<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-21752
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1697152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices)
724-349-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO ____
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:
CLASS OUTSTANDING AS OF May 5, 1999
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 5,975,424
Transitional Small Business Disclosure Format (Check one):
YES ____ NO __X__
<PAGE> 2
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX PAGE
- ----- ----
Part I - FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3.
Quantitative and Qualitative Disclosure About Market
Risk Sensitive Instruments 13
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings 14
Item 2. - Changes in Securities and Use of Proceeds 14
Item 3. - Defaults Upon Senior Securities 14
Item 5. - Other Information 14
Item 6. - Exhibits and Reports on Form 8-K 15
<PAGE> 3
Item 1. - Financial Statements
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
A S S E T S March 31, December 31,
----------- 1999 1998
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,709 $ 901
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$ 522 and $ 497 respectively 4,689 4,624
Management fees 209 224
Miscellaneous 80 458
Prepaid expenses and other current assets 154 399
------------ ------------
Total current assets 6,841 6,606
------------ ------------
PROPERTY AND EQUIPMENT, net 2,150 2,231
INTANGIBLE ASSETS, net (Note 2) 19,548 19,811
OTHER ASSETS 144 126
TOTAL ASSETS $ 28,683 $ 28,774
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
------------------------------------ 1999 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)
Senior Debt $ 14,083 $ 14,083
Thomas Zaucha and Zaucha Family Limited Partnership 4,364 4,069
Other debt 360 509
Accounts payable 852 833
Accrued expenses
Thomas Zaucha and Zaucha Family Limited Partnership 8,784 8,907
Other Obligations 4,403 4,318
Contractual obligations to employees 832 915
---------- ----------
Total current liabilities 33,678 33,634
---------- ----------
LONG-TERM DEBT (Note 3)
Thomas Zaucha and Zaucha Family Limited Partnership 580 809
Other debt 235 242
---------- ----------
Total long-term debt 815 1,051
MINORITY INTEREST 206 181
---------- ----------
Total liabilities 34,699 34,866
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized, none issued -- --
Common stock, par value $.01 per share, 20,000,000 shares authorized;
6,337,988 shares issued at March 31, 1999 and December 31, 1998 63 63
Additional paid-in capital 22,599 22,599
Warrants outstanding 1,487 1,487
Retained deficit (29,712) (29,788)
Less: Treasury stock, 362,564 shares in 1999 and 1998, at cost (453) (453)
---------- ----------
Total stockholders' equity/(deficit) (6,016) (6,092)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,683 $ 28,774
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 6,660 $ 7,782
Management fee revenue 323 384
------------------ -----------------
Total revenue 6,983 8,166
COSTS OF SERVICE 3,069 3,729
------------------ -----------------
Gross profit 3,914 4,437
OPERATING EXPENSES:
Selling, general and administrative expenses 2,477 2,969
Bad debt expense 108 119
Restructuring and other non-recurring expenses (Note 4) - 115
Amortization of intangibles 228 232
Depreciation and amortization 138 138
Management fee expenses 309 400
------------------ -----------------
Total operating expenses 3,260 3,973
------------------ -----------------
OPERATING INCOME 654 464
NON-OPERATING EXPENSES:
Interest expense, net 503 527
Other expense, net (2) (11)
------------------ -----------------
Total non-operating expenses 501 516
------------------ -----------------
INCOME/(LOSS) BEFORE INCOME TAXES 153 (52)
INCOME TAXES (14) --
------------------ -----------------
INCOME/(LOSS) BEFORE MINORITY INTEREST 167 (52)
MINORITY INTEREST 91 130
------------------ -----------------
NET INCOME/(LOSS) $ 76 $ (182)
================== =================
NET INCOME/(LOSS) PER SHARE - BASIC $ 0.01 $ (0.03)
================== =================
NET INCOME/(LOSS) PER SHARE - DILUTED $ 0.01 $ (0.03)
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,975,424
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
6,065,801 5,975,424
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 76 $ (182)
Adjustments to reconcile net income/(loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 551 584
Provision for doubtful accounts 108 119
Interest on discounted obligation 38 61
Gain on sale of equipment -- (7)
Provision for (decrease)/increase in contractual obligations to
employees (50) 51
Minority interest 91 130
Change in current assets and liabilities-
Decrease in receivables 220 163
Decrease in other current assets 245 20
Increase/(decrease) in accounts payable 19 (491)
Decrease in accrued expenses (38) (324)
---------------- ----------------
Net cash provided by operating activities 1,260 124
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 1 3
Capital expenditures (172) (69)
Deposits, loans and investments (18) 12
---------------- ----------------
Net cash used in investing activities (189) (54)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (164) (439)
Distributions to minority interests (66) (36)
Payments of contractual obligations to employees (33) (36)
Borrowings on long-term debt - 27
---------------- ----------------
Net cash used in financing activities (263) (484)
---------------- ----------------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 808 (414)
CASH AND CASH EQUIVALENTS, beginning balance 901 657
---------------- ----------------
CASH AND CASH EQUIVALENTS, ending balance $ 1,709 $ 243
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 445 $ 410
Income taxes (refunded)/paid (14) 10
NONCASH INVESTING ACTIVITIES:
Capital lease obligations -- 28
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
These condensed consolidated financial statements of Northstar Health Services,
Inc. (the "Company") are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations for the interim
period. These statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the year ended December 31, 1998.
