<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-21752
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1697152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices)
412-349-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ____ NO __X__
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:
CLASS OUTSTANDING AS OF NOVEMBER 14, 1997
- -------------------------------------- -----------------------------------
Common Stock, par value $.01 per share 5,867,154
Transitional Small Business Disclosure Format (Check one):
YES ____ NO __X___
<PAGE> 2
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 1997 and 1996 3
Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosure About Market
Risk Sensitive Instruments 16
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings 17
Item 3. - Defaults Upon Senior Securities 18
Item 4. - Submission of Matters to a Vote of Security
Holders 19
Item 6. - Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE> 3
Item 1. - Financial Statements
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
A S S E T S September 30, December 31,
----------- 1997 1996
------------------ -------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents- $ 71 $ 1,607
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$2,826 and $3,759, respectively 4,625 6,098
Management fees 519 766
Miscellaneous 163 244
Prepaid expenses and other current assets 258 731
------------ ------------
Total current assets 5,636 9,446
------------ ------------
PROPERTY AND EQUIPMENT, net 2,885 3,682
INTANGIBLE ASSETS, net (Note 2) 19,746 21,132
OTHER ASSETS 263 282
------------ ------------
TOTAL ASSETS $ 28,530 $ 34,542
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31,
------------------------------------ 1997 1996
------------------ -------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)
Senior Debt $ 14,083 $ 14,083
Thomas Zaucha and Zaucha Family Limited Partnership 2,520 1,285
Other debt 2,263 1,893
Accounts payable 1,999 2,048
Accrued expenses 6,860 5,323
Contractual obligations to employees 1,117 1,633
----------- ------------
Total current liabilities 28,842 26,265
----------- ------------
LONG-TERM DEBT
Thomas Zaucha and Zaucha Family Limited Partnership 2,115 3,183
Other debt 442 1,718
----------- ------------
Total long term debt 2,557 4,901
----------- ------------
MINORITY INTEREST 159 184
----------- ------------
Total liabilities 31,558 31,350
----------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized, none issued - -
Common stock, par value $.01 per share, 10,000,000 shares authorized;
6,229,718 shares issued; 5,867,154 shares outstanding at September
30, 1997 and December 31, 1996 62 62
Additional paid-in capital 26,208 26,208
Warrants outstanding 2,172 1,951
Retained deficit (31,017) (24,576)
Less: Treasury stock, 362,564 shares in 1997 and 1996 (453) (453)
----------- ------------
Total stockholders' equity/(deficit) (3,028) 3,192
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,530 $ 34,542
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 7,516 $ 8,144
Management fee revenue 405 697
------------------ -----------------
Total revenue 7,921 8,841
COSTS OF SERVICE 4,041 4,362
------------------ -----------------
Gross profit 3,880 4,479
OPERATING EXPENSES:
Selling, general and administrative expenses 2,575 2,775
Bad debt expense 386 420
Restructuring and other non-recurring expenses (Note 4) 654 857
Amortization of intangibles 272 355
Depreciation and amortization 136 209
Management fee expenses 558 693
------------------ -----------------
Total operating expenses 4,581 5,309
------------------ -----------------
OPERATING LOSS (701) (830)
NON-OPERATING EXPENSES:
Interest expense, net 534 575
Other expense, net 198 9
------------------ -----------------
Total non-operating expenses 732 584
------------------ -----------------
LOSS BEFORE INCOME TAXES (1,433) (1,414)
INCOME TAXES - 156
------------------ -----------------
LOSS BEFORE MINORITY INTEREST (1,433) (1,570)
MINORITY INTEREST 59 26
------------------ -----------------
NET LOSS $ (1,492) $ (1,596)
================== =================
NET LOSS PER SHARE $(0.25) $ (0.26)
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
5,867,154 6,229,718
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 23,843 $ 27,522
Management fee revenue 1,293 2,281
----------------- -----------------
Total revenue 25,136 29,803
----------------- -----------------
COSTS OF SERVICE 12,531 14,626
----------------- -----------------
Gross profit 12,605 15,177
OPERATING EXPENSES:
Selling, general and administrative expenses 7,818 9,420
Bad debt expense 1,738 1,397
Restructuring and other non-recurring expenses (Note 4) 4,149 4,091
Amortization of intangibles 859 1,329
Depreciation and amortization 427 507
Management fee expense 1,859 2,367
----------------- -----------------
Total operating expenses 16,850 19,111
----------------- -----------------
OPERATING LOSS (4,245) (3,934)
NON-OPERATING EXPENSES:
Interest expense, net 1,671 1,642
Other expense, net 265 114
----------------- -----------------
Total non-operating expenses 1,936 1,756
----------------- -----------------
LOSS BEFORE INCOME TAXES (6,181) (5,690)
INCOME TAXES 130 352
----------------- -----------------
LOSS BEFORE MINORITY INTEREST (6,311) (6,042)
MINORITY INTEREST 130 260
----------------- -----------------
NET LOSS $ (6,441) $ (6,302)
================= =================
NET LOSS PER SHARE $ (1.10) $ (1.01)
================= =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
5,867,154 6,229,718
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 2)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,441) $ (6,302)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 2,302 3,424
Provision for doubtful accounts 1,738 1,397
(Gain) on legal settlement (47) -
Loss on note receivable collateralized by common stock - 1,575
Loss on write off of investment - 39
Interest on discounted obligation 274 286
Loss on sale of equipment 7 53
Provision for increase in contractual obligations to employees 63 138
Compensation expense related to options and warrants 281 85
Minority interest 130 260
Change in current assets and liabilities-
(Increase)/decrease in receivables 63 (492)
Decrease in other current assets 473 40
Increase/(decrease) in accounts payable (49) 534
Increase in accrued expenses 1,537 373
----------------- -----------------
Net cash provided by operating activities 331 1,410
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired - (25)
Capital expenditures (50) (299)
Deposits, loans and investments (41) (74)
----------------- -----------------
Net cash used in investing activities (91) (398)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (1,042) (1,282)
Payment of acquisition note to Thomas Zaucha - (5,100)
Distributions to minority interests (155) (168)
Payments of contractual obligations to employees (579) (19)
Borrowings on long-term debt - 466
----------------- -----------------
Net cash used in financing activities (1,776) (6,103)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,536) (5,091)
CASH AND CASH EQUIVALENTS, beginning balance 1,607 5,730
----------------- -----------------
CASH AND CASH EQUIVALENTS, end balance $ 71 $ 639
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $1,020 $691
Income taxes paid 137 176
NONCASH INVESTING ACTIVITIES:
Capital lease obligations 76 381
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
These condensed consolidated financial statements of Northstar Health Services,
Inc. (the Company) are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations for the interim
period. These statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the year ended December 31, 1996.
Management Fees
The Company manages two businesses on a contract basis that provide mobile
diagnostics and physician services. In conjunction with these contracts, the
Company receives compensation in the form of a monthly management fee. This fee
is equal to the net income or loss of the managed business after the payment of
certain agreed-upon salaries and benefits to certain parties.
Effect of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". SFAS No. 128
differs from current accounting guidance in that earnings per share is
classified as basic earnings per share and diluted earnings per share, compared
to primary earnings per share and fully diluted earnings per share under the
current standards. Basic earnings per share differs from primary earnings per
share in that it includes only the weighted average common shares outstanding
and does not include any dilutive securities in the calculation. Diluted
earnings per share under the new standard differs in certain calculations when
compared to fully diluted earnings per share under the existing standards.
Adoption of SFAS No. 128 is required for interim and annual periods ending
after December 15, 1997. As a result of the Company's reported net loss, there
would be no impact on earnings per share compared to the results presented if
the Company had applied SFAS No. 128.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform with the current year presentation.
