" and through December 31, 1995, for branch operations.
Medical Assistance and Blue Cross - Services rendered to Medical Assistance
eligible patients and Blue Cross subscribers are paid at prospectively
determined rates.
Any normal recurring types of changes arising from audit or settlement after the
close of the fiscal year are reflected in subsequent years' net patient service
revenue.
The Company has also entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations and preferred provider
organizations. The basis for payment to the Company under these agreements
includes prospectively determined rates and discounts from established charges.
Certain of these contracts provide capitation terms whereby the Company receives
a sum of money per covered person within the certain insurance plan and in
return the Company agrees to
-9-
<PAGE>
provide all of the rehabilitation and certain diagnostic testing which is deemed
medically necessary for these plan members. In addition to the payments from the
insurance organizations, the Company receives in certain coverage circumstances
co-payment amounts from patients for each event of service.
The Company grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. The mix of
gross receivables from patients and third-party payors at December 31, 1996 and
1995, was as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Workers' compensation 31% 23%
Other third-party payors 26 24
Contracts with nursing homes and other
such providers 15 12
Medicare 14 23
Blue Cross 10 13
Self-pay patients 3 5
Medicaid 1 -
---- -----
100% 100%
==== ====
</TABLE>
The healthcare industry is subject to numerous laws and regulations of Federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs together with imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse as well as other government laws and regulations. While no
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
regulatory actions unknown or unasserted at this time.
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. As part of the management of the
operations, the Company is responsible for the process of writing accounts
payable checks. In connection with the simplification and streamlining of
duties, the Company pays the aforementioned invoices from its corporate location
and has accepted a gross management fee which includes reimbursement for the
payment of such managed-organizations expenses. A summary of the management
fees and related expenses is outlined below:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Management fees $ 2,697 $ 347
Less: expenses incurred with
management function (3,092) (406)
-------- ------
Net loss from managed operations $ (395) $ (59)
======== ======
</TABLE>
-10-
<PAGE>
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.
Insurance
- ---------
The Company presently insures against malpractice and workers' compensation
risks with independent third-party insurers and with the Commonwealth of
Pennsylvania Workers' Compensation fund utilizing claims-made policies.
Cash and Cash Equivalents
- -------------------------
All cash equivalents are stated at cost, which approximates market. The Company
considers all highly liquid investments purchased with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
- ----------------------
The Company's property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, as appropriate. Most non-leased depreciable assets have
estimated useful lives in the range of 5 to 7 years.
Upon disposal of property items, the asset and related accumulated depreciation
accounts are relieved of the amounts recorded therein for such items and any
resulting gain or loss is reflected in income.
Deferred Costs
- --------------
Organization costs are recorded at cost and amortized on a straight-line basis
over a five-year period. Debt issuance costs are amortized over the term of the
debt. Such costs are included in intangibles.
Intangible Assets
- -----------------
Intangible assets consist of the excess of cost over net assets of acquired
organizations (goodwill), non-compete and employment agreements with certain key
employees of organizations which have been acquired, the Keystone tradename and
assembled workforce and other intangibles consisting of primarily deferred
financing costs. Certain of the aforementioned non-compete agreements had been
amortized over a period of approximately fifteen years through December 31,
1994. As of December 31, 1995, the Company recognized that it was an error to
amortize these agreements over the aforementioned periods. Thus, as of December
31, 1995, the Company determined that the correct amortization period should
have been five years. See Note 19.
In March 1995, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This accounting pronouncement requires that long-lived assets and identifiable
intangibles to be held and used by an entity are to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable.
The Company has chosen early adoption of this accounting pronouncement as of
December 31, 1995. In accordance therewith, as of December 31, 1995 current
management believes that certain actions of
-11-
<PAGE>
former management that lead to the litigation discussed in Note 1, and other
circumstances have occurred that indicate that the remaining balance of
intangible assets may not be recoverable. Thus, as these factors have indicated
that intangible assets should be evaluated for possible impairment, the Company
has used an estimate of the related operations' undiscounted cash flows over the
remaining life of the various intangible assets in measuring whether these
intangible assets are recoverable. The Company's evaluations have resulted in
adjustments to goodwill, non-compete and employment agreements. See Note 4.
Treasury Stock
- --------------
The Company may periodically repurchase its own stock as a result of a specific
transaction or as part of an organized repurchase plan. The Company accounts
for such stock repurchases on the cost basis and records the stock value as a
contra-equity line item on its financial statements. Treasury stock was
received in December 1996 as a result of a surrender of 362,564 shares of common
stock in connection with a certain note receivable. See Note 3.
Income Per Share
- ----------------
Income per share is calculated based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents are not included in any period that has a net loss as they
would be anti-dilutive.
Income Taxes
- ------------
The provision for income taxes is based on earnings reported in the financial
statements. Deferred income taxes are provided on the basis of timing
differences between reported earnings and taxable income. Since 1994, the
Company and its subsidiaries have filed a consolidated federal income tax
return. The general and limited partnerships file separate income tax returns.
3. MERGERS, ACQUISITIONS AND JOINT VENTURE AGREEMENTS:
---------------------------------------------------
Keystone Rehabilitation Systems, Inc. (Keystone)
- ------------------------------------------------
On November 15, 1995, NSK Merger Corp., a newly-formed subsidiary of the
Company, was merged with and into Keystone (a Pennsylvania corporation). Prior
to this merger (the Merger), Keystone was the largest privately held
rehabilitation company in Pennsylvania, providing services in physical,
occupational and speech therapy, including sports rehabilitation and work
hardening in outpatient clinics, as well as in patient care facilities, located
throughout Pennsylvania and in New York, Ohio and West Virginia.
As consideration for the Merger, the shareholders of Keystone, Thomas W. Zaucha
and Alice L. Zaucha and the Zaucha Family Limited Partnership (collectively, the
"Shareholders), received the following: (a) $2,500,000 in cash; (b) a Time Note
due January 3, 1996 in the aggregate principal amount of $5,100,000; (c) a five-
year, interest free Term Note in the aggregate principal amount of $2,625,000;
(d) the agreement by the Company to issue, on January 3, 1996, a three-year, 6%
Term Note in the aggregate principal amount of $2,400,000 (the Three-Year Note);
and (e) the agreement by the Company to issue to the Shareholders, on January 3,
1996, an aggregate of 944,352 shares of common stock, par value $.01 per share
(the Common Stock), of the Company (the Stock Consideration). The debt issued
in this acquisition was discounted using current market rates. See Note 6.
-12-
<PAGE>
In connection with the Merger, the Company (i) guaranteed the value of the Stock
Consideration to be at least $5,600,000 through certain periods ending no later
that December 31, 1997; (ii) agreed to seek necessary stockholder approval to
allow the Three-Year Note to be converted into Common Stock at the conversion
price of $5.93 per share and to pay any guaranteed amount in additional shares
of Northstar Common Stock based on the trading price of the Common Stock at the
time of issuance; and (iii) issued a five-year interest-free note to David D.
Watson, Keystone's Chief Operating Officer and Executive Vice President, in the
aggregate principal amount of $375,000, in release of any interest Mr. Watson
might have in Keystone. Similar to the debt in the preceding paragraph, this
obligation to Mr. Watson has been discounted using the Company's current
borrowing rate.
As discussed above, a stock price of $5.93 per share was guaranteed to the
Shareholders for periods ending not later than December 31, 1997. As of
December 31, 1996, the market price of the Company's common stock was valued at
$1.375 per share, as quoted by the Bloomberg Service. The Company has a
contractual obligation to fund this shortfall in stock value through a cash
payment equal to the shortfall or, with shareholder approval, through the
issuance of additional shares to the Shareholders in an amount equal to the
shortfall. Based on the December 31, 1996 stock quotation, the Company was
obligated to issue approximately 3,128,000 additional shares of stock with an
estimated market value of $4,301,523. The issuance of such additional shares
would not affect the purchase price (goodwill) or the statement of operations,
but rather would cause a reclassification of the par value of said shares to
common stock from additional paid in capital to the par value of common stock.
Further, such shares would be included in the calculation of fully diluted
earnings per share except for the fact that such effect would be anti-dilutive
because of the Company's net loss.
The Company also agreed to make additional "earn-out" payments to the
Shareholders of $1,600,000 per year in the event that Keystone's "EBITA" exceeds
$2,500,000 in any year from 1996 to 2000, inclusive. EBITA is defined,
generally, to mean Keystone's earnings (including earnings from any internally
generated facility or contract but excluding earnings from any facility or
contract acquired from third parties) before taxes, interest, depreciation and
amortization. In the event an earn-out is not earned and therefore not paid in
any given year, the earn-out will be paid in the next year if EBITA in such next
year exceeds the greater of $3,200,000 or $2,500,000 plus the amount of the
EBITA shortfall in such prior year. The Shareholders are to receive an earn-out
of approximately $200,000 for 1995. The earn-out amounts for years 1996
through 2000 will be reduced in the event that the current liabilities of
Keystone at the date of the Merger (other than permitted capital leases)
exceeded $2,000,000. In addition, such earn-out payments will be reduced by
50% of such current liabilities up to $2,000,000. Management of the Company
believes that, based on the results of operations for 1996 as well as
management's interpretation of the above outlined adjustments, the 1996 earn-out
computation results in no amounts due to the Shareholders. If the final earn-out
received or paid differs from that calculated, the change would affect goodwill.
The earn-out payments for all years will accelerate and become due within 90
days after any change in ownership or control of the Company or a sale of the
majority of the assets of the business. Any additional compensation due to a
change in stock price would be additional purchase price allocated to goodwill.
The consideration for the Merger was determined by arms-length negotiations
among the various parties. In connection with this Merger, the Company paid
fees of approximately $145,000 to Commonwealth Associates and the Company paid
cash of $450,000 and issued 150,000 shares of common stock with a market value
of $937,500 to Commercial Financial Corporation. See Note 12.
At the effective time of the Merger, the Company paid $2,500,000 in cash to the
Shareholders and
-13-
<PAGE>
deposited $5,100,000 in a cash collateral account with a bank to support a
letter of credit securing the Company's obligation to pay the Shareholders
$5,100,000 on January 3, 1996. This obligation was paid on its due date. The
Company borrowed $3,500,000 of such amounts under the $6,500,000 acquisition
line portion of its existing $16,000,000 credit facility with IBJ Schroder Bank
and Trust Company. The remainder of the funds required at the effective time of
the Merger were provided from working capital.
Immediately prior to the Merger and in accordance with the Merger Agreement,
Keystone transferred to the Zaucha Family Limited Partnership, of which Thomas
W. Zaucha is a general partner, all of the real estate owned by Keystone for
approximately $5,200,000 which funds were used to pay off real estate and other
debt owed to a bank by Keystone. In connection with the Merger, the parcels of
such real estate used in Keystone's business were then leased to Keystone. See
Note 12 for discussion of these rental payments.
As part of the Merger, certain of the executive officers of Keystone entered
into employment agreements with and became executive officers of the Company.
See Notes 1, 15 and 21.
In connection with the Merger, the purchase price was allocated to the assets
acquired and liabilities assumed as follows based on an appraisal (dollars in
thousands):
<TABLE>
<S> <C>
Excess of cost over acquired net assets $ 9,895
Keystone tradename 2,500
Assembled workforce 1,000
Employment agreements 1,000
Cash 266
Accounts receivable 5,328
Other current assets 591
Property and equipment 2,291
Other assets 163
Accounts payable (294)
Other current liabilities (3,123)
Loans payable (1,271)
Minority interest (112)
-------
$18,234
=======
</TABLE>
The operating results for the year ended December 31, 1995 are discussed below
assuming the acquisition of Keystone had been effective as of January 1, 1995.
The pro forma information is, however, not necessarily indicative of the
combined results of operations as they might have been for the year ended
December 31, 1995. The pro forma amounts give effect to, among other things,
depreciation and amortization on the revalued assets acquired and imputed
interest on the debt incurred at the average interest rate actually incurred by
the Company during the period indicated.
Assuming that Keystone had been acquired on January 1, 1995, the unaudited pro
forma operating results of the Company for the year ended December 31, 1995,
would have approximated the following: total revenue would have been
$35,741,000; the net loss would have been $12,890,000; and the loss per common
share would have been $2.67.
Penn Vascular Lab, P.C. (PVL)
- ------------------------------
On November 28, 1995, the Company acquired from PVL (a Pennsylvania
professional corporation)
-14-
<PAGE>
certain assets and the stock of Vascusonics, Inc. (a Pennsylvania corporation or
Vascusonics). The agreement provided for a management services contract whereby
the Company would provide such services to PVL for a period of two years in
exchange for a fee equal to the excess of collected revenue over the sum of
$75,000 and PVL's business expenses. Although the management services contract
expires on November 28, 1997, it is renewable annually at the mutual agreement
of both parties. The purchase agreement also provides the Company with the
option to purchase the stock of PVL for one dollar under certain circumstances;
during the period one year after the management services contract is terminated.
See Note 21.
As consideration for the above-mentioned items, the Company (a) paid $50,000 to
the seller upon the consummation of the agreement, (b) loaned $2,150,000 to the
seller in exchange for a note, (c) provided the seller with shares of Northstar
common stock with a fair market value equivalent of $2,150,000 on the date of
the acquisition, (d) promised to pay $100,000 to the seller in twelve equal non-
interest bearing installment payments beginning in December 1996, and (e)
promised to pay certain contingent payments to the Seller. The non-interest
bearing note to the seller was discounted using a market rate of interest. See
Note 6. Additionally, in exchange for the loan and the common stock the Seller
agreed to pay back to Northstar the lesser of $2,150,000 or the proceeds from
the sale of the common stock. The aforementioned Northstar stock was pledged by
the Seller as collateral for the note. See Note 21.
The contingent payments to the seller are based upon the Net Collected Revenues,
as defined, for the years ending December 31, 1997 and 1998. If during either
of the two years ending December 31, 1998, the Net Collected Revenues of the
businesses acquired exceed $3,200,000, then a payment of $100,000 is to be made
to the seller. If the Collected Revenues are in excess of $3,400,000 million
and $3,600,000, in each year then the payment to the physician shall be $200,000
and $300,000, respectively. See Note 21.
During 1996, the seller returned to the Company the shares of common stock which
were issued in conjunction with the acquisition and the note receivable which
was collateralized with those shares. As of the date of the stock surrender,
the value of the stock collateral had decreased to $1.25 per share.
Accordingly, the Company included in its 1996 consolidated statement of
operations the effect of the reduction in collateral value.
The Company borrowed $2,500,000 under the $6,500,000 acquisition portion of its
existing $16,000,000 credit facility with IBJ Schroder Bank & Trust Company.
These borrowings financed the $2,150,000 promissory note to the seller and a
$350,000 broker fee. Under the purchase agreement, Ultrasonics, Inc.
(Ultrasonics) took ownership of PVL's and Vascusonics accounts receivable on the
date of purchase just prior to the consummation of the purchase agreement.
Also, Ultrasonics assumed certain leases for equipment used by Company and
entered into new lease terms with the Company. Ultrasonics is a related party
which is owned and operated by Jeff Bergman. See Note 21.
The current management of the Company believes that the current lease
arrangements with Ultrasonics are for lease rates which are greatly in excess of
market rates. At the date of the merger, Ultrasonics paid off leases which
represented a net liability to PVL of $155,000. However, the lease arrangement
with Ultrasonics obligates the Company to principal payments totaling $1,333,000
over the term of the leases. The Company has treated the excessive lease
payments of $1,178,000 as a disproportionate dividend. See Note 12.
In connection with the PVL acquisition, the Company paid a brokerage fee of
$350,000 to Mr. James P. Shields. Mr. Shields is a cousin of Mr. DeSimone, the
former Chairman of the Board of Directors of the
-15-
<PAGE>
Company. Additionally, in connection with the above-mentioned management
services contract, the Company provided shares of common stock with a fair
market value of approximately $300,000 to Mr. Shields in consideration for him
to renegotiate his employment agreement with the Company so as to include duties
with respect to both PVL and Vascusonics. The term of this management contract
is for a period of seven years and compensation consists of a management fee of
12% of the gross collections. Prior to this revised contract, Mr. Shields
received compensation equal to 5% of gross collections. In March 1996 the
Company canceled Mr. Shield's contract and severed his relationship with the
Company. See Note 12.
The Company has expensed during 1995 the amounts paid and shares issued to Mr.
Shields in connection with the above-mentioned brokerage fee and re-negotiation
of his employment contract. The Company has also expensed $50,000 paid to
Commonwealth Associates in connection with this acquisition.
Joint Venture Activities
- ------------------------
Prior to 1995 the Company formed a joint venture with CDL Medical Technologies,
Inc. (CDL) to provide mobile diagnostic services, including cardiac services in
Western Pennsylvania. The Company originally acquired a 51% interest in the
venture for a note receivable of $55,000. In connection with the 1994 fiscal
year financial reporting the Company only recognized a 2% interest in CDL on a
cost basis due to a purported sale of 49% back to CDL in exchange for a note
receivable. Effective January 1, 1995, the Company "re-purchased" its
additional 49% interest in the joint venture for $60,000. For 1995 financial
reporting purposes, the Company's 51% equity interest in CDL's 1994 loss,
$150,000, has been reflected as a correction of an error. See Note 19.
4. Intangible Assets:
------------------
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------------------
<S> <C> <C>
Excess of cost over net assets acquired
(40 years) $17,481 $17,471
Employment agreements (2 to 7 1/2 years) 2,660 3,312
Keystone tradename (20 years) 2,500 2,500
Covenant not to compete (5 years) 1,258 2,438
Assembled Keystone workforce (5 years) 1,000 1,000
Deferred financing and other costs (5
years) 861 883
--------------------
25,760 27,604
Less- accumulated amortization (4,628) (3,657)
--------------------
Intangible assets $21,132 $23,947
====================
</TABLE>
As discussed in Note 2, the Company has chosen to adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" as of December 31, 1995. In accordance therewith, as of
December 31, 1995, current management believes that certain actions of former
management that lead to the litigation discussed in Notes 1 and 20, and other
circumstances have occurred that indicated that the remaining balance of
intangible assets may not be
-16-
<PAGE>
recoverable. Thus, as these factors have indicated that intangible assets should
be evaluated for possible impairment, the Company has used an estimate of the
related operations' undiscounted cash flows over the remaining life of the
various intangible assets in measuring whether these assets are recoverable.
The Company's evaluations have resulted in adjustments to decrease goodwill and
non-compete and employment agreements as follows as of December 31, 1995:
<TABLE>
<S> <C>
Goodwill $2,940,795
Non-compete 32,334
Employment agreements 76,661
----------
Total $3,049,790
==========
</TABLE>
As of December 31, 1996, management of the Company does not believe that any of
the remaining intangible assets are impaired. On a going-forward basis, the
Company will continue to evaluate whether later events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of intangible assets may not be
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company will use an estimate of the related
operation's undiscounted cash flow over the remaining life of the goodwill in
measuring whether the goodwill or other intangible asset is recoverable. Any
subsequent asset impairment will be accounted for as a charge to the operating
expenses of the Company.
5. Property and Equipment:
-----------------------
Property and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Vehicles $ 342 $ 274
Clinical equipment 1,875 1,777
Furniture and fixtures 991 902
Leased medical equipment 1,885 1,701
Leasehold improvements 709 615
------- ------
Total cost basis 5,802 5,269
Less -- accumulated depreciation (2,120) (847)
------- ------
Property and equipment -- net $ 3,682 $4,422
======= ======
</TABLE>
-17-
<PAGE>
6. DEBT:
-----
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Term loan with IBJ Schroder, due in 60
monthly graduated payments, plus
interest at a Base Rate plus 1.5% in
1996 and at LIBOR plus 3.0% or a Base
Rate plus 1.5% in 1995 (Note 7) $ 6,083 $ 6,417
Revolving line of credit with IBJ
Schroder, due on demand and no later
than 10/20/00, interest payable
monthly a Base Rate plus 1.5% in 1996
and at LIBOR plus 3.0% or a Base Rate
plus 1.5% in 1995 (Note 7) 2,000 1,600
Acquisition facility with IBJ Schroder,
due in equal monthly installments
beginning 4/30/97 at a Base Rate plus
2% in 1996 and at LIBOR plus 3.5% or
a Base Rate plus 2.0% in 1995 (Note 7) 6,000 6,000
Non-interest bearing time notes to
Thomas Zaucha and the Zaucha Family
Limited Partnership, due 1/3/96,
collateralized by irrevocable letter
of credit supported by a compensating
cash deposit (interest imputed at 9%) - 5,100
Non-interest bearing term notes to
Thomas Zaucha and the Zaucha Family
Limited Partnership, approximately
$85,000 due on 11/15/97 and then
approximately $210,000 due quarterly
until 11/15/00 (interest imputed at 9%) 2,625 2,625
Term notes to Thomas Zaucha and the
Zaucha Family Limited Partnership, due
in equal quarterly installments
beginning on 9/30/96 of $200,000, 6%
stated interest rate (interest imputed
at 9%) 2,400 2,400
Capital lease obligations with interest
rates ranging from 9% to 15.6% 3,059 3,380
Other debt 1,157 1,460
--------- ---------
Total long-term debt 23,324 28,982
Less:
Current portion (17,261) (21,110)
Debt discount (1,162) (1,584)
--------- ---------
Long-Term debt $ 4,901 $ 6,288
========= =========
</TABLE>
Med-Bill Financing
- ------------------
On September 1, 1995, a $4,500,000 term note was refinanced by the Integra
facility, described below, and all amounts due were paid in full. At the time of
the early extinguishment of debt, the Company recognized the remaining
unamortized debt issuance costs of $175,000 as an extraordinary loss. See Note
12.
Integra Facility
- ----------------
On June 29, 1995, the Company accepted a commitment letter from Integra Bank
(Integra facility) for a $6,500,000 credit facility, consisting of a $4,500,000
term loan and a $2,000,000 revolving line of credit. The proceeds of the term
loan were used to consolidate the Company's existing loan obligations to Med-
Bill. The proceeds of the revolving credit facility provided working capital as
needed. In addition, the former President and Chief Executive Officer of the
Company, Mark A. DeSimone, personally guaranteed the loan. Mr. DeSimone
received a 5% guarantee fee totaling $325,000. The credit facility closed in
August, 1995. At of the time of this early extinguishment of debt, the Company
recognized the remaining unamortized debt issuance costs of approximately
$100,000 as an extraordinary loss.
IBJ Schroder Facility
- ---------------------
On October 20, 1995, the Company closed on a credit facility with IBJ Schroder
Bank and Trust Company (IBJ). The facility consists of a $6,500,000 term loan to
refinance existing obligations, a
-18-
<PAGE>
$3,000,000 revolving line of credit to fund operations and a $6,500,000
acquisition facility to fund the Company's existing and future acquisition
activity (collectively, the IBJ Facility). The total facility has a final
maturity of 5 years from the date of closing. The term loan was funded in full
at closing and was used to repay an existing bank credit facility. The term loan
is to be repaid through 60 monthly payments beginning at $83,333 and ending at
$133,337 with interest at either the LIBOR rate plus 300 basis points or a Base
Rate, as defined, plus 1.5%, subject to the terms and conditions of the credit
agreement. Repayment terms require the revolving line of credit to be paid in
full 5 years from closing, and interest accrues thereon at either LIBOR rate
plus 300 basis points or the Base Rate plus 1.5% subject to the terms and
conditions of the credit agreement. The repayment terms on the acquisition
facility are $142,857 per month beginning April 30, 1997, and for a period of 42
months at either the LIBOR rate plus 350 basis points or the Base Rate plus 2.0%
subject to the terms and conditions of the credit agreement. The IBJ facility is
secured by a first priority lien on substantially all of the assets of the
Company. In addition, the credit agreement has various financial compliance
covenants with which the Company must comply, including certain ratios and free
cash flow requirements. See Note 7. Fees paid in connection with the IBJ
facility consisted of a 1.25% commitment fee paid at closing, 0.5% unused
revolving line of credit fee and a 0.5% unused acquisition facility fee, subject
to the terms and conditions of a credit agreement. The Company's weighted
average interest rate was 9.867% for 1996.
In addition, the Company issued to IBJ certain warrants (the "IBJ Warrants").
Without the Company's written consent, the IBJ Warrants may not be transferred
except to affiliates of IBJ. The IBJ Warrants may be exercised to purchase up to
240,000 shares of the Company's Common Stock at an exercise price of $6.76 per
share until October 20, 2000. The IBJ Warrants and the Shares underlying the IBJ
Warrants have been registered. The fair market value of the IBJ Warrants on the
date of issuance, October 20, 1995, was $703,000. The Company accounted for the
IBJ Warrants as a debt discount and is amortizing the fair market value of these
warrants on a straight-line basis over the 60 months life of the IBJ Facility.
As of December 31, 1996, the term loan portion of this facility has been drawn
down in full, the remaining $1,000,000 of the original revolving line of credit
balance has been canceled and $6,000,000 of the acquisition facility has been
used and the remaining $500,000 has been terminated by the bank. See Note 7.
At December 31, 1996 the scheduled aggregate annual maturities of long-term debt
are as follows (dollars in thousands):
<TABLE>
<S> <C>
Payments in arrears $ 775
1997 7,638
1998 5,776
1999 5,204
2000 3,918
2001 13
----------
Total $23,324
==========
</TABLE>
7. COVENANTS UNDER CREDIT AGREEMENT:
---------------------------------
Current management does not believe that the Company has ever been in compliance
with the covenants of the IBJ Facility. During 1996, the Company entered into
two forbearance agreements with IBJ regarding the events of default on the IBJ
Facility. Under the terms of these forbearance agreements, IBJ agreed not to
institute the default rate of interest on the notes and also agreed not to force
the company
-19-
<PAGE>
into accelerated payment. The second forbearance agreement expired on December
31, 1996. However, the Company and IBJ are discussing an extension of that
agreement. Management of the Company believes that it has complied with
substantially all of the terms of the forbearance agreements throughout 1996.
The financial covenants of the IBJ Facility for fiscal year 1995 do not permit
(a) the ratio of Consolidated Current Assets to Consolidated Current
Liabilities, as defined, at any time to be less then 1.75 to 1.00, (b)
Consolidated EBITDA for the twelve months ended December 31, 1995, to be less
than $3,300,000, (c) the Consolidated Net Worth at any time to be less than the
sum of (i) $18,000,000, (ii) 80% of Consolidated Net Income on a cumulative
basis (without deduction for any losses) for the period commencing on October 1,
1995 and ending on the last day of the Determination Period most recently ended
and(iii) the Net Proceeds of any sale or other disposition of any equity
securities by the Borrower, (d) the ratio, for any Determination Period ending
on the last day of any calendar month during any period set forth, including the
three months ended December 31, 1995, of (i) Consolidated EBITDA for such
Determination Period minus Capital Expenditures made during such Determination
Period to (ii) Consolidated Fixed Charges for such Determination Period, to be
less than the ratio set forth of 1.20 and (e) (i) with respect to any
Determination Period, the aggregate principal amount of all Acquisition Loans
and Term Loans outstanding on the last day of such Determination Period plus the
aggregate Revolving Credit Commitments as of the last day of such Determination
Period to exceed the Free Cash Flow of the Borrower and its consolidated
Subsidiaries for such Determination Period multiplied by 3.25, and (ii) the sum
of Consolidated Indebtedness as of the last day of such Determination Period and
the aggregate Available RC Commitment as of the last day of such Determination
Period to exceed the Free Cash Flow of the Borrower and its consolidated
Subsidiaries for such Determination Period multiplied by 3.75. Similar
covenants were applicable to fiscal year 1996 and are stated in the agreement
for subsequent fiscal years.
The non-financial covenants of the IBJ Facility include but are not limited to
the Company furnishing (a) annual audited financial statements within 90 days to
IBJ without a "going concern" opinion and (b) quarterly financial data within 45
days of a quarter-end.
Effective May 31, 1996, the Company entered into a forbearance agreement with
IBJ Schroder regarding certain events of default on the IBJ facility. IBJ
agreed to forebear on the default events in the event that the Company complied
with certain additional covenants regarding cash receipts and disbursements,
levels of cash collections, and amount of service revenues. Some of the
covenants in the loan agreement may have changed in conjunction with the
negotiation of the forbearance agreement. In addition, there are numerous
reporting requirements of the Company to IBJ regarding these covenants. As of
December 31, 1996, management of the Company believes that it has substantially
complied with all of these covenants. In conjunction with the forbearance
agreements, IBJ and the Company agreed to convert all Eurodollar based loans to
base rate loans. As of December 31, 1996, the interest rate on all outstanding
borrowing was denominated in the Base Rate.
Although the Company has obtained forbearance agreements from IBJ relating to
the payment of principal and interest, it has not received any waivers regarding
the events of noncompliance. Given the aforementioned circumstances in
connection with the IBJ facility, all indebtedness due to IBJ has been
classified as current in the accompanying consolidated balance sheet. Other
indebtedness does not contain cross-default provisions and long-term portions
thereof have not been classified as current.
Current management and members of the Board of Directors are vigorously pursuing
efforts to bring the Company to a level of profitability and cash flow
sufficient to meet all of its obligations. Effective
-20-
<PAGE>
January 1, 1997, the Company has reorganized itself into four operating
subsidiaries, while enhancing its level of service at the corporate office.
Management anticipates that the reorganization will reduce costs, provide
revenue enhancements and enable the Company to restructure its debt.
8. ACCRUED EXPENSES:
-----------------
Accrued expenses consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
<S> <C> <C>
Payroll, including payroll taxes, and
deductions $1,867 $1,559
Other 3,456 2,009
------ ------
Total accrued expenses $5,323 $3,568
====== ======
</TABLE>
9. RESTRUCTURING AND NON-RECURRING EXPENSES:
-----------------------------------------
During 1996, following the resignation of KPMG as its independent public
accountants, the Company incurred professional fees in connection with the
ensuing independent investigation, shareholder litigation and suit against the
parties allegedly responsible for the wrong doings against the Company and its
shareholders. The professional fees in connection with these actions are
anticipated to continue until the legal matters are resolved. Additionally,
given the situations discussed above, the Company's fiscal year 1995 audit fees
were higher than would otherwise be incurred.
Because of the actions of former management, the Company has been faced with
recording certain transactions which are unusual in nature and are not expected
to be recurring in future years. These transactions include, but are not
limited to, the recognition of losses on notes receivable collateralized with
common stock, payments to potentially related parties for acquisition-related
functions which can not be capitalized as part of purchase price APB No. 16, and
other unusual compensation arrangements offered to certain former employees.
Current management has recognized the need for the Company to restructure its
operations in order to create a level of cash flow and profitability in order to
meet scheduled debt payments. Thus, the Company has undertaken certain
restructuring efforts which have included the creation of a detailed business
plan and the closure of certain locations which were not profitable.
A summary of these unusual and non-recurring expenses are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Legal and accounting fees $ 629 $ -
Litigation costs 565 -
Loss on notes receivable collateralized
with common stock 1,772 -
Write off of intangible assets 960 3,421
Corporate restructuring costs 292 406
Professional fees related to
investigation 751 -
------ ------
Total $4,969 $3,827
====== ======
</TABLE>
-21-
<PAGE>
10. LEASES:
-------
The Company has entered into various non-cancelable operating leases expiring at
various dates through December 31, 2001 for office and medical equipment,
vehicles, and office space at its headquarters and certain rehabilitation
centers. During the years ended December 31, 1996 and 1995, rental expense
included in the statement of operations was $3,345,000 and $1,275,000,
respectively. As discussed in Note 12, the Company leases certain properties
from a related party.
Future minimum lease commitments for all non-cancelable leases as of December
31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Operating
Year Ending December 31, Leases
- ------------------------- ---------
<S> <C>
1997 $ 2,443
1998 1,767
1999 1,439
2000 1,192
2001 847
Thereafter 2,857
---------
Total Payments $10,545
=========
</TABLE>
11. EMPLOYEE BENEFIT PLANS:
-----------------------
The Company has a deferred compensation plan for its employees pursuant to
Section 401(k) of the Internal Revenue Code of 1986, as amended (the Northstar
Plan.). This plan provides for certain matching of employee contributions up to
prescribed limits of 10% of the employee contribution. Keystone also had a
deferred compensation plan for its employees pursuant to Section 401(k) of the
Internal Revenue Code of 1986, as amended (the Keystone Plan). The Keystone
Plan provides for certain matching of employee contributions equal to 50% of
participants' contributions up to three hundred dollars per year. The Keystone
plan also provides that Keystone may make discretionary contributions; however,
no such contributions were made during the forty-five days ended December 31,
1995 or in 1996.
During 1996 and 1995 the Company made contributions to the Plans of
approximately $26,000 and $86,000, respectively.
12. RELATED-PARTY TRANSACTIONS:
---------------------------
The Company does not adopt or affirm any related party disclosures made in prior
financial statements or public filings. The transactions disclosed below are
based on current management's knowledge at this point in time; however,
management believes that other matters may come to their attention during the
litigation discussed in Notes 1, 20 and 21.
Transactions Directly With Mr. Mark DeSimone
- --------------------------------------------
During the year ended December 31, 1995, Mr. DeSimone reimbursed the Company for
$220,000 of expenses. During 1995 he also paid 7% interest of $29,000 to the
Company on this obligation. Conversely, the Company repaid a loan of $162,000 to
Mr. DeSimone on May 30, 1995 along with 8% per annum interest of $6,000.
-22-
<PAGE>
As of July 18, 1995, in consideration for Mr. DeSimone entering into an extended
non-compete agreement with the Company, fixing his compensation over the term of
the agreement and for returning to the Company options covering 250,000 shares
of common stock, the Company amended, restated and replaced Mr. DeSimone's
previous employment agreement. In addition to annual compensation and certain
benefits, Mr. DeSimone received 30,000 shares of common stock with a fair market
value of $198,000, a one-time bonus of $175,000 and the repayment of a personal
loan to PNC Bank in the amount of $150,000. In connection with this loan
repayment, for each year Mr. DeSimone remained as an employee or consultant to
the Company, the Company agreed to waive repayment by Mr. DeSimone to the
Company of one-seventh of this loan satisfaction.
In September 1995, the Company received approximately $253,000 from Mr. DeSimone
for payment of third party receivables that the Company had recorded.
In February 1996, Mr. DeSimone terminated his employment with the Company but
continued to work as a consultant to the Company. His employment contract was
changed to a consulting arrangement with similar terms. The Company paid him
$47,000 under the terms of this agreement during 1996. In March 1996, Mr.
DeSimone resigned from the Board of Directors and the Company terminated its
relationship with him.
As discussed in Note 6, Mr. DeSimone personally guaranteed the Integra facility
and received a 5% guarantee fee totaling $325,000.
Mr. DeSimone was a director of SMT Health Services, Inc. (SMT) during 1995. Mr.
DeSimone also had a 5-year consulting arrangement with SMT from which he
received $75,000 for consulting service. Mr. DeSimone sold his consulting
business to the Company prior to 1995. Current management believes that these
and possibly other fees for consulting services should have been remitted to the
Company and is seeking recover such fees.
Transactions with Med-Bill Corporation, Inc., Med Consulting and Med-Stat, Inc.
- -------------------------------------------------------------------------------
Med-Bill Corporation, Inc. (Med-Bill), which is a company located in Western
Pennsylvania, is a related party. Mr. James P. Shields, a cousin of Mr.
DeSimone is an officer and the sole owner of Med-Bill. Additionally, Mr.
DeSimone and his wife, Leslie M. DeSimone, are believed by current management
to be associated with Med-Bill and had the principal financial interests in Med-
Bill. Likewise, Med Consulting and Med-Stat, Inc. are believed by current
management to have relationships similar to that of Med-Bill.
Additionally, in 1994 the Company agreed to pay Med-Bill a financing fee of
$250,000 at the time of the loan in the preceding paragraph was received. On
May 29, 1995, the Company paid the final installment of $150,000 toward the
aforementioned financing fee.
Prior to 1995, Med-Bill purchased certain obligations of the Company totaling
$930,000. This obligation was paid in full during 1995. No interest was paid on
this note.
In the first quarter of 1995, the Company loaned Med-Bill and Med Consulting
$41,000 and $25,000, respectively, pursuant to a demand note that bears interest
at the rate of 9% per annum. At December 31, 1995, these amounts were deemed
uncollectible and were written-off.
