<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, 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 November 5, 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
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 5. - Other Information 17
Item 6. - Exhibits and Reports on Form 8-K 19
<PAGE> 3
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
A S S E T S ------------- ------------
----------- (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents- $ 799 $ 657
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$401 and $1,341, respectively 4,782 5,818
Management fees 238 350
Miscellaneous 277 309
Prepaid expenses and other current assets 119 162
------- -------
Total current assets 6,215 7,296
------- -------
PROPERTY AND EQUIPMENT, net 2,219 2,814
INTANGIBLE ASSETS, net (Note 2) 18,417 19,221
OTHER ASSETS 178 183
------- -------
TOTAL ASSETS $27,029 $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>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 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 3,837 2,932
Other debt 631 1,206
Accounts payable 1,197 2,401
Accrued expenses 6,612 7,476
Contractual obligations to employees 961 1,031
-------- --------
Total current liabilities 27,321 29,129
-------- --------
LONG-TERM DEBT (Note 3)
Thomas Zaucha and Zaucha Family Limited Partnership 1,002 1,757
Other debt 177 282
-------- --------
Total long term debt 1,179 2,039
MINORITY INTEREST 173 145
-------- --------
Total liabilities 28,673 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, 20,000,000 shares
authorized; 6,337,988 shares issued at September 30, 1998
and December 31, 1997 63 63
Additional paid-in capital 26,860 26,388
Warrants outstanding 1,919 2,392
Retained deficit (30,033) (30,189)
Less: Treasury stock, 362,564 shares in 1998 and 1997, at cost (453) (453)
-------- --------
Total stockholders' equity/(deficit) (1,644) (1,799)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,029 $ 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 September 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 7,601 $ 7,516
Management fee revenue 332 405
----------- -----------
Total revenue 7,933 7,921
COSTS OF SERVICE 3,690 4,041
----------- -----------
Gross profit 4,243 3,880
OPERATING EXPENSES:
Selling, general and administrative expenses 2,665 2,795
Bad debt expense 72 386
Restructuring and other non-recurring expenses (Note 4) 22 654
Amortization of intangibles 232 272
Depreciation and amortization 144 136
Management fee expenses 305 558
----------- -----------
Total operating expenses 3,440 4,801
----------- -----------
OPERATING INCOME/(LOSS) 803 (921)
NON-OPERATING EXPENSES:
Interest expense, net 535 534
Other income, net (40) (23)
----------- -----------
Total non-operating expenses 495 511
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES 308 (1,432)
INCOME TAXES 0 0
----------- -----------
INCOME/(LOSS) BEFORE MINORITY INTEREST 308 (1,432)
MINORITY INTEREST 95 60
----------- -----------
NET INCOME/(LOSS) $ 213 $ (1,492)
=========== ===========
NET INCOME/(LOSS) PER SHARE - BASIC $ 0.04 $ (0.25)
=========== ===========
NET INCOME/(LOSS) PER SHARE - DILUTED $ 0.04 $ (0.25)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,867,154
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
6,002,517 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>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ -----------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 23,313 $ 23,843
Management fee revenue 1,090 1,293
----------- -----------
Total revenue 24,403 25,136
COSTS OF SERVICE 11,380 12,531
----------- -----------
Gross profit 13,023 12,605
OPERATING EXPENSES:
Selling, general and administrative expenses 8,353 8,004
Bad debt expense 238 1,738
Restructuring and other non-recurring expenses (Note 4) 237 4,149
Amortization of intangibles 695 859
Depreciation and amortization 424 427
Management fee expenses 1,023 1,942
----------- -----------
Total operating expenses 10,970 17,119
----------- -----------
OPERATING INCOME/(LOSS) 2,053 (4,514)
NON-OPERATING EXPENSES:
Interest expense, net 1,598 1,671
Other income, net (57) (4)
----------- -----------
Total non-operating expenses 1,541 1,667
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES 512 (6,181)
INCOME TAXES 1 130
----------- -----------
INCOME/(LOSS) BEFORE MINORITY INTEREST 511 (6,311)
MINORITY INTEREST 355 130
----------- -----------
