<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 12, 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
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Operations
for the six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosure About Market
Risk Sensitive Instruments 15
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings 16
Item 2. - Changes in Securities and Use of Proceeds 16
Item 3. - Defaults Upon Senior Securities 16
Item 5. - Other Information 16
Item 6. - Exhibits and Reports on Form 8-K 17
<PAGE> 3
Item 1. - Financial Statements
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
A S S E T S June 30, December 31,
----------- 1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,030 $ 901
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$ 542 and $ 497 respectively 4,490 4,624
Management fees 155 224
Miscellaneous 71 458
Prepaid expenses and other current assets 122 399
------- -------
Total current assets 5,868 6,606
------- -------
PROPERTY AND EQUIPMENT, net 2,080 2,231
INTANGIBLE ASSETS, net (Note 2) 19,285 19,811
OTHER ASSETS 119 126
------- -------
TOTAL ASSETS $27,352 $28,774
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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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 June 30, December 31,
------------------------------------ 1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)
Senior Debt $13,883 $14,083
Thomas Zaucha and Zaucha Family Limited Partnership 4,615 4,069
Other debt 347 509
Accounts payable 507 833
Accrued expenses
Thomas Zaucha and Zaucha Family Limited Partnership 8,662 8,907
Other Obligations 3,661 4,318
Contractual obligations to employees 790 915
------- -------
Total current liabilities 32,465 33,634
------- -------
LONG-TERM DEBT (Note 3)
Thomas Zaucha and Zaucha Family Limited Partnership 397 809
Other debt 242 242
------- -------
Total long-term debt 639 1,051
MINORITY INTEREST 181 181
------- -------
Total liabilities 33,285 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 June 30, 1999 and December 31, 1998 63 63
Additional paid-in capital 22,599 22,599
Warrants outstanding 1,487 1,487
Retained deficit (29,629) (29,788)
Less: Treasury stock, 362,564 shares in 1999 and 1998, at cost (453) (453)
------- -------
Total stockholders' equity/(deficit) (5,933) (6,092)
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,352 $28,774
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
------ ------
<S> <C> <C>
REVENUE:
Net patient service revenue $6,737 $7,930
Management fee revenue 322 374
------ ------
Total revenue 7,059 8,304
COSTS OF SERVICE 3,247 3,961
------ ------
Gross profit 3,812 4,343
OPERATING EXPENSES:
Selling, general and administrative expenses 2,339 2,718
Bad debt expense 151 47
Restructuring and other non-recurring expenses (Note 4) - 100
Amortization of intangibles 228 232
Depreciation and amortization 134 142
Management fee expenses 272 318
------ ------
Total operating expenses 3,124 3,557
------ ------
OPERATING INCOME 688 786
NON-OPERATING EXPENSES:
Interest expense, net 509 537
Other expense, net 7 (5)
------ ------
Total non-operating expenses 516 532
------ ------
INCOME BEFORE INCOME TAXES 172 254
INCOME TAXES -- 1
------ ------
INCOME BEFORE MINORITY INTEREST 172 253
MINORITY INTEREST 89 129
------ ------
NET INCOME $ 83 $ 124
====== ======
NET INCOME PER SHARE - BASIC $ 0.01 $ 0.02
====== ======
NET INCOME PER SHARE - DILUTED $ 0.01 $ 0.02
====== ======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,975,424
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS 5,975,424 5,976,211
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUE:
Net patient service revenue $13,397 $15,712
Management fee revenue 645 758
------- -------
Total revenue 14,042 16,470
COSTS OF SERVICE 6,316 7,690
------- -------
Gross profit 7,726 8,780
OPERATING EXPENSES:
Selling, general and administrative expenses 4,818 5,687
Bad debt expense 258 166
Restructuring and other non-recurring expenses (Note 4) - 215
Amortization of intangibles 455 464
Depreciation and amortization 272 280
Management fee expenses 581 718
------- -------
Total operating expenses 6,384 7,530
------- -------
OPERATING INCOME 1,342 1,250
NON-OPERATING EXPENSES:
Interest expense, net 1,012 1,063
Other expense, net 5 (16)
------- -------
Total non-operating expenses 1,017 1,047
------- -------
INCOME BEFORE INCOME TAXES 325 203
INCOME TAX PROVISION/(BENEFIT) (14) 1
------- -------
INCOME BEFORE MINORITY INTEREST 339 202
MINORITY INTEREST 180 259
------- -------
NET INCOME/(LOSS) $ 159 $ (57)
======= =======
NET INCOME/(LOSS) PER SHARE - BASIC $ 0.03 $ (0.01)
======= =======
NET INCOME/(LOSS) PER SHARE - DILUTED $ 0.03 $ (0.01)
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,975,424
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS 6,006,891 5,975,424
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
------ -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 159 $ (57)
