<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 JUNE 30, 1998
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)
724-349-7500
(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 X NO
----- -----
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 August 6, 1998
- -------------------------------------- --------------------------------
Common Stock, par value $.01 per share 5,975,424
Transitional Small Business Disclosure Format (Check one):
YES NO X
----- -----
<PAGE> 2
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
INDEX PAGE
- ----- ----
Part I - FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Operations
for the six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3.
Quantitative and Qualitative Disclosure About Market
Risk Sensitive Instruments 16
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings 17
Item 2. - Changes in Securities and Use of Proceeds 17
Item 3. - Defaults Upon Senior Securities 17
Item 4. - Submission of Matters to a Vote of Security Holders 17
Item 5. - Other Information 18
Item 6. - Exhibits and Reports on Form 8-K 19
<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 June 30, December 31,
1998 1997
------------ --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents- $ 867 $ 657
Accounts receivable-
Patients, net of allowances for doubtful accounts of
861 and $1,341, respectively 4,850 5,818
Management fees 249 350
Miscellaneous 288 309
Prepaid expenses and other current assets 119 162
------------ --------------
Total current assets 6,373 7,296
------------ --------------
PROPERTY AND EQUIPMENT, net 2,402 2,814
INTANGIBLE ASSETS, net (Note 2) 18,686 19,221
OTHER ASSETS 195 183
------------ --------------
TOTAL ASSETS $27,656 $29,514
============ ==============
</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 June 30, December 31,
1998 1997
--------------- -------------
(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 3,603 2,932
Other debt 755 1,206
Accounts payable 1,074 2,401
Accrued expenses 7,358 7,476
Contractual obligations to employees 1,028 1,031
--------------- -------------
Total current liabilities 27,901 29,129
--------------- -------------
LONG-TERM DEBT (Note 3)
Thomas Zaucha and Zaucha Family Limited Partnership 1,189 1,757
Other debt 199 282
--------------- -------------
Total long term debt 1,388 2,039
MINORITY INTEREST 223 145
--------------- -------------
Total liabilities 29,512 31,313
--------------- -------------
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;
6,337,988 shares issued at June 30, 1998 and December 31, 1997 63 63
Additional paid-in capital 26,861 26,388
Warrants outstanding 1,919 2,392
Retained deficit (30,246) (30,189)
Less: Treasury stock, 362,564 shares in 1998 and 1997, at cost (453) (453)
--------------- -------------
Total stockholders' equity/(deficit) (1,856) (1,799)
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,656 $29,514
=============== =============
</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 June 30,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 7,930 $ 7,690
Management fee revenue 374 342
------------------ -----------------
Total revenue 8,304 8,032
COSTS OF SERVICE 3,961 4,333
------------------ -----------------
Gross profit 4,343 3,699
OPERATING EXPENSES:
Selling, general and administrative expenses 2,718 2,440
Bad debt expense 47 836
Restructuring and other non-recurring expenses (Note 4) 100 1,974
Amortization of intangibles 232 284
Depreciation and amortization 142 142
Management fee expenses 318 674
------------------ -----------------
Total operating expenses 3,557 6,350
------------------ -----------------
OPERATING INCOME/(LOSS) 786 (2,651)
NON-OPERATING EXPENSES:
Interest expense, net 537 613
Other (income)/expense, net (5) 28
------------------ -----------------
Total non-operating expenses 532 641
------------------ -----------------
INCOME/(LOSS) BEFORE INCOME TAXES 254 (3,292)
INCOME TAXES 1 65
------------------ -----------------
INCOME/(LOSS) BEFORE MINORITY INTEREST 253 (3,357)
MINORITY INTEREST 129 2
------------------ -----------------
NET INCOME/(LOSS) $ 124 $ (3,359)
================== =================
NET INCOME/(LOSS) PER SHARE - BASIC $ 0.02 $ (0.57)
================== =================
NET INCOME/(LOSS) PER SHARE - DILUTED $ 0.02 $ (0.57)
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,867,154
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
5,976,211 5,867,154
================== =================
</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>
Six Months Ended June 30,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 15,712 $ 16,327
Management fee revenue 758 888
------------------ -----------------
Total revenue 16,470 17,215
COSTS OF SERVICE 7,690 8,490
------------------ -----------------
Gross profit 8,780 8,725
OPERATING EXPENSES:
Selling, general and administrative expenses 5,687 5,208
Bad debt expense 166 1,352
Restructuring and other non-recurring expenses (Note 4) 215 3,495
Amortization of intangibles 464 587
Depreciation and amortization 280 291
Management fee expenses 718 1,385
------------------ -----------------
Total operating expenses 7,530 12,318
------------------ -----------------
OPERATING INCOME/(LOSS) 1,250 (3,593)
NON-OPERATING EXPENSES:
Interest expense, net 1,063 1,137
Other (income)/expense, net (16) 18
------------------ -----------------
Total non-operating expenses 1,047 1,155