NET INCOME/(LOSS) $ 156 $ (6,441)
=========== ===========
NET INCOME/(LOSS) PER SHARE - BASIC $ 0.03 $ (1.10)
=========== ===========
NET INCOME/(LOSS) PER SHARE - DILUTED $ 0.03 $ (1.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,867,154
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
5,988,638 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>
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 156 $ (6,441)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 1,748 2,302
Provision for doubtful accounts 238 1,738
Gain on legal settlement - (47)
Interest on discounted obligation 165 274
(Gain)/loss on sale of equipment (8) 7
Gain on sale of joint venture interest (17) -
Provision for increase in contractual obligations to employees 41 63
Minority interest 353 130
Stock option compensation expense - 281
Change in current assets and liabilities-
Decrease in receivables 942 63
Decrease in other current assets 43 473
Decrease in accounts payable (1,205) (49)
(Decrease)/Increase in accrued expenses (864) 1,537
------- --------
Net cash provided by operating activities 1,592 331
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 33 -
Capital expenditures (292) (50)
Deposits, loans and investments 6 (41)
------- --------
Net cash used by investing activities (253) (91)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (847) (1,042)
Distributions to minority interests (313) (155)
Payments of contractual obligations to employees (112) (579)
Borrowings on long-term debt 75 -
------- --------
Net cash used in financing activities (1,197) (1,776)
------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 142 (1,536)
CASH AND CASH EQUIVALENTS, beginning balance 657 1,607
------- --------
CASH AND CASH EQUIVALENTS, ending balance $ 799 $ 71
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,252 $ 1,020
Income taxes paid 1 137
NONCASH INVESTING ACTIVITIES:
Capital lease obligations 28 76
</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 nine month periods ended September 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 317,000 and 351,966 shares of the Company's common stock
have been granted for the three and nine month periods ended September 30, 1998,
respectively, and no options have been exercised for the three and nine month
periods ended September 30, 1998.
The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended September 30, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended
--------------------------
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net income (loss) $ 213 $ (1,492)
Average shares outstanding 5,975,424 5,867,154
Income (loss) per share $ 0.04 $ (0.25)
Diluted earnings per share:
Net income (loss) $ 213 $ (1,492)
Average shares outstanding 5,975,424 5,867,154
Shares issuable for Keystone merger - -
Stock warrants - -
Stock options 27,094 -
---------- ----------
Diluted average shares outstanding 6,002,517 5,867,154
Income (loss) per share $ 0.04 $ (0.25)
</TABLE>
6
<PAGE> 9
The following table reconciles the number of shares utilized in the earnings per
share calculations for the nine-month periods ended September 30, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net income (loss) $ 156 $ (6,441)
Average shares outstanding 5,975,424 5,867,154
Income (loss) per share $ 0.03 $ (1.10)
Diluted earnings per share:
Net income (loss) $ 156 $ (6,441)
Average shares outstanding 5,975,424 5,867,154
Shares issuable for Keystone merger - -
Stock warrants - -
Stock options 13,214 -
--------- ---------
Diluted average shares outstanding 5,988,638 5,867,154
Income (loss) per share $ 0.03 $ (1.10)
</TABLE>
For the three month periods ended September 30, 1998 and 1997, and the nine
month periods ended September 30, 1998 and 1997, options to purchase 716,408,
909,800, 716,408 and 909,800 and warrants to purchase 633,500, 843,500, 633,500
and 843,500 shares of common stock, respectively, were outstanding, but were not
included in the computation of diluted earnings per share because the options'
and warrants' 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 three and nine month periods in 1997. 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 and 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.
Statements of Cash Flows
During September 1998, approximately $29,000 of debt was assumed by a third
party in connection with the sale by the Company of a certain joint venture
interest.
