<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant / x /
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
NORTHSTAR HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
* No fee required
<PAGE> 2
[logo] NORTHSTAR HEALTH SERVICES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MEETING DATE: JUNE 11, 1998
To the Stockholders of Northstar Health Services, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of Northstar Health Services, Inc., a Delaware corporation
(the "Company"), will be held at The Indiana Country Club, 495 Country Club
Road, Indiana, Pennsylvania 15701, on Thursday, June 11, 1998, at 11:00 a.m.,
Eastern time, and at any postponement or adjournment thereof for the following
purposes:
1. To elect six members of 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. To 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. To 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 10,000,000 shares to 20,000,000 shares;
4. To 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;
5. To consider and act upon a proposal to terminate the Northstar
Health Services, Inc. 1994 Stock Option Plan;
6. To 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; and
7. To act upon such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
In accordance with the provisions of the Company's By-Laws, the Board
of Directors has fixed the close of business on April 20, 1998 as the record
date for the determination of the holders of Common Stock entitled to notice of,
and to vote at, the Annual Meeting, and any adjournment or postponement thereof.
To ensure that your shares are represented at the Annual Meeting, you
are urged to complete, sign, date and return the accompanying proxy card
promptly in the enclosed postage paid envelope. Please sign the accompanying
proxy card exactly as your name appears on your share certificate(s). You may
revoke your proxy at any time before it is voted at the Annual Meeting. If you
attend the Annual Meeting, you may vote your shares in person.
Your attention is directed to the accompanying Proxy Statement.
By Order of the Board of Directors
/s/ THOMAS W. ZAUCHA
----------------------------------------
Thomas W. Zaucha
May 8, 1998 Chairman, President and Chief Executive Officer
<PAGE> 3
NORTHSTAR HEALTH SERVICES, INC.
665 PHILADELPHIA STREET
INDIANA, PENNSYLVANIA 15701
- -------------------------------
ANNUAL MEETING OF STOCKHOLDERS
MEETING DATE: JUNE 11, 1998
- -------------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors (the "Board") of Northstar Health
Services, Inc. ("Northstar" or the "Company"), a Delaware corporation, to be
voted at the Annual Meeting of Stockholders of the Company (the "Annual
Meeting") to be held at the Indiana Country Club, 495 Country Club Road,
Indiana, Pennsylvania 15701 on Thursday, June 11, 1998, at 11:00 a.m., Eastern
time, and at any postponement or adjournment thereof. This Proxy Statement, the
Notice of Annual Meeting and the accompanying form of proxy are first being
mailed to stockholders on or about May 8, 1998.
Only holders of record of the Company's common stock, par value $.01
per share ("Common Stock"), at the close of business on April 20, 1998 (the
"Record Date"), are entitled to vote on the matters to be presented at the
Annual Meeting. The Company is currently authorized to issue 10,000,000 shares
of Common Stock and 1,000,000 shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"). The number of shares of Common Stock outstanding
on such date and entitled to vote was 5,975,424. Holders of Common Stock are
entitled to one vote on each matter to be voted upon by the stockholders at the
Annual Meeting for each share held. Cumulative voting does not exist with
respect to the election of directors. As of the record date, none of the
Company's Preferred Stock was issued.
At the Annual Meeting, stockholders will be asked: (i) to elect six
directors (the "Nominees") to the Board to serve until the next annual meeting
of stockholders of the Company to be held in 1999 (the "1999 Annual Meeting"),
and until their successors are duly elected and qualified (the "Board
Proposal"); (ii) to 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.
(the "Name Change Proposal"); (iii) to consider and act upon a proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock, par value $0.01 per share, from 10,000,000 shares to
20,000,000 shares (the "Common Stock Proposal"); (iv) to consider and act upon a
proposal to issue up to a maximum of 4,888,982 shares of Common Stock 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; (the "Issuance
of Additional Shares Proposal"), (v) to consider and act upon a proposal to
terminate the Northstar Health Services, Inc. 1994 Stock Option Plan (the
"Option Plan Termination Proposal"); and (vi) to consider and act upon a
proposal to appoint Arthur Andersen LLP, independent public accountants, to
serve as the Company's independent public accountants for the fiscal year ending
December 31, 1998 and until the 1999 Annual Meeting, or until their successors
are duly appointed (the "Independent Public Accountants Proposal").
<PAGE> 4
QUORUM REQUIREMENTS AND VOTING RIGHTSS
The presence, in person or by proxy, of holders of record of a majority
of the shares of Common Stock issued and outstanding and entitled to vote is
required for a quorum to transact business at the Annual Meeting, but if a
quorum should not be present, the Annual Meeting may be adjourned from time to
time until a quorum is obtained. Assuming the presence of a quorum, the Board
Proposal will require the affirmative vote of the holders of a plurality of the
shares of Common Stock, present in person or by proxy, and entitled to vote at
the Annual Meeting. Assuming the presence of a quorum, the affirmative vote of
the holders of a majority of the shares of Common Stock present, in person or by
proxy, and entitled to vote at the Annual Meeting is required for the approval
of the Name Change Proposal, the Common Stock Proposal, the Option Plan
Termination Proposal, and the Independent Public Accountants Proposal. Assuming
the presence of a quorum, the affirmative vote of a majority of the shares of
Common Stock present, in person or by proxy, and entitled to vote at the Annual
Meeting, but not including the shares of Common Stock held by the Zauchas, is
required to approve the Issuance of Additional Shares Proposal.
Broker "non-votes" (i.e. proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares as to a matter with respect to which the
brokers or nominees do not have discretionary power to vote) and shares for
which duly executed proxies have been received but with respect to which holders
of shares have abstained from voting will be treated as present for purposes of
determining the presence of a quorum at the Annual Meeting. Broker "non-votes"
are only counted for purposes of determining whether a quorum is present and,
therefore, will not be included in vote totals and will have no effect on the
outcome of the votes on the proposals to be acted upon at the Annual Meeting.
Abstentions will be counted as present and entitled to vote, and will have the
effect of a negative vote at the Annual Meeting, whereas instructions to
withhold voting on the election of any nominee for director will have no effect
on the outcome of the vote.
SOLICITATION AND REVOCATION
PROXIES IN THE FORM ENCLOSED ARE BEING SOLICITED BY, OR ON BEHALF OF,
THE BOARD. THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY HAVE BEEN
DESIGNATED AS PROXIES BY THE BOARD. Any stockholder desiring to appoint another
person to represent him or her at the Annual Meeting may do so either by
inserting such person's name in the blank space provided on the accompanying
form of proxy, or by completing another form of proxy and, in either case,
delivering an executed proxy to Continental Stock Transfer & Trust Company, the
Company's transfer agent, located at 2 Broadway, New York, New York 10004,
before the time of the Annual Meeting. It is the responsibility of the
stockholder appointing such other person to represent him or her to inform such
person of this appointment.
All Common Stock represented by properly executed proxies which are
returned and not revoked prior to the time of the Annual Meeting will be voted
in accordance with the instructions, if any, given thereon. If no instructions
are provided in an executed proxy, it will be voted: (i) FOR the Board Proposal;
(ii) FOR the Name Change Proposal; (iii) FOR the Common Stock Proposal, (iv) FOR
the Issuance of Additional Shares Proposal; (v) FOR the Option Plan Termination
Proposal; and (vi) FOR the Independent Public Accountants Proposal. If a
stockholder appoints a person other than the persons named in the enclosed form
of proxy to represent him or her, such person will vote the same shares in
respect of which he or she is appointed proxyholder in accordance with
2
<PAGE> 5
the directions of the stockholder appointing him or her. Any stockholder who
executes a proxy may revoke it at any time before it is voted by delivering to
the Company a written statement revoking such proxy, by executing and delivering
a later dated proxy, or by voting in person at the Annual Meeting. Attendance at
the Annual Meeting by a stockholder who has executed and delivered a proxy to
the Company shall not in and of itself constitute a revocation of such proxy.
The Company has retained MacKenzie Partners, Inc. ("MacKenzie") to
assist in the solicitation of proxies. MacKenzie will be paid a fee of
approximately $2,500 for its services by the Company. Proxies will be solicited
initially by mail. Further solicitation may be made by directors, officers and
employees of the Company personally, by telephone or otherwise, but such persons
will not be specifically compensated for such services. The Company also intends
to make, through bankers, brokers or other persons, a solicitation of proxies of
beneficial holders of the Common Stock. Upon request, the Company will reimburse
brokers, dealers, banks or similar entities acting as nominees for reasonable
expenses incurred in forwarding copies of the proxy materials relating to the
Annual Meeting to the beneficial owners of Common Stock which such persons hold
of record.
PROPOSAL 1--THE BOARD PROPOSAL
The Board presently consists of six directors (with five vacancies) who
are elected to serve until the 1998 Annual Meeting and until their successors
are duly elected and qualified. The Board, at the recommendation of the
Compensation & Nominating Committee, has designated the persons listed below as
Nominees for election as directors to the Board to serve until the 1999 Annual
Meeting and until their successors are duly elected and qualified. If any
Nominee shall, prior to the Annual Meeting, become unavailable for election as a
director, the persons named in the accompanying proxy card will vote for such
other nominee, if any, in their discretion as may be recommended by the
Compensation & Nominating Committee. The Board of Directors has no reason to
believe that the Nominees named will be unable to serve, if elected. Information
concerning the Nominees can be found below under the caption "Directors and
Executive Officers of the Company."
With the exception of Mr. Zaucha who has served as a director since
November 1995, all of the Nominees have served as a director since March 1997,
at which time they were elected by written consent of the stockholders pursuant
to the Consent Solicitation (defined and discussed below).
NOMINEES
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas W. Zaucha..................... 52 Chairman of the Board of Directors,
President and Chief Executive Officer
Lawrence F. Jindra, M.D.............. 39 Director
James H. McElwain.................... 52 Director
Mark G. Mykityshyn................... 40 Director
Roger J. Reschini.................... 60 Director
David B. White....................... 42 Director
</TABLE>
3
<PAGE> 6
RECOMMENDATION AND VOTE
Approval of the election of the Nominees to the Board requires the
affirmative vote of a plurality of the shares of Common Stock present, in person
or by proxy, and entitled to vote at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES TO THE BOARD.
