<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, 2000
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, 2000
------------------------------------- ----------------------------------
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, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Operations
for the six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3.
Quantitative and Qualitative Disclosure About Market
Risk Sensitive Instruments 16
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings 16
Item 2. - Changes in Securities and Use of Proceeds 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>
Restated
ASSETS June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,034 $ 754
Accounts receivable-
Patients, net of allowances for doubtful accounts of
$ 333 and $ 430 respectively 3,897 3,850
Management fees 7 13
Miscellaneous 80 206
Prepaid expenses and other current assets 372 107
Total current assets 5,390 4,930
PROPERTY AND EQUIPMENT, net 1,248 1,369
INTANGIBLE ASSETS, net (Note 2) 19,069 19,477
INVESTMENT IN SUBSIDIARY 172 141
------- -------
107 110
OTHER ASSETS
TOTAL ASSETS $25,986 $26,027
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Restated
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)
Senior Debt $ 11,822 $ 13,802
Thomas Zaucha and Zaucha Family Limited Partnership 5,017 4,989
Other debt 122 87
Accounts payable 494 591
Accrued expenses
Thomas Zaucha and Zaucha Family Limited Partnership 9,636 9,827
Other Obligations 1,985 1,911
Contractual obligations to employees 744 709
-------- --------
Total current liabilities 29,820 31,916
-------- --------
LONG-TERM DEBT (Note 3) 236 306
-------- --------
MINORITY INTEREST 90 71
-------- --------
Total liabilities 30,146 32,293
-------- --------
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, 2000 and December 31, 1999 63 63
Additional paid-in capital 22,642 22,642
Warrants outstanding 1,487 1,487
Retained deficit (27,899) (30,005)
Less: Treasury stock, 362,564 shares in 2000 and 1999, at cost (453) (453)
-------- --------
Total stockholders' equity/(deficit) (4,160) (6,266)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,986 $ 26,027
======== ========
</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>
Restated
Three Months Ended June 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 7,769 $ 6,431
Management fee revenue 26 341
----------- -----------
Total revenue 7,795 6,772
COSTS OF SERVICE 2,999 3,298
----------- -----------
Gross profit 4,796 3,474
OPERATING EXPENSES:
Selling, general and administrative expenses 2,584 2,334
Bad debt expense 53 137
Amortization of intangibles 205 228
Depreciation and amortization 86 140
----------- -----------
Total operating expenses 2,928 2,839
----------- -----------
OPERATING INCOME 1,868 635
NON-OPERATING (INCOME) EXPENSES:
Interest expense, net 480 509
Equity in Subsidiary Income (62) (26)
Other expense, net 11 7
----------- -----------
Total net non-operating expenses 429 490
----------- -----------
INCOME BEFORE INCOME TAXES 1,439 145
INCOME TAXES 130 --
----------- -----------
INCOME BEFORE MINORITY INTEREST 1,309 145
MINORITY INTEREST 100 62
----------- -----------
NET INCOME $ 1,209 $ 83
=========== ===========
NET INCOME PER SHARE - BASIC $ 0.20 $ 0.01
=========== ===========
NET INCOME PER SHARE - DILUTED $ 0.19 $ 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,975,424
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
6,348,536 $ 5,975,424
=========== ===========
</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>
Restated
--------
Six Months Ended June 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE:
Net patient service revenue $ 15,228 $ 12,767
Management fee revenue 57 684
----------- -----------
Total revenue 15,285 13,451
COSTS OF SERVICE 6,120 6,398
----------- -----------
Gross profit 9,165 7,053
OPERATING EXPENSES:
Selling, general and administrative expenses 5,214 4,844
Bad debt expense 31 236
Amortization of intangibles 409 455
Depreciation and amortization 179 285
----------- -----------
Total operating expenses 5,833 5,820
----------- -----------
OPERATING INCOME 3,332 1,233