On July 1, 1995, the Company entered into a lease agreement with Med-Stat, Inc.
for two pieces of ultrasound equipment in the amount of $225,000 and paid a
deposit of $30,000. On August 31, 1995, the lease was bought-out by a reduction
in amounts due from Med-Bill of $167,500. Current management believes that the
equipment leased/purchased may have been used and may not have been acquired at
fair market value.
-23-
<PAGE>
White-Oak Diagnostics Systems (White Oak)
- -----------------------------------------
In November 1993, the Company acquired an interest in White Oak Diagnostic
Systems (White Oak) from Northern Diagnostics Services, Inc. (Northern
Diagnostics), an entity which was purportedly owned by Mr. James Shields.
In connection with the acquisition, the Company agreed to make certain
contingent payments to either Northern Diagnostics or Med-Bill if gross
collected revenues exceeded $400,000 for 1995. The 1995 revenues exceeded the
aforementioned threshold and a contingent payment was made to Med-Bill during
the year of $85,000. Given the related party nature of the transaction, this
payment was treated as a disproportionate dividend as the Company was required
to record its investment in White Oak at the same basis as that of the related
parties' investment in White Oak.
Northern Diagnostics acquired White Oak from a group of physicians. In August
1995 White Oak made payments to the former physician owners of approximately
$150,000. Current management believes that these payments by White Oak
represent amounts due to these physicians by Northern Diagnostics for the
acquisition.
On May 30, 1995 the Company paid $350,000 to Med-Bill to satisfy amounts
recorded as due Med Bill.
PVL Acquisition
- ---------------
In connection with the purchase of PVL and Vascusonics, the Company transferred
to Ultrasonics, Inc. (Ultrasonics), all the receivables of PVL and Vascusonics
as of December 1, 1995, with a value as stated in the acquisition agreement of
$350,000 for no known consideration. Ultrasonics is a related party and is
owned by Mr. James Shields and/or Mr. Jeff D. Bergman, the CEO and Chairman of
the Board of SMT.
The purchase agreement stated that certain equipment lease obligations would be
transferred to Ultrasonics. White Oak and Vascusonics then agreed to sublease
the equipment from Ultrasonics such that the sellers would have no future
liability under the leases. Also, White Oak and the Company jointly and
severally indemnified the sellers from and against any liability resulting from
the failure of Ultrasonics to discharge all obligations to the lessors after the
date of the sale. Current management is not aware of any consideration received
by the Company from Ultrasonics in exchange for the lease contracts, which
current management believes yielded lease payments to Ultrasonics which were in
excess of fair market value for the leased equipment, or issuance of the
previously-mentioned indemnification.
During 1996, the Company paid $53,341 in lease payments. Further, although the
lessor paid approximately $155,000 for the equipment which it leased to the
Company, the Company is scheduled to make lease payments totaling approximately
$1,333,000. After March 1996, the Company refused to pay any further amounts
under this contract, believing the payment to be excessive. The Company is
vigorously contesting this obligation.
As discussed in Note 3, in connection with the this acquisition, the Company
paid a brokerage fee of $350,000 to Mr. James Shield.
-24-
<PAGE>
Shields Management Agreement
- ----------------------------
Throughout 1995 the Company paid fees to Mr. James Shields or Med-Bill in
connection with certain management services that he provided at White Oak.
Additionally, upon the acquisition of PVL, Mr. Shields began providing such
services at PVL. In total, management fees of approximately $270,000 were paid
to Mr. Shields/Med-Bill during 1995. As of December 31, 1995, the Company had
approximately $37,000 due to Mr. Shields or Med-Bill. The Company severed its
relationship with Mr. Shields during the first quarter of 1996. See Note 3 for
information relating to the financial incentives provided to Mr. Shields to
renegotiate his employment contract with the Company to terms more favorable to
Mr. Shields.
During 1996, the Company paid Mr. Shields $59,106 under the terms of this
contract. After March 1996, the Company refused to pay any further amounts
under this contract, believing the payments to be excessive. The Company is
vigorously contesting this obligation.
Keystone Acquisition
- --------------------
As part of the acquisition of Keystone, the Company paid cash of $450,000 and
issued 150,000 shares of common stock with a market value of $937,500 to
Commercial Financial Corporation (CFC) for services rendered. CFC is wholly-
owned by Nichlaus P. Horoczko who is a personal friend and business associate of
Mr. DeSimone. CFC is believed by current management to be a related party.
Additionally, the Company has made certain guarantees to CFC that the
aforementioned shares will be able to be sold with a net proceeds of at least
$937,500. These costs were expensed during 1995.
The Company believes that these shares of common stock were sold on February 12,
1996 for approximately $840,000. No additional compensation has been requested
by CFC for the shortfall in share proceeds. In the opinion of current
management, as Mr. Horoczko did not perform any services of value, he was not
entitled to the common shares discussed above or any additional compensation
thereon. Mr. Horoczko is a defendant in the Company's suit as discussed in Notes
1 and 20.
In connection with the Keystone acquisition, Mr. Thomas Zaucha and Mr. David
Watson, who both sold interests in the former Keystone, and are now or were
officers with Northstar, have gross debt and other amounts due directly to them
of $3,919,500 and $293,750, respectively, as of December 31, 1996 and $7,897,500
and $368,750 as of December 31, 1995. In addition, Mr. Zaucha's family limited
partnership is due $1,105,500 and $2,227,500 as of December 31, 1996 and 1995,
respectively. See Note 6.
As required under the Merger Agreement, immediately prior to the merger,
Keystone transferred to the Zaucha Family Limited Partnership, of which Mr.
Zaucha, is a general partner, all of the real estate previously owned by
Keystone in return for a payment of $5,215,568. The parcels of such real estate
used in Keystone's business were then leased to Keystone. The Company has
researched alternative leasing arrangements which are available for the Company
which would provide comparable quality space in similar areas. As a result of
this comparison, the current management of the Company believes that the current
leasing arrangements are in excess of fair market value and is currently seeking
to renegotiate the rental rates.
-25-
<PAGE>
The leases are for a period of ten years, and commenced November 15, 1995.
Lease payments for 1996 and 1995 were $470,364 and $59,000, respectively.
Future minimum lease payments under these leases, which are also disclosed
within Note 10, are as follows:
<TABLE>
<S> <C>
1997 $ 470,364
1998 470,364
1999 470,364
2000 470,364
2001 546,156
Thereafter 2,184,624
----------
Total $4,612,236
==========
</TABLE>
The Company also paid to Impulse Development Corporation, a company controlled
by Thomas Zaucha, certain sums related to housekeeping, maintenance and
leasehold improvement construction. In addition, a family member of the
Company's former Chief Financial Officer was employed by Impulse Development
Corporation. These payments totaled $86,320 in 1996 and $9,156 in 1995.
Transactions with Board Members
- -------------------------------
In 1996, Brody Associates, a consulting firm wholly-owned by Steven Brody,
Director, 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. During 1996, the Company paid $223,795
to Brody Associates for these services and related business expenses. At
December 31, 1996, the Company had a liability to Brody Associates of $25,586.
See Note 13 for option activity. See Note 13 for stock option activity.
In 1996, the Company retained Executive Advisory Group, Ltd., whose sole owner
is Robert Smallacombe, Director, to serve as a management consultant and to aid
in the corporate restructuring. For these services and related business
expenses, the company paid $189,503 to Executive Advisory Group, Ltd. As of
December 31, 1996, the Company owed $9,750 to Executive Advisory Group, Ltd.
See Note 13 for option activity. See Note 13 for stock option activity.
In conjunction with the investigation of former management, the Company retained
Plowman, Speigel & Lewis, P.C. in order to assist in understanding certain
corporate governance and securities litigation issues. Charles Jarrett, Jr.,
currently a director of the Company, is also a member of that firm. During
1996, but prior to Mr. Jarrett's appointment to the Board of Directors, the
Company paid to Plowman, Speigel & Lewis, P.C. $32,548 for professional services
rendered.
As discussed in Note 16, the Company has certain contractual obligations due to
employees. One such employee is the wife of Mr. Watson, an officer and director
of the Company. Mrs. Watson's funds provided to the Company were $126,354 as of
December 31, 1996. The maximum amount payable in accordance with the terms
discussed in Note 16 is approximately $182,000 to Mrs. Watson.
The Company had transactions involving Thomas Zaucha and related parties as
discussed in Notes 3 and earlier in Note 12. The Company also conducted
transactions with Mark DeSimone and related parties as discussed earlier in Note
12.
Other
- -----
During 1995, the Company paid $13,500 to Ogg Jones DeSimone & Ignelzi, a law
firm in which Mr. DeSimone was a partner, purportedly for rent. See Notes 3, 6,
10, 13, 15, 20 and 21.
-26-
<PAGE>
13. STOCK OPTIONS AND WARRANTS:
---------------------------
Stock Options
- -------------
The Company adopted a stock option plan in 1992 (the 1992 Plan) and a 1994 stock
option plan for non-employee directors (the 1994 Plan) collectively (the Plans).
The Company accounts for these plans under APB Opinion No. 25 under which
compensation expense does not normally require recognition of compensation
expense. Had compensation cost been determined consistent with FASB Statement
No. 123, the Company's pro forma net loss and loss per share would have been:
<TABLE>
<CAPTION>
1996 1995
---------------------
<S> <C> <C> <C>
Net Loss As Reported $(8,947) $(13,101)
Pro Forma (9,360) (14,287)
Loss per Share As Reported $ (1.44) $ (3.28)
Pro Forma (1.51) (3.58)
</TABLE>
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
Shares Wt Avg. Ex Shares Wt Avg. Ex
Price Price
---------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 540,380 $6.21 624,080 $7.06
Granted 50,000 5.25 300,000 6.03
Exercised - - 24,000 5.50
Forfeited 182,580 6.03 359,700 7.57
Expired - - - -
Outstanding at end of year 407,800 6.18 540,380 6.21
Exerciseable at end of year 317,867 6.20 360,086 6.17
Wt avg. fair value of options granted $4.39 $5.03
</TABLE>
The fair value of the 1995 option grant as outlined above is estimated using the
Black Scholes option pricing model with the following assumptions: life of the
options ranging from 3 to 5 years; an assumed risk free rate of interest equal
to the zero coupon Treasury bill yield on the date of grant with the given
maturity; an expected dividend yield of 0%, consistent with the Company's
policy; expected volatility of 118% for the 1995 grant.
A total of 800,000 shares are authorized and have been reserved for issuance
under the Plans, 650,000 of which has been allocated to the 1992 Plan and
150,000 of which has been allocated to the 1994 Plan. Options may be either
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986, or non-qualified options. The 1992 Plan is
administered by a committee of the Board of Directors who determine among other
things, those individuals who shall receive options, the time period during
which the options may be partially or fully exercised, the number of shares of
Common Stock that may be purchased under each option, and the option exercise
price.
-27-
<PAGE>
The following summarizes the activity under the 1992 Plan:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------------------------------------
<S> <C> <C>
Options-
Outstanding at beginning of year 502,880 594,080
Granted - 285,000
Exercised - (24,000)
Expired/Canceled (182,580) (352,200)
------- -------
Outstanding at end of year 320,300 502,880
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------------------------------------
<S> <C> <C>
Option price per share ranges-
Outstanding at beginning of year $ 5.25 - 7.88 $ 5.25 - 7.88
Granted - 5.50 - 8.30
Options exercisable at end of year 230,367 322,586
Exercisable option price ranges $5.25 - 7.88 $5.25 - 7.88
Options available for grant at end of
year under 1992 Plan 329,700 147,120
</TABLE>
Under the 1994 Plan, on June 7, 1994, the four non-employee members of the Board
of Directors each received an option to purchase 7,500 shares of Common Stock at
an exercise price of $7.3125 per share that expires on June 7, 2004. During
1995, options for 7,500 of these shares expired. On June 7, 1995, the three
non-employee members of the BOD each received an option to purchase 2,500 shares
of common stock at an exercise price of $6.875 per share that expires on June 7,
2005. On December 15, 1995, a newly appointed director was granted an option to
purchase 7,500 shares of Common Stock at $6.125 per share. On February 2, 1996,
the Board of Directors ratified a consulting contract for Steven Brody which
called for an issuance of an option to purchase 50,000 shares of common stock at
an exercise price of $5.25 per share and an expiration date of February 2, 2001.
The option prices represented fair market value at the dates of grant.
In addition, the Company's former Chief Operating Officer received an option to
purchase 150,000 shares of Common Stock, issued outside of the Plans, at a price
equal to $5.25 (the fair market value at the date of grant). During 1995, his
employment was terminated and the 50,000 options that were vested were exercised
in September 1995.
During 1996, the Company entered into four contracts which bound the Company to
provide stock options or some other type of compensation to the contracting
parties in return for some consideration. The terms of these contracts are
outlined below: (a) The Company entered into a contract with Steven Brody to
provide him with an option to purchase between 75,000 and 150,000 shares of
common stock at the lowest trading price during the term of the special
investigation; (b) The Company entered into Contracts with Robert Smallacombe
to issue him an option to purchase up to 25,000 shares of common stock at $2.00
per share and an option to purchase an additional 100,000 shares of common stock
at $2.00, exercisable when the Company's common stock is listed and trades in
excess of 5.93 per share for at least 10 consecutive trading days. The contract
was renewed in early 1997 and provided an option to purchase an additonal 25,000
shares of common stock at $1.75 per share; (c) As part of a severance agreement
with a former officer, the Company offered this employee an option to purchase
up to 10,000 shares of common stock at $2.00 per share; (d) In conjunction with
the signing of
-28-
<PAGE>
an employment agreement, the Company offered this employee an option to purchase
25,000 shares of common stock at the fair market value as of the date of the
agreement and an option to purchase another 50,000 shares of common stock at
$2.00 per share based on certain performance measures. As of December 31, 1996,
none of these options have been issued.
In January 1997, pursuant to a valuation analysis prepared by Compass Capital
Group dated November 30, 1996 and submitted to the Compensation Committee for
review and acceptance, the Board of Directors considered recommendations to
issue up to 1,020,000 options to directors, officers, advisors and key employees
of the Company. Further, the recommended issuances addressed the need to amend
the existing 1992 and 1994 option plans, subject to review by corporate counsel
and shareholder approval. The recommended amendments would increase the
Company's capacity for issuance to a maximum of 1,500,000 shares with additional
increased over a three year period to a maximum of 2,000,000 shares. Of the
1,020,000 shares recommended for issuance, a majority represent contractual
obligations approved by the Company's former CEO, Thomas Zaucha and the
remainder represent incentive stock option grants available within the capacity
of the 1992 and 1994 option plans previously approved by shareholders. See Note
21.
Stock Warrants
- --------------
Since the Company's initial public offering of common stock in June 1993, the
Company had numerous occasions to issue warrants to underwriters, their lender
and other organizations.
In connection with the Public Offering for underwriting services provided, the
Company issued 87,500 warrants to Pennsylvania Merchant Group, 70,000 warrants
to Commonwealth Associates and 17,500 warrants to Andreas V. Bello on May 18,
1995, for the purchase of its common stock at $8.29 per share. These warrants
are exercisable over a four-year period commencing on May 18, 1996. The total
fair value of these 175,000 warrants on the grant date was approximately
$686,000 as determined through a calculation using the Black-Scholes model. The
value of these warrants have been accounted for as a deduction of the Offering
proceeds through a reduction in additional paid-in capital.
On June 13, 1995 the Company issued 110,000 warrants to US Equity Capital Corp.
for the purchase of its common stock at $5.63 per share as compensation for
consulting services. These warrants were exercisable over a three year period
ending on June 13, 1998. The fair value of these warrants on the grant date
based upon a Black-Scholes model calculation was approximately $220,000 and has
been expensed in the accompanying consolidated statement of operations.
As discussed in Note 6, the Company issued the IBJ Warrants on October 20, 1995.
-29-
<PAGE>
The following summarizes the Company's warrant activity:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------------------------------------
<S> <C> <C>
Warrants-
Outstanding at beginning of year 693,500 168,500
Granted - 525,000
Exercised - -
Expired/Canceled - -
-----------------------------------
Outstanding at end of year 693,500 693,500
===================================
Warrant price per share ranges-
Outstanding at beginning of year $ 5.50 - 6.25 $5.50 - 6.25
Granted during the year - $5.63 - 8.29
Warrants exercisable at end of year 693,500 518,500
Exercisable warrant price ranges $ 5.50 - 6.25 $5.50 - 6.25
</TABLE>
14. INCOME TAXES:
-------------
The provision (benefit) for income taxes consisted of the following (in
thousand):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current:
Federal $(2,472) $(2,105)
State (337) 111
Deferred:
Federal 26 (2,596)
State 9 (587)
Valuation allowance 3,245 4,941
------------- -------------
$ 471 $ (236)
============= =============
</TABLE>
The reconciliation between income taxes computed by applying the statutory U.S.
federal income tax rate to the loss before income taxes and the actual benefit
for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Income tax at U.S. federal statutory $(2,446) $(4,336)
rate
State income taxes, net of federal
income tax benefit (328) (841)
Valuation allowance 3,245 4,941
------------- -------------
Income tax provision/(benefit) $ 471 $ (236)
============= =============
</TABLE>
-30-
<PAGE>
The Company had $9,350,000 in deferred tax assets at December 31, 1996 due
primarily to timing differences resulting from provisions for doubtful accounts
receivable, net book value of intangible assets and net operating loss
carryforwards.
A valuation allowance has been recorded to reduce deferred tax assets because
the Company believes, based on the weight of available evidence, it is more
likely than not that all of the deferred tax assets may not be realized.
15. EMPLOYMENT AGREEMENTS:
----------------------
The Company has entered into employment agreements, expiring from 1997 through
2002, with certain of its officers and other key employees. The minimum annual
payments required under these agreements are as follows (dollars in thousands):
<TABLE>
<S> <C>
1997 $1,454
1998 1,255
1999 1,199
2000 1,191
2001 1,047
------
Total $6,146
======
</TABLE>
Included in the above figures are employment agreement obligations to facility
directors who have also provided working capital funds to the Company as
discussed in Note 16. The employment agreements for these employees do not have
a fixed termination date. As such, the payments to those individuals of
approximately $850,000 annually will continue indefinitely beyond 2001.
In addition to the aforementioned employment agreements, the Company has a
management agreement with Mr. James Shields to perform services within certain
business operations of the Company. The agreement, before any extension,
expires on November 29, 2002. Mr. Shield's compensation was to be a fee of 12%
of the gross collections of the operations that he managed. See Note 12.
Also included in the above figures is the employment agreement of Mr. Zaucha who
the Company terminated as Chief Executive Officer in February 1997. Mr.
Zaucha's compensation is $125,000 annually for the years 1997 through 2000 and
is included in the above table. See Note 21.
16. CONTRACTUAL OBLIGATIONS TO EMPLOYEES:
-------------------------------------
Prior to the acquisition of Keystone, certain former partners of Keystone and
clinicians executed employment agreements with Keystone. These contracts
required the employees to provide funds to Keystone as part of their incentive
compensation arrangements. In return these employees received incentive
compensation equivalent to 25% of the net income for their facilities for each
month. The total funds provided to Keystone was $952,000.
As provided for within these agreements, the change in controlling interest in
Keystone, enables these employees to terminate the contracts and be entitled to
either the funds they provided to Keystone or two times the most recent twelve
months of pre-commission net income of the facility that they operate. As of
December 31, 1996, the Company has accrued $1,633,000, which is equal to the
maximum amounts under these agreements. See Note 12.
-31-
<PAGE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,607 $ 1,607 $ 5,730 $ 5,730
Long-term debt, including current 19,103 19,103 24,019 24,019
portion
Notes receivable collateralized with
common stock - - 2,187 2,159
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments for which it is practicable to
estimate that value. Fair value is defined as the amount at which the
instrument could be exchanged in a transaction between willing parties.
Cash and Cash Equivalents
- -------------------------
The carrying amount reported in the balance for cash and cash equivalents
approximates their fair value.
Long-Term Debt
- --------------
The fair value of long-term debt is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities.
Notes Receivable Collateralized with Common Stock
- -------------------------------------------------
The fair value of the notes receivable was estimated by calculating the fair
market value of the shares of common stock collateralizing the notes as of
December 31, 1995.
18. SIGNIFICANT CUSTOMERS:
----------------------
Although net patient service revenue is generated by performing procedures or
services for the ultimate patients, who are referred for care through their
physician, the Company receives most of its revenues through payments made by
certain governmental programs, private insurers such as Blue Cross and Blue
Shield of Western Pennsylvania or organizations, such as a nursing homes.
Additionally, the Company receives management fees for certain entities for
which it perform certain management services.
19. CORRECTION OF ERRORS:
---------------------
The Company has determined that certain transactions occurring prior to 1995
were not recorded correctly and have misstated certain of the Company's December
31, 1994, stockholders' equity accounts, including an overstatement of retained
earnings. The Company's current management was not employed with the Company
when the transactions discussed below took place. The accounting errors
discussed below are based on current management's knowledge although other
information may become known during the litigation discussed in Notes 1 and 20.
-32-
<PAGE>
The corrections of these errors are summarized below.
<TABLE>
<CAPTION>
Common Stock Common Shares Issuable Additional
------------------- ---------------------- Paid-In Warrants
Shares Amount Shares Amount Capital Outstanding
------ ------ ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994, as previously 2,600,000 $26 - $ - $5,592 $ -
reported
Shares issuable in
connection with
employee dispute
settlement (previously - - 20,378 127 - -
recorded as a
liability) (a)
To record warrants
issued to underwriters
for-
1993 initial public
offering (b) - - - - (252) 252
1994 attempt at a
failed offering (c) - - - - - 90
Write-off expenses on
failed offering (d) - - - - 161 -
Record value of shares
issued in NS Rehab
acquisition (e) - - - - 204 -
Expense compensation
when vested (f) - - - - - -
Change in estimated
lives assigned to NS
Rehab non-compete
agreements (g) - - - - - -
Disproportionate
dividends, net of
previous goodwill
amortization in
connection with the
acquisition of-
White Oak
Diagnostics (h) - - - - - -
NS Consulting (i) - - - - - -
Record sick pay accrual - - - - - -
(j)
Reverse receivables for
revenue which was not
supportable(k) - - - - - -
Amortization on
organization costs (l) - - - - - -
Reverse CDL goodwill
recorded on purported
sale and repurchase of
stock of CDL (m) - - - - - -
Record 1994 CDL loss on
the equity basis of
accounting (n) - - - - - -
Assign value to
non-compete agreement,
net of amortization (o) - - - - - -
Adjust non-compete
values and lives
assigned and deal
costs in NW Rehab
acquisition (p) - - - - - -
--------- ------ ------ ------- ----------- -----------
Subtotal of corrections - - 20,378 127 113 342
Balance, December 31,
1994, as restated 2,600,000 $26 20,378 $127 $5,705 $342
========= ====== ====== ======= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Retained
Earnings Notes
(Deficit) Receivable Total
----------- -------------- ----------
<S> <C> <C> <C>
Balance, December 31,
1994, as previously
reported $ 1,823 $(30) $ 7,411
Shares issuable in
connection with
employee dispute
settlement (previously
recorded as a
liability) (a) - - 127
To record warrants
issued to underwriters
for-
1993 initial public
offering (b) - - -
1994 attempt at a
failed offering (c) (90) - -
Write-off expenses on
failed offering (d) (161) - -
Record value of shares
issued in NS Rehab
acquisition (e) - - 204
Expense compensation
when vested (f) (500) - (500)
Change in estimated
lives assigned to NS
Rehab non-compete
agreements (g) (403) - (403)
Disproportionate
dividends, net of
previous goodwill
amortization in
connection with the
acquisition of-
White Oak
Diagnostics (h) (1,086) - (1,086)
NS Consulting (i) (214) - (214)
Record sick pay accrual
(j) (135) - (135)
Reverse receivables for
revenue which was not
supportable(k) (86) - (86)
Amortization on
organization costs (l) (25) - (25)
Reverse CDL goodwill
recorded on purported
sale and repurchase of
stock of CDL (m) (42) - (42)
Record 1994 CDL loss on
the equity basis of
accounting (n) (150) - (150)
Assign value to
non-compete agreement,
net of amortization (o) (22) - (22)
Adjust non-compete
values and lives
assigned and deal
costs in NW Rehab
acquisition (p) (259) - (259)
------- -------------- -------
Subtotal of corrections (3,173) - (2,591)
Balance, December 31,
1994, as restated $(1,350) $(30) $ 4,820
======= ============== =======
</TABLE>
(a) The Company had a dispute with a former employee. During November 1994 the
Company's Board of Directors approved a settlement whereby 20,378 of common
shares were to be issued to the aforementioned employee. The Company recorded a
liability for this amount as of December 31, 1994; however, the Company now
recognizes that such shares were in fact issuable at December 31, 1994.
(b) As part of their compensation for the 1993 initial public offering of the
Company's stock, Laidlaw Equities, Inc. was provided with 100,000 stock warrants
which had a Black Scholes Model value of approximately $252,000. The Company
now believes that these warrants should have been recorded on
-33-
<PAGE>
their accounting records as a reduction in additional paid in capital.
(c) The Company attempted to issue additional shares of common stock in late
1994. In connection therewith, 38,500 warrants with a fair market value under
the Black Scholes Model of approximately $90,000 were issued to U.S. Equity
Capital. Since the attempt at the offering failed, the Company now believes
that the value of the warrants should have been expensed at December 31, 1994.
(d) In connection with the failed offering described in item c above, the
Company had incurred approximately $161,000 of expenses during 1994 which the
Company now believes should have been recognized as a period cost during 1994.
(e) In connection with the acquisition of Northstar Rehabilitation, Inc. (NS
Rehab), the Company issued 15% of the Company's outstanding common shares as
part of the purchase price. However, the Company did not account for the shares
issued in their calculation of purchase price. Therefore, additional goodwill
and equity of $204,000 has been recorded as an adjustment.
(f) In accounting for the NS Rehab acquisition, the Company had assigned
$750,000 to an employment contract which was being amortized over 3 years. Six
months later, the Company re-allocated $500,000 of this employment to the non-
compete agreement which was being amortized over 15 years. As part of this
reallocation, a letter to the seller of NS Rehab indicated that the above-
mentioned $500,000 was deemed as earned as of the date of the letter. The
Company now believes that this $500,000 should have been expensed immediately in
1992 when the letter was written.
(g) As indicated in item f above, the Company amortized the purchase price
allocated to non-compete agreements over 15 years; however, the Company now
believes that the proper amortization period for such an agreement is five
years. In connection with the change in this estimated life, additional
amortization of $403,000 has been recorded for years prior to 1995.
(h) The Company acquired White Oak from Northern Diagnostics which has been
deemed by the Company to be a related party for the reasons outlined in Note 11.
Therefore, the Company cannot allocate a purchase price in excess of Northern
Diagnostic's basis in the business. Thus, the excess of the purchase price
(approximately $1,086,000 as of December 31, 1994) over Northern Diagnostic's
basis has been recorded as a disproportionate dividend.
(i) Prior to 1994, the Company acquired Mr. DeSimone's consulting business which
had no assets or liabilities. Thus, similar to item h above, the entire
purchase price should be recorded as a disproportionate dividend.
-34-
<PAGE>
(j) Prior to 1995, any employee who left the service of the Company was paid for
any unused sick time at their current rate of pay. Such time was not previously
accrued. This entry corrects that error.
(k) As of December 31, 1994 the Company had receivables of approximately $86,000
recorded for consulting services that current management is unable to support.
Thus, the Company has reversed this consulting revenue.
(l) During the year ended December 31, 1995, the Company realized that
amortization of certain organizational costs had not been recorded since 1991.
Thus, a correction of $25,000 has been recorded to correct this error.
(m) In December 1993, the Company purchased a 51% interest in CDL Medical
Technologies, Inc. (CDL). At the end of 1994, the Company purportedly sold 49%
of its interest in CDL back to their partner for $55,000 effective January 1,
1994. Then in January 1995, the Company repurchased the 49% interest in CDL for
$60,000. For accounting purposes, the Company now realizes that they in fact
had a 51% interest in CDL since December 1993. Thus, one year of goodwill
amortization in the amount of $42,000 has been recorded.
(n) In connection with this series of transactions described in item m, the
Company did not recognize their portion of the equity loss of CDL during 1994.
Therefore, the Company is now recording their equity in the loss which amounted
to approximately $150,000.
(o) In connection with the Company's purchase of Tri State Sports Rehab &
Physical Therapy, P.C. (Tri State), no value was assigned within the accounting
records for the non-compete agreement. The Company is therefore correcting this
error by assigning $110,000 of previously recorded goodwill to the non-compete
agreement and by amortizing this amount over five years. Thus, a net charge of
$22,000 was needed to correct this accounting error.
(p) When the Company purchased NW Rehabilitation Associates, Inc. (NW Rehab),
$986,000 of purchase price was allocated to a non-compete agreement which NW
Rehab had with its former partners for which there was no future economic
benefit to the Company. Additionally, the Company did not allocate $1,180,000
of purchase price to the non-compete agreement with the seller of NW Rehab. The
Company has corrected these two errors and have adjusted the amortization of the
non-compete agreement to a period of five years. The effect of this correction
was a $259,000 reduction to the December 31, 1994, retained deficit account.
20. COMMITMENTS AND CONTINGENCIES:
------------------------------
Certain stockholders have filed suits against the Company in regards to the
certain events which were allegedly caused by former management and other
potentially responsible parties. Additionally, the Company has instituted legal
action against various parties, some of whom are former employees, alleging
improper actions and the diversion of funds to other entities. See Note 1.
Although the results of these lawsuits are indeterminable at this time, the
Company expects to actively seek restitution for damages from the responsible
parties.
The Company has filed a claim under an existing fidelity insurance policy to
recover a portion of the damages from the above actions. The timing and extent
of any recoveries are unknown at this time.
-35-
<PAGE>
The Company is a defendant in several lawsuits resulting from the ordinary
course of business. Management believes that the outcome of such suits will not
have a material adverse effect on the Company's financial position or results of
operations.
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.
21. SUBSEQUENT EVENTS:
------------------
In January 1997, the Compensation Committee recommended to the Board of
Directors that the Board authorize the issuance of certain options as discussed
in Note 13. To date, the Board of Directors has not taken action to authorize
any new option grants.
In January 1997, the Company reached a settlement agreement with the seller of
PVL regarding several disputes. In the terms of this agreement, the Company
reduced certain future payments due to the seller from $100,000 to $50,000,
acquired ownership rights to disputed equipment, and reduced contingent payments
amounts.
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.
On February 6, 1997, Thomas W. Zaucha, the then Chief Executive Officer of
Northstar delivered to the US Securities and Exchange Commission (SEC) proxy
solicitation materials with the stated intention of changing the present Board
of Directors and management of the Company, changing the number and term of the
directors, filling the vacancies on the Board and making changes in the
Company's by-laws.
On February 10, 1997, Thomas W. Zaucha field suit against Northstar Health
Services, Inc. ("Northstar") and all other members of its Board of Directors in
the Delaware Chancery Court, Civil Action No. 15530. His litigation commenced on
the same day that Zaucha's Committee filed with the U.S. Securities and Exchange
Commission its preliminary consent materials in connection with this current
Solicitation. Zaucha began his lawsuit without providing any prior notice to the
Company or fellow Board members. The Company believes that, had Zaucha fulfilled
his duty of candor to the Company, and requested clarification of issues, he
could have avoided unnecessary and potentially costly litigation.
On February 13, 1997, the Board of Directors removed Mr. Zaucha from his office
as Chairman of the Board and Chief Executive Officer for cause. On February 17,
1997, the Board appointed Robert J. Smallacombe as the new Chief Executive
Officer and his existing consulting contract was recast as an employment
contract. The Board then named Steven N. Brody, a board member since December
1995, as the new Chairman. As discussed in Note 15, Mr. Zaucha was party to an
employment agreement which called for compensation of $125,000 annually.
Effective February 14, 1997, Richard Andracsik, the former owner of Medical
Rehabilitation Systems, Ltd. resigned from the Company. Andracsik will continue
his relationship with the Company through a consulting relationship for
occasional assignments.
On March 6, 1997, the Company filed a revocation of consent statement in order
to solicit revocation votes regarding the proxy solicitation by Mr. Zaucha.
On March 17, 1997, Ultrasonics filed suit against the Company as a result of
disputed lease agreements which the Company refuses to pay based on the fact
that such leases are for more than market rates.
On March 19, 1997, the Company filed a suit against multiple parties including
Thomas Zaucha, Commonwealth Associates and other members of the Committee to
Protect Northstar Health.
On March 24, 1997, Thomas Zaucha presented to current management of the Company
proxy solicitation cards which Mr. Zaucha claims represent a majority of the
shares authorized to vote in the proxy solicitation begun on February 6, 1997,
as described above. To date, these solicitation cards have not
-36-
<PAGE>
been independently verified. In addition, there are a multitude of litigation
matters pending regarding this solicitation.
-37-
<PAGE>
Northstar Health Services, Inc. and Subsidiaries
Valuation and Qualifying Accounts
For Years Ending December 31, 1996 and 1995
All Numbers in Thousands
<TABLE>
<CAPTION>
Balance at
Beginning of Charged to Costs Deductions from Balance at End
Description Period and Expenses Recoveries Reserve [1] Other of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, $ 141 $2,301 $0 ($ 715) $1,791 [2] $3,518
1995 - Allowance for doubtful
accounts
Year Ended December 31,
1996 - Allowance for doubtful $3,518 $1,820 $0 ($1,579) $ 0 $3,759
accounts
</TABLE>
[1] Represents uncollected accounts charged against the allowance account.
[2] Represents allowance for doubtful accounts acquired through acquisition.
38
<PAGE>
Exhibit 3.2
BYLAWS
OF
NORTHSTAR HEALTH SERVICES, INC., AS AMENDED
Article I. Offices.
Section 1. Registered Office. The registered office of the Corporation
shall be at The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle, State of Delaware 19801.
Section 2. Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
Article II. Meetings of Stockholders.
Section 1. Time and Place. A meeting of stockholders for any purpose may
be held at such time and place within or without the State of Delaware as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual Meeting. Annual meetings of stockholders, commencing
with the year 1993, shall be held on the second Tuesday in May if not a legal
holiday, or, if a legal holiday, then on the next secular day following, at
10:00 a.m., or at such other date and time as shall, from time to time, be
designated by the Board of Directors and stated in the notice of the meeting. At
such annual meetings, the stockholders shall elect a Board of Directors and
transact such other business as may properly be brought before the meetings.
Section 3. Notice of Annual Meeting. Written notice of the annual
meeting, stating the place, date, and time thereof, shall be given to each
stockholder entitled to vote at such meeting not less than ten (unless a longer
period is required by law) nor more than sixty days prior to the meeting.
Section 4. Special Meetings. Special meetings of the stockholders may be
called for any purpose or purposes, unless otherwise prescribed by statute or by
the Certificate of Incorporation, by the Chairman of the Board, if any, or the
President, and shall be called by the President or Secretary of the request, in
writing, of a majority of the Board of Directors. Such request shall state the
purpose of the proposed meeting.
Section 5. Notice of Special Meeting. Written notice of a special
meeting, stating the place, date, and time thereof and the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting not less than ten (unless a longer period is required by
law) nor more than sixty days prior to the meeting.
<PAGE>
Section 6. List of Stockholders. The transfer agent or the officer in
charge of the stock ledger of the Corporation shall prepare and make, at least
ten days before meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, at a place within
the city where the meeting is to be held, which place, if other than the place
of the meeting, shall be specified in the notice of the meeting. The list shall
also be produced and kept at the place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present in person
thereat.
Section 7. Presiding Office and Order of Business.
(a) Meetings of stockholders shall be presided over by the Chairman of the
Board. If he is not present or there is none, they shall be presided over by
the President, or, if he is not present or there is none, by a Vice President,
or, if he is not present or there is none, by a person chosen by the Board of
Directors, or, if no such person is present or has been chosen, by a chairman to
be chosen by the stockholders owning a majority of the shares of capital stock
of the Corporation issued and outstanding and entitled to vote at the meeting
and who are present in person or represented by proxy. The Secretary of the
Corporation, or, if he is not present, an Assistant Secretary, or, if he is not
present, a person chosen by the Board of Directors, shall act as Secretary at
meetings of stockholders; if no such person is present or has been chosen, the
stockholders owning a majority of the shares of capital stock of the Corporation
issued and outstanding and entitled to vote at the meeting who are present in
person or represented by proxy shall choose any person present to act as
secretary of the meeting.