Adjustments to reconcile net income/(loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 1,099 1,142
Provision for doubtful accounts 258 72
Interest on discounted obligation 71 115
Gain on sale of equipment 7 (11)
Provision for (decrease)/increase in contractual obligations to
employees (60) 72
Minority interest 180 259
Change in current assets and liabilities-
Decrease in receivables 332 1,018
Decrease in other current assets 277 43
Decrease in accounts payable (326) (1,328)
Decrease in accrued expenses (902) (117)
------ -------
Net cash provided by operating activities 1,095 1,208
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 7 12
Capital expenditures (275) (125)
Deposits, loans and investments 7 (12)
------ -------
Net cash used in investing activities (261) (125)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (469) (644)
Distributions to minority interests (181) (180)
Payments of contractual obligations to employees (66) (76)
Borrowings on long-term debt 11 27
------ -------
Net cash used in financing activities (705) (873)
------ -------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 129 210
CASH AND CASH EQUIVALENTS, beginning balance 901 657
------ -------
CASH AND CASH EQUIVALENTS, ending balance $1,030 $ 867
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 933 $ 832
Income taxes (refunded)/paid (14) 1
NONCASH INVESTING ACTIVITIES:
Capital lease obligations 89 28
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
General
These condensed consolidated financial statements of Northstar Health Services,
Inc. (the "Company") are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations for the interim
period. These statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the year ended December 31, 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 and six month periods ended June 30, 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 6,000 and 28,500 shares of the Company's common stock
have been granted for the three and six month periods ended June 30, 1999,
respectively, and no options have been exercised for the three and six month
periods ended June 30, 1999.
The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended June 30, 1999 and 1998
(dollars in thousands, except per share data):
For the three months ended June 30,
-----------------------------------
1999 1998
--------- ---------
Basic earnings per share:
Net income $83 $124
Average shares outstanding 5,975,424 5,975,424
Income per share $0.01 $0.02
Diluted earnings per share:
Net income $83 $124
Average shares outstanding 5,975,424 5,975,424
Stock options -- 787
--------- ---------
Diluted average shares outstanding 5,975,424 5,976,211
Income per share $0.01 $0.02
6
<PAGE> 9
The following table reconciles the number of shares utilized in the earnings per
share calculations for the six-month periods ended June 30, 1999 and 1998
(dollars in thousands, except per share data):
For the six months ended June 30,
-----------------------------------
1999 1998
--------- ---------
Basic earnings per share:
Net income $159 $(57)
Average shares outstanding 5,975,424 5,975,424
Income per share $0.03 $(0.01)
Diluted earnings per share:
Net income $159 $(57)
Average shares outstanding 5,975,424 5,975,424
Stock options 31,467 --
--------- ---------
Diluted average shares outstanding 6,006,891 5,975,424
Income per share $0.03 $(0.01)
For the three month periods ended June 30, 1999 and 1998, and the six month
periods ended June 30, 1999 and 1998, options to purchase 958,466, 909,367,
629,466 and 933,699 and warrants to purchase 565,000, 633,500, 565,000 and
633,500 shares of common stock, respectively, were outstanding, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the Company's
common shares for the periods and due to the loss position of the Company for
the six month period in 1998. Also, not included in the calculation of diluted
earnings per share were the shares that may be issued to the Zauchas in
connection with the Keystone merger that is subject to the approval of the
Special Committee of the Board of Directors. See Note 6. The Zaucha Stock
Guarantee could be satisfied by all cash, all stock, or a combination of both
cash and stock.
2. Intangible Assets:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
June 30, December 31,
1999 1998
--------- ------------
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 (3,904) (3,381)
------- -------
Net intangible assets $19,285 $19,811
======= =======
7
<PAGE> 10
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Term loan with Senior Lender $ 5,883 $ 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%
359 579
Other debt 491 441
-------- --------
Total long-term debt 19,758 20,128
Less:
Current portion (18,845) (18,661)
Debt discount (274) (416)
-------- --------
Long-term debt $ 639 $ 1,051
======== ========
</TABLE>
As of June 30, 1999, the Company has no unused amounts under its existing credit
facilities. During the second quarter of 1999, the Company's weighted average
interest rate was 9.5%.