Management Fees
The Company manages a business on a contract basis that provides mobile
diagnostic services. In conjunction with this contract, the Company receives
compensation in the form of a monthly management fee. This fee is equal to the
net income or loss of the managed business after the payment of certain
agreed-upon salaries and benefits to certain parties.
Earnings Per Common Share
Earnings per share for the three months ended March 31, 1999 and 1998 were
calculated in accordance with Statement of Financial Accounting Standards No.
128 (SFAS No. 128), "Earnings per Share", using the weighted average number of
shares outstanding during the period and including the effect of stock options
outstanding. Pursuant to the Company's 1992, 1994, and 1997 Stock Option plans
and certain stock options granted outside of these plans, options for a total of
22,500 shares of the Company's common stock have been granted and no options
have been exercised for the three month period ended March 31, 1999.
The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended March 31, 1999 and 1998
(dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Basic earnings per share:
Net income/(loss) $ 76 $ (182)
Average shares outstanding 5,975,424 5,975,424
Income/(loss) per share $ 0.01 $ (0.03)
Diluted earnings per share:
Net income/(loss) $ 76 $ (182)
Average shares outstanding 5,975,424 5,975,424
Shares issuable for Keystone merger - -
Stock warrants - -
Stock options 90,377 -
------------------------------------------
Diluted average shares outstanding 6,065,801 5,975,424
Income/(loss) per share $ 0.01 $ (0.03)
</TABLE>
For the three month periods ended March 31, 1999 and 1998, options to purchase
580,800 and 967,974 and warrants to purchase 565,000 and 843,500 shares of
common stock, respectively, were outstanding, but were not included in the
computation of diluted earnings per share because the options' and warrants'
exercise prices were greater than the average market price of the Company's
common shares for the periods and due to the loss position of the Company for
the three month period in 1998. Also, not included in the calculation of diluted
earnings per share were the shares that may be issued to the
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<PAGE> 8
Zauchas in connection with the Keystone merger that is subject to the approval
of the Special Committee and the Board of Directors. See Note 6. The Zaucha
Stock Guarantee could be satisfied by all cash, all stock, or a combination of
both cash and stock.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform to the current year presentation.
2. INTANGIBLE ASSETS:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $ 18,708 $ 18,708
Employment agreements (2 to 7 1/2 years) 625 625
Keystone tradename (20 years) 2,500 2,500
Covenant not to compete (5 years) 78 78
Assembled Keystone workforce (5 years) 450 450
Deferred financing and other costs (5 years) 828 831
----------------- ------------------
Gross intangible assets 23,189 23,192
Less-accumulated amortization (3,641) (3,381)
----------------- ------------------
Net intangible assets $ 19,548 $ 19,811
================= ==================
</TABLE>
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- -------------------
<S> <C> <C>
Term loan with Senior Lender $ 6,083 $ 6,083
Revolving line of credit with Senior Lender 2,000 2,000
Acquisition facility with Senior Lender 6,000 6,000
Non-interest bearing term notes to Thomas Zaucha and the Zaucha
Family Limited Partnership 2,625 2,625
Term notes to Thomas Zaucha and the Zaucha Family Limited Partnership
2,400 2,400
Capital lease obligations with interest rates ranging from 9% to 15.6%
424 579
Other debt 434 441
----------- -----------
Total long-term debt 19,966 20,128
Less:
Current portion (18,807) (18,661)
Debt discount (344) (416)
----------- -----------
Long-term debt $ 815 $ 1,051
=========== ===========
</TABLE>
As of March 31, 1999, the Company has no unused amounts under its existing
credit facilities. During the first quarter of 1999, the Company's weighted
average interest rate was 9.5%.