(b) The following order of business, unless otherwise determined at the
meeting, shall be observed as far as practicable and consistent with the
purposes of the meeting:
(1) Call the meeting to order.
(2) Presentation of proof of mailing of the notice of the meeting
and, if the meeting is a special meeting, the call thereof.
(3) Presentation of proxies.
(4) Announcement that a quorum is present.
(5) Reading and approval of the minutes of the previous
meeting.
(6) Reports, if any, of officers.
(7) Election of directors, if the meeting is an annual meeting or
a meeting called for that purpose.
(8) Consideration of the specific purpose or purposes, other
than the election of directors, for which the meeting has
2
<PAGE>
been called, if the meeting is a special meeting.
(9) Transaction of such other business as may properly come before
the meeting.
(10) Adjournment.
Section 8. Quorum and Adjournments. The presence in person or
representation by proxy of the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote
shall be necessary to, and shall constitute a quorum for, the transaction of
business at all meetings of the stockholders, except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, a quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat who are present in person or represented by proxy shall
have the power to adjourn the meeting from time to time until a quorum shall be
present or represented. If the time and place of the adjourned meeting are
announced at the meeting at which the adjournment is taken, no further notice of
the adjourned meeting need be given. Even if a quorum shall be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat who are present in person or represented by proxy shall have the
power to adjourn the meeting from time to time for good cause to a date that is
not more than thirty days after the date of the original meeting. Further notice
of the adjourned meeting need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken. At any adjourned
meeting at which a quorum is present in person or represented by proxy, any
business may be transacted that might have been transacted at the meeting as
originally called. If the adjournment is for more than thirty days, or if, after
the adjournment, a new record date is fixed for the adjourned meeting, notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote thereat.
Section 9. Voting.
(a) At any meeting of the stockholders, every stockholder having the right
to vote shall be entitled to vote in person or by proxy. Except as otherwise
provided by law or the Certificate of Incorporation, each stockholder of record
shall be entitled to one vote for each share of capital stock registered in his
name on the books of the Corporation.
(b) All elections shall be determined by a plurality vote, and, except as
otherwise provided by law or the Certificate of Incorporation, all other matters
shall be determined by a vote of a majority of the shares present in person or
represented by proxy and voting on such other matters.
Article III. Directors.
Section 1. General Powers, Number and Tenure. The business of the
Corporation shall be managed by its Board of Directors, which may exercise all
powers of the Corporation and perform all lawful acts that are not by law, the
Certificate of Incorporation, or these Bylaws directed or required to be
exercised or performed by the stockholders. The Board of Directors shall be
comprised of seven (7) directors. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 2 of this Article.
The directors shall be divided into three classes, as nearly equal in number as
possible, with the term of office of the first class to expire at the 1998
Annual Meeting of Stockholders, the term of office of the second class to expire
at the 1997 Annual Meeting of Stockholders and the term of the office of the
third class to expire
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at the 2000 Annual Meeting of Stockholders. At each Annual Meeting of
Stockholders Following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected
for a term of office to expire at the third succeeding Annual Meeting of
Stockholders after their election. Directors need not be stockholders.
Section 2. Vacancies. If any vacancies occur in the Board of Directors,
or if any new directorships are created, they may be filled by a majority
of the directors then in office,although less than quorum,or by a sole
remaining director. Each director so chosen shall hold office until the
next annual meeting of stockholders and until his successor is duly elected,
and shall qualify. If there are no directors in office, any officer or
stockholder may call special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, at which
meeting such vacancies shall be filled.
Section 3. Removal or Resignation.
(a) except as otherwise provided by law or the Certificate of
Incorporation, any director or the entire Board of Directors may be removed,
for good cause, by the holders of a two-thirds (2/3) of the shares than
entitled to vote at an election of directors.
(b) Any director may resign at any time by giving written notice to
the Board of Directors, the Chairman of the Board, if any, or the President
or Secretary of the Corporation. Unless otherwise specified in such written
notice, a resignation shall take effect on delivery thereof to the Board
of Directors or the designated officer. It shall not be necessary for a
resignation to be accepted before it becomes effective.
Section 4. Place of Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. Annual Meeting. The annual meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting
of stockholders, and no notice of such meeting shall be necessary to the
newly elected directors in order to constitute the meeting legally, provided
a quorum shall be present.
Section 6. Regular Meetings. Additional regular meetings of the Board
of Directors may be held without notice of such time and place as may be
determined from time to time by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President, or by two or
more directors on at least two days' notice to each director, if such notice
is delivered personally or sent by telegram, or on at least three days'
notice if sent by mail. Special meetings shall be called by the Chairman
of the Board, President, Secretary, or two or more directors in like manner
and in like notice on the written request of one-half or more of the number
of directors then in office. Any such notice need not state the purpose
or purposes of such meeting, except as provided in Article XI.
Section 8. Quorum and Adjustments. At all meetings of the Board of
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by law or
the Certificate of Incorporation. If a quorum is not present at any meeting of
the Board of Directors, the directors present may adjourn the meeting from
time to
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time, without notice other than announcement at the meeting at which the
adjournment is taken, until a quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such compensation
for their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time
be fixed by the Board of Directors. The compensation of directors may be
on such basis as is determined by the Board of Directors. Any director may
waive compensation for any meeting. Any director receiving compensation
under these provisions shall not be barred from serving the Corporation
in any other capacity and receiving compensation and reimbursement for
reasonable expenses for such other services.
Section 10. Action by Consent. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a
meeting, and without prior notice, if a written consent to such action is
signed by all members of the Board of Directors and such written consent
is filled with the minutes of its proceedings.
Section 11. Meetings by Telephone or Similar Communications Equipment.
The Board of Directors may participate in a meeting by conference telephone
or similar communications equipment by means of which all directors
participating in the meeting can hear each other, and participation in such
a meeting shall constitute presence in person by any such director at such
meeting.
Article IV. Committees.
Section 1. Executive Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board, may appoint an Executive Committee
consisting of one or more directors, one of whom shall be designated as
Chairman of the Executive Committee shall continue as a member thereof until
the expiration of his term as a director or his earlier resignation, unless
sooner removed as a member or as a director.
Section 2. Powers. The Executive Committee shall have and may exercise
those rights, powers, and authority of the Board of Directors as may from
time to time be granted to it by the Board of Directors to the extent permitted
by law, and may authorize the seal of the Corporation to be affixed to all
papers that may require it.
Section 3. Procedure and Meetings. The Executive Committee shall fix
its own rules of procedure and shall meet at such times and at such place
or places as may be provided by such rules or as the members of the Executive
Committee shall fix. The Executive Committee shall keep regular minutes
of its meetings, which it shall deliver to the Board of Directors from time
to time. The Chairman of the Executive Committee or, in his absence, a member
of the Executive Committee or, in his absence, a member of the Executive
Committee chosen by a majority of the members present, shall preside at
meetings of the Executive Committee: and another member chosen by the Executive
Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee shall constitute
a quorum for the transaction of business, and the affirmative vote of a
majority of the members present at any meeting at which there is a quorum
shall be required for any action of the Executive Committee: provided, however,
that when an Executive Committee of one member is authorized under the
provisions of Section 1 of this article, that one member shall constitute
a quorum.
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Section 5. Nominating Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board, may appoint a Nominating Committee
consisting of a minimum of three (3) directors. A majority of the members of
this committee shall be independent directors.
Section 6. Nominating Committee Powers. The Nominating Committee shall
select candidates to fill vacancies on the Board of Directors, and shall assume
other responsibilities as conferred on it by the Board of Directors from time to
time. The following information shall be submitted to the Secretary of the
Company for any nominee to be considered by the Nominating Committee:
(a) Name and address of the proposed nominee
(b) Age of the proposed nominee
(c) Principal occupation of the proposed nominee for the prior five years
(d) The number of shares beneficially owned by the proposed nominee, of
the Company's common stock or other issues of debt or equity
securities
Section 7. Other Committees. The Board of Directors, by resolutions
adopted by a majority of the whole Board, may appoint such other committee or
committees as it shall deem advisable and with such rights, power, and authority
as it shall prescribe. Each such committee shall consist of one or more
directors.
Section 8. Committee Changes. The Board of Directors shall have the power
at any time to fill vacancies in, to change the membership of, and to discharge
any committee.
Section 9. Compensation. Members of any committee shall be entitled to
such compensation for their services as members of the committee and to such
reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any member
may waive compensation for any meeting. Any committee member receiving
compensation under these provisions shall not be barred from serving the
Corporation in any other capacity and from receiving compensation and
reimbursement of reasonable expenses for such other services.
Section 10. Action by Consent. Any action required or permitted to be
taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if a written consent to such action is signed by all members
of the committee and such written consent is filled with the minutes of its
proceedings.
Section 11. Meetings by Telephone or Similar Communications Equipment. The
members of any committee designated by the Board of Directors may participate in
a meeting of such committee by conference telephone or similar communications
equipment by means.
Article V. Notices.
Section 1. Form and Delivery. Whenever a provision of any law, the
Certificate of Incorporation, or these Bylaws requires that notice be given to
any director or stockholder, it shall not be construed to require personal
notice unless so specifically provided, but such notice may be given in writing,
by mail addressed to the address of the director or stockholder as it appears on
the records of the Corporation,
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with postage prepaid. These notices shall be deemed to be given when they are
deposited in the United States mail. Notice to a director may also be given
personally or by telephone or by telegram sent to his addresss as it appears on
the records of the Corporation.
Section 2. Waiver. Whenever any notice is required to be given under the
provisions of any law, the Certificate of Incorporation, or these Bylaws, a
written waiver thereof signed by the person entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. In addition, any stockholder who attends a meeting of stockholders
in person or is represented at such meeting by proxy, without protesting at the
commencement of the meeting the lack of notice thereof to him, or any director
who attends a meeting of the Board of Directors without protesting at the
commencement of the meeting of the lack of notice, shall be conclusively deemed
to have waived notice of such meeting.
Article VI. Officers.
Section 1. Designations. The officers of the Corporation shall be chosen
by the Board of Directors. The Board of Directors may choose a Chairman of the
Board, a President, a Vice President or Vice Presidents, a Secretary, a
Treasurer, one or more Assistant Secretaries and/or Assistant Treasurers, and
other officers and agents that it shall deem necessary or appropriate. All
officers of the Corporation shall exercise the powers and perform the duties
that shall from time to time be determined by the Board of Directors. Any number
of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws provide otherwise.
Section 2. Term of, and Removal From, Office. At its first regular meeting
after each annual meeting of stockholders, the Board of Directors shall choose a
President, a Secretary, and a Treasurer. It may also choose a Chairman of the
Board, A Vice President or Vice Presidents, one or more Assistant Secretaries
and/or Assistant Treasurers, and such other officers and agents as it shall deem
necessary or appropriate. Each officer of the Corporation shall hold office
until his successor is chosen and shall qualify. Any officer elected or
appointed by the Board of Directors may be removed, with or without cause, at
any time by the affirmative vote of a majority of the directors then in office.
Removal from office, however, shall not prejudice the contract rights, if any,
of the person removed. Any vacancy occurring in any office of the Corporation
may be filed for the unexpired portion of the term by the Board of Directors.
Section 3. Compensation. The salaries of all officers of the Corporation
shall be fixed from time to time by the Board of Directors, and no officer shall
be prevented from receiving a salary because he is also a director of the
Corporation.
Section 4. The Chairman of the Board. The Chairman of the Board, if any,
shall be an officers of the Corporation and, subject to the direction of the
Board of Directors, shall perform such executive, supervisory, and management
functions and duties as may be assigned to him from time to time by the Board of
Directors. He shall, if present, preside at all meetings of stockholders and of
the Board of Directors.
Section 5. The President.
(a) The President shall be the chief executive officer of the Corporation
and, subject to the direction of the Board of directors, shall have general
charge of the business, affairs, and property of the Corporation and general
supervision over its other officers and agents. In general, he shall perform all
duties
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incident to the office of the President and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
(b) Unless otherwise prescribed by the Board of Directors, the President
shall have full power and authority to attend, act, and vote on behalf of the
Corporation, at any meeting of the security holders of other corporations in
which the Corporation may hold securities. At any such meeting, the President
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities that the Corporation might have possessed and
exercised if it had been present. The Board of Directors may from time to time
confer like powers upon any other person or persons.
Section 6. The Vice President. The Vice President, if any, or in the event
there be more than one, the Vice Presidents in the order designated, or in the
absence of any designation, in the order of their election, shall in the absence
of the President or in the event of his disability, perform the duties and
exercise the powers of the President and shall generally assist the President
and perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 7. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and the stockholders and record all votes and the proceedings
of the meetings in a book to be kept for that purpose. He shall perform like
duties for the Executive Committee or other committees, if required. He shall
give, or cause to be given, notice of all meetings of stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
from time to time be prescribed by the Board of Directors, the Chairman of the
Board, or the President, under whose supervision he shall act. He shall have
custody of the seal of the Corporation, and he, or an Assistant Secretary, shall
have authority to affix it to any instrument requiring it, and, when so affixed,
the seal may be attested by his signature or by the signature of the Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing thereof
by his signature.
Section 8. The Assistant Secretary. The Assistant Secretary, if any, or in
the event there be more than one, the Assistant Secretaries in the order
designated, or in the absence of any designation, in the order of their
election, shall, in the absence of the Secretary or in the event of his
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 9. The Treasurer. The Treasurer shall have custody of the
corporate funds and other valuable effects, including securities, and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may from time
to time be designated by the Board of Directors. He shall disburse the funds of
the Corporation in accord with the orders of the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, if any, the President, and the Board of Directors, whenever they may
required it or at regular meetings of the Board, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
Section 10. The Assistant Treasurer. The Assistant Treasurer, if any, or
in the event there shall be more than one, the Assistant Treasurers in the order
designated, or in the absence of any designation, in the order of their
election, shall, in the absence of the Treasurer or in the event of his
disability, perform such other duties and have such other powers as may from
time to time be prescribed by the Board of Directors.
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ARTICLE VII. INDEMNIFICATION.
Reference is made to Section 145 and any other relevant provisions of the
General Corporation Law of the State of Delaware. Particular reference is made
to the class of persons, hereinafter, called "Indemnities", who may be
indemnified by a Delaware corporation pursuant to the provisions of such Section
145, namely, any person, or the heirs, executors, or administrators of such
person, who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that such
person is or was a director, officer, employee, or agent of such corporation or
is or was serving at the request of such corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise. The Corporation shall, and is hereby obligated to, indemnify
the Indemnities, and each of them, in each and every situation where the
Corporation shall indemnify the Indemnities, and each of them, in each and every
situation where, under the aforesaid statutory provisions, the Corporation is
not obligated, but is nevertheless permitted or empowered, to make such
indemnification, it being understood that, before making such indemnification
with respect to any situation covered under this sentence, (i) the Corporation
shall promptly make or cause to be made, by any of the methods referred to in
Subsection (d) of such Section 145, a determination as to whether each
Indemnitee acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the Corporation, and, in the case of
any criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful, and (ii) that no such Indemnitee acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interest of the Corporation, and, in the case of any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
ARTICLE VIII. AFFILIATED TRANSACTIONS AND INTERESTED DIRECTORS.
SECTION 1. AFFILIATED TRANSACTIONS. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof that authorizes
the contract or transaction or solely because his or their votes are counted for
such purpose if:
(a) The material as to his relationship or interest and as to the contract
or transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by the vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved, or ratified by the Board of Directors, a
committee thereof, or the stockholders.
SECTION 2. DETERMINING QUORUM. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of committee thereof which authorizes the contract or transaction.
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Article IX. Stock Certificates.
Section 1. Form and Signatures.
(a) Every holder of stock of the Corporation shall be entitled to a
certificate stating the number and class, and series, if any, of shares owned by
him, signed by the Chairman of the Board, if any, or the President and Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, and bearing the seal of the Corporation. The signatures and the
seal may be facsimiles. A certificate may be signed, manually or by facsimile,
by a transfer agent or registrar other than the Corporation or its employee. In
case any officer who has signed, or whose facsimile signature was placed on, a
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock that are
subject to restrictions on transfer or to other restrictions may have imprinted
thereon any notation to that effect determined by the Board of Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation or
any transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment, or authority to
transfer, the Corporation or its transfer agent shall issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction upon the books of the Corporation.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be entitled
to recognize the exclusive right of a person who is registered on its books as
the owner of shares of its capital stock to receive dividends or other
distributions and to vote or consent as such owner, and to hold liable for calls
and assessments any person who is registered on its books as the owner of shares
of its capital stock. The Corporation shall not be bound to recognize any
equitable or legal claim to, or interest in, such shares on the part of any
other person.
(b) If a stockholder desires that notices and/or dividends shall be sent to
a name or address other than the name or address appearing on the stock ledger
maintained by the Corporation, or its transfer agent or registrar, if any, the
stockholder shall have the duty to notify the Corporation, or its transfer agent
or registrar, if any, in writing of his desire and specify the alternate name or
address to be used.
Section 4. Record date. In order that the Corporation may determine the
stockholders of record who are entitled to receive notice of, or to vote at,
any meeting of stockholders or any adjournment thereof or to express consent to
corporation action in writing without a meeting, to receive payment of any
dividend or other distribution or allotment of any rights, or to exercise any
rights in respect of any change, conversion, or exchange of stock or for the
purpose of any lawful action, the Board of Directors may, in advance, fix a date
as the record date for any such determination. Such date shall not be more than
sixty nor less then ten days before the date of such meeting, nor more than
sixty days prior to the date of any other action. A determination or
stockholders of record entitled to notice of, or to vote at, a meeting of
stockholders shall apply to any adjournment of the meeting taken pursuant to
Section 8 of Article II; provided, however, that the Board of Directors may fix
a new record date for the adjourned meeting.
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Section 5. Lost, Stolen, or Destroyed Certificates. The Board of
Directors may direct that a new certificate be issued to replace any certificate
theretofore issued by the Corporation that, it is claimed, has been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen, or destroyed. When authorizing the
issue of a new certificate, the Board of Directors may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of the lost,
stolen, or destroyed certificate, or his legal representative, to advertise the
same in such manner as it shall require, and/or to give the Corporation a bond
in such sum, or other security in such form, as it may direct as indemnity
against any claims that me be made against the Corporation with respected to the
certificate claimed to have been lost, stolen, or destroyed.
Article X. General Provisions.
Section 1. Dividends. Subject to the provisions of law and the
Certificate of Incorporation, dividends upon the outstanding capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting, and may be paid in cash, in property, or in shares of the
Corporation's capital stock.
Section 2. Reserves. The Board of Directors shall have full power,
subject to the provisions of law and the Certificate of Incorporation, to
determine whether any, and, if so, what part, of the funds legally available for
the payment of dividends shall be declared as dividends and paid to the
stockholders of the Corporation. The Board of Directors, in its sole discretion,
may fix a sum that may be set aside or reserved over and above the paid-in
capital of the Corporation as a reserve for any proper purpose, and may, from
time to time, increase, diminish, or vary such amount.
Section 3. Fiscal Year. Except as from time to time otherwise provided by
the Board of Directors, the fiscal year of the Corporation shall end on December
31 of each year.
Section 4. Seal. The corporation seal shall have inscribed thereon the
name of the Corporation, the year of the incorporation, and the words "Corporate
Seal" and "Delaware".
Article XI. Amendments.
The Board of Directors shall have the power to alter and repeal these
Bylaws and to adopt new Bylaws by an affirmative vote of a majority of the whole
Board, provided that notice of the proposal to alter or repeal these Bylaws or
to adopt new Bylaws must be included in the notice of the meeting of the Board
of Directors at which such action takes place.
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Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into this lst day of January, 1995,
by and between KEYSTONE REHABILITATION SYSTEMS, INC., d/b/a KEYSTONE
REHABILITATION SYSTEMS, a Pennsylvania corporation, with its principal executive
offices located at The Atrium, 665 Philadelphia Street, P. O. Box 1289, Indiana,
Pennsylvania, 15701 (hereinafter referred to as "KRS");
AND
RALPH SWEITHELM, of 170 Mill Run Road, Indiana, Pennsylvania, 15701
(hereinafter referred to as "PT").
PART I - RECITALS
-----------------
1.01 WHEREAS, all employees providing services on behalf of Keystone
Rehabilitation Systems, Inc. or subsidiary companies are employed by
KRS; and
1.02 WHEREAS, KRS or other subsidiary corporations of Keystone
Rehabilitation Systems, Inc. are the owners and/or operators of
outpatient facilities in several states which provide outpatient
physical therapy and rehabilitation services to patients on site, as
well as physical therapy and rehabilitation services by contract
<PAGE>
to other institutions and agencies which provide physical therapy and
rehabilitation services; and
1.03 WHEREAS, PT has the managerial and clinical capabilities to manage and
provide direct services to facilities providing physical therapy and
rehabilitation services; and
1.04 WHEREAS, the cooperation of KRS and PT will permit comprehensive,
economical and lawful services to be rendered to patients seeking such
services at KRS, as well as patients of other institutions and
agencies currently under contract with KRS or other Keystone
Rehabilitation Systems, Inc.'s subsidiary corporations in Indiana
Borough and/or White Township, Pennsylvania, and other mutually
agreeable areas; and
1.05 WHEREAS, KRS therefore desires to provide through employment the
necessary rehabilitation management and clinical services for its
patients, as well as the institutions and/or agencies under contract
with KRS or other subsidiary corporations of Keystone Rehabilitation
Systems, Inc., from PT in Indiana Borough and/or White Township,
Pennsylvania; and
1.06 WHEREAS, PT, therefore desires to be employed by KRS for the
purposes of providing comprehensive physical therapy
<PAGE>
and rehabilitation management to patients and institutions seeking
such services at KRS and/or other institutions and/or agencies where
KRS or other Keystone Rehabilitation Systems' subsidiary corporations
provide physical therapy and other rehabilitation services by
contract.
1.07 WHEREAS, immediately prior to this Employment Agreement, PT owned a
twenty-five (25%) percent interest in a general partnership that owned
KRS of Indiana; and
1.08 WHEREAS, this Employment Agreement has been designed as a replacement
for the General Partnership Agreement; and
1.09 WHEREAS, the purpose behind the transition of the General Partnership
Agreement into an Employment Agreement was and is to maximize third
party reimbursement and streamline accounting; and
1.10 WHEREAS, the intent of both parties is to make this Employment
Agreement address issues raised in the General Partnership Agreement
in order that neither party loses any rights or privileges enjoyed in
the General Partnership Agreement that immediately preceded this
Employment Agreement; and
1.11 WHEREAS, the previously mentioned General Partnership Agreement was
developed for the purposes of PT
<PAGE>
establishing a general partnership with Thomas W. Zaucha, the sole
stockholder of KRS, and now agree that if Thomas W. Zaucha does not
own controlling interest in KRS at any time in the future,, this
Employment Agreement will address the options of the PT in the event
he/she wishes not to be a partner of the new stockholder of KRS, or
wishes to change his/her employment with the new stockholder; and
1.12 WHEREAS, the options of PT mentioned in 1.11 above are addressed in
5.04 of this Employment Agreement.
THEREFORE, in consideration of the mutual promises contained herein
and intending to be legally bound hereby, the parties agree as follows:
PART II - SERVICES PROVIDED BY PT
---------------------------------
2.01 KRS shall employ PT as Facility Director at the Keystone
Rehabilitation SystemS of Indiana facility located at 119 Professional
Center, 1265 Wayne Avenue, Suite 312, Indiana, Pennsylvania, 15701
(herein referred to as "Facility") or wherever in Indiana Borough
and/or White Township that Facility may be relocated during the term
of this Agreement, and PT accepts and agrees to remain in the
employ of KRS in the aforesaid capacity upon the terms, conditions and
provisions herein stated from the date of execution hereby, and during
such periods of renewal as KRS and PT may agree upon in writing.
<PAGE>
2.02 During the term of employment, PT agrees to devote his/her primary
employment efforts, attention and skill to act as Facility Director
and perform the executive, administrative, supervisory and clinical
functions of a Facility Director outlined below and further agrees to
notify, in writing, the President of KRS of other employment or
contractual arrangements in the field of physical therapy and/or
rehabilitation outside of KRS.
2.03 PT agrees to make a reasonable effort to provide the time and services
required to meet the needs of KRS to render physical therapy and
rehabilitation services to patients of KRS and/or other
institutions/agencies currently under contract with KRS as the
Keystone Rehabilitation Systems of Indiana Facility Director. These
duties shall include high quality services meeting the standards
established by the American Physical Therapy Association, the
Pennsylvania Licensure Acts, the Pennsylvania Department of Health,
Medicare and third-party reimbursing agencies.
2.04 PT agrees to perform the following duties in his/her capacity as
Facility Director of Keystone Rehabilitation Systems of Indiana: PT
will have overall supervisory responsibility and accountability for
the Facility on a day-to-day basis. He/She will administer and direct
in accordance with the Facility and corporate policy, and will be
responsible for Facility policy, planning,
<PAGE>
directing, personnel hiring and management, purchasing, consulting and
patient care, including the following:
(a) The supervision of the Facility.
(b) Maintaining timely records of purchases, as well as being
responsible for purchase order tracking, as required, and
logging of expenses as they pertain to the Facility chart of
accounts.
(c) Obtaining reasonable prices for items purchased for the
Facility.
(d) Monitoring the purchase of all needed Facility items and
maintaining adequate inventory where needed.
(e) Assisting in the hiring and management of qualified staff
for the Facility to perform needed rehabilitation services
at an optimal level.
(1) Informing the Regional Vice President of the need
for the hiring of new staff at the Facility.
(2) Assisting in interviewing and the selection of
candidates best suited to fill job openings at the
Facility.
(3) Administering and overseeing proper orientation of
new employees in order to maintain smooth and
efficient Facility operation.
<PAGE>
(4) Monitoring Facility professional staff to assure
skill levels are maintained and that all continuing
education credit requirements are met.
(5) Reviewing all Facility employees on a regular basis
as outlined in the KRS employee manual and providing
performance appraisals as required by KRS.
(f) Supervising Facility personnel on a day-to-day basis.
(1) Delegating and assigning responsibilities to staff,
as needed.
(g) Participating as a member of standing committees as required
in the Facility, including: Patient Care, Safety, Infection
Control, Utilization Review, Pharmacy.
(h) Participating in Facility's in-service programs.
(1) Presenting programs and acting as a resource person
for the in-service coordinator or like person.
(i) Representing the Facility in meetings or assigning
appropriate representatives, as deemed necessary.
(j) Supervising and/or participating in the screening and/or
evaluating of all Facility
<PAGE>
incoming admissions and assisting in the formulation of a
specific regiment of therapy including goals and objectives.
(k) Supervising the collection of all pertinent statistical
information in the Facility. Providing treatment projections
for the Facility and KRS.
(l) Acting as primary consultant to the Facility Utilization
Review Committee with respect to all patients.
(m) Acting as Facility clinical supervisor of physical therapy
students from local schools on clinical affiliations.
(n) Assisting in the development of Facility studies which will
conceivably provide for better and more efficient patient
care in the future.
(o) Assisting in arranging for homebound instruction and
discharge planning with regard to all Facility patients.
(p) Maintaining a caseload of Facility patients and
administering routine daily planning with regard to
patients.
(q) Maintaining effective public relations for the Facility.
(1) Being available for community events and
presentations that will increase
<PAGE>
awareness of the Facility as deemed necessary by the
KRS Facility administrator and Regional Vice
President.
2.05 PT agrees to provide quality physical therapy and rehabilitation
services to patients seeking such services at the Facility on behalf
of KRS regardless of race, creed, color or national origin.
2.06 PT agrees to work within the KRS organizational framework including
all policies and procedures of KRS as well as the
institutions/agencies where PT may be responsible for providing
services on behalf of KRS.
2.07 PT agrees to provide the necessary public relations, marketing and
personal physician contact necessary and required for the development
and expansion of the Facility's rehabilitation services in Indiana
Borough and/or White Township, Pennsylvania.
2.08 PT agrees to provide KRS with descriptive statistical reports of
services rendered at the Facility, analysis for demands of services in
the Indiana Borough and/or White Township area and assistance in
developing quality, as well as quantity physical therapy and
rehabilitation services.
<PAGE>
2.09 PT agrees to an annual physical examination conducted by a licensed
physician selected by PT at KRS' expense or KRS' physician.
2.10 PT agrees not to directly bill the patient, patient's family or other
health insurance programs or the institutions/agencies currently under
contract by KRS or placed under contract by KRS during the terms of
this Agreement for physical therapy and rehabilitation services during
the term of this contract.
2.11 PT agrees to work cooperatively with KRS' Regional and Corporate
Management Staff as it currently stands or as future re-organization
may require in matters associated with overall management and
development of his/her Facility. Furthermore, KRS shall work
cooperatively with PT in providing him/her with the same
Corporate/Regional services as received by other facilities. Such
Corporate/Regional services include, but are not limited to, policies
and procedures associated with day-to-day management and mechanisms
for implementation, programs in marketing and public relations,
direction and assistance in development of new contracts, physician
partnerships, wholly owned outpatient centers and/or other mutually
agreeable for-profit businesses, all aspects of human relation
services as well as programs necessary for finance including
accounting services,
<PAGE>
computer services, management and financial information services,
billings and accounts receivables, accounts payable, and all aspects
of business associated with taxes.
PART III - SERVICES PROVIDED BY KRS
-----------------------------------
3.01 KRS shall work cooperatively with PT in providing quality and quantity
physical therapy and rehabilitation services as previously stated in
this contract. KRS shall supply management services and accounting to
the Facility on the same basis as in the calendar year of 1994 or as
otherwise mutually agreed upon subject to its requirement to permit PT
equal rights with it in the management and conduct of Facility
activities.
3.02 For physical therapy and rehabilitation services provided at the
Facility, KRS shall be responsible for maximizing and collecting all
fees associated with services including contractual arrangements with
various governmental and private institutions/agencies and shall
permit PT access to all records of KRS that relate to the Facility.
3.03 KRS shall provide equipment, supplies and facilities necessary for PT
to render services to patients and/or institutions under contract with
KRS and to maintain the Facility's certification as a medicare
rehabilitation agency.
<PAGE>
3.04 KRS shall maintain records that segregate the equipment and account
receivables associated with the operation of the Facility from other
equipment and account receivables of KRS. No equipment or account
receivables so identified shall be transferred or sold without the
prior written consent of PT. PT shall be supplied by KRS with a
statement of the equipment and account receivables of the Facility on
at least an annual basis and more frequently if requested by PT.
3.05 Without the written consent of PT and regarding the equipment and
accounts receivable of the Facility (as mentioned above), KRS shall
not:
(a) Do any act in contravention of this Agreement;
(b) Do any act that would make it impossible to carry on the
business of the Facility;
(c) Possess Facility property or assign Facility property for
other than a Facility purpose;
(d) Make, execute, or deliver any assignments for the benefit of
creditors, or on the assignee's promise to pay the debts of
the Facility, or any bond, guaranty, indemnity bond, or
surety bond;
(e) Assign, transfer, pledge, compromise, or release any claim
of the Facility except for full payment, or arbitrate, or
consent to the
<PAGE>
arbitration of, any of it disputes or controversies;
(f) Sell all or any part of any Facility property without first
having obtained the written consent of all parties; or
(g) Do any of the following without the consent of all the
parties:
(1) Make, execute, or deliver for the Facility any
bond, mortgage, deed of trust, guarantee, indemnity
bond, surety bond, or accommodation paper or
accommodation endorsement;
(2) Amend or otherwise change this Agreement so as to
modify the rights or obligations of the parties as
set forth in this Agreement; or
(3) Create any personal liability for any party other
than that personal liability to which any party may
have agreed to in writing.
PART IV - COMPENSATION
----------------------
4.01 The annual base salary of PT shall be at the rate of EIGHTY-TWO
THOUSAND FOUR HUNDRED AND N0/100 ($82,400.00) Dollars per year,
payable in equal bi-weekly installments. The annual base salary shall
be increased each lst day of January, at a minimum, by the most
recently published consumer price index.
<PAGE>
4.02 PT shall be a participant in all benefits offered by KRS that are
usual and customary for Facility Directors; at no time shall these
benefits be less than those in effect as of the lst day of January,
1995, unless otherwise mandated by law, and KRS shall provide and pay
for the expense of company malpractice insurance issued to cover all
employees with respect to any liability arising from employment. Such
insurance shall be in the amount of $5,000,000.00 per case and/or
$5,000,000.00 in the aggregate. KRS shall maintain the same throughout
this Agreement.
4.03 In addition to the annual base salary of PT and in consideration of
the sum of TWO HUNDRED SEVEN THOUSAND EIGHT HUNDRED TWENTY-FIVE AND
NO/100 ($207,825.00) DOLLARS paid by PT to KRS, receipt of which is
hereby acknowledged by KRS, KRS hereby agrees to pay PT a monthly
commission equal to twenty-five (25%) percent of Pre-Commission Net
Income of the Keystone Rehabilitation Systems of Indiana Facility,
Cost Center No. 130.
Pre-Commission Net Income is defined for this purpose as it has
been used and defined by KRS's past practice in treating each of it's
facilities as "cost centers".
It is further agreed that the Corporate and Regional Overhead in
the "cost center" statement shall be defined as the product of the Net
Revenues, as presented on the
<PAGE>
monthly Facility Profit and Loss Statement, multiplied by 8.6%. The
services and expenses provided to the Facility by KRS are listed on
Exhibit "A".
4.04 Other than losses in the monthly Profit and Loss Statements at the
Facility which will be carried forward to be offset against profits,
but otherwise not payable by PT, in no event shall PT be responsible
for any obligations or liability of KRS with respect to any
liabilities and losses in connection with the business of the Facility
or any other business of KRS whether under this Agreement, under prior
Agreements, or otherwise.
4.05 Payment of commissions to the PT for each calendar month during the
year shall be made within ninety (90) days of the last day of such
calendar month. Monthly reports of Facility operations shall be
provided to PT within a reasonable time following the end of such
calendar month, and payment of commission shall be based upon such
reports. However, in order for both parties to make a reasonable
transition for payment of commissions to the PT from forty-five (45)
days to ninety (90) days, the following schedule shall be adopted:
January Commission 45 days Paid in first pay
period in March
February Commission 60 days Paid in last pay
period of April
<PAGE>
March Commission 75 days Paid in first pay
period in June
April Commission 90 days Paid in last pay
period in July
All additional months shall be paid in the last pay period of the
month, but within ninety (90) days of the month of services rendered.
PART V - NONCOMPETITION AND SECRECY
-----------------------------------
5.01 In the event that PT voluntarily terminates this Agreement by default
or withdrawal, as provided below, PT agrees to be bound by the non-
competition provisions of this Agreement defined below and KRS shall
be entitled to conduct the same business within Indiana Borough and/or
White Township, Pennsylvania free of competition from PT for a period
of 12 months from the effective date of termination. In the event that
KRS voluntarily terminates this Agreement by default or withdrawal, as
provided below, KRS agrees to be bound by the non-competition
provision of this Agreement defined below and PT shall be entitled to
conduct the same business within Indiana Borough and/or White
Township, Pennsylvania free of Competition from KRS for a period of 12
months from the effective date of termination. KRS and PT agree not to
open or purchase another physical therapy or rehabilitation facility
within Indiana Borough and/or White Township, Pennsylvania unless
mutually agreed upon, in writing.
<PAGE>
In the event the parties by mutual consent terminate this
Agreement, neither Party shall be bound by the non-competition
provisions defined below.
"Non-competition" for the purposes and intent of this Agreement,
is defined as not directly or indirectly becoming or serving as an
officer, agent, consultant to, independent contractor with or employee
of an individual, partnership, corporation or other business entity,
or owner, partner or shareholder of any business entity, which
conducts a business in direct competition with the party who, by
virtue of the terms and conditions of this paragraph, is entitled to
conduct business operations contemplated by this Agreement, within
Indiana Borough and/or White Township, Pennsylvania.
5.02 At all times, both during and after the termination of his/her
employment, PT shall keep and retain in confidence and shall not
disclose to any persons, firm or corporation (except with the written
consent of KRS first obtained) any of the proprietary, confidential or
secret information or trade secrets of KRS.
5.03 PT agrees not to take employment or be a subcontractor at any agency
currently under contract with KRS or other Keystone Rehabilitation
Systems, Inc.'s subsidiary corporations or other agencies under
contract with KRS that PT has direct responsibility to manage during
the
<PAGE>
term of this Agreement and for twelve (12) months following
termination, unless agreed to in writing by the President of KRS.