6
<PAGE> 9
2. INTANGIBLE ASSETS:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- ------------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $ 17,481 $ 17,481
Employment agreements (2 to 7 1/2 years) 778 2,660
Keystone tradename (20 years) 2,500 2,500
Covenant not to compete (5 years) 78 1,258
Assembled Keystone workforce (5 years) 1,000 1,000
Deferred financing and other costs (5 years) 861 861
----------------- ------------------
Gross intangible assets 22,698 25,760
Less- accumulated amortization (2,952) (4,628)
----------------- ------------------
Net intangible assets $19,746 $ 21,132
================= ==================
</TABLE>
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------- -------------------
<S> <C> <C>
Term loan with Senior Lender $ 6,083 $ 6,083
Revolving line of credit with Senior Lender 2,000 2,000
Acquisition facility with Senior Lender 6,000 6,000
Non-interest bearing term notes to Thomas Zaucha and the Zaucha
Family Limited Partnership 2,625 2,625
Term notes to Thomas Zaucha and the Zaucha Family Limited
Partnership 2,400 2,400
Capital lease obligations with interest rates ranging from 9% to
15.6% 2,674 3,059
Other debt 504 1,157
----------------- ------------------
Total long-term debt 22,286 23,324
Less:
Current portion (18,866) (17,261)
Debt discount (863) (1,162)
----------------- ------------------
Long-term debt $ 2,557 $ 4,901
================= ==================
</TABLE>
As of September 30, 1997, the Company has no unused amounts under its existing
credit facilities. During the third quarter of 1997, the Company's weighted
average interest rate was 10.5%. The Company is currently in default of its
obligations under its credit facility with its Senior Lender. Please refer to
the Liquidity section of Item 2 for further discussion.
In September 1997, Cerberus Partners, LP, a diversified financial securities
firm that invests in publicly traded and private debt issues of both large and
middle market companies, purchased from IBJ Schroder Bank & Trust Company all
of the Company's senior debt amounting to $15.3 million, including principal
and accrued interest. The debt was purchased subject to an existing forbearance
agreement that expired at the end of September 1997. The Company has
subsequently entered into extensions of the forbearance agreement directly with
Cerberus. The current forbearance agreement extension is valid through December
5, 1997. Please refer to the Form 8-K dated September 10, 1997.
7
<PAGE> 10
4. RESTRUCTURING AND NON-RECURRING EXPENSES:
Through March 28, 1997, the Company incurred costs of approximately $527,000 in
connection with its defense against the Consent Solicitation initiated by
Thomas Zaucha. Mr. Zaucha has presented the Company with documentation for his
reimbursable expenses incurred in connection with the Consent Solicitation of
approximately $1,750,000. The Company has recorded this amount as an expense
during the first nine months of 1997. The Company does not anticipate any
significant additional expenses related to this matter in the fourth quarter.
In addition, since 1996, the Company has incurred significant accounting, legal
and consulting expenses arising out of its investigation of apparent wrongdoing
on the part of the management team that controlled Northstar prior to 1996 and
the resulting litigation brought both against and by the Company. Please refer
to the Legal Proceedings section in Part II for a discussion of these matters.
A summary of these unusual and non-recurring expenses is as follows:
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Company costs related to proxy solicitation incurred $ 527 $ -
by former management
Proxy solicitation cost incurred by Mr. Zaucha 1,750 -
Loss on notes receivable collateralized with common stock - 1,575
Additional legal and accounting fees 558 458
Write off of intangible assets 477 960
Litigation and investigation costs 528 901
Corporate restructuring costs 309 197
----------------- -----------------
Total $ 4,149 $ 4,091
================= =================
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
Keystone Acquisition
In connection with the Keystone acquisition, Mr. Thomas Zaucha, an officer of
Northstar, and Mr. Zaucha's Family Limited Partnership, have debt and other
amounts due directly to them of $3,573,000 and $1,007,000 as of September 30,
1997, respectively.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through September
30, 1997, the Company has incurred an expense of $352,771 related to rent due
on these spaces, of which approximately $46,046 of past due expenses remained
unpaid by the Company, and are being repaid on a monthly payment schedule
through November 15, 1997. A Special Committee of the Board of Directors of the
Company has been appointed and is evaluating the fair market lease rates for
these properties.
In conjunction with the acquisition of Keystone by Northstar, Mr. Zaucha and
the Zaucha Family Limited Partnership were granted certain contingent payments
(earn out payments) based on the financial performance of Keystone during the
period from 1996 to 2000. A Special Committee of the Board of Directors of the
Company has been appointed and is evaluating the earn out calculation for 1996.
If an earn out is determined to be due, the additional consideration would be
recorded as goodwill.
8
<PAGE> 11
6. COMMITMENTS AND CONTINGENCIES:
Zaucha Stock Guarantee
The Company has issued a guarantee of the value of certain stock issued to Mr.
Zaucha and the Zaucha Family Limited Partnership to be at least $5,600,000 for
a period not to extend beyond December 31, 1997. The Company has an obligation
to fund any shortfall in stock value through the issuance of additional shares
of stock or a cash payment equal to the shortfall. As of the September 30, 1997
closing stock price, the shortfall results in a liability of $3,239,127. The
Company would need to issue 1,295,651 shares to fulfill this obligation. If
these additional shares were issued, the proper accounting treatment would be
to increase Common Stock Outstanding and decrease Additional Paid-in Capital.
7. STOCK OPTIONS AND WARRANTS:
In June and July 1997, warrants to purchase 187,500 and 50,000 shares of common
stock were issued to Commonwealth Associates and Booke & Co., respectively.
Based on the Black-Scholes valuation model, the Company must expense $440,875
in compensation expense related to these warrants. The third quarter results
include $220,438 of this expense. The remainder of $220,437 will be expensed in
the fourth quarter of 1997.
At the Annual Meeting of Shareholders held on September 11, 1997, the
stockholders voted to adopt the 1997 Stock Option Plan, which authorizes
options to purchase 1,000,000 shares of the Company's stock. The 1997 Stock
Option Plan is intended as an incentive and to encourage stock ownership by
officers, certain key employees, consultants and directors of the Company and
its subsidiaries in order to increase their proprietary interest in the
Company's success and to encourage them to remain in the employ or service of
the Company.
8. SUBSEQUENT EVENTS:
Shareholder Lawsuits
On November 7, 1997, a definitive settlement was reached in U.S. District Court
in Pittsburgh for all shareholder lawsuits that had been filed against the
Company and others as a result of financial and accounting irregularities
uncovered by the Company in the course of an investigation by an independent
committee of the board of directors. Chief Judge Donald E. Ziegler ruled the
final settlement of $6.45 million to be "fair, reasonable and adequate" in
settlement of the class action. Of the Company's $1.1 million share of the
settlement, $1.0 million will be covered by its directors and officers
liability policy, with others, including the Company's former auditors and
former CEO, funding the balance. This event is discussed in the Legal
Proceedings section of this report.
9
<PAGE> 12
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this
Quarterly Report include forward-looking statements that reflect the Company's
current expectations concerning future results. The words "expects", "intends",
"believes", "anticipates", "likely", "will", and similar expressions identify
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements.
Results of Operations
Three Months Ended September 30, 1997 and 1996
Total revenue
During the third quarter of 1997, the Company's total revenues
declined by $920,000, or 10.4%, from $8,841,000 for the third quarter of 1996
to $7,921,000 for the third quarter of 1997. Approximately $738,000 of the
decrease was the result of the closure or termination of certain clinics and
contracts. A decline in management fee revenues of approximately $292,000 is
attributable to a change in the reimbursement of certain diagnostic services
and the termination of services in unprofitable areas. The Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $190,000. This was partially offset by a
decrease of $80,000 in net patient service revenues that resulted from a
decline in net reimbursement from continuing operations as a result of
increased managed care penetration in the central and western Pennsylvania
marketplace.