7
<PAGE> 10
2. INTANGIBLE ASSETS:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $ 17,297 $ 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) 78 78
Assembled Keystone workforce (5 years) 600 600
Deferred financing and other costs (5 years) 803 808
-------- --------
Gross intangible assets 21,903 22,092
Less-accumulated amortization (3,486) (2,871)
-------- --------
Net intangible assets $ 18,417 $ 19,221
======== ========
</TABLE>
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
September 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%
612 1,241
Other debt 505 685
-------- --------
Total long-term debt 20,225 21,034
Less:
Current portion (18,551) (18,221)
Debt discount (495) (774)
-------- --------
Long-term debt $ 1,179 $ 2,039
======== ========
</TABLE>
As of September 30, 1998, the Company has no unused amounts under its existing
credit facilities. During the third quarter of 1998, the Company's weighted
average interest rate was 9.9%.
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 $15.2 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 most recent of which is
effective through November 20, 1998. Please refer to the Liquidity and Capital
Resources section of Item 2 for further discussion.
8
<PAGE> 11
4. RESTRUCTURING AND NON-RECURRING EXPENSES:
Since 1996, the Company has incurred significant legal, accounting and
consulting expenses arising out of its investigation of the actions 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.
A summary of these unusual and non-recurring expenses is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Company costs related to proxy solicitation incurred
by former management $ -- $ 527
Proxy solicitation cost incurred by Mr. Zaucha -- 1,750
Additional legal and accounting fees -- 558
Write off of intangible assets -- 477
Litigation and investigation costs 66 528
Corporate restructuring costs 171 309
---- ------
Total $237 $4,149
==== ======
</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 September 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 $453,000 and
$128,000, respectively, as of September 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 September
30, 1998, the Company has incurred an expense of $352,770 related to rent due on
these spaces. A Special Committee of the Board of Directors of the Company has
evaluated, through an appraisal by an independent real estate professional, the
fair market lease rates for these properties, and has determined that the leases
are substantially within the range of market rent in the aggregate, and
therefore, a renegotiation of the leases is not required.
6. COMMITMENTS AND CONTINGENCIES:
Zaucha Stock Guarantee
The Company guaranteed the value of certain stock issued to Mr. Zaucha and the
Zaucha Family Limited
9
<PAGE> 12
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.
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:
In connection with stock options previously granted to the Company's Board of
Directors and Board Secretary, certain stock options were granted outside of any
stock option plan of the Company. The Company has determined that the Common
Stock underlying the options granted outside the stock option plans cannot be
registered under federal and state securities laws without significant expense
to the Company. Because it is cost prohibitive to register the stock underlying
these options, the Board of Directors has taken action to cancel, in the
aggregate, 127,500 stock options previously granted to the Directors and
Secretary, pursuant to a cancellation agreement dated August 3, 1998. New
options were subsequently granted under the Company's 1997 Stock Option Plan
pursuant to parameters previously established by the Board of Directors.
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 September 30, 1998 and 1997
Total revenue
During the third quarter of 1998, the Company's total revenues increased by
$12,000, or .2%, from $7,921,000 for the third quarter of 1997 to $7,933,000 for
the third quarter of 1998. The Company opened new outpatient offices and entered
into new contracts that resulted in an increase in net patient service revenues
of $352,000. Net patient service revenue from continuing operating units
increased $199,000 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 $14,000. Offsetting these increases, revenues
decreased approximately $479,000 as the result of the closure or termination of
certain clinics and contracts, including $370,000 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 $74,000.
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 third quarter of 1997 to the third quarter of 1998. As a
result, the Company's costs of service decreased $351,000 from $4,041,000 for
the third quarter of 1997 to $3,690,000 for 1998, or 8.7%, despite the increase
in total revenues. As a percentage of net patient service revenue, costs of
service also decreased from 53.8% in the third quarter of 1997 to 48.5% in the
third quarter of 1998. As a result of the increase in total revenue and decrease
in costs of services, gross profit also increased $363,000, from $3,880,000
(49.0% of total revenue) for the third quarter of 1997 to $4,243,000 (53.5% of
total revenue) for 1998.