5.04 In the event that Thomas W. Zaucha does not own controlling interest
in KRS, then, in that event, PT may either immediately or at a later
date exercise one of the following:
(a) With sixty (60) days written notice to the President of KRS,
PT may withdraw from the. 25% Pre-Commission Net Income
provisions of Section 4.03 of this Agreement, be reimbursed
PT's payment under Section 4.03 of this Agreement by KRS or
its successor within sixty (60) days, and not be bound by
the non-compete provisions of this Agreement. Either party
may then terminate employment under the provisions of this
Agreement or negotiate a new agreement.
(b) With sixty (60) days written notice to the President of KRS,
PT may withdraw from the 25% Pre-Commission Net Income
provisions of Section 4.03 of this Agreement, be reimbursed
a minimum of two (2) times the most recent twelve (12)
months of the PT's share of Pre-Commission Net Income by KRS
or its successor within sixty (60) days, and not be bound by
the non-compete provisions of this Agreement. Either party
may
<PAGE>
then terminate employment under the provisions of this
Agreement or negotiate a new agreement.
SECTION VI - TERMINATION
------------------------
6.01 Any party may withdraw from this Agreement by giving the other party
ninety (90) days written notice of such party's intention to withdraw
(withdrawing party). The withdrawing party agrees to be bound by the
non-competition provisions defined in 5.01. The non-withdrawing party
has the option to continue the Facility by purchasing the withdrawing
party's interest pursuant to 6.03. In any event, should the
withdrawing party be PT, KRS is bound to reimburse PT his/her
contribution under 4.03 or two (2) times the most recent twelve (12)
months of the PT's share of Pre-Commission Net Income, whichever is
greater, within sixty (60) days, and PT shall have the option to
remain as a Facility Director of KRS at the compensation equal to the
base salary established in this Agreement pursuant to 4.01 with
routine six (6%) percent Pre-Commission Net Income and on the same
basis as other employed facility directors.
6.02 This Agreement may be terminated by either party upon a material
breach of the terms and conditions of this Agreement by the other
party, provided written notice is delivered to the other party setting
forth the nature of the material breach and the defaulting party has
not cured the breach within thirty (30) days of said notice.
<PAGE>
The party that breaches the terms and conditions of this Employment
Agreement (defaulting party) agrees to be bound by the non-
competition provisions in 5.01. The non-defaulting party has the
option to continue the business by purchasing the defaulting party's
interest pursuant to 6.03. In any event, should the defaulting party
be PT, KRS is bound to reimburse PT his/her contribution under 4.03,
within sixty (60) days.
6.03 The purchase price of a party's interest as a result of a termination
of this Agreement shall be as follows:
(a) If the defaulting or withdrawing party is PT, then
$207,825.00 and PT's share of unpaid Pre-Commission Net
Income produced at the Facility; and
(b) If the defaulting or withdrawing party is KRS, then
$623,475.00 and KRS's share of unpaid Pre-Commission Net
Income produced at the Facility.
(c) In either (a) or (b) of the above, payment shall be made
within sixty (60) days of the termination of this Agreement.
6.04 In the event of the death or total and permanent disability of PT,
this Agreement is terminated and, in lieu of distributions as set
forth in Section 6.03, KRS shall pay PT or his/her estate an amount
equal to two (2) times PT's most recent twelve (12) months Pre-
Commission Net Income, and PT's share of unpaid Pre-Commission Net
<PAGE>
Income and the amount of PT's payment under Section 4.03 of this
Agreement. Such payment shall be made within sixty (60) days following
the death of PT or the date PT is declared by a licensed physician to
be totally and permanently disabled.
SECTION VII - GENERAL PROVISIONS
--------------------------------
7.01 This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
7.02 This Agreement is not assignable by either party hereto without the
prior written consent of the other party. Subject to the foregoing,
however, this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, assigns, heirs
and representatives, including but not limited to any trustee of the
estate, estate administrator, or any other party responsible for the
affairs of the estate.
7.03 This Agreement constitutes the entire understanding of the parties
with respect to the subject matter hereof and supersedes all prior or
contemporaneous understanding and writings. This Agreement may be
modified or amended only by a writing executed by all parties
hereto. The waiver by any party of any breach or default hereunder by
the other party shall not be construed as a waiver by such party of
any subsequent breach or default.
<PAGE>
7.04 Any notices required or permitted to be given under this Agreement
shall be sufficient, if in writing, sent certified mail, return
receipt requested, as follows:
If to KRS:
Thomas W. Zaucha
KEYSTONE REHABILITATION SYSTEMS
The Atrium
665 Philadelphia Street
P.O. Box 1289
Indiana PA 15701
If to Employee:
RALPH SWEITHELM
170 Mill Run Road
Indiana PA 15701
EXECUTED on this 26 day of January ,
------ -----------
1995, at Indiana, PA .
-- ----------------
KEYSTONE REHABILITATION SYSTEMS
665 Philadelphia Street
P.O. Box 1289
Indiana PA 15701
/s/ Sheree Frederick
- ------------------------------ BY: /s/Thomas W. Zaucha
Witness ----------------------
Thomas W. Zaucha
Employee:
RALPH SWEITHELM
170 Mill Run Road
Indiana PA 15701
/s/ Theresa M. Sweithelm
- ------------------------------ /s/RALPH SWEITHELM
Witness -------------------------
RALPH SWEITHELM
<PAGE>
EXHIBIT "A"
-----------
1. Monitor charges affecting Physical Therapy services at the Local, State
and National level.
2. The Facility Director is named as an additional insured on KRS policies of
general liability, professional liability, and property insurance
3. KRS is responsible for assuring the Facilities certification as a
rehabilitation agency and maintaining the same throughout the term of this
Agreement.
4. KRS shall indemnify and save Facility Director harmless from and against
actions of any third parties including without limitation any and all
claims, suits, costs, loses, and expenses that may in any manner result
from or arise out of KRS's performance of its duties under this Agreement
together with all costs and attorneys fees that the Facility Director may
incur as a result of the acts or omissions of KRS hereunder.
5. Assure that all KRS staff follow Personnel Policies that are supported by
appropriate written documentation including job descriptions,
qualifications, licensure, performance evaluation, and health examinations
as required.
6. Assure all practices and procedures are supported by written policies and
procedures covering the scope of services offered, patient care plans,
clinical records, administrative records, use and maintenance of service
related equipment and program evaluation.
7. Assure that all Medicare, CARF, ADA, OSHA and Labor and Industry
requirements are followed on a timely basis.
8. Maintain all patient records for at least seven (7) years after termination
of services.
9. Develop, review and update when necessary all fees for services of the
Facility.
10. Prepare requests and appropriate documents for Facility regarding all
capital equipment.
11. Establish and assure the Facility of a reasonable staffing pattern that
permits economic but quality rehabilitation therapy services.
12. Establish and implement a mechanism to evaluate the business and clinical
activities of the Facility.
<PAGE>
13. Provide all internal bookkeeping, Profit and Loss Statements, Internal
financial statements, and statistical reports.
14. Provide for all communications with financial institutions regarding any
matters appropriate to the financing of equipment purchased for the
Facility.
15. Maintain all hardware and software associated with computers including
consulting and programming for systems enhancement and new applications.
16. Provide data transmission lines between MIS Department and the Facility.
17. Provide for billing invoices and envelopes, payroll checks and envelopes,
accounts payable checks and envelopes, purchase orders, financial operation
guidelines, etc.
18. Provide for adequate documentation of depreciation and/or amortization for
furnishing and equipment and leasehold improvements as well as computer
equipment where applicable.
19. Assume all financial responsibility associated with the collection of fees
for services provided.
20. Provide for provisions for outside collection agencies when necessary.
21. Assure that appropriate mailing of accounts payable checks, payroll checks,
and billing invoices and other mail in general on an as needed basis.
22. Establish and recommend future business opportunities of the Facility which
may include but is not limited to the development of contracts with skilled
nursing facilities, home health agencies, hospitals, school districts, etc.
23. Expansion of existing services to include industrial rehabilitation,
orthotics services, sports medicine services, back testing services, etc.,
where applicable.
24. Develop a marketing and public relations program.
The following expenses will be charged directly to the cost centers and are
not included in the 8.6% of Net Revenue charge:
1. External legal fees associated with actions arising directly as a result of
services at the Facility except to the extent reimbursed or covered by
insurance.
<PAGE>
2. Expenses associated with marketing programs/public relations programs
specifically for the Facility and approved by the Facility Director.
3. Salaries, fringe benefits, and reimbursable expenses of the KRS staff at
the Facility.
4. Reasonable recruitment expenses for the Facility as necessary when approved
by Facility Director.
5. Other reasonable expenses associated with the day-to-day operation of the
Facility which include but are not limited to rent, taxes, utilities,
supplies, etc.
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
August 22, 1995
TO: BRIAN STRONG
1660 North Prospect
Milwaukee, Wisconsin 53202
In consideration of your agreement to serve as a Chief Operating Officer,
the undersigned, NORTHSTAR HEALTH SERVICES, INC., a Delaware corporation (the
"Company"), hereby agrees effective as of September 5, 1995 (the "Effective
Date"), to extend to you an Employment Agreement on the following terms and
conditions.
1. POSITION AND RESPONSIBILITIES.
-----------------------------
1.1 You shall serve as a Chief Operating Officer of the Company and
in such position you will exercise such executive authority, duties, powers and
responsibilities as customarily attend such position in the Company.
1.2 You will, to the best of your knowledge, skill and ability,
devote your time and best efforts to the performance of your duties hereunder
and the business and affairs of the Company. You agree to perform such
executive duties as may be assigned to you from time to time by the Company's
Board of Directors or any committee of the Board of Directors.
1.3 You will duly, punctually, competently and faithfully perform and
discharge your duties in accordance with all applicable laws and all policies,
rules and regulations which the Company may now or shall hereafter establish
governing the conduct of its business.
2. Term of Employment.
2.1 The initial term of this Agreement shall be for a period of six
(6) months commencing on September 5, 1995. The Company shall have the option
(the "Option") to extend the term of this Agreement for an additional twenty
four (24) months (the "Option Term") upon delivery to you, prior to the
expiration of this initial six month term, of a notice of the Company's
election to exercise the Option. Thereafter, this Agreement shall be
automatically renewed on the anniversary date of the commencement of the
initial two year term of this Agreement for successive periods of one (1) year,
unless you or the Company shall give the other party, prior to such anniversary
date, not less than sixty (60) days prior written notice of non-renewal. In the
event that, during the term, the Company terminates your employment hereunder
other than for "Cause" as defined herein, the Company shall pay you severance
in an amount set forth on Exhibit A hereto.
---------
<PAGE>
2.2 The Company may at any time terminate your employment hereunder
for "Cause." In such event, the Company shall give you prompt written notice
specifying in reasonable detail the basis for such termination. For purposes of
this Agreement, "Cause" shall mean any of the following by you: (i) Material
breach of any material provision of this Agreement, which breach you shall have
failed to cure within ten (10) days after your receipt from the Company
specifying the specific nature of your breach; (ii) Willful misconduct by you
that is materially inimical to the best interests, monetary or otherwise, of
the Company; and (iii) Conviction of a felony or any crime involving moral
turpitude or fraud. In the event of your termination for "Cause," the Company
shall pay you any accrued salary and benefits due you as of such date, less
applicable taxes and other required withholdings and any amounts you may owe to
the Company.
3. COMPENSATION. You shall receive the compensation and benefits set forth
------------
on Exhibit A hereto ("Compensation") for all services to be rendered by you
---------
hereunder.
4. OTHER ACTIVITIES DURING EMPLOYMENT. You acknowledge and agree that you
----------------------------------
may serve on boards of directors and hold other leadership positions in non-
profit organizations unless the objectives and requirements of such position are
determined by the Board of Directors to be inconsistent with the performance of
your duties. You also acknowledge and agree that the approval of the Board of
Directors shall be required before you accept or serve as a director, officer or
employee of any other for profit corporation during the term of this Agreement.
5. ILLNESS, INCAPACITY AND DEATH.
-------------------------------
(a) If, during the term of this Agreement, you shall be prevented
from performing your duties by reason of illness or physical or mental
disability (hereinafter referred to collectively as "incapacity") for a
continuous period greater than 120 days in any 12-month period, the Company may
terminate your employment hereunder by giving written notice thereof to you,
effective on the date set forth in the notice (which date shall be not less
than 15 business days after the notice is given), and the Company shall pay you
any accrued salary and benefits due to you as of such date, less applicable
taxes and other required withholdings and any amounts you owe the Company.
(b) For purposes of this Agreement, a continuous period of incapacity
shall not be deemed interrupted until you return to substantially full time
work for a period of at least thirty (30) consecutive business days.
(c) In the event of your death during the term of this Agreement,
employment hereunder shall terminate on the date of your death, and the Company
shall pay your estate any accrued salary and benefits due to you as of such
date, less applicable taxes and other required withholdings and any amounts you
owe the Company.
2
<PAGE>
6. FORMER EMPLOYERS. You represent and warrant that your employment by the
-----------------
Company will not conflict with and will not be constrained by any prior or
current employment, consulting agreement or relationship whether oral or
written. You represent and warrant that you do not possess confidential
information arising out of any such employment, consulting agreement or
relationship which, in your best judgment, would be utilized in connection with
your employment by the Company.
7. CONFIDENTIALITY. You agree to keep confidential, except as the Company
----------------
may otherwise consent in writing, and, except for the Company's benefit, not to
disclose or make any use of at any time either during or subsequent to your
employment, any trade secrets, confidential information, knowledge, data or
other information of the Company relating to services, treatment procedures,
processes, know-how, designs, marketing data, test data, customer lists,
referral services, business plans, marketing plans and strategies, pricing
strategies, or other subject matter pertaining to any business of the Company or
any of its affiliates, which you may produce, obtain, or otherwise acquire
during the term of this Agreement, except as herein provided. You further agree
not to deliver, reproduce or in any way allow any such trade secrets,
confidential information, knowledge, data or other information, or any
documentation relating thereto, to be delivered to or used by any third parties
without specific direction or consent of a duly authorized representative of the
Company. In the event your employment with the Company terminates for any reason
whatsoever, you agree to promptly surrender and deliver to the Company all
records, materials, equipment, drawings, documents and data which you may obtain
or produce during the term of this Agreement, and you will not take with you any
summaries, outlines or descriptions of any confidential information, knowledge
or data of the Company which you may produce or obtain during the term of this
Agreement.
8. NON-COMPETITION.
----------------
8.1 During the term of your employment hereunder, and for a period
equal to the greater of:
(x) two (2) years after the termination of your employment with
the Company, including without limitation termination by the Company for Cause
or without Cause, hereunder, or
(y) any period under which you receive compensation from the
Company under Exhibit A hereto, absent the Company's prior written approval,
---------
you will not engage, directly or indirectly, whether as principal or as agent,
officer, director, employee, consultant, shareholder, or otherwise, alone or in
association with any other person, corporation or other entity, in any
Competing Business. For purposes of this Agreement, the term "Competing
Business" shall mean: any person, corporation or other entity which solicits,
trades with, advises calls upon or otherwise does, or attempts to do, directly
or indirectly, business with any patients, referral sources, customers or
accounts of the Company, its successors, assigns or
3
<PAGE>
affiliates, that have done business with the Company at any time or from time to
time during the period of your employment hereunder.
8.2 You agree that during your employment with the Company you shall
not, directly or indirectly, solicit the trade of, or trade with, any patients,
referral source, customer, prospective customer, supplier, or prospective
supplier of the Company for any business purpose other than for the benefit of
the Company. You further agree that for two (2) years following termination of
your employment with the Company, including without limitation termination by
the Company for Cause or without Cause, you shall not, directly or indirectly,
solicit the trade of, or trade with, any patients, referral source, customers or
suppliers, or prospective customers or suppliers, of the Company.
8.3 You agree that, except as expressly provided in Exhibit A hereto,
---------
during your employment with the Company and for two (;) years following
termination of your employment with the Company, including without limitation
termination by the Company for Cause or without Cause, you shall not, directly
or indirectly, solicit or induce, or attempt to solicit or induce, any employee
of the Company to leave the Company for any reason whatsoever, or hire any
employee of the Company.
8.4 You represent that your experience and capabilities are such that
the provisions of this Agreement will not prevent you from earning a livelihood
and you acknowledge that it would cause the Company serious and irreparable
injury and cost if you were to use your ability and knowledge in competition
with the Company or to otherwise breach the obligations contained in this
Agreement
9. REMEDIES. In the event of a breach by you of the terms of this
---------
Agreement, the Company shall be entitled, if it shall so elect, to institute
legal proceedings to obtain damages for any such breach, or to enforce the
specific performance of this Agreement by you and to enjoin you from any further
violation of this Agreement and to exercise such remedies cumulatively or in
conjunction with all other rights and remedies provided by law. You
acknowledge, however, that the remedies at law for any breach by you of the
provisions of this Agreement may be inadequate and that the Company shall be
entitled to injunctive relief against you in the event of any breach.
10. ASSIGNMENT. This Agreement shall be binding upon and inure to the
-----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly acknowledge and assume its
obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by you or your legal
representatives, executors, administrators, successors and heirs. You may not
assign any of your rights or delegate any of your duties, responsibilities,
obligations or positions hereunder to any person and any such purported
delegation by you shall be void and of no force and effect.
4
<PAGE>
11. SEVERABILITY. The Company and you acknowledge and agree that in
-------------
the event any one or more of the provisions contained in this Agreement shall,
for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect the other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. NOTICES. Any notice given by the Company hereunder shall be by
--------
personal delivery or registered or certified mail, return receipt requested,
addressed to you at your address of record with the Company. Any notice which
you are required or may desire to deliver to the Company may be given by you by
personal delivery or by registered or certified mail, return receipt requested,
addressed to the Company at its principal office. The date of personal delivery
or five (5) business days after the date of mailing any notice shall be deemed
to be the date of delivery thereof.
13. WAIVERS. If either party should waive any breach of any provision
--------
of this Agreement, such waiver shall not operate or be construed as a waiver of
any subsequent breach of any provision of this Agreement.
14. COMPLETE AGREEMENT; AMENDMENTS. This Agreement, including Exhibit A
------------------------------- ---------
hereto, is the entire agreement of the parties with respect to the subject
matter hereof, superseding all previous oral or written communications,
representations, understandings or agreements with the Company or any officer
or representative thereof. Any amendment to this Agreement or waiver by the
Company of any right hereunder shall be effective only if evidenced by a
written instrument executed by the parties hereto, upon authorization of the
Company's Board of Directors.
15. HEADINGS. The headings of the Sections hereof are inserted for
---------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
16. COUNTERPARTS. This Agreement may be signed in counterparts, each of
-------------
which shall be deemed an original and both of which shall together constitute
one agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the Commonwealth of Pennsylvania.
18. ARBITRATION. Except as otherwise provided herein, in the event of
------------
any controversy, dispute or claim arising out of, or relating to, this
Agreement, or the breach thereof, or arising out of any other matter relating to
the your employment with the Company or the termination of such employment, the
parties may seek recourse only for temporary or preliminary injunctive relief to
the courts having jurisdiction thereof and if any relief other than injunctive
relief is sought, the Company and you agree that such underlying controversy,
dispute or claim shall be settled by arbitration conducted in Pittsburgh,
Pennsylvania in accordance with
5
<PAGE>
this Section 18 of the Agreement and the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"). The matter shall be heard and
decided, and awards rendered by a panel of three (3) arbitrators (the
"Arbitration Panel"). The Company and you shall each select one arbitrator from
the AAA National Panel of Commercial Arbitrators (the "Commercial Panel") and
AAA shall select a third arbitrator from the Commercial Panel. The award
rendered by the Arbitration Panel shall be final and binding as between the
parties hereto and their respective heirs, executors, administrators, successors
and assigns, and judgment on the award may be entered by any court having
jurisdiction thereof.
19. RELEASE. You hereby acknowledge and agree that prior to the
--------
occurrence of your's or your dependents right to receive from the Company or any
of its representatives or agents any compensation or benefit to be paid or
provided to you or your dependents pursuant to Sections 2.2, 3, or 5 of this
Agreement, you may be required by the Company, in its sole discretion, to
execute a release in a form reasonably acceptable to the Company, which releases
any and all claims you have or may have against the Company or its affiliates
agents, officers, directors, successors or assigns with respect to matters
relating to your employment and termination of employment.
If you are in agreement with the foregoing, please sign your name below,
whereupon this Agreement shall become binding in accordance with its terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith.)
Very truly yours,
NORTHSTAR HEALTH SERVICES, INC.
By: /s/ M. J. Kulmoski
-----------------------
Authorized Officer
ACCEPTED AND AGREED WITH THE
INTENT TO BE LEGALLY BOUND
THIS DAY OF AUGUST 1995:
----
/s/ Brian Strong
- -----------------------
BRIAN STRONG
Exhibit A
6
<PAGE>
Exhibit A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF BRIAN STRONG
1. COMPENSATION.
-------------
a. BASE SALARY. Employee's base salary will be $130,000, which shall be
payable in equal installments in accordance with the Company's general
salary payment policy but in any event no less frequently than
monthly.
b. BONUS. Commencing with the first quarter of 1996, in the event that in
the immediately preceding quarter the Company's same store earnings
exceed the Company's same store earnings for the same quarter in the
immediately preceding year, Employee shall be entitled to receive each
quarter a bonus equal to ten percent (10%) of the Employee's then
current quarterly base salary. The bonus shall be payable in
accordance with the Company's general salary payment schedule within
seventy-five (75) days following the quarter end in which the
Company's same store earnings exceeded the prior year's same store
earnings. Employee shall be entitled to receive such additional
bonuses, if any, as determined by the Compensation Committee of the
Board of Directors.
c. EXTENSION BONUS. In the event the Company elects to exercise the
Option and Employee elects to continue his employment with the Company
following the Company's exercise of the Option, the Company shall pay
the Employee a bonus of Thirty Thousand Dollars ($30,000) (less
applicable taxes and other required withholdings) within thirty (30)
days of the Employee's agreement to continue his employment with the
Company following the Company's exercise of such Option; provided,
however, that Employee shall be obligated to repay such bonus in the
event that he voluntarily terminates his employment with the Company
as follows:
VOLUNTARY AMOUNT OF EXTENSION
TERMINATION DATE BONUS TO BE REPAID
---------------- ------------------
Within first six months of the Option Term 100%
A-7
<PAGE>
After six months but before twelve months of 75%
the Option Term
After twelve months but before eighteen months 50%
of the Option Term
After eighteen months but before twenty-four 25%
months of the Option Term
After twenty-four months of the Option Term 0%
d. STOCK OPTIONS. Employee shall be eligible to participate in the
Company's 1992 Stock Option Plan or any other stock bonus or stock
option plan authorized by the Company for its employees, officers and
consultants. On the Effective Date, Employee shall be granted, under
the 1992 Stock Option Plan, stock options for 100,000 shares of the
Company's Common Stock in connection with the Employee's execution of
this Agreement. Such options shall have an exercise price equal to
the fair market value (as defined in the 1992 Stock Option Plan) as
of the Effective Date. Options covering twenty-five thousand
(25,000) shares shall vest and become exercisable upon Employee's
commencement of employment with the Company; Options covering
thirty-seven thousand five hundred (37,500) shares shall vest and
become exercisable eighteen months after the Employee's commencement
of employment; and options covering thirty-seven thousand five
hundred (37,500) shares shall vest and become exercisable thirty
months after Employee's commencement of employment. Such options
shall be exercisable for ten years from the date of grant; provided,
however, Employee shall forfeit all non-vested options upon
termination of employment with the Company for any reason and as
otherwise provided in the 1992 Stock Option Plan.
e. In connection with the granting of the aforementioned options,
Employee hereby acknowledges prior receipt of the Company's Form
10-KSB for the fiscal year ending December 31, 1994, Proxy Statement
dated May 8, 1995, Form 10-QSB for the quarter ended June 30, 1995,
1992 Stock Option Plan and related stock option plan disclosure
documents. Employee also acknowledges that he has had ample
opportunity to review each of the aforementioned documents prior to
the execution of this Agreement.
A-8
<PAGE>
2. VACATION. Employee shall be entitled to a total of thirty-two (32)
---------
paid vacation days and holidays per annum, including certain holidays
determined by the Company. Employee shall not be permitted to accrue
unused vacation days to subsequent periods nor collect payment for any
unused vacation at the end of each fiscal year.
3. INSURANCE AND BENEFITS. Employee shall be eligible to participate in
----------------------
all employee and executive benefit plans and programs currently available
to other Company employees of a comparable status and title as well as any
such plans and programs adopted and generally available to the Company's
other executive officers during the term of this Agreement. The Company
shall provide health insurance (without any Employee copayment) for
Employee and his family.
4. RETIREMENT PLAN. Employee will be eligible to participate in the
---------------
Company's 401(k) Plan in accordance with its terms. The Company will
provide a matching contribution in accordance with its matching
contribution plan for all employees, with such matching contribution not
to exceed fifteen percent (15%) of Employee's income as permitted by the
Internal Revenue Service.
5. AUTOMOBILE. Employee shall be entitled to receive a $400 per month
-----------
automobile allowance during the term of this Agreement.
6. SEVERANCE. In the event Employee's employment is terminated other than for
---------
"Cause" during the initial six months of this Agreement or the Company
elects not to exercise the Option to extend the Agreement for the
additional two (2) year period, the Company shall pay the Employee an
amount equal to two (2) months base salary as severance pay (less
applicable taxes and other required withholdings and amounts due the
Company by the Employee), the timing of such severance payments shall be in
accordance with the Company's regular payroll schedule.
In the event the Company elects to exercise the Option to extend the
Agreement for two (2) additional years or the Agreement is automatically
extended thereafter for successive one-year periods and Employee's
employment is subsequently terminated other than for "Cause" pursuant to
Section 2.3 of the Agreement, Employee shall be entitled to all payments
and benefits under this Agreement when due (less applicable taxes and other
required withholdings and amounts due the Company by the Employee).
7. EXPENSE REIMBURSEMENT. During the term of this Agreement, the Company
---------------------
shall reimburse the Employee for all reasonable and necessary out-of-pocket
expenses incurred by Employee in connection with the performance of
Employee's duties hereunder, upon the presentation of proper verification
therefor in accordance with Company policy.
A-9
<PAGE>
8. RELOCATION EXPENSES. In connection with Employee's relocation to
-------------------
Pittsburgh, Pennsylvania, the Company shall reimburse Employee for the
following: (i) reasonable out-of-pocket moving expenses incurred in
connection with Employee's permanent relocation; (ii) reasonable out-of-
pocket costs incurred in connection with up to two (2) house-hunting trips
to Pittsburgh, Pennsylvania for Employee; and (iii) out-of-pocket costs
incurred in connection with Employee's termination of his Milwaukee
apartment lease. Expenses will be reimbursed upon presentation of proper
verification therefor in accordance with Company policy.
9. RECRUITED EMPLOYEES. Following the termination of the Employee's employment
-------------------
with the Company, Employee shall be permitted to solicit or induce, or
attempt to solicit or induce Jennifer Wright, Dianne Dianello and Malcolm
Dalrymple to leave their employment with the Company and to hire or cause
such individuals to be hired by a third party.
A-10
<PAGE>
[LOGO] NORTHSTAR HEALTH SERVICES, INC.
Foster Plaza 9 (412) 920-1730
750 Holiday Drive Fax (412) 920-1738
Pittsburgh, PA 15220
September 5, 1995
Brian Strong
Northstar Health Services, Inc.
Foster Plaza 9
750 Holiday Drive
Pittsburgh, PA 15220
Dear Brian:
I am pleased to inform you that pursuant to Section 2.1 of the Employment
Agreement (the "Agreement" dated August 22, 1995, between Northstar Health
Services, Inc. (the "Company" ) and you, the Company has elected to exercise its
option to extend the term of the Agreement for an additional twenty-four (24)
months from the date hereof. In accordance with the terms of the Agreement, the
Company shall pay you a one time extension bonus of Thirty Thousand Dollars
($30,000) (less applicable taxes and other required withholdings) within thirty
days of your agreement to continue your employment with the Company pursuant to
the terms of the Agreement.
Please indicate your agreement to continue your employment with the
Company pursuant to the terms of the Agreement by executing both copies hereof
in the space provided below, retain one copy for your files, and return the
other copy to the undersigned.
Very truly yours,
Northstar Health Services, Inc.
By: /s/ Mark A. DeSimone
-----------------------------
Mark A. DeSimone
Chief Executive Officer and
President
Acknowledged and Agreed to
this 5th day of September, 1995
/s/ Brian Strong
- -----------------------------
Brian Strong
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
TO: MICHAEL J. KULMOSKI, JR.
2030 Clare Drive
Pittsburgh, PA 15237
In consideration of your agreement to enter into the non-compete contained
herein and to continue to serve as the Treasurer and Vice President of Finance,
the undersigned,
NORTHSTAR HEALTH SERVICES, INC., a Delaware corporation (the "Company"), hereby
agrees effective as of November 1, 1995 (the "Effective Date"), to extend to you
an Employment Agreement on the following terms and conditions:
1. POSITION AND RESPONSIBILITIES.
------------------------------
1.1 You shall serve as the Treasurer and Vice President of Finance of
the Company and in such position you will exercise such executive authority,
duties, powers and responsibilities as customarily attend such position in the
Company from time to time. You shall at all times have a direct reporting
relationship to the Company's Chief Executive Officer and President. You shall
not be required to relocate from the Pittsburgh, Pennsylvania metropolitan area
without the Company obtaining your prior written consent. In your position as
Treasurer and Vice President of Finance, and you shall assist Mark A. DeSimone
and you shall be responsible for (i) arranging and negotiating all of the
Company's debt and equity financing, including all acquisition financing; (ii)
arranging and managing the Company's cash management program; and (iii)
assisting with the integration of accounting and operating systems between the
Company and entities acquired by the Company or which merge with the Company.
You shall be responsible for assisting and coordinating the day to day
accounting and financial reporting obligations of the Company with the Chief
Financial Officer of the Company. Provided, however, you agree to perform such
additional executive duties consistent with the aforementioned provisions of
this Agreement as may be assigned to you from time to time by the President and
Chief Executive Officer of the Company, the Company's Board of Directors or any
committee of the Board of Directors.
1.2 You will, to the best of your knowledge, skill and ability,
devote your time and best efforts to the performance of your duties hereunder
and the business and affairs of the Company.
1.3 You will duly, punctually, competently and faithfully perform and
discharge your duties in accordance with all applicable laws and all policies,
rules and regulations which the Company may now or shall hereafter establish
governing the conduct of its business.
2. TERM OF EMPLOYMENT.
------------------
2.1 The initial term of this Agreement shall be for a period of two
(2) years commencing on November 1, 1995. Unless earlier terminated, on
November 1, 1996 and on each
<PAGE>
subsequent annual anniversary thereof, the expiration date of this Agreement
shall be automatically extended for an additional one (1) year period, provided
that neither you or the Company give the other party written notice at least
sixty (60) days prior to such annual anniversary date of that party's intention
not to have this Agreement so extended. Provided, however, upon the occurrence
of a Change of Control, as hereinafter defined, the then remaining term of the
Agreement shall be automatically extended for an additional twelve (12) month
period, and thereafter the expiration date of the Agreement shall be
automatically extended on subsequent annual anniversary dates of the Agreement
to the extent and in accordance with the procedure set forth in the prior
sentence. In the event that either party hereto shall give such notice to the
other party of their intention not to extend the then existing term of this
Agreement, which the Company may do by delivery of a resolution adopted by the
unanimous vote of the Company's Compensation and Stock Option Committee so
stating the Company's intention not to extend the Agreement, this Agreement
shall expire at the end of the then existing term. In the event that, during
the term of this Agreement, your employment is terminated hereunder either by
the Company other than for "Cause" (as defined herein), or by you as the result
of the Company's breach of this Agreement, which breach the Company fails to
cure within thirty (30) days after the Company's receipt of written notice from
you specifying the specific nature of the Company's breach, the Company shall
pay you severance in an amount set forth on Exhibit A hereto.
---------
For purposes of this Agreement, a "Change of Control" shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's common stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's common stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or
(ii) the shareholders of the Company approved any plan or proposal for the
liquidation or dissolution of the Company, or (iii) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the Company's
outstanding common stock. Provided, however, the proposed transaction between
the Company or its affiliate and Keystone Rehabilitation Services, Inc. shall in
no event be deemed to involve or result in a Change of Control.
2.2 Employee acknowledges and agrees that he shall serve in such
office at the pleasure of the Company's Board of Directors and Employee may be
removed from said office at any time with or without "Cause" pursuant to the
terms hereof; provided, that any such removal shall be without prejudice to any
contract rights the Employee may have hereunder.
2.3 The Company may at any time terminate your employment hereunder
for "Cause." In such event, the Company shall deliver to you a resolution
adopted by the Company's Board of Directors setting forth in reasonable detail
the particular conduct which provides the basis for the termination of your
employment for "Cause." For purposes of this Agreement, "Cause"
-2-
<PAGE>
shall mean any of the following by you: (i) Material breach of any material
provision of this Agreement, which breach you shall have failed to cure within
ten (10) days after your receipt of written notice from the Company specifying
the specific nature of your breach; (ii) Willful misconduct by you that is
materially inimical to the best interests, monetary or otherwise, of the
Company; and (iii) Conviction of a felony or any crime involving moral turpitude
or fraud. For purposes of this definition of "Cause," no act, or failure to act
on the Employee's part shall be considered "willful" unless done, or omitted to
be done, by the Employee not in good faith and without reasonable belief that
his action or omission was in the best interests of the Company. In the event
of your termination for "Cause," the Company shall pay you any accrued salary
and benefits due you as of such date, less applicable taxes and other required
withholdings and any amounts you may owe to the Company.
3. COMPENSATION. You shall receive the compensation and benefits set
------------
forth on Exhibit A hereto ("Compensation") for all services to be rendered by
---------
you hereunder.
4. OTHER ACTIVITIES DURING EMPLOYMENT. You acknowledge and agree that you
-----------------------------------
may serve on boards of directors and hold other leadership positions in
non-profit organizations unless the objectives and requirements of such
position are determined by the Board of Directors to be inconsistent with the
performance of your duties. You also acknowledge and agree that the approval
of the Board of Directors shall be required before you accept or serve as a
director, officer or employee of any other for profit corporation or entity
during the term of this Agreement.
5. ILLNESS, INCAPACITY AND DEATH.
------------------------------
(a) If, during the term of this Agreement, you shall be prevented from
performing your duties by reason of illness or physical or mental disability
(hereinafter referred to collectively as "incapacity") for a continuous period
greater than 120 days in any 12-month period, the Company may terminate your
employment and this Agreement hereunder by giving written notice thereof to you,
effective on the date set forth in the notice (which date shall be not less than
15 business days after the notice is given), and the Company shall pay you any
accrued salary and benefits due to you as of such date, less applicable taxes
and other required withholdings and any amounts you owe the Company.
(b) For purposes of this Agreement, a continuous period of incapacity
shall not be deemed interrupted until you return to substantially full time work
for a period of at least thirty (30) consecutive business days.
(c) In the event of your death during the term of this Agreement,
your employment hereunder and this Agreement shall terminate on the date of your
death, and the Company shall pay your estate any accrued salary and benefits due
to you as of such date, less applicable taxes and other required withholdings
and any amounts you owe the Company.
-3-
<PAGE>
6. FORMER EMPLOYERS. You represent and warrant that your employment
----------------
by the Company will not conflict with and will not be constrained by any prior
or current employment, consulting agreement or relationship whether oral or
written. You represent and warrant that you do not possess confidential
information arising out of any such employment, consulting agreement or
relationship which, in your best judgment, would be utilized in connection with
your employment by the Company.