------------------ -----------------
INCOME/(LOSS) BEFORE INCOME TAXES 203 (4,748)
INCOME TAXES 1 130
------------------ -----------------
INCOME/(LOSS) BEFORE MINORITY INTEREST 202 (4,878)
MINORITY INTEREST 259 71
------------------ -----------------
NET LOSS $ (57) $ (4,949)
================== =================
NET LOSS PER SHARE (Basic and diluted) $ (0.01) $ (0.84)
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
5,975,424 5,867,154
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 2)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (57) $(4,949)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 1,142 1,522
Provision for doubtful accounts 72 1,352
Gain on legal settlement - (47)
Interest on discounted obligation 115 114
Gain on sale of equipment (11) (23)
Provision for increase/(decrease) in contractual obligations to
employees 72 (142)
Minority interest 259 71
Stock option compensation expense - 60
Change in current assets and liabilities-
Decrease/(Increase) in receivables 1,018 (261)
Decrease in other current assets 43 449
Decrease in accounts payable (1,328) (417)
(Decrease)/Increase in accrued expenses (117) 2,262
----------------- -----------------
Net cash provided/(used) by operating activities 1,208 (9)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 12 -
Capital expenditures (125) (2)
Deposits, loans and investments (12) 10
----------------- -----------------
Net cash (used)/provided by investing activities (125) 8
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (644) (820)
Distributions to minority interests (180) (136)
Payments of contractual obligations to employees (76) -
Borrowings on long-term debt 27 -
----------------- -----------------
Net cash used in financing activities (873) (956)
----------------- -----------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 210 (957)
CASH AND CASH EQUIVALENTS, beginning balance 657 1,607
----------------- -----------------
CASH AND CASH EQUIVALENTS, ending balance $ 867 $ 650
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 832 $ 696
Income taxes paid 1 133
NONCASH INVESTING ACTIVITIES:
Capital lease obligations 28 62
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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, 1997.
Management Fees
The Company manages a business on a contract basis that provides mobile
diagnostic services. In conjunction with this contract, 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.
Earnings Per Common Share
Earnings per share for the three and six month periods ended June 30, 1998 and
1997 were calculated in accordance with Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings per Share", using the weighted
average number of shares outstanding during the period and including the effect
of stock options outstanding. Pursuant to the Company's 1992, 1994, and 1997
Stock Option plans and certain stock options granted outside of these plans,
options for a total of 20,750 and 34,966 shares of the Company's common stock
have been granted for the three and six month periods ended June 30, 1998,
respectively, and no options have been exercised for the three and six month
periods ended June 30, 1998.
The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended June 30, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net income (loss) $ 124 $ (3,359)
Average shares outstanding 5,975,424 5,867,154
Income (loss) per share $ 0.02 $ (0.57)
Diluted earnings per share:
Net income (loss) $ 124 $ (3,359)
Average shares outstanding 5,975,424 5,867,154
Shares issuable for Keystone merger - -
Stock warrants - -
Stock options 787 -
----------------- ----------------
Diluted average shares outstanding 5,975,211 5,867,154
Income (loss) per share $ 0.02 $ (0.57)
</TABLE>
6
<PAGE> 9
The following table reconciles the number of shares utilized in the earnings per
share calculations for the six-month periods ended June 30, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
For the six months ended
------------------------
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net loss $ (57) $ (4,949))
Average shares outstanding 5,975,424 5,867,154
Loss per share $ (0.01) $ (0.84)
Diluted earnings per share:
Net loss $ (57) $ (4,949)
Average shares outstanding 5,975,424 5,867,154
Shares issuable for Keystone merger - -
Stock warrants - -
Stock options - -
----------------- ---------------
Diluted average shares outstanding 5,975,424 5,867,154
Loss per share $ (0.01) $ (0.84)
</TABLE>
For the three month periods ended June 30, 1998 and 1997, and the six month
periods ended June 30, 1998 and 1997, options to purchase 909,367, 874,200,
933,699 and 874,200 and warrants to purchase 633,500, 793,500, 633,500 and
793,500 shares of common stock, respectively, were outstanding, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the Company's
common shares for the periods and due to the loss position of the Company for
the six month period. Also, not included in the calculation of diluted earnings
per share were the shares that may be issued to the Zauchas in connection with
the Keystone merger that is subject to the approval of the Special Committee of
the Board of Directors. See Note 6. The Zaucha Stock Guarantee could be
satisfied by all cash, all stock, or a combination of both cash and stock.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform to the current year presentation.