PROPOSAL 2 --THE NAME CHANGE PROPOSAL
On April 14, 1998, the Board of Directors recommended and adopted a
resolution to amend Article 1 of the Company's Certificate of Incorporation to
change the corporate name of the Company from Northstar Health Services, Inc. to
Keystone Rehabilitation Enterprises, Inc., and directed that the resolution be
submitted to the stockholders at the Annual Meeting for their consideration and
approval. The Board of Directors has determined that changing the corporate name
to Keystone Rehabilitation Enterprises, Inc. is in the best interests of the
Company and the stockholders because the change will enable the Company (i) to
market itself and its subsidiaries under the Keystone name which the Board
believes is a respected name that has market recognition in the Company's
geographic marketplace for quality service. In order to change the corporate
name of the Company, Article 1 of the Certificate of Incorporation of the
Company must be amended. Therefore, upon stockholder approval of the Name Change
Proposal, a Certificate of Amendment will be filed with the Secretary of the
State of Delaware at which time the amendment to the Certificate of
Incorporation shall be effective.
RECOMMENDATION AND VOTE
Approval of the Name Change Proposal requires the affirmative vote of a
majority of the shares of Common Stock present, in person or by proxy, and
entitled to vote at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE NAME
CHANGE PROPOSAL.
PROPOSAL 3 --THE COMMON STOCK PROPOSAL
On April 14, 1998, the Board of Directors recommended and adopted a
resolution to amend Article 4 of the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock of the Company from
10,000,000 shares to 20,000,000 shares, and directed that the resolution be
submitted to the shareholders at the Annual Meeting for their consideration and
approval. The proposed amendment, if adopted by the stockholders, would increase
the number of authorized but unissued shares of Common Stock of the Company from
4,024,576 shares to 14,024,576 shares. Upon stockholder approval, these unissued
shares of Common Stock will be available for issuance at the discretion of the
Board from time to time for any proper corporate purposes generally without
further action of the stockholders upon the affirmative vote of a majority of
the members of the Board, except to the extent required by law, or the rules and
regulations promulgated thereunder.
4
<PAGE> 7
Subject to stockholder approval of the Common Stock Proposal and the
Issuance of Additional Shares Proposal (Proposal 4), the Board plans to issue
additional shares of Common Stock to the Zauchas in satisfaction of certain of
the Company's legal obligations under the Guaranty, as more fully described
under Proposal 4 below. In addition, the Board is considering stock plans to
enable certain employees, outside directors and consultants to convert their
salaries, directors' fees, and consulting fees, respectively, ordinarily paid in
cash to payment in shares of Common Stock. Since the Board is considering
operating the plans over a five-year period, sufficient shares of Common Stock
must be registered with the Securities and Exchange Commission (the
"Commission"). Therefore, the Board contemplates registering 500,000 shares of
Common Stock, in the aggregate, for issuance under the plans at this point the
number of employees, outside directors and consultants who will participate in
the plans is uncertain, therefore, the Company is not able to estimate the
number of shares of Common Stock to be issued under the plans. Assuming approval
of the Issuance of Additional Shares Proposal (Proposal 4) and the Common Stock
Proposal by the stockholders, and taking into consideration the number of shares
of Common Stock which will be reserved and registered for issuance under the
proposed stock plans described above, the Company will have, on a pro forma
basis, 8,635,594 authorized but unissued shares of Common Stock.
Although the proposed amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock may be
deemed to be an "anti-takeover" provision, the proposed amendment is not a
result of, nor does the Board have knowledge of, any specific effort to
accumulate the Company's shares of Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation in opposition to the
Board or otherwise. Other than the Issuance of Additional Shares Proposal and
the issuance of Common Stock under the proposed stock plans described above, the
Company has no specific plans, understandings or arrangements to issue any of
the shares of Common Stock which will be authorized if the Common Stock Proposal
is approved and adopted, and such shares may be issued for such consideration,
cash or otherwise, at such times and in such amounts as the Board in its
discretion may determine, without further stockholder action.
The proposed increase in the number of authorized shares is intended to
provide the Board with as much flexibility as possible to issue additional
shares for proper corporate purposes, including financing, acquisitions, stock
splits, stock dividends, employee incentive plans, and other similar purposes,
and could be used by the Board, if consistent with its fiduciary
responsibilities, to deter future attempts to obtain control of the Company
which do not receive prior approval of the Board.
In order to increase the number of authorized shares of Common Stock,
Article 4 of the Certificate of Incorporation of the Company must be amended.
Therefore, upon stockholder approval of the Common Stock Proposal, a Certificate
of Amendment will be filed with the Secretary of the State of Delaware at which
time the amendment to the Certificate of Incorporation shall be effective.
5
<PAGE> 8
RECOMMENDATION AND VOTE
Approval of the Common Stock Proposal requires the affirmative vote of
a majority of the shares of Common Stock present, in person or by proxy, and
entitled to vote at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE COMMON
STOCK PROPOSAL.
PROPOSAL 4 -- ISSUANCE OF ADDITIONAL SHARES PROPOSAL
Pursuant to the merger of Keystone Rehabilitation Systems, Inc.
("Keystone") with and into the Company (the "Keystone Merger"), Thomas W.
Zaucha, Alice L. Zaucha, and the Zaucha Family Limited Partnership
(collectively, the "Zauchas"), as the only stockholders of Keystone, received
certain consideration in the form of cash, notes and stock (the "Stock
Consideration") from the Company. In addition, the Company guaranteed the Stock
Consideration to be at least $5,600,000 with a stock price of $5.93 per share
(the "Guaranty") through certain periods ending no later than December 31, 1997.
Based on the weighted average trading volume of the daily closing price per
share for the ten consecutive trading days immediately prior to the third
business day prior to the determination of the stock value as of December 31,
1997, the Company's Common Stock was valued at $0.96 per share, representing a
shortfall of $4,693,423. The Company has a contractual obligation to fund this
shortfall in stock value through a cash payment equal to the shortfall or, with
stockholder approval, through the issuance of additional shares of Common Stock
in an amount equal to the shortfall. The Company is currently obligated to
either make a cash payment of $4,693,423 or issue approximately 4,888,982
additional shares of Common Stock to the Zauchas.
The Company presently does not have sufficient cash or authorized
shares of Common Stock to meet its obligations under the Guaranty. Taking into
consideration the best interests of the Company and the stockholders, the
Zauchas are not requiring the Company to pay the entire shortfall in cash. The
Special Committee of the Board, comprised entirely of outside directors, has
been charged with authority to negotiate with the Zauchas the obligations of the
Company under the Guaranty. The Special Committee has recommended to the Board
that it seek approval from the stockholders to issue 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 Guaranty in stock. In the event the stockholders do not
approve the issuance of the additional shares of Common Stock, the Zauchas have
the right to demand, and the Company is obligated to pay, the entire shortfall
in cash. For this reason, the Board believes that it is in the best interests of
the Company and the stockholders for the stockholders to approve the Issuance of
Additional Shares Proposal to give the Special Committee flexibility in
negotiating the Company's obligations under the Guaranty with the Zauchas.
Approval of the Issuance of Additional Shares Proposal by the
stockholders does not obligate the Zauchas to accept the entire satisfaction of
the Company's obligation under the Guaranty in shares of Common Stock. Approval
of the proposal, however, will allow the Zauchas and the Special Committee of
the Board to negotiate a settlement that will include some combination of cash
and stock, with the issuance of a maximum number of shares of Common Stock not
to exceed 4,888,982 shares. If the negotiated settlement of the Company's
6
<PAGE> 9
obligations under the Guaranty results in the issuance of 4,888,982 shares of
Common Stock to the Zauchas, Thomas W. Zaucha and the Zaucha affiliates would
beneficially own approximately fifty-four percent (54%) of the outstanding
shares of Common Stock. Currently, the Zauchas intend to take an amount of
shares of Common Stock which would result in them beneficially owning less than
fifty percent (50%) of the Company's outstanding shares of Common Stock.
RECOMMENDATION AND VOTE
Approval of the Issuance of Additional Shares Proposal requires the
affirmative vote of a majority of the shares of Common Stock present, in person
or proxy, and entitled to vote at the Annual Meeting. However, in a letter dated
March 19, 1997, Thomas W. Zaucha agreed that the requisite majority required for
the issuance of stock to the Zauchas would not include the shares of Common
Stock held by the Zauchas. As such, the Zauchas have agreed not to vote on this
proposal and their shares will not be included in the calculation of the
majority of the shares of Common Stock present, in person or by proxy, at the
Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE
FOR THE APPROVAL OF THE ISSUANCE OF ADDITIONAL SHARES PROPOSAL.
PROPOSAL 5 -- OPTION PLAN TERMINATION PROPOSAL
At the Board of Directors Meeting held on April 14, 1998, the Board of
Directors approved a resolution to terminate the Northstar Health Services, Inc.
1994 Stock Option Plan (the "Plan"). The Plan was originally adopted to promote
the interests of the Company and its stockholders. One of the provisions of the
Plan requires the Company to grant an option to purchase 2,500 shares of Common
Stock on an annual basis to each non-employee director (an "outside director")
who has served at least one year as a director without considering such outside
director's performance or the financial or operational performance of the
Company. Due to the financial position of the Company at this time, the Board
does not believe that the Plan is advancing the best interests of the Company
and the stockholders particularly in light of the provision for mandatory annual
grants of options to certain outside directors.
Notwithstanding stockholder approval, termination of the Plan will have
no effect on the awards made under the Plan prior to such termination.
Therefore, after approval and adoption of the termination of the Plan by the
stockholders of the Company, any and all options granted under the Plan which
were exercisable immediately prior to termination of the Plan shall remain
exercisable consistent with the terms pursuant to which such options were
granted.
If the stockholders do not approve the proposal to terminate the Plan,
the Company will be obligated under the terms of the Plan to grant 12,500
options, in the aggregate, to outside directors. In addition, if the
stockholders do not terminate the Plan at this Annual Meeting, the Plan will
continue in effect until the annual meeting of stockholders held in the year
2001, unless otherwise terminated or extended.