7. CONFIDENTIALITY. You agree to keep confidential, except as the
---------------
Company may otherwise consent in writing, and, except for the Company's benefit,
not to disclose, publish, transfer or make any use of at any time either during
or subsequent to your employment with the Company, any trade secrets,
confidential information, knowledge, data or other information of the Company
relating to services, treatment procedures, processes, know-how, designs,
marketing data, test data, customer lists, referral services, business plans,
marketing plans and strategies, pricing strategies, or other subject matter
pertaining to any business of the Company or any of its affiliates, which you
may produce, obtain, or otherwise acquire during the term of this Agreement,
except as herein provided. You further agree not to disclose, publish, deliver,
reproduce or in any way allow any such trade secrets, confidential information,
knowledge, data or other information, or any documentation relating thereto, to
be delivered to or used by any third parties without specific direction or
consent of a duly authorized officer of the Company. In the event your
employment with the Company terminates for any reason whatsoever, you agree to
promptly surrender and deliver to the Company all records, materials, equipment,
drawings, documents and data which you may obtain or produce during the term of
this Agreement, and you will not take with you any summaries, outlines or
descriptions of any confidential information, knowledge or data of the Company
which you may produce or obtain during the term of this Agreement.
8. NON-COMPETITION.
----------------
8.1 During the term of your employment hereunder, and for a period
equal to the greater of:
(x) two (2) years after the termination of your employment with
the Company, including without limitation termination by the Company for Cause
or without Cause, hereunder, or
(y) any period under which you receive compensation from the
Company under Exhibit A hereto, absent the Company's prior written approval,
---------
you will not engage, directly or indirectly, whether as principal or as agent,
officer, director, employee, consultant, shareholder, or otherwise, alone or in
association with any other person, corporation or other entity, in any
Competing Business. For purposes of this Agreement, the term "Competing
Business" shall mean: any person, corporation or other entity which
solicits, trades with, advises, calls upon or otherwise does, or attempts to
do, directly or indirectly, business with any patients, referral sources,
customers or accounts of the Company, its successors, assigns or
-4-
<PAGE>
affiliates, that have done business With the Company at any time or from time to
time during the period of your employment hereunder.
8.2 You agree that during your employment with the Company and for
two (2) years following termination of your employment with the Company,
including without limitation termination by the Company for Cause or without
Cause, you shall not, directly or indirectly, solicit, trade with, advise, call
upon any patient, referral source, customer, prospective customer, supplier, or
prospective supplier of the Company for any business purpose other than for the
benefit of the Company, without the prior written consent of the Company.
8.3 You agree that during your employment with the Company and for
two (2) years following termination of your employment with the Company,
including without limitation termination by the Company for Cause or without
Cause, you shall not, directly or indirectly, solicit or induce, or attempt to
solicit or induce, any employee of the Company to leave the Company for any
reason whatsoever, or hire any employee of the Company, without the prior
written consent of the Company.
8.4 You represent that your experience and capabilities are such
that the provisions of this Agreement will not prevent you from earning a
livelihood and you acknowledge that it would cause the Company serious and
irreparable injury and cost if you were to use your ability and knowledge in
competition with the Company or to otherwise breach the obligations contained
in this Agreement.
9. REMEDIES. In the event of a breach by you of the terms of this
--------
Agreement, the Company shall be entitled, if it shall so elect, to institute
legal proceedings to obtain damages for any such breach, or to enforce the
specific performance of this Agreement by you and to enjoin you from any
further violation of this Agreement and to exercise such remedies cumulatively
or in conjunction with all other rights and remedies provided by law. You
acknowledge, however, that the remedies at law for any breach by you of the
provisions of this Agreement may be inadequate and that the Company shall be
entitled to injunctive relief against you in the event of any breach.
10. ASSIGNMENT. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly acknowledge and assume the
Company's obligations hereunder. This Agreement shall inure to the extent
provided hereunder to the benefit of and be enforceable by you or your legal
representatives, executors, administrators, successors and heirs. You may not
assign any of your rights or delegate any of your duties, responsibilities,
obligations or positions hereunder to any person and any such purported
assignment or delegation by you shall be void and of no force and effect.
11. SEVERABILITY. The Company and you acknowledge and agree that in the
-------------
event any one or more of the provisions contained in this Agreement shall, for
any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability
-5-
<PAGE>
shall not affect the other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
12. NOTICES. Any notice given by the Company hereunder shall be by personal
--------
delivery or registered or certified mail, return receipt requested, addressed to
you at your address of record with the Company. Any notice which you are
required or may desire to deliver to the Company may be given by you by personal
delivery or by registered or certified mail, return receipt requested, addressed
to the Company's Chief Executive Officer and President at the Company's
principal office. The date of personal delivery or three (3) business days
after the date of mailing any notice shall be deemed to be the date of delivery
thereof.
13. WAIVERS. If either party should waive any breach of any provision of
--------
this Agreement, such waiver shall not operate or be construed as a waiver of
any subsequent breach of any provision of this Agreement.
14. COMPLETE AGREEMENT; AMENDMENTS. This Agreement, including Exhibit A
------------------------------ ---------
hereto, is the entire agreement of the parties with respect to the subject
matter hereof, superseding all previous oral or written communications,
representations, understandings or agreements with the Company or any officer or
representative thereof. Any amendment to this Agreement or waiver by the
Company of any right hereunder shall be effective only if evidenced by a written
instrument executed by the parties hereto, upon authorization of the Company's
Board of Directors.
15. HEADINGS. The headings of the Sections hereof are inserted for
---------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
16. COUNTERPARTS. This Agreement may be signed in counterparts, each of
-------------
which shall be deemed an original and both of which shall together constitute
one agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania
18. ARBITRATION. Except as otherwise provided herein, in the event of
-----------
any controversy, dispute or claim arising out of, or relating to, this
Agreement, or the breach thereof, or arising out of any other matter relating
to the your employment with the Company or the termination of such employment,
the parties may seek recourse only for temporary or preliminary injunctive
relief to the courts having jurisdiction thereof and if any relief other than
injunctive relief is sought, the Company and you agree that such underlying
controversy, dispute or claim shall be settled by arbitration conducted in
Pittsburgh, Pennsylvania in accordance with this Section 18 of the Agreement
and the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). The matter shall be heard and decided, and awards rendered by a panel
of three (3) arbitrators (the "Arbitration Panel"). The Company and you shall
each select one arbitrator from the AAA National Panel of Commercial
Arbitrators (the "Commercial Panel") and AAA shall select a third arbitrator
from the Commercial Panel. The award rendered
-6-
<PAGE>
by the Arbitration Panel shall be final and binding as between the parties
hereto and their respective heirs, executors, administrators, successors and
assigns, and judgment on the award may be entered by any court having
jurisdiction thereof
19. RELEASE. You hereby acknowledge and agree that prior to the occurrence
--------
of your's or your dependents right to receive from the Company or any of its
representatives or agents any compensation or benefit to be paid or provided to
you or your dependents pursuant to Sections 2.1, 2.3, 3, or 5 of this Agreement,
you may be required by the Company, in its sole discretion, to execute a release
in a form reasonably acceptable to the Company, which releases any and all
claims you have or may have against the Company or its affiliates agents,
officers, directors, successors or assigns with respect to matters relating to
your employment and termination of employment.
If you are in agreement with the foregoing, please sign your name below,
whereupon this Agreement shall become binding in accordance with its terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith.)
Very truly yours,
NORTHSTAR HEALTH SERVICES, INC.
By: /s/ Mark A. DeSimone
--------------------------------
Authorized Officer
ACCEPTED AND AGREED WITH THE
INTENT TO BE LEGALLY BOUND
THIS 27th DAY OF OCTOBER, 1995:
/s/ Michael J. Kulmoski, Jr.
- ------------------------------
MICHAEL J. KULMOSKI, JR.
-7-
<PAGE>
Exhibit A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF MICHAEL J. KULMOSKI, JR.
1. COMPENSATION.
------------
a. BASE SALARY. Employee's base salary shall be $85,000, which shall be
payable in equal installments in accordance with the Company's payroll
policy, but in any event no less frequently than monthly. Commencing
on January 1, 1996 and on January 1 of each year thereafter, Employee
shall receive such salary increases as determined to be appropriate by
the Compensation and Stock Option Committee of the Board of Directors
consistent with the Company's declaration of salary increases to other
of the Company's executive officers.
b. SIGNING BONUS. The Company shall pay the Employee a one time signing
bonus of Ten Thousand Dollars ($ 10,000) within thirty (30) days of the
Employee's execution and delivery of this Agreement.
c. Bonus. Employee shall be entitled to receive such bonuses, if any, as
determined by the Compensation Committee of the Board of Directors.
d. Stock Options. Employee shall be eligible to participate in the
Company's 1992 Stock Option Plan or any other stock bonus or stock
option plan authorized by the Company for its employees, officers and
consultants. Within thirty (30) days of the Effective Date of this
Agreement, Employee shall be granted, under the 1992 Stock Option Plan,
stock options (the "Options") for forty thousand (40,000) shares of the
Company's Common Stock in connection with the Employee's execution of
this Agreement. Such Options shall have an exercise price equal to the
fair market value (as defined in the 1992 Stock Option Plan) as of the
record date of grant by the Compensation and Stock Option Committee of
the Board of Directors. Options covering all forty thousand (40,000)
shares shall vest and become immediately exercisable on the Effective
Date. The Options shall be exercisable for ten years from the date of
grant.
Upon the Employee's execution and delivery of this Agreement, the
"Vesting" provision of that certain Northstar Health Services, Inc.
Non-Qualified Stock
A-1
<PAGE>
Option Agreement, which has a date of grant of November 3, 1994, shall
be amended to read as follows "The shares underlying the options shall
become purchasable by the Optionee on November 1, 1995."
In the event of a Change of Control, all of the Employee's unvested
Options shall immediately vest and become exercisable.
In connection with the granting of the aforementioned options, Employee
hereby acknowledges prior receipt of the Company's Form 10-KSB for the
fiscal year ending December 31, 1994, Proxy Statement dated May 8,
1995, Form 10-QSB for the quarter ended September 30, 1995, 1992 Stock
Option Plan and related stock option plan disclosure documents.
Employee also acknowledges that he has had ample opportunity to review
each of the aforementioned documents prior to the execution of this
Agreement.
2. VACATION. Employee shall be entitled to all legal and religious holidays,
--------
and a total of twenty (20) paid vacation days per annum. Employee shall not
be permitted to accrue unused vacation days to subsequent periods but
Employee shall have the option to collect payment for any unused vacation at
the end of each fiscal year at Employee's then applicable base salary level.
3. INSURANCE AND BENEFITS. Employee shall be eligible to participate in all
-----------------------
employee and executive benefit plans and programs currently available to
other Company employees of a comparable status and title as well as any such
plans and programs adopted and generally available to the Company's other
executive officers during the term of this Agreement. The Company shall
provide health insurance to Employee and Employee's eligible dependents
pursuant to Company policy.
4. RETIREMENT PLAN. Employee will be eligible to participate in the Company's
---------------
401(k) Plan in accordance with its terms. The Company will provide a
matching contribution in accordance with its matching contribution plan for
all employees, with such matching contribution not to exceed fifteen percent
(15%) of Employee's income as permitted by the Internal Revenue Service.
5. AUTOMOBILE. Employee shall be entitled to receive a $400 per month
-----------
automobile allowance during the term of this Agreement, plus Company
reimbursement for insurance upon the vehicle.
6. SEVERANCE. In the event Employee's employment is terminated either by the
----------
Company other than for "Cause," or by Employee as the result of the
Company's breach of this Agreement, which breach the Company fails to cure
in accordance with Section 2.3 of the Agreement, Employee shall be entitled
to continued salary and benefits coverage (which
A-2
<PAGE>
shall be deemed to include medical and dental insurance, if any, and
automobile allowance) under this Agreement when and as due under this
Agreement during the term of this Agreement remaining as of such date, plus
payment of any other amounts, if any, otherwise due to Employee.
7. EXPENSE REIMBURSEMENT. During the, term of this Agreement, the
----------------------
Company shall reimburse the Employee for all reasonable and necessary
out-of-pocket expenses incurred by Employee in connection with the
performance of Employee's duties hereunder, upon the presentation of proper
verification therefor in accordance with Company policy.
8. TAXES-AND WITHHOLDINGS. The Company shall be authorized to withhold from
-----------------------
any payment to the Employee, his estate or his beneficiaries hereunder all
such amounts, if any, that the Company may reasonably determine is required
to withhold pursuant to any applicable law or regulation. The Company shall
also be authorized to withhold any other amounts which the Company
reasonably believes are due the Company by the Employee.
A-3
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, made as of the 15th day of November, 1995, by
and between Northstar Health Services, Inc., a Delaware corporation (the
"Company"), and Lisa S. Guarino ("Employee").
WITNESSETH:
-----------
WHEREAS, prior to and upon, the consummation of the Merger, the Company
has been, and will be, respectively, engaged in the business of providing
rehabilitation services;
WHEREAS, the Company entered into that certain Merger Agreement, dated the
date hereof (the "Merger Agreement"), by and among Keystone Rehabilitation
Systems, Inc., a Pennsylvania corporation ("KRS"), the Company and NSK Merger
Corp., a Pennsylvania corporation and a wholly-owned subsidiary of the Company
("Newco"); and
WHEREAS, pursuant to the Merger Agreement, Newco will be merged with
and into KRS, and KRS will become a wholly-owned subsidiary of the Company
(the "Merger"); and
WHEREAS, prior to the consummation of the Merger, Employee was the Executive
Vice President and Chief Financial Officer of KRS, and as a result possesses
valuable knowledge and skills that will contribute to the successful operation
of the Company's business; and
WHEREAS, the Company and Employee have agreed to execute and deliver this
Employment Agreement in consideration, among other things, of (i) Company
entering into the Merger, (ii) the access Employee will have to confidential or
proprietary information of the Company, (iii) the access Employee will have to
confidential or proprietary information to be acquired hereafter by the Company,
(iv) the willingness of the Company to make valuable benefits available
hereafter to Employee, (v) the Company's willingness to obligate itself to give
Employee adequate prior written notice of any termination of Employee's
employment without cause or make a severance payment to Employee in lieu thereof
and (vi) Employee's receipt of compensation from time to time by the Company;
and
WHEREAS, the Company desires to procure the services of Employee, and
Employee is willing to enter the employment of the Company, upon the terms and
subject to the conditions hereinafter set forth;
<PAGE>
NOW, THEREFORE, intending to be legally bound, the Company agrees to employ
Employee, and Employee hereby agrees to be employed by the Company, upon the
following terms and conditions:
ARTICLE I
EMPLOYMENT
----------
1.1. Office and Scope of Duties:
--------------------------
(a) Employee is hereby employed as the Executive Vice President and Chief
Financial Officer of the Company and shall report to the Chief Executive Officer
or his designee and in such capacity shall use best energies or abilities in the
performance of the duties customarily attributed to the office of Chief
Financial Officer (other than as limited by this Agreement) and as may be
prescribed in the By-Laws of the Company and such other duties as may be
assigned from time to time by the Board of Directors; provided, however, that
-----------------
Employee shall have no authority to alter, amend, terminate or otherwise modify
existing employment or consulting agreements between the Company and each of
Richard Andrasic, Gayle Davis, Mark A. De Simone, Michael J. Kulmoski, Jr.,
James Shields, Brian Strong or Nancy White or any employment or consulting
agreements that may be entered into in connection with the Penn Vascular Lab,
P.C., transaction; and provided further, that Employee's duties shall not
----------------
include primary responsibility for the following matters:
(i) arranging and negotiating the Company's debt and equity financing,
including all acquisition financing; and
(ii) arranging and managing the Company's cash management program.
(b) As Executive Vice President and Chief Financial Officer of the
Company, Employee shall not have the authority, directly or indirectly, to do
any of the following on behalf of the Company, KRS, or any other direct or
indirect subsidiary of the Company without the approval of the Board of
Directors of the Company or Mark A. DeSimone:
(i) Issue any one check, or series of related checks, in an an amount, or
amounts, in excess of $25,000, other than in the ordinary course of
business;
(ii) Borrow money from existing credit sources in excess of $50,000, or
from new credit sources in excess of $25,000, at any one time or in a
series of related actions, or incur any other indebtedness,
liabilities or obligations of any nature except liabilities in the
ordinary course of business;
(iii) Receive perquisites or employee benefits except as provided in this
Employment Agreement or as are available generally to employees of
comparable status and title;
(iv) Agree to enter into, or enter into, any material business combination
(such as a merger, consolidation, sale of stock or sale of assets);
-2-
<PAGE>
(v) Agree to acquire, sell, transfer or otherwise dispose of, or acquire,
sell, transfer or otherwise dispose of, any assets of the Company,
otherwise the ordinary course of business and provided that the market
value thereof does not exceed $25,000;
--------
(vi) Establish new, or amend, alter or make any change to the existing
banking relationships of the Company;
(vi) Establish new, or materially amend, materially alter or make any
material change to the existing method of accounting, accounting
principles, accounting practices or policies, accounting systems or
accounting controls of the Company unless the changes are consistent
with Generally Accepted Accounting Principles;
(vii) Make any material bids or proposals or enter into any lease, license,
permit, contract or other commitment or agreement, except in the
ordinary course of business and not involving an increase in
liability or a reduction in revenue in excess of $25,000;
(viii) Terminate, materially modify or materially amend any lease, license,
permit contract or other commitment or agreement, except in the
ordinary course of business and not involving an increase in liability
or a reduction in revenue in excess of $25,000;
(xi) Adjust in any way, grant or agree to grant, directly or indirectly,
any increase in the wages, salary, bonus or other compensation,
remuneration or benefits of any officer, consultant or agent except as
required under existing collective bargaining agreements or in other
agreements or arrangements existing as of the date hereof;
(x) Become a party to any new contract or arrangement providing for the
payment of wages, salary, bonus, profits, shares, stock benefits,
severance payments, retirement benefits or other compensation,
remuneration or benefits in excess of $25,000 per year with any
officer, consultant or agent other than Thomas W. Zaucha or the Zaucha
Family Limited Partnership;
(xi) Make any capital expenditure in excess of $25,000;
(xii) Mortgage, pledge or subject to any lien, charge or encumbrance, or
take or permit any action which would result therein on, any assets,
tangible or intangible in excess of $10,000; or
(xiii) Institute any litigation other than collection matters.
-3-
<PAGE>
1.2 Term. The initial term of this Agreement shall be for a period of two
----
(2) years commencing on the date of this Employment Agreement. Unless earlier
terminated, on the first anniversary of the date of this Employment Agreement.
Unless earlier terminated, on the anniversary thereof, the expiration date of
this Employment Agreement shall be automatically extended for an additional one
(1) year period, provided that neither you nor the Company give the other party
written notice at least sixty (60) days prior to such annual anniversary date of
that party's intention not to have this Employment Agreement so extended.
Provided, however, upon the occurrence of a Change of Control, as hereinafter
defined, the then remaining term of the Employment Agreement shall be
automatically extended for an additional twelve (12) month period, and
thereafter the expiration date of the Employment Agreement shall be
automatically extended on subsequent annual anniversary dates of the Employment
Agreement to the extent and in accordance with the procedure set forth in the
prior sentence. In the event that either party hereto shall give such notice to
the other party of their intention not to extend the then existing term of this
Employment Agreement, which the Company may do by delivery of a resolution
adopted by the unanimous vote of the Company's Compensation Committee so stating
the Company's intention not to extend the Employment Agreement, this Employment
Agreement shall expire at the end of the then existing term. In the event that,
during the term of this Employment Agreement, your employment is terminated
hereunder either by the Company other than for "Cause" (as defined herein), or
by you as the result of the Company's breach of this Agreement, which breach the
Company fails to cure within thirty (30) days after the Company's receipt of
written notice from you specifying the specific nature of the Company's breach,
you shall be entitled to continued salary and benefits coverage (which shall be
deemed to include medical and dental insurance, if any, and automobile
allowance) under this Employment Agreement when and as due under this Employment
Agreement during the term of this Employment Agreement remaining as of such
date, plus payment of any other amounts, if any, otherwise due to Employee.
For purposes of this Agreement, a "Change of Control" shall be deemed to
have occurred if (i) there shall be consummated (x) any consolidation or merger
of the Company in which the Company's common stock would be converted into cash,
securities or other property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the merger have the
same proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (ii) the shareholders of the
Company approved any plan or proposal for the liquidation or dissolution of the
Company, or (iii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than Thomas W. Zaucha or the Zaucha Family Limited Partnership or
any group in which any such person is a member, shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) or 30% or more
of the Company's outstanding common stock. Provided, however, the proposed
transaction between the Company or its affiliate and Keystone Rehabilitation
Systems Inc. shall in no event be deemed to involve or result in a Change of
Control.
-4-
<PAGE>
1.3 Base Salary. During the term of Employee's employment hereunder,
-----------
compensation shall be paid to Employee by the Company at the rate of One Hundred
Six Thousand Dollars ($106,000) per annum (the "Base Salary"), payable in
accordance with the Company's regular policy in effect from time to time. The
rate of compensation to be paid to Employee may be adjusted upward but not,
without Employee's consent, downward by the Board of Directors of the Company at
any time based upon Employee's contribution to the success of the Company and on
such other factors as the Board of Directors of the Company shall deem
appropriate. Employee shall also be reimbursed by the Company for reasonable
out-of-pocket expenses incurred by her on behalf of the Company and supported by
appropriate documentation, or are otherwise pre-approved by the Board of
Directors of the Company, and shall be entitled to such vacations as in
Employee's opinion, subject only to reasonable review by the Board of Directors
of the Company, will not interfere with the conduct of the business and the
operations of the Company, except that under no circumstance shall Employee be
entitled to more than six (6) weeks vacation and not less than four (4) weeks.
1.4 Employee Benefits. At all times during the term of Employee's
-----------------
employment hereunder, Employee shall (a) be covered by such major medical or
health benefit plans and pensions as are available generally to employees of the
Company, (b) be eligible to participate in, and receive grants under, any stock
option, stock bonus or profit sharing or similar plans of the Company under the
terms of any such plans, and (c) receive the benefits listed on Schedule I
attached hereto (to the extent such benefits can be obtained by the Company
without violation of law and on commercially reasonable terms).
ARTICLE II
TERMINATION
2.1 Illness, Incapacity. If during the term of Employee's employment
-------------------
hereunder Employee shall be prevented, in the Board of Director's reasonable
judgment, from effectively performing all of her duties hereunder by reason of
illness or disability, then the Company may, by written notice to Employee,
terminate Employee's employment hereunder. In the event that Employee's
employment is terminated by reason of illness or disability, Employee shall
continue to receive all payments when due under this Agreement. The obligations
of Employee under Article IV hereof shall continue notwithstanding termination
of Employee's employment pursuant to this Section 2.1.
2.2 Death. If Employee dies during the term of her employment hereunder,
-----
Employee's employment hereunder shall be deemed to have ceased, and Employee
shall receive all payments when due hereunder during the term of this Agreement.
Except as provided in the preceding sentence, payment of compensation to
Employee hereunder shall cease effective as of the date of any such termination.
2.3 Company Termination. If the Company determines that Employee has
-------------------
intentionally failed to perform her duties hereunder or under law, has
materially violated any of the agreements, covenants, terms or conditions
hereunder or has engaged in conduct which has injured the business or reputation
of the Company or otherwise materially adversely affect its
-5-
<PAGE>
interests, then, and in such event, the Company may, by written notice to
Employee, terminate Employee's employment hereunder. Upon delivery to Employee
of such notice, together with payment of any accrued and unpaid salary under
Section 1.3 hereof, Employee's employment and all obligations of the Company
under Article I hereof shall forthwith terminate. The obligations of Employee
under Article IV hereof shall continue notwithstanding termination of Employee's
employment pursuant to this Section 2.3.
ARTICLE III
EMPLOYEE'S ACKNOWLEDGEMENTS
Employee recognizes and acknowledges that: (a) in the course of Employee's
employment by the Company it will be necessary for Employee to acquire
information which could include, in whole or in part, information concerning the
Company's sales, sales volume, sales methods, sales proposals, customers and
prospective customers, identity of customers and prospective customers, identity
of key purchasing personnel in the employ of customers and prospective
customers, amount or kind of customer's purchases from the Company, the
Company's sources of supply, the Company's computer programs, system
documentation, special hardware, product hardware, related software development,
the Company's manuals, formulae, processes, methods, machines, compositions,
ideas, improvements, inventions or other confidential or proprietary information
belonging to the Company or relating to the Company's affairs, excluding,
however, such information as is publicly available or was known by Employee
prior to her employment hereunder and was not subject to a confidentiality
agreement (collectively referred to herein as the "Confidential Information");
(b) the Confidential Information is the property of the Company; (c) the use,
misappropriation or disclosure of the Confidential Information would constitute
a breach of trust and could cause irreparable injury to the Company; and (d) it
is essential to the protection of the Company's goodwill and to the maintenance
of the Company's competitive position that the Confidential Information be kept
secretary and that Employee not disclose the Confidential Information to others
or use the Confidential Information to Employee's own advantage or the advantage
of others.
Employee further recognizes and understands that her duties at the Company
may include the preparation of materials, including written or graphic
materials, and that any such materials conceived or written by him shall be done
as "work made for hire" as defined and used in the Copyright Act of 1976, 17
U.S.C. (s) 1 et seq. In the event of publication of such materials, Employee
-- ---
understands that since the work is a "work made for hire", the Company will
solely retain and own all rights in said materials, including right of
copyright, and that the Company shall grant Employee by-line credit on such
materials unless Employee otherwise consents.
-6-
<PAGE>
ARTICLE IV
EMPLOYEE'S COVENANTS AND AGREEMENTS
-----------------------------------
4.1 Non-Disclosure of Confidential Information. Employee agrees to hold and
------------------------------------------
safeguard the Confidential Information in trust for the Company, its successors
and assigns and agrees that she shall not, without the prior written consent of
the Company, misappropriate or disclosure or make available to anyone for use
outside the Company's organization at any time, either during her employment
with the Company or subsequent to the termination of her employment with the
Company for any reason, including, without limitation, termination by the
Company for cause or without cause, any of the Confidential Information, whether
or not developed by Employee, except as required in the performance of
Employee's duties to the Company.
4.2 Duties. Employee agrees to devote her best efforts full time to the
------
performance of her duties for the Company, to give proper time and attention to
furthering the Company's business, and to comply with all rules, regulations and
instruments established or issued by the Company. Employee further agrees that
during the term of this Employment Agreement, Employee shall not, directly or
indirectly, engage in any business which would detract from Employee's ability
to apply her reasonable best efforts to the performance of her duties hereunder.
Employee also agrees that she shall not usurp any corporate opportunities of the
Company.
4.3. Return of Materials. Upon the termination of Employee's employment
-------------------
with the Company for any reason, including without limitation termination by the
Company for cause or without cause, Employee shall promptly deliver to the
Company all correspondence, drawings, blueprints, manuals, letters, notes,
notebooks, reports, flow-charts, programs, proposals and any documents
concerning the Company's customers or concerning products or processes used by
the Company and, without limiting the foregoing, will promptly deliver to the
Company any and all other documents or materials containing or constituting
Confidential Information.
4.4 Work Made for Hire. Employee agrees that in the event of publication
------------------
by Employee of written or graphic materials the Company will retain and own all
rights in said materials, including right of copyright.
ARTICLE V
EMPLOYEE'S REPRESENTATIONS AND WARRANTIES
5.1 No Prior Agreements. Employee represents and warrants that she is not a
party to or otherwise subject to or bound by the terms of any contract,
agreement or understanding which in any manner would limit or otherwise affect
her ability to perform her obligations hereunder, including, without limitation,
any contract, agreement or understanding containing terms and provisions similar
in any manner to those contained in Article IV hereof. Employee further
represents and warrants that her employment with the Company will not
-7-
<PAGE>
require Employer to disclose or use any confidential information belonging to
prior employers or other persons or entities.
5.2 Employee's Abilities. Employee represents that her experience and
--------------------
capabilities are such that the provisions of Article IV will not prevent
Employee from earning her livelihood, and acknowledges that it would cause the
Company serious and irreparable injury and cost if Employee were to use her
ability and knowledge in competition with the Company or to otherwise breach the
obligations contained in Article IV.
5.3 Review by Counsel. Employee represents and warrants that counsel for
-----------------
Employee has reviewed this Employment Agreement and that such counsel has
advised Employee in connection with its execution and delivery.
ARTICLE VI
MISCELLANEOUS
6.1 Authorization to Modify Restrictions. It is the intention of the
------------------------------------
parties that the provisions of Article IV hereof shall be enforceable to the
fullest extent permissible under applicable law, but that the unenforceability
(or modification to conform to such law) of any provision or provisions hereof
shall not render unenforceable, to impair, the remainder thereof. If any
provision or provisions hereof shall be deemed invalid or unenforceable, either
in whole or in part, this Employment Agreement shall be deemed amended to delete
or modify, as necessary, the offending provision or provisions and to alter the
bounds thereof in order to render it valid and enforceable.
6.2 Entire Agreement. This Employee Agreement represents the entire
----------------
agreement of the parties and may be amended only by a writing signed by each of
them.
6.3 Governing Law. This Employment Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Pennsylvania.
6.4 Consent to Jurisdiction. Employee hereby irrevocably submits to the
-----------------------
personal jurisdiction of the United States District Court for the Western
District of Pennsylvania or the Court of Common Pleas of Allegheny or Indiana
County, Pennsylvania in any action or proceeding arising out of or relating to
this Employment Agreement, and Employee hereby irrevocably agrees that all
claims in respect of any such action or proceeding may be heard and determined
in either such court.
6.5 Service of Process. Employee hereby irrevocably consents to the service
------------------
of any summons and complaint and any other process which may be served in any
action or proceeding arising out of or related to this Employment Agreement
brought in the United States District Court for the Western District of
Pennsylvania or the Court of Common Pleas of Allegheny or Indiana County by the
mailing by certified or registered mail of copies of such process to Employee at
her address as set forth on the signature page hereof.
-8-
<PAGE>
6.6 Venue. Employee hereby irrevocably waives any objection which she now
-----
or hereafter may have to the laying of venue of any action or proceeding arising
out of or relating to this Employment Agreement brought in the United States
District Court for the Western District of Pennsylvania or the Court of Common
Pleas of Allegheny or Indiana County, Pennsylvania and any objection on the
ground that any such action or proceeding in either of such Courts has been
brought in any inconvenient forum.
6.7 Remedies. If either party to this Agreement prevails in a proceeding
--------
for damages or injunctive relief, the parties hereto agree that the prevailing
party, in addition to other relief, shall be entitled to reasonable attorneys'
fees, costs and the expenses of litigation incurred by the prevailing party
in securing the relief granted by the Court.
6.8 Agreement Binding. The obligations of Employee under this Employment
-----------------
Agreement shall continue after the termination of her employment with the
Company for any reason, with or without cause, and shall be binding on and inure
to the benefit of her heirs, executors, legal representatives and assigns. The
obligations of the Company hereunder shall continue until discharged in
accordance with the terms hereof and shall be binding upon and shall inure to
the benefit of any successors and assigns of the Company. Employee may not
assign this Agreement, in whole or in part, or any of her rights or obligations
hereunder.
6.9 Counterparts; Section Headings. This Employment Agreement may be
------------------------------
executed in any number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument. The section headings of this Employment Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of any of the provisions hereof.
-9-
<PAGE>
EMPLOYEE ACKNOWLEDGES THAT SHE HAS READ AND UNDERSTANDS THE FOREGOING
PROVISIONS AND THAT SUCH PROVISIONS ARE REASONABLE.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement or caused this Employment Agreement to be executed on date first above
written.
Witness:
/s/ David D. Watson /s/ Lisa S. Guarino
- ----------------------------------- ------------------------------------
Lisa S. Guarino
Address: 72 Shady Dr.
----------------------------
Indiana, PA 15701
----------------------------
----------------------------
Attest: NORTHSTAR HEALTH SERVICES, INC.
By: /s/ Mark A. DeSimone
- ------------------------------------ ---------------------------------
Authorized Officer
-10-
<PAGE>
SCHEDULE I
TO
EMPLOYMENT AGREEMENT
BENEFITS
--------
All of the benefits as defined in the Keystone Rehabilitation Systems, Inc.
Personnel Policy and Procedures Manual as of November 15, 1995, including but
not limited to:
- - 6 Holidays (New Year's Day, Memorial Day, July 4th, Labor Day,
Thanksgiving Day, Christmas Day)
- - 3 Personal Days
- - 1 Sick Day per month accruing up to 60 days
- - Group Health Insurance - BC/BS/MM/Drug/Vision/Dental
- - Group Life Insurance/Dependent/AD&D
- - Disability Insurance
- - Jury Duty
- - Leave of Absence
- - Education Assistance - $1,500, 7 Days
- - Professional Dues
- - Funeral Leave
- - 401(k) Plan
-11-
<PAGE>
And the following additional benefits:
- - Company Car
- - In the event Employee's employment is terminated either by the Company other
than for "Cause," or by Employee as the result of the Company's breach of this
Agreement, which breach the Company fails to cure in accordance with Section 1.2
of the Agreement, Employee shall be entitled to continued salary and benefits
coverage (which shall be deemed to include medical and dental insurance, if any,
and automobile allowance) under this Agreement when and as due under this
Agreement during the term of this Agreement remaining as of such date, plus
payment of any other amounts, if any, otherwise due to Employee.
-12-
<PAGE>
Exhibit 10.5
[Letterhead of Steven N. Brody Associates]
Company, Client and Board of Directors
---------------------------------------
CONFIDENTIAL
------------
April 2, 1996
Northstar Health Services, Inc.
The Board of Directors
c/o Thomas W. Zaucha, Chairman
The Atrium
665 Philadelphia Street
Indiana, Pennsylvania 15701
cc: Michael S. Delaney, General Counsel
Re: Engagement Letter For Director Services in
Connection With Special Committee Work
Gentlemen:
This letter sets forth the scope and terms of the relationship of Steven N.
Brody (a/k/a Steven N. Brody, Brody Associates, Brody) to Northstar Health
Services, Inc., a public company trading under the NASDAQ ticker identification
NSTR.
1) Whereas NSTR has been informed by KPMG that it cannot complete or continue
with its 1995 audit because of certain questions pertaining to management
integrity and related party transactions among Northstar's prior Chairman and
others as outlined in a letter presented to management on or about March 18,
1996,
2) Whereas KPMG has stated that it will not continue with its audit unless such
questions are investigated and further acted upon by Northstar's Board of
Directors and management,
3) Whereas KPMG has resigned from the Northstar audit without indicating the
specific remedies which would permit it, or another independent audit firm;
to complete the Northstar audit for fiscal 1995, and subsequent filings of
the Company's Form 10KSB, and other filings required under the Securities
and Exchange Acts,
4) Whereas, on or about March 19, 1996, in response to KPMG's and other Company
concerns, Northstar's Chief Executive Officer, Mr. Thomas W. Zaucha and
Northstar's newly elected independent Director, Mr. Steven N. Brody initiated
actions to address the issues surrounding KPMG's withdrawal as Northstar's
independent auditor,
5) Whereas, Mr. Zaucha asked for and obtained the resignations of Northstar's
Chairman of the Board, Mr. Mark DeSimone, and its other outside Director,
Mr. Michael Pitterich, pursuant to the questions which KPMG raised about a
"credible Board",
6) Whereas, the remaining Directors, Zaucha and Brody subsequently elected
Thomas W. Zaucha Chairman of the Board and organized an independent Board
Committee, all at a special Board meeting held on or about the morning of
March 21, 1996,
7) Whereas, as a result of the above mentioned Board meeting, Steven N. Brody
was appointed by the Chairman to organize and head a special independent
committee of the
STRATEGIC PLANNING
BUSINESS DEVELOPMENT
MARKETING
<PAGE>
Board of Directors to (a) investigate all matters relating to KPMG's
withdrawal from the Northstar audit, including, but not limited to mergers,
acquisitions, all related party transactions, commissions and fees associated
with these transactions, other business activities undertaken by Northstar or
its agents on its behalf, and all other matters which the special committee
deems appropriate to investigate, (b) to do whatever is necessary to complete
the investigation in a timely manner that, to the fullest extent possible,
will facilitate resumption and completion of the 1995 audit, (c) to
immediately commence a search for qualified independent Directors, whose
presence and experience will restore confidence in the integrity and
reliability of the Northstar financial reporting and management oversight
systems, pursuant further to restoring investor confidence in the Company's
business prospects, and (d) to do whatever else is needed to discover and
remedy any improper practices and transactions which may or may not have
surrounded the events, activities and actions described herein, and (e) to
evaluate Northstar's requirements to prevent recurrences of the matters which
led to the resignation of KPMG and subsequent investigation, or any other
situations which may arise in the conduct of the investigation, and (f) to
report to the Board, in such manner as is appropriate, the findings, and (g)
to make recommendations consistent with the responsibilities of an
independent committee of the Board.