2. INTANGIBLE ASSETS:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ------------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $ 17,481 $ 17,481
Employment agreements (2 to 7-1/2 years) 625 625
Keystone tradename (20 years) 2,500 2,500
Covenant not to compete (5 years) 77 77
Assembled Keystone workforce (5 years) 600 600
Deferred financing and other costs (5 years) 809 809
----------------- ------------------
Gross intangible assets 22,092 22,092
Less- accumulated amortization (3,406) (2,871)
----------------- ------------------
Net intangible assets $ 18,686 $ 19,221
================= ==================
</TABLE>
7
<PAGE> 10
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- -------------------
<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% 823 1,241
Other debt 479 685
---------------- -------------------
Total long-term debt 20,410 21,034
Less:
Current portion (18,441) (18,221)
Debt discount (581) (774)
---------------- -------------------
Long-term debt $ 1,388 $ 2,039
================ ===================
</TABLE>
As of June 30, 1998, the Company has no unused amounts under its existing credit
facilities. During the second quarter of 1998, the Company's weighted average
interest rate was 10.0%.
The Company is currently in default of its obligations under its credit facility
with its Senior Lender, Cerberus Partners, LP. In September 1997, Cerberus
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 had subsequently entered into extensions
of the forbearance agreement directly with Cerberus. The most recent forbearance
agreement extension expired on December 5, 1997. The Company has been operating
under a verbal extension of this agreement since that date. Please refer to the
Liquidity and Capital Resources section of Item 2 for further discussion.
4. RESTRUCTURING AND NON-RECURRING EXPENSES:
Since 1996, the Company has incurred significant legal, accounting 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. It has also
incurred significant expenses related to the proxy solicitation that was
conducted in 1997, and the reorganization of the management and operations of
the Company after the reinstatement of Thomas Zaucha as Chairman and CEO in May
1997. Although the majority of these issues were resolved in 1997, certain
matters are still subject to resolution in 1998. Please refer to Note 6,
Commitments and Contingencies, and to the Legal Proceedings section in Item 1 of
Part II for a discussion of these outstanding matters.
8
<PAGE> 11
A summary of these unusual and non-recurring expenses is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Company costs related to proxy solicitation incurred
by former management $ - $ 527
Proxy solicitation cost incurred by Mr. Zaucha - 1,650
Additional legal and accounting fees - 472
Write off of intangible assets - 230
Litigation and investigation costs 59 307
Corporate restructuring costs 156 309
----------------- -----------------
Total $215 $3,495
----------------- -----------------
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
Keystone Acquisition
In connection with the Company's acquisition of Keystone Rehabilitation Systems,
Inc., on November 15, 1995, Mr. Thomas Zaucha, an officer of Northstar, and Mr.
Zaucha's family limited partnership, have debt due directly to them of
$3,919,000 and $1,105,000 as of June 30, 1998, respectively. In addition, Mr.
Zaucha and the Zaucha Family Limited Partnership also have 1995 earn-out
payments and accrued interest due directly to them totaling $400,746 and
$143,805, respectively, as of June 30, 1998.
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 and its
effect, if any, on subsequent years. If an earn out is determined to be due, the
additional consideration would be recorded as goodwill.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through June 30,
1998, the Company has incurred an expense of $235,180 related to rent due on
these spaces. 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.
6. COMMITMENTS AND CONTINGENCIES:
Zaucha Stock Guarantee
The Company guaranteed the value of certain stock issued to Mr. Zaucha and the
Zaucha Family Limited Partnership to be at least $5,600,000 through certain
periods ending no later than December 31, 1997. The Company has an obligation to
fund the shortfall in stock value through a cash payment equal to the shortfall
or, with shareholder approval, through the issuance of additional shares in an
amount equal to the shortfall. As of the December 31, 1997 final determination
date, the Company was obligated to either make a cash payment of $4,693,423 or
issue approximately 4,888,982 additional shares of stock.
The Special Committee of the Board has been charged with the authority to
negotiate with the Zauchas the obligations under the stock guarantee. The
Company presently does not have sufficient cash to meet its obligations under
the guarantee. At the Company's Annual Meeting held on June 11, 1998, the
Company's stockholders approved the issuance of up to 4,888,982 shares of Common
Stock in order to enable the Company to fully satisfy the obligations of the
Company under the guarantee in stock if deemed appropriate. The issuance of any
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.
9
<PAGE> 12
Other
David D. Watson, former President of the Company, has made claims against the
Company in excess of $500,000 in relation to an Employment Agreement and Note.
Negotiations for settlement of these claims have not been successful, and no
legal action has been taken. The Company believes that Mr. Watson has breached
the Employment Agreement, was terminated for cause, and as a result thereof, the
Company has counterclaims against Mr. Watson. The Company has and will continue
to vigorously defend these claims.
7. STOCK OPTIONS AND WARRANTS:
On June 17, 1998, the Company filed a registration statement on Form S-8 with
the Securities and Exchange Commission to register the offer and sale of
1,000,000 shares of common stock authorized under the 1997 Stock Option Plan.
On June 17, 1998, the Company filed a Post Effective Amendment No. 1 to Form S-8
Registration Statement (Registration No. 33-94584) with the Securities and
Exchange Commission to terminate the 1994 Stock Option Plan (the "1994 Plan")
and deregister 112,500 shares of common stock which were not subject to options
granted under the 1994 Plan.