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<PAGE> 9
The Company is currently in default of its obligations under its credit facility
with its Senior Lender, Cerberus Partners, LP. In September 1997, Cerberus
purchased from IBJ Schroder Bank & Trust Company all of the Company's senior
debt amounting to $15.3 million, including principal and accrued interest. The
debt was purchased subject to an existing forbearance agreement that expired at
the end of September 1997. The Company has subsequently entered into extensions
of the forbearance agreement directly with Cerberus, the most recent of which is
effective through May 31, 1999. Please refer to the Liquidity and Capital
Resources section of Item 2 for further discussion.
4. RESTUCTURING AND NON-RECURRING EXPENSES:
Since 1996, the Company has incurred significant legal, accounting and
consulting expenses arising out of its investigation of the actions of the
management team that controlled Northstar prior to 1996 and the resulting
litigation brought both against and by the Company. It has also incurred
significant expenses related to the consent solicitation that was conducted in
1997, and the reorganization of the management and operations of the Company
after the reinstatement of Thomas Zaucha as Chairman and CEO in May 1997.
Although the majority of these issues were resolved in 1997 and 1998, certain
matters are still subject to resolution in 1999. The amount of the expenses
related to these matters is not expected to be material on an ongoing basis.
Please refer to Note 6, Commitments and Contingencies, and to the Legal
Proceedings section in Part II for a discussion of any outstanding matters.
5. RELATED-PARTY TRANSACTIONS:
Keystone Acquisition
In connection with the Company's acquisition of Keystone Rehabilitation Systems,
Inc., on November 15, 1995, Mr. Thomas Zaucha, an officer of Northstar, and Mr.
Zaucha's family limited partnership, have debt and other amounts due directly to
them of $3,919,500 and $1,105,500, respectively, as of March 31, 1999. In
addition, Mr. Zaucha and the Zaucha Family Limited Partnership have other
amounts due directly to them of $7,057,000 and $1,727,000, respectively, as of
March 31, 1999.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through March 31,
1999, the Company has incurred an expense of $117,590 related to rent due on
these spaces.
6. COMMITMENTS AND CONTINGENCIES:
Zaucha Stock Guarantee
The Company guaranteed the value of certain stock issued to Mr. Zaucha and the
Zaucha Family Limited Partnership to be at least $5,600,000 through certain
periods ending no later than December 31, 1997. The Company has an obligation to
fund the shortfall in stock value through a cash payment equal to the shortfall
or, with shareholder approval, through the issuance of additional shares of
Common Stock in an amount equal to the shortfall. As of the December 31, 1997
final determination date, the Company was obligated to either make a cash
payment of $4,693,423 or issue approximately 4,888,982 additional shares of
Common Stock.
The Special Committee of the Board has been charged with the authority to
negotiate with the Zaucha's the obligations under the stock guarantee. The
Company presently does not have sufficient cash to meet its obligations under
the guarantee. This amount is recorded as a liability in accrued expenses. At
the Company's Annual Meeting held on June 11, 1998, the Company's stockholders
approved the issuance of up to 4,888,982 shares of Common Stock in order to
enable the Company to fully satisfy the obligations of the Company under the
guarantee in stock if deemed appropriate.
Other
David D. Watson, former President of the Company, has made claims against the
Company in excess of
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<PAGE> 10
$500,000 in relation to an Employment Agreement and Note. Negotiations for
settlement of these claims have not been successful, and no legal action has
been taken. The Company believes and avers that Mr. Watson has breached the
Employment Agreement, was terminated for cause, and as a result thereof, the
Company has counterclaims against Mr. Watson. The Company has and will continue
to vigorously defend these claims.
