UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 000-23343
NovaCare Employee Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2866146
(State of incorporation) (I.R.S. Employer Identification No.)
2621 Van Buren Avenue, Norristown, PA 19403
(Address of principal executive office) (Zip code)
Registrant's telephone number: (610) 650-4700
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[ ]
* The Company has been subject to filing requirements under the Securities
and Exchange Act of 1934, as amended, since November 11, 1997, the date
its initial public offering was consummated.
As of January 31, 1998, NovaCare Employee Services, Inc. had 27,116,079 shares
of common stock, $.01 par value, outstanding.
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED DECEMBER 31, 1997
INDEX
Part No. Item No. Description Page No.
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance
Sheets as of December 31, 1997
and June 30, 1997 1
- Condensed Consolidated Statements
of Operations for the Three Months
Ended December 31, 1997 and 1996 2
- Condensed Consolidated Statements
of Operations for the Six Months
Ended December 31, 1997 and 1996 3
- Condensed Consolidated Statements
of Cash Flows for the Six Months
Ended December 31, 1997 and 1996 4
- Consolidated Statement of
Shareholders Equity for the Six
Months Ended December 31, 1997 5
Notes to Condensed Consolidated
Financial Statements 6-11
2 Management's Discussion and
Analysis of Financial Condition and
Results of Operations 12-17
II OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 18
Signature 19
i
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and June 30, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
ASSETS (Unaudited) (See Note 1)
Current assets:
<S> <C> <C>
Cash and cash equivalents ....................... $ 5,860 $ 1,782
Accounts receivable:
Related party ................................ 37,129 27,607
Unbilled ..................................... 6,903 7,215
Third parties, net of allowance for doubtful
accounts at December 31, 1997 and at June 30,
1997 of $94 and $26, respectively............ 9,537 1,910
Prepaid assets .................................. 2,268 567
Deferred income taxes ........................... 643 296
Other current assets ............................ 902 502
------------ -----------
Total current assets ......................... 63,242 39,879
Property and equipment, net ....................... 4,005 1,326
Excess cost of net assets acquired, net ........... 71,632 53,691
Other assets, net ................................. 1,128 1,102
============ ===========
$ 140,007 $ 95,998
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements........ $ 4,969 $ 298
Accounts payable and accrued expenses............ 7,026 6,172
Accrued salaries, wages and payroll taxes........ 43,886 28,159
Current portion of accrued workers' compensation
and health claims................................ 10,063 5,423
Note payable to related party.................... -- 28,382
Current portion of deferred purchase price
obligations.................................... 2,733 18,905
Income taxes payable............................. 3,115 1,382
------------ -----------
Total current liabilities..................... 71,792 88,721
Financing arrangements, net of current portion... 1,133 1,068
Accrued workers' compensation and health claims,
net of current portion......................... 3,813 1,910
Deferred purchase price obligations, net of
current portion................................ 5,856 856
Other............................................ 498 411
------------ ------------
Total liabilities............................. 83,092 92,966
Mandatorily redeemable common stock................ -- 2,731
Commitments and contingencies...................... -- --
Shareholders' equity:
Preferred stock, $.01 par value; authorized 1,000
shares; no shares issued or outstanding.......... -- --
Common stock, $.01 par value; authorized 60,000
shares; issued 27,116 shares at December 31, 1997
and 19,193 shares at June 30, 1997............... 271 192
Additional paid-in capital........................ 55,932 1,189
Retained earnings................................. 871 --
------------ ------------
57,074 1,381
Less: Common stock in treasury (at cost), 563
shares at June 30, 1997.......................... -- (1,080)
Deferred compensation, net.................... (159) --
------------ ------------
Total shareholders' equity.................... 56,915 301
------------ ------------
$ 140,007 $ 95,998
============ ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended
December 31,
--------------------------
1997 1996
----------- -----------
Revenues:
<S> <C> <C>
Related party .................................. $ 189,986 $ --
Third parties .................................. 112,765 10,894
---------- -----------
Total revenues .............................. 302,751 10,894
Direct Costs:
Related party:
Salaries, wages and employment taxes of
worksite employees......................... 174,759 --
Healthcare and workers' compensation,
state unemployment and other............... 10,551 --
Third parties:
Salaries, wages and employment taxes of
worksite employees........................... 94,812 9,082
Healthcare and workers' compensation,
state unemployment and other................ 13,217 970
---------- -----------
Gross profit ............................... 9,412 842
Selling, general and administrative expenses ..... 6,456 660
Provision for uncollectible accounts ............. 30 1
Amortization of excess cost of net assets
acquired........................................ 639 27
---------- -----------
Income from operations ...................... 2,287 154
Investment income ................................ 59 4
Interest expense ................................. (57) --
Interest expense--related party .................. (197) (34)
---------- -----------
Income before income taxes ................. 2,092 124
Income taxes ..................................... 973 63
---------- -----------
Net income .................................. $ 1,119 $ 61
========== ===========
Net income per share - basic ................ $ .05 $ --
========== ===========
Net income per share - assuming dilution .... $ .05 $ --
========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended
December 31,
--------------------------
1997 1996
---------- -----------
Revenues:
<S> <C> <C>
Related party .................................. $ 366,078 $ --
Third parties .................................. 203,430 10,894
---------- -----------
Total revenues .............................. 569,508 10,894
Direct Costs:
Related party:
Salaries, wages and employment taxes of
worksite employees......................... 336,196 --
Healthcare and workers' compensation,
state unemployment and other............... 21,240 --
Third parties:
Salaries, wages and employment taxes of
worksite employees......................... 175,875 9,082
Healthcare and workers' compensation,
state unemployment and other............... 18,457 970
---------- -----------
Gross profit ............................... 17,740 842
Selling, general and administrative expenses ..... 12,048 660
Provision for uncollectible accounts ............. 68 1
Amortization of excess cost of net assets acquired 1,211 27
---------- -----------
Income from operations ...................... 4,413 154
Investment income ................................ 117 4
Interest expense ................................. (76) --
Interest expense--related party .................. (611) (34)
---------- -----------
Income before income taxes ................. 3,843 124