10
<PAGE> 13
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 relating to such matters as anticipated financial performance,
business prospects, and projected plans for and results of its operations. 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; defaults in borrowing arrangements,
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 national market or exchange; and the
uncertainties surrounding the healthcare industry in general.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Total revenue
During the second quarter of 1998, the Company's total revenues increased by
$272,000, or 3.4%, from $8,032,000 for the second quarter of 1997 to $8,304,000
for the second quarter of 1998. Revenues decreased approximately $924,000 as the
result of the closure or termination of certain clinics and contracts, including
$146,000 for the termination of a sub-acute contract in Illinois, and the
termination of diagnostic services in Ohio. Management fee revenues related to
diagnostic services increased approximately $32,000 and the Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $298,000. Net patient service revenue from
continuing operations increased $743,000 as a result of the Company's expanded
sales and marketing efforts that contributed to an increase in the number of
patient referrals in the second quarter of 1998 and due to a revision in the
Company's fee schedule effective February 1, 1998, that positively affected net
reimbursement from certain payors. Revenues from joint venture operations in
nuclear imaging services increased approximately $123,000.
Costs of service and Gross profit
Due to the continued stabilization of the Company's workforce and revenue base,
subcontracted services were significantly reduced and direct labor costs
declined from the second quarter of 1997 to the second quarter of 1998. As a
result, the Company's costs of service actually decreased $372,000 from
$4,333,000 for the second quarter of 1997 to $3,961,000 for 1998, or 8.6%,
despite the increase in total revenues. As a percentage of net patient service
revenue, costs of service also decreased from 56.3% in the second quarter of
1997 to 49.9% in the second quarter of 1998. As a result of the increase in
total revenue and decrease in costs of services, gross profit also increased
$644,000, from $3,699,000 (46.0% of total revenue) for the second quarter of
1997 to $4,343,000 (52.3% of total revenue) for 1998.
Selling, general and administrative expense
Total selling, general and administrative expenses for the second quarter
increased $278,000 from $2,440,000 in 1997 to $2,718,000 in 1998. The 11.4%
increase can be attributed to the expansion of corporate services in the areas
of sales, marketing, provider relations and regional management that has
contributed to the increased revenues in continuing operations.
11
<PAGE> 14
Bad debt expense
The Company incurred bad debt expense of $47,000 or approximately 0.6% of net
patient service revenue during the second quarter of 1998 versus $836,000 or
approximately 10.9% during the second quarter of 1997. The decrease in bad debt
expense was accomplished through increased billing efficiency, the use of a more
aggressive collection agency in 1998 that has increased the rate of bad debt
recoveries, and recoveries of contract billings deemed uncollectible in prior
years. Bad debt expense without recoveries would have been 1.7% of net patient
service revenue, which is a level of bad debt that can be expected in the future
after the catch-up effect of the new collection procedures is fully realized.
The second quarter of 1997 included a bad debt reserve of $400,000 directly
attributed to a sub-acute contract in Illinois that had been determined to be
uncollectible. Without this specific reserve, bad debt expense would have been
approximately 5.7% of net patient service revenue for the second quarter of
1997.
Restructuring and non-recurring expense
The Company continued to incur additional legal and other professional fees
resulting from the continuing reorganization of the Company and litigation both
against and on behalf of the Company in various matters. As a result of the
resolution of a majority of these matters by the end of 1997, the expenses
deemed non-recurring during the second quarter of 1998 were $100,000 compared to
$1,974,000 for the second quarter of 1997.
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 second quarter of 1998 declined by $52,000
from the 1997 total, reflecting (1) intangible asset write-offs that occurred
after the first quarter of 1997 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 $537,000 for the second quarter of 1998 compared to
$613,000 for 1997. This decrease can be attributed to the amortization of leases
and other debt. The Company reported net non-operating income of $5,000 in the
second quarter of 1998 compared to $28,000 in net non-operating expense in the
second quarter of 1997. Net operating expense for the second quarter of 1997
included approximately $20,000 in losses on the disposal of fixed assets as
compared to $5,000 in gains for the second quarter of 1998.
Income taxes
The Company has not recorded a tax provision during the second quarter of 1998.
As a result of the losses experienced in 1997 and prior years, as well as to
date in 1998, the Company does not anticipate any significant taxable income for
federal or state income tax purposes.
Net income
Net income for the second quarter of 1998 was $124,000 compared to a loss of
$3,359,000 for the same period in 1997. This significant increase in
profitability is due to improved operations, the decrease in the amount of
restructuring and other non-recurring expenses, and the decline in bad debt
expense from the second quarter of 1997 to the second quarter of 1998.