Costs of service and Gross profit
Due to the decrease in total revenues, the Company's costs of service
also decreased $321,000 from $4,362,000 for the third quarter of 1996 to
$4,041,000 for 1997, or 7.4%. However, as a percentage of net patient service
revenue, costs of service remained relatively constant, increasing slightly
from 53.6% in 1996 to 53.8% in 1997. As a result of the decline in total
revenue, gross profit declined $599,000, from $4,479,000 (50.1% of total
revenue) for the second quarter of 1996 to $3,880,000 (49.0% of total revenue)
for 1997.
Selling, general and administrative expense
Total selling, general and administrative expenses for the third
quarter declined $200,000 from $2,775,000 in 1996 to $2,575,000 in 1997. The
7.2% decrease can be attributed to increased efficiency of corporate office
functions and a reduction of corporate office salary and consulting expenses as
a result of personnel changes made in connection with the reinstatement of
current management as a result of the Consent Solicitation. The Company is
committed to continuing reductions in overhead expenses wherever possible by
continually evaluating all administrative expenses for necessity and value.
Bad debt expense
The Company incurred bad debt expense of $386,000 or approximately
5.1% of net patient service revenue during the third quarter of 1997 versus
$420,000 or approximately 5.2% during the third quarter of 1996.
10
<PAGE> 13
Restructuring and non-recurring expense
During the third quarter of 1997, certain expenses deemed
non-recurring were $654,000 compared to $857,000 for 1996. A portion of the
1997 expense arose from legal fees and other expenses incurred relating to the
Consent Solicitation initiated by Thomas Zaucha, the Company's current Chief
Executive Officer. These expenses totaled approximately $100,000 for the third
quarter of 1997. In addition, the Company continued to incur higher than normal
audit, legal and other professional fees resulting from continuing
reorganization of the Company, shareholder litigation against the Company, and
the Company's lawsuit against former management. Intangible assets written off
for both 1997 and 1996 represented the write off of the remaining employment
contracts with former employees.
Depreciation and amortization
Other operating costs include amortization of intangibles arising from
past acquisitions, depreciation and other deferred charges, primarily finance
costs. Amortization of intangibles for the third quarter of 1997 of $272,000
declined by $83,000 from the 1996 total, reflecting (1) intangible asset
write-offs that occurred after the third quarter of 1996, and (2) completion of
the amortization period for certain assets acquired during previous
acquisitions by the Company.
Interest and other non-operating expenses
Interest expenses were $534,000 for the third quarter of 1997 compared
to $575,000 for 1996. The Company reported net non-operating expense of
$198,000 in 1997 compared to $9,000 in 1996. The expense for 1997 includes a
provision for approximately $220,000 for professional fees compensated with
warrants.
Income taxes
The Company has not recorded a tax provision during the third quarter
of 1997. As a result of the losses experienced in both 1997 and prior years,
the Company does not anticipate any significant taxable income for federal or
state income tax purposes.
Net loss
The net loss for the third quarter of 1997 was $1,492,000 compared to
a loss of $1,596,000 for the same period in 1996. After taking into account the
Company's non-recurring expenses, the Company showed the following net loss
compared to that of 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss ($1,492,000) ($1,596,000)
Non-recurring expenses 654,000 857,000
Professional fees compensated with warrants 220,000 -
----------- ----------
Net loss prior to non-recurring expenses ($618,000) ($739,000)
=========== ==========
</TABLE>
The decrease in the net loss from 1996 to 1997 can be attributed
primarily to the decline in the selling, general and administrative expenses
discussed above.
11
<PAGE> 14
Results of Operations
Nine Months Ended September 30, 1997 and 1996
Total revenue
For the nine month period ended September 30, 1997, the Company's
total revenues declined by $4,667,000, or 15.7%, from $29,803,000 for 1996 to
$25,136,000 for 1997. Approximately $2,115,000 of the decrease was the result
of an agreement reached with the former owner of the Company's subsidiary, NW
Rehabilitation Services, Inc., ("NWR") who severed her relationship with the
Company in 1996, and retained the rights to certain of NWR's contract
businesses. The Company also experienced the closure or termination of certain
clinics and contracts that resulted in a decline in net patient service
revenues of approximately $2,188,000. A decline in management fee revenues of
approximately $988,000 is attributable to a change in the reimbursement of
certain diagnostic services and the termination of services in unprofitable
areas. The Company entered the sub-acute care business in Illinois in late
1996. These sub-acute revenues contributed approximately $350,000 in the first
nine months. The Company has terminated the separate sub-acute care division of
the Company in Illinois due to its poor operating performance. The Company also
opened new outpatient offices and entered into new contracts that resulted in
an increase in net patient service revenues of $470,000. The remaining decrease
in net patient service revenues of $196,000 is a result of a decline in net
reimbursement in continuing operations for the nine month period as a result of
increased managed care penetration in the central and western Pennsylvania
marketplace.
Costs of service and Gross profit
Due to the decrease in total revenues, the Company's costs of service
also decreased $2,095,000 from $14,626,000 for the first nine months of 1996 to
$12,531,000 for 1997, or 14.3%. As a percentage of net patient service revenue,
costs of service decreased slightly during the first nine months of 1997, from
53.1% in 1996 to 52.6% in 1997. As a result of the decline in total revenue,
gross profit declined $2,572,000, from $15,177,000 for the first nine months of
1996 to $12,605,000 for 1997. As a percentage of total revenue, gross profit
declined slightly, from 50.9% of revenue for 1996 compared to 50.1% in the
first nine months of 1997.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first six
months declined $1,602,000 from $9,420,000 in 1996 to $7,818,000 in 1997. The
17% decrease can be attributed to increased efficiency and consolidation of the
Indiana, PA and Pittsburgh, PA corporate office functions, a reduction of
expenses arising from the NWR severance agreement, and a reduction of corporate
office salary and consulting expenses as a result of personnel changes made in
connection with the reinstatement of current management as a result of the
Consent Solicitation. The Company is committed to continuing reductions in
overhead expenses wherever possible by continually evaluating all
administrative expenses for necessity and value.
Bad debt expense
The Company incurred bad debt expense of approximately $1,738,000 or
approximately 7.3% of net patient service revenue during the first nine months
of 1997 versus $1,397,000 or approximately 5.1% for 1996. This increase is the
direct result of a $400,000 bad debt reserve in the second quarter of 1997
directly attributed to a receivable for a sub-acute contract in Illinois that
has been determined to be uncollectable. Without this specific reserve, bad
debt expense would have been $1,338,000 for the nine month period, or 5.6% of
net patient service revenue, which is comparable to 1996.
12
<PAGE> 15
Restructuring and non-recurring expense
During the nine month period ended September 30, 1997, certain
expenses deemed non-recurring were $4,149,000 compared to $4,091,000 for 1996.
A significant portion of the 1997 expense arose from legal fees and other
expenses incurred relating to the Consent Solicitation initiated by Thomas
Zaucha, the Company's current Chief Executive Officer. These expenses totaled
approximately $2,276,000 for the first nine months of 1997. In addition, the
Company continued to incur higher than normal audit, legal and other
professional fees resulting from continuing reorganization of the Company,
shareholder litigation against the Company, and the Company's lawsuit against
former management. Intangible assets written off for both 1997 and 1996
represented the write off of the remaining employment contracts with former
employees.