Now then, Steven N. Brody accepts the appointment to head the special
investigation and to continue in the role of an outside Director of Northstar
Health Services, Inc. under the following terms and conditions, and assisted by
special counsel of his own choice, who shall have the authority and financial
resources to hire such subcontractors as he/she deems necessary:
1) With the exception of willful malfeasance or dereliction of the fiduciary
responsibilities customarily imputed to outside Directors of public and
private companies, Northstar Health Services, Inc. hereby indemnifies and
holds harmless Steven N. Brody from any acts or consequences arising as a
result of his or his firm's conduct of the special investigation, or his
continued role as a Director of Northstar Health Services, Inc.,
2) Effective with the organization of the special investigative committee of
the Board of Directors, the consulting contract with Steven N. Brody
Associates dated January 1, 1996 is hereby suspended until such time as the
special investigation is complete and the strategic planning and growth
management services provided through that contract are requested and
approved by a new Independent Board of Directors and the contract is
resumed,
3) Pursuant to this suspension, all monies owed under its terms are due and
payable immediately per the work summaries and invoice submitted herewith to
the Northstar Board of Directors and the Company's General Counsel,
3a) In lieu of the duties outlined in the suspended consulting contract dated
1/1/96, such duties and additional duties and responsibilities relating to
investor relations, search activities connected with the recruitment of new
independent Directors, negotiations with lenders, interfaces with investment
bankers, and other activities that arise within the scope of
responsibilities as the head of the Special Committee of the Board of
Directors, this engagement letter sets the effective compensation rate for
such activities.
4) Effective March 19, 1996 the compensation for Steven N. Brody in his role
as head of the independent investigative committee of the Board of Directors
will be set at $150 per hour plus expenses for subcontractors, travel,
lodging, telephone, facsimile, printing and other support services. In the
event that Steven N. Brody is required to devote more than sixty hours per
month to these activities and responsibilities, independent of his work to
assist directly with the special investigation being conducted by special
counsel, the rate for excess hours will be $250 per hour.
5) In addition to the direct compensation outlined in #4 above, Steven N. Brody
will be given an equity incentive as is customary in situations similar to
the one for which he is engaged by Northstar Health Services, Inc. Such
incentive will, depending upon the timing and outcome of the investigation
and related matters, include the issuance of a minimum of
BRODY ASSOCIATES
<PAGE>
75,000 and a maximum of 150,000 shares of Northstar common stock to be made
available through non-qualified stock options, exerciseable at the lowest
closing price for Northstar common stock during the period commencing March
19, 1996 and ending with the formal termination of the investigation and
report of the special committee to the Board of Directors,
6) During the conduct of his engagement as the Special Committee Director,
Northstar Health Services, Inc. will use its best efforts to pay all vendors
and/or contractors essential to the conduct of the investigation and the
pursuit of a successful outcome in a timely manner. Such vendors may
include, but not necessarily be limited to accountants, forensic
investigation experts, public relations and securities information firms,
attorneys, consultants, expert witnesses and others with expertise critical
to obtaining a timely result,
7) Northstar Health Services, Inc. will make the efforts described in #6 by
both the management of regular cash flow and the segregation of funds Into
escrow accounts needed to pay engagement retainers, fees and expenses of
Independent experts, and other service providers who, in the judgment of the
independent Director are deemed essential to a timely outcome,
8) Effective with the March 19, 1996 commencement of this engagement, Northstar
hereby agrees to pay Steven N. Brody an advance retainer of $25,000 against
fees and expenses incurred for the conduct of the special investigation.
Steven N. Brody will submit itemized work summaries and expense receipts to
the Company through its general counsel to the Board of Directors. In the
event any retainer monies are unapplied by the end of the investigation, they
will be returned to Northstar Health Services, Inc.
If this meets with your approval and is in accordance with the Northstar
Health Services, Inc. Board resolution to set compensation for the Special
Independent Committee Director, please sign and return a copy of this letter.
Sincerely,
/s/ Steven N. Brody
-----------------------------
Steven N. Brody
Independent Director
Special Investigative Committee
Northstar Health Services Inc.
Approved /s/ Thomas W. Zaucha 4-5-96
----------------------------- --------------
Thomas W. Zaucha Date
Chairman/CEO
/s/ Michael S. Delaney 4-5-96
----------------------------------- --------------
Michael S. Delaney Date
General Counsel
----------------------------------- --------------
Acting Secretary Date
BRODY ASSOCIATES
<PAGE>
Exhibit 10.6
AGREEMENT
---------
THIS AGREEMENT, dated as of May 1, 1996 (this "Agreement"), by and among NW
REHABILITATION ASSOCIATES, INC., a Pennsylvania corporation ("NW"), NORTHSTAR
HEALTH SERVICES, INC., a Delaware corporation ("Northstar") and NANCY B. WHITE
("White").
RECITALS:
A. NW and Northstar are parties to a Purchase and Sale Agreement made and
entered into as of November 1, 1993 (the "Purchase Agreement") pursuant to which
NW sold certain assets to Northstar.
B. White and Northstar are parties to an Employment Agreement dated
December 6, 1993 (the "Employment Agreement").
C. NW, Northstar and White desire to modify their existing business
relationship in certain respects as more fully set forth herein.
D. This Agreement is intended to be effective as of 12:01 a.m. on May 1,
1996 (the "Effective Date").
NOW, THEREFORE, in consideration of the premises and the related agreements
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Termination of Employment Agreement. The Employment Agreement
-----------------------------------
(including without limitation all non-compete restrictions contained therein) is
hereby terminated, effective immediately. However, White will continue to be
employed by Northstar and her new employment relationship with Northstar
hereinafter will be governed by Section 2 below. White and Northstar hereby
mutually release each other and their respective affiliates, successors and
assigns from any and all claims arising under or relating to the Employment
Agreement that either may have against the other, except for the payment of
accrued but unpaid salary and benefits owed by Northstar to White.
2. New Employment Relationship.
---------------------------
(a) Duties and Compensation. White shall be employed by Northstar
-----------------------
with such duties and responsibilities as White and Northstar may mutually agree
from time to time. Such employment shall commence as of the date hereof and
shall continue through April 30, 1997 (the "Term"). White shall be paid in
connection therefor an annual amount of $102,000 payable in equal bi-weekly
installments.
<PAGE>
(b) Reimbursement of Expenses. During the Term, Northstar shall
--------------------------
reimburse White for all reasonable and necessary out-of-pocket prior approved
expenses (including without limitation travel expenses) incurred by White in
connection with the performance of her duties, upon proper verification therefor
in accordance with Northstar's customary policies.
(c) Other Benefits. During the Term, White shall be entitled to
---------------
receive four weeks of paid vacation per annum and such other benefits, including
participation in Northstar's 401(k) Plan, medical insurance and continuing
education benefits as are from time to time made available to employees of
Northstar.
(d) Automobile Allowance. During the Term, White shall be entitled
---------------------
to receive an automobile allowance of $6,000 per annum, payable in equal monthly
installments, to be used for loan or lease payments, plus prompt reimbursement
for prior approved maintenance and repairs.
(e) Employee Expenses. On the Effective Date, Northstar will pay to
------------------
White all accrued, unpaid amounts due her under the Employment Agreement as of
the Effective Date.
(f) Withholding. All payments required to be made by Northstar to
------------
White shall be subject to withholding of such amounts relating to taxes as are
required pursuant to any applicable law or regulation.
(g) Prepayment. Northstar, at its option, may at any time prepay all
----------
amounts due under this Section 2 for the entire Term by making a lump-sum
payment equal to all amounts remaining to be paid.
3. Earnout Payments. Northstar shall remain liable to pay to NW the
-----------------
additional consideration called for by Section 2.2 of the Purchase Agreement for
the year ended December 31, 1995 and the four months ended April 30, 1996. The
amount of such payment shall be determined in accordance with said Section 2.2
and shall be determined by such firm of independent public accountants as may be
agreeable to the parties. Northstar and NW shall each pay one-half the cost of
such determination. The parties shall use their best efforts to have the amount
determined as soon as practicable and in any event not later than June 30, 1996.
The amount so determined to be owned shall be paid by Northstar to NW within
fifteen (15) days of the determination and in any event not later than July 15,
1996. Except as set forth above, no further earnout payments will be due under
the Purchase Agreement.
4. Non-Compete. (a) White will not, directly or indirectly, during the
-----------
Term own or operate any outpatient physical or occupational therapy facility
anywhere within a 50 mile radius of any such facility operated by Northstar or
its affiliates. White also will not during the Term, directly or indirectly,
-2-
<PAGE>
compete with North with respect to any existing contract arrangements of
Northstar and its affiliates, including without limitation the contract
arrangements listed on Schedule 1 hereto but excluding however the contract
arrangements being assigned to NW. This Section 4 sets forth the only
non-compete covenant which shall be binding upon White, NW and their affiliates
hereafter with respect to Northstar and its affiliates.
(b) Neither Northstar nor any of its affiliates will, during the Term
(i) engage in the business of providing temporary ("fill-in") physical or
occupational therapy or medical staffing services within a 50 mile radius of
Pittsburgh, Pennsylvania (except fill-in services for its own facilities and
contracts), or (ii) compete with White or any affiliate of White with respect to
the contract arrangements listed on Schedule 2 hereto or any other contracts
currently being performed by White or any of her affiliates. This Section 4 sets
forth the only non-compete covenant which shall be binding upon Northstar and
its affiliates hereafter with respect to White, NW and their affiliates.
(c) Except to the extent provided in Section 7 hereof, neither NW nor
its affiliates, on the one hand, nor Northstar nor its affiliates, on the other,
will seek, to induce or solicit the other's employees to leave their respective
employment.
(d) Each party will promptly advise the other if its receives notice
that any of its contract arrangements are being terminated. In such event, the
party receiving such advice will be permitted to solicit such business
notwithstanding the other provisions of this Section 4, and to hire the related
employees notwithstanding the provisions of Section 7 of this Agreement.
5. Accrued Expenses for Staffing Services. As set forth on the attached
---------------------------------------
Schedule 3, Northstar and certain of its affiliates owe to NW and certain of its
affiliates accrued amounts through March 31, 1996. On the Effective Date,
Northstar will pay to Medical Temporary Specialists, Inc. ("MTS") and Allegheny
Rehabilitation Associates, Inc. ("ARA") the net amount of $63,1665.50 through
March 31, 1996 to settle all accrued amounts owed for staffing services.
Accordingly, no separate payments will be made to Northstar by MTS or ARA and
any amounts owed by MTS or ATA will be deemed satisfied. Northstar will pay,
within 30 days of submission by NW, the net amount owed for staffing services
with respect to the month of April 1996. NW will pay, within 30 days of
submission of Northstar, the net amount owed for staffing services with respect
to the month of April 1996.
6. Office Space. Northstar will provide to NW without charge office space
-------------
at Northstar's Monroeville facility through June, 1996.
-3-
<PAGE>
7. Employees. Northstar acknowledges and agrees that NW is free to hire
---------
those current employees of Northstar who are listed on Schedule 4 hereto and
that those employees who are listed on Schedule 5 hereto may perform services
for both NW and Northstar. The parties hereby consent to such shared employment.
Nothing herein, however, requires any party to hire any of the listed persons.
8. Indemnification. Northstar, on behalf of itself and its affiliates,
---------------
hereby ratifies and confirms all prior indemnification obligations entered into
by any of them in favor of White or NW. In addition, Northstar will indemnify
and hold harmless White, NW and their respective affiliates from and against
any and all claims, demands, losses, costs, expenses, obligations, liabilities
and damages, including attorneys' fees and costs, which any of them may incur or
suffer as a result of or relating to (i) Northstar's ownership or operation of
the Purchased Assets (as defined in the Purchase Agreement), or (ii)
Northstar's prior direct or indirect use of provider or billing numbers
assigned to NW or White.
9. Contracts. (a) It is understood and agreed that all of the contract
---------
arrangements listed on the attached Schedule 1 will be carried out by Northstar
and all compensation or other benefits thereunder will inure to Northstar.
(b) It is understood and agreed that all of the contract arrangements
listed on the attached Schedule 2 will be carried out by NW or its designee and
all compensation or other benefits thereunder will inure to NW. Northstar will
not, however, be conveying any equipment to NW. Northstar, on behalf of itself
and its subsidiaries, hereby assigns to NW any and all interest they may have in
and to such contracts. Northstar and NW Rehabilitation, Inc. will execute and
deliver to NW on the Closing Date an assignment in the form of Exhibit A hereto.
10. Time of Essence. The parties hereto understand and agree that time is
---------------
of the essence in performing their respective obligations hereunder.
11. Corporate and Business Names. White and/or entities controlled by
----------------------------
her shall be entitled to conduct business under any name which does not
conflict with Northstar. Without limiting the generality of the foregoing, White
and/or such affiliates may conduct business under the names Medical Temporary
Specialists, Allegheny Rehabilitation Associates, NW Rehabilitation Associates
and variations thereof (including by way of corporate designations).
From the Effective Date and within two weeks thereof, Northstar will change
the name of its subsidiary "NW Rehabilitation, Inc." to another name which does
not include the term "NW" and which is not otherwise likely to be confused in
-4-
<PAGE>
the marketplace with any entity controlled by White. Neither Northstar nor any
affiliate of Northstar shall have any further right to use the "NW" name or any
variation thereof.
12. Billing. Neither Northstar nor any affiliate of Northstar shall use
-------
any provider or billing number assigned to NW, White or any other entity
controlled by White for any purpose whatsoever.
13. Non-Assignability. This Agreement and any rights pursuant hereto shall
-----------------
not be assignable by any party hereto without the consent of the other party,
which consent will not be unreasonably withheld.
14. Applicable Law. This Agreement and the legal relations between the
--------------
parties hereto shall be governed by and in accordance with the laws of the
Commonwealth of Pennsylvania.
15. Section and Other Headings. The section and other headings contained
--------------------------
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
17. Severability. The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect any other provision hereof and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision were omitted.
18. Modification. This Agreement may be amended, modified or supplemented
------------
only by a written instrument executed (in counterpart or otherwise) by each of
the parties hereto. Except as expressly modified by this Agreement, the
provisions of the Purchase Agreement shall remain in full force and effect.
19. Further Assurances. From time to time after the Effective Date each
------------------
party will execute, deliver and acknowledge such further instruments and such
other acts as may be reasonably necessary under the circumstances to carry out
the purposes of this Agreement.
20. Arbitration. If any dispute shall arise between the parties hereto
-----------
concerning the terms of this Agreement, arbitration by a single arbitrator (the
"Arbitrator") shall be had in Pittsburgh, Pennsylvania in accordance with the
rules of the American Arbitration Association. The Arbitrator shall be selected
by the American Arbitration Association upon petition of the parties. Judgment
upon the award rendered by the Arbitrator
-5-
<PAGE>
may be entered in any court having jurisdiction thereof. The decision or award
of the Arbitrator shall be final and binding on the parties hereto and their
respective successors and assigns. Notwithstanding the foregoing, discovery
shall be permitted pursuant to the Federal Rules of Civil Procedure.
21. No Third Party Beneficiaries. Nothing herein expressed or implied is
----------------------------
intended or shall be construed to confer upon or give to any person or
corporation other than the parties hereto and their respective corporate
affiliates, successors or assigns any rights or remedies under or by reason of
this Agreement.
22. Announcements. No party hereto will make any announcements or
-------------
communications to the public, to employees or the business community concerning
this Agreement or the matters related hereto without the prior approval of the
other parties in each instance, unless required by law.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as of the date first above written.
WITNESS: NW REHABILITATION ASSOCIATES, INC.
/s/ David D. Watson By: /s/ Nancy White
- --------------------------------- ----------------------------------
Title: President
---------------------------------
NORTHSTAR HEALTH SERVICES, INC.
/s/ David D. Watson By: /s/ Thomas W. Zaucha
- --------------------------------- ----------------------------------
Title: Chairman & Chief Executive Officer
----------------------------------
/s/ David D. Watson By: /s/ Nancy White
- --------------------------------- ----------------------------------
Nancy White
-6-
<PAGE>
SCHEDULE 1
----------
Avalon
Fox Chapel
Monroeville
Moon
Sewickley
Wexford
Nentwick Convalescent
Eastern Star
East Liverpool Ext.
Ross Convalescent
Golfview Manor
Monroeville Contracts
Reformed Presby.
Nugent Convalescent
Aliquippa Hospital
Collins Nursing Home
Indian Creek (Crossroads)
Commonwealth Rehab.
O'Brien Memorial Home
Fox Nursing Home
Camp Hill Corp.
Windsor House
Western Center
Labelle Nursing Center
Dixon Nursing Center
Avalon Contracts
Moon Contracts
Diversified Health Care
Rochester Manor
<PAGE>
SCHEDULE 2
----------
Lemington Center
Western Pa. School for the Blind
Western Pa. School for the Deaf
Amateur Penguins
Heritage Shadyside
Sherwood Oaks
Riverside Nursing Home
South Hills Convalescent
St. Francis North
Magee Women's Hospital
Mercy Hospital
Mercy Providence Hospital
Mon Valley Hospital
Southside Hospital
Jamison Health (Lawrence)
West Penn Hospital
St. Barnabus (Adv. Rehab.)
Valley View Nursing
St. Francis NC East
IHS of Laurelview
McMurry Hills Manor
Heartland
McKeesport Hospital
Allegheny Valley Hospital
Jeanette District Memorial Hospital
Carriage Inn of Steubenville
Ohio Valley Hospital
TBI Neurorehabilitation
IHS of Mountainview Manor
<PAGE>
SCHEDULE 3
Northstar owes Med Temps Med Temps owes Northstar
- ----------------------------------------------------------------------
1. Due from NW Rehab 12/94 - 12/95 23,955.50
Dec. 1995 17,201.25
April 4,000.00 Jan. 1996 7,807.50
---------- February 8,550.00
$21,201.25 March 6,747.25
----------
Jan. 1996 17,673.75 $23,104.75
February 14,445.00
March 13,196.25
----------
$45,315.00 Total Due Northstar from
Med Temps $47,060.25
----------
2. Due from Tri-state
July 1995 200.00
August 1,600.00
September 1,025.00
December 887.50
----------
$ 3,712.50
3. Due from Medical Rehab. Systems
Jan. 1996 7,180.00
February 6,720.00
March 6,400.00
----------
$20,300.00
Total Due Med Temps from Northstar
and Related Companies $90,528.75
----------
Northstar owes Allegheny Rehab
- ------------------------------
for Dolores Khalouf
- -------------------
Aug. 1995 4,060.00
September 2,860.00
----------
6,920.00
paid@ 692.00 Check written for $6,920.00, however, bank error
----------
Due $ 6,228.00 and only credited for $692.00
October 2,380.00
November 1,630.00
December 2,000.00
----------
1995 Total $12,238.00
Jan. 1996 2,290.00
February 2,670.00
March 2,500.00
----------
$ 7,460.00
Total Due to Allegheny Rehab $19,698.00
----------
<PAGE>
SCHEDULE 4
----------
Adamson, Karen (as of 5/31/96)
Acevedo, Sandra
Anderson, Jennifer
Beckett-Wilson, Alice
Benko, Gretchen
Brennan, Linda
Brenneman, Troy
Brust, Deborah
Butler, Michael
Childers, Susan
Crowley, David
Darby, Terri
Edmonds, Scott
Evans, Chad
Farrow, Jean
Faulkner, Larry
Fritz, Julie
Graf, Peter
Graskey, Brenda
Guarnero, Deana
Hardick, Jacqueline
Hensel, Wendy (as of 5/31/96)
Henshawe, Karen
Kalemba, John
Kandravy,Pearl
Karas, Steven
Kimball, Allison
Kopriva, Jody
Kuligowski, Lori
Kuntz, Robert
Landolfi, Marion
Long, Mary
Mackowick, Julie
Maloney Winter, Anna Lee
Marangoni, Allen
McGlumphy, Barry
McKenzie, Jean
Meyer, Judith
Mickey, Cheryl
Miller, Maria
Nash, Dennis
Och, Barbara
Ostrowski, William
Pantano, Kathleen
Panza, Dana
Pavlick, Nicholas
Pezzullo, David
Reed, Travis
Ridley, Duane
Rupert, Danzil
Saner, Colleen
<PAGE>
Schoming, Chris
Shaw, Lea Ann
Shields, Brian
Simbahau, Reynoldo
Sterner, Robert
Stewart, William
Sullivan, Ellen
Tice, Shirley
Trasaline, Virginia
Vitti, Kelly
<PAGE>
SCHEDULE 5
----------
Bartels, Anita
Crabill, Nancy
Dominquez, Susan
Fabian, Loretta
Kathrine, Jon
Klinkner, John
Korber, Nancy
Kren, Sandra
Labick, John
Palumbo, Marilyn
Parker, Claire
Pollock, Sandra
Prishack, Andrew
Rauf, Deborah
Raynes, Juliana
Rizzo, Nina
Schwer, Kimberly
Shaw, Lea Ann
Shay, Cynthia
Smith, Karen
Snowden, Rita
Vaccarello, Rita
Vitti, Kelly
<PAGE>
EXHIBIT A
---------
Lemington Center
Western Pa. School for the Blind
Western Pa. School for the Deaf
Amateur Penguins
Heritage Shadyside
Sherwood Oaks
Riverside Nursing Home
South Hills Convalescent
St. Francis North
Magee Women's Hospital
Mercy Hospital
Mercy Providence Hospital
Mon Valley Hospital
Southside Hospital
Jamison Health (Lawrence)
West Penn Hospital
St. Barnabus (Adv. Rehab.)
Valley View Nursing
St. Francis NC East
IHS of Laurelview
McMurry Hills Manor
Heartland
McKeesport Hospital
Allegheny Valley Hospital
Jeanette District Memorial Hospital
Carriage Inn of Steubenville
Ohio Valley Hospital
TBI Neurorehabilitation
IHS of Mountainview Manor
<PAGE>
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT (this "Assignment") is made as of the 1st day of
May, 1996, by and between NW REHABILITATION, INC. and NORTHSTAR HEALTH SERVICES,
INC. (collectively, "Assignors") and NW REHABILITATION ASSOCIATES, INC., a
Pennsylvania corporation ("Assignee"), with respect to the following recitals:
A. Assignors and Assignee are parties to an Agreement dated as of May 1,
1996 (the "Agreement") which Agreement provides, among other things, for the
assignment to Assignee of certain contract arrangements (the "Contract
Arrangements") identified on Exhibit A hereto.
B. Assignors desire to assign to Assignee all of their right, title and
interest in and to each of the Contract Arrangements.
C. Assignee desires to accept the assignment of Assignors' interest in
each Contract Arrangement on the terms and subject to the conditions contained
in the Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuation consideration, receipt of which is acknowledged, and on the terms and
subject to the conditions contained in the Agreement, Assignors hereby assign,
transfer and convey to Assignee all their right, title and interest in and to
each of the Contract Arrangements under the terms and provisions of each of the
Contract Arrangements.
IN WITNESS WHEREOF, Assignors and Assignee have executed and delivered this
Assignment as of the day and year first written above.
NW REHABILITATION, INC. NW REHABILITATION ASSOCIATES, INC.
By: /s/ Thomas W. Zaucha By: /s/ Nancy B. White
----------------------------------- --------------------------------
Its: Chairman Its: President
----------------------------------- --------------------------------
NORTHSTAR HEALTH SERVICES, INC.
By: /s/ Thomas W. Zaucha
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Its: Chairman & Chief Executive Officer
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<PAGE>
Exhibit 10.7
FORBEARANCE AGREEMENT
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FORBEARANCE AGREEMENT, dated as of May 31, 1996 (this "Forbearance
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Agreement"), among
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(i) NORTHSTAR HEALTH SERVICES, INC., a Delaware corporation (the
"Borrower"),
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(ii) NSHS HOLDINGS, INC., a Delaware corporation, NORTHSTAR HS
HOLDINGS, INC., a Delaware corporation, NSHS SERVICES, INC., a Delaware
corporation, NORTHSTAR HEALTH SERVICES OF BEAVER, INC., a Delaware corporation,
NORTHSTAR HEALTH CONSULTING, INC., a Delaware corporation, NORTHSTAR REHAB EAST,
INC., a Delaware corporation, NORTHSTAR REHABILITATION SERVICES, INC., a
Pennsylvania corporation, NORTHSTAR THERAPY SERVICES, INC., a Pennsylvania
corporation, NW REHABILITATION, INC., a Delaware corporation, TRISTATE SPORTS
REHAB & PHYSICAL THERAPY, INC., a Delaware corporation, NSHS CARDIAC HOLDINGS,
INC., a Delaware corporation, NORTHSTAR NUCLEAR SERVICES, INC., a Delaware
corporation, WHITE OAK DIAGNOSTIC SYSTEMS HOLDINGS, INC., a Pennsylvania
corporation, WHITE OAK DIAGNOSTIC SYSTEMS, a Pennsylvania limited partnership,
KEYSTONE REHABILITATION SYSTEMS, INC., a Pennsylvania corporation, KEYSTONE
REHABILITATION MANAGEMENT, INC., a Pennsylvania corporation, VASUSONICS, INC., a
Pennsylvania corporation (collectively, the "Subsidiary Guarantors") and
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(iii) IBJ SCHRODER BANK & TRUST COMPANY ("IBJS");
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in respect of the Credit Agreement referred to below.
WITNESSETH:
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WHEREAS, the Borrower, the lenders parties thereto (the "Lenders") and
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IBJS, as Agent (in such capacity, the "Agent") have entered into that certain
Credit Agreement dated as of October 20, 1995 ( as amended, the "Credit
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Agreement") and the Borrower has entered into certain other Credit Documents (as
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defined in the Credit Agreement); and
WHEREAS, the Subsidiary Guarantors have executed and delivered that
certain Subsidiaries Guarantee dated as of October 20, 1995 (as amended,
supplemented or otherwise modified, the "Subsidiaries Guarantee") to the Agent
----------------------
for the benefit of the Lenders and have entered into certain other Credit
Documents; and
<PAGE>
WHEREAS, certain Events of Default (as defined in the Credit Agreement)
exist under the Credit Agreement; and
WHEREAS, the Agent and the Lenders are unwilling to waive the Events of
Default that currently exist; and
WHEREAS, notwithstanding the foregoing, subject to the terms and conditions
hereof, the Agent and the Lenders are willing, through August 31, 1996, to
forbear in certain respects in the enforcement of the remedies set forth in the
Credit Documents as set forth herein; provided, that the rights of the Agent and
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the Lenders are not otherwise waived or impaired.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
contained herein and for other valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the Borrower, the Subsidiary Guarantors, the
Agent and the Lenders hereby agree as follows:
1. Definitions. Capitalized terms used and not otherwise defined
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herein shall have the meanings ascribed thereto in the Credit Agreement.
2. Acknowledgments.
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(a) The Borrower acknowledges that, as of the date hereof, it is
indebted to the Lenders (i) pursuant to the Term Loan and the Term Note, in the
amount of $6,083,335 plus accrued but unpaid interest in the amount of
$173,228.97 (collectively, the "Existing Term Loan Indebtedness"); (ii) pursuant
-------------------------------
to the Revolving Credit Loans and the Revolving Credit Note, in the amount of
$2,000,000 plus accrued but unpaid interest in the amount of $46,355.64
(collectively, the "Existing Revolving Credit Indebtedness"); (iii) pursuant to
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the Acquisition Loans and the Acquisition Note, in the amount of $6,000,000 plus
accrued but unpaid interest in the amount of $143,340.42 (collectively, the
"Existing Acquisition Loan Indebtedness"); (the Existing Term Loan Indebtedness,
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the Existing Revolving Credit Indebtedness and the Existing Acquisition
Indebtedness, the "Outstanding Indebtedness").
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(b) The Borrower acknowledges the effectiveness and continuing
validity of the Credit Agreement (including, without limitation, Section 12.5
thereof) and of each Credit Document to which it is a party.
(c) The Borrower acknowledges that one or more Events of Default
have occurred and are continuing and that, pursuant to Section 10 of the Credit
Agreement, the Agent is presently entitled, with the consent of the Lenders, to
terminate the Commitments and to declare the Outstanding Indebtedness and the
other amounts owing under the Credit Agreement to be due and payable.
(d) The Borrower acknowledges the cancellation of the unused portion
of the Acquisition Credit Commitment prior to the date hereof.
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<PAGE>
(e) Each Subsidiary Guarantor acknowledges the effectiveness and
continuing validity of the Subsidiaries Guarantee and of each Credit Document to
which it is a party.
(f) Each Subsidiary Guarantor acknowledges the existence and amount
of the Outstanding Indebtedness and its liability therefor pursuant to the terms
of the Subsidiaries Guarantee.
(g) Each Subsidiary Guarantor expressly acknowledges and consents
to this Forbearance Agreement and to the terms hereof, such Forbearance
Agreement and terms to be without prejudice to such Subsidiary Guarantor's
liability pursuant to the Subsidiaries Guarantee and the other Credit Documents
to which it is a party.
(h) The Agent and the Lenders recognize that, notwithstanding the
acknowledgments set forth in this Paragraph 2, Keystone Rehabilitation Systems,
Inc., Keystone Rehabilitation Management, Inc. and its officers, directors and
shareholders may have claims against the Borrower or the Subsidiary Guarantors
relating to or arising out of the merger transaction pursuant to which, inter
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alia, Keystone Rehabilitation Systems, Inc. and Keystone Rehabilitation
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Management, Inc. became subsidiaries of the Borrower, and that the execution and
delivery of this Forbearance Agreement by certain of them does not constitute a
waiver of any such claims. Nothing herein is intended as a recognition or
agreement by the Agent or the Lenders that any such claims exist or have merit,
the sole purpose of the addition of this provision to the Forbearance Agreement
being to acknowledge that such claims, to the extent they exist, are not waived
by entry into this Forbearance Agreement.
3. Forbearance; Deferral of Principal; Interest Rate; Termination.
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(a) Subject to the terms and conditions set forth herein, the Agent
and the Lenders hereby agree that none of them shall, prior to the Forbearance
Termination Date, exercise any of the remedies set forth in the Credit Agreement
or in any of the other Credit Documents.
(b) Subject to the terms and conditions set forth herein, the Agent
and the Lenders hereby agree that the principal installments of the Term Loan
which were due or became due on the last days of each of April and May 1996,
each in the amount of $83,333, and each principal installment of the Term Loan
that shall become due and payable from the date hereof to the Forbearance
Termination Date, together with accrued interest on the Outstanding Indebtedness
shall be deferred until, and shall be due on, the Forbearance Termination Date.
(c) As of June 1, 1996, the Revolving Credit Commitment shall be
terminated, subject to reinstatement at the sole option of the Lenders.
(d) Subject to the terms and conditions set forth herein, the Agent
and the Lenders hereby waive the imposition of interest at the Default Rate as
provided in Section 5.5(c) of the Credit Agreement from the date hereof to the
Forbearance Termination Date and
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<PAGE>
the Agent, the Lenders agree that interest shall accrue on all unpaid
Obligations for the period from the date hereof until the Forbearance
Termination Date at the rates provided for such Obligations in Section 5.5(a)
or (b) (or, if no such rate is so provided, at the rate provided for Revolving
Credit Loans which are Base Rate Loans in Section 5.5(b)).
(e) From and after the date hereof, at the end of the Interest Period
for each Eurodollar Loan, such Eurodollar Loan shall be converted to a Base Rate
Loan.
(f) This Forbearance Agreement shall terminate on August 31, 1996,
unless earlier terminated upon the occurrence of a Forbearance Event of Default
(any such date, the "Forbearance Termination Date").
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4. Representations and Warranties. In order to induce the Lenders to
------------------------------
enter into this Forbearance Agreement, the Borrower and each Subsidiary
Guarantor hereby represents and warrants to the Agent and to each Lender that:
(a) each of the representations and warranties made by the
Borrower and each of the Subsidiary Guarantors in each Credit Document to which
it is a party is true and correct in all material respects as of the date hereof
(other than the representations and warranties made pursuant to Sections 6.1,
6.2, 6.6, 6.7, 6.9 (as to the Borrower and its Subsidiaries, other than Keystone
and its Subsidiaries), 6.11, 6.13 (as to the Borrower and its Subsidiaries,
other than Keystone and its Subsidiaries), 6.17, 6.20 and 6.23 of the Credit
Agreement);
(b) the Borrower has provided the Agent with the updated Schedule
6.19 to the Credit Agreement attached hereto as Schedule 1 and has exerted all
reasonable efforts to provide the Agent with true and correct information of the
type described in Section 6.1 of the Credit Agreement, to cure any Events of
Default arising under 6.17 of the Credit Agreement and to apprise the Agent and
the Lenders of the circumstances that render the Borrower incapable of making
the representations and warranties in Sections 6.2, 6.6 and 6.7 of the Credit
Agreement; and
(c) the Borrower has no intention of commencing bankruptcy,
insolvency or similar proceedings prior to August 31, 1996 and has no intention
of commencing such proceedings thereafter if mutually acceptable agreements can
be reached among the Borrower and its principal creditors and shareholders.
5. Conditions Precedent to Effectiveness of Forbearance Agreement.
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This Forbearance Agreement shall not become effective unless and until the Agent
has received:
(a) this Agreement, executed and delivered by a duly authorized
officer of the Borrower and each Subsidiary Guarantor;
(b) the executed legal opinion of Manion, McDonough & Lucas, P.C.,
counsel to the Borrower and the Subsidiary Guarantors, covering such matters
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<PAGE>
incident to the transactions contemplated by this Forbearance Agreement as the
Agent may reasonably require; and
(c) such other documents and information as the Agent may
reasonably require, which documents and information shall be satisfactory to the
Agent in its sole discretion.
6. Covenants. The agreement of the Agent and the Lenders to forbear
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from exercising remedies as set forth in Section 4 hereof is expressly
conditioned upon the Borrower's continued compliance with the following:
(a) The Borrower shall continue to comply with the affirmative
covenants set forth in Section 8 of the Credit Agreement.
(b) The Borrower shall furnish weekly reports of actual cash
receipts and disbursements ("Weekly Cash Flow Reports") to the Agent no later
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than Tuesday of the next succeeding week, certified as correct and complete by a
Responsible Officer of the Borrower.
(c) The Borrower shall cooperate with the special consultant to be
retained by the Agent and the Lenders on or promptly following the date hereof
(the "Consultant"), which Consultant shall, on behalf of the Agent and the
Lenders, review the business of the Borrower and its Subsidiaries generally, and
in particular (i) provide management assessment, (ii) test the Borrower's
projections and assumptions, (iii) assess the likelihood that the Borrower will
achieve its projections, (iv) test the amounts and reasonableness of new
initiatives and investments of the Borrower (including shutdowns), and
(v) generally assist the Agent and the Lenders in assessing the status of the
Borrower's situation and developing credit management strategies. All fees
and expenses of the Consultant shall be for the account of the Agent and
the Lenders.
(d) Beginning with the week ending Friday, May 24, 1996,
collections for each successive four-week period ending on a Friday shall be no
less than $2,800,000.
(e) Beginning with the week ending Friday, May 24, 1996, cash
disbursements for each successive four-week period ended on a Friday, excluding
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cash disbursements during such period for (i) the investigation being performed
by the committee referred to in clause (i) of this Section 6, (ii) consulting
fees relating to such investigation and the work-out of the pending Events of
Default, (iii) restructuring expenses, (iv) shareholder lawsuits and (v)
existing payables as of May 17, 1996 which are more than 90 days past due, shall
not exceed collections for such period.
(f) Amounts invoiced by the Borrower and its Subsidiaries on or
prior to the tenth day of June, July and August for the prior month shall be
no less than $3,000,000.
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<PAGE>
(g) The amount of accounts payable of the Borrower and its
Subsidiaries as of June 14, July 12 and August 12, 1996 shall not exceed the
amount of accounts payable of the Borrower and its Subsidiaries as of May 17,
1996. For purposes of this clause (h), accounts payable will in any event
include accounts payable included in accruals on the books of the Borrower and
its Subsidiaries, the amount of cash payments made to physical therapists
employed by the Borrower who become entitled to such payments 60 days after
written notice of their election to withdraw from the 25% Pre-Commission Net
Income Provisions pursuant to their respective employment agreements, or any
similar payments payable to physical therapists employed by the Borrower
(collectively, "Withdrawal Payments"), and book cash and checks, but will
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exclude withholding taxes.