Income taxes ..................................... 1,787 63
---------- -----------
Net income .................................. $ 2,056 $ 61
========== ===========
Net income per share - basic ................ $ .09 $ --
========== ===========
Net income per share - assuming dilution .... $ .09 $ --
========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended
December 31,
--------------------------
1997 1996
----------- ------------
Cash from operating activities:
<S> <C> <C>
Net income ....................................... $ 2,056 $ 61
Adjustments to reconcile net income to net cash
flows from operating activities, net of effects
from acquisitions:
Depreciation and amortization ................. 1,695 48
Provision for uncollectible accounts .......... 68 1
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable--third parties .......... 1,709 (122)
Accounts receivable--related party .......... (11,940) --
Other current assets ........................ (1,604) 27
Accounts payable and accrued expenses ....... (760) 141
Accrued salaries, wages, and payroll taxes... 10,506 352
Accrued interest--related party ............. 611 34
Accrued workers' compensation and health
claims..................................... 4,922 --
Income taxes payable ........................ 1,679 --
Other, net .................................. 467 61
----------- -----------
Net cash flows provided by operating
activities............................... 9,409 603
----------- -----------
Cash from investing activities:
Payments for businesses acquired, net of cash
acquired........................................ (7,964) (1,804)
Payment of deferred purchase price obligation..... (16,172) --
Additions to property and equipment............... (1,908) (11)
Other, net........................................ (515) --
----------- -----------
Net cash flows (used in) investing
activities............................... (26,559) (1,815)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility .......... 4,000 --
Net proceeds from the initial public offering of
common stock.................................... 45,941 --
Proceeds from financing arrangements with
related party................................... -- 2,000
Payment of financing arrangements with related
party........................................... (28,382) --
Payment of long-term debt and financing
arrangements.................................... (331) --
----------- -----------
Net cash flows provided by financing
activities............................... 21,228 2,000
----------- -----------
Net increase in cash and cash equivalents ........ 4,078 788
Cash and cash equivalents, beginning of period ... 1,782 --
----------- -----------
Cash and cash equivalents, end of period ......... $ 5,860 $ 788
=========== ===========
Supplemental disclosures of cash flow:
Interest paid ................................. $ 108 $ --
=========== ===========
Income taxes paid ............................. $ 25 $ --
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Shares Issued Common
---------------- ($.01 Additional Deferred
Par Treasury Paid-In Compen- Retained
Common Treasury Value) Stock Capital sation Earnings
-------- -------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1997....... 19,193 (563) $ 192 $(1,080) $ 1,189 $ -- $ --
Issuance through
initial public
offering, net of
offering costs
of $5,810........... 5,750 -- 58 -- 45,883 -- --
Issuance in
connection with
acquisitions........ 1,360 563 13 1,080 4,781 -- --
Accretion of
mandatorily
redeemable common
stock............... -- -- -- -- -- -- (1,185)
Conversion of
mandatorily
redeemable common
stock............... 813 -- 8 -- 3,907 -- --
Issued under stock
option plan......... -- -- -- -- 172 (172) --
Amortization of
deferred
compensation........ -- -- -- -- -- 13 --
Net income............ -- -- -- -- -- -- 2,056
======== ======== ======= ======== ========== ======== ========
Balance at
December 31, 1997... 27,116 -- $ 271 $ -- $ 55,932 $ (159) $ 871
======== ======== ======= ======== ========== ======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
NovaCare Employee Services, Inc. (the "Company") is a national
professional employer organization ("PEO") providing small and medium-sized
businesses with comprehensive, fully integrated outsourcing solutions to
human resource issues, including payroll management, risk management,
benefits administration, unemployment services, rehabilitation temporary
staffing and human resource consulting services.
The Company was established by NovaCare, Inc. (the "Parent") in September
1996 as a subsidiary and began operation in October 1996 with the acquisition
of one PEO business. In February 1997, the Company acquired three additional
PEO businesses and entered into a contract with the Parent to co-employ
substantially all of the Parent's workforce (the "NovaCare Contract"). On
July 1, 1997, the Company acquired NovaPro, a rehabilitation temporary
staffing business, from the Parent.
The condensed consolidated financial statements include the operations of
NovaCare Employee Services, Inc., and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements of the
Company are unaudited. The balance sheet as of June 30, 1997 is condensed
from the audited balance sheet of the Company at that date. These statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the period
ended June 30, 1997 contained in the Company's final prospectus dated
November 11, 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. In the opinion of Company management, the
condensed consolidated financial statements for the unaudited interim periods
presented include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position and results of operations for the interim periods presented. Certain
amounts in the fiscal 1996 condensed consolidated financial statements have
been reclassified to conform with the fiscal 1997 presentation.
Operating results for the three and six-month periods ended December 31,
1997 are not necessarily indicative of the results that may be expected for a
full year or any portion thereof.
2. Initial Public Offering
On November 11, 1997, the Company completed an initial public offering of
5,000 shares of its common stock (the "Offering"). Subsequent to the
Offering, the Company issued an additional 750 shares pursuant to the
exercise of an over-allotment provision, for a total issuance of 5,750
shares. The net proceeds from the Offering, (after deducting offering costs
of $5,810), amounted to $45,941. The proceeds were used by the Company to pay
(i) the Company's outstanding revolving credit loan of $28,382 from the
Parent, (ii) $1,000 to an affiliate of the Company who is a former owner of a
business acquired by the Company, and (iii) $16,172 to retire deferred
purchase obligations, $1,000 of which was paid subsequent to December
31,1997. Simultaneously with the completion of the Offering, the Company's
mandatorily redeemable common stock was converted into 813 shares of the
Company's common stock.
6
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
(In thousands, except per share data)
(Unaudited)
3. Acquisitions
The Company acquired all of the outstanding stock of AmeriCare Employers
Group, Inc. ("AmeriCare"), a PEO in Phoenix, Arizona, effective December 1,
1997, for $9,000 in cash, 723 shares of the Company's common stock, the
assumption of certain liabilities, and future contingent payments. The cash
portion of the purchase price was funded through borrowings under the
Company's revolving credit facility and through cash generated from
operations.