7
<PAGE> 10
RECOMMENDATION AND VOTING
Approval of the Option Plan Termination Proposal requires the
affirmative vote of a majority of the shares of Common Stock present, in person
or by proxy, at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE
FOR THE APPROVAL OF THE OPTION PLAN TERMINATION PROPOSAL.
PROPOSAL 6 -- THE INDEPENDENT PUBLIC ACCOUNTANTS PROPOSAL
Upon recommendation of the Audit Committee of the Board, the Board
proposes that the stockholders appoint the firm of Arthur Andersen LLP,
independent public accountants ("Arthur Andersen"), to serve 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 appointed.
Arthur Andersen served as the Company's independent public accountants for the
1996 and 1997 fiscal years. A representative of Arthur Andersen will attend the
Annual Meeting, and will be available to respond to appropriate questions
presented by the stockholders and may make a statement if he or she desires.
Even though stockholder approval is not required to retain Arthur
Andersen as the Company's independent public accountants, management of the
Company is seeking stockholder approval of such appointment based on the voting
requirements set forth below. However, in the event the stockholders do not
approve the appointment of Arthur Andersen as the Company's independent public
accountants for the 1998 fiscal year, management intends to retain Arthur
Anderson to act as the Company's independent public accountants for the 1998
fiscal year.
RECOMMENDATION AND VOTE
Approval of appointment of the Independent Public Accountants Proposal
requires the affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, and entitled to vote at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
OF THE INDEPENDENT PUBLIC ACCOUNTANTS PROPOSAL.
CHANGE IN ACCOUNTANTS
In March 1996, the Company's auditors, KPMG Peat Marwick ("KPMG") who
had been appointed in 1995, resigned prior to completing an audit of the
Company's financial statements, citing concerns related to the management of the
Company that had been in place prior to the Keystone Merger. KPMG advised the
Company that: (i) internal controls were not sufficient for preparation of
reliable financial statements; (ii) information had come to KMPG's attention
which made the auditors unwilling to rely on management's representations and
unwilling to be associated with the financial statements prepared by management;
and (iii) the scope of the audit should be expanded significantly, and that
information had come to their attention that, if further investigated,
8
<PAGE> 11
might materially impact the fairness or reliability of previously issued
financial statements. As a result, the Company's Form 10-K for the year ended
December 31, 1995 was not filed timely with the Commission. The Company retained
Arthur Andersen as its auditors, and Arthur Andersen completed the audit of the
Company for the years ended December 31, 1996 and 1995. On March 25, 1996, the
Company filed a report on Form 8-K with the Commission to report the change in
accountants.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Stockholder proposals to be included in the Company's proxy statement
with respect to the 1999 Annual Meeting of Stockholders must be received by the
Company at its executive offices located at the Atrium, 665 Philadelphia Street,
Indiana, Pennsylvania 15701 no later than January 11, 1999.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons
who are the current directors and executive officers of the Company. The
directors were re-elected by stockholder vote at the 1997 Annual Meeting of
Stockholders held on September 11, 1997.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION HELD SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Michael S. Delaney*............ 48 Secretary and Assistant March, 1997
Treasurer
Lisa S. Guarino................ 39 Executive Vice President, Chief September, 1997
Financial Officer and Treasurer
Lawrence F. Jindra, M.D........ 39 Director March, 1997
James H. McElwain.............. 52 Director March, 1997
Mark G. Mykityshyn............. 40 Director March, 1997
Roger J. Reschini.............. 60 Director March, 1997
David B. White................. 42 Director March, 1997
Thomas W. Zaucha............... 52 Chairman of the Board of Directors, November, 1995
President and Chief Executive Officer
</TABLE>
* Mr. Delaney is not an employee of the Company or its subsidiaries.
THOMAS W. ZAUCHA (52) is the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company and has been a Director of
the Company since November 1995. His term as a Director is for 1997 - 1998. He
will stand for re-election at the Annual Meeting. Mr. Zaucha, founder of
Keystone Rehabilitation Systems, Inc., served as its Chairman, President and
Chief Executive Officer until Keystone merged with Northstar in 1995. Mr. Zaucha
became Chairman of the Board and Chief Executive Officer of Northstar in March
1996. Mr. Zaucha has approximately twenty-nine (29) years of experience in the
health care and physical therapy related industries. He currently serves on the
State Board of Physical Therapy and is a member of the Pennsylvania Physical
Therapy Association and the American Physical Therapy Association. Mr. Zaucha
has been the recipient of the Entrepreneur of the Year Award (Health Care) in
1992 and was named Civic Leader of the Year in 1996.
9
<PAGE> 12
Mr. Zaucha is a member of numerous community and civic organizations. His
business address is that of the Company's address.
LISA S. GUARINO (39) has served as the Executive Vice President, Chief
Financial Officer and Treasurer of the Company since September 1997. She is
involved in strategic financial decisions for the Company including cash
management and financial reporting. Prior to her present position, she served as
Chief Financial Officer of Northstar from November 1995 to September 1996 and
served as Chief Financial Officer and Controller for Keystone Rehabilitation
Systems, Inc. from August 1986 to November 1995. Ms. Guarino obtained her public
accounting experience as an auditor with Arthur Andersen LLP in Pittsburgh
(1980-1983). She obtained her MBA from Indiana University of Pennsylvania in
1990. Ms. Guarino is an actively licensed Certified Public Accountant in
Pennsylvania and is a member of the PICPA and AICPA. Her business address is
that of the Company's address.
LAWRENCE F. JINDRA, M.D. (39) has served as a Director of the Company
since March 1997 and is Chairman of the Special Committee and a member of the
Compensation & Nominating Committee of the Board of Directors. His term as a
Director of the Company is for 1997-1998. He will stand for re-election at the
Annual Meeting. Dr. Jindra has served as the President of Eye Care Management,
Inc. and on the adjunct faculty of the Department of Ophthalmology of the
College of Physicians and Surgeons of Columbia University since 1997. Dr. Jindra
has also served as the Assistant Chief of Ophthalmology of Northport Veterans
Affairs Medical Center and as the Founder and Director of the Glaucoma
Consultation Unit of the United States Department of Veterans Affairs since 1994
and 1989, respectively. From 1992 to 1993, Dr. Jindra served as a White House
Fellow, as a member of the Office of Science & Technology Policy and as a member
of the President's Task Force for National Health Care Reform. Dr. Jindra
received a Master's Degree in Public Administration (Medicine, Science and
Technology Concentration) from Harvard University and a Master of Science Degree
in Management from Oxford University. His business address is The Landmark,
Suite 305, 99 Tulip Avenue, Floral Park, New York.
JAMES H. MCELWAIN (52) has served as a Director of the Company since
March 1997 and is Chairman of the Audit Committee of the Board of Directors. His
term as a Director of the Company is for 1997-1998. He will stand for
re-election at the Annual Meeting. Mr. McElwain has served as the Chief
Operating Officer of S.W. Jack Drilling Company since 1995. From September 1988
until December 1994, he served as the Vice President of Finance of Keystone
Rehabilitation Systems, Inc., which merged with the Company in 1995. His
business address is 57 South Ninth Street, Indiana, Pennsylvania.
MARK G. MYKITYSHYN (40) has served as a Director of the Company since
March 1997 and is Chairman of the Compensation & Nominating Committee and a
member of the Special Committee of the Board of Directors. His term as a
Director of the Company is for 1997-1998. He will stand for re-election at the
Annual Meeting. Mr. Mykityshyn has served as President of Strategy Partners,
Inc. since 1993. He has served as Technical and Financial Consultant with High
Technology Venture Finance since 1995. He has also served as a Management and
Technology Consultant with Booz Allen & Hamilton, Inc. from 1993 to 1997, and
was an Adjunct Professor of Aeronautics at The George Washington University from
1994 to 1995. Prior to 1993, Mr. Mykityshyn served as an aviator in the United
States Marine Corps (1982-1989) and earned the Degree of Engineer of
Aeronautical and Astronautical Engineering and the Degree of Master of Science
in Aeronautical and Astronautical Engineering
10
<PAGE> 13
from the Massachusetts Institute of Technology and a Masters Degree in Public
Administration (Science and Technology Policy concentration) from Harvard
University (1990-1993). His business address is 1705 Patriots Way, Atlanta,
Georgia.
ROGER J. RESCHINI (60) has served as a Director of the Company since
March 1997 and is a member of the Compensation & Nominating Committee and the
Audit Committee of the Board of Directors. His term as a director of the Company
is for 1997-1998. He will stand for re-election at the Annual Meeting. Mr.
Reschini founded the Reschini Agency, Inc., a multiple line insurance agency, in
1979 and founded TFID, Inc., a real estate development company, in 1984. Mr.
Reschini has also been the recipient of a Benjamin Rush Award and a Paul Harris
Fellowship. His business address is 922 Laurel Place, Indiana, Pennsylvania.
DAVID B. WHITE (42) has served as a Director of the Company since March
1997 and is a member of the Compensation & Nominating Committee and the Audit
Committee of the Board of Directors. His term as a Director of the Company is
for 1997-1998. He will stand for re-election at the Annual Meeting. Mr. White is
a partner in the law firm of Burns, White & Hickton (Pittsburgh, PA). Mr. White
was admitted to the practice of law in 1982, and he is currently a member of the
Allegheny County, Pennsylvania and American Bar Associations; the Hospital
Association of Pennsylvania; the National Order of Barristers; and the Academy
of Trial Lawyers. His business address is Burns, White & Hickton, 2400 Fifth
Avenue Place, 120 Fifth Avenue, Pittsburgh, Pennsylvania.
MICHAEL S. DELANEY (48) has served as Corporate counsel to the Company
since November 1995, and as its Secretary and Assistant Treasurer since March
1997. Mr. Delaney has also served as Corporate counsel to Keystone
Rehabilitation Systems, Inc. from 1981 to 1995. Mr. Delaney is a name partner in
Delaney & Delaney (Indiana, PA). Mr. Delaney was admitted to the practice of law
in 1977, and is currently a member of the Indiana County, Pennsylvania and
American Bar Associations. His business address is Delaney & Delaney, 936
Philadelphia Street, Indiana, Pennsylvania.