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<PAGE> 11
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this Quarterly Report
include forward-looking statements that reflect the Company's current
expectations relating to such matters as anticipated financial performance,
business prospects, and projected plans for and results of its operations. A
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations and performance of the Company's business include the following:
changes in regulatory, governmental and payor policies regarding reimbursement;
competition, both directly in terms of other providers of physical therapy and
other services, and the competition for qualified personnel; the outcomes of the
current litigation involving the Company; defaults in borrowing arrangements,
defaults in bank financing, including an inability to comply with various
covenants in connection with such financing; the ability of the Company to have
its Common Stock relisted on a national market or exchange; and the
uncertainties surrounding the healthcare industry in general.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Total revenue
During the first quarter of 1999, the Company's total revenues declined by
$1,183,000, or 14.5%, from $8,166,000 for the first quarter of 1998 to
$6,983,000 for the first quarter of 1999. Revenues decreased approximately
$933,000 as the result of the closure or termination of certain clinics and
contracts. A decline in management fee revenues of approximately $61,000 is
attributable to the termination of services in unprofitable areas and a change
in the reimbursement of certain diagnostic services. The Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $287,000. Net patient service revenue from
continuing operations decreased $263,000 as a result of adverse weather
conditions experienced in January 1999 that contributed to a decrease in the
number of patient visits in the first quarter of 1999, and due to a change in
Medicare compensation for therapy services provided by outpatient rehabilitation
agencies that was effective January 1, 1999, that negatively affected net
reimbursement from Medicare and certain other payors. Revenues also declined
$213,000 as the result of the sale in 1998 of the Company's interests in two
joint ventures that provided mobile diagnostic services, including cardiac
services, in Western Pennsylvania.
Costs of service and Gross profit
Due to the decrease in total revenues and the Company's cost reduction program
initiated in 1998, costs of service decreased $660,000 from $3,729,000 for the
first quarter of 1998 to $3,069,000 for 1999, or 17.7%. As a percentage of net
patient service revenue, costs of service decreased from 47.9% in the first
quarter of 1998 to 46.1% in the first quarter of 1999. As a result of these
factors, gross profit declined $523,000, from $4,437,000 (54.3% of total
revenue) for the first quarter of 1998 to $3,914,000 (56.1% of total revenue)
for 1999.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first quarter
decreased $492,000 from $2,969,000 in 1998 to $2,477,000 in 1999. The 16.6%
decrease can be attributed to the cost reduction program initiated in May 1998,
and the regional management reorganization that was completed in December 1998.
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<PAGE> 12
Bad debt expense
The Company incurred bad debt expense of $108,000 or approximately 1.6% of net
patient service revenue during the first quarter of 1999 versus $119,000 or
approximately 1.5% during the first quarter of 1998. Bad debt expense in both
years was reduced by the recovery of contract billings deemed uncollectible in
prior years. Bad debt expense without any recoveries would have been
approximately 2.9% and 3.1%, respectively, in the first quarter of 1999 and
1998.
Restructuring and non-recurring expense
In 1998, the Company continued to incur additional legal and other professional
fees resulting from the continuing reorganization of the Company and litigation
both against and on behalf of the Company in various matters. During the first
quarter of 1999, the expenses deemed non-recurring were considered immaterial.
Interest and other non-operating expenses
Interest expenses were $503,000 for the first quarter of 1999 compared to
$527,000 for 1998. This decrease can be attributed to a decline in the Company's
weighted average interest rate from 1998 to 1999. The Company reported net
non-operating income of $2,000 in the first quarter of 1999 compared to $11,000
in the first quarter of 1998.
Income taxes
The Company has recorded a tax benefit of $14,000 as the result of the receipt
of an income tax refund from prior years. The Company has not recorded a tax
provision during the first quarter of 1999. As a result of the losses
experienced in 1997 and prior years, the Company anticipates that taxable income
in 1999 will be offset by tax loss carryforwards.
Net income
The net income for the first quarter of 1999 was $76,000 compared to a loss of
$182,000 for the same period in 1998. This significant increase in profitability
is due to improved operations and the decrease in the amount of restructuring
and other non-recurring expenses from the first quarter of 1998 to the first
quarter of 1999.
Liquidity and Capital Resources
The Company is currently in default of its obligations under the credit facility
with Cerberus Partners, LP. Failure to reach an agreement with this senior
creditor relative to a restructuring of the Company's outstanding debt
obligations would likely result in acceleration of the loan and a filing of a
petition for relief under the Federal Bankruptcy Code. The Company has been
engaged in negotiations with Cerberus to reach a mutually agreeable
restructuring of this debt at various times since September 1997. During this
process, the Company has continued to enter into extensions of the forbearance
agreement with Cerberus, which is currently extended through May 31, 1999, and
has made monthly payments to Cerberus that approximate the monthly interest
expenses on the loan. In addition, on May 3, 1999, the Company made a payment of
$100,000 to be applied to loan principal as provided for in the current
extension of the forbearance agreement. However, there can be no assurance that
the Company will be able to reach a mutually agreeable restructuring of the
debt, or that it will continue to be able to enter into extensions of the
current forbearance agreement. In addition, the Company has other obligations,
including obligations incurred in the Keystone merger with the Zaucha's, that it
is currently unable to pay. The Company is attempting to reach payment
agreements with all of these parties; however, there is no assurance that it
will be able to do so on mutually agreeable terms.