(h) The Borrower shall provide full disclosure to the Agent of all
interim and final findings and reports of the special committee of the Borrower
that is investigating related third-party transactions and other matters
involving the Borrower's prior senior management, to be provided as and when
such findings and reports are made available to management of the Borrower;
provided, however, that the Borrower shall not be required to disclose materials
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subject to attorney-client privilege; provided, further, however, that the
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Borrower acknowledges that materials subject to the attorney-client, work
product or other legal privilege shall be deemed not to include materials
relating to factual circumstances (as opposed to materials relating to strategy
and legal advice) and materials otherwise required to be provided to the Agent
pursuant to the Credit Documents.
(i) The Borrower shall promptly provide such additional financial
and other information, including, without limitation, payment plans for
significant creditors not yet negotiated or known as of the date hereof,
certified copies of corporate proceedings of the Borrower and any of its
Subsidiaries, certified copies of management communications and communications
from certified public accountants engaged by the Borrower or any of its
Subsidiaries from time to time, certified copies of all notices from or other
communications with the Securities and Exchange Commission, the National
Association of Securities Dealers and other Governmental Authorities, and such
other information as the Agent or the Lenders may from time to time request.
(j) The Borrower shall use its best efforts to negotiate the
withdrawal of all, notices :from physical therapists seeking to receive
Withdrawal Payments from the Borrower and shall not prepay any Withdrawal
Payment.
7. Events of Default.
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(a) The agreement of the Agent and the Lenders to make
Forbearance Revolving Credit Loans and to forbear from exercising remedies
pursuant to Section 4 hereof shall immediately terminate and be of no further
force and effect upon the occurrence of any of the following (each, a
"Forbearance Event of Default"):
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(i) the occurrence of one or more Defaults or Events of Default
under any of Subsections 10(a), Subsections 10(c) and (d), Subsections (f)
through (j) and Subsection (l) of the Credit Agreement (other than a Default
or Event of Default
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<PAGE>
arising solely from a breach of the Borrower's obligations under Section 9.1 or
9.20 of the Credit Agreement); or
(ii) any representation or warranty made or deemed made by the
Borrower or any Subsidiary Guarantor in Section 4 hereof or elsewhere herein or
which is contained in any certificate, document or financial or other statement
created and/or delivered at any time under or in connection with this
Forbearance Agreement or on or subsequent to the date hereof under or in
connection with any other Credit Document shall prove to have been incorrect in
any material respect on or as of the date made or deemed made; or
(iii) the Borrower or any Subsidiary shall default in the
observance or performance of any agreement contained in Section 6; or
(iv) any Withdrawal Payments shall be paid; or
(v) the Agent or the Lenders shall in their sole discretion
determine that an adverse change has occurred in the finances or business
operations of the Borrower or the Subsidiary Guarantors.
(b) Upon the occurrence of a Forbearance Event of Default on or
as of any date, the Forbearance Termination Date shall be deemed to occur on
said date.
8. Absence of Waiver. The parties hereto agree that the agreements
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set forth in Sections 3 and 4 hereof shall not be deemed to:
(a) be a consent to, or waiver of, any Default or Event of
Default;
(b) except as expressly set forth herein, modify or limit any
other term or condition of the Credit Agreement or any other Credit Document;
(c) impose upon any Lender or the Agent any obligation, express
or implied, to consent to any amendment or further modification of the Credit
Agreement or other Credit Documents, including, without limitation, any further
extension of the Revolving Credit Commitment; or
(d) prejudice any right or remedy that the Agent or the Lenders
may now have or may in the future have under the Credit Agreement or under or
in connection with the other Credit Documents or any instrument or agreement
referred to therein including, without limitation, any right or remedy resulting
from any Default or Event of Default.
9. Miscellaneous.
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<PAGE>
(a) Section headings used in this Forbearance Agreement are for
convenience of reference only and shall not affect the construction of this
Forbearance Agreement.
(b) This Forbearance Agreement may be executed by one or more of
the parties hereto by facsimile or in any number of separate counterparts and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
(c) This Forbearance Agreement and the rights and obligations of
the parties under this Forbearance Agreement shall be governed by, and construed
and interpreted in accordance with, the law of the State of New York, without
giving effect to conflicts of laws principles.
(d) All obligations of the Borrower and each Subsidiary Guarantor
and all rights of the Agent and the Lenders that are expressed herein shall be
in addition to and not in limitation of those provided by applicable law.
(e) This Forbearance Agreement, the Credit Agreement and the other
Credit Documents represent the agreement of the Borrower, the Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Agent or any Lender relative
to subject matter hereof not expressly set forth or referred to herein or in the
other Credit Documents.
(f) Whenever possible, each provision of this Forbearance
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law; but if any provision of this Forbearance Agreement shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision of such provision or the remaining
provisions of this Forbearance Agreement.
(g) THE BORROWER AND EACH SUBSIDIARY GUARANTOR HEREBY IRREVOCABLY
AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS FORBEARANCE AGREEMENT AND THE OTHER CREDIT
DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY
JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF
THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM
ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE VENUE
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<PAGE>
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR
CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO THE BORROWER AT ITS ADDRESS SET FORTH IN SECTION 12.2 OF THE
CREDIT AGREEMENT AND TO EACH SUBSIDIARY GUARANTOR AT ITS ADDRESS SET FORTH
BELOW ITS SIGNATURE ON THE SUBSIDIARIES GUARANTEE, OR AT SUCH OTHER ADDRESS
OF WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION; AND
(E) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING
REFERRED TO IN THIS SECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES.
(h) EACH OF THE BORROWER, THE SUBSIDIARY GUARANTORS, THE LENDERS
AND THE AGENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY
LEGAL ACTION OR PROCEEDING RELATING TO THIS FORBEARANCE AGREEMENT AND ANY OTHER
CREDIT DOCUMENT TO WHICH IT IS A PARTY AND FOR ANY COUNTERCLAIM THEREIN.
(i) This Forbearance Agreement shall be deemed a "Credit
Document" for purposes of the Credit Agreement and the other Credit Documents.
(j) This Forbearance Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior and contemporaneous oral or written agreements with respect to the
subject matter hereof.
(k) The Borrower and each Subsidiary Guarantor hereby
acknowledges that:
(i) it has been advised by counsel in the negotiation, execution
and delivery of this Forbearance Agreement;
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<PAGE>
(ii) neither the Agent nor any Lender has any fiduciary
relationship to the Borrower or any Subsidiary Guarantor, and the relationship
between the Agent and the Lenders, on the one hand, and the Borrower and the
Subsidiary Guarantors, on the other, is solely that of creditor and debtor; and
(iii) no joint venture exists among the Lenders or among the
Borrower, the Subsidiary Guarantors and the Lenders.
[SIGNATURE PAGES FOLLOW]
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<PAGE>
Forbearance Agreement
dated as of May 31, 1996
IN WITNESS WHEREOF, the parties hereto have caused this Forbearance
Agreement to be duly executed and delivered as of the day and year first above
written.
IBJ SCHRODER BANK & TRUST COMPANY,
as Agent and as a Lender
By /s/ D. H. Casher
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Name: D. H. Casher
Title: Vice President
NORTHSTAR HEALTH SERVICES, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NSHS HOLDINGS, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NORTHSTAR HS HOLDINGS, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
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<PAGE>
Forbearance Agreement
dated as of May 31, 1996
NSHS SERVICES, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NORTHSTAR HEALTH SERVICES OF
BEAVER, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NORTHSTAR HEALTH
CONSULTING, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NORTHSTAR REHAB EAST, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
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<PAGE>
Forbearance Agreement
dated as of May 31, 1996
NORTHSTAR REHABILITATION SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR THERAPY SERVICES, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NW REHABILITATION, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
TRISTATE SPORTS REHAB & PHYSICAL
THERAPY, INC.
By /s/ David D. Watson
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Name: David D. Watson
Title: President
NSHS CARDIAC HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
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<PAGE>
Forbearance Agreement
dated as of May 31, 1996
NORTHSTAR NUCLEAR SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
WHITE OAK DIAGNOSTIC SYSTEMS
HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
WHITE OAK DIAGNOSTIC SYSTEMS
By: White Oak Diagnostic Systems
Holdings, Inc., its General Partner
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
KEYSTONE REHABILITATION SYSTEMS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
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<PAGE>
Forbearance Agreement
dated as of May 31, 1996
KEYSTONE REHABILITATION
MANAGEMENT, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
VASUSONICS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
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<PAGE>
AMENDMENT TO FORBEARANCE AGREEMENT
AMENDMENT, dated as of September 1, 1996 (this "Amendment"), to the
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Forbearance Agreement, dated as of May 31, 1996 (as amended, supplemented or
otherwise modified prior to the date hereof, the "Forbearance Agreement"),
---------------------
among:
(i) NORTHSTAR HEALTH SERVICES, INC., a Delaware corporation (the
"Borrower"),
(ii) NSHS HOLDINGS, INC., a Delaware corporation, NORTHSTAR HS
HOLDINGS, INC., a Delaware corporation, NSHS SERVICES, INC., a Delaware
corporation, NORTHSTAR HEALTH SERVICES OF BEAVER, INC., a Delaware
corporation, NORTHSTAR HEALTH CONSULTING, INC., a Delaware corporation,
NORTHSTAR REHAB EAST, INC., a Delaware corporation, NORTHSTAR
REHABILITATION SERVICES, INC., a Pennsylvania corporation, NORTHSTAR
THERAPY SERVICES, INC., a Pennsylvania corporation, NW REHABILITATION,
INC., a Delaware corporation, TRISTATE SPORTS REHAB & PHYSICAL THERAPY,
INC., a Delaware corporation, NSHS CARDIAC HOLDINGS, INC., a Delaware
corporation, NORTHSTAR NUCLEAR SERVICES, INC., a Delaware corporation,
WHITE OAK DIAGNOSTIC SYSTEMS HOLDINGS, INC., a Pennsylvania corporation,
WHITE OAK DIAGNOSTIC SYSTEMS, a Pennsylvania limited partnership, KEYSTONE
REHABILITATION SYSTEMS, INC., a Pennsylvania corporation, KEYSTONE
REHABILITATION MANAGEMENT, INC., a Pennsylvania corporation, VASUSONICS,
INC., a Pennsylvania corporation (collectively, the "Subsidiary
----------
Guarantors") and
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(iii) IBJ SCHRODER BANK & TRUST COMPANY ("IBJS").
----
RECITALS
The Borrower has requested IBJS, in its capacity as agent (in such
capacity, the "Agent"), and as a lender (in such capacity, the "Lender"), under
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the Credit Agreement referred to in the Forbearance Agreement to agree to amend
certain provisions of the Forbearance Agreement as set forth in this Amendment.
The Agent and the Lenders parties hereto are willing to agree to such
amendments, but only on the terms and subject to the conditions set forth in
this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower, the Lenders parties hereto and the Agent hereby
agree as follows:
<PAGE>
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Forbearance Agreement are used herein as therein defined.
2. Amendment to Section 3. Section 3(f) of the Forbearance Agreement
----------------------
is hereby amended by deleting such subsection in its entirety and substituting
in lieu thereof the following new Section 3(f):
"(f) This Forbearance Agreement shall terminate on December 2, 1996,
provided that if, on or prior to December 2, 1996, (x) the Borrower shall have
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made payments, in addition to the payments required to be made on or prior to
December 2, 1996 pursuant to Section 6(l)(i) and (ii), to IBJS in an aggregate
amount of at least $25,000 and to Cadwalader, Wickersham & Taft in an aggregate
amount of at least $12,500, (y) the Borrower shall have provided the Agent and
each Lender with the business plan and projected financial statements referred
to in Section 6(k) and (z) no Forbearance Event of Default shall have occurred
and be continuing, then this Forbearance Agreement shall terminate on December
31, 1996; in any such case unless earlier terminated upon the occurrence of
a Forbearance Event of Default (any such date, the "Forbearance Termination
-----------------------
Date")."
- ----
3. Amendments to Section 6. (a) Subsection (b) of Section 6 of the
-----------------------
Forbearance Agreement is hereby amended by deleting such subsection in its
entirety and substituting in lieu thereof the following new subsection (b):
"(b) The Borrower shall furnish to the Agent:
(i) weekly reports of actual cash receipts and disbursements
("Weekly Cash Flow Reports") no later than Thursday of the next
------------------------
succeeding week, each such Weekly Cash Flow Report to include a weekly
"Flash" report by source and by region indicating prior week "new"
revenue activity (specifying billed and unbilled);
(ii) monthly reports of actual cash receipts and disbursements
for each month, each period of three months ended on such month and
year-to-date ("Monthly Cash Flow Reports") no later than the
---------------------------
fifteenth day of the next succeeding month, each such Monthly Cash Flow
Report to include a "Flash" report, on a monthly, three-month and year-
to-date basis, by source and by region indicating prior period "new"
revenue activity (specifying billed and unbilled);
(iii) concurrently with the delivery of each Monthly Cash Flow
Report, schedules on an aggregate, regional and by-location basis, of
(A) income (gross and net) by category of service, (B) income by source
and (C) actual costs;
each of such Weekly Cash Flow Reports, Monthly Cash Flow Reports and
schedules to be certified as correct and complete by a Responsible Officer
of the Borrower and to be
-2-
<PAGE>
provided both in hard copy form and an electronic form reasonably
satisfactory to the Agent."
(b) Section 6(e) of the Forbearance Agreement is hereby amended by
adding at the end thereof the following new sentence:
"The Borrower and each of its Subsidiaries agrees that it shall not
pay, or commit to pay, or undertake any transaction which would result
in or require the payment of, any cash disbursement that would be
unusual or extraordinary or outside the ordinary course of business,
such determination to be made by reference both to the business of the
Borrower and its Subsidiaries as presently conducted and by reference
to the business plan, budget and projections delivered pursuant to
Section 6(k)."
(c) Section 6 of the Forbearance Agreement is hereby amended by adding
the following new clauses (k) and (1) thereto in the appropriate
alphabetical order:
"(k) The Borrower shall, not later than December 2, 1996,
provide to the Agent and each Lender a business plan and
projected financial statements of the Borrower and its
Subsidiaries for the period from December 1, 1996 to
November 30, 1997 (the "Plan Period"), which business plan and
-----------
projected financial statements shall be in form and substance
reasonably acceptable to the Agent and the Lenders and shall
include, without limitation, the information described on Annex A
to this Forbearance Agreement.
"(l) The Borrower shall pay:
(i) to Cadwalader, Wickersham & Taft, an amount
equal to $25,000 during each of October, November and
December, 1996 (assuming, with respect to the payments
for December 1996, that the Forbearance Termination Date
shall have been extended to December 31, 1996 in
accordance with Section 3(f)), payable in equal bimonthly
installments of $12,500 each on the 15th day and the last
day of each of such months, on account of legal fees and
disbursements previously invoiced;
(ii) to the Agent for the account of the Lenders,
an amount for each month listed in the table below set
forth opposite such month below, payable in the equal
bimonthly installments set forth below on the 15th day
and the last day of each of such months (assuming, with
respect to the payments for December 1996, that the
Forbearance Termination Date shall have been extended to
December 31, 1996 in accordance with Section 3(f)):
<TABLE>
<CAPTION>
Monthly Bi-Monthly
Month Amount Installment
----- ------- -----------
<S> <C> <C>
October 1996 $25,000 $12,500
November 1996 35,000 17,500
December 1996 50,000 25,000
</TABLE>
-3-
<PAGE>
in each case on account of accrued and unpaid interest on the
outstanding Loans; and
(iii) to the Agent for the account of the Lenders, concurrently
with the delivery to the Agent of each Weekly Cash Flow Report, an
amount equal to the excess, if any, of (A) collections for such week
over (B) the sum of cash disbursements for such week (including cash
disbursements pursuant to Section 6(l)(i) and (ii) hereof) and an
amount of cash to be retained from such collections determined by the
Borrower in light of reasonably anticipated cash needs and consistent
with maintaining prudent, non-excessive reserves (such excess, "Excess
------
Cash"), which Excess Cash shall be applied by the Agent and the
----
Lenders to the payment of accrued and unpaid interest on the
outstanding Loans, until all such accrued and unpaid interest has been
paid in full."
(d) The Forbearance Agreement is hereby amended by adding at the end
thereof a new Annex A in the form attached as Annex A to this Amendment.
4. Consent and Acknowledgment. The Agent and the Lenders hereby consent,
--------------------------
so long as no Forbearance Event of Default shall have occurred and be
continuing or would result therefrom, to the payment to Thomas W. Zaucha, Alice
L. Zaucha and the Zaucha Family Limited Partnership (collectively, the "Zaucha
------
Parties"), concurrently with the payments to the Agent and the Lenders pursuant
- -------
to Section 6(l)(ii) of the Forbearance Agreement (as amended by this Amendment),
in an aggregate amount not to exceed (A) on each of October 15 and 31, 1996,
$1,785.71, (B) on each of November 15 and 30, 1996, $2,500.00, and (B) on each
of December 15 and 31, 1996 (assuming the extension of the Forbearance
Termination Date to December 31, 1996 in accordance with Section 3(f) of the
Forbearance Agreement), $3,571.43, in each case on account of accrued and unpaid
interest on the subordinated debt listed as items 1, 2 and 4 on Supplement to
Schedule 2 attached to the Amendment and Supplement to the Subordination
Agreement, dated as of November 15, 1995, which is payable to such Zaucha
Parties. Each of the Zaucha Parties, the Borrower and the Subsidiary Guarantors,
by their execution of this Amendment below, hereby acknowledges that, subject to
the reservation of rights by Keystone Rehabilitation Systems, Inc., Keystone
Rehabilitation Management, Inc. and its officers, directors and shareholders
provided in Section 2(h) of the Forbearance Agreement (which the parties hereto
intend shall continue notwithstanding the subordination referred to in this
sentence), nothing in this Section 4 shall be deemed to be a waiver, amendment
or modification of any benefits accruing in favor of the Agent and the Lenders
pursuant to the Subordination Agreement, that all of such subordinated debt
continues to be subordinated to all Senior Obligations (as defined in the
Subordination Agreement) in accordance with the terms of the Subordination
Agreement, and that, upon the occurrence and during the continuance of a
Forbearance Event of Default, without the need for any notice or other action on
the part of the Agent or any of the Lenders, any further payments permitted to
be made on or after the date of such Forbearance Event of Default pursuant to
this Section 4, which would otherwise have been prohibited pursuant to the terms
of the Subordination Agreement, shall thereupon again be prohibited in
accordance with the terms of the
-4-
<PAGE>
Subordination Agreement, and the Zaucha Parties agree that in such circumstances
they shall not request or accept payment thereof.
5. Effectiveness. This Amendment shall become effective upon receipt by
-------------
the Agent of this Amendment, executed and delivered by the Borrower, each
Subsidiary Guarantor and each Zaucha Party.
6. Representations and Warranties. To induce the Agent and the Lenders to
------------------------------
enter into this Amendment, the Borrower hereby represents and warrants to the
Agent and the Lenders that, after giving effect to the amendments provided for
herein, the representations and warranties contained in the Forbearance
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Forbearance Event of Default will have occurred
and be continuing.
7. No Other Amendments; Absence of Waiver. (a) Except as expressly amended
--------------------------------------
hereby, the Forbearance Agreement shall remain in full force and effect in
accordance with its terms, without any waiver, amendment or modification of any
provision thereof.
(b) The parties hereto agree that nothing in this Amendment, or the
Forbearance as amended hereby, shall be deemed to:
(i) be a consent to, or waiver of, any Default or Event of
Default;
(ii) except as expressly set forth herein, modify or limit any
other term or condition of the Credit Agreement or any other Credit
Document;
(iii) impose upon any Under or the Agent any obligation, express
or implied, to consent to any amendment or further modification of the
Credit Agreement or other Credit Documents, including, without
limitation, any further extension of the Revolving Credit Commitment;
or
(iv) prejudice any right or remedy that the Agent or the Lenders
may now have or may in the future have under the Credit Agreement or
under or in connection with the other Credit Documents or any
instrument or agreement referred to therein including, without
limitation, any right or remedy resulting from any Default or Event of
Default.
8. Counterparts. This Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
9. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-5-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY,
as Agent and as a Lender
By /s/ Daniel H. Casher
---------------------------------------
Name: Daniel H. Casher
Title: Vice President
NORTHSTAR HEALTH SERVICES, INC.
By
---------------------------------------
Name:
Title:
NSHS HOLDINGS, INC.
By
---------------------------------------
Name:
Title:
NORTHSTAR HS HOLDINGS, INC.
By
---------------------------------------
Name:
Title:
-6-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY,
as Agent and as a Lender
By
---------------------------------------
Name:
Title:
NORTHSTAR HEALTH SERVICES, INC
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NSHS HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR HS HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
-6-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
NSHS SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR HEALTH SERVICES OF
BEAVER, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR HEALTH
CONSULTING, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR REHAB EAST, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
-7-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
NORTHSTAR REHABILITATION SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NORTHSTAR THERAPY SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NW REHABILITATION, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
TRISTATE SPORTS REHAB & PHYSICAL
THERAPY, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
NSHS CARDIAC HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
-8-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
NORTHSTAR NUCLEAR SERVICES, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
WHITE OAK DIAGNOSTIC SYSTEMS
HOLDINGS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
WHITE OAK DIAGNOSTIC SYSTEMS
By: White Oak Diagnostic Systems
Holdings, Inc., its General Partner
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
KEYSTONE REHABILITATION SYSTEMS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
-9-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
KEYSTONE REHABILITATION
MANAGEMENT, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
VASCUSONICS, INC.
By /s/ David D. Watson
---------------------------------------
Name: David D. Watson
Title: President
-10-
<PAGE>
Amendment to
Forbearance Agreement
dated as of September 1, 1996
/s/ Thomas W. Zaucha
-----------------------------------------
Thomas W. Zaucha
/s/ Alice. L. Zaucha
-----------------------------------------
Alice. L. Zaucha
ZAUCHA FAMILY LIMITED PARTNERSHIP
By its General Partner, Thomas W. Zaucha
By /s/ Thomas Zaucha
---------------------------------------
Name: Thomas Zaucha
Title: General Partner
By its General Partner, Alice L. Zaucha
By /s/ Alice L. Zaucha
---------------------------------------
Name: Alice L. Zaucha
Title: General Partner
-11-
<PAGE>
INDEPENDENT CONSULTANT CONTRACT
-------------------------------
CONTRACT MADE the 20th day of August, 1996, between NORTHSTAR HEALTH
SERVICES, INC., a corporation organized and existing under the laws of the
State of Delaware, with its principal place of business at The Atrium, 665
Philadelphia Street, Indiana, Pennsylvania, 15701, herein referred to as
"Corporation",
AND
EXECUTIVE ADVISORY GROUP, LTD., in care of Robert J. Smallacombe, President,
P.O. Box 348, 124 Beech Court, Bensalem, Pennsylvania, 19020, herein referred to
as "Consultant".
RECITALS
1. Corporation is engaged in the business of providing rehabilitation
services, and in the conduct of such business desires to have administrative
services to be performed by Consultant.
2. Consultant agrees to perform these services for Corporation under the
terms and conditions set forth in this Contract.
IN CONSIDERATION of the mutual promises set forth herein, it is agreed by
and between Corporation and Consultant as follows:
SECTION ONE
NATURE OF WORK
Consultant will perform consulting, advisory and administrative services
on behalf of the Corporation with respect to the Corporation's operating and
financial performance with the goal of improving the price of the Corporation's
stock as an active working member of the Board of Directors of the Corporation,
Consultant will also work actively with the Board, its Committees, and its
Chairman and CEO in the following critical areas of activity:
A. Strategic planning - refinement, monitoring and execution of the
Corporation's strategic plan;
B. Corporation development - optimizing the balance between internal and
external growth opportunities to support the Corporation's growth strategy and
financial goals;
<PAGE>
C. Assist in resolving all corporate conflicts;
D. Evaluate short term Corporation performance in relation to short and
long range Corporation goals;
E. Develop short and long range succession plans for all key management
functions;
F. Ensure that the Corporation has an integrated, compatible and
shareholders value-oriented system of incentive compensation;
G. Assess the Corporation's management resources in relationship to its
growth strategy, objectives and opportunities;
H. Assist in developing business policies and administrative practices
that are consistent with high standards of business ethics and professionalism
which can support the Corporation's image and reputation for clinical quality
and a focus on care giving; and
I. Provide insight to assist the new managers of the Corporation to move
from a private company mentality to a public company operation.
In this capacity, Consultant will report to and be subject to the
oversight of Thomas W. Zaucha, Chief Executive Officer of the Corporation.
Before implementing any proposal, plan, recommendation or decision, Consultant
shall consult with and obtain the concurrence of the Chief Executive Officer of
the Corporation. If the Chief Executive Officer does not concur, Consultant
shall obtain the concurrence of the Board of Directors of the Corporation.
SECTION TWO
PLACE OF WORK
It is understood that Consultant's services will be rendered largely at
the Corporation's corporate offices situate at The Atrium, 665 Philadelphia
Street, Indiana, Pennsylvania, 15701, or such other places as designated by
the Corporation to meet with representatives of the Corporation.
SECTION THREE
TIME DEVOTED TO WORK
In the performance of the services, the services and the hours Consultant
is to work on any given day will be entirely within Consultant's control and
Corporation will rely upon Consultant to put in such number of hours as is
reasonably necessary to fulfill the spirit and purpose of this Contract,
however, the Consultant will work four (4) days each week.
<PAGE>
SECTION FOUR
PAYMENT
Corporation will pay Consultant the total sum of Six Thousand Five Hundred
and No/100 ($6,500.00) Dollars per week, payable biweekly following services
rendered upon receipt of an appropriate invoice. Corporation shall not be liable
to Consultant for any other compensation, including, but not limited to, board
meetings or other corporate meetings. Corporation will pay Consultant a maximum
of One Thousand Five Hundred and No/100 ($1,500.00) Dollars in reimbursement for
moving expenses.
SECTION FIVE
DURATION
The period of this Contract will be for six (6) months effective the 18th
day of August, 1996, and concluding on the 17th day of February, 1997. Any
changes to the duration of this Contract shall be mutually agreed on in writing
between the Corporation and the Consultant. This Contract may be terminated by
either party with thirty (30) days written notice. The Corporation will only
authorize termination of this Contract with action from the Corporation's
Board of Directors, with Robert J. Smallacombe abstaining from voting on the
issue.
SECTION SIX
STATUS OF CONSULTANT
The parties to this Contract agree that Consultant is a professional
person, and that the relation created by this Contract is that of
Corporation/Independent Consultant. Consultant is not an employee of
Corporation, and is not entitled to the benefits provided by Corporation to its
employees, including, but not limited to, group insurance and pension plan.
SECTION SEVEN
INCENTIVE COMPENSATION
In addition to the basic payments set forth in Section Four, Consultant
will be awarded the following incentive compensation package, based on both the
scope of Consultant's commitment and the Board of Directors' goal of increasing
shareholder value:
A. Common Stock options to purchase twenty-five thousand
(25,000) shares of Corporation's Common Stock at an exercise price
of $2.00 per share. These shares are in addition to Consultant's
<PAGE>
twenty-five thousand (25,000) shares allotted for serving on the Corporation's
Board of Directors;
B. A performance-based grant of stock options to purchase one
hundred thousand (100,000) shares of the Corporation's Common Stock at $2.00
subject to the restriction that such shares are not exercisable until
Corporation's Common Stock has traded in excess of $5.93 for at least ten (10)
consecutive trading days. Performance shares will enjoy all vesting and
acceleration rights and privileges contained in option grants to other key
employees. In the event that this Contract is terminated in less than six (6)
months, Consultant will be entitled to stock options on a prorata basis over six
(6) months (i.e. 16,666 options per month or any fraction thereof). In any
case, the stock options must be exercised within twelve (12) months of
termination.
IN WITNESS WHEREOF, the parties have approved and ratified this
Contract by Board Resolution effective the 20th day of August, 1996.
NORTHSTAR HEALTH SERVICES, INC.
BY: /s/ Thomas W. Zaucha
------------------------------
Thomas W. Zaucha, Chairman
BY: /s/ David D. Watson
------------------------------
David D. Watson, President/
Director
BY: /s/ Steven N. Brody
------------------------------
Steven N. Brody, Director
ATTEST:
/s/ Michael S. Delaney
- ------------------------------
Asst. Secretary
(SEAL)
WITNESS: EXECUTIVE ADVISORY GROUP, LTD.
/s/ Michael S. Delaney BY: /s/ Robert J. Smallacombe
- ------------------------------ ------------------------------
Robert J. Smallacombe
President
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made, effective as of September 1, 1996, by and between NORTHSTAR
HEALTH SERVICES, INC., a Delaware Corporation, with a place of business at 665
Philadelphia Street, Indiana, Pennsylvania, 15701, hereinafter referred to as
"Company", and ED BANOS, of 238-A Lakeview Drive, Jeannette, Pennsylvania,
15644, hereinafter referred to as "Employee".
RECITALS
The parties recite and declare:
A. Company desires to hire Employee because of Employee's vast business
experience.
B. Employee desires to be employed by the Company in the executive capacity
described below.
For the reasons set forth above, and in consideration of the mutual covenants
and promises of the parties set forth in this Agreement, Company and Employee
agree as follows:
1. Position and Responsibilities.
-----------------------------
1.1. Employee shall serve as President of White Oak Diagnostic Systems
Holdings, Inc., a Pennsylvania Company and subsidiary of the Company, and in
such position Employee will exercise such executive authority, duties, powers
and responsibilities as customarily attend such position in the Company. A job
description is attached hereto and made a part hereof.
1.2. Employee will, to the best of Employee's knowledge, skill and
ability, devote Employee's time and best efforts to the performance of
Employee's duties hereunder and the business and affairs of the Company.
Employee agrees to perform such executive duties as may be assigned to Employee
from time to time by the Company's Board of Directors or any committee of the
Board of Directors.
1.3. Employee will duly, punctually, competently and faithfully perform
and discharge Employee's duties in accordance with all applicable laws and all
policies, rules and regulations which the Company may now or shall hereafter
establish governing the conduct of its business.
2. Term of Employment.
------------------
2.1. The initial term of this Agreement shall be for a period of two
(2) years commencing on September 1, 1996.
<PAGE>
Thereafter, this Agreement shall be automatically renewed on the anniversary
date of the commencement of the initial two (2) year term of this Agreement for
successive periods of one (1) year, unless Employee or the Company shall give
the other party, prior to such anniversary date, not less than sixty (60) days
prior written notice of non-renewal. If the Company is sold, merged or
restructured eliminating this position, this Contract will be held binding until
the end of the stated contract period.
2.2. The Company may at any time terminate Employee's employment
hereunder for "Cause." In such event, the Company shall give Employee prompt
written notice specifying in reasonable detail the basis for such termination.
For purposes of this Agreement, "Cause" shall mean any of the following by
Employee: (i) material breach of any material provision of this Agreement, which
breach Employee shall have failed to cure within ten (10) days after Employee's
receipt from the Company specifying the specific nature of Employee's breach;
(ii) misconduct or neglect by Employee that is materially inimical to the best
interests, monetary or otherwise, of the company; and (iii) conviction of a
felony or any crime involving moral turpitude or fraud. In the event of
Employee's termination for "Cause," the Company shall pay Employee any accrued
salary and benefits due Employee as of such date, less applicable taxes and
other required withholdings and any amounts Employee may owe to the Company.
3. Compensations. Employee shall receive the compensation and
-------------
benefits set forth on Exhibit "A", attached hereto and made a part hereof
("Compensation"), for all services to be rendered by Employee hereunder.
4. Other Activities During Employment. Employee acknowledges and
-----------------------------------
agrees that Employee may serve on boards of directors and hold other leadership
positions in non-profit organizations unless the objectives and requirements of
such positions are determined by the Board of Directors of Company to be
inconsistent with the performance of Employee's duties. Employee also
acknowledges and agrees that the approval of the Board of Directors of Company
shall be required before Employee accepts or serves as a director, officer or
employee of any other for profit corporation during the term of this Agreement.
5. Illness, Incapacity and Death.
-----------------------------
(a) If, during the term of this Agreement, Employee shall be prevented
from performing Employee's duties by reason of illness or physical or mental
disability (hereinafter referred to collectively as "incapacity") for a
continuous period greater than one hundred twenty (120) days in any twelve (12)
month period, the Company may terminate Employee's employment hereunder by
giving written notice thereof to Employee, effective on the date set forth in
the notice (which date shall be not less than fifteen (15) business days after
the notice is given), and the Company
<PAGE>
shall pay Employee any accrued salary and benefits due to Employee as of such
date, less applicable taxes and other required withholdings and any amounts
Employee owes the Company.
(b) For purposes of this Agreement, a continuous period of incapacity
shall not be deemed interrupted until Employee returns to substantially full
time work for a period of at least thirty (30) consecutive business days.
(c) In the event of Employee's death during the term of this Agreement,
employment hereunder shall terminate on the date of Employee's death, and the
Company shall pay Employee's estate any accrued salary and benefits due to
Employee as of such date, less applicable taxes and other required withholdings
and any amounts Employee owes the Company. All vested stock options will be
transferred to wife or other beneficiary.
6. Former Employers. Employee represents and warrants that Employee's
----------------
employment by the Company will not conflict with and will not be constrained by
any prior or current employment consulting agreement or relationship whether
oral or written. Employee represents and warrants that Employee does not
possess confidential information arising out of any such employment, consulting
agreement or relationship which, in Employee's best judgment, would be utilized
in connection with Employee's employment by the Company.
7. Confidentiality. Employee agrees to keep confidential, except as the
---------------
Company may otherwise consent in writing, and, except for the Company's benefit,
not to disclose or make any use of at any time, either during or subsequent to
Employee's employment, any trade secrets, confidential information, knowledge,
data, or other information of the Company relating to services, treatment
procedures, processes, know-how, designs, marketing data, test data, customer
lists, referral services, business plans, marketing plans and strategies,
pricing strategies, or other subject matter pertaining to any business of the
Company, or any of its affiliates, which Employee may produce, obtain, or
otherwise acquire during the term of this Agreement, except as herein
provided. Employee further agrees not to deliver, reproduce or in any way
allow any such trade secrets, confidential information, knowledge, data or other
information, or any documentation relating thereto, to be delivered to or used
by any third parties without specific direction or consent of a duly authorized
representative of the Company. In the event Employee's employment with the
Company terminates for any reason whatsoever, Employee agrees to promptly
surrender and deliver to the Company all records, materials, equipment,
drawings, documents and data which Employee may obtain or produce during the
term of this Agreement, and Employee will not take with Employee any summaries,
outlines or descriptions of any confidential information, knowledge or data of
the Company which Employee may produce or obtain during the term of this
Agreement.
<PAGE>
8. Non-Competition.
---------------
8.1. During the term of Employee's employment hereunder, and for a
period equal to the greater of:
(a) two (2) years after the termination of Employee's employment
with the Company, including without limitation, termination by the Company for
Cause or without Cause hereunder, or
(b) any period under which Employee receives compensation from the
Company under Exhibit "A" hereto, absent the Company's prior written approval,
Employee will not engage, directly or indirectly, whether as principal or as
agent, officer, director, employee, consultant, shareholder, or otherwise,
alone or in association with any other person, corporation or other entity, in
any Competing Business. For purposes of this Agreement, the term "Competing
Business" shall mean: any person, corporation or other entity which solicits,
trades with, advises, calls upon or otherwise does, or attempts to do, directly
or indirectly, business with any patients, referral sources, customers or
accounts of the Company, its successors, assigns or affiliates, that have done
business with the Company at any time or from time to time during the period of
Employee's employment hereunder.
8.2. Employee agrees that during Employee's employment with the
Company Employee shall not, directly or indirectly, solicit the trade of, or
trade with, any patient, referral source, customer, prospective customer,
supplier, or prospective supplier of the Company for any business purpose other
than for the benefit of the Company. Employee further agrees that for two (2)
years following termination of Employee's employment with the Company, including
without limitation, termination by the Company for Cause or without Cause,
Employee shall not, directly or indirectly, solicit the trade of, or trade with,
any patients, referral sources, customers or suppliers, or prospective customers
or suppliers, of the Company.
8.3. Employee agrees that, except as expressly provided in Exhibit
"A" hereto, during Employee's employment with the Company and for two (2) years
following termination of Employee's employment with the Company, including
without limitation, termination by the Company for Cause or without Cause,
Employee shall not, directly or indirectly, solicit or induce, or attempt to
solicit or induce, any employee of the Company to leave the Company for any
reason whatsoever or hire any employee of the Company.