NON-OPERATING (INCOME) EXPENSES:
Interest expense, net 976 1,012
Equity in Subsidiary Income (148) (53)
Other expense, net 11 5
----------- -----------
Total net non-operating expenses 839 964
----------- -----------
INCOME BEFORE INCOME TAXES 2,493 269
INCOME TAX PROVISION/(BENEFIT) 150 (14)
----------- -----------
INCOME BEFORE MINORITY INTEREST 2,343 283
MINORITY INTEREST 237 124
----------- -----------
NET INCOME $ 2,106 $ 159
=========== ===========
NET INCOME PER SHARE - BASIC $ 0.35 $ 0.03
=========== ===========
NET INCOME PER SHARE - DILUTED $ 0.34 $ 0.03
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,975,424 5,975,424
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
6,279,462 6,006,891
=========== ===========
</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>
Restated
--------
Six Months Ended June 30,
-------------------------
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,106 $ 159
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 794 1,090
Provision for doubtful accounts 31 236
Interest on discounted obligation 34 71
Loss on sale of equipment 12 7
Provision for increase/(decrease) in contractual obligations to
employees 51 (60)
Equity in Subsidiary Income (148) (53)
Minority interest 237 124
Change in current assets and liabilities-
Decrease in receivables 54 291
(Increase)/Decrease in other current assets (265) 278
(Decrease) in accounts payable (97) (327)
(Decrease) in accrued expenses (117) (862)
------- -------
Net cash provided by operating activities 2,692 954
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 7
Capital expenditures (199) (243)
Deposits, loans and investments 3 6
Distribution from Subsidiary 117 53
------- -------
Net cash used in investing activities (79) (177)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (2,099) (469)
Distributions to minority interests (218) (126)
Payments of contractual obligations to employees (16) (66)
Borrowings on long-term debt -- 11
------- -------
Net cash used in financing activities (2,333) (650)
NET INCREASE IN CASH AND CASH EQUIVALENTS 280 127
CASH AND CASH EQUIVALENTS, beginning balance 754 901
------- -------
CASH AND CASH EQUIVALENTS, ending balance 1,034 1,028
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid 809 $ 933
Income taxes paid/(refunded) 20 (14)
NONCASH INVESTING ACTIVITIES:
Capital lease obligations -- 89
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DATED JUNE 30, 2000
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, 1999.
Restatements
The financial statements for the three months and six months ended June 30, 1999
have been restated to correct an error in recording the Company's 49% ownership
interest in an outpatient clinic partnership. The Company had previously
consolidated this partnership since the Company controlled the operation of the
Partnership. These statements have been corrected to reflect the operations of
the partnership using the Equity Method of Accounting. This correction had no
effect on Net income or Shareholders' Equity of the Company.
Management fee operating expenses have also been restated for better
presentation with no effect on operating or net income. Management fee expenses
had previously been reported on a separate line item in Operating Expenses.
These costs have now been more properly included in the appropriate expense
categories, primarily Cost of Service and Selling, general and administrative
expenses.
The total of all restatements had no effect on Net Income for any of the periods
presented. However, Total Revenue decreased by $287,000 and $591,000 for the
three and six months ended June 30, 1999, respectively. Total Operating Expenses
decreased by $285,000 and $564,000 for the same periods. Operating Income for
the three and six months decreased by $53,000 and $109,000, respectively.
Non-Operating expenses for the three and six months ended June 30, 1999,
decreased $26,000 and $53,000, respectively, due to the restatements. Income
before Minority Interest and Minority Interest both decreased by $27,000 and
$56,000, respectively, for the three and six months ended June 30, 1999. These
restatements did not change Net Income.