During the three months ended March 31, 1999, the Company's operating activities
provided net cash of
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<PAGE> 13
$1,260,000 compared to $124,000 provided during the first three months of 1998.
This change in cash provided from operations is the result of an improvement in
net income from a loss of $182,000 during the first three months of 1998 to
$76,000 in net income during the same period in 1999; the collection of other
current assets in the first quarter of 1998; and the decline in cash needed to
improve the payment status of accounts payable and accrued expenses that existed
in 1998.
The net cash used in investing activities increased from $54,000 in the first
three months of 1998 to $189,000 in the first three months of 1999 resulting
primarily from an increase in expenditures for capital items in 1999.
During the first three months of 1998, the Company made debt principal payments
of $439,000 which were primarily scheduled debt and lease payments as well as
payments on debt to former owners and managers of the Company. This amount
decreased to $164,000 for the first three months of 1999 due to the final
payment of certain debt after the first quarter of 1998. In addition, during the
first quarter of 1999, the Company paid approximately $66,000 to minority
interest holders in companies controlled by Northstar and $33,000 under
contractual obligations with certain employees. During the first three months of
1999, the Company made no additional material borrowings under any debt
arrangements.
Summary of Financial Condition and Results of Operations
The Company is presently experiencing a severe liquidity crisis as a result of
the expenses related to the contest for corporate control in 1997; the
investigation and litigation expenses arising out of certain actions taken by
the Company's pre-1996 management; prior year's operating losses; and prior
obligations to buy out profit-sharing interests in several of the Company's key
clinics. As a result of these circumstances, the Company's access to the capital
and debt markets has been severely impaired. If it is unable to raise additional
capital and/or effect a permanent restructuring of the terms of its outstanding
long-term debt obligations in the forseeable future, the Company could be
required to file a petition for relief under the provisions of the Bankruptcy
Code.
In response to these developments, the Company continues to focus its efforts on
improving the performance of its core physical therapy and rehabilitation
businesses. As the Company has been unsuccessful in selling it's mobile
diagnostic business, management is also committed to improving the efficiency
and profitability of this venture. The Company is also continuing to review all
expenses in an effort to reduce costs wherever possible, and to seek additional
sources of revenues. The Company's Chairman has indicated that he will not
demand immediate reimbursement of all amounts currently due to him and his
family partnership. While the Company is currently in default of its obligations
under its Credit Agreement, it has been engaged in negotiations with Cerberus
that the Company anticipates will lead to the execution of a permanent
restructuring of its debt.
There can be no assurance that the Company will be successful in raising
additional equity or other capital, or that it will be in a position to do so on
terms that will not significantly dilute the equity interest of the Company's
existing stockholders. The Company is not currently eligible to utilize Form S-3
to register offerings of securities under the Securities Act of 1933, and its
shares are not currently listed on either the NASDAQ National Market or the
NASDAQ Small Cap Market. These circumstances could adversely affect the
Company's ability to attract additional equity capital.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company is aware of potential Year 2000 issues in its internal computer
systems and software, payor and supplier systems and software, Electronic Data
Interchange (EDI) software, and certain
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<PAGE> 14
therapy and diagnostic equipment that contain computer operating systems. In
response to these issues, the Company has formed a Year 2000 Project Team (the
"Team") that is headed by the Director of Management Information Systems. This
Team includes members of senior management, Information Systems professionals,
department heads and outside consultants. The Year 2000 Project Team has
developed a work plan that includes inventory, assessment, planning,
implementation and testing. The scope of this plan encompasses many elements,
including hardware, operating systems, application software, end user computing,
communications, facilities, equipment and suppliers. Monthly status/progress
reports, including Y2K Compliance Status Worksheets, are issued to the Chief
Financial Officer who, in turn, updates the Board of Directors.