The acquisition has been accounted for as a purchase, and accordingly, the
aggregate purchase price was allocated to assets and liabilities based on
their fair values at the date of acquisition. The excess of the purchase
price over the fair market value of the underlying assets acquired was
approximately $19,348.
In the third quarter of fiscal 1997, the Company acquired three PEO
businesses. In addition, on July 1, 1997, the Company acquired NovaPro, a
rehabilitation temporary staffing business, from the Parent.
The following unaudited pro forma consolidated results of the Company give
effect to each of the acquisitions as if they occurred as of October 1, 1996
(the date of inception):
<TABLE>
<CAPTION>
For the Six Months Ended
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues.............................. $ 642,757 $ 105,661
Net income................................ 2,192 (2,090)
Net income per share - basic.............. $ .10 $ (.10)
Net income per share - assuming dilution.. $ .10 $ (.10)
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been made
as of October 1, 1996, or the results which may occur in the future.
4. Net Income Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
became effective for periods ending after December 15, 1997. This statement
revised the calculation of earnings per share from the "primary" and "fully
diluted" methods previously employed, to the "basic" and "assuming dilution"
methods. The Company had not previously presented fully-diluted earnings per
share because the result was not materially different than the primary
calculation. Under the new statement, basic earnings per share represents
earnings divided by the weighted average number of shares outstanding during
the period. Earnings per share-assuming dilution represents the basic
weighted average shares outstanding adjusted for the effects of stock options
and contingently issuable shares under certain acquisition agreements. The
calculation of the Company's earnings per share assuming dilution closely
resembles that used in prior calculations of primary earnings per share.
In accordance with this statement, the Company has replaced its disclosure
of primary net income per share with net income per share-basic and net
income per share-assuming dilution.
7
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
(In thousands, except per share data)
(Unaudited)
4. Net Income Per Share (Continued)
The following table sets forth the computation and reconciliation of net
income per share-basic and net income per share-assuming dilution:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
December 31, December 31,
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income.................... $ 1,119 $ 61 $ 2,056 $ 61
========= ========= ========== ==========
Weighted average shares
outstanding:
Weighted average shares
outstanding - basic....... 23,869 16,855 22,405 16,855
Stock options.............. 162 -- 156 --
--------- --------- ---------- ----------
Weighted average shares
outstanding - assuming
dilution.................. 24,031 16,855 22,561 16,855
========= ========= ========== ==========
Net income per share -
basic..................... $ .05 $ -- $ .09 $ --
========= ========= ========== ==========
Net income per share -
assuming dilution......... $ .05 $ -- $ .09 $ --
========= ========= ========== ==========
</TABLE>
Net income per share has been computed in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98
requires that common shares issued by the Company in the twelve months
immediately preceding a proposed public offering plus the number of common
equivalent shares which became issuable during the same period pursuant to
the grant of stock options at prices substantially less than the security's
fair value (nominal issuances) be included in the calculation of common stock
and common stock equivalent shares, as if they were outstanding for all
periods presented. The Company determined there were no material issuances of
nominal shares in the twelve months preceding the Offering.
Options to purchase 809 shares of common stock for the three and six
months ended December 31, 1997, were not included as common stock equivalents
in the computation of net income per share-assuming dilution because the
effect would be antidilutive. As part of certain purchase agreements, the
former stockholders are eligible to receive additional shares of the
Company's common stock contingent upon achieving certain financial and
operating criteria. Approximately 1,845 contingently issuable shares were
not included in the computation of net income per share-assuming dilution
because all specified financial and operating conditions have not been
satisfied.
8
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1997
(In thousands, except per share data)
(Unaudited)
5. Property and Equipment
The components of property and equipment were as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Land and buildings...................... $ 70 $ 70
Property, equipment and furniture....... 2,416 1,019
Leasehold improvements.................. 291 162
Computer equipment and capitalized
software.............................. 1,731 240
------------ ------------
4,508 1,491
Less: Accumulated depreciation and
amortization............................ (503) (165)
============ ============
$ 4,005 $ 1,326
============ ============
</TABLE>
6. Financing Arrangements
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
$25,000 revolving credit facility (Prime
rate plus 0.125% to 1.25%), due
November 17, 2000....................... $ 4,000 $ --
Subordinated promissory notes (6% to 10%),
through 2002............................ 1,235 1,322
$750 revolving credit facility (Prime
rate plus 1.25%), due May 15, 1998...... 750 --
Other...................................... 117 44
------------ ------------
6,102 1,366
Less: current portion..................... (4,969) (298)
============ ============
$ 1,133 $ 1,068
============ ============
</TABLE>
Subsequent to the November 1997 Offering, the Company entered into a
$25,000 three-year revolving credit facility with a syndicate of lenders (the
"Credit Facility"). The Credit Facility provides for revolving credit
available to fund working capital, capital expenditures, standby letters of
credit and finance acquisitions. The Credit Facility includes a $5,000 letter
of credit subfacility.
The Credit Facility provides for interest at a variable rate, depending on
certain financial ratios, equal to (a) the EuroDollar rate plus a range of
1.375% to 2.50% or (b) the lead lender's prime rate plus a range of 0.125% to
1.25%. In addition, the Company has agreed to pay a commitment fee ranging
from 0.30% to 0.50% per annum on the unused portion of the commitment. Loans
made under the Credit Facility are collateralized by a pledge of all of the
(i) Company's interest in the common stock of its subsidiaries, (ii) assets
of the Company and its subsidiaries, and (iii) the Parent's interest in the
common stock of the Company.
9
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997
(In thousands, except per share data)
(Unaudited)
6. Financing Arrangements (Continued)
At December 31, 1997, the Company had outstanding borrowings of $4,000
under the Credit Facility. In January 1998, the Company borrowed an
additional $750 under the Credit Facility to pay off a revolving credit
facility assumed in connection with the AmeriCare acquisition, and assumed a
letter of credit from the Parent in the amount of $1,141, which guarantees
payment of claims to one of the Company's former workers' compensation
insurance carriers. As of December 31, 1997, $21,000 of the line was
available.