6
<PAGE> 9
CONDENSED SUMMARY OF RESTATEMENTS FOR THREE MONTHS ENDED JUNE 30, 1999
(In thousands) AS FILED RESTATEMENTS RESTATED
TOTAL REVENUE 7,059 (287) 6,772
GROSS PROFIT 3,812 (338) 3,474
TOTAL OPERATING EXPENSES 3,124 (285) 2,839
OPERATING INCOME 688 (53) 635
TOTAL NON-OPERATING EXPENSES 516 (26) 490
INCOME BEFORE MINORITY INTEREST 172 (27) 145
MINORITY INTEREST 89 (27) 62
NET INCOME 83 -- 83
CONDENSED SUMMARY OF RESTATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1999
(In thousands) AS FILED RESTATEMENTS RESTATED
TOTAL REVENUE 14,042 (591) 13,451
GROSS PROFIT 7,726 (673) 7,053
TOTAL OPERATING EXPENSES 6,384 (564) 5,820
OPERATING INCOME 1,342 (109) 1,233
TOTAL NON-OPERATING EXPENSES 1,017 (53) 964
INCOME BEFORE MINORITY INTEREST 339 (56) 283
MINORITY INTEREST 180 (56) 124
NET INCOME 159 -- 159
Management Fees
The Company previously managed a business on a contract basis
that provided mobile diagnostic services. In conjunction with this contract, the
Company received compensation in the form of a monthly management fee. This fee
was equal to the net income or loss of the managed business after the payment of
certain agreed-upon salaries and benefits to certain parties. The Company's
mobile diagnostic services business was terminated on August 13, 1999.
Management fee income also includes fee income from the management of a physical
therapy partnership where the Company does not have majority ownership.
7
<PAGE> 10
Earnings Per Common Share
Earnings per share for the three and six month periods ended
June 30, 2000 and 1999 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 0 and 2500 shares of the Company's common stock
have been granted for the three and six month periods ended June 30, 2000,
respectively, and no options have been exercised for the three and six month
periods ended June 30, 2000.
The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended June 30, 2000 and 1999
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Basic earnings per share:
Net income $ 1,209 $ 83
Average shares outstanding 5,975,424 5,975,424
Income per share $ 0.20 $ 0.01
Diluted earnings per share:
Net income $ 1,209 $ 83
Average shares outstanding 5,975,424 5,975,424
Dilutive Effect of Stock options 373,112 --
---------- ----------
Diluted average shares outstanding 6,348,536 5,975,424
Income per share $ 0.19 $ 0.01
</TABLE>
The following table reconciles the number of shares utilized in the earnings per
share calculations for the six-month periods ended June 30, 2000 and 1999
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Basic earnings per share:
Net income $ 2,106 $ 159
Average shares outstanding 5,975,424 5,975,424
Income per share $ 0.35 $ 0.03
Diluted earnings per share:
Net income $ 2,106 $ 159
Average shares outstanding 5,975,424 5,975,424
Dilutive Effect of Stock options 304,038 31,467
---------- ----------
Diluted average shares outstanding 6,279,462 6,006,891
Income per share $ 0.34 $ 0.03
</TABLE>
For the three month periods ended June 30, 2000 and 1999, and the six month
periods ended June 30, 2000 and 1999, options to purchase 646,698, 958,466,
667,989 and 629,466 and warrants to purchase 424,764, 565,000, 406,198 and
565,000 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 period. Also, not included in the calculation of diluted
earnings per share were the shares that may be issued to the Zaucha's 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.
8
<PAGE> 11
Revenue Recognition
In December 1999, the Security Exchange Commission released Staff Accounting
Bulletin No. 101, "Revenue Recognition," (SAB No. 101), to provide guidance on
recording, presenting, and disclosure of revenue in financial statements. SAB
No. 101 explains the Security and Exchange Commission's general framework for
revenue recognition. SAB No. 101 does not change existing literature on revenue
recognition, but rather clarify the Security and Exchange Commission's position
on preexisting literature. SAB No. 101 must be adopted by the Company by
December 31,2000. While the Company has not completed its review of the effect
of SAB No. 101, management does not presently believe that its adoption will
have a significant impact on the financial statements or results of operations.
2. Intangible Assets:
Intangible assets and the related amortization periods consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Excess of cost over net assets acquired (40 years) $ 19,144 $ 19,144
Employment agreements (2 to 7 1/2 years) 625 625
Keystone trade name (20 years) 2,500 2,500
Covenant not to compete (5 years) -- 53
Assembled Keystone workforce (5 years) 400 400
Deferred financing and other costs (5 years) -- 754
-------- --------
Gross intangible assets 22,669 23,476
Less- accumulated amortization (3,600) (3,999)
-------- --------
Net intangible assets $ 19,069 $ 19,477
======== ========
</TABLE>
3. DEBT:
Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Amended and Restated Credit Agreement with two Senior Lenders
$ 11,822 $ 13,802
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%
121 192
Other debt 334 380
-------- --------
Total long-term debt 17,302 19,399
Less:
Current portion (16,961) (18,878)
Debt discount (105) (215)
-------- --------
Long-term debt $ 236 $ 306
======== ========
</TABLE>
9
<PAGE> 12
During the second quarter of 2000, the Company's weighted average interest rate
was 10.0%.