General. Directors of the Company hold office until the next annual
meeting of stockholders and until their successors are elected. Executive
officers are elected annually by, and serve at the discretion of, the Board of
Directors. There are no arrangements or understandings known to the Company
between any of the Directors, Nominees for director or executive officers of the
Company and any other person pursuant to which any of such persons was elected
as a director or an executive officer, except various employment agreements
between the Company and certain executive officers. (See Executive Compensation,
Employment Agreements)
BOARD OF DIRECTORS; BOARD COMMITTEES
Board of Directors Meetings; Board Committee Meetings
During fiscal year 1997, the composition of the Board of Directors
changed as a result of the Consent Solicitation (discussed and defined below).
Prior to the Consent Solicitation, according to documentation available to
current management, the members of the Board met six (6) times, the members of
the Audit Committee did not
11
<PAGE> 14
meet and the members of the Compensation & Nominating Committee did not meet.
Subsequent to the Consent Solicitation, members of the Board met eleven (11)
times; the Audit Committee met three (3) times; the Compensation & Nominating
Committee met nine (9) times and the Special Committee met ten (10) times. The
Special Committee was not formed until after the Consent Solicitation. Prior to
the Consent Solicitation, each of the Company's Directors attended at least
seventy-five percent (75%) of the total number of meetings of the Board held
from January 1, 1997 until March 24, 1997. Subsequent to the Consent
Solicitation, each of the Company's Directors attended at least seventy-five
percent (75%) of the total number of meetings of the Board and Committees on
which he served held from March 24, 1997 until December 31, 1997.
Audit Committee
The Audit Committee of the Board, which presently consists of Messrs.
McElwain, Reschini and White, provides assistance to the corporate directors in
fulfilling their responsibility to the stockholders, potential stockholders and
the investment community relating to corporate accounting, reporting practices
of the Company and the quality and integrity of the financial reports of the
Company. The Committee also reviews and recommends to the directors the
independent auditors to be selected to audit the books of the Company; reviews
the risk assessment process and scope of the annual audit and the procedures to
be utilized; reviews with the independent auditors and the Company's financial
personnel the adequacy and effectiveness of the internal accounting and
financial controls of the Company and elicits any recommendations for the
improvement of such internal control procedures and prior to the release of the
annual report to the stockholders, reviews with the independent auditors, the
financial statements to be contained in such report to determine that the
independent auditors' position is fairly presented to the stockholders.
Compensation & Nominating Committee
The Compensation & Nominating Committee of the Board, which presently
consists of Messrs. Jindra, Mykityshyn, Reschini and White establishes, reviews
and approves compensation programs of the Company generally, and approves
salaries and bonuses for officers and certain other salaried employees of the
Company. In addition, the Committee administers the Company's 1992, 1994 and
1997 Stock Option Plans and determines which eligible employees and consultants
of the Company may participate in the Plans and the type, extent and terms of
equity-based awards to be granted to them. In addition, the Committee controls
the granting of any options made outside of the Company's stock option plans to
eligible directors, employees and consultants. The Committee also identifies and
submits on an annual basis to the full Board, nominees to be placed on the
ballot for election to the Board at each annual meeting of stockholders. The
Compensation & Nominating Committee will consider suggested nominees to be
placed on the ballot for election to the Board at each annual meeting of
stockholders in accordance with applicable rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
rules and regulations provide that the Company is not required to include a
stockholder proposal in its proxy materials unless it is received by a specified
date. Accordingly, all recommended nominations to be placed on the ballot for
election to the Board at the 1999 Annual Meeting of
12
<PAGE> 15
Stockholders must be in writing and must be received by the Company on or before
its close of business on January 11, 1999.
Special Committee
The Special Committee of the Board, which presently consists of Messrs.
Jindra and Mykityshyn, reviews and assesses proposals regarding the
restructuring of the Company's obligations to the Zauchas: (i) under certain
earn out provisions of the Northstar/Keystone merger agreement; (ii) under lease
agreements applicable to certain real property owned by Mr. Zaucha and the
Zaucha Family Limited Partnership, which are leased to the Company; (iii) under
term notes issued under the Northstar/Keystone merger agreement; (iv) under the
Guaranty which is the subject of Proposal 4; and (v) involving costs incurred by
Mr. Zaucha in connection with the Consent Solicitation (discussed and defined
below).
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND DIRECTORS
The following table sets forth information as of April 15, 1998 with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to be the beneficial owner of more than five percent (5%) of the
Common Stock; (ii) each person serving as a director of the Company; (iii) each
Named Executive Officer (defined below) and (iv) all current directors and
executive officers of the Company as a group. Unless otherwise indicated, all
shares are owned directly and the indicated owner has sole voting and
dispositive power with respect thereto.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY
OWNED (1)
---------
Beneficial Owner NUMBER (2) PERCENT
---------------- ---------- -------
<S> <C> <C>
5% HOLDERS (3)
Thomas W. Zaucha (4)......................... 974,958 16.3%
Mellon Bank Corporation (5).................. 476,000 8.0%
DIRECTORS (3)
Lawrence F. Jindra, M.D. (6).................... 50,000 *
James H. McElwain (6)........................ 50,000 *
Mark G. Mykityshyn (6)....................... 50,000 *
Roger J. Reschini (7)........................ 168,271 2.8%
David B. White (6)........................... 50,000 *
NAMED EXECUTIVE OFFICERS(3)
Lisa S. Guarino (8).......................... 27,000 *
Linda K. Summers (6)(9)..................... 25,000 *
Robert J. Smallacombe........................ 100 *
Ralph Sweithelm.............................. 0 *
ALL CURRENT DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (total 9 persons) ..... 1,478,779 23.32%
- ----------------------------------------
* Less than 1% of the outstanding Common Stock
</TABLE>
13
<PAGE> 16
(1) Pursuant to the regulations of the Securities and Exchange Commission
(the "Commission"), shares are deemed to be "beneficially owned" by a
person if such person directly or indirectly has or shares (i) the
power to vote or dispose of such shares, whether or not such person
has any pecuniary interest in such shares, or (ii) the right to
acquire the power to vote or dispose of such shares within 60 days,
including any right to acquire through the exercise of any option,
warrant or right.
(2) Represents total number of shares of Common Stock owned by each person,
which each named person or group has the right to acquire, through the
exercise of options within sixty (60) days, together with Common Stock
currently owned, as a percentage of the total number of shares of
Common Stock outstanding as of April 15, 1998. In accordance with the
Commission's rules, the ownership percentage of each person or group is
calculated treating all shares, including options to purchase shares,
beneficially owned by such person or group as issued and outstanding
shares.
(3) Mr. Thomas W. Zaucha is also a Director, the President and the Chief
Executive Officer of the Company.
(4) Includes 692,201 shares of Common Stock owned directly by Mr. Zaucha
and his wife, Alice L. Zaucha, as joint tenants, 207,757 shares of
Common Stock are held by the Zaucha Family Limited Partnership whose
sole partners are currently Mr. Zaucha, Mrs. Zaucha and their four
children, and 75,000 shares of Common Stock which are held by Mr.
Zaucha as sole beneficial owner. If the stockholders approve the
Issuance of Additional Shares Proposal (Proposal 4), Mr. Zaucha's
beneficial ownership of Common Stock would increase significantly. (See
the discussion under Proposal 4.) Mr. Zaucha's business address is
Northstar Health Services, Inc., 665 Philadelphia Street, Indiana,
Pennsylvania 15701.
(5) These shares of Common Stock are beneficially owned by Mellon Bank
Corporation's direct or indirect subsidiaries, Mellon Bank, N.A. and
The Dreyfus Corporation. These subsidiaries have sole voting power over
the shares of Common Stock they beneficially own and shared dispositive
power over the shares of Common Stock they beneficially own. Mellon
Bank Corporation is located at One Mellon Bank Center, 500 Grant
Street, Pittsburgh, Pennsylvania 15258-0001.
(6) Comprised entirely of options to purchase shares of Common Stock.
(7) Includes 108,271 shares of Common Stock indirectly owned by the
Reschini Agency, Inc., of which Mr. Reschini is a majority owner,
10,000 shares of Common Stock which are held by Mr. Reschini as sole
beneficial owner and options to purchase 50,000 shares of Common Stock.
(8) Includes 2,000 shares of Common Stock which are held by Ms.
Guarino as sole beneficial owner and options to purchase
25,000 shares of Common Stock.
(9) Although Ms. Summers is a member of senior management and is a "Named
Executive Officer" as that term is defined under the Commission's
regulations, she is not an executive officer of the Company.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 1997,
1996 and 1995, the cash compensation paid by the Company and its subsidiaries,
as well as certain other compensation paid or accrued for those years, to (i)
any person who served as the Chief Executive Officer during fiscal year 1997,
and (ii) the other most highly compensated executive officers of the Company to
the extent such person's total annual salary and bonus exceeded $100,000 in 1997
(the "Named Executive Officers") in all capacities in which they served.
14
<PAGE> 17
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year Salary Bonus (1) Options (#) (2)
- --------------------------- ---- ------ ----- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Zaucha 1997 $125,000 (3) $0 $0 0 $300
Chairman, President and CEO
1996 $125,000 (3) $0 $0 0 $300
1995 $ 15,625 (3) $0 $0 0 $ 0
Robert J. Smallacombe, CEO 1997 $124,211 (4) $0 $0 50,000 $ 0
Lisa S. Guarino 1997 $134,445 (5) $0 $0 15,000 $300
Executive Vice President, CFO
and Treasurer
1996 $142,630 (5) $0 $0 10,000 $300
1995 $ 11,931 (5) $0 $0 0 $ 0
Linda K. Summers 1997 $141,144 (6) $0 $0 25,000 $300
Regional Vice President
of Subsidiary 1996 $115,086 (6) $0 $0 0 $300
1995 $ 9,231 (6) $0 $0 0 $ 0
Ralph Sweithelm 1997 $200,939 (7) $0 $0 0 $300
President of Subsidiary
1996 $273,099 (7) $0 $0 0 $300
1995 $ 29,599 (7) $0 $0 0 $ 0
</TABLE>
15
<PAGE> 18
(1) The aggregate amount of all perquisite compensation was less
than the lesser of $50,000 or 10% of the total annual salary
and bonus reported for each Named Executive Officer for fiscal
years ended December 31, 1997, 1996 and 1995.