7. Accrued Workers' Compensation and Health Claims
The Company's accruals for claims are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Accrued health benefit premiums payable
and claims reserves..................... $ 9,226 $ 3,756
Accrued workers' compensation premiums
payable and claims reserves............ 4,650 3,577
------------ ------------
13,876 7,333
Less: workers' compensation and health
claims expected to be settled in
more than one year...................... (3,813) (1,910)
============ ============
$ 10,063 $ 5,423
============ ============
</TABLE>
8. Mandatorily Redeemable Common Stock
Mandatorily redeemable common stock was issued in the prior year in
connection with certain acquisitions which provided certain registration and
valuation rights. On November 11, 1997, all 813 shares of mandatorily
redeemable stock were automatically converted into common stock.
9. Deferred Compensation
On August 8 and September 5, 1997, the Company granted options to purchase
shares of common stock at an exercise price of $4.50 per share. There was no
trading market for the common stock as of each respective date. For financial
statement purposes, a fair market value for the common stock has been
determined by the Board of Directors to be $7.12 on August 8, 1997, and $9.00
on September 5, 1997.
Accordingly, the Company has recorded deferred compensation expense based
on the difference between the exercise price and the fair market value of the
common stock on the date of grant, in the aggregate amount of $172. This
amount is recognized as compensation expense, on a straight line basis, over
the vesting period of five years. The unamortized portion of deferred
compensation is recorded as a reduction to shareholders' equity. At December
31, 1997, the remaining unamortized portion of deferred compensation amounted
to $159.
10. Commitments and Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the financial position or results of operations
of the Company.
10
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 1997
(In thousands, except per share data)
(Unaudited)
10. Commitments and Contingencies (Continued)
Certain purchase agreements require additional payments if specific
financial and/or operating conditions are met. Aggregate contingent payments
in connection with these acquisitions at December 31, 1997 of approximately
$1,100 in cash and 1,870 shares of common stock have not been included in the
initial determination of cost of the businesses acquired since the amount of
such contingent consideration, if any, is not presently determinable.
The Company's operations are subject to numerous Federal, state and local
laws related to employment, taxes and benefit plan matters. Generally, these
regulations affect all companies in the United States. However, the
regulatory environment for PEOs is an evolving area due to uncertainties
resulting from the non-traditional employment relationships. Many Federal and
state laws relating to tax and employment matters were enacted prior to the
development of PEO companies and do not specifically address the obligations
and responsibilities of these co-employer relationships. The Internal Revenue
Service (the "IRS") is conducting a market segment study of the PEO industry
(the "Market Segment Study") focusing on selected PEOs (not including the
Company) in order to examine the relationship among PEOs, their clients,
worksite employees, and the owners of clients. IRS officials previously
indicated that the Market Segment Study was expected to be completed during
the early months of 1998. However, more recent IRS statements suggest that an
announcement of the IRS' position with respect to PEOs may be delayed. If the
IRS concludes that PEOs are not "employers" of certain worksite employees for
purposes of the Code, the Company's benefit plans (including cafeteria,
health and welfare, and retirement plans) may lose their favorable tax
status, and the Company may no longer be able to assume its clients' Federal
employment tax withholding obligations.
11
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
NovaCare Employee Services, Inc. (the "Company") is one of the largest
professional employer organizations ("PEO"s) in the United States. The Company
commenced operations on October 1, 1996, concurrent with the acquisition of one
PEO business. In February 1997, the Company acquired three additional PEO
businesses and signed an agreement with NovaCare, Inc. (the "Parent") to provide
traditional PEO services to principally all of the Parent's worksite employees
(the "NovaCare Contract"). On July 1, 1997, the Company acquired NovaPro, a
rehabilitation temporary staffing business, from the Parent. Effective December
1, 1997 the Company acquired AmeriCare Employers Group, Inc. ("AmeriCare"), a
PEO business. As of December 31, 1997, the Company served 2,455 organizations
with 46,430 employees at over 3,000 worksites in 45 states, principally in 10
different industries. The Company is an employee services company which provides
small and medium-sized businesses with comprehensive, fully integrated out-
sourcing solutions to human resource issues, including payroll management,
risk management, benefits administration, unemployment services and human
resource consulting services.
Results of Operations for the Three Months Ended December 31, 1997
The Company commenced operations on October 1, 1996 with the acquisition
of one PEO business which generated $10.9 million of revenues for the quarter
ended December 31, 1996. All material increases in revenues, direct costs,
selling, general and administrative expenses and other expense categories,
between the quarter ended December 31, 1997 and 1996, are directly attributable
to the completion of five additional acquisitions and the consummation of the
NovaCare Contract, subsequent to December 31, 1996, as described above.