Selling, general and administrative expense
Total selling, general and administrative expenses for the third quarter
decreased $130,000 from $2,795,000 in 1997 to $2,665,000 in 1998. The expense
for 1997 includes a provision for approximately $220,000 for professional fees
compensated with warrants. Excluding this provision, selling, general and
administrative expenses for the third quarter increased $90,000, or 3.5%. This
increase can be attributed
11
<PAGE> 14
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, partially offset by cost reductions
implemented in April 1998.
Bad debt expense
The Company incurred bad debt expense of $72,000 or approximately 1.0% of net
patient service revenue during the third quarter of 1998 versus $386,000 or
approximately 5.1% during the third quarter of 1997. The decrease in bad debt
expense was accomplished through increased billing efficiency, the use of a new
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 2.1% of net patient service
revenue, which is a more likely level of bad debt expense that can be expected
in the future after the catch-up effect of the new collection procedures is
fully realized.
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 third quarter of 1998 were $22,000 compared to
$654,000 for the third 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 third quarter of 1998 declined by $40,000
from the 1997 total, reflecting (1) intangible asset write-offs that occurred
after the second 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 comparable between years, totaling $535,000 for the third
quarter of 1998 compared to $534,000 for 1997. The Company reported net
non-operating income of $40,000 in the third quarter of 1998 compared to $23,000
in the third quarter of 1997. Net operating income for the third quarter of 1998
included a gain of approximately $22,000 for the sale of a joint venture
interest.
Income taxes
The Company has not recorded a tax provision during the third quarter of 1998.
As a result of the losses experienced in 1997 and prior years, the Company does
not anticipate any significant taxable income for federal or state income tax
purposes in 1998.
Net income
Net income for the third quarter of 1998 was $213,000 compared to a loss of
$1,492,000 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 third quarter of 1997 to the third quarter of 1998.
12
<PAGE> 15
Results of Operations
Nine Months Ended September 30, 1998 and 1997
Total revenue
For the nine month period ended September 30, 1998, the Company's total revenues
declined by $733,000, or 2.9%, from $25,136,000 for the first nine months of
1997 to $24,403,000 for 1998. Revenues decreased approximately $2,662,000 as the
result of the closure or termination of certain clinics and contracts, including
$370,000 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 $203,000 and the Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $771,000. Net patient service revenue from
continuing operating units increased $1,199,000 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 nine 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 $162,000.
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 by $1,151,000 from $12,531,000 for the first nine months of 1997 to
$11,380,000 for 1998, or 9.2%. As a percentage of net patient service revenue,
costs of service decreased during the first nine months of 1998, from 52.6% in
1997 to 48.8% in 1998. As a result of the decrease in costs of services in the
second and third quarters of 1998, gross profit increased $418,000, from
$12,605,000 for the first nine months of 1997 to $13,023,000 for 1998. As a
percentage of total revenue, gross profit also increased, from 50.1% of revenue
for 1997 to 53.4% for the first nine months of 1998.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first nine months
increased $349,000 from $8,004,000 in 1997 to $8,353,000 in 1998. The 4.4%
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, partially offset
by cost reductions implemented in April 1998.
Bad debt expense
The Company incurred bad debt expense of $238,000 or approximately 1.0% of net
patient service revenue during the first nine months of 1998 versus $1,738,000
or approximately 7.3% during the first nine months of 1997. The decrease in bad
debt expense was accomplished through increased billing efficiency, the use of a
new 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 nine 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 5.6% of net patient service revenue for the first nine 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 nine months of 1998 were $237,000 compared
to $4,149,000 for the first nine 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 nine months of 1998 declined by
$164,000 from the 1997 total, reflecting (1) intangible asset write-offs that
occurred after the first nine 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 $1,598,000 for the first nine months of 1998 compared to
$1,671,000 for 1997. This decrease can be attributed to the amortization of
leases and other debt. The Company reported net non-operating income of $57,000
for the first nine months of 1998 compared to $4,000 in the first nine months of
1997. Net operating income for the first nine months of 1998 included a gain of
approximately $23,000 for the disposal of a joint venture interest and
approximately $8,000 in gains on the disposal of fixed assets as compared to
$7,000 in losses for the first nine months of 1998.