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 August 31, 1999. The most recent extensions included a
provision for payments that approximate the monthly accrued interest expenses on
the loan plus principal payments of $100,000 on May 1, June 1, and July 1, 1999,
and a principal and interest payment of $300,000 on August 1, 1999, which have
been paid.
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 the Company 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.
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 the Company, and
Mr. Zaucha's family limited partnership, have
8
<PAGE> 11
debt and other amounts due directly to them of $3,919,500 and $1,105,500,
respectively, as of June 30, 1999. In addition, Mr. Zaucha and the Zaucha Family
Limited Partnership have other amounts due directly to them of $6,927,209 and
$1,734,580, respectively, as of June 30, 1999.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through June 30,
1999, the Company has incurred an expense of $235,181 related to rent due on
these spaces. The Company also contracts with Impulse Development, a maintenance
and construction company owned by Mr. Zaucha, from time-to-time for various
projects. Through June 30, 1999, the Company has paid Impulse $1,073 for
services rendered or projects in progress. As of June 30, 1999, outstanding
advances to Impulse Development total $12,741.
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 relation to an Employment Agreement and Note. On August 2, 1999, a
settlement has been reached between the Company and David D. Watson.
9
<PAGE> 12
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this Quarterly Report
include forward-looking statements that reflect the Company's current
expectations relating to such matters as anticipated financial performance,
business prospects, and projected plans for and results of its operations. A
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations and performance of the Company's business include the following:
changes in regulatory, governmental and payor policies regarding reimbursement;
competition, both directly in terms of other providers of physical therapy and
other services, and the competition for qualified personnel; the outcomes of the
current litigation involving the Company; defaults in borrowing arrangements,
defaults in bank financing, including an inability to comply with various
covenants in connection with such financing; the ability of the Company to have
its Common Stock relisted on a national market or exchange; and the
uncertainties surrounding the healthcare industry in general.
Results of Operations
Three Months Ended June 30, 1999 and 1998
Total revenue
During the second quarter of 1999, the Company's total revenues declined by
$1,245,000, or 15%, from $8,304,000 for the second quarter of 1998 to $7,059,000
for the second quarter of 1999. Revenues decreased approximately $810,000 as the
result of the closure or termination of certain clinics and contracts. A decline
in management fee revenues of approximately $52,000 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 $240,000. Net patient service revenue from continuing operations
decreased $339,000 as a result of 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 $284,000 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 $714,000 from $3,961,000 for the
second quarter of 1998 to $3,247,000 for 1999, or 18%. As a percentage of net
patient service revenue, costs of service decreased from 49.9% in the second
quarter of 1998 to 48.2% in the second quarter of 1999. As a result of these
factors, gross profit declined $531,000, from $4,343,000 (52.3% of total
revenue) for the second quarter of 1998 to $3,812,000 (54.0% of total revenue)
for 1999.
Selling, general and administrative expense
Total selling, general and administrative expenses for the second quarter
decreased $379,000 from $2,718,000 in 1998 to $2,339,000 in 1999. The 13.9%
decrease can be attributed to the cost reduction program initiated in May 1998,
and the regional management reorganization that was completed in December 1998.
10
<PAGE> 13
Bad debt expense
The Company incurred bad debt expense of $151,000 or approximately 2.2% of net
patient service revenue during the second quarter of 1999 versus $47,000 or
approximately .59% during the second 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 3.3% and 1.7%, respectively, in the second 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 second
quarter of 1999, the expenses deemed non-recurring were considered immaterial.
Interest and other non-operating expenses
Interest expenses were $509,000 for the second quarter of 1999 compared to
$537,000 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 a net
non-operating loss of $7,000 in the second quarter of 1999 compared to net
non-operating income of $5,000 in the second quarter of 1998.
Income taxes
The Company has not recorded a tax provision during the second 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 second quarter of 1999 was $83,000 compared to $124,000
for the same period in 1998.
Six Months Ended June 30, 1999 and 1998
Total revenue
For the six month period ended June 30, 1999 the Company's total revenues
declined by $2,428,000, or 14.7%, from $16,470,000 for the first six months of
1998 to $14,042,000 for 1999. Revenues decreased approximately $1,742,000 as the
result of the closure or termination of certain clinics and contracts.
Management fee revenues related to diagnostic services decreased approximately
$113,000 and the Company opened new outpatient offices and entered into new
contracts that resulted in an increase in net patient service revenues of
$527,000. Net patient service revenue from continuing operations decreased
$602,000 as a result of 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 $498,000 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.