Accordingly, results for the quarter ended September 30, 1997 are presented and
used for additional comparative purposes. The following table sets forth certain
income statement and statistical data for the quarters ended December 31, 1997,
September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
For the period from
-------------------------------------------------------------
October 1, 1997 July 1, 1997 October 1, 1996
(Table in thousands, to to (inception) to
except percentages) December 31, 1997 September 30, 1997 December 31, 1996
------------------- ------------------- -------------------
Operating Results: $ % $ % $ %
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $302,751 100.0% $266,757 100.0% $ 10,894 100.0%
Direct costs:
Salaries, wages and
employment taxes of
worksite employees.... 269,571 89.0 242,500 90.9 9,082 83.4
Health care, workers'
compensation, state
unemployment taxes
and other............. 23,768 7.9 15,929 6.0 970 8.9
--------- -------- --------- -------- --------- --------
Gross profit.......... 9,412 3.1 8,328 3.1 842 7.7
Selling, general and
administrative
expenses.............. 6,486 2.1 5,630 2.1 661 6.1
Amortization of excess
cost of net assets
acquired.............. 639 0.2 572 0.2 27 0.2
--------- -------- --------- -------- --------- --------
Income from
operations.......... 2,287 0.8 2,126 0.8 154 1.4
Interest expense, net.. (195) (0.1) (375) (0.1) (30) (0.3)
--------- -------- --------- -------- --------- --------
Income before income
taxes................. 2,092 0.7 1,751 0.7 124 1.1
Income tax expense..... 973 0.3 814 0.3 63 0.6
========= ======== ========= ======== ========= ========
Net income............ $ 1,119 0.4% $ 937 0.4% $ 61 0.5%
========= ======== ========= ======== ========= ========
</TABLE>
12
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations for the Three Months Ended December 31, 1997 (Continued)
<TABLE>
<CAPTION>
For the period from
-----------------------------------------
October 1,
1996
October 1, July 1, (inception)
1997 to 1997 to to
December 31, September 31, December 31,
1997 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Statistical Data:
EBITDA (in thousands) (1)...... $ 3,192 $ 2,916 $ 202
Number of clients at period
end.......................... 2,455 1,763 128
Worksite employees at period
end:
Third parties................. 29,552 21,531 1,958
Related party................. 16,878 15,135 --
============ ============= ============
Total......................... 46,430 36,666 1,958
============ ============= ============
Weighted average worksite
employees paid during the
period:
Third parties................. 24,277 20,313 1,757
Related party................. 16,384 14,889 --
------------ ------------- ------------
Weighted average.............. 40,661 35,202 1,757
============ ============= ============
Quarterly gross profit per
weighted average worksite
employee (in whole $'s):
Third parties................. $ 195 $ 215 $ 479
Related party................. 285 266 --
Weighted average............. 231 237 479
- ----------
<FN>
(1)EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation or as a substitute for
net income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Also, the EBITDA definition used herein may not be comparable to
similarly titled measures reported by other companies.
</FN>
</TABLE>
Revenues for the quarter ended December 31, 1997 increased $36.0 million or
13.5% from the quarter ended September 30, 1997. The revenue increase is
attributed to internal growth due to an increase in the number of clients and
worksite employees served and the AmeriCare acquisition. The number of clients
increased to 2,455 at December 31, 1997, from 1,763 at September 30, 1997. The
AmeriCare acquisition contributed 625 clients to this growth. The weighted
average number of worksite employees increased to 40,661 at December 31, 1997
from 35,202 at September 30, 1997 with AmeriCare contributing 2,465.
13
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations for the Three Months Ended December 31, 1997 (Continued)
Gross profit increased to $9.4 million for the quarter ended December 31,
1997 from $8.3 million for the quarter ended September 30, 1997 due to the
increased revenues. Gross profit as a percentage of revenues remained consistent
with the September quarter at 3.1%. The second quarter gross profit per third
party weighted average worksite employee of $195 decreased from $215 for the
first quarter due to increased direct costs to support growth, and seasonality
of state unemployment profit impact. The related party gross profit per weighted
average worksite employee increased to $285 from $266 for the first quarter due
to improved management of employee benefits program costs. For the quarter
ended December 31, 1997, gross profit percentage has decreased from 7.7% for
the quarter ended December 31, 1996 to 3.1%, due to subsequent acquisitions and
consummation of the NovaCare Contract, both of which produced a lower gross
profit percentage versus the initial acquisition.
Selling, general and administrative expenses increased to $6.5 million for
the quarter ended December 31, 1997 from $5.6 million for the quarter ended
September 30, 1997, due to increased selling and administrative expenses
required to carry out the Company's growth strategy. As a percentage of
revenues, selling, general and administrative expenses were 2.1% for each
period. For the quarter ended December 31, 1997, selling, general and
administrative expenses has decreased from 6.1% for the quarter ended December
31, 1996 to 2.1% due to a more favorable cost structure resulting from
subsequent acquisitions and the NovaCare Contract.
Amortization of excess cost of net assets acquired increased to $639,000 for
the quarter ended December 31, 1997 from $572,000 for the quarter ended
September 30, 1997 primarily as a result of amortization of goodwill related to
the AmeriCare acquisition.
Interest expense, net of interest income, decreased to $195,000 for the
quarter ended December 31, 1997 from $375,000 for the quarter ended September
30, 1997 primarily due to a reduction in debt obligations with proceeds from the
Offering.
Income taxes as a percentage of pretax income were 46.5% for the three months
ended December 31, 1997 and September 30, 1997.
Results of Operations for the Six Months Ended December 31, 1997
The Company commenced operations on October 1, 1996 with the acquisition
of one PEO business which generated $10.9 million of revenues for the six months
ended December 31, 1996. All material increases in revenues, direct costs,
selling, general and administrative expenses and other expense categories,
between the six months ended December 31, 1997 and 1996, are directly
attributable to the completion of five additional acquisition and the
consummation of the NovaCare Contract, subsequent to December 31, 1996, as
described in the overview above.
14
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations for the Six Months Ended December 31, 1997 (Continued)
<TABLE>
<CAPTION>
For the period from
-------------------------------------------
July 1, 1997, October 1, 1996
(Table in thousands, to (inception), to
except percentages) December 31, 1997 December 31, 1996
-------------------- ---------------------
Operating Results: $ % $ %
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues.................. $ 569,508 100.0% $ 10,894 100.0%
Direct costs:
Salaries, wages and
employment taxes of
worksite employees....... 512,071 89.9 9,082 83.4
Health care, workers'
compensation, state
unemployment taxes
and other................ 39,697 7.0 970 8.9
---------- -------- ---------- ---------
Gross profit............. 17,740 3.1 842 7.7
Selling, general and
administrative
expenses................. 12,116 2.1 661 6.1
Amortization of excess
cost of net assets
acquired................. 1,211 0.2 27 0.2
---------- --------- ---------- --------
Income from operations... 4,413 0.8 154 1.4
Interest expense, net..... (570) (0.1) (30) (0.3)
---------- --------- ---------- --------
Income before income 3,843 0.7 124 1.1
taxes.................