On September 30, 1999, the Company restructured its credit facility with its
Senior Lender, Cerberus Capital Management, LLC, pursuant to an Amended and
Restated Credit Agreement (the "Restated Credit Agreement"). As a result, the
Company is no longer in default of its obligations to its Senior Lender. The
restructured credit facility is due and payable in monthly installments with a
final payment of all remaining obligations due on or before December 31, 2000.
Please refer to the Liquidity and Capital Resources section of Item 2 for
further discussion.
4. Related-Party Transactions:
Keystone Acquisition
In connection with the Company's acquisition of Keystone Rehabilitation Systems,
Inc., on November 15, 1995, Mr. Thomas Zaucha, Chairman and CEO of the Company,
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 June 30,
2000. In addition, Mr. Zaucha and the Zaucha Family Limited Partnership have
other amounts due directly to them of $7,620,000 and $2,015,000, respectively,
as of June 30, 2000.
The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through June 30,
2000, the Company has incurred an expense of $296,787 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, 2000, the Company has paid Impulse $43,562 for
services rendered or projects in progress.
5. 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 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.
6. MERGER AGREEMENT
On March 15, 2000, the Company signed a Agreement and Plan of Merger by and
among the Company, Benchmark Medical, Inc., a privately held Delaware
corporation ("BMI"), and Northstar Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of BMI ("NAC"), providing for the merger of NAC with and
into the Company with the Company being the surviving corporation (the
"Merger"), and pursuant to which each outstanding share of the Company's common
stock will be converted into the right to receive $1.50 in cash, without
interest, at the effect time of the Merger. The total transaction consideration
is approximately $36 million, which includes payments to stockholders and
repayment or assumption of certain obligations of the company. The transaction
is subject to certain closing conditions. The transaction is expected to close
during the third calendar quarter of this current year.
10
<PAGE> 13
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this Quarterly Report
include forward-looking statements that reflect the Company's current
expectations relating to such matters as anticipated financial performance,
business prospects, and projected plans for and results of its operations. A
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations and performance of the Company's business include the following:
changes in regulatory, governmental and payor policies regarding reimbursement;
competition, both directly in terms of other providers of physical therapy and
other services, and the competition for qualified personnel; the outcomes of the
current litigation involving the Company; inability to refinance its Senior Debt
and 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
Restatement
The financial statements for the three month and six months ended June 30, 1999
have been restated to correct an error in recording the Company's 49% ownership
in an outpatient clinic partnership. The Company had previously consolidated
this partnership since the Company controlled the operation of the Partnership.
These statements have been corrected to reflect the operations of the
partnership using the Equity Method of Accounting. This correction had no effect
on Net Income or Shareholders' Equity of the Company.
Management fee operating expenses have also been restated for better
presentation with no effect on Operating or Net Income. Management fee expense
had previously been reported on a separate line item in Operating Expenses.
These costs have now been more properly included in the appropriate expense
categories, primarily Cost of Service and Selling, general and administrative
expenses.
The total of all restatements had no effect on Net Income for any of the periods
presented. However, Total Revenue decreased by $287,000 and $591,000 for the
three and six months ended June 30, 1999, respectively. Total Operating Expenses
decreased by $285,000 and $564,000 for the same periods. Operating Income for
the three and six months decreased by $53,000 and $109,000, respectively.
Non-Operating expenses for the three and six months ended June 30, 1999,
decreased $26,000 and $53,000, respectively, due to the restatements. Income
before Minority Interest and Minority Interest both decreased by $27,000 and
$56,000, respectively, for the three and six months ended June 30, 1999. These
restatements did not change Net Income.