Cost of service and Gross profit
Due to a decrease in total revenues and the continued stabilization of the
Company's workforce and revenue base, subcontracted services were significantly
reduced and direct labor costs declined, thereby decreasing the Company's costs
of service $1,374,000 from $7,690,000 for the first six months of 1998 to
$6,316,000 for 1999, or 17.9%. As a percentage of net patient service revenue,
cost of service decreased during the first six months of 1999, from 48.9% in
1998 to 47.1% in 1999. As a result of the
11
<PAGE> 14
decrease in total revenue in the first six months of 1999, gross profit
decreased $1,054,000 from $8,780,000 for the first six months of 1998 to
$7,726,000 for 1999. As a percentage of total revenue, gross profit increased
from 53.3% of revenue for the first six months of 1998 to 55.0% for the first
six months of 1999.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first six months
decreased $869,000 from $5,687,000 in 1998 to $4,818,000 in 1999. The 15.3%
decrease can be attributed to the cost reduction program initiated in May 1998,
and the regional management reorganization that was completed in December 1998.
Bad debt expense
The Company incurred bad debt expense of $258,000 or approximately 1.9% of net
patient service revenue during the first six months of 1999 versus $166,000 or
approximately 1.1% during the first six months 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 3.1% and 2.4%, respectively, in the first six months 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
six months of 1999, the expenses deemed non-recurring were considered
immaterial.
Interest and other non-operating expenses
Interest expenses were $1,012,000 for the first six months of 1999 compared to
$1,063,000 for 1998. This decrease can be attributed to the amortization of
leases and other debt. The company reported net non-operating expense of $5,000
for the first six months of 1999 compared to $16,000 in net non- operating
income in the first six months of 1998. Net operating income for the first six
months of 1998 included approximately $12,000 in gain on the disposal of fixed
assets compared to $7,000 in losses for the first six months of 1999.
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 six months 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 six months of 1999 was $159,000 compared to a loss
of $57,000 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 six months of 1998
to the first six months 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
12
<PAGE> 15
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 August 31, 1999,
and has made monthly payments to Cerberus that approximate the monthly interest
expenses on the loan. In addition, on May 3, June 1, and July 1, 1999, the
Company made principal payments of $100,000 and on July 28, 1999, a principal
and interest payment of $300,000, to be applied as provided for in the
extensions 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 six months ended June 30, 1999, the Company provided $1,098,000
versus $1,208,000 of cash provided during the first six months of 1998. This
change in cash provided from operations is primarily the result of an increase
in the net income of the Company from a net loss of $57,000 during the first six
months of 1998 to net income of $159,000 during the same period in 1999 that
allowed the Company to continue to reduce the amount of its outstanding
liabilities.
The net cash used in investing activities increased from $125,000 in the first
six months of 1998 to $264,000 in the first six months of 1999 resulting
primarily from an increase in expenditures for capital items in 1999.
During the first six months of 1998, the Company made debt principal payments of
$644,000 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 $469,000 for the first six months of 1999 due to the net affect of
final payment of certain debt after the first six months of 1998 and principal
payments of $100,000 to Cerberus on May 3 and June 1. In addition, during the
first six months of 1999, the Company paid approximately $181,000 to minority
interest holders in companies controlled by Northstar and $66,000 under
contractual obligations with certain employees. During the first six 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. The Company has been engaged in negotiations for the sale of the
assets of it's mobile diagnostic business, which has been unprofitable to date,
and expects to finalize the sale during the third quarter of 1999. 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.
13
<PAGE> 16
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 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
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 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 June 1, the inventory and assessment phases of the plan have been
completed. All planned hardware and software upgrades to internal financial
billing systems were completed on schedule, by July1, 1999. In-house testing of
the components of the plan are scheduled to be completed by August 31, 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,
14
<PAGE> 17
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. All
remediation of the Company's computer systems or equipment, relating to the Year
2000 Issue, has been completed.
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.
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.
15
<PAGE> 18
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings
On October 2, 1998 , Commercial Financial Corporation, a named defendant in the
lawsuit filed by the Company in September 1996 in federal court in Pittsburgh,
filed a demand for arbitration against the Company for alleged breach of
contract. A settlement has been reached between the Company, Commercial
Financial Corporation, and Nichlaus P. Horoszko, Commercial Financial
Corporation's President, in that federal court action. As part of that
settlement, Commercial Financial Corporation agreed to withdraw its demand for
arbitration, with prejudice.