The Company's software systems, including its internal financial and billing
systems, have all been assessed. The Team has obtained compliance certificates
for the General Ledger (general accounting), Accounts Payable, Billing &
Accounts Receivable, Fixed Asset and Stock Option software packages. All
upgrades, if any, to these systems were done at no cost to the Company. The
Payroll system package requires an upgrade for customized features that is
anticipated to be completed by May 31, 1999. The cost for this upgrade is
estimated to be approximately $3,000. The Company generally utilizes Microsoft
based Office Suites and networking products for its office computing software
needs and upgrades to newer software as deemed necessary. The Company's current
standard products are Windows 95 and Office 97, which are Year 2000 compliant.
The Company has inventoried its computer equipment and identified potential Year
2000 issues. The upgrade on the Company's IBM RS/6000 operating system was
installed in April 1999. All Personal Computer hardware is Year 2000 compliant,
with the exception of a few older machines that require a "patch" that will be
installed by May 31, 1999, at a total cost of less than $1,000.
The Company has initiated formal communications with its significant payors and
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. These
communications ask for written assurances that they are or will be Year 2000
compliant. Currently, the Company does not believe the failure of such third
parties to remediate their own Year 2000 Issue will have a material adverse
effect on the Company. There can be no guarantee, however, that the systems of
other companies on which the Company's systems rely will be timely converted, or
that failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
As of May 1, 1999, the inventory and assessment phases of the plan were close to
completion. The assessment of certain therapy, diagnostic and communications
equipment is still being performed, but is expected to be completed by May 31,
1999. The implementation and testing phases are expected to be completed by July
1, 1999.
Based on the assessment to date, the Company has determined that it will not be
required to invest significant funds to replace hardware or software in order
for its computer systems or equipment to properly utilize dates beyond December
31, 1999. Estimated costs to upgrade systems or equipment, either already
performed or necessary in the future, are not expected to exceed $25,000, which
will be provided out of internally generated cash flow. The Company presently
believes that if any additional modifications are required that are unknown at
this time, they will be insignificant in scope and cost. To the extent that the
Company's computer systems or equipment need to be modified to remediate any
Year 2000 Issue, the Company plans to complete such remediation by July 1, 1999.
The Company does not currently believe that it has any material exposure for the
Year 2000 issue. However, if the Company discovers any such exposure, it will
implement projects to correct or prepare contingency plans to address any such
issue. The Company believes that a material failure would occur if a major
payor, such as Blue Cross/Blue Shield, was unable to reimburse the Company in a
timely manner for services provided. The Company does not believe, based on its
current financial situation and access to capital, that it can produce an
adequate contingency plan if its significant payors are unable to reimburse the
Company on a timely basis for services provided.
12
<PAGE> 15
The Company's assessment of its Year 2000 Issue and the associated costs are
based on management's best estimates, which were derived utilizing assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from these plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct relevant
computer codes and similar uncertainties. Therefore, there can be no assurance
that management's assessment that the Company's Year 2000 Issue is insignificant
is correct.
Item - 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments
The Company currently does not invest excess funds in derivative financial
instruments or other market risk sensitive instruments for the purpose of
managing its interest rate risk or for any other purpose.
13
<PAGE> 16
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings
On October 2, 1998, Nicholas P. Horoszko, a named defendant in the lawsuit filed
by the Company in September 1996 under the Racketeer Influenced and Corrupt
Organization Act ("RICO") in federal court in Pittsburgh, filed a demand for
arbitration against the Company for alleged breach of contract. Horoszko is
seeking damages of approximately $225,000. The Company plans to vigorously
contest this liability. No scheduling order has yet been entered on this claim.
Item 2. - Changes in Securities and Use of Proceeds
Chapter 1, Title 8, Section 170 of the Delaware Corporation Law provides that
the directors of every corporation may declare and pay dividends either out of
surplus or, in the event that there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Although the Company has experienced a small profit for fiscal year 1998 and the
first quarter of 1999, the Company has not had surplus during the past fiscal
year and does not have surplus during the first quarter of fiscal year 1998, and
therefore, the Company does not plan to declare and pay dividends on its Common
Stock.
In addition, the Company is prohibited from declaring any dividend, other than
dividends payable solely in common stock, on any shares of any class of stock
under the terms of the Company's Credit Agreement with Cerberus Partners, LP.
Item 3. - Defaults Upon Senior Securities
The Company is currently in default of its financial and other covenants and
payment obligations under its Credit Agreement with Cerberus Partners, LP. As of
the date of the filing of this report, the Company is in arrears on its
principal obligations in the amount of $7,067,000 and accrued interest in the
amount of approximately $940,000. Please refer to the Liquidity and Capital
Resources and Summary sections of the Management's Discussion and Analysis (Part
I, Item 2).