Income tax expense..... 1,787 0.3 63 0.6
=========== ========= ========== ========
Net income............ $ 2,056 0.4% $ 61 0.5%
=========== ========= ========== ========
</TABLE>
15
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations for the Six Months Ended December 31, 1997 (Continued)
<TABLE>
<CAPTION>
For the period from
-------------------------------
October 1,
1996
July 1, 1997 (inception)
to to
December 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Statistical Data:
EBITDA (in thousands)(1)........ $ 6,108 $ 202
Number of clients at period end 2,455 128
Worksite employees at period
end:
Third parties................ 29,552 1,958
Related party................ 16,878 --
============== ==============
Total...................... 46,430 1,958
============== ==============
Weighted average worksite
employees paid during
the period:
Third parties................ 22,295 1,757
Related party................ 15,637 --
-------------- --------------
Weighted average............. 37,932 1,757
============== ==============
Year-to-date gross profit per
weighted average worksite employee
(in whole $'s):
Third parties................ $ 408 $ 479
Related party................ 553 --
Weighted average............. 468 479
- ----------
<FN>
(1)EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation or as a substitute for
net income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Also, the EBITDA definition used herein may not be comparable to
similarly titled measures reported by other companies.
</FN>
</TABLE>
Liquidity and Capital Resources
The Company had $5.9 million in cash and cash equivalents as of December 31,
1997. As of the same date, the Company had negative working capital of $8.6
million primarily as a result of the Company borrowing $4.0 million from its
credit facility for the December 1, 1997 AmeriCare acquisition. The Company's
primary short-term liquidity requirements relate to the payment of accrued
payroll and payroll taxes of its worksite and internal employees, accounts
payable and the payment of accrued workers' compensation expense and health
benefit plan premiums.
16
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Company's cash flows provided by operating activities were $7.4 million
for the quarter ended December 31, 1997 resulting primarily from net income,
amortization and depreciation of $2.0 million along with an $11.3 million
liability increase for accrued salaries, wages and payroll taxes, caused by the
timing of the payment of these liabilities, offset by a $3.4 million net cash
use for increased accounts receivable and a $2.3 million liability decrease for
accrued workers' compensation and health claims. Accounts receivable, accrued
salaries, wages, payroll taxes, and health benefit premiums payable are subject
to fluctuations depending on the correlation between the financial reporting
cycle versus the payroll cycle.
Cash expended for investing activities during the same period was $25.7
million primarily resulting from the payment of $16.2 million to retire deferred
purchase obligations and the payment of net cash of $8.0 million for the
AmeriCare acquisition, along with $1.5 million for additions to furniture,
equipment and other assets. Although the Company currently has no significant
capital commitments, the Company anticipates the possible acquisition of PEO or
other employee services businesses in strategic markets during the remainder of
fiscal 1998.
Net cash provided by financing activities was $21.7 million for the three
months ended December 31, 1997. During the quarter, the Company completed its
initial public offering and received proceeds of $45.9 million, net of offering
costs, from the sale of 5.8 million shares of common stock of the Company. The
Company used $28.3 million of its proceeds to retire debt due to the Parent. The
increase in cash also related to the $4.0 million borrowing on the Company's
revolving credit facility.
The Company believes the cash flows generated by the Company's operations,
together with its existing cash and availability of credit under the credit
facility, will be sufficient to meet the Company's short- and long-term cash
needs.
Year 2000 Compliance
The Company is in the process of assessing the effects of Year 2000
software issues on its present information technology structure. As of
December 31, 1997, that assessment, including a determination of the exposure
of the Company's business processes to these issues and the need for and
estimated costs associated with any necessary conversions had not been
completed.
Cautionary Statement
Except for historical information, matters discussed above including, but not
limited to, statements concerning future growth, are forward-looking statements
that are based on management's estimates, assumptions and projections. Important
factors that could cause results to differ materially from those expected by
management include management retention and development, management's success in
integrating acquired businesses, in developing and introducing new products and
lines of business and in entering new markets, adverse Internal Revenue Service
rulings and state regulations with respect to the employer status of employee
services businesses and the Company's ability to implement its employee services
business model.
17
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibit
Number Exhibit Description Page Number
4(a) Amendment No. 1 to the NovaCare
Employee Service, Inc. 1997 Stock
Option Plan, dated as of November 24,
1997.
10(a) Employment agreement dated as of
December 10, 1997 between the Company
and Kenneth J. Jankowski.
27 Financial Data Schedule
(B) The Company filed report Form 8-K regarding the Americare acquisition on
February 2, 1998.
18
<PAGE>
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
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 thereunto duly authorized.
NOVACARE EMPLOYEE SERVICES, INC.
--------------------------------
(Registrant)
February 16, 1998 By/s/Thomas D. Schubert
-------------------------------
Thomas D. Schubert
Senior Vice President,
Chief Financial Officer and Principal
Accounting Officer
19
AMENDMENT NO. 1 TO THE
NOVACARE EMPLOYEE SERVICES, INC.
1997 STOCK OPTION PLAN
Amendment made as of November 24, 1997 by NovaCare Employee Services, Inc.
(the "Company") to the NovaCare Employee Services, Inc. 1997 Stock Option Plan
(the "Plan").
WITNESSETH:
WHEREAS, the Company adopted the Plan as of February 28, 1997 to
provide incentives for key employees of the Company and its subsidiary or parent
corporations; and
WHEREAS, the Company desires to amend the Plan to (i) increase the
number of shares of common stock, $.01 par value, of the Company available for
options and other awards under the Plan from 625,000 to 1,625,000 and (ii) limit
the maximum number of options which may be granted to any person under the Plan
during any fiscal year of the Company to 200,000 shares.
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. Section 3 of the Plan is hereby deleted in its entirety and
the following substituted therefor:
"3. Stock Available for Options. There shall be available for options
under the Plan a total of 1,625,000 shares of Stock, subject to any
adjustments which may be made pursuant to Section 5(f). Shares of Stock
used for purposes of the Plan may be either authorized and unissued
shares or previously issued shares held in the treasury of the Company,
or both. Shares of Stock covered by options which have terminated or
expired prior to exercise shall be available for further options
hereunder. The maximum number of options which may be granted to any
person under the Plan during any fiscal year of the Company shall not
exceed 200,000 shares."