8.4. Employee represents that Employee's experience and capabilities
are such that the provisions of this Agreement will not prevent Employee from
earning a livelihood and Employee acknowledges that it would cause the Company
serious and irreparable injury and cost if Employee was to use Employee's
<PAGE>
ability and knowledge in competition with the Company or to otherwise breach the
obligations contained in this Agreement.
9. Remedies. In the event of a breach by Employee of the terms of this
--------
Agreement, the Company shall be entitled, if it shall so elect, to institute
legal proceedings to obtain damages for any such breach, or to enforce the
specific performance of this Agreement by Employee and to enjoin Employee from
any further violation of this Agreement and to exercise such remedies
cumulatively or inconjunction with all other rights and remedies provided by
law. Employee acknowledges, however, that the remedies at law for any breach
by Employee of the provisions of this Agreement may be inadequate and that the
Company shall be entitled to injunctive relief against Employee in the event of
any breach.
10. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly acknowledge and assume its
obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of, and be enforceable by, Employee or Employee's legal
representatives, executors, administrators, successors and heirs. Employee may
not assign any of Employee's rights or delegate any of Employee's duties,
responsibilities, obligations or positions hereunder to any person, and any such
purported delegation by Employee shall be void and of no force and effect.
11. Severability. The Company and Employee acknowledge and agree that in
------------
the event any one or more of the provisions contained in this Agreement shall,
for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect the other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. Notices. Any notice given by the Company hereunder shall be by personal
-------
delivery or registered or certified mail, return receipt requested, addressed to
Employee at Employee's address of record with the Company. Any notice which
Employee is required or may desire to deliver to the Company may be given by
Employee by personal delivery or by registered or certified mail, return receipt
requested, addressed to the Company at its principal office. The date of
personal delivery or five (5) business days after the date of mailing any
notice shall be deemed to be the date of delivery thereof.
13. Waivers. If either party should waive any breach of any provision of
-------
this Agreement, such waiver shall not operate or be construed as a waiver of any
subsequent breach of any provision of this Agreement.
14. Complete Agreement; Amendments. This Agreement, including Exhibit "A"
------------------------------
hereto, is the entire agreement of the
<PAGE>
parties with respect to the subject matter hereof, superseding all previous oral
or written communications, representations, understandings or agreements with
the Company or any officer or representative thereof. Any amendment to this
Agreement or waiver by the Company of any right hereunder shall be effective
only if evidenced by a written instrument executed by the parties hereto, upon
authorization of the Company's Board of Directors.
15. Headings. The headings of the sections hereof are inserted for
--------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
16. Counterparts. This Agreement may be signed in counterparts, each of
------------
which shall be deemed an original and both of which shall together constitute
one agreement.
17. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, each party to this Agreement has caused it to be executed
at Indiana, Pennsylvania, on the date indicated below.
COMPANY:
NORTHSTAR HEALTH SERVICES, INC.
ATTEST: BY: /s/ David D. Watson
------------------------------
/s/ ????????????????????? David D. Watson, President
- ------------------------------
Secretary
(SEAL)
WITNESS: EMPLOYEE:
/s/ ??????????????????????? /s/ Ed Banos
- ------------------------------ ------------------------------ (SEAL)
ED BANOS
<PAGE>
EXHIBIT "A"
-----------
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
------------------------------------------
OF ED BANOS
-----------
1. Compensation.
------------
Employee's annual base salary will be Seventy-six Thousand and No/100
($76,000.00) Dollars paid bi-weekly, less appropriate deductions in
accordance with the Company's salary payment policy. Anniversary
evaluation and raise appropriately increased in conjunction with other
senior management.
2. Stock Options.
-------------
Employee shall be eligible to participate in the Company's 1992 Stock
Option Plan or any other stock bonus or stock option plan authorized by
the Company for its employees, officers and consultants. On the
Effective Date, Employee shall be granted, under the 1992 Stock Option
Plan, stock options for 50,000 shares of the Company's Common Stock in
connection with the Employee's execution of this Agreement. Such options
shall have an exercise price equal to the fair market value (as defined
in the 1992 Stock Option Plan) as of the Effective Date. Options
covering 25,000 shares shall vest and become exercisable upon Employee's
commencement of Employee's Employment Agreement with the Company;
options covering 25,000 shares shall vest and become exercisable twelve
(12) months after the Employee's commencement of this Employment
Agreement. If employee's position is terminated or eliminated due to,
but not limited to, merger, acquisition or restructuring, the 25,000
unvested options become fully vested on date of termination at price set
by date of hire, September 1, 1996, and exercisable for ten (10) years
from date of grant. Such options shall be exercisable for ten (10) years
from the date of grant; provided, however, Employee shall forfeit all
non-vested options upon termination of employment with the Company for
any reason and as otherwise provided in the 1992 Stock Option Plan. In
connection with the granting of the aforementioned options, Employee
hereby acknowledges prior receipt of the Company's Form 10-KSB for the
fiscal year ending December 31, 1994, Proxy Statement dated May 8, 1995,
Form 10-QSB for the quarter ended June 30, 1995, 1992 Stock option Plan
and related stock option plan disclosure documents. Employee also
acknowledges that Employee has had ample opportunity to review each of
the aforementioned documents prior to the execution of this Agreement.
<PAGE>
3. Relocation Expenses.
-------------------
The Company will provide up to One Thousand Five Hundred and No/100
($1,500.00) Dollars in moving expenses to move to Indiana, Pennsylvania.
4. Benefits.
--------
All standard benefits will be governed under Keystone Rehabilitation
Systems existing Employee Benefit Plan. The benefits are attached and
are the standard benefits of Northstar Health Services, Inc. and
Keystone Rehabilitation Systems, Inc.
5. Retirement Plan.
---------------
Employee will be eligible to participate in the Company's 401(k) Plan
in accordance with its terms. The Company will provide a matching
contribution in accordance with its matching contribution plan for all
employees, with such matching contribution not to exceed fifteen (15%)
percent of Employee's income as permitted by the Internal Revenue
Service.
6. Automobile.
----------
Employee shall be entitled to receive a $400.00 per month automobile
allowance during the term of this Agreement.
7. Management Incentive Program (MIP).
-----------------------------------
Northstar Health Services, Inc. agrees to designate to employee a
minimum of three (3%) percent of the EBITDA profits Employee's division
earns which are to be given to Employee's management staff, employees
and himself on a solely discretionary basis. Under no circumstance is
Employee to give himself more than fifty (50%) percent of the MIP. By
act of the Board of Directors, the percentage of MIP may be increased,
but a minimum of three (3%) percent is the base amount. Payment is to be
made after year-end audits of the division are complete and will be
paid through payroll no later than March 30, 1996.
8. Press Release.
-------------
A press release is expected and to be released involving Employee's
division on the designation of his position and is to be released to all
publication agencies, including but not limited to, WSJ, Pittsburgh Post
Gazette, Business Times, Tribune Review, Modern Healthcare, Hospital
News and other appropriate publication agencies.
<PAGE>
Exhibit 10.10
SEPARATION AGREEMENT, MUTUAL GENERAL RELEASE
AND WAIVER OF CLAIMS
THIS SEPARATION AGREEMENT, MUTUAL GENERAL RELEASE AND WAIVER OF CLAIMS (the
"Agreement"), is made this 10th day of September, 1996, by and between
Lisa S. Guarino ("Employee") and Northstar Health Services, Inc. ("NHS" or the
"Company").
WHEREAS, Employee has been employed pursuant to a written Employment
Agreement dated November 15, 1995, a true and correct copy of which is attached
hereto and marked as Exhibit "A;" and
WHEREAS, Employee and Company have a dispute which may give rise to claims
by the Employee against the Company and/or by the Company against the Employee;
and
WHEREAS, Employee and Company desire to resolve said dispute on the terms
and conditions set forth herein; and
WHEREAS, in exchange for valuable consideration, the parties desire that
Employee sever and forever waive all employment rights with NHS, that the
Employee execute a confidentiality provision, and that the parties reach a
mutually satisfactory agreement to fully and finally resolve all existing and
potential controversies among them;
NOW, THEREFORE, for the consideration set forth below and other good and
valuable consideration, including the parties' mutual releases, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties hereto do covenant and agree as follows:
1. Termination of Employment. The parties agree that the Employee will be
-------------------------
employed by the Company until the close of business on September 30, 1996.
Employee agrees that she has no right to be re-employed by the Company after
that date, and Employee agrees not to apply for employment or re-employment with
the Company.
2. Consideration by the Company. The Company hereby agrees to pay or
----------------------------
provide to Employee the following:
a. As severance, One Hundred Thirteen Thousand Eight Hundred Fifteen and
no/100 ($113,815.00) Dollars, payable in thirteen (13) equal
installment of Eight Thousand Seven Hundred Fifty-Five and no/100
($8,755.00) (subject to normal required withholding taxes) biweekly
beginning October 11, 1996 and continuing through March 28, 1997;
<PAGE>
b. Continuation until midnight October 1, 1996, of to health care
benefits provided to Employee as of the date of this Agreement. (In
order to continue such benefits, Employee shall elect continuing
health care coverage under COBRA effective October 1, 1996):
c. Options covering 10,000 shares of the Common Stock, par value $0.01
per share, exercisable until October 1, 2001, such options to be
evidenced by an option agreement in the form attached hereto as
Exhibit "B" and to be granted pursuant to and subject to the terms of
the Company's 1992 Stock Option Plan;
3. Consideration by Employee. Employee hereby agrees to provide the
-------------------------
Company twenty-five (25) consulting days between October 1, 1996 and March 31,
1997, subject to the following conditions:
a. Company is required to provide Employees with at least seventy-two
(72) hours prior notice of the need for consultation, and Employee is
required to provide Company with at least seventy-two (72) hours prior
notice of unavailability;
b. In no event shall Employee be required to provide more than ten (10)
consulting days in any calendar month. For purposes of this Section 3,
a "consulting day" shall mean 9:00 a.m. to 5:00 p.m. Mondays through
Fridays, not including legal holidays;
c. With respect to consulting days not used by the Company by March 31,
1997 the Company shall have waived its right to such consulting days;
and
d. Company shall advance to Employee, or promptly reimburse Employee, for
all expenses incurred by Employee in providing consultation,
including, but not limited to, travel, meals, hotel, taxi, parking,
postage, long distance telephone calls and facsimile transmissions.
4. Release. Each party, on their own behalf, and an behalf of their
-------
respective heirs, executors, assigns and administrators, attorneys and
representatives, hereby irrevocably and unconditionally release, acquit,
covenant not to sue and forever discharge each other and their owners,
stockholders, predecessors, successors, assigns, agents, principals, directors,
officers, employees, representatives, partners, attorneys, divisions,
subsidiaries, parents and affiliates and all persons acting by, through, under
or in concert with, or any of them (herein referred to collectively as
"Releases"), from any and all grievances, charges, complaints, claims,
liabilities, obligations, agreements, controversies,
2
<PAGE>
actions, causes of action, suits, rights, demands, costs, losses, debts and
expenses (including those for attorney's fees, costs incurred, liquidated
damages, punitive damages or penalties) of any nature whatsoever, known or
unknown (herein referred to as "claim" or "claims") (a) which either party now
has, owns or holds, or claims to have, own or hold, or (b) which either party at
any time heretofore had, owned or held, or claimed to have, own or hold, or (c)
which either party at any time hereafter may have, own or hold, or claim to
have, own or hold, arising out of any transaction or occurrence occurring,
accruing or arising on or before the date of this Agreement, including, but not
limited to, any claim related to Employee's employment or the termination of
Employee's employment including, but not limited to, any claim for wages,
salaries, severance or termination or vacation pay, or benefits or insurance
payments. This Agreement covers all claims of any nature under any federal,
state and local law, including, but not limited to, all statutory or common-law
claims, and those under Title VII of the Civil Rights Act of 1964, as amended,
the Pennsylvania Human Relations Act, as amended, the Family and Medical Leave
Act, the Americans with Disabilities Act, the Age Discrimination in Employment
Act, as amended, the Pittsburgh Code, and any other law or statute. The parties
further agree to indemnify, defend and hold harmless each and all of the
Releases from any claim made against any of them relating to the subject matter
of this Agreement, including any claim for attorney's fees, costs or expenses.
In releasing Employee from all claims, Company is relying on Employee's
representation that she does not possess any Company funds or property of any
kind and that she has not transferred to any third party any Company funds or
property of any kind. In releasing Company from all claims, Employee is relying
on Company's representation that it will pay to Employee all wages, salary,
accrued vacation and personal time, and benefits due her under her Employment
Agreement for her services rendered up through September 30, 1996.
5. Confidentiality. Employee and Company each acknowledge their respective
---------------
material interests in the confidentiality of this Agreement and represent and
agree that each will keep the existence and terms of this Agreement and this
settlement completely confidential with:
a. their attorneys; and
b. members of Employee's immediate family; and
c. such bona fide professional advisors as each may from time to time
engage.
Each party agrees to take no action, including making oral or written
statements of a derogatory or disparaging nature, which would cause the other
party and/or its employees embarrassment or humiliation, or would otherwise
cause or contribute to either party being held in disrepute by the general
public. The parties further agree that any violation of this Paragraph 5 is a
material breach of this Agreement.
3
<PAGE>
6. Advisor. Employee is advised to consult with an attorney of her choice
-------
before signing this Agreement. Employee will be allowed a period of twenty-one
(21) days in which to consult with an attorney or otherwise consider the terms
of this Agreement.
7. Effective Date. This Agreement shall not become effective until seven (7)
--------------
days following the date of the last signature of this Agreement (the "Effective
Date"). Prior to that time, Employee may elect to revoke this Agreement. If
Employee chooses to revoke this Agreement, Employee or her attorney or
representative shall notify Michael S. Delaney, Esquire, 1921 Phildelphia
Street, Indiana, Pennsylvania 15701, in writing.
8. Representatives. Employee represents, acknowledges and agrees that, in
---------------
executing this Agreement, Employee does not rely and has not relied upon any
representation or statement made by the Company or any of its agents,
representatives or attorneys with regard to the subject matter, basis or effect
of this Agreement, other than the matters contained herein.
9. Governing Law. This Agreement is made and entered into in the
-------------
Commonwealth of Pennsylvania and shall, in all respects, be interpreted,
enforced and governed under the internal laws of Pennsylvania, without regard to
its conflicts or choice of law provisions. The language of all parts of this
Agreement shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against any of the parties thereto.
10. Specific Performance. The Company and Employee agree that Paragraphs 2,
--------------------
3 and 5 of this Agreement are of a unique and special nature and that any
violation thereof is a material breach of this Agreement and will result in
immediate and irreparable harm to the Company or Employee, and that in the event
of any actual or threatened breach or violation of the provisions of this
Agreement, the Company or Employee will be entitled as a matter of right to an
injunction or decree of specific performance from any equity court of competent
jurisdiction. The Company and Employee hereby waive the right to assert the
defense that such breach or violation can be compensated adequately in damage
and in an action at law. Nothing contained in this provision will be construed
as prohibiting the Company or Employee from pursuing any other remedies at law
or in equity available to it for any such breach or violation or threatened
violation, without the need for posting any bond or the requirement of any other
guarantee.
11. Severability. The parties agree that the provisions of this Agreement
------------
will be severable, and if any portion of this Agreement is held to be unlawful
or unenforceable, the same will not affect any other portion of this Agreement
and the remaining terms and conditions or portions thereof will remain in full
force and effect. This Agreement will be construed in such case as if such
unlawful or unenforceable provision had never been contained herein, in order
to effectuate the intentions of the parties in executing this Agreement. In
furtherance and not in limitation of the foregoing, should any durational or
4
<PAGE>
geographical restriction or restriction on business activities covered under
this Agreement be found by any court of competent jurisdiction to be overly
broad, Employee and the Company intend that such court will enforce this
Agreement in any less broad manner the court may find appropriate by construing
such overly broad provisions to cover only that duration, extent or activity
which may be enforceable. The parties acknowledge the uncertainty of the law in
this respect, and expressly agree that this Agreement will be given the
construction that renders its provisions valid and enforceable to the maximum
extent permitted by law.
12. Merger. The Agreement sets forth the entire agreement between Employee
------
and Company and fully supersedes any and all prior agreements or understandings
between them pertaining to the subject matter thereof.
13. No Oral Modification. This Agreement may be modified or amended only by
--------------------
the written agreement of Employee and Company.
14. Reference Letter. In exchange for the provisions of this Agreement,
----------------
Company has provided an acceptable reference letter to Employee, a copy of which
is attached hereto as Exhibit C. Employee acknowledges that said letter is the
sole response that Company will give to those requesting a reference regarding
Employee's service to the Company.
15. No Admission. This Agreement does not constitute and shall not be
------------
construed in any way as an admission of any wrongdoing or any violation of or
noncompliance with any obligation by Company or Employee and/or any of their
predecessors, successors, affiliates, related entities, assigns, directors,
officers, agents and employees.
16. Construction. Neither this Agreement nor any terms or provisions herein
------------
shall be construed against the drafter thereof and this Agreement and all terms
and provisions herein shall be deemed to have been drafted jointly by all
parties thereto.
17. Indemnification. NHS hereby indemnifies and holds Employee harmless from
---------------
and against any and all liability resulting from Employee's employment with NHS
until September 30, 1996, excluding any act of Employee constituting fraud. NHS
is giving this indemnification based on Employee's representation that she is
unaware of any claim made, pending or threatened against the Company or Employee
which could be subject to this indemnification provision. Such indemnification
shall include attorney's fees and expenses reasonably incurred by Employee in
defending against any and all claims of liability on the part of Employee
relating to her employment with NHS.
5
<PAGE>
18. Successors, Assigns, Etc. This Agreement shall be binding upon, and
------------------------
shall insure to the benefit of, the Employee and the Company and their
respective successors, permitted assigns, heirs and legal representatives.
Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect, provided, however, that nothing in this Section 18 shall
preclude the assumption of such rights by executors, administrators, or other
legal representatives of the Employee or her estate and their assigning any
rights hereunder to the person or persons entitled thereto.
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all, or substantially all, of its
assets to another corporation or any similar such transaction. Upon a
consolidation or merger or upon a transfer of assets to an entity which assumes
this Agreement, the term "Company" as used herein shall mean such other or
surviving corporation and this Agreement shall continue in full force and
effect.
19. Interest. Any sum due and owing to Employee hereunder and not received
--------
by the Employee on or before the due date therefor shall bear interest, until so
received by the Employee, at that interest rate equal to the lesser of (A) the
highest rate permitted by applicable law; or (B) the sum of (i) ten (10)
percentage points, and (ii) the "prime rate" of Mellon Bank, N.A., Pittsburgh,
Pennsylvania, office, as announced from time to time.
20. Remedies. If the Company or Employee prevails in a proceeding for
--------
damages or equitable relief to enforce any provision of this Agreement, the
Company and Employee agree that the prevailing party in such proceeding, in
addition to other relief, shall be entitled to reasonable attorneys' fees, costs
and the expenses of litigation incurred in securing the relief granted by the
Court.
PLEASE READ THIS DOCUMENT CAREFULLY AS IT INCLUDES A GENERAL RELEASE AND WAIVER
OF ALL KNOWN AND UNKNOWN CLAIMS OF ANY KIND.
6
<PAGE>
The parties set their hands and seals this 19th day of September, 1996:
WITNESS:
/s/ Sheree D. Frederick /s/ Lisa S. Guarino
- -------------------------------------- --------------------------------------
Lisa S. Guarino
ATTEST: NORTHSTAR HEALTH SERVICES, INC.
/s/ Sheree D. Frederick By: /s/ Thomas W. Zaucha (Seal)
- -------------------------------------- ----------------------------
Thomas W. Zaucha, CEO
7
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made, effective as of September 16, 1996, by and between
NORTHSTAR HEALTH SERVICES, INC., a Delaware Corporation, with a place of
business at 665 Philadelphia Street, Indiana, Pennsylvania, 15701, hereinafter
referred to as "Company", and JOHN LOMBARDI, of 1601 Market Street,
Philadelphia, Pennsylvania, 19103, hereinafter referred to as "Employee".
RECITALS
The parties recite and declare:
A. Company desires to hire Employee because of Employee's vast business
experience.
B. Employee desires to be employed by the Company in the executive
capacity described below.
For the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties set forth in this Agreement, Company and
Employee agree as follows:
1. Position and Responsibilities.
-----------------------------
1.1. Employee shall serve as Executive Vice President, Chief
Financial Officer and Treasurer of the Company, and in such position Employee
will exercise such executive authority, duties, powers and responsibilities as
customarily attend such position in the Company. A job description is attached
hereto and made a part hereof. This position will be termed "interim" until
such time, by mutual decision of the Board of Directors and Employee, the
position will be changed to "permanent" at which time a new agreement will be
negotiated.
1.2. Employee will, to the best of Employee's knowledge, skill and
ability, devote Employee's time and best efforts to the performance of
Employee's duties hereunder and the business and affairs of the Company.
Employee agrees to perform such executive duties as may be assigned to Employee
from time to time by the Company's Board of Directors or any committee of the
Board of Directors.
1.3. Employee will duly, punctually, competently and faithfully
perform and discharge Employee's duties in accordance with all applicable laws
and all policies, rules and regulations which the Company may now or shall
hereafter establish governing the conduct of its business.
2. Term of Employment.
------------------
1
<PAGE>
2.1. The initial term of this Agreement shall be for a period of one
(1) year commencing on September 16, 1996. Either party may elect to cancel
this Agreement within one hundred twenty (120) days prior written notice.
However, this Agreement may not be cancelled by either party within the first
ninety (90) days for any reason. This Agreement will automatically renew for a
one (1) year period, unless terminated in writing with one hundred twenty (120)
days notice prior to September 12, 1997.
2.2. The Company may at any time terminate Employee's employment
hereunder for "Cause." In such event, the Company shall give Employee prompt
written notice specifying in reasonable detail the basis for such termination.
For purposes of this Agreement, "Cause" shall mean any of the following by
Employee: (i) material breach of any material provision of this Agreement,
which breach Employee shall have failed to cure within ten (10) days after
Employee's receipt from the Company specifying the specific nature of
Employee's breach; (ii) misconduct or neglect by Employee that is materially
inimical to the best interests, monetary or otherwise, of the Company; and
(iii) conviction of a felony or any crime involving moral turpitude or fraud.
In the event of Employee's termination for "Cause," the Company shall pay
Employee any accrued salary and benefits due Employee as of such date, less
applicable taxes and other required withholdings and any amounts Employee may
owe to the Company.
3. Compensations. Employee shall receive the compensation and benefits set
-------------
forth on Exhibit "A", attached hereto and made a part hereof ("Compensation"),
for all services to be rendered by Employee hereunder.
4. Other Activities During Employment. Employee acknowledges and agrees
-----------------------------------
that Employee may serve on boards of directors and hold other leadership
positions in non-profit organizations unless the objectives and requirements of
such positions are determined by the Board of Directors of Company to be
inconsistent with the performance of Employee's duties. Employee also
acknowledges and agrees that the approval of the Board of Directors of Company
shall be required before Employee accepts or serves as a director, officer or
employee of any other for profit corporation during the term of this Agreement.
5. Illness, Incapacity and Death.
-----------------------------
(a) If, during the term of this Agreement, Employee shall be
prevented from performing Employee's duties by reason of illness or physical or
mental disability (hereinafter referred to collectively as "incapacity") for a
continuous period greater than one hundred twenty (120) days in any twelve (12)
month period, the Company may terminate Employee's employment hereunder by
giving written notice thereof to Employee, effective on the date set forth in
the notice (which date shall be not less than fifteen (15) business days after
the notice is given), and the Company
2
<PAGE>
shall pay Employee any accrued salary and benefits due to Employee as of such
date, less applicable taxes and other required withholdings and any amounts
Employee owes the Company.
(b) For purposes of this Agreement, a continuous period of incapacity
shall not be deemed interrupted until Employee returns to substantially full
time work for a period of at least thirty (30) consecutive business days.
(c) In the event of Employee's death during the term of this
Agreement, employment hereunder shall terminate on the date of Employee's death,
and the Company shall pay Employee's estate any accrued salary and benefits due
to Employee as of such date, less applicable taxes and other required
withholdings and any amounts Employee owes the Company.
6. Former Employers. Employee represents and warrants that Employee's
----------------
employment by the Company will not conflict with and will not be constrained by
any prior or current employment consulting agreement or relationship whether
oral or written. Employee represents and warrants that Employee does not
possess confidential information arising out of any such employment, consulting
agreement or relationship which, in Employee's best judgment, would be utilized
in connection with Employee's employment by the Company.
7. Confidentiality. Employee agrees to keep confidential, except as
---------------
the Company may otherwise consent in writing, and, except for the Company's
benefit, not to disclose or make any use of at any time, either during or
subsequent to Employee's employment, any trade secrets, confidential
information, knowledge, data, or other information of the Company relating to
services, treatment procedures, processes, know-how, designs, marketing data,
test data, customer lists, referral services, business plans, marketing plans
and strategies, pricing strategies, or other subject matter pertaining to any
business of the Company, or any of its affiliates, which Employee may produce,
obtain, or otherwise acquire during the term of this Agreement, except as herein
provided. Employee further agrees not to deliver, reproduce or in any way allow
any such trade secrets, confidential information, knowledge, data or other
information, or any documentation relating thereto, to be delivered to or used
by any third parties without specific direction or consent of a duly
authorized representative of the Company. In the event Employee's employment
with the Company terminates for any reason whatsoever, Employee agrees to
promptly surrender and deliver to the Company all records, materials,
equipment, drawings, documents and data which Employee may obtain or produce
during the term of this Agreement, and Employee will not take with Employee any
summaries, outlines or descriptions of any confidential information, knowledge
or data of the Company which Employee may produce or obtain during the term of
this Agreement.
8. Non-Competition.
---------------
3
<PAGE>
8.1. During the term of Employee's employment hereunder, any period
under which Employee receives compensation from the Company under Exhibit "A"
hereto, absent the Company's prior written approval, Employee will not engage,
directly or indirectly, whether as principal or as agent, officer, director,
employee, consultant, shareholder, or otherwise, alone or in association with
any other person, corporation or other entity, in any Competing Business. For
purposes of this Agreement, the term "Competing Business" shall mean: any
person, corporation or other entity which solicits, trades with, advises, calls
upon or otherwise does, or attempts to do, directly or indirectly, business
with any patients, referral sources, customers or accounts of the Company, its
successors, assigns or affiliates, that have done business with the Company at
any time or from time to time during the period of Employee's employment
hereunder.
8.2. Employee agrees that, except as expressly provided in Exhibit
"A" hereto, during Employee's employment with the Company, including without
limitation, termination by the Company for Cause or without Cause, Employee
shall not, directly or indirectly, solicit or induce, or attempt to solicit or
induce, any employee of the Company to leave the Company for any reason
whatsoever or hire any employee of the Company.
8.3. Employee represents that Employee's experience and capabilities
are such that the provisions of this Agreement will not prevent Employee from
earning a livelihood and Employee acknowledges that it would cause the Company
serious and irreparable injury and cost if Employee was to use Employee's
ability and knowledge in competition with the Company or to otherwise breach
the obligations contained in this Agreement.
9. Remedies. In the event of a breach by Employee of the terms of this
--------
Agreement, the Company shall be entitled, if it shall so elect, to institute
legal proceedings to obtain damages for any such breach, or to enforce the
specific performance of this Agreement by Employee and to enjoin Employee from
any further violation of this Agreement and to exercise such remedies
cumulatively or in conjunction with all other rights and remedies provided by
law. Employee acknowledges, however, that the remedies at law for any breach
by Employee of the provisions of this Agreement may be inadequate and that the
Company shall be entitled to injunctive relief against Employee in the event of
any breach.
10. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly acknowledge and assume its
obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of, and be enforceable by, Employee or Employee's
legal representatives, executors, administrators, successors and heirs.
Employee may not assign any of Employee's rights or delegate any
4
<PAGE>
of Employee's duties, responsibilities, obligations or positions hereunder to
any person, and any such purported delegation by Employee shall be void and of
no force and effect.
11. Severability. The Company and Employee acknowledge and agree that in
------------
the event any one or more of the provisions contained in this Agreement shall,
for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect the other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. Notices. Any notice given by the Company hereunder shall be by
--------
personal delivery or registered or certified mail, return receipt requested,
addressed to Employee at Employee's address of record with the Company. Any
notice which Employee is required or may desire to deliver to the Company may
be given by Employee by personal delivery or by registered or certified mail,
return receipt requested, addressed to the Company at its principal office.
The date of personal delivery or five (5) business days after the date of
mailing any notice shall be deemed to be the date of delivery thereof.
13. Waivers. If either party should waive any breach of any provision
-------
of this Agreement, such waiver shall not operate or be construed as a waiver of
any subsequent breach of any provision of this Agreement.
14. Complete Agreement; Amendments. This Agreement, including Exhibit
------------------------------
"A" hereto, is the entire agreement of the parties with respect to the subject
matter hereof, superseding all previous oral or written communications,
representations, understandings or agreements with the Company or any officer
or representative thereof. Any amendment to this Agreement or waiver by the
Company of any right hereunder shall be effective only if evidenced by a
written instrument executed by the parties hereto, upon authorization of the
Company's Board of Directors.
15. Headings. The headings of the sections hereof are inserted for
--------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
16. Counterparts. This Agreement may be signed in counterparts, each of
------------
which shall be deemed an original and both of which shall together constitute
one agreement.
17. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
5
<PAGE>
IN WITNESS WHEREOF, each party to this Agreement has caused it to be
executed at Indiana, Pennsylvania, on the date indicated below.
COMPANY:
NORTHSTAR HEALTH SERVICES, INC.
ATTEST: BY: /s/ David D. Watson
-------------------------------
David D. Watson, President
- ------------------------------
Secretary
( SEAL )
WITNESS: EMPLOYEE:
/s/ Emily B. Fister /s/ John Lombardi
- ------------------------------ -------------------------------(SEAL)
JOHN LOMBARDI
6
<PAGE>
EXHIBIT "A"
-----------
EMPLOYMENT TERM. COMPENSATION AND BENEFITS
-------------------------------------------
OF JOHN LOMBARDI
----------------
1. Compensation.
------------
Employee's annual base salary will be One Hundred Twelve Thousand and
No/100 ($112,000.00) Dollars paid bi-weekly, less appropriate deductions in
accordance with the Company's salary payment policy.
2. Stock Options.
-------------
Employee shall be eligible to participate in the Company's 1992 Stock
Option Plan or any other stock bonus or stock Option plan authorized by the
Company for its employees, officers and consultants. On the Effective
Date, Employee shall be granted, under the 1992 Stock option Plan, stock
options for 25,000 shares of the Company's Common Stock in connection with
the Employee's execution of this Agreement. Such options shall have an
exercise price equal to the fair market value (as defined in the 1992 Stock
Option Plan) as of the Effective Date of this Employment Agreement. Such
options shall be in accordance with the 1992 Stock Option Plan.
A grant of stock options to purchase fifty thousand (50,000) shares of the
Company's Common Stock at $2.00. Such option shares are not exercisable
until Company's Common Stock has traded in excess of $5.93 for at least ten
(10) consecutive trading days. Performance shares will enjoy all vesting
and acceleration rights and privileges contained in option grants to other
key employees. In the event that this Agreement is terminated in less than
six (6) months, Employee will be entitled to stock options on a pro rata
basis over six (6) months (i.e. 8,333 options per month or any fraction
thereof). In any case, the stock options must be exercised within twelve
(12) months of termination. At the termination of this Agreement, this
grant may be assigned to Employee's designee.
In connection with the granting of the aforementioned options, Employee
hereby acknowledges prior receipt of the Company's Form 10-KSB for the
fiscal year ending December 31, 1994, Proxy Statement dated May 8, 1995,
Form 10-QSB for the quarter ended June 30, 1995, 1992 Stock Option Plan and
related stock option plan disclosure documents. Employee also acknowledges
that Employee has had ample opportunity to review each of the
7
<PAGE>
aforementioned documents prior to the execution of this Agreement.
3. Benefits.
--------
All standard benefits will be governed under Keystone Rehabilitation
Systems existing Employee Benefit Plan. The following benefits that are
not standard will be valid for this Agreement and any renewal:
A. Vacation: At least four (4) weeks, but not more
than six (6) weeks.
B. Ninety (90) day eligibility for benefits is waived.
The remainder of benefits are attached and are the standard benefits of
Northstar Health Services, Inc. and Keystone Rehabilitation Systems, Inc.
4. Retirement Plan.
---------------
Employee will be eligible to participate in the Company's 401(k) Plan in
accordance with its terms. The Company will provide a matching
contribution in accordance with its matching contribution plan for all
employees, with such matching contribution not to exceed fifteen (15%)
percent of Employee's income as permitted by the Internal Revenue
Service.
5. Relocation Expenses.
-------------------
The Company will provide up to One Thousand Five Hundred and No/100
($1,500.00) Dollars, or greater with Board of Directors' approval, in
moving expenses to move to Indiana, Pennsylvania.
8
<PAGE>
EXHIBIT 17.1
November 15, 1995
Northstar Health Services, Inc.
Foster Plaza 9
750 Holiday Drive
Pittsburgh, Pennsylvania 15220
Attention: Mark A. DeSimone,
Chairman of the Board
Re: Resignation
Dear Sir or Madam:
This is to advise you that I hereby resign from the Board of Directors of
Northstar Health Services, Inc. (the "Company") effective as of the 30th day
following the effective time of the merger (the "Merger") of NSK Merger Corp. (a
wholly-owned subsidiary of the Company) with and into Keystone Rehabilitation
Systems, Inc.
Very truly yours,
/s/ Daniel P. McMenamin
Daniel McMenamin
<PAGE>
EXHIBIT 17.2
November 17, 1995
Northstar Health Services, Inc.
Foster Plaza Nine
750 Holiday Drive
Pittsburgh, PA 15220
Attention: Mark A. DeSimone
Chairman of the Board
Re: Resignation
Dear Sir or Madam:
This is to advise you that I hereby resign from the Board of Directors of
Northstar Health Services, Inc. (the "Company") effective immediately.
Very truly yours,
/s/ Daniel Dickman
Daniel Dickman
<PAGE>
Exhibit 17.3
[LOGO of NORTHSTAR Health Services, Inc.] Northstar Health Services Inc.
Foster Plaza 9
750 Holiday Drive (412) 920-1730
Pittsburgh, PA 15220 Fax (412) 920-1738
February 20, 1996
Thomas W. Zaucha
CEO
Northstar Health Services, Inc.
665 Philadelphia Street
Indiana, PA 15701-3941
Dear Tom:
At your request and that of the Board of Directors of Northstar Health Services,
Inc., I hereby submit my resignation as Treasurer and Corporate Secretary. I do
hereby still remain an employee of the company under all the remaining terms and
conditions of my November 1, 1995 employment agreement.
If you should have any further questions, please do not hesitate to call.
Very truly yours,
/s/ Michael J. Kulmoski Jr.
Michael J. Kulmoski Jr.
<PAGE>
Exhibit 17.4
[LOGO of Moltrup Steel Products Company]
Moltrup Steel Products Company
FOURTEENTH STREET AND SECOND AVENUE
POST OFFICE BOX 331 . BEAVER FALLS, PA. 15010
412/845-3100 . FAX: 412/845-3110 . 800-33-MOLTRUP
MICHAEL P. PITTERICH
President and Chairman
March 21, 1996
Board of Directors
NORTHSTAR HEALTH SERVICES, INC.
Foster Plaza 9
750 Holiday Drive
Pittsburgh, PA 15220
To the Board of Directors:
Please accept my resignation from this Board of Directors of
Northstar Health Services effective immediately.
I hope the company does well and prospers. I particularly felt the
merger of Keystone and Northstar offers tremendous potential.
Sincerely,
/s/ Michael P. Pitterich
Michael P. Pitterich
<PAGE>
Exhibit 17.5
March 21, 1996
Northstar Health Services, Inc.
c/o Mr. Thomas W. Zaucha
Foster Plaza 9
750 Holiday Drive
Pittsburgh, PA 15220
Gentlemen:
Effective immediately, I resign as a Director of Northstar Health
Services, Inc.
Very truly yours,
/s/ Mark A. Desimone
Mark A. Desimone
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