11
<PAGE> 14
CONDENSED SUMMARY OF RESTATEMENTS FOR THREE MONTHS ENDED JUNE 30, 1999
(In thousands) AS FILED RESTATEMENTS RESTATED
TOTAL REVENUE 7,059 (287) 6,772
GROSS PROFIT 3,812 (338) 3,474
TOTAL OPERATING EXPENSES 3,124 (285) 2,839
OPERATING INCOME 688 (53) 635
TOTAL NON-OPERATING EXPENSES 516 (26) 490
INCOME BEFORE MINORITY INTEREST 172 (27) 145
MINORITY INTEREST 89 (27) 62
NET INCOME 83 -- 83
CONDENSED SUMMARY OF RESTATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1999
(In thousands) AS FILED RESTATEMENTS RESTATED
TOTAL REVENUE 14,042 (591) 13,451
GROSS PROFIT 7,726 (673) 7,053
TOTAL OPERATING EXPENSES 6,384 (564) 5,820
OPERATING INCOME 1,342 (109) 1,233
TOTAL NON-OPERATING EXPENSES 1,017 (53) 964
INCOME BEFORE MINORITY INTEREST 339 (56) 283
MINORITY INTEREST 180 (56) 124
NET INCOME 159 -- 159
12
<PAGE> 15
Three Months Ended June 30, 2000 and 1999
Total revenue
During the second quarter of 2000, the Company's total revenues increased by
$1,023,000, or 15.1%, from $6,772,000 for the second quarter of 1999 to
$7,795,000 for the second quarter of 2000. Revenues decreased approximately
$86,000 as the result of the closure or termination of certain clinics and
contracts. A decline in management fee revenues of approximately $315,000 is
attributable to the termination of all mobile diagnostic services effective
August 13, 1999. The Company opened new outpatient offices and entered into new
contracts that resulted in an increase in net patient service revenues of
$393,000. Net patient service revenue from continuing operations increased
$1,031,000 as a result of most clinics meeting or exceeding revenue budget goals
for patient visits and revenue per visit.
Costs of service and Gross profit
Costs of service decreased $299,000 from $3,298,000 for the second quarter of
1999 to $2,999,000 for 2000, or 9.1%. As a percentage of net patient service
revenue, costs of service decreased from 51.3% in the second quarter of 1999 to
38.6% in the second quarter of 2000. The improved margin reflects the
termination of the mobile diagnostic business in August of 1999 and continuing
cost and staffing level controls. The 1999 results also included charges for
$694,000 of Medicare Audit Adjustments for 1996-1998. As a result of these
factors, gross profit increased $1,322,000, from $3,474,000 (51.3% of total
revenue) for the second quarter of 1999 to $4,796,000 (61.5% of total revenue)
for 2000.
Selling, general and administrative expense
Total selling, general and administrative expenses for the second quarter
increased $250,000 from $2,334,000 in 1999 to $2,584,000 in 2000. A significant
portion of the 10.7% increase can be attributed to expenses related to the
merger discussed in Note 6 and for increased outpatient facility lease expenses
from clinics opened or relocated in the past year. However, such costs are
in-line with the year 2000 budget.
Bad debt expense
The Company incurred bad debt expense of $53,000 or approximately .68% of net
patient service revenue during the second quarter of 2000 versus $137,000 or
approximately 2.1% during the second quarter of 1999. 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 1.5% and 3.2%, respectively, in the second quarter of 2000 and
1999.
Amortization of intangible and depreciation
Depreciation and amortization is $77,000 less than last year due to the
write-off of PVL related assets in the third quarter of 1999 and other assets
becoming fully amortized.
Interest and other non-operating expenses
Interest expenses were $480,000 for the second quarter of 2000 compared to
$509,000 for 1999. This decrease can be attributed to a reduction in the
principal balance for the senior debt offset somewhat by the increased effective
interest rate in year 2000.
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Income taxes
The Company has recorded a tax provision of $130,000 during the second quarter
of 2000. As a result of the losses experienced in 1999 and prior years, the
Company anticipates that substantially all taxable income in 2000 will be offset
by tax loss carry forwards except for the estimated impact of alternative
minimum tax (AMT), resulting in an effective tax rate that is lower than the
statutory tax rate.