2. In all other respects, the Plan shall remain in full force and
effect as previously written.
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of
the date first above written.
NOVACARE EMPLOYEE SERVICES, INC.
By/s/
------------------------------
Secretary
December 10, 1997
Mr. Kenneth J. Jankowski
3276 Wyndwicke Drive
St. Joseph, MI 49085
Dear Ken:
It is indeed a pleasure to confirm NovaCare Employee Services' offer of
employment and your acceptance to become Senior Vice President/Chief Information
Officer. The management team is very pleased that someone of your stature and
experience will be helping shape our future. Equally important, we believe that
you will contribute in a significant way to the building of a culture based on
values. Your experience, leadership and accomplishments are important to this
decision, and we look forward to your contributions and much success together.
The offer of employment is as follows:
Base Salary - Your employment will begin on January 5, 1998 and you will
be paid $5,769.23 on a bi-weekly basis, as that is our method of payment.
This annualizes to a base salary of $150,000. You will be eligible for a
salary review on January 5, 1999.
Incentive Opportunity - You will be eligible to participate in the
NovaCare Employee Services Incentive Compensation Plan as approved by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"). Your opportunity will be 35% of your base salary. This
incentive will be based on performance against objectives that you and
Loren will negotiate. Bonuses are normally distributed after the end of the
fiscal year. Your first bonus, prorated for the time you are employed, will
be payable after the end of the 1998 fiscal year, provided you are still
employed by NCES at that time. An incentive plan document will be
forthcoming.
Equity - You will receive an initial stock option grant of 65,000 stock
options subject to approval of the Compensation Committee. This grant will
vest in five equal installments of 20% each based on the following stock
appreciation schedule:
$12.00 20%
$14.00 40%
$16.00 60%
$18.00 80%
$20.00 100%
1
<PAGE>
Thereafter, you will be eligible to participate in NovaCare Employee
Services Stock Option Plan and may receive grants at the discretion of the
Board of Directors.
Officer Status - You will be elected an Officer of NovaCare Employee
Services, subject to the approval of the Board of Directors.
Supplemental Benefits Plan - You will participate in the NovaCare, Inc.
Supplemental Benefits Plan as a Level I executive, or in a comparable plan
established by NovaCare Employee Services, Inc. A brochure is enclosed that
more fully describes this plan.
Benefits - You will be eligible to participate in any and all of the group
benefit plans that NovaCare Employee Services offer. You will be entitled
to three weeks of paid time off.
Relocation Benefits - NovaCare Employee Services will reimburse you for
reasonable and customary expenses associated with the sale of your current
residence and the purchase of a home in the Philadelphia area. These are
typically as follows:
Househunting - two trips;
Temporary living for 30 days;
Movement of household goods;
Home sale including realtor's commission of up to 6% and
standard closing costs; Home purchase standard closing
costs; Carrying costs for second residence for up to
three months; A one-time payment of $10,000, less
applicable taxes, to recognize standard and reasonable
expenses associated with the start-up of a new home.
All relocation-related monies (except wages) provided to the employee are
considered to be a loan to be repaid by the employee unless forgiven by the
Company. An agreement stipulating the terms is enclosed for your
information.
Non-Compete and Confidentiality Agreement - Restrictions. You acknowledge
that the services to be rendered by you to NovaCare Employee Services are
of a special and unique character. That knowledge will give us a
competitive advantage and could be used to our significant detriment by our
competitors. Therefore, in order to induce NovaCare Employee Services to
enter into this Agreement, and in consideration of your employment
hereunder, you agree, for the benefit of NovaCare Employee Services and its
affiliates, that you will not, during the period of your employment with
NovaCare and for one (1) year thereafter commencing on the date of
termination of your employment with NovaCare Employee Services:
2
<PAGE>
(a) engage, directly or indirectly, whether as principal, consultant,
employee, officer, director, partner, agent, stockholder, limited partner
or other investor (other than an investment of (i) not more than five
percent (5%) of the stock or equity of any corporation the capital stock of
which is publicly traded or (ii) not more than five percent (5%) of the
ownership interest of any partnership or other entity) or otherwise, within
the United States of America, with any firm or person in any activity or
business venture which is in competition with any line or lines of business
being conducted by NovaCare Employee Services or any affiliate of NovaCare
Employee Services.
(b) solicit or entice or endeavor to solicit or entice away from NovaCare
Employee Services or any affiliate of NovaCare Employee Services or employ,
directly or indirectly, any person who was an employee of NovaCare Employee
Services or of any affiliate of NovaCare Employee Services at any time
during the one-year period ending on the date of termination of your
employment with NovaCare Employee Services, either for your own account or
for any individual, firm or corporation, whether or not such person would
commit any breach of his contract of employment by reason of leaving the
service of NovaCare Employee Services or its affiliates, except that this
restriction shall not apply in the case of any person whose employment
shall have been terminated by NovaCare Employee Services or its affiliates;
or
(c) The Employee shall, during the Employee's employment with the Employer
and at all times thereafter, treat all confidential material (as
hereinafter defined) of the Employer or any other member of the Company
Group (as hereinafter defined) confidentially. The Employee shall not
without the prior written consent of the President of the Employer,
disclose such confidential material, directly or indirectly, to any party,
who at the time of such disclosure is not an employee or agent of any
member of the Company Group, or remove from the premises of the Employer or
any other member of the Company Group any notes or records relating
thereto, copies to facsimiles thereof (whether made by electronic,
electrical, magnetic, optical, laser, acoustic or other means), or any
other property of any member of the Company Group. The Employee agrees that
all confidential material, together with all notes and records of the
Employee relating thereto, and all copies or facsimiles thereof in the
possession of the Employee (whether made by the foregoing or other means),
are the exclusive property of the Company Group. The Employee shall not in
any manner use any confidential material of the Company Group, or any other
property of any member of the Company Group, outside of the scope of the
Employee's duties and responsibilities under this Agreement or in any way
that is detrimental to any member of the Company Group.