(2) All dollar amounts listed in this column represent the
Company's contributions made on behalf of the Named Executive
Officers pursuant to the Keystone Rehabilitation System's Inc.
401(k) Retirement Savings Plan, a qualified plan for the
Company's employees pursuant to Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "401(k) Plan"). The
401(k) Plan calls for certain annual matching contributions up
to prescribed limits of fifty percent (50%) of the employee
contribution with a maximum of $300 per employee. Employees
can defer up to twenty percent (20%) of their salary. The
Named Executive Officers were limited to a maximum deferral of
$9,500 for 1997, $9,500 for 1996 and $9,240 for 1995. The
401(k) Plan also provides that the Company can make
discretionary contributions; however, no such contributions
were made by the Company during the year ended December 31,
1997. During the year ended December 31, 1997, the Named
Executives received medical benefits under the Company's group
insurance policy, including disability and life insurance
benefits which are equivalent to such benefits paid to all
other full-time employees.
(3) During 1997, and the applicable period of 1996, Mr. Zaucha
received annual cash compensation in the amount of $125,000,
which consisted entirely of salary pursuant to his employment
contract which is summarized herein. Mr. Zaucha also receives
funds from the Company in the form of lease payments, note
payments and other related-party transactions which relate to
the merger with Keystone. See, "Certain Relationships and
Related Transactions." Lease payments to Mr. Zaucha for 1997
and 1996 were $470,360 and $59,000 for 1995. In conjunction
with the merger with Keystone, the Company is required to make
earn out payments to Mr. Zaucha, Alice Zaucha and the Zaucha
Family Limited Partnership in certain events, none of which
have been made to this date. The Company also paid $80,404 in
1997, $86,320 in 1996 and $9,156 in 1995 for real estate
maintenance, housekeeping and leasehold improvement
construction services to Impulse Development Corporation, a
company controlled by Mr. Zaucha.
(4) Mr. Smallacombe was CEO of the Company from February 1997 to
March 24, 1997. Pursuant to the rules and regulations under
the Exchange Act, only information regarding compensation paid
to Mr. Smallacombe during fiscal year 1997 is required to be
disclosed. Included within Mr. Smallacombe's salary for 1997,
are consulting fees in the amount of $59,201 which he received
pursuant to a consulting agreement with the Company. For a
discussion of the material terms of Mr. Smallacombe's
consulting agreement and employment agreement, see the caption
below entitled "Employment Agreements."
(5) Included within Ms. Guarino's salary for 1997 was a severance
payment in the amount of $61,285 and consulting fees in the
amount of $39,506, which she received for services rendered
between May 8, 1997, and August 31, 1997, during which time
she was not an employee of the Company. Included within Ms.
Guarino's salary for 1996 was a severance payment in the
amount of $52,530. Ms. Guarino's position with the Company was
terminated on September 30, 1996 and she was reinstated to her
position in September, 1997 as a result of the Consent
Solicitation (defined and discussed below).
(6) Included in Ms. Summers salary for 1997, 1996 and 1995 are
commissions and certain payments she earned pursuant to the
terms of her employment agreement. Ms. Summers' salary without
taking into account the commissions and other payments she
earned pursuant to the terms of her employment agreement for
1997 was $86,461, for 1996 was $89,603, and for 1995 was
$85,000. For a discussion of the material terms of Ms.
Summers' employment agreement, see the caption below entitled
"Employment Agreements."
16
<PAGE> 19
(7) Mr. Sweithelm resigned from the Company in August, 1997.
Included in his annual salary for 1997, 1996 and 1995 are
commissions he earned pursuant to the terms of his employment
agreement. Also, included in his salary for 1997 are payments
made to him upon his termination of his employment agreement.
Mr. Sweithelm's salary without taking into account the
commissions and other payments he earned pursuant to the terms
of his employment agreement for 1997 was $63,674, for 1996 was
$85,290, and for 1995 was $84,163. For a discussion of the
material terms of Mr. Sweithelm's employment agreement, see
the caption below entitled "Employment Agreements."
OPTION/SAR GRANTS IN FISCAL YEAR 1997
The following table sets forth information as of December 31, 1997
concerning individual grants of options to purchase Common Stock made to Named
Executive Officers during 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE AT ASSUMED
UNDERLYING OPTIONS/SARS EXERCISE ANNUAL RATES OF STOCK
OPTIONS/SARS GRANTED TO OR BASE EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED EMPLOYEES PRICE DATE OPTION TERM
- ------------------ --------- --------- --------- -------- -----------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Robert J. Smallacombe(1) 50,000 8.04% $ 1.750 03/24/98 $56,082 $93,682
Lisa S. Guarino 15,000 2.41% $ 1.625 10/01/02 $ 6,734 $14,881
Linda K. Summers 25,000 4.02% $ 1.875 10/29/02 $12,951 $28,618
</TABLE>
(1) The options were immediately exercisable upon grant and continue to be
immediately exercisable, with the exception of the options granted to
Mr. Smallacombe. The options granted to Mr. Smallacombe were not
granted under a stock option plan, Board resolution, employment
agreement or any other written agreement specifying the terms and
conditions of the options. Therefore, the Company has made certain
assumptions as to the expiration date of the options; specifically, the
Company has applied the expiration terms of the options granted to
other directors of the Company to the options granted to Mr.
Smallacombe. Based on these assumptions, the Company has taken the
position that the options granted to Mr. Smallacombe expired on March
24, 1998 since he did not exercise the options within one year from the
date of his termination of employment with the Company on March 24,
1997. The potential realizable value at the assumed annual rates of
stock appreciation represents a full term of five years and not the
values as of the expiration date of March 24, 1998.
17
<PAGE> 20
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR END 1997
OPTION/SAR VALUES
The following table sets forth information regarding the exercise of
Options by Named Executive Officers during 1997. The table also shows the number
and value of unexercised Options which were held by the Named Executive Officers
as of December 31, 1997.
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised
Number of Options Value of Unexercised
Shares Acquired Value Exercisable/ In-the-Money Options
Name on Exercise Realized Unexercisable Exercisable/Unexercisable (1)
- ---- ----------- -------- ------------- -----------------------------
<S> <C> <C> <C> <C>
Robert J. Smallacombe 0 $0 50,000/0 (2) $0/0
Lisa S. Guarino 0 $0 25,000/0 $0/0
Linda K. Summers 0 $0 25,000/0 $0/0
(1) As of December 31, 1997, none of the options were in the money.
(2) As indicated in footnote 1 to the table above, the options held by Mr.
Smallacombe are no longer exercisable and have expired.
</TABLE>
COMPENSATION OF DIRECTORS
From March 24, 1997 to December 31, 1997 each Director who is not an
employee of the Company received a quarterly retainer fee of $3,000 and an
attendance fee of $1,000 for each Board of Director meeting or committee meeting
at which he is present in person or via telephone means. In addition, Directors
received options to purchase 25,000 shares, at market value, upon joining the
Board. Directors are also eligible to receive options to purchase 2,500 shares
of Common Stock upon re-election if they served for at least a full term and if
they do not own more than ten percent (10%) of the outstanding shares of Common
Stock. The additional options granted to directors upon re-election to the Board
is the subject of Proposal 5-- Option Plan Termination Proposal.
EMPLOYMENT AGREEMENTS
Thomas W. Zaucha
In November 1995, the Company and Thomas W. Zaucha, President and Chief
Executive Officer of the Company, entered into an employment agreement for a
term of five years. The agreement specifies Mr. Zaucha's position and duties,
compensation and benefits, and termination provisions. The agreement also
contains a non-competition provision and a confidentiality provision.
Under the terms of his employment agreement, Mr. Zaucha serves as the
President and Chief Executive Officer of the Company. Mr. Zaucha is entitled to
an annual base salary of $125,000 which may be increased but not decreased by
the Board at any time based on Mr. Zaucha's contribution to the success of the
Company and
18
<PAGE> 21
such other factors as the Board may deem appropriate. Mr. Zaucha is
also entitled to insurance and health benefit plans available generally to
employees of the Company and is eligible to participate in and receive grants
under stock option or bonus plans, profit sharing or similar plans and certain
other benefits generally available to employees of the Company. In addition, Mr.
Zaucha is entitled to a company car.
The agreement with Mr. Zaucha also provides that if his employment is
terminated due to illness or disability, he will continue to receive all
payments when due under the agreement. If Mr. Zaucha's employment with the
Company is terminated by reason of his death, he will receive all payments under
the agreement when due as of the time of his death. If the Company terminates
Mr. Zaucha for cause, Mr. Zaucha will only be entitled to accrued and unpaid
salary.
Lisa S. Guarino
In September 1997, the Company and Lisa S. Guarino, Executive Vice
President and Chief Financial Officer of the Company, entered into an employment
agreement for a term of one year which such term will automatically extend for
additional one year periods unless terminated by the Company with ninety days
prior written notice. Upon a change of control of the Company (as defined in the
agreement) the term of the agreement will automatically extend for one year from
the date of the change of control. In the event of a change of control, Ms.
Guarino will have the option of remaining with the Company or any surviving
company or being paid six months salary as severance.
Under the terms of the agreement, Ms. Guarino serves as the Executive
Vice President and Chief Financial Officer and reports directly to the Chief
Executive Officer. Ms. Guarino is entitled to receive an annual salary of
$125,000. This annual salary cannot be reduced without the approval of Ms.
Guarino and may be increased at the Board's discretion, with a minimal increase
of $5,000 per year. Ms. Guarino is entitled to all benefits customary to
full-time, exempt management employees of the Company. Ms. Guarino also received
an option to purchase 15,000 shares of Common Stock pursuant to the Company's
1992 Stock Option Plan and is eligible to receive certain options on a quarterly
basis if certain corporate performance goals are achieved under the 1997 Stock
Option Plan. In 1997, Ms. Guarino received no options pursuant to this incentive
stock option program under the 1997 Stock Option Plan.
The terms of the agreement also allow Ms. Guarino to operate her
consulting business and her accounting services company.