Item 5. - Other Information
Future Business Opportunities
From time to time, the Company engages in exploratory discussions with possible
candidates for a merger or joint venture in an effort to improve its liquidity
and operations and as part of its strategic planning to improve shareholder
value. However, there is no guarantee that the Company will decide to enter into
a merger or joint venture, or that it will find a suitable merger or joint
venture partner.
14
<PAGE> 17
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
The following exhibits required by Item 601 of Regulation S-K are set
forth in the following list and are filed either by incorporation or by
reference from previous filings with the Securities and Exchange
Commission or by attachment to this Form 10-Q.
3.1.1 Articles of Incorporation of Northstar Health Services, Inc., as filed
in the state of Delaware, filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1996, is
incorporated by reference.
3.1.2 Amendment to Certificate of Incorporation, as filed in the state of
Delaware, filed as an exhibit to the Company's Quarterly Report on Form
10-Q dated August 7, 1998, is incorporated by reference.
3.2.1 Bylaws of Northstar Health Services, Inc., filed as an exhibit to the
Company's Quarterly Report on Form 10-Q dated August 14, 1997, is
incorporated by reference.
3.2.2 Amendment to the Bylaws of Northstar Health Services, Inc., filed as an
exhibit in the Company's Form 8-K, dated September 1, 1998, is
incorporated by reference.
4.1 1997 Stock Option Plan, filed as an exhibit to the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, is
incorporated by reference.
4.2 1992 Stock Option Plan, as amended, filed as an exhibit to the
Company's Annual Report on Form 10-K for fiscal year ended December 31,
1996, is incorporated by reference.
4.3 Form S-8 Registration Statement (No. 33-94584), 1992 Stock Option Plan
filed July 14, 1995, is incorporated by reference.
4.4 Form S-8 Registration Statement (No. 333-57051), 1997 Stock Option Plan
filed June 17, 1998, is incorporated by reference.
4.5 Post Effective Amendment No. 1 to Form S-8 Registration Statement (No.
33-94584), 1994 Stock Option Plan, filed June 17, 1998, is incorporated
by reference.
10.1 Employment Agreement dated November 15, 1995, between Northstar Health
Services, Inc. and Thomas W. Zaucha, filed as an exhibit to the
Company's Form 8-K dated November 15, 1995, is incorporated by
reference.
10.2 Employment Agreement dated September 1, 1997, between Northstar Health
Services, Inc. and Lisa S. Guarino, filed as an exhibit to the
Company's Quarterly Report on Form 10-Q dated November 14, 1997, is
incorporated by reference.
10.3 Forbearance Agreement between Northstar Health Services, Inc. and IBJ
Schroder Bank & Trust Co., dated August 18, 1997, filed as an exhibit
to the Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1997, is incorporated by reference.
10.4 Extension Supplement between Northstar Health Services, Inc. and IBJ
Schroder Bank & Trust Co. dated August 29, 1997, filed as an exhibit to
the Company's Annual Report on Form 10-K for fiscal year ended December
31, 1997, is incorporated by reference.
10.5 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LLP and IBJ Schroder Bank & Trust Co. dated October 1, 1997,
filed as an exhibit to the Company's Annual
15
<PAGE> 18
Report on Form 10-K for fiscal year ended December 31, 1997, is
incorporated by reference.
10.6 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LLP and IBJ Schroder Bank & Trust Co. dated November 12,
1997, filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1997, is incorporated by reference.
10.7 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated August 28, 1998, filed as an
exhibit to the Company's Quarterly Report on Form 10-Q dated November
6, 1998, is incorporated by reference.
10.8 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated October 29, 1998, filed as an
exhibit to the Company's Quarterly Report on Form 10-Q dated November
6, 1998, is incorporated by reference.
10.9 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated December 21, 1998, filed as
an exhibit to the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 1998, is incorporated by reference.
10.10 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated January 26, 1999, filed as an
exhibit to the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 1998, is incorporated by reference.
10.11 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated February 22, 1999, filed as
an exhibit to the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 1998, is incorporated by reference.
10.12 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated March 31, 1999.