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 $7,557,000 and accrued interest in the
amount of approximately $930,000. 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.
16
<PAGE> 19
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 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.
10.3 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.
10.4 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 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 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.
17
<PAGE> 20
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated March 31, 1999, filed as an
exhibit to the Company's Quarterly Report on Form 10-Q dated May 7,
1999, is incorporated by reference.
10.12 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated May 31, 1999.
10.13 Extension Supplement between Northstar Health Services, Inc., Cerberus
Partners, LP and Bear Sterns & Co., dated July 31, 1999.
10.14 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
99 Form 8-K, dated May 27, 1999.
18
<PAGE> 21
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 and Principal Accounting and Financial Officer)
Date: August 13, 1999
19
<PAGE> 1
Exhibit 10.13
EXTENSION SUPPLEMENT
EXTENSION SUPPLEMENT, dated as of May 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 May
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 July 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 modifcation 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 (a) June 1, 1999, the Borrower shall pay an
aggregate of $100,000 to the Lenders which payment shall represent the monthly
principal installment due on June 1, 1999 under the latest draft of the Amended
and Restated Loan Agreement and (b) July 1, 1999, the Borrower shall pay an
aggregate of $100,000 to the Lenders which payment shall represent the monthly
principal installment due on July 1, 1999 under the latest draft of the Amended
and Restated Loan Agreement. In the event that the Borrower shall fail to make
any 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: President & CEO
-3-
<PAGE> 4
CERBERUS PARTNERS, L.P.
By
------------------------------
Name: Joyce Johnson-Miller
Title: Managing Director
BEAR, STERNS & CO. INC.
By
------------------------------
Name: Gregory A. Hanley
Title: Senior Managing Director
-4-
<PAGE> 5
IBJ SCHRODER BANK & TRUST COMPANY
By
------------------------------
Name:
Title:
-5-
<PAGE> 1
Exhibit 10.14
EXTENSION SUPPLEMENT
EXTENSION SUPPLEMENT, dated as of July 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 July
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 August 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 modifcation 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. On or prior to August 2, 1999, the Borrower
shall pay an aggregate of $300,000 as a payment of the monthly interest due and
as a reduction of the principal amount due on the loan. In the event that the
Borrower shall fail to make any 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: President & CEO
-3-
<PAGE> 4
CERBERUS PARTNERS, L.P.
By
-------------------------------
Name: Joyce Johnson-Miller
Title: Managing Director
BEAR, STERNS & CO. INC.
By
-------------------------------
Name: Gregory A. Hanley
Title: Senior Managing Director
-4-
<PAGE> 5
IBJ SCHRODER BANK & TRUST COMPANY
By
-------------------------------
Name:
Title:
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,030
<SECURITIES> 0
<RECEIVABLES> 4,716
<ALLOWANCES> 542
<INVENTORY> 0
<CURRENT-ASSETS> 5,868
<PP&E> 2,080
<DEPRECIATION> 3,111
<TOTAL-ASSETS> 27,352
<CURRENT-LIABILITIES> 32,464
<BONDS> 639
0
0
<COMMON> 63
<OTHER-SE> (1,487)
<TOTAL-LIABILITY-AND-EQUITY> 27,352
<SALES> 14,042
<TOTAL-REVENUES> 14,042
<CGS> 6,316
<TOTAL-COSTS> 7,169
<OTHER-EXPENSES> 5
<LOSS-PROVISION> 258
<INTEREST-EXPENSE> 1,012
<INCOME-PRETAX> 325
<INCOME-TAX> (14)
<INCOME-CONTINUING> 339
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 159
<EPS-BASIC> 0.03
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</TABLE>
<PAGE> 1
Exhibit 99
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 24, 1999
NORTHSTAR HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-21752 25-1697152
(State or other jurisdiction of Incorporation) (Commission File No.) (IRS Employer Identification No.)
</TABLE>
665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (724) 349-7500
Not Applicable
(Former name or former address, if changed from last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Resignation of Chief Financial Officer
Lisa S. Guarino, the Company's Executive Vice-President, Chief
Financial Officer, Treasurer, and Principal Accounting Officer, has resigned
from these positions effective June 4, 1999. Ms. Guarino, who is leaving to
pursue her own consulting and financial services business, has agreed to
continue to assist the Company as a financial advisor, on an as needed basis,
with issues related to the Finance Department and other matters. The Company is
presently searching for a replacement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses being acquired: None.
(b) Pro Forma financial information: None.