Net income
The net income for the second quarter of 2000 was $1,209,000 compared to $83,000
for the same period in 1999. This improvement is due to the increase in patient
revenue, the closing of PVL in August of 1999, the absence of any Medicare
adjustments in 2000 and continued cost control.
Six Months Ended June 30, 2000 and 1999
Total revenue
For the six month period ended June 30, 2000 the Company's total revenues
increased by $1,834,000, or 13.6%, from $13,451,000 for the first six months of
1999 to $15,285,000 for 2000. Revenues decreased approximately $221,000 as the
result of the closure or termination of certain clinics and contracts.
Management fee revenues related to diagnostic services decreased approximately
$627,000 and the Company opened new outpatient offices and entered into new
contracts that resulted in an increase in net patient service revenues of
$732,000. Net patient service revenue from continuing operations increased
$1,950,000 as a result of most clinics meeting or exceeding revenue budget goals
for patients visits and revenues per visit.
Cost of service and Gross profit
Cost of services decreased $278,000 from $6,398,000 for the first six months of
1999 to $6,120,000 for 2000, or 4.3%. As a percentage of net patient service
revenue, cost of service decreased during the first six months of 2000, from
50.1% in 1999 to 40.2% in 2000. The improved margin reflects the termination of
the mobile diagnostics business in August of 1999 and continuing cost and
staffing level controls. The 1999 results also include charges for $762,000 of
Medicare Audit Adjustments for 1996-1998. As a result of the increase in total
revenue in the first six months of 2000, gross profit increased $2,112,000 from
$7,053,000 for the first six months of 1999 to $9,165,000 for 2000. As a
percentage of total revenue, gross profit increased from 52.4% of total revenue
for the first six months of 1999 to 60.0% for the first six months of 2000.
Selling, general and administrative expense
Total selling, general and administrative expenses for the first six months
increased $370,000 from $4,844,000 in 1999 to $5,214,000 in 2000. A significant
portion of the 7.6% increase can be attributed to expenses related to the
merger discussed in Note 6 and for increased outpatient facility lease expenses
from clinics opened or relocated in the past year. However, such costs are
in-line with the year 2000 budget.
Bad debt expense
The Company incurred bad debt expense of $31,000 or approximately .2% of net
patient service revenue during the first six months of 2000 versus $236,000 or
approximately 1.8% during the first six months of 1999. 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 1.2% and 3.0%, respectively, the first six months of 2000 and
1999.
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Interest and other non-operating expenses
Interest expenses were $976,000 for the first six months of 2000 compared to
$1,012,000 for 1999. This net decrease can be attributed to a reduction in the
principal balance for the senior debt offset somewhat by the increased effective
interest rate in year 2000.
Income taxes
The Company has recorded a tax provision of $150,000 during the first six months
of 2000. As a result of the losses experienced in 1999 and prior years, the
Company anticipates that substantially all taxable income will be offset by tax
loss carry forwards except for the estimated impact of Alternative Minimum Tax
(AMT), resulting in an effective tax rate that is lower than the statutory tax
rate.
Net Income
The net income for the first six months of 2000 was $2,106,000 compared to a net
income of $159,000 for the same period in 1999. This improvement is due to the
increase in patient revenues, the closing of PVL in August 1999, and the absence
of any Medicare adjustments in 2000 and continued cost control.
Liquidity and Capital Resources
On September 30, 1999, the Company restructured its credit facility with its
Senior Lender, Cerberus Capital Management, LLC, pursuant to the Restated Credit
Agreement. As a result, the Company is no longer in default of its obligations
to its Senior Lender. The restructured credit facility is due and payable in
monthly installments with a final payment of all remaining obligations due on or
before December 31, 2000.
During the six months ended June 30, 2000, $2,692,000 versus $954,000 of net
cash was provided by operating activities during the first six months of 1999
primarily due to increased net income. The net cash used in investing activities
decreased from $177,000 in the first six months of 1999 to $79,000 in the first
six months of 2000 resulting primarily from a decrease in capital expenditures
and an increase in distribution from subsidiary.