Income taxes
The Company has not recorded a tax provision during the first nine months of
1998. As a result of the losses experienced in 1997 and prior years, the Company
does not anticipate any significant taxable income for federal or state income
tax purposes in 1998.
Net income
Net income for the first nine months of 1998 was $156,000 compared to a loss of
$6,441,000 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, which has recently been extended through
November 20, 1998, and has made monthly payments to Cerberus that approximate
the monthly interest expense on the loan.
During the nine months ended September 30, 1998, the Company provided $1,592,000
versus $331,000 of cash by operations during the first nine months of 1997. This
change in cash provided from operations is primarily the result of (1) a
decrease in the net loss from $6,441,000 during the first nine months of 1997 to
net income of $156,000 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 nine 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 $253,000 in the first nine months
of 1998 as compared to $91,000 in the first nine months of 1997, resulting
primarily from an increase in expenditures for capital items in 1998.
During the first nine months of 1997, the Company made debt principal payments
of $1,042,000 which were primarily scheduled debt and lease payments as well as
payments on debt to former owners and
14
<PAGE> 17
managers of the Company. This amount decreased to $847,000 for the first nine
months of 1998 due to the final payment of certain debt after the first nine
months of 1997. In addition, during the first nine months of 1998, the Company
paid approximately $313,000 to minority interest holders in companies controlled
by Northstar and $112,000 under contractual obligations with certain employees.
During the first nine months of 1998, the Company made no additional material
borrowings under any debt arrangements.
Summary
Although the Company has experienced a significant improvement in its cash flow,
it continues to face a potential 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, and there can be no assurance that
the assets of the Company will be fully realizable.
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 of the Company. The Company has now reported two
consecutive profitable quarters, in part due to the previously announced
implementation of an expense reduction plan. Although originally expected to
reduce operating expenses in excess of $250,000 per month on an ongoing basis,
actual results have been a positive effect on net income of approximately
$100,000 per month. In order to realize an effect closer to the original
projection, a reorganization of regional management was implemented in October
1998 that is expected to reduce administrative expenses $800,000 per year on an
annualized basis beginning in January 1999. In addition, management is
continuing to analyze additional potential areas of cost savings and mechanisms
to increase revenues that will allow the Company to maximize net income.
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.
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 testing recently installed software upgrades on the
remaining packages to insure compliance with all aspects of the systems. 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. Currently, the expense associated
with these modifications is estimated at less than $25,000.
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 is accurate.
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 interest rate risk or for any other purpose.
16
<PAGE> 19
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings
On October 2, 1998, Nicholas P. Horoszko, a named defendant in the lawsuit filed
by the Company in September 1996 under the Racketeer Influenced and Corrupt
Organization Act ("RICO") in federal court in Pittsburgh, filed a demand for
arbitration against the Company for alleged breach of contract. Horoszko is
seeking damages of approximately $225,000. The Company plans to vigorously
contest this liability. No scheduling order has yet been entered 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 $5,496,000 and accrued interest in the
amount of approximately $1,147,000. Please refer to the Liquidity and Capital
Resources and Summary sections of the Management's Discussion and Analysis (Part
I, Item 2).
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 January 8, 1999.