10.13 Assignment and Acceptance Agreement between Northstar Health Services,
Inc., and Cerberus Partners, LP, dated September 8, 1997, filed as an
exhibit to the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 1997, is incorporated by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northstar Health Services, Inc.
(Registrant)
By: /s/ Thomas W. Zaucha
-----------------------------
Thomas W. Zaucha
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 1999
By: /s/ Lisa S. Guarino
-----------------------------
Lisa S. Guarino, CPA
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: May 7, 1999
17
<PAGE> 1
Exhibit 10.12
EXTENSION SUPPLEMENT
EXTENSION SUPPLEMENT, dated as of March 31, 1999 (this "Supplement"),
between Northstar Health Services, Inc., a Delaware corporation (the
"Borrower"), Cerberus Partners, LP and Bear, Stearns & Co. Inc. (collectively,
the "Lenders").
WITNESSETH
WHEREAS, IBJ Schroder Bank & Trust Company (the "Agent") and the
Borrower are parties to that certain Forbearance Agreement, dated as of August
18, 1997 (as amended, supplemented or otherwise modified prior to the date
hereof, the "Forbearance Agreement"); and
WHEREAS, the Forbearance Agreement shall by its terms terminate on
March 31, 1999 (the "Old Forbearance Termination Date");
WHEREAS, the Borrower has requested that the Old Forbearance
Termination Date be extended as contemplated by Section 4 of the Forbearance
Agreement, and the Agent and the Lenders are willing to agree to such extension
but only on the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower and the Agent hereby agree as follows:
1. Definitions. Terms defined in or by the reference in the Forbearance
Agreement are used herein as therein defined.
2. Forbearance Termination Date. The Forbearance Termination Date is
hereby extended to May 31, 1999 (the "New Forbearance Termination Date").
3. Effectiveness. This Supplement shall become effective upon the
receipt by the Lenders of evidence satisfactory to the Lenders that this
Supplement has been executed and delivered by the Borrower.
4. Representations and Warranties. To induce the Lenders to enter into
this Supplement, the Borrower hereby represents and warrants to the Agent and
the Lenders that, after giving effect to the extension of the Forbearance
Termination Date and the other modifications to the Forbearance Agreement
provided for herein, the representations and warranties contained in the
Forbearance Agreement will be true and correct in all material respects as if
made on and as of the date hereof and that no Forbearance Event of Default will
have occurred and be continuing.
<PAGE> 2
5. No Other Modifications. Except as expressly modified hereby, the
Forbearance Agreement shall remain in full force and effect in accordance with
its terms, without any waiver, amendment or modification of any provision
thereof.
6. No Waiver. The parties hereto agree that the Agent and the Lenders
have not waived or consented to any Default or Event of Default, waived any
right or remedy they may have with respect to any such Default or Event of
Default, or agreed to any modification or waiver of any of the terms and
provisions of the Loan Documents.
7. Counterparts. This Supplement may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Applicable Law. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9. Payment of Principal. In addition to the monthly interest payable by
the Borrower to the Lenders, on May 3, 1999, the Borrower shall pay an aggregate
of $100,000 to the Lenders which payment shall represent the monthly principal
installment due on May 1, 1999 under the latest draft of the Amended and
Restated Loan Agreement. In the event that the Borrower shall fail to make such
payment, the Lenders reserve the right to immediately terminate this forbearance
extension prior to the New Forbearance Termination Date.
10. Interest Rate. The parties hereby agree that effective as of April
1, 1999, the Interest Rate on the Loans shall be calculated as the sum of (a)
the higher of (x) the Prime Rate (as defined in the Loan Documents) and (y) the
Federal Funds Rate plus 0.5%, plus (b) 2.125%.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE> 3
IN WITNESS WHERE OF, the parties hereto have caused this Supplement to
be duly executed and delivered as of the day and year first above written.
NORTHSTAR HEALTH SERVICES, INC.
By /s/ Thomas W. Zaucha
---------------------------
Name: Thomas W. Zaucha
Title: CEO
-3-
<PAGE> 4
CERBERUS PARTNERS, L.P.
By /s/ Joyce Johnson-Miller
-----------------------------
Name: Joyce Johnson-Miller
Title: Managing Director
BEAR, STERNS & CO. INC.
By /s/ Gregory A. Hanley
-----------------------------
Name: Gregory A. Hanley
Title: Senior Managing Director
-4-
<PAGE> 5
IBJ SCHRODER BANK & TRUST COMPANY
By _____________________________
Name:
Title:
-5-
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