Linda K. Summers
In December 1997, the Company and Linda K. Summers, Regional Vice
President of the Company's subsidiary, Keystone Rehabilitation Systems, Inc.
("Keystone"), entered into an employment agreement for a term of one year which
such term will automatically renew for additional one year periods unless the
agreement is terminated or modified in writing pursuant to prior written notice
of ninety days of any anniversary date. Upon a change of control of the Company
(as defined in the Agreement), if Ms. Summers elects not to remain with the
Company or any surviving company, she is entitled to receive six months pay with
benefits as severance. This option is only exercisable within the first ninety
days of a change of control. Ms. Summers is also subject to non-competition and
confidentiality provisions.
19
<PAGE> 22
Under the terms of the agreement, Ms. Summers serves as Regional Vice
President of Keystone and reports directly to the President of Keystone. Ms.
Summers is entitled to receive an annual salary of $95,000. In addition, she is
entitled to certain bonuses and grants of options based on the financial
performance of the Company. In 1997, Ms. Summers received an option to purchase
25,000 shares of Common Stock under the Company's 1997 Stock Option Plan. Ms.
Summers is also eligible to participate in the incentive programs which may from
time to time be implemented by the Company. Ms. Summers is also entitled to all
benefits customary and usual for full-time exempt employees. She also has the
use of a company car at the discretion of the Chief Executive Officer.
Robert J. Smallacombe
In January 1997, the Company and Robert J. Smallacombe entered into an
independent consulting contract for a term of eight months concluding on
September 30, 1997. On January 20, 1997, the Board approved a resolution
converting the consulting contract to an employment contract. This contract was
terminated for cause as a result of the Consent Solicitation (defined and
discussed below) and Mr. Smallacombe was removed from his position as Chief
Executive Officer on March 24, 1997. Under the contract, Mr. Smallacombe was
charged with the goal of improving the trading price of the Common Stock and
working directly with the Board in strategic planning for improving the
financial performance and operational performance of the Company. The material
terms of Mr. Smallacombe's terminated contract are set forth below.
Pursuant to the terms of the consulting contract and employment
contract, Mr. Smallacombe was entitled to receive $6,500 per week payable in
bi-weekly installments. In addition, Mr. Smallacombe was eligible to receive an
incentive compensation package based on his past performance, scope of
commitment and his achievement with respect to the Board's goal of increasing
stockholder value. Subject to Board approval, Mr. Smallacombe was eligible to
receive stock options to purchase 50,000 shares of Common Stock at an exercise
price of $1.75 per share and options to purchase 100,000 shares of Common Stock
at an exercise price of $1.75 per share subject to the restriction that the
options did not become exercisable until the trading price of the Common Stock
was greater than $5.93 for at least fifteen consecutive trading days. Mr.
Smallacombe did not receive any of these options to purchase the additional
100,000 shares of Common Stock. Further, the option to purchase 50,000 shares of
Common Stock expired in March, 1998 since Mr. Smallacombe did not exercise such
option within one year of his termination date of employment by the Company.
(See footnote 1 under the Option/SAR Grants In Fiscal Year 1997 Table under the
section "Executive Compensation.")
Ralph Sweithelm
Prior to January 1995, Ralph Sweithelm owned a twenty-five percent
(25%) interest and Keystone owned a seventy-five percent (75%) interest in a
general partnership related to the Company's clinic in Indiana, PA. In January
1995, the partnership was terminated and his 25% interest in the partnership
agreement was converted into an employment agreement with Keystone with
compensation as described below. Prior to and subsequent to the conversion of
the partnership agreement to the employment agreement, Mr. Sweithelm served as a
Facility Director of Keystone. In addition to the employment agreement, on April
1, 1997, he was promoted to President
20
<PAGE> 23
of Keystone. The termination provisions of the employment agreement permitted
termination by any party with ninety days prior written notice to the
non-terminating party. The agreement set forth Mr. Sweithelm's position, duties
and responsibilities. On August 13, 1997, Mr. Sweithelm executed a termination
of employment agreement (the "Termination Agreement") and resigned his position
as President of Keystone.
Under the terms of the employment agreement, Mr. Sweithelm was entitled
to an annual base salary of $82,400 with increases based on the consumer price
index on the first day of January each year. He was also entitled to receive all
benefits offered by Keystone that are usual and customary for his position and
malpractice insurance coverage. The terms of the agreement also subjected Mr.
Sweithelm to confidentiality provisions and under certain events,
non-competition provisions.
In addition to his annual base salary and in consideration of the
$207,825 (the "Contribution") he paid to Keystone in exchange for the conversion
of his partnership agreement into an employment agreement, Mr. Sweithelm was
entitled to a monthly commission equal to twenty-five percent (25%) of
pre-commission net income of one of Keystone's facilities (as defined in the
agreement)(the "25% Commission").
In the event that Mr. Zaucha lost controlling interest of Keystone, the
agreement allowed Mr. Sweithelm to: (i) withdraw from the 25% Commission; (ii)
be reimbursed his Contribution or receive two times his share of the most recent
twelve months 25% Commission (the "Terminating Commission") whichever is
greater; (iii) escape the application of the non-competition provision; and (iv)
terminate the agreement or negotiate a new agreement.
Pursuant to the Termination Agreement, Mr. Sweithelm exercised his
option to terminate the employment agreement, withdraw from the 25% Commission,
and not be bound by the non-competition provisions of the agreement. He also
elected to receive the Termination Commission, or $235,443, since it was higher
than his Contribution.
21
<PAGE> 24
COMPENSATION & NOMINATING COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Executive Compensation Policy. The Company's compensation policy for
all of its executive officers is formulated and administered by the Compensation
& Nominating Committee of the Board. The Compensation & Nominating Committee
also administers the Company's 1992 Stock Option Plan, the 1994 Non-Employee
Directors Stock Option Plan and the 1997 Stock Option Plan, and the granting of
any options made outside of the Company's stock option plans pursuant to which
the Compensation & Nominating Committee periodically grants options to
directors, executive officers and other employees of the Company.
The primary goals of the Company's compensation policy are to attract,
retain and motivate skilled executive officers and to encourage them to act in
the best interests of the Company's stockholders. In determining the level of
executive compensation, certain quantitative and qualitative factors, including,
but not limited to, the Company's operating and financial performance, the
individual's level of responsibilities, experience, commitment, leadership and
accomplishments relative to stated objectives, and marketplace conditions are
taken into consideration.
Chief Executive Officer's Compensation. For 1997, the compensation of
Mr. Zaucha, the Chief Executive Officer of the Company, was set by the terms of
his employment agreement. A summary of the key provisions of Mr. Zaucha's
employment agreement is included elsewhere in this Proxy Statement. See
"Employment Agreements." Mr. Zaucha also participates in benefit programs that
are generally available to employees of the Company, including medical benefits
and a 401(k) savings plan. Mr. Zaucha has not participated in the Company's
Stock Option Plans to date.
Executive Officer Compensation. During 1997, the Company also had an
employment agreement with Ms. Guarino, the Chief Financial Officer of the
Company. A summary of the key provisions of these employment agreements is
included elsewhere in this Proxy Statement. See "Employment Agreements." For the
year ended December 31, 1997, compensation paid to the executive officers of the
Company was determined primarily pursuant to the terms of the employment
agreements negotiated by the Company with the executives. For discretionary
compensation paid to executive officers that is not set by employment
agreements, the Compensation & Nominating Committee made subjective
determinations on a case-by-case basis based on recommendations of the Chief
Executive Officer as to each executive's merit and contribution to the success
of the Company.
Section 162(m) of the Code. Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), generally limits to $1 million the
deductibility by the Company of compensation paid in any one year to any
executive officer named in the Summary Compensation Table. As none of the
executive officers of the Company are currently paid compensation in excess of
$1 million, the Company has not yet developed a policy with respect to Section
162(m) of the Code.
As submitted by the
Compensation & Nominating Committee,
Mark G. Mykityshyn, Chairman
Lawrence F. Jindra, M.D.
Roger J. Reschini
David B. White
22
<PAGE> 25
PERFORMANCE GRAPH
The following graph compares the cumulative return on the Common Stock
from June 3, 1993 to December 31, 1997 with such return for the NASDAQ Stock
Market Index (U.S.), and The Standard & Poor's Midcap 400 Health Care Sector
Index (an Industry Index consisting of a peer group of 29 companies (1) ("Peer
Group Index"). The performance graph assumes an investment of $100 on June 3,
1993, together with the reinvestment of dividends. Each measurement point on the
graph below represents the cumulative stockholder return as measured by the
closing price at the end of each period during the period from June 3, 1993
through December 31, 1997.
COMPARISON OF 55 MONTH CUMULATIVE TOTAL RETURN
AMONG NORTHSTAR HEALTH SERVICES, INC. THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP(2)
<TABLE>
<CAPTION>
6/03/93 12/93 12/94 12/95 12/96 12/97
------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
NORTHSTAR HEALTH SERVICES, INC. $100 $147 $119 $100 $ 23 $ 17
PEER GROUP 100 117 124 165 167 174
NASDAQ STOCK MARKET (U.S.) 100 110 108 152 187 230
</TABLE>
- -------------------------
1 The Peer Group Index consists of the following 29 companies: Acuson Corp,
Allegiance Corp, Apria Healthcare Group, Inc., ATL Ultrasound, Inc., Beckman
Coulter, Inc., Beverly Enterprises, Inc., Concentra Managed Care, Inc., Covance,
Inc., Datascope Corp., Dentsply Intl., Inc., Diagnostic Prods. Corp., First
Health Group Corp., Forest Labs, Inc., Foundation Health Sys., Inc., Health Care
& Retirement Corp., Health Mgmt. Assoc., Inc. New, Ivax Corp, Mylan Labs, Inc.,
Novacare, Inc., Omnicare, Inc., Oxford Health Plans, Inc., Pacificare Health
Sys., Inc., Quorum Health Group, Inc., Scherer RP Corp, Stryker Corp., Sybron
Intl., Total Renal Care Hldgs, Inc., Vencor, Inc., and Watson Pharmaceuticals,
Inc.