Depreciation and amortization
Other operating costs include amortization of intangibles arising from
past acquisitions, depreciation and other deferred charges, primarily finance
costs. Amortization of intangibles for the first nine months of 1997 of
$859,000 declined by $470,000 from the 1996 total, reflecting (1) intangible
asset write-offs that occurred after the first nine months of 1996, and (2)
completion of the amortization period for certain assets acquired during
previous acquisitions by the Company.
Interest and other non-operating expenses
Interest expenses were $1,671,000 for the first nine months of 1997
compared to $1,642,000 for 1996. The increase can be attributed to an increase
in the Company's weighted average interest rate from 1996 to 1997 due to the
inability of the Company to qualify in 1997 for the lower interest rates that
were available in the early part of 1996 with its senior lender. The Company
reported net non-operating expenses of $265,000 in 1997 compared to net
non-operating expenses of $114,000 in 1996. The expense for 1997 includes a
provision of approximately $220,000 for professional fees compensated with
warrants.
Income taxes
The Company has recorded an expense of $130,000 during the first nine
months of 1997 versus an expense of $260,000 during 1996. As a result of the
losses experienced in both 1997 and prior years, the Company does not
anticipate any significant taxable income for federal or state income tax
purposes in 1997.
Net loss:
The net loss for the first nine months of 1997 was $6,441,000 compared
to a loss of $6,302,000 for the same period in 1996. After taking into account
the Company's non-recurring expenses, the Company showed an improved net loss
compared to that of 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss ($6,441,000) ($6,302,000)
Non-recurring expenses 4,149,000 4,091,000
Professional fees compensated with warrants 220,000 -
------------- ------------
Net loss prior to non-recurring expenses ($2,072,000) ($2,211,000)
============= ============
</TABLE>
The improvement in the operating loss was accomplished through the
elimination of unprofitable clinics and contracts and a reduction in overhead
expenses, which was offset by operating losses experienced in contracts related
to the Company's venture into the sub-acute care business in Illinois. These
sub-acute contracts were terminated in July 1997.
13
<PAGE> 16
Effect of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share". SFAS
No. 128 differs from current accounting guidance in that earnings per share is
classified as basic earnings per share and diluted earnings per share, compared
to primary earnings per share and fully diluted earnings per share under the
current standards. Basic earnings per share differs from primary earnings per
share in that it includes only the weighted average common shares outstanding
and does not include any dilutive securities in the calculation. Diluted
earnings per share under the new standard differs in certain calculations when
compared to fully diluted earnings per share under the existing standards.
Adoption of SFAS No. 128 is required for interim and annual period ending after
December 15, 1997. As a result of the Company's reported net loss, there would
be no impact on earnings per share compared to the results presented if the
Company had applied SFAS No. 128.
Liquidity and Capital Resources
The Company is currently in default of its obligations under the
credit facility with Cerberus Partners, LP. Failure to reach an agreement with
this senior creditor relative to a restructuring of the Company's outstanding
debt obligations would likely result in acceleration of the loan and a filing
of a petition for relief under the Federal Bankruptcy Code. The Company is
currently engaged in negotiations with Cerberus to reach a mutually agreeable
restructuring of this debt.
During the nine months ended September 30, 1997, the Company provided
$331,000 versus $1,410,000 of cash provided by operations during the first nine
months of 1996. This change in cash provided from operations can be attributed
to a number of items, but is primarily the result of a decrease in accounts
payable of $49,000 during the first six months of 1997 versus a significant
increase of $534,000 during the same period in 1996.
The Company also expended less money on investing activities in 1997
versus that expended during 1996. The net cash used in investing activities
declined from $398,000 in 1996 to $91,000 in 1997 resulting primarily from
reduced capital investment.
The Company also had a significant change in its cash used in
financing activities. During 1996, the Company had a net usage of $6,103,000
during the first nine months of the year. This total was used to:
* Pay $5,100,000 of a note due to Thomas Zaucha and the Zaucha Family
Limited Partnership as a result of the Keystone acquisition and
* Make payments of approximately $1,282,000 that were used to amortize long
term debt and other obligations of the Company.
The net figure presented above also includes a $400,000 cash inflow during
the first quarter of 1996 resulting from a direct borrowing on the Company's
line of credit with its senior creditor.
During 1997, the Company made net debt payments of $1,042,000 during
the first nine months of the year, which were primarily scheduled debt and
lease payments as well as to pay debts owed to former owners and managers of
the Company. In addition, the Company paid approximately $155,000 to minority
interest holders in companies controlled by Northstar and $579,000 under
contractual obligations with certain employees. During the first nine months of
1997, the Company made no additional material borrowings under any debt
arrangements.
14
<PAGE> 17
Summary
The Company is presently experiencing a severe liquidity crisis as a
result of the extraordinary expenses related to its recently concluded contest
for corporate control; investigation and litigation expenses arising out of
certain actions taken by the Company's pre-1996 management; continuing
operating losses; and prior obligations to buy out profit-sharing interests in
several of the Company's key clinics. As a result of these circumstances, the
Company's access to the capital and debt markets has been severely impaired. If
it is unable to raise additional capital and/or effect a permanent
restructuring of the terms of its outstanding long-term debt obligations before
the end of 1997, the Company could be required to file a petition for relief
under the provisions of the Bankruptcy Code.
In response to these developments, the Company has terminated its
separate sub-acute care division in Illinois which had incurred significant
operating losses and experienced a high rate of uncollectable receivables, and
has focused its efforts on improving the performance of the mobile diagnostics
and core physical therapy and rehabilitation businesses. To this end, the
Company has formed a corporate administrative function that encompasses sales,
marketing, recruitment, provider relations, managed care services and clinical
compliance to support the day-to-day operations of all subsidiaries of the
Company. The Company is also continuing to review all expenses in an effort to
reduce costs wherever possible. The extraordinary expenses associated with the
Company's recent proxy fight have ended, and the Company's Chairman has
indicated that he will not demand immediate reimbursement of all expenses due
to him in connection therewith. While the Company is currently in default of
its obligations under its Credit Agreement, it has signed a Forbearance
Agreement through December 5, 1997. The Company has been actively engaged in
negotiations with Cerberus that it expects will lead to the execution of a
permanent restructuring of its debt in the near future.
There can be no assurance that the Company will be successful in
raising additional equity or other capital, or that it will be in a position to
do so on terms that will not dilute the equity interest of the Company's
existing stockholders. The Company is not currently eligible to utilize Form
S-3 to register offerings of securities under the Securities Act of 1933, and
its shares are not currently listed on either the NASDAQ National Market or the
NASDAQ Small Cap Market. These circumstances could adversely affect the
Company's ability to attract additional equity capital. Moreover, the Company
has been advised that its capital-raising efforts should not commence in
earnest until a settlement of pending lawsuits, related to certain actions of
the Company's pre-1996 management, has been effected. Please see Part II, Item
1, "Legal Proceedings" for further discussion of the pending legal actions.
15
<PAGE> 18
Item - 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments
The Company currently does not invest excess funds in derivative financial
instruments or other market risk sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
16
<PAGE> 19
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings
Shareholder Suits and Related Litigation
On November 7, 1997, a comprehensive settlement of a number of
shareholder suits, which had been pending since 1996, was approved during a
hearing in U.S. District Court in Pittsburgh, at which time the settlement
amount of $6.45 million was ruled to be fair, reasonable and adequate. Barring
any appeals of the judge's decision, the settlement will become final on
December 8, 1997. The Company is liable for $1.1 million of the settlement
amount, of which $1.0 million will be covered by its directors and officers
liability policy.