During the first six months of 1999, the Company made debt principal payments of
$469,000 which primarily were schedule debt and lease payments other than to the
Senior Lender, as well as, payments on debt to former owners and managers of the
Company. This amount increased to $2,099,000 for the first six months of 2000
due to principal payments made to the Senior Lender in accordance with the
Amended and Restated Credit Agreement. In addition, during the six months of
2000, the Company paid approximately $218,000 to minority interest holders in
companies controlled by Northstar and $16,000 under contractual obligations with
certain employees. During the first six months of 1999 and 2000, the Company
made no additional material borrowings under any debt arrangements.
Summary of Financial Condition and Results of Operations
The Company has previously experienced problems with liquidity 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. The Company's cash flow has
increased significantly in 2000 allowing for substantial principal payments
toward its Senior Debt. However, the Senior Debt must be referenced prior to
December 31, 2000 unless the merger discussed in Note 6 is completed as the
Senior Debt is scheduled to be fully paid during the closing of the transaction.
If the merger is not completed the Company may be unable to raise additional
capital and/or effect refinancing of its outstanding long-term debt obligations
in the foreseeable future, the Company could be required to file a petition for
relief under the provisions of the Bankruptcy Code.
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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's Chairman continues to indicate that he will not demand
immediate reimbursement of all amounts currently due to him and his family
partnership.
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.
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.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings
On or about February 18, 1998, Robert J. Smallacombe, a former director,
employee and consultant of the Company commenced an action by filing a Praecipe
for Writ of Summons against the Company, Mr. Zaucha and other related parties.
Mr. Smallacombe believes he is entitled to the balance of his employment
contract and certain stock options that may or may not have been granted. The
Company believes that it has counterclaims against Mr. Smallacombe, and intends
to vigorously defend itself against any claims brought by Mr. Smallacombe. On
March 17, 2000, Mr. Zaucha filed a petition with the Court seeking the dismissal
of the action because of Mr. Smallacombe's failure to prosecute same. On or
about March 29, 2000, Mr. Smallacombe filed a complaint, alleging breach of
contract and defamation, and seeking compensatory and punitive damages. On March
31, 2000, the Court of Common Pleas of Westmoreland County, Pennsylvania,
entered a stay of the action pending the resolution of Mr. Zaucha's petition
seeking dismissal of the case. On June 19, 2000, the Court ordered that further
discovery was necessary to make a decision regarding Mr. Zaucha's petition
seeking dismissal. Discovery is currently ongoing, and the petition remains
unresolved.
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.
The Company has experienced a loss for fiscal year 1999 and a profit for the
first half of 2000, the Company has not had surplus during the past fiscal year
and does not have surplus during the first half of fiscal year 2000, 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 Restated Credit Agreement with its Senior Lender.
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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 Amended and Restated Credit Agreement.
10.3 Amended and Restated Promissory Note: Cerberus Capital Management, LLC.
10.4 Amended and Restated Promissory Note: Bear Stearns & Co.
10.5 Amended and Restated Company Security Agreement.
10.6 Amended and Restated Subsidiaries Guaranty.
10.7 Amended and Restated Company Pledge Agreement.
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10.8 Amended and Restated Subsidiaries Stock Pledge Agreement.
10.9 Amended and Restated Subsidiaries Security Agreement.
10.10 Zaucha Subordination Agreement
10.11 Zaucha Payment Letter.
10.12 Warrant to Purchase Shares of Common Stock.
27 Financial Data Schedule
(b) Reports on Form 8-K
99 Form 8-K, dated March 6, 2000, Item 5 "Other Events" reported.
99 Form 8-K, dated March 20, 2000, Item 5 "Other Events" reported.
99 Form 8-K, dated June 30, 2000, item 5 "Other Events" reported
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northstar Health Services, Inc.
(Registrant)
By: /s/ Thomas W. Zaucha
-------------------------
Thomas W. Zaucha
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000
By: /s/ James R. Martin
-------------------------
James R. Martin
Executive Vice President and Chief Financial Officer
and Treasurer
(Principal Accounting and Financial Officer)
Date: August 14, 2000
19