12
<PAGE> 15
Results of Operations
Six Months Ended June 30, 1998 and 1997
Total revenue
For the six month period ended June 30, 1998, the Company's total revenues
declined by $744,000, or 4.3%, from $17,215,000 for the first six months of 1997
to $16,470,000 for 1998. Revenues decreased approximately $2,260,000 as the
result of the closure or termination of certain clinics and contracts, including
$348,000 for the termination of a sub-acute contract in Illinois, and the
termination of diagnostic services in Ohio. Management fee revenues related to
diagnostic services decreased approximately $130,000 and the Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $443,000. Net patient service revenue from
continuing operations increased $1,053,000 as a result of the Company's expanded
sales and marketing efforts that contributed to an increase in the number of
patient referrals in the first six months of 1998 and due to a revision in the
Company's fee schedule effective February 1, 1998, that positively affected net
reimbursement from certain payors. Revenues from joint venture operations in
nuclear imaging services increased approximately $148,000.
Costs of service and Gross profit
Due to the decrease in total revenues and the continued stabilization of the
Company's workforce and revenue base, subcontracted services were significantly
reduced and direct labor costs declined, thereby decreasing the Company's costs
of service $800,000 from $8,490,000 for the first six months of 1997 to
$7,640,000 for 1998, or 9.4%. As a percentage of net patient service revenue,
costs of service decreased during the first six months of 1998, from 52.0% in
1997 to 48.9% in 1998. As a result of the decrease in costs of services in the
second quarter of 1998, gross profit increased $55,000, from $8,725,000 for the
first six months of 1997 to $8,780,000 for 1998. As a percentage of total
revenue, gross profit also increased, from 50.7% of revenue for 1997 to 53.3%
for the first six months of 1998.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first six months
increased $479,000 from $5,208,000 in 1997 to $5,687,000 in 1998. The 9.2%
increase can be attributed to the expansion of corporate services in the areas
of sales, marketing, provider relations and regional management that has
contributed to the increased revenues in continuing operations.
Bad debt expense
The Company incurred bad debt expense of $166,000 or approximately 1.1% of net
patient service revenue during the first six months of 1998 versus $1,352,000 or
approximately 8.3% during the first six months of 1997. The decrease in bad debt
expense was accomplished through increased billing efficiency, the use of a more
aggressive collection agency in 1998 that has increased the rate of bad debt
recoveries, and recoveries of contract billings deemed uncollectible in prior
years. The first six months of 1997 included a bad debt reserve of $400,000
directly attributed to a sub-acute contract in Illinois that had been determined
to be uncollectible. Without this specific reserve, bad debt expense would have
been approximately 5.8% of net patient service revenue for the first six months
of 1997.
Restructuring and non-recurring expense
The Company continued to incur additional legal and other professional fees
resulting from the continuing reorganization of the Company and litigation both
against and on behalf of the Company in various matters. As a result of the
resolution of a majority of these matters by the end of 1997, the expenses
deemed non-recurring during the first six months of 1998 were $215,000 compared
to $3,495,000 for the first six months of 1997.
13
<PAGE> 16
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 six months of 1998 declined by
$123,000 from the 1997 total, reflecting (1) intangible asset write-offs that
occurred after the first six months of 1997, 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 $1,063,000 for the first six months of 1998 compared to
$1,137,000 for 1997. This decrease can be attributed to the amortization of
leases and other debt. The Company reported net non-operating income of $16,000
for the first six months of 1998 compared to $18,000 in net non-operating
expense in the first six months of 1997. Net operating expense for the first six
months of 1997 included approximately $23,000 in losses on the disposal of fixed
assets as compared to $12,000 in gains for the first six months of 1998.
Income taxes
The Company has not recorded a tax provision during the first six months of
1998. As a result of the losses experienced in 1997 and prior years, as well as
to date in 1998, the Company does not anticipate any significant taxable income
for federal or state income tax purposes.
Net loss
The net loss for the first six months of 1998 was $57,000 compared to a loss of
$4,949,000 for the same period in 1997. This significant reduction in net losses
is due to improved operations, the decrease in the amount of restructuring and
other non-recurring expenses, and the decline in bad debt expense.
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 had come to a
verbal agreement on restructured payment terms and covenants in March 1998;
however, since that time, the Company has been unable to finalize a written
restructuring of this debt. The Company has continued to comply with the terms
of the last forbearance agreement, and has made monthly payments to Cerberus
that approximate the monthly interest expense on the loan.
During the six months ended June 30, 1998, the Company provided $1,208,000
versus $9,000 of cash used by operations during the first six months of 1997.
This change in cash provided from operations is primarily the result of (1) a
decrease in the net loss from $4,949,000 during the first six months of 1997 to
$57,000 during the same period in 1998 that allowed the Company to reduce the
amount of its outstanding liabilities and (2) the increased efficiency in
accounts receivable in the first six months of 1998 that resulted in decreased
receivables and an improvement in the provision for doubtful accounts.
The net cash used in investing activities was $125,000 in the first six months
of 1998 as compared to $8,000 provided by investing activities in the first six
months of 1997, resulting primarily from an increase in expenditures for capital
equipment in 1998.