2 On May 31, 1996, NASDAQ suspended trading in the Company's Common Stock.
- -----------------------------
23
<PAGE> 26
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the Exchange Act, the Company's directors and executive officers,
and any persons holding more than ten percent (10%) of the outstanding shares of
Common Stock are required to report their initial ownership of Common Stock and
any subsequent changes in that ownership to the Commission. Specific due dates
for these reports have been established by the Commission, and the Company is
required to disclose in this Proxy Statement any failure by such persons to file
these reports in a timely manner during the 1997 fiscal year. Based solely upon
the Company's review of copies of such reports furnished to it, the Company
believes that since March 24, 1997 through December 31, 1997, the Company's
current executive officers and directors and the holders of more than ten
percent (10%) of the outstanding Common Stock complied with all reporting
requirements of Section 16(a) under the Exchange Act, with the exception of Mr.
Frank Spramelli, former Executive Vice President and Chief Administrative
Officer, who failed to file timely one (1) Form 3 to report no ownership in the
Common Stock. Mr. Spramelli resigned from the Company in February, 1998. With
respect to the Company's executive officers and directors and the holders of
more than ten percent (10%) of the outstanding Common Stock from January 1, 1997
until March 24, 1997, current management has no records indicating the status of
such persons' compliance or non-compliance under Section 16(a) of the Exchange
Act.
CONSENT SOLICITATION
In February 1997, Thomas W. Zaucha, the current Chairman of the Board
and Chief Executive Officer of the Company, commenced a solicitation of consents
of the Company's stockholders to remove and replace the other members of the
Board of Directors who were serving at the time (which such members are not the
persons who are Nominees listed under Proposal 1 or the current members of the
Board) and effectuated related changes in the bylaws of the Company (the
"Consent Solicitation"). Shortly thereafter, the Board of Directors in control
at the time of the Consent Solicitation, terminated Mr. Zaucha's employment with
the Company, although he remained a member of the Board of Directors. On March
24, 1997, Mr. Zaucha delivered executed consents representing the votes of
sixty-one percent (61%) of the outstanding shares of Common Stock in favor of
his proposals which were the subject of the Consent Solicitation. Following
confirmation of the decision by the Delaware Chancery Court on May 8, 1997, Mr.
Zaucha resumed his duties as the Company's President and Chief Executive
Officer.
The ruling of the Delaware Chancery Court was appealed to the Delaware
Supreme Court by three of the Board members removed from office as a result of
the Chancery Court's decision. On August 1, 1997, a unanimous panel of the
Delaware Supreme Court affirmed the decision of the Delaware Chancery Court
confirming the election of the current Board.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management does not adopt or affirm any related party disclosures made
in prior public filings including financial statements. The transactions
discussed herein are based on current management's knowledge at this point
24
<PAGE> 27
in time, however, management believes that other matters may come to its
attention in connection with the litigation discussed as set forth in the "Legal
Proceedings" section herein.
25
<PAGE> 28
TRANSACTIONS RELATED TO THOMAS W. ZAUCHA
CONSENT SOLICITATION EXPENSES
Since the decision of the Delaware Chancery Court confirming the
results of the Consent Solicitation was affirmed by the Delaware Supreme Court
on August 1, 1997, the Company will reimburse Mr. Zaucha for the expenses he
incurred in connection with the Consent Solicitation. To date, those expenses,
which primarily consist of investment advisory fees, legal fees, printing and
proxy solicitation costs and incidental expenses approximate $1,750,000.
KEYSTONE ACQUISITION
Mr. Thomas Zaucha was the founder and principal owner of Keystone which
merged with the Company in November 1995 and is now the Company's principal
operating subsidiary. In connection with the Keystone acquisition, Mr. Thomas
Zaucha and Mr. David Watson, who both sold interests in the former Keystone, and
are now or were officers with Northstar, have gross debt and other amounts due
directly to them by the Company of $3,919,000 and $262,500, respectively, as of
December 31, 1997 and $3,919,000 and $293,750, respectively, as of December 31,
1996. In addition, Mr. Zaucha's Family Limited Partnership is due $1,105,500
from the Company as of December 31, 1997 and 1996.
As required under the Keystone Merger Agreement, immediately prior to
the merger, Keystone sold, at fair market value determined by a third party
appraisal, all of the real estate previously owned by Keystone to the Zaucha
Family Limited Partnership, of which Mr. Zaucha is a general partner, and a
related entity, in return for a payment of $5,215,568. The parcels of such real
estate used in Keystone's business were then leased to Keystone. At the request
of Mr. Zaucha, the Company has formed a Special Committee of the Board to
evaluate the fairness of the lease agreements as well as certain other financial
arrangements Mr. Zaucha has with the Company. The leases are for a period of
either five or ten years, and commenced November 15, 1995. Lease payments were
$470,360 for 1997 and 1996 and $59,000 for 1995. Future minimum lease payments
under these leases aggregate in excess of $4.0 million.
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.
IMPULSE DEVELOPMENT CORPORATION
The Company also uses, on an as needed basis, the services of Impulse
Development Corporation, a Company controlled by Thomas Zaucha, for real estate
maintenance, housekeeping and leasehold improvement construction. Payments to
Impulse totaled $80,404 in 1997, $86,320 in 1996 and $9,156 in 1995.
26
<PAGE> 29
OTHER
The Reschini Agency, Inc., of which Roger J. Reschini, a current
Director, is a majority owner, acts as the Company's broker for professional and
general liability insurance. During 1997 and 1996, the Company paid premiums of
approximately $214,000 and $184,000 for these insurance coverages. The agency
received commissions of approximately $25,000 in 1997 and $22,000 in 1996.
During 1997, the Company entered into a simultaneous transaction with the
Reschini Agency, Inc. whereby the Company paid $180,000 for insurance premiums
and the Reschini Agency purchased 108,271 shares of Common Stock.
The Company retains the law firm of Burns, White & Hickton, of which
Mr. David B. White , a current director and a Nominee, is a named partner, for
various litigation matters.
During 1997, Brody Associates, a consulting firm wholly-owned by Steven
N. Brody, a former director of the Company, was retained by the Company to
perform a variety of consulting services for the Company related to its
investigation of former management and related corporate structuring of the
Company. Mr. Brody was removed as a director on March 24, 1997 as a result of
the Consent Solicitation. During 1997, the Company paid Brody Associates
$148,103 in consulting fees. In November 1997, the Company reached a mutual
release and settlement agreement with Steven Brody and Brody Associates that
provided for, among other things, a payment of approximately $26,000 in
outstanding consulting bills and whereby all parties resolved all remaining
suits and claims against each other. See "Legal Proceedings."
In connection with the Keystone Merger, Mr. David Watson, a former
officer and Director of the Company has debt due directly to him of $262,500 as
of December 31, 1997 and $293,750 as of December 31, 1996. Mr. Watson was
removed as a director and an officer of the Company on March 24, 1997 and as an
employee of the Company on July 5, 1997.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be subject to
claims and legal actions, from time to time, by patients and others. The Company
does not believe that any such pending actions, if adversely decided, would have
a material adverse effect on its financial condition.
In November, 1997, a comprehensive settlement of a number of
stockholder lawsuits filed in 1996 and consolidated into one action in federal
court in the Western District of Pennsylvania (Butler v. Northstar, No. 96-701
W.D. Pa) was given final approval by the court. The lawsuit alleged violations
of federal securities laws by the Company and certain of its former officers and
directors, and an alleged scheme to disseminate false and misleading information
regarding the Company. This action was described in the Company's Form 10-K
filing for the fiscal years ended December 31, 1996 and December 31, 1997. In
December 1997, with no party having appealed the order approving the settlement,
the decision became final. The settlement agreement which was approved by the
court, created a settlement fund of $6.45 million, of which $5.75 million, less
any expenses and legal counsel fees, will be paid to those Northstar
stockholders who submitted proofs of claim by December 27, 1997, which the court
approved as valid claims. The Company contributed $100,000 to the $6.45 million
settlement fund; the insurer on the Company's directors' and officers' liability
policy contributed the $1.0 million limits of coverage of that policy; and the
$5.35 million balance in the fund was contributed by other defendants.
27
<PAGE> 30
In September 1996, the Company filed an action in federal court in
Pittsburgh, seeking to recover damages from Northstar's former Chief Executive
Officer, Mr. Mark DeSimone, and various Northstar related-parties and others
(Northstar v. DeSimone, C.A. No. 96-1695, W.D. Pa.). This action was described
in the Company's Form 10-K filing for the fiscal years ended December 31, 1996
and December 31, 1997. Since then, in connection with the settlement of the
Butler class action, Northstar has settled its claims against its former Chief
Executive Officer for the sum of $600,000 which was then contributed to the
settlement fund created in the Butler action. Since that settlement, Northstar
has also agreed to settle its claims against another related-party and his
affiliated companies (the Bergman defendants) and that settlement is in the
process of being documented. Northstar's claims against the two remaining sets
of defendants (the Shields and Horoszko defendants) are being prosecuted
vigorously.
In response to Northstar's suit against Mark A. DeSimone and the other
defendants, Coregis Insurance Company, a professional liability insurer which
insured DeSimone's former law firm, brought an action in federal court (Coregis
Insurance Co. v. Ogg, Jones Cordes & Igneizi, C.A. No. 96-2243 W.D. Pa.),
seeking a declaratory judgment that Northstar's claims were not covered by the
defendant's professional liability policy. Although the action named Northstar,
its primary purpose was to determine the obligation of the insurance company.
The main defendant was the law firm which Northstar had sued and which claimed
coverage under the professional liability policy in question. The case was
settled as part of the settlement of the Butler action by means of a $250,000
payment into the Butler settlement fund by the defendant law firm's professional
liability insurer.
In May 1996, a group of approximately forty Northstar stockholders
filed suit in state court in California, (Bosco v. Northstar, C.A. No. BC
149867, Superior Court of California for Los Angeles County), which alleged
violations of various California securities laws and related common law claims.
Northstar and its former Chief Executive Officer, Mark A. DeSimone, and
Northstar's former Chief Financial Officer, Michael J. Kulmoski, Jr., along with
the Company's former auditor, Richard A. Eisner & Co., LLP were named as
defendants. This action was described in the Company's Form 10-K filing for the
fiscal years ended December 31, 1996 and December 31, 1997. In summary, these
claims arose out of the false and misleading statements concerning Northstar and
its financial condition which were disseminated by the individual defendants. In
November 1997, the lawsuit was settled in connection with settlement of the
Butler action described above for the sum of $500,000, which was paid out of the
settlement fund created in the Butler action in December 1997.