On August 20, 1998, the Board of Directors approved amendments to the
Corporation's Bylaws in order to clarify the procedures to be followed and
provide for an advance notice in connection with stockholder proposals to be
discussed and voted upon at annual and special meetings of stockholders; and, to
establish procedures by which stockholders may nominate candidates for election
to the Board of Directors. The following is a summary of the amendments, as
disclosed in an 8-K filing released by the
17
<PAGE> 20
Company on September 1, 1998: Any stockholder who intends to bring a matter
before a meeting of stockholders, other than nominations for the election of a
candidate to the Board of Directors, shall provide written notice to the Company
no less than one hundred twenty (120) calendar days prior to the first
anniversary date of the mailing date of the Corporation's proxy solicitation
materials for the previous year's annual meeting of stockholders. Stockholders
who intend to nominate candidates for election to the Board of Directors, shall
also notify the Secretary in writing no less than one hundred twenty (120)
calendar days prior to the first anniversary date of the mailing date of the
Corporation's proxy solicitation materials for the previous year's annual
meeting of stockholders. Such written notice shall contain certain information
about the candidate being nominated otherwise such nomination may be disregarded
by the presiding officer of the meeting.
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, filed as an exhibit to the Company's 10-Q Quarterly Report
dated August 7, 1998, is incorporated by reference.
3.2.1 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.
3.2.2 Amendment to the Bylaws of Northstar Health Services, Inc., filed as an
exhibit in the Company's Form 8-K, dated September 1, 1998, 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 (No. 33-94584), 1992 Stock Option Plan
filed July 14, 1995, is incorporated by reference.
4.4 Form S-8 Registration Statement (No. 333-57051), 1997 Stock Option
Plan, filed June 17, 1998, is incorporated by reference.
4.5 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.
19
<PAGE> 22
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 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Stearns & Co., dated August 28, 1998.
10.7 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Stearns & Co., dated October 29, 1998.
10.8 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.
10.9 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
Form 8-K, dated September 1, 1998. The item listed was Item 5, Other
Events; Item 7(c), Exhibits.
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: November 6, 1998
By: /s/ Lisa S. Guarino
-------------------
Lisa S. Guarino, CPA
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: November 6, 1998
21
<PAGE> 1
Exhibit 10.6
EXTENSION SUPPLEMENT
EXTENSION SUPPLEMENT, dated as of August 28, 1998 (the "Supplement"),
between Northstar Health Services, Inc., a Delaware corporation (the
"Borrower"), Cerberus Partners, LP and Bear Sterns & Co. (collectively, the
"Lenders").
WITNESSETH
WHEREAS, IBJ Schroder Bank & Trust Company (the "Agent") and the Borrower
are parties to that certain Forbearance Agreement, dated as of August 18, 1997
(as amended, supplemented or otherwise modified prior to the date hereof, the
"Forbearance Agreement"); and
WHEREAS, the Forbearance Agreement shall by its terms terminate on the
Forbearance Termination Date referenced therein (the "Old Forbearance
Termination Date");
WHEREAS, the Borrower has requested that the Old Forbearance Termination
Date be extended as contemplated by Section 4 of the Forbearance Agreement, and
the Agent and the Lenders are willing to agree to such extension but only on the
terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower and the Agent hereby agree as follows:
1. Definitions. Terms defined in or by the reference in the Forbearance
Agreement are used herein as therein defined.
2. Forbearance Termination Date. The Forbearance Termination Date is hereby
extended to October 31, 1998 (the "New Forbearance Termination Date").
3. Effectiveness. This Supplement shall become effective upon receipt by
the Lenders of evidence satisfactory to the Lenders that this Supplement has
been executed and delivered by the Borrower.
4. Representations and Warranties. To induce the Lenders to enter into this
Supplement, the Borrower hereby represents and warrants to the Agent and the
Lenders that, after giving effect to the extension of the Forbearance
Termination Date and the other modifications to the Forbearance Agreement
provided for herein, the representations and warranties contained in the
Forbearance Agreement will be true and correct in all material.
<PAGE> 2
respects as if made on and as of the date hereof and that no Forbearance Event
of Default will have occurred and be continuing.
5. No Other Modifications. Except as expressly modified hereby, the
Forbearance Agreement shall remain in full force and effect in accordance with
its terms, without any waiver, amendment or modification of any provision
thereof.