(d) For the purpose hereof, the term "confidential material" means all
information in any way concerning the activities, business or affairs of
any member of the Company Group or any of the customers or clients of any
member of the Company Group, including, without limitation, information
concerning trade secrets, together with all sales and financial information
concerning any member of the Company Group and any and all information
4
<PAGE>
concerning projects in research and development or marketing plans for any
products or projects of the Company Group, and all information in any way
concerning the activities, business or affairs of any of such customers or
clients, which is furnished to the Employee by any member of the Company
Group or any of its agents, customers or clients, or otherwise acquired by
the Employee in the course of the Employee's employment with the Employer;
provided, however, that the term "confidential material" shall not include
information which (i) becomes generally available to the public other than
as a result of a disclosure by the Employee, (ii) was available to the
Employee on a non-confidential basis prior to his employment with any
member of the Company Group or (iii) becomes available to the Employee on a
non-confidential basis from a source other than any member of the Company
Group or any of its agents, customers and clients, provided that such
source is not bound by a confidentiality agreement with any member of the
Company Group or any of such agents, customers or clients.
You agree that if, in any proceeding, the court or other authority refuses
to enforce the confidentiality and non-compete covenants set forth herein
because such covenants cover too extensive a geographic area or too long a
period of time, any such covenant will be deemed appropriately amended and
modified in keeping with the intention of the parties, to the maximum
extent permitted by law.
You acknowledge and agree that the confidentiality and non-compete
covenants and agreements set forth herein are reasonable in all respects,
and necessary in order to protect, maintain and preserve the value and
goodwill of the business and other legitimate business interests of
NovaCare. You acknowledge and agree that the covenants and agreements set
forth in this Agreement are a material reason for the payment of the
compensation and benefits provided for in this Agreement.
In the event of a breach or threatened breach by you of any of the
confidentiality and non-compete provisions of this Agreement, you hereby
consent and agree that NovaCare will be entitled to prejudgment injunctive
relief or similar equitable relief, designed to maintain the status quo
ante pending arbitration under this Agreement, as described below, by
restraining you from committing or continuing any such breach or threatened
breach or granting specific performance of any act required to be performed
by you under this Agreement, without the necessity of showing any actual
damage or that only damages would not afford in adequate remedy and without
the necessity of posting any bond or other security. You hereby consent to
the jurisdiction of the federal courts located in the Eastern District of
Pennsylvania and the state courts operating within the geographical area
included in such District for any proceedings hereunder.
Arbitration - We will attempt amicably to resolve disagreements and
disputes hereunder by negotiation. If the matter is not amicably resolved
through negotiation, within thirty (30) days after written notice from
either party, and controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, will be subject to
exclusive, final and binding arbitration, which will be conducted in
Philadelphia, PA, in accordance with the J.A.M.S./Endispute Alternative
Dispute Resolution Services Rules of Procedure for Arbitration. Either
party may bring a court action to compel arbitration under this Agreement
or to enforce an arbitration award.
5
<PAGE>
Termination of Employment - If NovaCare Employee Services terminates your
employment for any reason other than due cause, NovaCare will provide a
lump sum payment in accordance with the severance policy in place at that
time. All other provisions of NovaCare Employee Services severance policies
will apply in the event of your termination, including the execution of an
Agreement and General Release as a precondition to any severance payment.
For purposes of this agreement, due cause means (a) any willful and
continuing failure to discharge your duties, (b) gross negligence in the
performance of your duties, (c) conduct detrimental to the Company, or (d)
commission of a felony or any crime or offense involving moral turpitude.
You will also be extended Outplacement Benefits appropriate for an
executive of your level through a vendor of NovaCare Employee Services'
choice should you be terminated for any reason other than due cause.
Your employment relationship with NovaCare Employee Services is at will.
Either you or NovaCare Employee Services may terminate that relationship at
any time, with or without notice. You and the Company hereby acknowledge
that no express or implied commitment or promise of employment for any
period of time has been made, and that the at-will nature of this
employment relationship may not be altered hereafter, except through a
written agreement signed by you and an authorized officer on behalf of
NovaCare Employee Services. This offer of employment is contingent upon the
successful completion of references.
These issues represent the substantive parts of the employment offer. We
have a dynamic organization and a bright future. We are all delighted that
you will be joining the team. Please acknowledge your acceptance of this
Agreement by signing the enclosed copy of this letter and returning it to
me. If you have any questions, please feel free to contact me at (610)
650-4840 or (610) 286-7822 at my home.
Welcome to NovaCare Employee Services!
Sincerely,
A.T. Locilento, Jr.
cc: Loren J. Hulber
Milton M. Wood
Agreed and Accepted:
By/s/Kenneth J. Janowski December 10, 1997
---------------------- ----------------------
Kenneth J. Jankowski Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a)
the Condensed Consolidated Balance Sheet as of December 31, 1997 and the
Condensed Consolidated Statement of Operations for the six months ended
December 31, 1997 and is qualified in its entirety by reference to such (b)
statements on Form 10-Q for the six month period ended December 31, 1997.
</LEGEND>
<CIK> 0001045536
<NAME> NovaCare Employee Services, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,860
<SECURITIES> 0
<RECEIVABLES> 53,663
<ALLOWANCES> (94)
<INVENTORY> 0
<CURRENT-ASSETS> 63,242
<PP&E> 4,508
<DEPRECIATION> (503)
<TOTAL-ASSETS> 140,007
<CURRENT-LIABILITIES> 71,792
<BONDS> 6,102
0
0
<COMMON> 271
<OTHER-SE> 56,803
<TOTAL-LIABILITY-AND-EQUITY> 140,007
<SALES> 0
<TOTAL-REVENUES> 569,508
<CGS> 0
<TOTAL-COSTS> 563,816<F1>
<OTHER-EXPENSES> 1,094<F2>
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 687
<INCOME-PRETAX> 3,843
<INCOME-TAX> 1,787
<INCOME-CONTINUING> 2,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,056
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
(F1) "Total Costs" consist of cost of services and selling and administrative
expenses.
(F2) "Other Expenses" consist of amortization of goodwill offset by interest
income.
</FN>
</TABLE>