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. 96-701 W.D. Pa.). In September 1996, after an internal corporate
investigation by an independent committee of Northstar directors, Northstar
filed suit under the Racketeer Influenced and Corrupt Organization Act ("RICO")
in federal court in Pittsburgh 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.). Settlement of the claims against the DeSimones
and Richard Eisner & Co. are being made in conjunction with the settlement of
the shareholder lawsuits detailed above. Negotiations are continuing with
Shields and other related parties.
In May 1996, a group of some 38 individual Northstar shareholders
filed an action in the Superior Court of Los Angeles County California (No.
BC149867). This suit will be settled out of proceeds from the above $6.45
million settlement fund.
Claim for Breach of Employment Agreement
In July 1996, Michael Kulmoski, Jr., a named defendant in both the
shareholder class actions and the California action described above, filed a
demand for arbitration against Northstar for the alleged breach of his
employment contract and other related matters. Kulmoski is seeking damages of
approximately $500,000. The Company is contesting liability vigorously and
believes that the potential maximum damage claim, even assuming liability, is
less than 25% of the amount alleged. An arbitration hearing was held on
November 6 and 7, 1997 on this claim, and a ruling is expected early next year.
Claim on Lease Agreements
In March 1997, Ultrasonics, Inc. confessed judgement against two
subsidiaries of the Company, and filed suit against the Company itself, in the
Court of Common Pleas of Allegheny County, Pennsylvania, for alleged
non-performance under two lease agreements with the Company. In addition to
challenging the legality and enforceability of these lease agreements as
fraudulent in the RICO action discussed above, the Company has filed a petition
to open the confessed judgement against its subsidiaries and has filed an
answer and counterclaim against Ultrasonics for fraud. Settlement negotiations
are continuing at this time.
17
<PAGE> 20
Item 3. - Defaults Upon Senior Securities
The Company is currently in default of its financial and other covenants and
payment obligations under its Credit Agreement with Cerberus Partners, LP. As
of the date of the filing of this report, the Company is in arrears on its
principal obligations in the amount of $2,733,000 and accrued interest in the
amount of approximately $1,180,000. Please refer to the Liquidity and Capital
Resources and Summary sections of the Management's Discussion and Analysis
(Part I, Item 2).
18
<PAGE> 21
Item 4. - Submission of Matters to a Vote of Security Holders
On September 11, 1997, the Company held its Annual Meeting of Shareholders
("Annual Meeting"). At the Annual Meeting stockholders were asked to:
1. Elect six members to the Board of Directors of the Company to serve until
the next annual meeting of stockholders to be held in 1998;
2. Consider and act upon a proposal to adopt the Northstar Health Services,
Inc. 1997 Stock Option Plan, which authorizes options to purchase
1,000,000 shares of Common Stock; and
3. Appoint the firm of Arthur Andersen LLP as the independent public
accountants of the Company for the 1997 fiscal year to serve until the
1998 Annual Meeting.
At the Annual Meeting the stockholders elected the following individuals to
serve as directors of the Company:
<TABLE>
<S> <C>
1. Thomas W. Zaucha, CEO (5,178,300 votes for, 270,130 against, 1,000 withheld);
2. Lawrence F. Jindra, MD (5,178,300 votes for, 270,130 against, 1,000 withheld);
3. James H. McElwain (5,178,300 votes for, 270,130 against, 1,000 withheld);
4. Mark G. Mykityshyn (5,178,300 votes for, 270,130 against, 1,000 withheld);
5. Roger J. Reschini (5,176,800 votes for, 271,630 against, 1,000 withheld);
6. David B. White (5,178,300 votes for, 270,130 against, 1,000 withheld);
</TABLE>
In addition, the 1997 Stock Option Plan was adopted with 2,573,484 votes for,
925,905 votes against and 22,100 votes withheld; and Arthur Andersen LLP was
appointed as the Company's independent public accountants, receiving 5,390,600
votes for, 56,730 votes against, and 2,100 votes withheld.
19
<PAGE> 22
Item 6. - Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule
99.1 Employment Agreement effective September 1, 1997, for Lisa S. Guarino,
Chief Financial Officer
99.2 Employment Agreement effective September 2, 1997, for Frank J. Spramelli,
Chief Administrative Officer
99.3 Form 8-K covering Item 1 for the event dated August 14, 1997.
99.4 Form 8-K covering Item 1 for the event dated September 10, 1997
20
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northstar Health Services, Inc.
(Registrant)
By: /s/ THOMAS W. ZAUCHA
-------------------------------
Thomas W. Zaucha
Chairman of the Board, President and Chief Executive Officer
Date: November 14, 1997
By: /s/ LISA S. GUARINO, CPA
-------------------------------
Lisa S. Guarino, CPA
Executive Vice President and Chief Financial Officer
Date: November 14, 1997
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 71
<SECURITIES> 0
<RECEIVABLES> 7,451
<ALLOWANCES> (2,826)
<INVENTORY> 0
<CURRENT-ASSETS> 5,636
<PP&E> 2,885
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,530
<CURRENT-LIABILITIES> 28,842
<BONDS> 2,557
0
0
<COMMON> 62
<OTHER-SE> (3,090)
<TOTAL-LIABILITY-AND-EQUITY> 28,530
<SALES> 25,136
<TOTAL-REVENUES> 25,136
<CGS> 12,531
<TOTAL-COSTS> 16,850
<OTHER-EXPENSES> 265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,671
<INCOME-PRETAX> (6,181)
<INCOME-TAX> 130
<INCOME-CONTINUING> (6,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,441)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
<PAGE> 1
Exhibit 99.1
LETTER OF EMPLOYMENT
This Letter of Employment, effective September 1, 1997, by and between Northstar
Health Services, Inc. (NSH), 665 PHILADELPHIA Street, Indiana, Pennsylvania,
15701, and Lisa S. Guarino, CPA, 72 Shady Drive, Indiana, Pennsylvania, 15701
(LSG), is inclusive of the following terms and conditions:
OFFICE AND SCOPE OF DUTIES
LSG will be employed as the Executive Vice President and Chief Financial Officer
of NSH and shall report directly to the Chief Executive Officer, unless
otherwise agreed to by LSG. LSG will perform the duties customarily attributed
to the office of Chief Financial Officer under the direction of the CEO. LSG
will have full authority to make decisions related to the operations of the
Finance Department. The Finance Department will include, at a minimum, the
following departments: General Accounting, Accounts Payable, Accounts
Receivable/Billing, Payroll, and MIS. LSG is recognized as a member of
Executive Management, and as such, has authority that supercedes that of
subsidiary management personnel. LSG will be entitled to attend all NSH
Board meetings.
TERM
This agreement will be for one year. The term will automatically be extended for
an additional one year period unless terminated by written notice by NSH at
least 90 days prior to the annual anniversary date. However, upon the occurrence
of a Change of Control, the term of this agreement will automatically be
extended for a period of one year from the date of the Change of Control. A
Change of Control is defined as any of the following: acquisition by third
parties; merger; consolidation; sale of more than 50% of assets; liquidation or
dissolution of the company; any person or group becoming the beneficial owner of
more than 30% of the stock of NSH; or if Thomas W. Zaucha no longer serves as
the CEO or Chairman of the Board. In the event of a Change of Control, LSG will
have the option of remaining with the company or any surviving company if the
same or similar position is available, or being paid six (6) months of pay as
severance.
SALARY AND BENEFITS
LSG will be paid at the rate of One Hundred Twenty Five Thousand Dollars
($125,000) per year. This rate of pay may not be reduced without LSG's approval.