6. No Waiver. The parties hereto agree that the Agent and the Lenders have
not waived or consented to any Default or Event of Default, waived any right or
remedy they may have with respect to any such Default or Event of Default, or
agreed to any modification or waiver of any of the terms and provisions of the
Loan Documents.
7. Counterparts. This Supplement may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Applicable Law. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be
duly executed and delivered as of the day and year first above written.
NORTHSTAR HEALTH SERVICES, INC.
By: /s/ THOMAS W. ZAUCHA
-------------------------------------
Name: Thomas W. Zaucha
Title: CEO
CERBERUS PARTNERS, L.P.
By: /s/ CERBERUS PARTNERS, L.P.
-------------------------------------
Name:
Title:
BEAR STEARNS & CO.
By: /s/ BEAR STEARNS & CO.
-------------------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
as Agent
By: /s/ IBJ SCHRODER BANK & TRUST COMPANY
-------------------------------------
Name:
Title:
-3-
<PAGE> 1
Exhibit 10.7
EXTENSION SUPPLEMENT
EXTENSION SUPPLEMENT, dated as of October 29, 1998 (this "Supplement"),
between Northstar Health Services, Inc., a Delaware corporation (the
"Borrower"), Cerberus Partners, LP and Bear Stearns & Co. (collectively, the
"Lenders").
WITNESSETH
WHEREAS, IBJ Schroder Bank & Trust Company (the "Agent") and the Borrower
are parties to that certain Forbearance Agreement, dated as of August 18, 1997
(as amended, supplemented or otherwise modified prior to the date hereof, the
"Forbearance Agreement"); and
WHEREAS, the Forbearance Agreement shall by its terms terminate on October
31, 1998 (the "Old Forbearance Termination Date");
WHEREAS, the Borrower has requested that the Old Forbearance Termination
Date be extended as contemplated by Section 4 of the Forbearance Agreement, and
the Agent and the Lenders are willing to agree to such extension but only on
the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower and the Agent hereby agree as follows:
1. Definitions. Terms defined in or by the reference in the Forbearance
Agreement are used herein as therein defined.
2. Forbearance Termination Date. The Forbearance Termination Date is
hereby extended to November 20, 1998 (the "New Forbearance Termination Date").
3. Effectiveness. This Supplement shall become effective upon receipt by
the Lenders of evidence satisfactory to the Lenders that this Supplement has
been executed and delivered by the Borrower.
4. Representations and Warranties. To induce the Lenders to enter into
this Supplement, the Borrower hereby represents and warrants to the Agent and
the Lenders that, after giving effect to the extension of the Forbearance
Termination Date and the other modifications to the Forbearance Agreement
provided for herein, the representations and warranties contained in the
Forbearance Agreement will be true and correct in all material
<PAGE> 2
respects as if made on and as of the date hereof and that no Forbearance Event
of Default will have occurred and be continuing.
5. No Other Modifications. Except as expressly modified hereby, the
Forbearance Agreement shall remain in full force and effect in accordance with
its terms, without any waiver, amendment or modification of any provision
thereof.
6. No Waiver. The parties hereto agree that the Agent and the Lenders have
not waived or consented to any Default or Event of Default, waived any right or
remedy they may have with respect to any such Default or Event of Default, or
agreed to any modification or waiver of any of the terms and provisions of the
Loan Documents.
7. Counterparts. This Supplement may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Applicable Law. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be
duly executed and delivered as of the day and year first above written.
NORTHSTAR HEALTH SERVICES, INC.
By: /s/ THOMAS W. ZAUCHA
-------------------------------------
Name: Thomas W. Zaucha
Title: CEO
CERBERUS PARTNERS, L.P.
By: /s/ CERBERUS PARTNERS, L.P.
-------------------------------------
Name:
Title:
BEAR STEARNS & CO.
By: /s/ BEAR STEARNS & CO.
-------------------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
as Agent
By: /s/ IBJ SCHRODER BANK & TRUST COMPANY
-------------------------------------
Name:
Title:
-3-
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0
0
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