During the first six months of 1997, the Company made debt principal payments of
$820,000 which were primarily scheduled debt and lease payments as well as
payments on debt to former owners and managers of the Company. This amount
decreased to $644,000 for the first six months of 1998 due to the final payment
of certain debt after the first six months of 1997. In addition, during the
first six months
14
<PAGE> 17
of 1998, the Company paid approximately $180,000 to minority interest holders in
companies controlled by Northstar and $76,000 under contractual obligations with
certain employees. During the first six months of 1998, the Company made no
additional material borrowings under any debt arrangements.
Summary
Although the Company has experienced an improvement in its cash flow, it
continues to face a severe liquidity crisis as a result of the significant
expenses incurred related to the contest for corporate control in 1997; expenses
arising out of certain actions taken by the Company's pre-1996 management; prior
obligations to buy out profit-sharing interests in several of the Company's key
clinics; and ongoing changes in healthcare reimbursement. In addition, the
Company has not been able to finalize a restructuring of its debt with its
senior lender, Cerberus Partners, LP, although negotiations are continuing at
this time. The Company's Chairman has indicated that he will not demand
immediate reimbursement of all expenses due to him in connection with the 1997
proxy fight, and he is currently negotiating with the Special Committee of the
Board a restructuring of other components of his debt and stock guarantees of
which the Company is currently in default. 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 in the
foreseeable future, 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 continued to focus its
efforts on improving the performance of its core physical therapy and
rehabilitation businesses. The result has been a significant improvement in the
operating and net income/(loss) of the Company. For the first time in over three
years, the Company has reported a profitable quarter. The Company had previously
announced its decision to withdraw from the mobile diagnostic industry so that
management can focus on the core rehabilitation business, and is currently in
the process of communicating with potential buyers. The Company also previously
announced the implementation of an expense reduction plan that was expected to
reduce operating expenses in excess of $250,000 per month on an ongoing basis,
although the full impact of the reductions was not expected to be realized until
the third quarter of 1998. At this time, the Company does not expect the expense
reductions implemented to date will meet these original expectations in full
during the third quarter; however, management is continuing to analyze
additional potential areas of cost savings and mechanisms to increase revenues
that will allow the Company to eventually realize the original cost savings
projections.
There can be no assurance that the Company will be successful in restructuring
its debt or 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. As a result, in order to improve its liquidity,
the Company may explore possible options to merge or enter into a joint venture.
See discussion under Item 5 below.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 will be effective for all fiscal
quarters and fiscal years beginning after June 15, 1999. The Company currently
does not invest in derivative financial instruments or engage in hedging
activities.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
15
<PAGE> 18
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
Based on a recent assessment, the Company has determined that it will not be
required to replace significant portions of its software or hardware in order
for its computer systems to properly utilize dates beyond December 31, 1999. The
Company has received statements of Year 2000 compliance from three of its
software vendors, and is expecting software upgrades during the next few months
that will bring the remaining two vendors into compliance. The Company is in the
process of analyzing the need for any updates to any of the computer hardware
currently being utilized within the Company, with initial assessments showing
that the majority of the hardware is in compliance, and minor fixes may be
necessary on certain systems. The Company presently believes that if any
modifications are required related to either hardware or software, they will be
insignificant in scope and cost.
The Company has initiated formal communications with its significant payors and
vendors to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. The assessment of
these third parties is ongoing at this time. Based on the information received
to date from these third parties, the Company does not currently believe the
failure of such third parties to remediate their own Year 2000 Issue will have a
material adverse effect on the Company. However, there can be no guarantee that
the systems of other companies will be timely converted, or that the failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
To the extent that the Company's computer systems need to be modified to
remediate any Year 2000 Issue, the Company plans to complete remediation by
December 31, 1998. The Company's assessment of its Year 2000 Issue is based on
management's best estimates, which were derived utilizing assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that
management's assessments that the Company's Year 2000 Issue is insignificant to
correct.
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
Claim for Breach of Employment Agreement
In July 1996, Michael Kulmoski, Jr. ("Kulmoski"), Northstar's former Chief
Financial Officer, filed a demand for arbitration against Northstar (Kulmoski v.
Northstar, American Arbitration Assn., No. 55-116-0106-96-CEW). This action was
described in the Company's Form 10-K filing for the fiscal year ended December
31, 1997 and the 10-Q filing for the quarterly period ended March 31, 1998. In
June 1998, Kulmoski was awarded approximately $136,000 by the arbitration panel
on this claim.
Item 2. - Changes in Securities and Use of Proceeds
Chapter 1, Title 8, Section 170 of the Delaware Corporation Law provides that
the directors of every corporation may declare and pay dividends either out of
surplus or, in the event that there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Since the Company has not had surplus during the past fiscal year and does not
have surplus during the first six months of fiscal year 1998, and has
experienced net losses during the past fiscal year and continues to experience
net losses during the first six months of fiscal year 1998, under Delaware
corporate law, the Company cannot declare and pay dividends on its Common Stock.
In addition, the Company is prohibited from declaring any dividend, other than
dividends payable solely in common stock, on any shares of any class of stock
under the terms of the Company's Credit Agreement with Cerberus Partners, LP.