Increases may be granted at NSH's discretion; however, a minimum increase of
5,000 per year will occur on each anniversary date. LSG will be entitled to all
benefits customary to full time exempt management employees, with the following
exceptions: LSG will receive four (4) weeks vacation per year; years of service
will include the time period previously worked from 10-1-86 to 10-1-96; sick
time earned but not used as of 10-1-96 will be reinstated. Upon the signing of
this agreement, NSH will grant LSG 15,000 options of NSH stock at an exercise
price of the closing stock price on August 29, 1997, pursuant to the 1992 Stock
Option Plan. These options will vest immediately, and will terminate five years
from the date of grant. In addition, NSH confirms that the 10,000 options
granted in the September 10, 1996, Separation Agreement were issued under the
1992 Stock Option Plan.
INCENTIVE PROGRAMS
LSG will receive 5,000 options of NSH stock for every quarter beginning with the
third quarter of 1997 if NSH shows a profit before Unusual and Non-recurring
Expenses as disclosed in the 10Q and 10K filings. However, beginning the second
quarter of 1998, LSG will only receive the 5,000 options of NSH stock on a
quarterly basis if the earnings of the quarter exceed the earnings of the same
quarter in the previous year. These shares will be granted under the 1997 Stock
Option Plan if approved by the shareholders at the annual meeting. In addition,
LSG will be entitled to participate in other incentive programs that are based
on a written agreement with the CEO.
<PAGE> 2
OTHER EMPLOYMENT/BUSINESS
LSG is allowed to continue to operate her consulting business under the name
Lisa S. Guarino, CPA, and to operate her accounting services company,
Beancounters Accounting and Financial Services. LSG agrees to devote adequate
time and energy to her duties at NSH.
SEPARATION AGREEMENT AMENDMENT
NSH and LSG agree to amend the Separation Agreement made Sepember 10, 1996,
deleting the provision prohibiting LSG to be re-employed by the company.
Agreed to this 11th day of August, 1997 by:
/s/ Lisa S. Guarino, CPA /s/ Thomas W. Zaucha, CEO
- ------------------------- -------------------------------
Lisa S. Guarino, CPA Thomas W. Zaucha, CEO
Northstar Health Services, Inc.
/s/ Jacalyn A. Fritt
- ------------------------- /s/ Sheree Dee Frederick
Witness: -------------------------------
Witness:
<PAGE> 1
Exhibit 99.2
NORTHSTAR HEALTH SERVICES, INC.
The Atrium, 665 Philadelphia Street (412) 349-7500
P.O. Box 1289 Fax: (412) 465-3250
Indiana, PA 15701
August 6, 1997
Frank J. Spramelli
28 Overlook Drive
Indiana, PA 15701
Dear Frank,
The purpose of this letter is to memorialize the terms and conditions of
your employment with Northstar Health Services, Inc. I will consider this letter
as a binding agreement between you and Northstar Health Services. By signing
this agreement, you shall do the same.
Effective, on or about September 2, 1997, you will hold the title of
Executive Vice President & Chief Administrative Officer. You shall report
directly to me. Your salary will be $95,000.00 per year and your first salary
review will take place during the month of February 1998.
In addition to your salary, you will be entitled to the following incentive
compensation:
FINANCIAL -- Beginning with the third quarter of 1997, you will be eligible
to receive $5,000.00 per quarter if the Company demonstrates a profit after
deducting unusual and non-recurring expenses. You will be paid in the
first paycheck following the public release of the Company's 10Q.
STOCK OPTIONS -- Beginning with the third quarter of 1997, you will be
eligible for 5,000 shares of stock options per quarter under the 1997 Stock
Option Plan. The stock options will be granted if the Company demonstrates
a profit after deducting unusual and non-recurring expenses. If the stock
options are granted, they will be granted on the day that the Company
releases the 10Q.
OTHER INCENTIVES -- There may be other incentive programs that you will be
eligible for from time to time and based on written agreement between you
and me.
Please note that even though your employment begins in September 1997, the
incentive program will commence on July 1, 1997 and conclude on June 30, 1998.
The incentive program will continue unless modified in writing.
<PAGE> 2
Frank J. Spramelli
August 6, 1997
Page 2
Additionally, you will be entitled to all benefits customary and usual for
all full-time exempt employees (summarized in Exhibit A) with the following
exceptions:
VACATION - Four (4) weeks per year, prorated in the first calendar year
based on hire date
COUNTRY CLUB - Corporate membership at Indiana Country Club -- dues paid by
employee
During the term of your employment, you will 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
positions are determined by me to be inconsistent with the performance of your
duties. Further, my approval will be required before you may accept or serve as
a director, officer, or employee of any other for-profit corporation during the
term of this agreement.
Relative to restrictions on competition, you shall agree that during the
two (2) years following your date of termination of employment, you shall not,
directly or indirectly, solicit the trade of, or trade with, any customer,
prospective customer, supplier, or prospective supplier of the Company and its
subsidiaries for any business purpose for which the Company is engaged.
Additionally, during the term of this agreement and for two (2) years following
your date of termination, 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.
The initial term of this agreement shall be for a period of one (1) year,
commencing on or about September 2, 1997. Either party may elect to cancel this
agreement for any reason with 120 days written notice. This agreement will
automatically renew for one (1) year, unless terminated in writing with ninety
(90) days notice prior to the anniversary date.
Should there be a change in control of the Company, i.e. acquisition by
third parties; mergers; consolidation; sale of more than 50% of assets; any
person or group becoming the beneficial owner of more than 30% of the stock of
the Company; or if I am no longer the CEO or Chairman of the Board, you will
have the option of terminating your employment and receiving six (6) months of
salary going forward. Such option is only exercisable within the first thirty
(30) days following a change of control.
This letter shall be considered the entire agreement between you and me,
and shall supercede all previous oral or written agreements, representations,
understandings, or agreements with the Company and any officer or
representative. Any amendments to this agreement or a waiver by the Company of
any rights hereunder shall be effective only if placed in writing.
<PAGE> 3
Frank J. Spramelli
August 6, 1997
Page 3
In closing, I believe the terms and conditions of this letter properly
document the most important components of your employment agreement. Everything
else will be on a handshake and our future together will be dependent upon
mutual trust and respect. I look forward to your agreement as to the terms and
conditions of this letter. More so, I look forward to developing a strong
relationship with you as you become instrumental in the success of Northstar
Health Services.
Please acknowledge your agreement to the foregoing by countersigning this
letter in the place provided below.
Sincerely,
/s/ THOMAS W. ZAUCHA
--------------------
Thomas W. Zaucha
Chairman & CEO
TWZ:em
Received and consented to this 6TH day of AUGUST, 1997.
----- ---------
/s/ FRANK J. SPRAMELLI
- -----------------------
Frank J. Spramelli
<PAGE> 4
NORTHSTAR HEALTH SERVICES EXHIBIT A
Corporate Office o the Atrium o 665 Philadelphia Street EMPLOYEE BENEFITS
Indiana, PA 15701 o (412) 349-7500
<TABLE>
<CAPTION>
FT PPT OTHER PLAN BENEFIT* ELIGIBILITY
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
* * Vacation (Annually) o Full-time employees 2 weeks (Non-Exempt) Available after 90 days
Paid Holidays/Personal Days or 3 weeks (Exempt) Prorated based on hire date
o 6 main holidays (New Years, Memorial Day, Prorated for permanent
July 4, Labor Day, Thanksgiving, Christmas) part-time
o 3 Personal days per year
- ------------------------------------------------------------------------------------------------------------------------------------
* * Jury Duty Pay Full wages less jury pay are payable to Available after 90 days
employee; maximum 15 days per year
- ------------------------------------------------------------------------------------------------------------------------------------
* * Bereavement (3) days for immediate family, Available after 90 days
(1) day other relatives.