In July 1996, Michael Kulmoski, Jr., Northstar's former Chief Financial
Officer and a named defendant in both the stockholder class actions and the
individual action described above, filed a demand for arbitration against
Northstar (Kulmoski v. Northstar, Arbitration Assn., No. 55-116-0106-96-CEW). In
his demand for arbitration, Kulmoski, whose employment with Northstar was
terminated in the summer of 1996, alleges breach of his employment agreement by
Northstar and related claims, including a claim for indemnification under
Northstar's by-laws in suits filed against him by Northstar stockholders.
Kulmoski later agreed, however, to sever the issue of his right to
indemnification from this proceeding to be decided by the courts as an ancillary
issue in the Butler case. An arbitration hearing was held on November 6 and 7,
1997 on the issue of liability only, post-hearing briefs were submitted in
mid-February 1998. On March 20, 1998, an arbitration panel decided that the
record does not support the conclusion that Kulmoski's employment had been
terminated for "cause" as defined in his employment agreement. The panel has
scheduled a hearing on the issues of damages for May 1, 1998.
28
<PAGE> 31
In October 1997, in accordance with his agreement to have the issue of
his right to indemnification for counsel fees and expenses incurred in his
defense of the stockholder actions filed against him in the Butler and Bosco
cases, Michael Kulmoski, Jr., filed a petition for such fees and expenses in the
Butler case in which he sought an award of $69,244.02. (Kulmoski Fee Petition in
Butler v. Northstar, C.A. No. 96-709, W.D. Pa.). Although Northstar had raised
an issue whether Kulmoski was entitled to indemnification under its by-laws
under the circumstances of these cases, in an effort to resolve this matter,
Northstar agreed to confine its objections to the amount of the counsel fees and
expenses claimed in the petition. In an opinion and order dated December 16,
1997, the court agreed with Northstar's objections and awarded Kulmoski
$22,050.77 in counsel fees and expenses. Notwithstanding Kulmoski's agreement to
submit this issue to the judge for final resolution, he has appealed the court's
decision to the United States Court of Appeals for the Third Circuit.
In March 1997, Ultrasonics, Inc. ("Ultrasonics") confessed judgment
against two subsidiaries of the Company and filed a lawsuit against the Company
itself in the Court of Common Pleas of Allegheny County, Pennsylvania for
alleged non-performance under two lease agreements with the Company. The lease
obligations arose in connection with the Company's purchase of certain assets of
Penn Vascular Labs, P.C. ("PVL") and the stock of Vascusonics, Inc.
("Vascusonics") in November, 1995. In addition to challenging the legality and
enforceability of these lease agreements as fraudulent in the RICO action
described above, the Company filed an Answer and Counterclaim against
Ultrasonics for fraud. In March 1998, the Company reached a settlement in
principle with Ultrasonics that resulted in mutual releases and no payment to
either party.
In February 1997, Thomas W. Zaucha, the current Chairman of the Board
of Directors and Chief Executive Officer of Northstar, commenced a solicitation
of Northstar stockholder consents to remove and replace the other members of the
Northstar Board of Directors which at the time consisted of Messrs. Brody,
Jarrett, Pesci, Smallacombe and Watson and effectuate related changes in
Northstar's bylaws (the "Consent Solicitation). Shortly thereafter, the Board of
Directors terminated Mr. Zaucha's employment with the Company, though he
remained a member of the Board of Directors. On March 24, 1997, Mr. Zaucha
delivered executed consents representing the votes of sixty-one percent (61%) of
the outstanding shares in favor of his proposals and, following confirmation of
the decision of the Delaware Chancery Court on May 8, 1997, Mr. Zaucha resumed
his duties as the Company's Chief Executive Officer. The ruling of the Delaware
Chancery Court was appealed to the Delaware Supreme Court by three of the Board
members removed from office as a result of the Chancery Courts' decision. On
August 1, 1997, a unanimous panel of the Delaware Supreme Court affirmed the
decision of the Delaware Chancery Court confirming the election of the current
Board. The proxy solicitation is described in greater detail in the Company's
report on Form 8-K dated May 8, 1997.
In January 1997, the Company and Samuel Armfield III, M.D., the seller
in the PVL transaction, reached a settlement agreement in regard to the various
claims that each had against the other, resulting from the acquisition by the
Company of the stock of Vascusonics and certain of the assets of PVL.
In January 1997, the Justice Department initiated an action against
Samuel Armfield, III, M.D for claims amounting to $300,000 in connection with
Dr. Armfield's Medicare billings. Although such claims could be trebled if Dr.
Armfield is convicted, the Company believes that its exposure, through its
dealings with Vascusonics, would aggregate $50,000 to $100,000. In addition, the
Company has recourse against Dr. Armfield for any amounts assessed against the
Company, which the Company plans to aggressively pursue, if necessary.
29
<PAGE> 32
OTHER BUSINESS OF THE MEETING
The Company is not aware of any matters to come before the Annual
Meeting other than those stated in this Proxy Statement. However, inasmuch as
matters of which management of the Company is not now aware may come before the
Annual Meeting or any adjournment or postponement thereof, the proxies confer
discretionary authority with respect to acting thereon, and the persons named in
such proxies intend to vote, act and consent in accordance with their best
judgement with respect thereto. Upon receipt of such proxies (in the form
enclosed and properly signed) in time for voting, the shares represented thereby
will be voted as indicated thereon and in this Proxy Statement.
ANNUAL REPORT
A copy of the Company's Annual Report for its fiscal year ended
December 31, 1997 is enclosed with this Proxy Statement. A representative of
Arthur Andersen LLP, the accounting firm which examined the financial statements
in the Annual Report, will attend the Annual Meeting. This representative will
have the opportunity to make a statement if he or she desires to do so, and will
be available to respond to any appropriate questions presented by the
stockholders at the Annual Meeting.
ADDITIONAL INFORMATION
UPON WRITTEN REQUEST OF ANY STOCKHOLDER, A COPY OF THE COMPANY'S REPORT
ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1997, INCLUDING THE
FINANCIAL STATEMENTS AND SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE
COMMISSION PURSUANT TO RULE 13a-1 UNDER THE EXCHANGE ACT, MAY BE OBTAINED
WITHOUT CHARGE, FROM TRACEY L. MISSIEN, DIRECTOR OF INVESTOR RELATIONS,
NORTHSTAR HEALTH SERVICES, INC., 665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA
15701.
ADDITIONAL COPIES OF THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS, DATED
DECEMBER 31, 1997, MAY BE OBTAINED WITHOUT CHARGE BY ANY STOCKHOLDER TO WHOM
THIS PROXY STATEMENT IS SENT, UPON WRITTEN REQUEST TO TRACEY L. MISSIEN,
DIRECTOR OF INVESTOR RELATIONS, NORTHSTAR HEALTH SERVICES, INC., THE ATRIUM, 665
PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701.
By Order of the Board of Directors
/s/ Thomas W. Zaucha
---------------------------------
Thomas W. Zaucha
Chairman, President and
Chief Executive Officer
May 8, 1998
30
<PAGE> 33
[INSERT LOGO]
NORTHSTAR HEALTH SERVICES, INC.
31
<PAGE> 34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NORTHSTAR HEALTH SERVICES, INC.
665 PHILADELPHIA STREET
INDIANA, PENNSYLVANIA 15701
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 11, 1998 AT 11:00 A.M., EASTERN TIME
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF NORTHSTAR
HEALTH SERVICES, INC.
The undersigned hereby appoints Lisa S. Guarino and Sheree D. Frederick,
and each or any of them, or _________________ (a substitute proxyholder
of the undersigned) with full power of substitution, as proxies of the
undersigned, to vote all shares of stock which the undersigned is entitled
in any capacity to vote at the above-stated annual meeting, and or any and
all adjournments or postponements thereof (the "Annual Meeting"), on the
matters set forth on this Proxy Card, and in their discretion upon all
matters incident to the conduct of the Annual Meeting and upon such other
matters as may properly be brought before the Annual Meeting. This proxy
revokes all prior proxies given by the undersigned.
ALL PROPERLY EXECUTED PROXIES WILL BE VOTED AS DIRECTED. IF NO
INSTRUCTIONS ARE INDICATED ON A PROPERLY EXECUTED PROXY, SUCH PROXY WILL
BE VOTED FOR APPROVAL OF PROPOSALS 1, 2, 3, 4, 5 AND 6. ALL ABSTAIN VOTES
WILL BE COUNTED IN DETERMINING THE EXISTENCE OF A QUORUM AT THE ANNUAL
MEETING, BUT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST PROPOSALS 2, 3,
4, 5 AND 6. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2,
3, 4, 5 AND 6.
Please mark boxes in blue or black ink.
1. Election of Directors
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Nominees: Thomas W. Zaucha, Lawrence F. Jindra, M.D., James H. McElwain, Mark
G. Mykityshyn, Roger J. Reschini, David B. White
INSTRUCTION: IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME ON THE FOLLOWING LINE:
--------------------------------------------------------------------------
2. Proposal to consider and act upon an amendment to the Company's
Certificate of Incorporation to change the corporate name of the
Company from Northstar Health Services, Inc. to Keystone Rehabilitation
Enterprises, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal to consider and act upon an amendment to 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 10,000,000
shares to 20,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. 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.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Proposal to terminate the Northstar Health Services, Inc. 1994 Stock
Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. 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.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
RECEIPT OF THE NOTICE OF ANNUAL MEETING AND THE PROXY STATEMENT, DATED MAY
8, 1998 IS HEREBY ACKNOWLEDGED.
---------------------------------
(TITLE OR AUTHORITY)
---------------------------------
(SIGNATURE)
---------------------------------
(SIGNATURE)
DATED: , 1998
(Joint owners should EACH sign. Please sign EXACTLY as your name(s) appears
on this card. When signing as
attorney, trustee, executor,
administrator, guardian or
corporate officer, please give
your FULL title.)
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