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 $4,743,000 and accrued interest in the
amount of approximately $1,152,000. Please refer to the Liquidity and Capital
Resources and Summary sections of the Management's Discussion and Analysis (Part
I, Item 2).
Item 4. - Submission of Matters to a Vote of Security Holders
On June 11, 1998, the Company held its Annual Meeting ("Annual Meeting") of
stockholders. 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 1999 (the "1999
Annual Meeting") and until their successors are duly elected and qualified;
2. Consider and act upon a proposal to amend the Company's Certificate of
Incorporation to change the corporate name of the Company from Northstar
Health Services, Inc. to Keystone Rehabilitation Enterprises, Inc.;
3. Consider and act upon a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock, par value $0.01 per share, from 10 million shares to 20
million shares;
4. Consider and act upon a proposal to issue up to a maximum of 4,888,982
shares of Common Stock of the Company to Thomas W. Zaucha, Alice L. Zaucha,
and the Zaucha Family Limited Partnership (collectively, "the Zauchas") in
satisfaction of certain terms of the Merger Agreement, dated November 15,
1995 by and among the Zauchas, Keystone Rehabilitation Systems, Inc., NSK
Merger Group and the Company;
17
<PAGE> 20
5. Consider and act upon a proposal to terminate the Northstar Health
Services, Inc. 1994 Stock Option Plan; and
6. Consider and act upon a proposal to appoint Arthur Andersen LLP,
independent public accountants, as the independent public accountants of
the Company for the fiscal year ending December 31, 1998 and until the 1999
Annual Meeting, or until their successors are duly appointed.
At the Annual Meeting, the stockholders elected the following individuals to
serve as directors of the Company:
1. Thomas W. Zaucha, CEO (5,521,732 votes FOR; 148,210 withheld);
2. Lawrence F. Jindra, MD (5,525,732 votes FOR; 144,210 withheld);
3. James H. McElwain (5,517,732 votes FOR; 152,210 withheld);
4. Mark G. Mykityshyn (5,519,732 votes FOR; 150,210 withheld);
5. Roger J. Reschini (5,509,732 votes FOR; 160,210 withheld);
6. David B. White (5,519,732 votes FOR; 150,210 withheld);
The results of the proxy voting on the remaining proposals as outlined above
were as follows:
1. Stockholders voted to approve a change in the corporate name of the Company
with 5,593,632 votes FOR, 25,280 against and 51,030 withheld;
2. Stockholders approved an increase in the number of authorized shares of the
Company's Common Stock with 5,144,532 votes FOR, 482,610 against and 42,800
withheld.
3. Stockholders approved the issuance of up to 4,888,982 shares of Common
Stock of the Company to the Zauchas in satisfaction of certain terms of the
Merger Agreement dated November 15, 1995 with 2,292,741 votes FOR, 670,960
against, 60,000 withheld and 2,394,241 broker non-votes.
4. The termination of the 1994 Stock Option Plan was approved with 5,586,782
votes FOR, 30,630 against and 52,530 withheld.
5. Arthur Andersen LLP was appointed as the Company's Independent Public
Accountants receiving 5,619, 762 votes FOR, 43,180 against and 7,000
withheld.
Total shares voted were 5,669,942.
Item 5. - Other Information
Future Business Opportunities
From time to time, the Company engages in exploratory discussions with possible
candidates for a merger or joint venture in an effort to improve its liquidity
and operations and as part of its strategic planning to improve shareholder
value. However, there is no guarantee that the Company will decide to enter into
a merger or joint venture, or that it will find a suitable merger or joint
venture partner.
Notification of Discretionary Authority of Proxies to Vote on Certain
Shareholder Proposals Under Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended.
The person or persons named as a proxy on the form of proxy to be mailed in
connection with the solicitation of proxies on behalf of the Company's Board of
Directors in connection with the Company's 1999 Annual Meeting of Stockholders
will be authorized to vote in his or their own discretion on any proposal as to
which the Company shall not have received written notice by March 24, 1999.
18
<PAGE> 21
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
The following exhibits required by Item 601 of Regulation S-K are set
forth in the following list and are filed either by incorporation or by
reference from previous filings with the Securities and Exchange
Commission or by attachment to this Form 10-Q.
3.1.1 Articles of Incorporation of Northstar Health Services, Inc., as filed
in the state of Delaware, filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1996, is
incorporated by reference.
3.1.2 Amendment to Certificate of Incorporation, as filed in the state of
Delaware, June 16, 1998.
3.2 Bylaws of Northstar Health Services, Inc., filed as an exhibit to the
Company's 10-Q Quarterly Report dated August 14, 1997, is incorporated
by reference.
4.1 1997 Stock Option Plan, filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, is
incorporated by reference.
4.2 1992 Stock Option Plan, as amended, filed as an exhibit to the
Company's Annual Report on Form 10-K for fiscal year ended December 31,
1996, is incorporated by reference.