- ------------------------------------------------------------------------------------------------------------------------------------
* * Sick Days (1) day per month - maximum 60 days carry-over Available after 90 days;
accrue from hire date
- ------------------------------------------------------------------------------------------------------------------------------------
* * Continuing Education o Exempt management/PT, OT, SP $1,500/yr.; Available after 90 days
7 education days
o ATC's, COTA's, PT Assistants $750/yr.;
5 education days
o Non-exempt staff $300/yr.; 0 education days
- ------------------------------------------------------------------------------------------------------------------------------------
* * Health Insurance/ Optional Coverage for employee and dependents. Available the first of the
Hospitalization Blue Cross/Blue Shield Major Medical or month following completion
Select Blue -- 71% company paid; of 90 day job entry period
29% employee contribution.
- ------------------------------------------------------------------------------------------------------------------------------------
* * Prescription Optional coverage for employee and dependents. Available the first of the
Copayment of $6 for prescription drugs. month following completion
of 90 day job entry period
- ------------------------------------------------------------------------------------------------------------------------------------
* * Dental Optional coverage for employee and dependents. Available the first of the
No deductible or copayment for participating month following completion
providers. Maximum benefit $1,000 per calendar of 90 day job entry period
year.
- ------------------------------------------------------------------------------------------------------------------------------------
* * Vision Optional coverage for employee and dependents Available the first of the
month following completion
of 90 day job entry period
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 401(k) Retirement Savings Employee may elect up to 20% contribution. Available after (1) year of
Employer matches 50% of employee contribution employment and 1,000 hours
up to $300/yr. Highly compensated may be of service
limited to lower percentages.
- ------------------------------------------------------------------------------------------------------------------------------------
* * * Direct Deposit Automatic deposit of payroll check to Upon employment
pre-authorized bank account
- ------------------------------------------------------------------------------------------------------------------------------------
* * U.S. Savings Bonds Payroll deduction of bonds available. Upon employment
Minimum $25 deduction per pay.
- ------------------------------------------------------------------------------------------------------------------------------------
* * Christmas Club Payroll deduction Upon employment
- ------------------------------------------------------------------------------------------------------------------------------------
* * Life Insurance and AD&D Coverage provided at no cost to employee Available the first of
$25,000--employee, 10,000--spouse, 5,000--Child the month following the
Accidental death & dismemberment coverage date of hire
$25,000 -- employee only
- ------------------------------------------------------------------------------------------------------------------------------------
* * Supplemental Life Insurance Option to purchase additional coverage through Available the first of
payroll deduction. Enrollment available the month following the
within 31 days of hire date. date of hire
- ------------------------------------------------------------------------------------------------------------------------------------
* * Long-Term Disability Provides a benefit of 50% of basic monthly Available the first of
earnings the month following the
Elimination Period: 90 days date of hire
- ------------------------------------------------------------------------------------------------------------------------------------
* * * Malpractice Insurance Professional liability policy covering Upon employment
employees while performing clinical duties
- ------------------------------------------------------------------------------------------------------------------------------------
* * Professional Memberships Reimbursement of annual professional dues for Available upon employment
management and clinical therapists, COTA's, as renewals occur
PTA's, and ATC's
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FT = Full-Time 80 hours per pay period
PPT = Permanent Part-Time 60-79 hours per pay period (prorated benefits)
Other = Part-Time hours less than 60 hours per pay period
* Please refer to the personnel policy manual and benefits
booklets for additional information
<PAGE> 1
Exhibit 99.3
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 14, 1997
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-21752 25-1697152
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 349-7500
Not Applicable
(Former name or former address, if changed from last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Shareholder Litigation
The Company has reached a preliminary settlement which, if confirmed,
will resolve all of the eight shareholder suits currently pending
against the Company. These shareholder suits were initiated after
certain accounting irregularities were discovered early in 1996. These
discoveries resulted in the resignations of the Company's former
independent public accountants and two Directors of the Company,
including then Chairman and Chief Executive Officer, Mark A. DeSimone.
The suits, which originally sought more than $20 million in damages,
will be settled for $6.45 million. Substantially all of the Company's
share of the proposed settlement fund ($1.1 million) will be covered
by its director and officer liability insurance. The balance of the
fund will be covered by other parties and their insurers.
Final judicial confirmation of these settlements is scheduled for
November 7, 1997.
Forbearance Agreement and Related Matters
On August 18, 1997, the Company and some of its subsidiaries entered
into a Forbearance Agreement with IBJ Schroder Bank & Trust Company
("IBJ") with respect to certain defaults currently existing under a
Credit Agreement, dated as of October 20, 1997 (as amended, the
"Credit Agreement"), between the Company and IBJ, as both lender and
agent. Pursuant to the terms of the Forbearance Agreement, IBJ will
forbear in certain respects in the enforcement of the remedies
available to IBJ under the Credit Agreement through August 31, 1997,
provided that the rights of IBJ are not waived or impaired.
New Executive Officers Appointed
The Company has filled three key executive positions. Frank J.
Spramelli, 51, currently Vice President for Development of Three
Rivers Health Plan, a Pittsburgh HMO, will join the Company in
September as its Executive Vice President and Chief Administrative
Officer. Lisa S. Guarino, 38, currently a consultant to the Company,
will resume her former duties as the Company's Chief Financial
Officer. Michael J. Fournier, 32, an experienced occupational
therapist who most recently managed his own enterprise, has been named
President of the Company's long term care subsidiary, Keystone
Rehabilitation Management.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses being acquired: None.
(b) Pro Forma financial information: None.
(c) Exhibits:
99.1 Press release, dated August 14, 1997, issued by the
Company regarding the preliminary settlement of the
shareholder suits.
99.2 Press release, dated August 19, 1997, issued by the
Company regarding the Forbearance Agreement and the
appointment of new officers.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHSTAR HEALTH SERVICES, INC.
/s/ Thomas W. Zaucha
----------------------------
Name: Thomas W. Zaucha
Title: Chief Executive Officer and
President
August 21, 1997
<PAGE> 5
EXHIBIT INDEX
Exhibit Page
- ------- ----
99.1 Press release, dated August 14, 1997, issued by
the Company regarding the preliminary settlement
of the shareholder suits.......................................5
99.2 Press release, dated August 19, 1997, issued by
the Company regarding the Forbearance Agreement
and the appointment of new officers............................6
<PAGE> 6
Contact: Thomas W. Zaucha, CEO
Northstar Health Services, Inc.
(412) 465-3201
Tracey L. Missien, Director of Marketing Northstar Health
Services, Inc. (412) 465-3711
FOR IMMEDIATE RELEASE
NORTHSTAR HEALTH SETTLES SHAREHOLDER CLAIMS
INDIANA, PA - August 14, 1997 - Northstar Health Services, Inc. (NSTR:OTCBB)
today announced a preliminary settlement which, if confirmed, will resolve all
of the eight shareholder suits currently pending against the Company. The
suits, which had originally sought more than $20 million in damages, were filed
following the Company's discovery early in 1996 of certain accounting
irregularities. These discoveries, in turn, led to the resignations of the
Company's then Chairman and Chief Executive Officer Mark DeSimone, an Executive
Vice President and an outside director.
Substantially all of the Company's share of the proposed $6.45 million
settlement fund will be covered by its director and officer liability
insurance, with other parties and their insurers funding the balance.
Thomas W. Zaucha, who became the Company's Chief Executive Officer in 1996
after the resignation of his predecessor, stated, "This settlement removes a
significant cloud over Northstar's financial future, and positions us to
restructure our debt and attract new sources of financing. With the litigation
behind us, our plan now is to focus on our core business of physical therapy
and rehabilitation, and improve operating margins, creating a basis for
measured expansion."