(c) Exhibits:
(99.1) Press Release, dated May 27, 1999, issued by the Company.
(99.2) Termination of Letter of Employment between Northstar
Health Services, Inc., and Lisa S. Guarino, CPA, dated
May 24, 1999.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Northstar Health Services, Inc.
/s/ Thomas W. Zaucha
-------------------------------
Name: Thomas W. Zaucha
Title: Chairman, CEO, President and Director
(Principal Executive Officer)
/s/ Lisa S. Guarino
-------------------------------
Name: Lisa S. Guarino
Title: Executive Vice-President, Chief Financial
Officer and Treasurer
(Principal Accounting and Financial Officer)
May 27, 1999
<PAGE> 4
Exhibit 99.1
Contact: Thomas W. Zaucha, Chairman and CEO
Northstar Health Services, Inc.
(724) 465-3200
FOR IMMEDIATE RELEASE
NORTHSTAR HEALTH ANNOUNCES RESIGNATION OF CFO
INDIANA, PA - MAY 27, 1999 -- Northstar Health Services, Inc. (OTCBB:NSTR),
announced today the resignation of Lisa S. Guarino, CPA, the Company's Executive
Vice-President, Chief Financial Officer, and Treasurer, effective June 4, 1999.
Ms. Guarino has agreed to continue to assist the Company as a financial advisor,
on an as needed basis, with issues related to the Finance Department and other
matters.
Ms. Guarino, who is leaving to pursue her own consulting and financial services
business, stated, "My experience at Northstar has been professionally
challenging and rewarding, and I am appreciative of the opportunities that I
have had. The knowledge that I have gained over the years is invaluable, and I
am sure it will serve me well in my future endeavors. I look forward to
continuing my relationship with Northstar in a new capacity."
The Company is presently searching for a replacement. According to Thomas W.
Zaucha, Chairman and CEO of Northstar Health Services, Inc., "It is with deep
regret that I have accepted Lisa's resignation as CFO, as she has been a valued
member of the management team at Northstar. However, I am pleased that she has
agreed to continue her association with the Company, and that we will have
access to her knowledge and expertise as needed."
Northstar Health Services, Inc., is a leading provider of physical
rehabilitation and contracted long term care services at outpatient
rehabilitation clinics and by contract to other healthcare facilities in
Pennsylvania, Ohio and West Virginia.
Forward-looking statements in this release are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including, without limitations, changes in policies regarding
reimbursement, increased levels of competition, competition for qualified
personnel, the outcomes of current litigation involving the Company, defaults in
borrowing arrangements, outcome of debt restructuring negotiations, and the
ability to have its Common Stock relisted on a national market or exchange and
other risks detailed from time to time in the Company's SEC reports.
####
<PAGE> 5
Exhibit 99.2
TERMINATION OF LETTER OF EMPLOYMENT
This agreement, effective June 4, 1999, by and between Northstar Health
Services, Inc. (NSH), Indiana, Pennsylvania, 15701, and Lisa S. Guarino, CPA, 72
Shady Drive, Indiana, Pennsylvania, 15701 (LSG), terminates the Letter of
Employment effective September 1, 1997, between the aforementioned parties under
the following terms and conditions:
1. LSG hereby resigns as the Executive Vice-President, Chief Financial Officer
and Treasurer of NSH effective June 4, 1999. LSG will thereafter be
employed on a part-time, as needed, basis to assist the Company with issues
related to the Finance Department and other matters as mutually agreeable.
Dates and hours of work will be determined on a mutually agreeable basis.
2. LSG will be paid at the rate of $65.00 per hour for all hours worked after
June 4, 1999. All other benefits will be limited to those customary for a
casual, part-time employee.
3. If a change of control (as defined in the Letter of Employment effective
September 1, 1997) takes place prior to May 31, 2000, and LSG has
represented the Company in any capacity in the due diligence process (as
evidenced by hours documented on LSG's Employee Timesheets), LSG will be
granted a bonus of $60,000 on the closing date of the change of control, to
be paid within fourteen (14) days.
Agreed to this 24th day of May, 1999, by:
/s/ Lisa S. Guarino /s/ Thomas W. Zaucha
- -------------------------- ---------------------------
Lisa S. Guarino, CPA Thomas W. Zaucha, CEO
Northstar Health Services, Inc.
/s/ Denise A. Shildt /s/ Charles R. Quiggle
- -------------------------- ---------------------------
Witness: Denise A. Shildt Witness: Charles R. Quiggle