4.3 Form S-8 Registration Statement, 1997 Stock Option Plan, filed June 17,
1998, is incorporated by reference.
4.4 Post Effective Amendment No. 1 to Form S-8 Registration Statement (No.
33-94584), 1994 Stock Option Plan, filed June 17, 1998, is incorporated
by reference.
10.1 Employment Agreement dated November 15, 1995, between Northstar Health
Services, Inc. and Thomas W. Zaucha, filed as an exhibit to the
Company's Form 8-K dated November 15, 1995, is incorporated by
reference.
10.2 Employment Agreement dated September 1, 1997, between Northstar Health
Services, Inc. and Lisa S. Guarino, filed as an exhibit to the
Company's 10-Q Quarterly Report dated November 14, 1997, is
incorporated by reference.
10.2 Forbearance Agreement between Northstar Health Services, Inc. and IBJ
Schroder Bank & Trust Co., filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, dated
August 18, 1997, is incorporated by reference.
10.3 Extension Supplement between Northstar Health Services, Inc. and IBJ
Schroder Bank & Trust Co., filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, dated
August 29, 1997, is incorporated by reference.
10.4 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LLP and IBJ Schroder Bank & Trust Co., filed as an exhibit to
the Company's Annual Report on Form 10-K for fiscal year ended December
31, 1997, dated October 1, 1997, is incorporated by reference.
10.5 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LLP and IBJ Schroder Bank & Trust Co., filed as an exhibit to
the Company's Annual Report on Form 10-K for fiscal year ended December
31, 1997, dated November 12, 1997, is incorporated by reference.
10.6 Assignment and Acceptance Agreement between Northstar Health Services,
Inc. and Cerberus Partners, LP, filed as an exhibit to the Company's
Annual Report on Form 10-K for fiscal year ended December 31, 1997,
dated September 8, 1997, is incorporated by reference.
19
<PAGE> 22
10.7 Advisory Agreement between Northstar Health Services, Inc. and
Commonwealth Associates, filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, dated June
9, 1997, is incorporated by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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
(Principal Executive Officer)
Date: August 7, 1998
By: /s/ LISA S. GUARINO
----------------------
Lisa S. Guarino, CPA
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: August 7, 1998
21
<PAGE> 1
Exhibit 3.1.2
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "NORTHSTAR HEALTH SERVICES, INC." FILED IN THIS OFFICE ON THE SIXTEENTH DAY
OF JUNE, A.D. 1998, AT 2 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
2316184 8100 AUTHENTICATION: 9141677
981232574 DATE: 06-16-98
<PAGE> 2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:00 PM 06/16/1998
981232574-2316184
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NORTHSTAR HEALTH SERVICES, INC.
Northstar Health Services, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of Northstar Health Services, Inc. (the
"Corporation"), at a meeting of the Board of Directors held on April 14, 1998,
pursuant to notice duly given, duly adopted the following resolutions setting
forth a proposed amendment of the previously amended Certificate of
Incorporation of the Corporation, declaring such amendment to be advisable and
calling for a meeting of the stockholders of said Corporation for consideration
thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that in accordance with Title 8, Chapter 1, Section 242 of
the Delaware Code, as amended, the Board of Directors hereby declares the
advisability of, and hereby approves and adopts, the following proposed
amendment to the Company's Certificate of Incorporation and hereby directs that
the following proposed amendment to the Certificate of Incorporation of this
Company be submitted to the stockholders of the Company for their approval and
adoption at the 1998 Annual Meeting of the Stockholders, to wit:
Article 4 of the Certificate of Incorporation of Northstar Health
Services, Inc. is amended and restated to read in full and in its
entirety as follows:
4. The total number of shares of stock which the Corporation
shall have authority to issue is twenty-one million (21,000,000)
shares, twenty million (20,000,000) shares of which shall be Common
Stock, of the par value of One Cent ($0.01) per share (the "Common
Stock"), and one million (1,000,000) shares of which shall be
Preferred Stock, of the par value of One Cent ($0.01) per share (the
"Preferred Stock"), amounting in the aggregate to Two Hundred Ten
Thousand Dollars ($210,000).
Additional designations and powers, preferences and rights and
qualifications, limitations or restrictions thereof of the shares of
stock shall be determined by the Board of Directors of the Corporation
from time to time.
SECOND: Thereafter, pursuant to resolution of the Board of Directors, at
the annual meeting of the stockholders of the Corporation held on June 11,
1998, after notice in accordance with Section 222 of the General Corporation
Law of the State of Delaware, the holders of a majority of the outstanding
shares entitled to vote thereon voted in favor of the approval and adoption of
the amendment.
THIRD: Such amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Amendment to be signed by Thomas W. Zaucha, its President and Chief Executive
Officer this 11th day of June, 1998.
(SEAL) NORTHSTAR HEALTH SERVICES, INC.
BY: /S/ THOMAS W. ZAUCHA
-------------------------------
Thomas W. Zaucha
President and Chief Executive Officer
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