Today's announcement came following a hearing before the U.S. District Court in
Pittsburgh, where seven of the suits have been consolidated. Terms of the
settlement will now be forwarded to members of the plaintiff classes involved
in the suits, who will have the opportunity to opt out of the proposal if they
elect to do so. Final judicial confirmation of these settlements is scheduled
for November 7, 1997. In connection with the settlement, the Company will also
settle its claims against Mr. DeSimone and others.
Northstar Health Services, Inc. is a leading regional provider of physical
rehabilitation, mobile diagnostics and contracted long term care services at
outpatient rehabilitation clinics and by contract to other healthcare
facilities in Pennsylvania, Ohio and West Virginia.
<PAGE> 7
Contact: Thomas W. Zaucha, CEO
Northstar Health Services, Inc.
(412) 465-3200
Tracey L. Missien, Director of Marketing
Northstar Health Services, Inc.
(412) 465-3710
FOR IMMEDIATE RELEASE
NORTHSTAR HEALTH ANNOUNCES NEW OFFICERS;
SIGNS FORBEARANCE AGREEMENT WITH SENIOR LENDER
INDIANA, PA -- August 19, 1997 -- Northstar Health Services, Inc. (NSTR:
OTCBB) today announced that it has appointed three key executives to its
management team.
Frank J. Spramelli, 51, currently Vice President for Development of Three
Rivers Health Plan, a Pittsburgh HMO, will be joining Northstar in
September as its Executive Vice President and Chief Administrative
Officer. Mr. Spramelli previously served as President and Chief Executive
Officer of Philipsburg Area Hospital. He holds a Masters degree in Public
Administration from Shippensburg University.
Lisa S. Guarino, 38, currently serving as financial consultant to Northstar,
has agreed to resume her former duties effective September 1, as Northstar's
Chief Financial Officer. Ms. Guarino is a Certified Public Accountant and holds
an MBA from Indiana University of Pennsylvania. Ms. Guarino served as Chief
Financial Officer of Northstar from November 1995 to September 1996 and had
previously served as Controller and CFO of Keystone Rehabilitation Systems,
Inc. since October 1986. Her auditing experience was obtained through Arthur
Andersen LLP from 1980 to 1983.
Michael J. Fournier, OTR/L, 32, has been named President of the Company's long
term care subsidiary, Keystone Rehabilitation Management. Mr. Fournier,
employed as an occupational therapist by Keystone Rehabilitation Systems, Inc.
for six years, most recently was Facility Director of the Indiana, PA
outpatient facility and a practicing clinician in several of the company's long
term care contract locations.
Commenting on these appointments, Thomas W. Zaucha, Chairman and CEO of
Northstar said, "These executives will bring new expertise, experience and
energy to Northstar. They will give our management team the depth and resources
we need to serve our therapists in the field, and to manage our
responsibilities in both the communities we serve and in the financial
community."
The Company also announced that it has entered into a Forbearance Agreement
with its senior lender and largest creditor, IBJ Schroder Bank & Trust Company,
pursuant to which the bank has agreed not to enforce its rights under its
credit agreement with the Company through August 31, 1997, subject to extension
in the sole discretion of the bank. The Company has been in default of its
obligations under the credit agreement since its discovery, early in 1996, of
certain accounting
<PAGE> 8
irregularities but, as part of the Forbearance Agreement, the Bank has waived
its right to default interest during the period covered thereby.
Thomas Zaucha further added, "With this agreement, Northstar has taken an
important step toward normalization of its financial affairs. We hope it will
lead to a permanent reconfiguration of Northstar's entire capital structure,
including new cash infusions, as well as a reshaping of existing debt."
In recent weeks, Northstar has also announced the final resolution of its
recent contest for corporate control, as well as a global settlement, subject
to final confirmation, of the shareholder litigation against it that began in
1996. Mr. Zaucha noted, "A bleak and difficult period in this company's
history is now drawing to a close. Challenges lie ahead, but today we know that
we are on the road back to health."
Northstar Health Services, Inc. is a leading regional provider of physical
rehabilitation, mobile diagnostic testing and contracted long term care
services as outpatient rehabilitation clinics and by contract to other
healthcare facilities in Pennsylvania, Ohio and West Virginia.
<PAGE> 1
Exhibit 99.4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 10, 1997
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-21752 25-1697152
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 349-7500
Not Applicable
(Former name or former address, if changed from last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Cerberus Partners, L.P. has purchased from IBJ Schroder Bank & Trust
Company all of the Company's senior debt amounting to $15.3 million. The debt
was purchased subject to an existing forbearance agreement that extends through
the end of September 1997.
Cerberus Partners, L.P. is a broadly diversified financial securities firm
that invests in publicly traded and private debt issues of both large and
middle market companies. Cerberus also provides financing for companies seeking
capital for mergers, acquisitions and working capital. The Company has entered
into discussions with Cerberus Partners, L.P., a New York based investment
firm, to commence negotiations to establish a permanent restructuring of the
company's senior debt that would cure all existing defaults and contemplate a
viable repayment schedule.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses being acquired: None.
(b) Pro Forma financial information: None.
(c) Exhibits:
99.1 Press release, dated September 10, 1997, issued by the
Company regarding the purchase of senior debt by Cerberus
Partners, L.P.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHSTAR HEALTH SERVICES, INC.
/s/ Thomas W. Zaucha Name:
-------------------------------------------
Thomas W. Zaucha
Title: Chief Executive Officer and President
September 15, 1997
<PAGE> 4
EXHIBIT INDEX
Exhibit Page
- ------- ----
99.1 Press release, dated September 10, 1997, issued by the Company
regarding the purchase of senior debt by Cerberus Partners, L.P.....5
<PAGE> 5
Exhibit 99.1
Contact: Thomas W. Zaucha, CEO
Northstar Health Services, Inc.
(412) 465-3200
Tracey L. Missien, Director of Marketing
Northstar Health
Services, Inc.
(412) 465-3710
FOR IMMEDIATE RELEASE
NORTHSTAR'S $15.3M SENIOR DEBT PURCHASED BY CERBERUS PARTNERS, L.P.
INDIANA, PA - SEPTEMBER 10, 1997-Northstar Health Services,Inc.(NSTR:OTCBB)
announced today that Cerberus Partners, L.P., a New York based investment firm
has purchased from IBJ Schroder Bank & Trust Company, its senior debt amounting
to $15.3 million. The company's debt was purchased subject to an existing
forbearance agreement that extends through the end of September 1997.
Founded in 1992, Cerberus Partners, L.P. is a broadly diversified financial
securities firm that invests in publicly traded and private debt issues of both
large and middle market companies. Cerberus also provides financing for
companies seeking capital for mergers, acquisitions and working capital.
Northstar believes, based on prior discussions with Cerberus, that Cerberus
intends to work closely with management to build a mutually beneficial long
term relationship. To that end, Northstar and Cerberus Partners intend to
commence negotiations immediately to establish a permanent restructuring of the
company's senior debt that would cure all existing defaults and contemplate a
viable repayment schedule.
Thomas W. Zaucha, Chairman and CEO stated, "Our movement toward working closely
with Cerberus Partners will enable Northstar to accomplish financial goals on
several fronts both in terms of debt restructuring and stability. We view this
partnership very favorably for the future as we continue our forward progress
in restoring the Company to financial health."
Northstar Health Services, Inc. is a leading regional provider of physical
rehabilitation, mobile diagnostics and contracted long term care services at
outpatient rehabilitation clinics and by contract to other healthcare
facilities in Pennsylvania, Ohio and West Virginia.
###
